Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
or
For the transition period from to
Commission File No. 001‑37852
PROTAGONIST THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
7707 Gateway Boulevard, Suite 140
Newark, California 94560
(Address, including zip code, of registrant’s
principal executive offices)
98-0505495
(I.R.S. Employer
Identification No.)
(510) 474-0170
(Telephone number, including area code, of registrant’s
principal executive offices)
Title of each class
Common Stock, $0.00001 par value
Securities registered pursuant to Section 12(b) of the Act:
Trading Symbol
PTGX
Securities registered pursuant to Section 12(g) of the Act:
None
Name of each exchange on which registered
The Nasdaq Global Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
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
Non-accelerated filer
☐
☐
Accelerated filer
Smaller reporting company
Emerging growth company
☒
☒
☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act. Yes ☒ No ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act of 1934). Yes ☐ No ☒
The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $212.4 million as of June 30, 2019, based upon the closing sale price on The Nasdaq Global
Market reported on June 30, 2019. Excludes an aggregate of 7,424,570 shares of the registrant’s common stock held by officers, directors and affiliated stockholders. For purposes of determining whether a
stockholder was an affiliate of the registrant at June 30, 2019, the registrant assumed that a stockholder was an affiliate of the registrant at June 30, 2019 if such stockholder (i) beneficially owned 10% or more
of the registrant’s common stock, as determined based on public filings and/or (ii) was an executive officer or director or was affiliated with an executive officer or director of the registrant at June 30, 2019.
Exclusion of such shares should not be construed to indicate that any such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant or that
such person is controlled by or under common control with the registrant.
There were 27,294,299 shares of registrant’s Common Stock, par value $0.00001 per share, outstanding as of February 28, 2020.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant’s definitive Proxy Statement for the registrant’s 2020 Annual Meeting of Stockholders, to be filed subsequent to the date hereof with the Securities and Exchange Commission
(“SEC”), are incorporated by reference into Part III of this report. Such proxy statement will be filed with the SEC not later than 120 days after the end of the registrant’s fiscal year ended December 31, 2019.
Table of Contents
PROTAGONIST THERAPEUTICS, INC.
2019 FORM 10‑K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers, and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15.
SIGNATURES
Exhibits, Financial Statement Schedules
Page
2
25
64
65
65
65
66
68
70
85
86
121
121
121
122
122
122
122
122
123
Table of Contents
PART I
Statements made in this Annual Report on Form 10‑K contain certain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are
identified by words such as “believe,” “will,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,”
“could,” “potentially” or the negative of these terms or similar expressions. You should read these statements carefully because they discuss
future expectations, contain projections of future results of operations or financial condition, or state other “forward-looking” information.
These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie
these statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ
materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to,
those discussed in this report in “Item 1A. Risk Factors” and elsewhere in this Annual Report. 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 report, 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 investors are cautioned not to unduly rely upon these
statements. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our
management. These statements, like all statements in this report, speak only as of their date, and we undertake no obligation to update or revise
these statements in light of future developments. We caution investors that our business and financial performance are subject to substantial risks
and uncertainties.
3
Table of Contents
Item 1.
Business.
Overview
We are a clinical-stage biopharmaceutical company that utilizes a proprietary technology platform to discover and develop novel peptide-
based drugs to address significant unmet medical needs and transform existing treatment paradigms for patients. We have three assets in various
stages of clinical development derived from this platform, and we expect to report results from six different Phase 2 studies by the end of 2021.
Figure 1: Our Product Pipeline
Our most advanced clinical asset, PTG-300, is an injectable hepcidin mimetic in development for the potential treatment of iron overload
and other blood disorders. PTG-300 mimics the effect of the natural hormone hepcidin, but with greater potency, solubility and stability. Hepcidin
is a key hormone in regulating iron equilibrium and is critical to the proper development of red blood cells. We are currently developing PTG-
300 for the treatment of ineffective erythropoiesis, chronic anemia and iron overload, with an initial focus on beta-thalassemia non-transfusion
dependent (“NTD”) and transfusion dependent (“TD”) patients where the primary endpoints are hemoglobin increases and transfusion burden
reductions, respectively. PTG-300 has received an orphan drug designation from the U.S. Food and Drug Administration (“FDA”) and European
Union (“EU”) regulatory authorities for the treatment of beta-thalassemia. The FDA has granted Fast Track designation to PTG-300 for the
treatment of beta-thalassemia. In the first quarter of 2019, we began dosing patients in a global Phase 2 study of PTG-300 in beta-thalassemia.
Preliminary results from this Phase 2 study reported in the fourth quarter of 2019 suggest that the dose related pharmacodynamic responses in
lowering serum iron and transferrin saturation (“TSAT”) warrant continued evaluation at higher and/or more frequent doses which will be
required to evaluate the rate and durability of clinical response in order to reach definitive conclusions. We expect to report clinical efficacy
results from this Phase 2 study in 2020. We initiated a Phase 2 study in polycythemia vera (“PV”) in the third quarter of 2019 and a Phase 2 study
in hereditary hemochromatosis (“HH”) in January 2020. We are working toward the initiation of an investigator-sponsored study (“IST”) of PTG-
300 in patients with myelodysplastic syndromes (“MDS”) in the first half of 2020. Assuming PTG-300 shows clinical efficacy in one or more of
the above indications, we intend to select our first indication in 2020 for a potential pivotal study to begin in 2021.
4
Table of Contents
Our clinical assets PTG-200 and PN-943 are orally delivered drugs currently in development for inflammatory bowel disease (“IBD”), a
gastrointestinal (“GI”) disease consisting primarily of ulcerative colitis (“UC”) and Crohn’s disease (“CD”), that block biological pathways
currently targeted by marketed injectable antibody drugs. Our orally stable peptide approach offers targeted delivery to the GI tissue
compartment. We believe that, compared to antibody drugs, these product candidates have the potential to provide improved safety due to
minimal exposure in the blood, increased convenience and compliance due to oral delivery, and the opportunity for the earlier introduction of
targeted oral therapy. As a result, if approved, they may transform the existing treatment paradigm for IBD.
PTG-200 (also referenced as JNJ-67864238) is an orally delivered gut-restricted Interleukin-23 receptor (“IL-23R”) antagonist for the
treatment of IBD. In May 2017, we entered into a worldwide license and collaboration agreement with Janssen Biotech, Inc. (“Janssen”), a
Johnson & Johnson company, to co-develop and co-detail PTG-200 and any second-generation compounds for all indications, including IBD.
The agreement with Janssen was amended in May 2019 to expand the collaboration by supporting efforts towards second-generation IL-23R
antagonists, triggering a $25.0 million milestone payment to us. In January 2020, as part of the expanded research collaboration, we announced
the identification and nomination of an orally delivered, gut-restricted IL-23R antagonist peptide as a second-generation development candidate,
triggering a $5.0 million milestone payment to us. See “Item 7. Management’s Discussion and Analysis – Overview” and Note 3 to the
Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additional information. In 2018, we completed a
Phase 1 clinical study to evaluate the safety, pharmacokinetics and pharmacodynamics of PTG-200 in healthy volunteers. Janssen submitted a
U.S. Investigational New Drug application (“IND”) for PTG-200 in CD during the second quarter of 2019, which took effect in July 2019. In
collaboration with Janssen, we initiated a Phase 2 clinical study for PTG-200 in CD in the fourth quarter of 2019, with results expected in the
first half of 2021.
PN-943 is an orally delivered, gut-restricted, alpha-4-beta-7 (“α4β7”) specific integrin antagonist. We developed PN-943 as a potentially
more potent orally delivered, gut-restricted α4β7 backup compound to PTG-100, our first-generation orally delivered gut-restricted α4β7
inhibitor that was being developed for treatment of UC. In 2019, we completed a Phase 1 single ascending dose (“SAD”) and multiple ascending
dose (“MAD”) clinical study of PN-943 in healthy volunteers to evaluate safety, pharmacokinetics and pharmacodynamics. We reported results
of the SAD part of the study during the second quarter of 2019 and the MAD part of the study during the third quarter of 2019. The
pharmacodynamic results indicated that the administration of PN-943 was well tolerated, and results of target engagement were supportive of the
higher potency of PN-943 as compared to PTG-100. We submitted a U.S. IND for PN-943 in December 2019, which took effect in January 2020.
We anticipate initiating a Phase 2 proof of concept (“POC”) study in UC in the second quarter of 2020, with topline data expected in the second
half of 2021.
Our clinical assets are all derived from our proprietary discovery platform. Our platform enables us to engineer novel, structurally
constrained peptides that retain key advantages of both orally delivered small molecules and injectable antibody drugs, while overcoming many
of their limitations as therapeutic agents. Importantly, constrained peptides can be designed to alleviate the fundamental instability inherent in
traditional peptides to allow different delivery forms, such as oral, subcutaneous, intravenous, and rectal. We continue to use our peptide
technology platform to discover product candidates against targets in disease areas with significant unmet medical needs.
PTG‑300: AN INJECTABLE HEPCIDIN MIMETIC
PTG-300, an injectable hepcidin mimetic, was discovered through our peptide technology platform. Hepcidin is a natural hormone that
regulates iron metabolism. We are developing PTG-300 for the treatment of certain disorders characterized by ineffective erythropoiesis,
excessive red blood cells or iron overload. In diseases of ineffective erythropoiesis, excessive quantities of iron in the bone marrow contribute to
oxidative stress and premature cell death causing anemia. In healthy individuals, hepcidin regulates iron levels by inhibiting iron absorption from
the GI tract and by limiting macrophage release of iron. Individuals with beta-thalassemia and MDS can have insufficient hepcidin to maintain
appropriate iron levels that result in chronic anemia. Because of stability issues, complexity of synthesis and solubility limitations, direct
replacement with native hepcidin is not a practical therapeutic approach. We developed PTG-300 as a stable, soluble, more readily manufactured
injectable hepcidin mimetic that could potentially prevent iron toxicity and anemia with chronic subcutaneous injections.
5
Table of Contents
Mechanism of Action and Rationale
The molecular target of the hormone hepcidin is the cellular trans-membrane protein ferroportin, which functions as an export channel for
intracellular iron in macrophages, liver hepatocytes, and duodenal enterocytes. By binding to the extracellular domain of ferroportin, hepcidin
redistributes iron by reducing the export of iron from inside the enterocytes and macrophages to the systemic circulation. Excessive quantities of
iron relative to the lower levels of beta-globin chains in the bone marrow induce ineffective erythropoiesis resulting in anemia. As a hepcidin
mimetic, PTG-300 may redistribute iron to the macrophages, reduce iron-induced oxidative stress in the bone marrow, and allow for sufficient
production of red blood cells. In addition, by limiting the release of iron into the blood, PTG-300 may inhibit the damage caused by excessive
absorption of iron by vital organs such as the liver and heart (i.e. secondary iron overload).
Iron Disorders Overview
Beta-thalassemia
Beta-thalassemia is a rare genetic blood disorder that is characterized by impaired red blood cell production. As a result of the underlying
genetic defect in (cid:0)-globin production, beta-thalassemia patients may be severely anemic, resulting in the need for lifelong supportive care with
regular red blood cell transfusions. Repeated transfusions can cause secondary iron overload in the heart and liver which results in shortened
lifespan in patients. In the bone marrow, elevated levels of iron relative to the decreased levels of beta-globin can prevent red blood cells from
fully developing, resulting in anemia. In addition, the resulting immature red blood cells can aggregate in the spleen causing organ enlargement
that may require surgical removal. In conditions of ineffective erythropoiesis, such as beta-thalassemia and MDS, hepcidin levels are suppressed
leading to increases in iron absorption from the GI tract and iron export from macrophages which may be toxic to developing erythrocytes. It has
been proposed that agents with hepcidin activity may help correct the iron distribution abnormalities in beta-thalassemia with beneficial effects
on erythropoiesis.
Existing treatment options for iron-loading anemia and secondary iron overload are limited. Patients with transfusion-dependent (“TD”)
beta-thalassemia require lifelong regular red blood cell transfusions and general supportive care. Red blood cell transfusions can treat a patient’s
anemia but exacerbate the patient’s iron overload and are burdensome. The iron overload caused by transfusions may require treatment with
chelating agents, which can have adverse effects. Transfusion and iron chelation therapy have significantly improved the survival of TD beta-
thalassemia patients over the last few decades. However, these agents work very slowly and have significant kidney, gastrointestinal, and liver
toxicity issues. The greatest unmet need for beta-thalassemia is for more effective treatment for chronic anemia to decrease the burden of
frequent blood transfusions and thus eliminate the complications associated with the disease and its management as well as costs associated with
red blood cell transfusions and chelation therapy. We believe that PTG-300 may be able to restore iron homeostasis in the bone marrow as well as
reduce excess circulating iron, improving anemia and thereby reducing or eliminating the need for red blood cell transfusions and related
chelation treatments.
Beta-thalassemia is most prevalent in people of Mediterranean descent, such as Italians, Greeks or Turks, and is also found in people from
the Arabian Peninsula, Iran, Africa, Southeast Asia and southern China. Globally, the prevalence of beta-thalassemia was estimated to be
approximately 300,000 patients in 2008, with at least 60,000 patients born each year with the disease, according to the Centers for Disease
Control and Prevention. In 2018, Decision Resource Group (“DRG”) reported that while beta-thalassemia has a worldwide carrier rate of 1.5%,
the disease is rare in the United States, Italy, Germany, United Kingdom, Spain, and France with a total diagnosed prevalence of 16,000 patients,
approximately 85% of which are transfusion dependent, representing an estimated market opportunity of approximately $1.4 billion to $2.5
billion. The prevalence in the United States is low, with an estimated 3,000 patients and approximately 300 patients born each year with the
disease. Most patients with beta-thalassemia suffer from anemia caused by hepcidin deficiency and a significant number are dependent on
transfusions and chelating agents, which can cost between $50,000 to $70,000 per year in the United States.
6
Table of Contents
Polycythemia vera (“PV”)
PV is a rare chronic disease caused by a hematopoietic stem cell mutation. PV is characterized by excessive erythropoiesis (production of
blood cells). These excess blood cells can increase risk of serious problems such as blood clots, potentially leading to heart attack and stroke as
well as more common symptoms including fatigue, headache, blurred vision, shortness of breath and an enlarged spleen. Over time PV may
transform into myelofibrosis or leukemia. An important aspect of the mechanism of action of the hepcidin mimetic PTG-300 is to reduce serum
iron, which is required to support the excessive erythropoiesis which occurs in PV, thereby potentially enabling PTG-300 to manage this
excessive erythropoiesis and ultimately reduce the phlebotomy burden and thrombotic risk in these patients. In the United States, Italy, Germany,
United Kingdom, Spain and France, there are currently more than 150,000 diagnosed PV patients representing an estimated market opportunity
of approximately $1.0 billion to $2.0 billion.
Hereditary hemochromatosis (“HH”)
HH is a blood disorder caused by genetic mutations that increase iron uptake from the diet and alter its distribution in the body, leading to
iron buildup in the body’s tissues and organs, particularly in the skin, heart, liver, pancreas and joint tissues. Excess iron in these organs and
tissues can be toxic and over time lead to cirrhosis, liver cancer, heart problems, joint pain and diabetes. Current treatments for HH, including
periodic phlebotomy, can be a significant burden to patients. PTG-300 could potentially reduce the need for phlebotomy and offer a safer and
better long-term solution to management of the disease. The genetic defects that cause most HH are present in approximately five to seven
million patients in the United States and EU.
Myelodysplastic syndromes (“MDS”)
MDS are a group of disorders in which blood cells do not mature properly in the bone marrow. Symptoms can include fatigue, shortness of
breath, excessive bleeding or frequent infections. There are approximately 19,000 transfusion dependent MDS patients in the United States, Italy,
Germany, United Kingdom, Spain, and France. There are multiple MDS subpopulations, some of which are characterized by anemia, low
hepcidin, and high serum iron and transferrin saturation. Significant unmet needs for these patients include reduction in or elimination of
transfusions, prevention of disease progression to acute myelogenous leukemia and overall survival.
PTG‑300’s Clinical Development Program
PTG-300 has received orphan drug designation from the FDA and EU regulatory authorities, and Fast Track designation from the FDA for
the treatment of beta-thalassemia. Fast Track designation is an expedited review to facilitate development of investigational drugs which treat a
serious or life-threatening condition and fill an unmet medical need. In 2018, we successfully filed an IND for PTG-300 in the United States and
related clinical trial applications outside the United States.
In the first quarter of 2019, we began dosing patients in a global Phase 2 study of PTG-300 in beta-thalassemia called TRANSCEND. The
study is a single-arm, open label, MAD design that evaluates safety, POC and dose finding in adolescent and adult patients with anemia
associated with NTD or TD beta-thalassemia. NTD patients receive 12 weeks treatment with PTG-300 in escalating dose cohorts. The primary
efficacy endpoint in NTD patients is a change in hemoglobin from baseline. TD patients receive 16 weeks treatment with PTG-300 in escalating
dose cohorts. The primary efficacy endpoint in TD patients is a change in transfusion burden from baseline. The primary objectives of this study
are to evaluate the safety, tolerability and preliminary efficacy of PTG-300 and identify an appropriate starting dose and titration regimen for
registration studies.
Previously, we reported preliminary results from the Phase 2 study. Dose-related drug exposure reductions from baseline TSAT and serum
iron levels were observed (Figure 2), with significant reductions at the 40 mg and 80 mg weekly doses and significant and sustained reductions at
the 40 mg twice weekly doses.
7
Table of Contents
Figure 2: PTG-300 Reduces TSAT and Serum Iron Levels – TD Beta-thalassemia Patients and Normal Human Volunteers (“NHV”)
The dose-related pharmacodynamic responses in TSAT and serum iron levels observed in this preliminary analysis provide the first
evidence of the effects of PTG-300 in patients with beta-thalassemia. These early results suggest the potential of finding an appropriate dose of
PTG-300 for continued development in the treatment of beta-thalassemia. While we have observed clinical responders in the study based on the
pre-specified criteria of reductions in transfusion burden, continued evaluation at higher doses will be required to evaluate the rate and durability
of these
8
Table of Contents
effects in order to reach definitive conclusions. We will continue further study with additional dose regimens and longer follow-up and expect to
report topline results in 2020.
PTG-300 was well-tolerated and systemic adverse events were mild to moderate in severity and were typical of patients with beta-
thalassemia. These events were not dose-related and did not prevent dose escalation. There was one serious drug-related adverse event of
vomiting and confusion, and the most frequent treatment emergent adverse event observed was injection site erythema in 5 out of 39 patients
(12.8%).
In the fourth quarter of 2019, we initiated a Phase 2 study of PTG-300 in PV designed to evaluate safety and preliminary efficacy in
patients requiring phlebotomy. The Phase 2 study in PV is expected to enroll approximately 30 patients and consists of a 16-week open-label
dose finding stage every 4 weeks from 10 mg to 80 mg and a 12-week maintenance period at doses which generate desired hematocrit levels,
followed by a 12-week randomized and blinded withdrawal stage. The study has an open-label extension for up to one year to monitor long term
safety and benefits of the drug. The endpoints of this clinical POC study include measurement of blood parameters (hematocrit and hemoglobin
levels), reductions or delay in phlebotomy requirements, and improvements in quality-of-life symptoms.
In January 2020, we initiated a Phase 2 study of PTG-300 in HH. This study is an open label, multicenter study designed to evaluate the
effects of PTG-300 in approximately 30 adult patients over 24 weeks of treatment. Guidelines for HH focus on controlling TSAT and ferritin to
prevent long-term complications. Given the TSAT reductions from PTG-300 observed to date in both healthy volunteers and beta-thalassemia
patients, as well as regulation of organ iron content in a mouse model of HH, we believe that a significant reduction in phlebotomy may be
possible with PTG-300. The endpoints of this POC study include change in TSAT and serum iron levels, reductions in phlebotomy requirements
and an assessment of participant-reported outcomes.
We expect to initiate an IST of PTG-300 in MDS in the first half of 2020.
Assuming PTG-300 shows clinical efficacy in one or more of the above indications, we intend to select our first indication in 2020 for a
potential pivotal study to begin in 2021.
OVERVIEW OF INFLAMMATORY BOWEL DISEASE
IBD is a group of chronic autoimmune and inflammatory conditions of the colon and small intestine, consisting primarily of UC and CD. In
UC, inflammation may be limited to part of the colon or extend through its entirety. UC is primarily characterized by ulceration of the intestinal
surface, accompanied by rectal bleeding and frequent, urgent bowel movements. CD occurs anywhere along the GI tract, commonly affecting the
small intestine and the proximal large intestine. CD complications may include strictures and fistula, which penetrate all layers of the intestine.
UC is usually diagnosed earlier than CD due to bleeding symptoms. Patients with CD may initially present with abdominal pain, fatigue and
anorexia, which can be misdiagnosed. Both diseases’ peak diagnosis years are in young adulthood and are found about equally in both males and
females. Management is lifelong and affects school attendance, graduation rates, childbearing and work productivity. IBD prevalence is
increasing worldwide and is correlated with the adoption of western diets and lifestyle, as well as genetic factors (5 to 20% of affected patients
have a first degree relative with the disease).
Market Overview
According to the Crohn’s & Colitis Foundation of America, there are more than 1.6 million IBD patients in the United States alone, an
increase of approximately 200,000 patients since 2011. As many as 70,000 new cases of IBD are diagnosed in the United States each year, and
there may be as many as 80,000 children in the United States with IBD. GlobalData estimates that the UC market was approximately $5.3 billion
across seven major markets: United States, France, Germany, Italy, Spain, United Kingdom and Japan. This is expected to increase at a
compound annual growth rate of approximately 2.5% to $6.8 billion by 2026. In 2017, GlobalData estimated that the CD market reached
approximately $9.6 billion across those same seven major markets and is expected to grow approximately 3.7% per year to $13.8 billion by 2026.
9
Table of Contents
Johnson & Johnson global sales of Stelara (approved for psoriasis, psoriatic arthritis, moderate-to-severe CD and UC) exceeded $5.0
®
billion in 2018. Takeda Pharmaceuticals sales of Entyvio® for IBD reached approximately $3.0 billion in 2019.
Current Standard of Care in IBD
In recent years, treatment of IBD has evolved from a focus on successful symptom management to an emphasis on modifying the
underlying disease to achieve long-term remission. While available treatments exist for moderate-to-severe IBD, there continues to be a
significant medical need for novel, efficacious, safe and convenient treatments. New technologies and outcome measures have been developed to
improve staging definitions and assessments of treatment benefit. Nonetheless, halting or reversing IBD progression has not yet been achieved
with any single agent therapy, and attaining and maintaining long-term remission in most patients remains a significant unmet medical need.
Across therapeutic classes, 15% to 31% rates of clinical remission represent the current ceiling in patients with moderate-to-severely active
disease.
Biosimilar infliximab and other tumor necrosis factor (“TNF”) inhibitors are the first line standard of care in moderate-to-severe IBD. Anti-
TNFs bind to and neutralize a central pro-inflammatory cytokine in the gut via systemic immunosuppression. As a result, they can be associated
with infection and malignancy risk. Although the magnitude of these risks is relatively low, they are significant for the young IBD population
who must continue on lifelong treatment. In addition, more than 10% of patients treated with anti-TNF agents lose response with each year of
treatment. In 2014, a novel anti-trafficking mechanism launched with vedolizumab (Entyvio®), which blocks migration of leukocytes into the gut
via α4β7 integrins. This mechanism remains the only true “gut selective” approach in the IBD market today, although formulation technologies
can limit systemic exposure from orally delivered agents. Entyvio® has shown an excellent safety profile, although it requires intravenous
administration. Entyvio® was followed by the launch of ustekinumab (Stelara®) in CD in 2016, which blocks inflammation produced through
the Interleukin 12 (“IL-12”) and Interleukin 23 (“IL-23”) pathways, and tofacitinib (Xeljanz®), an orally delivered pan-Janus kinase (JAK)
inhibitor approved in UC.
A head-to-head trial called VARSITY comparing the long-term safety and efficacy of an anti-integrin and anti-TNFs has been completed.
Entyvio® demonstrated superior rates of clinical remission and endoscopic improvement compared with Humira, the market leader in the TNF
inhibitor class. The first formal combination trials in IBD were initiated in the last year, adding new mechanisms such as integrin inhibitors or IL-
23 inhibitors to anti-TNFs. Most IBD experts now believe that combining treatment classes with additive or synergistic mechanisms of action
will be required to attain the disease-modifying effects and lasting remissions in a larger group of patients documented in other areas of
immunology, such as psoriasis or rheumatoid arthritis.
We believe the development of new, potent and targeted orally delivered therapies for IBD may offer safer and more effective treatment
options, alone or in combination, for moderate-to-severe IBD patients. In addition, many clinicians continue to advocate for earlier introduction
of targeted therapeutics in mild-to-moderate IBD in order to prevent disease progression and irreversible gastrointestinal damage. Our orally
delivered, GI-restricted, peptide drugs PTG-200 and PN-943 work on the same specific validated targets as FDA-approved injectable antibodies
and have the potential to offer improved safety and compliance and to minimize the risk of immunogenicity associated with antibodies. We
believe that our product candidates, if approved, have the potential to be used more broadly, including treatment of mild-to-moderate IBD.
Our IBD Solution: Orally Delivered, GI-Restricted Peptides as Targeted Therapies
For the IBD targets of interest, the size and nature of our peptides are carefully selected and modified so as to acquire the desired potency
and specificity, and also to largely restrict their presence to the GI tissue compartment when administered orally. These features translate to orally
delivered, GI-restricted, selective and potent peptide drug candidates with specific advantages compared to antibody drugs:
·
Oral administration. We are developing our peptide therapeutics in a convenient capsule or tablet form intended for oral
administration. We believe oral administration may reduce many of the problems and
10
Table of Contents
limitations associated with injections or infusions, including injection site pain and local reactions, inconvenience, anxiety, high
rates of immunogenicity and potential safety risks.
·
Potential for improved safety and tolerability compared to antibody drugs.
·
·
·
Oral and GI-restricted delivery minimizes systemic exposure in the blood. Oral and GI-restricted delivery results in lower drug
levels in the blood that may provide the potential for an enhanced safety profile over antibody drugs.
Peptides can be cleared more quickly from systemic circulation. Small molecules and peptides below a size threshold can be
rapidly cleared from blood circulation by kidney filtration and excretion. Rapid clearance may be beneficial especially if
patients need to discontinue therapy. In contrast, antibody drugs, because of their long plasma half-life, may take months to
clear from blood circulation, leaving patients exposed to continued or increased safety risk.
The likelihood of much lower immunogenicity of small stable peptides compared to antibody drugs reduces the risk of loss of
response. We believe that anti-drug antibodies are less likely to be elicited against constrained peptides, due to their small size,
lack of epitope density, resistance to proteolysis, oral tolerance, and minimal systemic absorption.
Potential for localized delivery to site of disease. We believe oral dosing of GI-restricted peptides results in substantially higher
drug concentrations in the diseased GI tissue compartment compared to injectable antibody drugs. This targeted delivery to the site
of action may lead to more immediate and significant target engagement at the site of active disease in the GI tissue compartment
with the potential for improved efficacy.
Cost-effective and less complex manufacturing. Because of their size and stability, we believe that our orally delivered, GI-restricted
peptide product candidates can be produced, stored and shipped in a more cost-effective manner than many antibody drugs.
·
·
In chronic GI diseases such as IBD, we believe that our orally delivered, GI-restricted peptide product candidates may offer improved
delivery, the potential for improved safety and tolerability, and cost efficiencies that may provide an overall benefit to patients, payors, and
physicians.
PTG‑200: AN ORALLY DELIVERED IL‑23R ANTAGONIST
PTG-200, an orally delivered, gut-restricted IL‑23R specific antagonist for the treatment of IBD, was discovered through our peptide
technology platform. Interleukin‑23 (“IL-23”), a member of the IL‑12 family of pro-inflammatory cytokines, is a protein that regulates
inflammatory and immune function and plays a key role in the development of IBD. By blocking IL‑23R with PTG‑200 in the GI tissue
compartment, we hope to improve disease symptoms and reduce bowel wall damage while potentially minimizing the risk of systemic side
effects due to its GI-restricted nature.
Mechanism of Action and Rationale
IL-23 is a member of the IL‑12 family of cytokines with pro-inflammatory and autoimmune properties. Cytokines are cell signaling
proteins that are released by cells and affect the behavior of other cells. Binding of the IL‑23 ligand to the IL‑23R receptor leads to an expression
of pro-inflammatory cytokines involved in the mucosal autocrine cascade that is an important pathway of many inflammatory diseases, including
IBD. Furthermore, genetic analyses of IBD patients have implicated IL‑23R mutations as a risk factor associated with susceptibility to IBD. The
infused antibody drug ustekinumab (marketed as ‑Stelara for psoriasis, psoriatic arthritis, and moderate-to-severe CD) is a p40 antagonist
antibody that inhibits both the IL-23 and IL-12 pathways. Next-generation IBD antibody drugs, such as guselkumab, target the p19 subunit of the
IL‑23 ligand and are specific to the IL-23 pathway, which is believed to be an important driver of local IBD pathology, while not blockading the
IL‑12 pathway. IL‑12 is believed to be important in immune surveillance against the development of infections and malignancies.
®
11
Table of Contents
We believe that the orally delivered, GI-restricted nature of PTG-200 may allow PTG‑200 to be a potent inhibitor of the IL‑23 pathway for
the treatment of IBD. By targeting IL‑23R with our orally delivered GI-restricted IL‑23R antagonist PTG-200, we believe PTG‑200 may restore
proper immune function in the GI tissue compartment where there is active disease while minimizing the risk of systemic side effects. Several
key cell types that reside in gut-associated lymphoid tissue (“GALT”), including T cells, innate lymphoid cells, and natural killer cells, increase
their expression of IL-23R during the progression of IBD. Therefore, the high concentrations of PTG‑200 in GALT will facilitate access and
binding to IL‑23R expressed in the same tissue with the potential for concomitant efficacy benefits.
PTG-200’s Phase 1 Clinical Study
We completed a Phase 1 clinical trial of PTG-200 in Australia during the fourth quarter of 2018. The Phase 1 study was a randomized,
double-blind, placebo-controlled, SAD and MAD-escalation trial in 80 normal healthy volunteers. The primary endpoint was safety and
tolerability. Secondary endpoints included the identification of the maximally tolerated dose and the evaluation of pharmacokinetic parameters.
Results of the Phase 1 study demonstrated that administration of PTG-200 was well-tolerated. No serious adverse events or dose-limiting
toxicities were observed. The pharmacokinetic and pharmacodynamic parameters were consistent with the GI-restricted design of PTG-200.
PTG-200’s Clinical Development Plan
We have a worldwide license and collaboration agreement with Janssen, to co-develop and co-detail PTG-200 and any second-generation
compounds for all indications, including IBD. The agreement was amended in May 2019 to expand the collaboration by supporting efforts
towards second-generation IL-23R antagonists, triggering a $25.0 million milestone payment to the Company. In January 2020, we announced
the identification and nomination of an orally delivered, gut-restricted IL-23R antagonist peptide as a second-generation development candidate
under our license and collaboration agreement with Janssen, advancing the collaboration and triggering a $5.0 million milestone payment to us.
See “Item 7. Management’s Discussion and Analysis – Overview” and Note 3 to the Consolidated Financial Statements included elsewhere in
this Annual Report on Form 10-K for additional information. Janssen submitted an IND for PTG-200 in CD during the second quarter of 2019,
which took effect in July 2019.
In collaboration with Janssen, we initiated a Phase 2 clinical study in CD called PRISM in the fourth quarter of 2019. The global,
randomized, double blind, placebo-controlled, Phase 2 study is evaluating the efficacy of oral administration of PTG-200 in 90 patients with
moderate-to-severe CD. The study will assess the effect of twice-daily dosing of PTG-200 on change from baseline in Crohn's Disease Activity
Index score at week 12 as the primary endpoint. The study will also assess change from baseline in simple endoscopic score for CD rates of
clinical response and remission, endoscopic response and remission, and patient-reported outcome-2 remission. Results from this Phase 2 study
in CD are expected in 2021.
PN-943: AN ORALLY DELIVERED α4β7 INTEGRIN ANTAGONIST
PN-943, an orally delivered, gut-restricted α4β7 specific integrin antagonist, was discovered through our peptide technology platform and
is being developed initially for patients with moderate-to-severe UC. α4β7 integrin is considered to be one of the most GI-specific biological
targets for IBD due to its binding to MAdCAM-1, an extracellular protein that resides mostly in the GI vasculature. PN-943 shares the same α4β7
integrin target as the injectable antibody drug vedolizumab, marketed as Entyvio®, for the treatment of moderate-to-severe UC and CD. We
believe that we can leverage the development and regulatory path of Entyvio® and other approved antibody drugs for IBD to help inform the
design of our clinical development studies.
Mechanism of Action and Rationale
Integrins, such as α4β7, are transmembrane proteins that regulate cellular movement into extravascular tissue and play an important role in
modulating the inflammatory reaction in the gut. The α4β7 integrin is expressed on the surface of T cells, immune cells that help defend against
foreign and potentially harmful substances that enter the body. The
12
Table of Contents
development of UC is driven by the migration of α4β7 T cells into the GI tissue compartment and their subsequent activation within the GI tissue
compartment. The entry of α4β7 T cells into the GI tissue compartment is facilitated by the protein-protein interactions (“PPI”) between the α4β7
integrin and its corresponding ligand, MAdCAM‑1, which is primarily expressed in the GI tissue compartment. Hence, the binding of α4β7 to
MAdCAM‑1 can be categorized as a GI-specific interaction and has been identified as an IBD-specific targeted therapeutic approach. By
blocking the binding of α4β7 integrin to MAdCAM‑1, PN-943 may prevent T cells from entering the GI tissue compartment, thereby reducing
the inflammation that leads to the clinical manifestations and long-term implications of UC.
α4β7 for IBD is targeted by the FDA-approved drug Entyvio , which has demonstrated safety and efficacy in patients with moderate-to-
®
severe UC and CD. Since PN-943 targets the same biological pathway as Entyvio , we utilized similar PD-based POC in our pre-clinical studies
and Phase 1 clinical trial to inform and guide our Phase 2 development program. We sourced these PD biomarker assays from public scientific
publications and do not maintain any contractual arrangement providing access to this information with the makers of these marketed products.
®
PN-943 Pre-Clinical Proof-of-Concept Studies
We have completed extensive pre-clinical studies of PN-943 in which we established pharmacodynamic target engagement POC, including
effects on receptor occupancy, T cell trafficking and mucosal healing in rodents and monkeys. Based on pre-clinical data, we believe that PN-943
may be a more potent α4β7 integrin antagonist compound than PTG-100 without sacrificing its other positive attributes, such as selectivity and
tolerability. PTG-100 is our first generation α4β7 inhibitor that shares the same α4β7 integrin target as Entyvio® for the treatment of moderate-
to-severe UC and CD. We completed extensive pre-clinical studies of PTG-100 in which we established pharmacological POC and completed a
Phase 1 clinical trial in Australia in 2016.
PN-943’s Phase 1 Clinical Trial Overview
We completed a Phase 1 randomized, double-blind, placebo-controlled clinical trial of PN-943 in normal healthy male volunteers in
Australia in 2019. The Phase 1 SAD and MAD components were conducted with a solution-based liquid formulation. In addition to determining
the safety and tolerability and pharmacokinetics of PN-943, the SAD and MAD components of the trial evaluated PD-based POC through the
assessment of α4β7 receptor occupancy and α4β7 target expression that indicate target engagement on peripheral blood memory T cells similar to
what was done in the pre-clinical studies and in the Phase 1 trial with PTG-100. In the clinical trial, dose escalation proceeded from 100 mg up to
1,400 mg for the SAD portion and 1,000 mg for the MAD portion.
We reported results of the SAD part of the study during the second quarter of 2019 and the MAD part of the study during the third quarter
of 2019. The pharmacodynamic results of target engagement were supportive of the three-fold higher potency of PN-943 as compared to PTG-
100 and saturation at 1000 mg (Figure 3). This is consistent with data from pre-clinical studies and confirmed by this Phase 1 pharmacodynamic
data. We believe this links PN-943 to greater probability of success in a Phase 2 trial based on signs of clinical efficacy of PTG-100 in the Phase
2 PROPEL trial in US patients. The administration of PN-943 was well-tolerated.
13
Table of Contents
Figure 3: PN-943 vs. PTG-100: Dose Related and Saturable Effect on Blood % Receptor Occupancy (“RO”)
PN-943 Clinical Development Plan
We filed an IND for PN-943 that took effect in January 2020. We expect to initiate a Phase 2 POC study of PN-943 in UC in the second
quarter of 2020.
OUR PEPTIDE TECHNOLOGY PLATFORM
Our proprietary technology platform is purposefully built to exploit the advantages of constrained peptides, which are smaller than
antibody-based drugs and may be delivered orally but are big enough to bind and block the difficult targets that antibodies bind and modulate.
The platform has been successfully applied to a diverse set of biological targets that has led to several pre-clinical and clinical stage peptide-
based new chemical entities, including our clinical stage product candidates, for a variety of clinical indications. Our platform is comprised of a
series of tools and methods, including a combination of molecular design, phage display, stability assays, medicinal chemistry, biomarker,
formulations, and in vivo pharmacology approaches. We apply this platform to the discovery and development of constrained peptides to develop
new drug candidates.
The platform is used to develop potential drug candidates (agonists and antagonists): (i) using the structure of a target, when available,
(ii) when no target structure exists, or (iii) from publicly disclosed peptide starting points. In a structure-based approach, our proprietary
molecular design software and structural database of several thousand constrained peptides, termed Vectrix™, are screened to identify suitable
scaffolds. The scaffolds identified form the basis of designing and constructing the first set of phage or chemical libraries. The initial hits are
identified by either panning or screening such libraries, respectively. When structural information is unavailable for a target, hits are identified by
panning a set of 34 proprietary cluster-based phage libraries consisting of millions of constrained peptides. Once the hits are identified, they are
optimized using a set of peptide, peptide mimetic and medicinal chemistry techniques that include the incorporation of new or manipulation of
existing cyclization-constraints, as well as natural or unnatural amino acids and chemical conjugation or acylation techniques. These techniques
are applied to optimize potency, selectivity, stability, exposure and ultimately efficacy. For PTG-300, hit discovery and optimization relied
exclusively on medicinal chemistry, with no phage display, to develop potent and selective injectable candidates with enhanced stability and
exposure in blood. For injectable products, stability in blood is determined using in vitro assay techniques to identify chemical and biological
sites of degradation, which are then optimized whilst maintaining potency and selectivity. Conjugation strategies are used to optimize the
exposure of the injected peptide. For PN-943 and PTG‑200, phage display is tightly coupled to medicinal chemistry and oral stability techniques
to develop potent,
14
Table of Contents
selective and orally delivered molecules that are GI-restricted. Oral stability is profiled in a series of in vitro and ex vivo assays that portray the
chemical and metabolic barriers a peptide will encounter as it transits the GI tract. These metabolically labile spots in the peptides are optimized
using medicinal chemistry-based approaches to engineer oral stability whilst maintaining selectivity and potency. Various in vivo pharmacology
tools are then used to quantify peptide exposure in relevant GI organs and tissues. This data can be used to optimize required GI exposure over
the required time frame to achieve in vivo efficacy. This is complemented by formulation studies to enhance GI exposure. Finally, various
biomarkers are also developed to correlate exposure with efficacy to guide candidate selection, dose selection and provide preliminary proof-of-
concept of target engagement in clinical trials.
Future Applications of our Platform
We believe we have built a versatile, well-validated and unique discovery platform. For example, this peptide technology platform has been
used to develop product candidates for diverse target classes including G-protein-coupled receptors, ion channels, transporters and cytokines for a
variety of therapeutic areas. In the future we may tackle other GI diseases and expand our delivery techniques to include other organ/tissue
systems, such as the lung and eye, which will provide potential opportunities to pursue a variety of diseases. In addition, the gut may
communicate with the immune, central nervous, and endocrine systems, providing the potential of our GI-restricted approach to treat metabolic,
cancer and cardiovascular diseases. Lastly, we intend to progress our platform to achieve systemic bioavailability with peptides, macrocyles and
peptidomimetics, thereby enabling us to address systemic diseases.
Material Agreements
Janssen License and Collaboration Agreement
In May 2017, we and Janssen entered into an exclusive license and collaboration agreement for the clinical development, manufacture and
potential commercialization of PTG-200 and any second-generation compounds worldwide for the treatment of CD and UC (the “Janssen
License and Collaboration Agreement”). The Janssen License and Collaboration Agreement became effective on July 13, 2017 and was
subsequently amended effective May 2019 (the “First Amendment”). The First Amendment expands the original collaboration by supporting
efforts towards research and development of second-generation IL-23R antagonists. During the third quarter of 2017, we received a non-
refundable, upfront cash payment of $50.0 million from Janssen. During the second quarter of 2019, we received a non-refundable cash payment
of $25.0 million upon execution of the First Amendment. During the first quarter of 2020, we received a milestone payment of $5.0 million
triggered by the identification and nomination of a second-generation development candidate. See “Item 7. Management’s Discussion and
Analysis – Overview” and Note 3 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for
additional information.
Research Collaboration and License Agreement with Zealand Pharma A/S
In June 2012, we entered into a Research Collaboration and License Agreement with Zealand Pharma A/S (“Zealand”) to identify, optimize
and develop novel disulfide-rich peptides to discover a hepcidin mimetic. We amended this agreement on February 28, 2014, at which point
Protagonist assumed responsibility for the development program. See “Item 7. Management’s Discussion and Analysis – Contractual Obligations
and Other Commitments” and Note 6 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for
additional information.
Competition
The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change.
While we believe that our product candidates, technology, knowledge and experience provide us with competitive advantages, we face
competition from established and emerging pharmaceutical and biotechnology companies, academic institutions, governmental agencies and
public and private research institutions, among others.
We believe our principal competition in the treatment of chronic iron overload disorders such as beta-thalassemia will be luspatercept
(Acceleron/Celgene-BMS) and mitapivat (Agios). Although gene therapy is potentially curative for
15
Table of Contents
beta-thalassemia, we believe that Bluebird Bio’s LentiGlobin will have limited application due to safety risks associated with its required “pre-
conditioning” regimen, which is similar to allogeneic hematopoietic stem cell transplantation. Hematopoietic stem cell transplantation is
infrequently utilized in beta-thalassemia due to its risk benefit profile in a younger patient population. Luspatercept and LentiGlobin have been
approved in the United States and Europe, respectively, for TD beta-thalassemia, and are in Phase 3 development for beta-thalassemia, and
mitapivat is in Phase 2 studies for beta-thalassemia. An IND for Luspatercept has been filed in the United States for thalassemia and MDS.
There are currently no approved orally delivered peptide-based α4β7 or IL‑23R products for IBD. We believe our principal competition in
the treatment of IBD will come from companies with injectable agents in the anti-integrin class that are or will be approved by 2028, including:
·
·
·
Takeda’s Vedolizumab (Entyvio®) IV and SC (IV approved, SC Phase 3);
Roche’s Etrolizumab SC (Phase 3); and
Shire’s SHP-647 SC (Phase 3; divested as part of the Takeda acquisition of Shire - buyer to be determined).
In addition, orally delivered agents with novel mechanisms of action are approved or in development and may be approved for UC and/or CD
prior to the launch of PTG-200 and PN-943. These include JAK inhibitors, pan-JAK tofacitinib (Xeljanz) approved in UC and next-generation
JAK1 inhibitors filgotinib and upadacitinib, as well as S1P inhibitors, ozanimod, amiselmod and etrasimod. The anti-IL-23 antibodies are also
demonstrating positive data in IBD. Our clinical asset PTG-200 will compete as the only orally delivered IL-23R antagonist.
Intellectual Property
We strive to protect and enhance the proprietary technology, inventions, and improvements that are commercially important to the
development of our business, including seeking, maintaining, and defending patent rights, whether developed internally or licensed from third
parties. We also rely on trade secrets relating to our proprietary technology platform and on know-how, and continuing technological innovation
to develop, strengthen, and maintain our proprietary position in the field of peptide-based therapeutics that may be important for the development
of our business. We will also take advantage of regulatory protection afforded through data exclusivity, market exclusivity and patent term
extensions where available.
Our commercial success may depend in part on our ability to obtain and maintain patent and other proprietary protection for commercially
important technology, inventions and know-how related to our business; defend and enforce our patents; preserve the confidentiality of our trade
secrets; and operate without infringing the valid enforceable patents and proprietary rights of third parties. Our ability to stop third parties from
making, using, selling, offering to sell or importing our products may depend on the extent to which we have rights under valid and enforceable
patents or trade secrets that cover these activities. We cannot be sure that patents will be granted with respect to any of our pending patent
applications or with respect to any patent applications filed by us in the future, nor can we be sure that any of our existing patents or any patents
that may be granted to us in the future will be commercially useful in protecting our commercial products and methods of manufacturing the
same. For more information, please see “Item 1A. Risk Factors—Risks Related to Our Intellectual Property.”
We own or co-own 16 issued U.S. patents, over 20 granted ex-U.S. patents, and numerous U.S. and ex-U.S. patent applications related to
our clinical assets. We possess substantial know-how and trade secrets relating to the development and commercialization of peptide based
therapeutic products. Our proprietary intellectual property, including patent and non-patent intellectual property, is generally directed to, for
example, peptide-based therapeutic compositions, methods of using these peptide-based therapeutic compositions to treat or prevent disease,
methods of manufacturing peptide-based therapeutic compositions, and other proprietary technologies and processes related to our lead product
development candidates. Specific patents and patent applications are directed to compositions of α4β7 integrin peptides, IL-23R antagonist
peptides, and hepcidin and enkephalin mimetics peptides, as well as methods of synthesizing and using these peptides to treat inflammatory
disorders. Applications are currently pending in the United States and other
16
Table of Contents
major jurisdictions, including Australia, Canada, China, Japan, and Europe. We expect our patents and patent applications, if issued, and if the
appropriate maintenance, renewal, annuity, or other governmental fees are paid, to expire from October 2033 to July 2039 (excluding possible
patent term extensions).
Our objective is to continue to expand our portfolio of patents and patent applications in order to protect our clinical assets and related
peptide-based drug technologies.
We also license patents and patent applications directed to processes and methods related to our technology platform. These patents have
issued in the United States and other major jurisdictions, including Australia and Europe. Some licensed patents are expired, and others are
expected to expire before or by February 2023. Material aspects of our technology platform are protected by trade secrets and confidentiality
agreements.
In addition to the above, we have established expertise and development capabilities focused in the areas of pre-clinical research and
development, manufacturing and manufacturing process scale-up, quality control, quality assurance, regulatory affairs and clinical trial design
and implementation. We believe that our focus and expertise will help us develop products based on our proprietary intellectual property.
The term of individual patents depends upon the legal term of the patents in the countries in which they are obtained. In most countries in
which we file, the patent term is 20 years from the date of filing the non-provisional application. In the United States, a patent’s term may be
lengthened by patent term adjustment, which compensates a patentee for administrative delays by the U.S. Patent and Trademark Office in
granting a patent or may be shortened if a patent is terminally disclaimed over an earlier-filed patent.
The term of a patent that covers an FDA approved drug may also be eligible for patent term extension, which permits patent term
restoration of a U.S. patent as compensation for the patent term lost during the FDA regulatory review process. The Hatch-Waxman Act permits a
patent term extension of up to five years beyond the expiration of the patent. The length of the patent term extension is related to the length of
time the drug is under regulatory review. 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 one patent applicable to an approved drug may be extended. Moreover, a patent can only be extended once,
and thus, if a single patent is applicable to multiple products, it can only be extended based on one product. Similar provisions are available in
Europe and other foreign jurisdictions to extend the term of a patent that covers an approved drug. When possible, we expect to apply for patent
term extensions for patents covering our product candidates and their methods of use.
Trade Secrets
We rely on trade secrets to protect certain aspects of our technology, particularly in relation to our technology platform. However, trade
secrets can be difficult to protect. We seek to protect our proprietary technology and processes, in part, by entering into confidentiality
agreements with our employees, consultants, scientific advisors and contractors. We also seek to preserve the integrity and confidentiality of our
data and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology
systems. While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached, and we
may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by
competitors. To the extent that our consultants, contractors or collaborators use intellectual property owned by others in their work for us,
disputes may arise as to the rights in related or resulting know-how and inventions. For more information, please see “Item 1A. Risk Factors—
Risks Related to Our Intellectual Property.”
Manufacturing
We contract with third parties for the manufacturing of all of our product candidates for pre-clinical and clinical studies and eventually for
commercial supplies, and intend to continue to do so in the future. We do not own or operate any manufacturing facilities and we have no plans
to build any owned clinical or commercial scale manufacturing capabilities. We believe that the use of contract manufacturing organization
(“CMOs”) eliminates the need for us to directly invest in manufacturing facilities, equipment and additional staff. Although we rely on contract
manufacturers,
17
Table of Contents
our personnel and consultants have extensive manufacturing and quality control experience overseeing CMOs. We regularly consider second
source or back-up manufacturers for both active pharmaceutical ingredient and drug product manufacturing. To date, our third-party
manufacturers have met the manufacturing requirements for the product candidates. We expect third-party manufacturers to be capable of
providing needed quantities of our product candidates to meet anticipated full-scale commercial demands, but we have not assessed these
capabilities beyond the supply of clinical materials to date. We currently engage CMOs on a “fee for services” basis for our current development
plans. We plan to identify CMOs and enter into longer term contracts or commitments as we move our product candidates into Phase 3 clinical
trials. We believe there are alternate sources of manufacturing that have been and could be engaged and enabled to satisfy our clinical and
commercial requirements, however we cannot guarantee that identifying and establishing alternative relationships with such sources will be
successful, cost effective, or completed on a timely basis without significant delay in the development or commercialization of our product
candidates.
Government Regulation
The FDA and comparable regulatory authorities in state and local jurisdictions and in other countries impose substantial and burdensome
requirements upon companies involved in the clinical development, manufacture, marketing and distribution of drugs, such as those we are
developing. These agencies and other federal, state and local entities regulate, among other things, the research and development, testing,
manufacture, quality control, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion, distribution, post-
approval monitoring and reporting, sampling and export and import of our product candidates.
U.S. Government Regulation
In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act (“FDCA”) and its implementing
regulations. The process of obtaining regulatory approvals and the subsequent compliance with applicable federal, state, local and foreign statutes
and regulations requires the expenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements at
any time during the product development process, approval process or after approval, may subject an applicant to a variety of administrative or
judicial sanctions, such as the FDA’s refusal to approve pending NDAs, withdrawal of an approval, imposition of a clinical hold, issuance of
warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of
government contracts, restitution, disgorgement or civil or criminal penalties.
The process required by the FDA before a drug may be marketed in the United States generally involves the following:
·
·
·
·
·
·
completion of pre-clinical laboratory tests, animal studies and formulation studies in compliance with the FDA’s GLP
regulations;
submission to the FDA of an IND application, which must become effective before human clinical trials may begin;
approval by an independent institutional review board (“IRB”) at each clinical site before each trial may be initiated;
performance of adequate and well-controlled human clinical trials in accordance with good clinical practice (“GCP”)
requirements to establish the safety and efficacy of the proposed drug product for each indication;
submission to the FDA of an NDA;
satisfactory completion of an FDA advisory committee review, if applicable;
18
Table of Contents
·
·
satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced to
assess compliance with current good manufacturing practices (“cGMP”) requirements and to assure that the facilities, methods
and controls are adequate to preserve the drug’s identity, strength, quality and purity; and
FDA review and approval of the NDA.
Pre-clinical Studies
Pre-clinical studies include laboratory evaluation of product chemistry, toxicity and formulation, as well as animal studies to assess
potential safety and efficacy. An IND sponsor must submit the results of the pre-clinical tests, together with manufacturing information,
analytical data and any available clinical data or literature, among other things, to the FDA as part of an IND. Some pre-clinical testing may
continue even after the IND is submitted. An IND automatically becomes effective 30 days after receipt by the FDA, unless before that time the
FDA raises concerns or questions related to one or more proposed clinical trials and places the clinical trial on a clinical hold. In such a case, the
IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. As a result, submission of an IND may not
result in the FDA allowing clinical trials to commence.
Clinical Trials
Clinical trials involve the administration of the investigational new drug to human subjects under the supervision of qualified investigators
in accordance with GCP requirements, which include the requirement that all research subjects provide their informed consent in writing for their
participation in any clinical trial. Clinical trials are conducted under protocols detailing, among other things, the objectives of the trial, the
parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated. A protocol for each clinical trial and any subsequent
protocol amendments must be submitted to the FDA as part of the IND (or equivalent submission ex-US). In addition, an IRB or ethics
committee (“EC”) at each institution participating in the clinical trial must review and approve the plan for any clinical trial before it commences
at that institution. Information about certain clinical trials must be submitted within specific timeframes to the National Institutes of Health
(“NIH”) for public dissemination on their www.clinicaltrials.gov website.
Human clinical trials are typically conducted in three sequential phases, which may overlap or be combined:
·
·
·
Phase 1: The drug is initially introduced into healthy human subjects or patients with the target disease or condition and tested
for safety, dosage tolerance, absorption, metabolism, distribution, excretion and, if possible, to gain an early indication of its
effectiveness.
Phase 2: The drug is administered to a limited patient population to identify possible adverse effects and safety risks, to
preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal
dosage.
Phase 3: The drug is administered to an expanded patient population, generally at geographically dispersed clinical trial sites, in
well-controlled clinical trials to generate enough data to statistically evaluate the efficacy and safety of the product for
approval, to establish the overall risk-benefit profile of the product, and to provide adequate information for the labeling of the
product.
Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and more frequently if serious
adverse events occur. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, or at all.
Furthermore, the FDA or the sponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the
research subjects are being exposed to an unacceptable health risk. Similarly, an IRB or EC 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 drug has been associated with
unexpected serious harm to patients.
19
Table of Contents
Marketing Approval
Assuming successful completion of the required clinical testing, the results of the pre-clinical and clinical studies, together with detailed
information relating to the product’s chemistry, manufacture, controls and proposed labeling, among other things, are submitted to the FDA as
part of an NDA requesting approval to market the product for one or more indications. In most cases, the submission of an NDA is subject to a
substantial application user fee. Under the Prescription Drug User Fee Act (“PDUFA”) guidelines that are currently in effect, the FDA has a goal
of ten months from the date of “filing” of a standard NDA for a new molecular entity to review and act on the submission. This review typically
takes twelve months from the date the NDA is submitted to FDA because the FDA has approximately two months to make a “filing” decision.
In addition, under the Pediatric Research Equity Act of 2003 (“PREA”), as amended and reauthorized, certain NDAs or supplements to an
NDA must contain data that are adequate to assess the safety and effectiveness of the drug 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, on its own initiative or at the request of the applicant, grant deferrals for submission of some or all pediatric data until after approval of the
product for use in adults, or full or partial waivers from the pediatric data requirements.
The FDA also may require submission of a risk evaluation and mitigation strategy (“REMS”) plan to ensure that the benefits of the drug
outweigh its risks. The REMS plan could include medication guides, physician communication plans, assessment plans, and/or elements to assure
safe use, such as restricted distribution methods, patient registries, or other risk minimization tools.
The FDA conducts a preliminary review of all NDAs within the first 60 days after submission, before accepting them for filing, to
determine whether they are sufficiently complete to permit substantive review. The FDA may request additional information rather than accept an
NDA for filing. In this event, the application must be resubmitted with the additional information. The resubmitted application is also subject to
review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review. The FDA
reviews an NDA to determine, among other things, whether the drug is safe and effective and whether the facility in which it is manufactured,
processed, packaged or held meets standards designed to assure the product’s continued safety, quality and purity.
The FDA may refer an application for a novel drug to an advisory committee. An advisory committee is a panel of independent experts,
including clinicians and other scientific experts, that reviews, evaluates and provides a recommendation as to whether the application should be
approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such
recommendations carefully when making decisions.
Before approving an NDA, the FDA typically will inspect the facility or facilities where the product is manufactured. The FDA will not
approve an application unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and
adequate to assure consistent production of the product within required specifications. Additionally, before approving an NDA, the FDA may
inspect one or more clinical trial sites to assure compliance with GCP requirements.
After evaluating the NDA and all related information, including the advisory committee recommendation, if any, and inspection reports
regarding the manufacturing facilities and clinical trial sites, the FDA may issue an approval letter, or, in some cases, a complete response letter.
A complete response letter generally contains a statement of specific conditions that must be met in order to secure final approval of the NDA
and may require additional clinical or pre-clinical testing in order for FDA to reconsider the application. Even with submission of this additional
information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval. If and when those conditions
have been met to the FDA’s satisfaction, the FDA will typically issue an approval letter. An approval letter authorizes commercial marketing of
the drug with specific prescribing information for specific indications.
20
Table of Contents
Even if the FDA approves a product, it may limit the approved indications for use of the product, require that contraindications, warnings
or precautions be included in the product labeling, require that post-approval studies, including Phase 4 clinical trials, be conducted to further
assess a drug’s safety after approval, require testing and surveillance programs to monitor the product after commercialization, or impose other
conditions, including distribution and use restrictions or other risk management mechanisms under a REMS, which can materially affect the
potential market and profitability of the product. The FDA may prevent or limit further marketing of a product based on the results of post-
marketing studies or surveillance programs. After approval, some types of changes to the approved product, such as adding new indications,
manufacturing changes and additional labeling claims, are subject to further testing requirements and FDA review and approval.
Fast Track Designation
The FDA has various programs, including fast track designation, which are intended to expedite or simplify the process for the
development and FDA review of drugs that are intended for the treatment of serious or life threatening diseases or conditions and demonstrate the
potential to address unmet medical needs. The purpose of these programs is to provide important new drugs to patients earlier than under
standard FDA review procedures. Under the fast track program, the sponsor of a new drug candidate may request that the FDA designate the
drug candidate for a specific indication as a fast track drug concurrent with, or after, the filing of the IND for the drug candidate. To be eligible
for a fast track designation, the FDA must determine, based on the request of a sponsor, that a product is intended to treat a serious or life
threatening disease or condition and demonstrates the potential to address an unmet medical need. The FDA will determine that a product will fill
an unmet medical need if it will provide a therapy where none exists or provide a therapy that may be potentially superior to existing therapy
based on efficacy or safety factors. Fast track designation provides additional opportunities for interaction with the FDA’s review team and may
allow for rolling review of NDA components before the completed application is submitted, if the sponsor provides a schedule for the submission
of the sections of the NDA, the FDA agrees to accept sections of the NDA and determines that the schedule is acceptable, and the sponsor pays
any required user fees upon submission of the first section of the NDA. However, the FDA’s time period goal for reviewing an application does
not begin until the last section of the NDA is submitted. The FDA may decide to rescind the fast track designation if it determines that the
qualifying criteria no longer apply.
Orphan Designation
The FDA may grant orphan designation to drugs or biologics intended to treat a rare disease or condition that affects fewer than 200,000
individuals in the United States, or if it affects more than 200,000 individuals in the United States, and there is no reasonable expectation that the
cost of developing and marketing the product for this type of disease or condition will be recovered from sales in the United States. Orphan
designation must be requested before submitting a NDA or Biologics License Application (“BLA”). After the FDA grants orphan designation,
the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan designation does not convey any
advantage in or shorten the duration of the regulatory review and approval process.
In the United States, orphan designation entitles a party to financial incentives such as opportunities for grant funding towards clinical trial
costs, tax advantages and user-fee waivers. In addition, if a product receives the first FDA approval for the indication for which it has orphan
designation, the product is entitled to orphan exclusivity, which means the FDA may not approve any other application to market the same
product for the same indication for a period of seven years, except in limited circumstances, such as a showing of clinical superiority over the
product with orphan exclusivity or where the manufacturer with orphan exclusivity is unable to assure sufficient quantities of the approved
orphan designated product. Competitors, however, may receive approval of different products for the indication for which the orphan product has
exclusivity or obtain approval for the same product but for a different indication for which the orphan product has exclusivity. Orphan product
exclusivity also could block the approval of one of our products for seven years if a competitor obtains approval of the same product as defined
by the FDA or if our product candidate is determined to be contained within the competitor’s product for the same indication or disease. If a drug
or biological product designated as an orphan product receives marketing approval for an indication broader than what is designated, it may not
be entitled to orphan product exclusivity.
21
Table of Contents
Post-Approval Requirements
Drugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including,
among other things, requirements relating to recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion and
reporting of adverse experiences with the product. After approval, most changes to the approved product, such as adding new indications or other
labeling claims are subject to prior FDA review and approval. There also are continuing, annual program user fee requirements for any marketed
products, as well as application fees for supplemental applications with clinical data.
The FDA may impose a number of post-approval requirements as a condition of approval of an NDA. For example, the FDA may require
post-marketing testing, including Phase 4 clinical trials, and surveillance to further assess and monitor the product’s safety and effectiveness after
commercialization.
In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register
their establishments with the FDA and state agencies and are subject to periodic unannounced inspections by the FDA and these state agencies
for compliance with cGMP requirements. Changes to the manufacturing process are strictly regulated and often require prior FDA approval
before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP requirements and impose
reporting and documentation requirements upon the sponsor and any third-party manufacturers that the sponsor may decide to use. Accordingly,
manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain cGMP compliance.
Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not
maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product, including
adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may
result in mandatory revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical trials to assess
new safety risks; or imposition of distribution or other restrictions under a REMS program. Other potential consequences include, among other
things:
·
·
·
·
·
restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product
recalls;
fines, warning letters or holds on post-approval clinical trials;
refusal of the FDA to approve pending NDAs or supplements to approved NDAs, or suspension or revocation of product
approvals;
product seizure or detention, or refusal to permit the import or export of products; or
injunctions or the imposition of civil or criminal penalties.
The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Drugs may be
promoted only for the approved indications and in accordance with the provisions of the approved label. The FDA and other agencies actively
enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label
uses may be subject to significant liability.
Coverage and Reimbursement
Sales of our product candidates, if approved, will depend, in part, on the extent to which the cost of such products will be covered and
adequately reimbursed by third-party payors, such as government healthcare programs, commercial insurance and managed health care
organizations. These third-party payors are increasingly limiting coverage and/or reducing reimbursements for medical products and services by
challenging the prices and examining the medical necessity and cost-effectiveness of medical products and services, in addition to their safety
and efficacy. If these third-
22
Table of Contents
party payors do not consider our products to be cost-effective compared to other therapies, they may not cover our products after approval 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.
There is no uniform policy requirement for coverage and reimbursement for drug products among third-party payors in the United States.
Therefore, coverage and reimbursement for drug products can differ significantly from payor to payor. The coverage determination process can
be a time-consuming and costly process that may require us to provide scientific and clinical support for the use of our products to each payor
separately, with no assurance that coverage and adequate reimbursement will be obtained or applied consistently. Even if reimbursement is
provided, market acceptance of our products may be adversely affected if the amount of payment for our products proves to be unprofitable for
health care providers or less profitable than alternative treatments, or if administrative burdens make our products less desirable to use.
In addition, the U.S. government, state legislatures and foreign governments have continued implementing cost-containment programs,
including price controls, restrictions on reimbursement and requirements for substitution of generic products. Adoption of price controls and cost-
containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit our net
revenue and results. Decreases in third-party reimbursement for our product candidates or a decision by a third-party payor to not cover our
product candidates could reduce physician usage of our products candidates, once approved, and have a material adverse effect on our sales,
results of operations and financial condition.
The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, collectively
referred to as the ACA, enacted in March 2010, has had and is expected to continue to have a significant impact on the health care industry. The
ACA, among other things, imposes a significant annual fee on certain companies that manufacture or import branded prescription drug products.
The ACA also increased the Medicaid rebate rate and expanded the rebate program to include Medicaid managed care organizations. It also
contains substantial new provisions intended to broaden access to health insurance, reduce or constrain the growth of health care spending,
enhance remedies against health care fraud and abuse, add new transparency requirements for the health care industry, impose new taxes and fees
on pharmaceutical manufacturers, and impose additional health policy reforms, any or all of which may affect our business.
There remain judicial and Congressional challenges to certain aspects of the ACA, as well as efforts by the current administration to repeal
or replace certain aspects of the ACA. For example, since January 2017, the President has signed two Executive Orders and other directives
designed to delay, circumvent, or loosen certain requirements mandated by the ACA. Concurrently, Congress has considered legislation that
would repeal or repeal and replace all or part of the ACA. While Congress has not passed comprehensive repeal legislation, two bills affecting
the implementation of certain taxes under the ACA were signed into law. The Tax Cuts and Jobs Act of 2017 (the “Tax Act”) includes a provision
repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on certain individuals who fail to maintain
qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate”. Additionally, the 2020 federal
spending package permanently eliminated, effective January 1, 2020, the ACA-mandated “Cadillac” tax on high-cost employer-sponsored health
coverage and the medical device tax and, effective January 1, 2021, also eliminates the health insurance tax. Further, the Bipartisan Budget Act of
2018, or the 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”, and increase from 50% to 70% the point-of-sale discount that is owed by pharmaceutical
manufacturers who participate in the Medicare Part D program. On December 14, 2018, a Texas U.S. District Court Judge ruled that the ACA is
unconstitutional in its entirety because the “individual mandate” was repealed by Congress as part of the Tax Act. Additionally, on December 18,
2019, the U.S. Court of Appeals for the 5th Circuit upheld the District Court ruling that the individual mandate was unconstitutional and
remanded the case back to the District Court to determine whether the remaining provisions of the ACA are invalid as well. It is unclear how this
decision, future decisions, subsequent appeals, and other efforts to repeal and replace the ACA will impact the ACA and our business.
Other legislative changes have also been proposed and adopted since the ACA was enacted. For example, the Budget Control Act of 2011
resulted in aggregate reductions in Medicare payments to providers of 2% per fiscal year,
23
Table of Contents
which went into effect in 2013 and, following passage of subsequent legislation, including the BBA, will stay in effect through 2029 unless
additional Congressional action is taken. Additionally, the American Taxpayer Relief Act of 2012, among other things, reduced Medicare
payments to several types of providers and increased the statute of limitations period for the government to recover overpayments to providers
from three to five years. New laws may result in additional reductions in Medicare and other health care funding.
Further, there has been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products.
Such scrutiny has resulted in several recent Congressional inquiries and proposed and enacted federal and state legislation designed to, among
other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform
government program reimbursement methodologies for products. At the federal level, the current administration’s budget proposal for fiscal year
2021 includes a $135 billion allowance to support legislative proposals seeking to reduce drug prices, increase competition, lower out-of-pocket
drug costs for patients, and increase patient access to lower-cost generic and biosimilar drugs. Further, the Trump administration released a
“Blueprint” to lower drug prices and reduce out of pocket costs of drugs that contains additional proposals to increase drug manufacturer
competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their
products, and reduce the out of pocket costs of drug products paid by consumers. The Department of Health and Human Services, or HHS, has
solicited feedback on some of these measures and, at the same, has implemented others under its existing authority. For example, in May 2019,
CMS issued a final rule to allow Medicare Advantage plans the option to use step therapy for Part B drugs beginning January 1, 2020. This final
rule codified CMS’s policy change that was effective January 1, 2019. While some measures may require additional authorization to become
effective, Congress and the current administration have both stated that they will continue to seek new legislative and/or administrative measures
to control drug costs. At the state level, legislatures have become increasingly aggressive in passing legislation and implementing regulations
designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on
certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from
other countries and bulk purchasing.
It is uncertain whether and how future legislation, whether domestic or foreign, could affect prospects for our product candidates or what
actions foreign, federal, state, or private payors for health care treatment and services may take in response to any such health care reform
proposals or legislation. Adoption of price controls and other cost-containment measures, and adoption of more restrictive policies in
jurisdictions with existing controls and measures reforms may prevent or limit our ability to generate revenue, attain profitability or
commercialize our product candidates.
Other Health Care Laws and Compliance Requirements
We will also be subject to health care regulation and enforcement by the federal government and the states and foreign governments in
which we will conduct our business once our products are approved. The laws that may affect our ability to operate include, but are not limited
to, the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health Information Technology for
Economic and Clinical Health Act, which governs the conduct of certain electronic health care transactions and protects the security and privacy
of protected health information; the criminal health care fraud statutes under HIPAA also prohibits persons and entities from knowingly and
willfully executing a scheme to defraud any health care benefit program, including private payors, or knowingly and willfully falsifying,
concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or
payment for health care benefits, items or services; the federal health care programs’ Anti-Kickback Statute, which prohibits, among other things,
persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce
either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under
federal health care programs such as the Medicare and Medicaid programs; federal false claims laws and civil monetary penalties laws that
prohibit, among other things, any person or entity from knowingly presenting, or causing to be presented, a false claim for payment to the federal
government, or knowingly making, or causing to be made, a false statement to have a false claim paid; and the Physician Payments Sunshine Act,
which requires certain manufacturers of drugs, devices, biologics, and medical supplies for which payment is available under Medicare,
Medicaid, or Children’s Health Insurance Program to report annually to the U.S. Department of Health and Human
24
Table of Contents
Services information related to payments and other transfers of value made to physicians (defined to include doctors, dentists, optometrists,
podiatrists and chiropractors) and teaching hospitals, and ownership and investment interests held by physicians and their immediate family
members and, beginning in 2022, applicable manufacturers also will be required to report such information regarding payments and transfers of
value provided, as well as ownership and investment interests held, during the previous year to physician assistants, nurse practitioners, clinical
nurse specialists, certified nurse anesthetists and certified nurse-midwives.
The majority of states also have statutes or regulations similar to the aforementioned federal anti-kickback and false claims laws, which
apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. We may be
subject to state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in
significant ways and often are not preempted by HIPAA, thus complicating compliance efforts. In addition, we may be subject to reporting
requirements under state transparency laws, as well as 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 that otherwise restricts certain payments
that may be made to health care providers and entities. In addition, certain states and local jurisdictions require the registration of pharmaceutical
sales representatives.
Because of the breadth of these laws and the narrowness of available statutory and regulatory exceptions, it is possible that some of our
business activities could be subject to challenge under one or more of such laws. If we or our operations are found to be in violation of any of the
laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including significant administrative,
civil and criminal penalties, damages, fines, imprisonment, disgorgement, additional reporting requirements and oversight if we become subject
to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, exclusion of products from
reimbursement under U.S. federal or state health care programs, and the curtailment or restructuring of our operations.
Government Regulation Outside of the United States
In addition to regulations in the United States, we will be subject to a variety of regulations in other jurisdictions governing, among other
things, clinical studies and any commercial sales and distribution of our products.
Whether or not we obtain FDA approval for a product, we must obtain the requisite approvals from regulatory authorities in foreign
countries prior to the commencement of clinical studies or marketing of the product in those countries. Certain countries outside of the United
States have a similar process that requires the submission of a clinical study application much like the IND prior to the commencement of human
clinical studies.
The requirements and process governing the conduct of clinical studies, product licensing, pricing and reimbursement vary from country to
country. If we fail to comply with applicable foreign regulatory requirements, we may be subject to, among other things, fines, suspension or
withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.
Employees
As of December 31, 2019, we had 73 full-time employees, 54 of whom were in research and development, of which three hold an M.D. and
20 hold Ph.D. degrees. The remaining 19 employees worked in finance, business development, human resources and administrative support, of
which three hold a Ph.D. None of our employees are represented by a labor union or covered by a collective bargaining agreement. We consider
our relationship with our employees to be good.
Corporate and Other Information
Protagonist Pty Limited (“Protagonist Australia”) was incorporated in Australia in September 2001. We were incorporated as a Delaware
corporation in 2006, under the name Protagonist Therapeutics, Inc., and became the parent of Protagonist Australia pursuant to a transaction in
which all of the issued and outstanding capital stock of Protagonist
25
Table of Contents
Australia was exchanged for shares of our common stock and Series A preferred stock. Our principal executive offices are located at 7707
Gateway Boulevard, Suite 140, Newark, California 94560. Our telephone number is (510) 474‑0170. Our website address is www.protagonist-
inc.com. References to our website address do not constitute incorporation by reference of the information contained on the website, and the
information contained on the website is not part of this document.
We make available, free of charge on our corporate website, copies of our Annual Reports on Form 10‑K, Quarterly Reports on Form 10‑Q,
Current Reports on Form 8‑K, Proxy Statements, and all amendments to these reports, as soon as reasonably practicable after such material is
electronically filed with or furnished to the Securities and Exchange Commission pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act. We also show detail about stock trading by corporate insiders by providing access to SEC Forms 3, 4 and 5. This information may also be
obtained from the SEC’s on-line database, which is located at www.sec.gov. Our common stock is traded on the Nasdaq Stock Market under the
symbol “PTGX.”
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012. As such, we are eligible for
exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies, including, but not
limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and reduced
disclosure obligations regarding executive compensation. We will remain an emerging growth company until the earlier of (1) December 31,
2021, (2) the last day of the first fiscal year in which our annual gross revenues are $1.0 billion or more, (3) the date on which we have, during
the previous rolling three-year period, issued more than $1.0 billion in non-convertible debt securities, and (4) the date on which we are deemed
to be a “large accelerated filer” as defined in the Securities Exchange Act of 1934, as amended (Exchange Act).
26
Table of Contents
Item 1A.
Risk Factors
We have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition or
results of operations. Investors should carefully consider the risks described below before making an investment decision. Our business faces
significant risks and the risks described below may not be the only risks we face. Additional risks not presently known to us or that we currently
believe are immaterial may also significantly impair our business operations. If any of these risks occur, our business, results of operations or
financial condition could suffer, the market price of our common stock could decline and you could lose all or part of your investment in our
common stock.
Risks Related to Clinical Development
We are an early clinical-stage biopharmaceutical company with no approved products and no historical product revenue, which makes it
difficult to assess our future prospects and financial results.
We are an early clinical-stage biopharmaceutical company with a limited operating history. Biopharmaceutical product development is a
highly speculative undertaking and involves a substantial degree of uncertainty. Our operations to date have been limited to developing our
technology, undertaking pre-clinical studies and early stage clinical trials of our pipeline candidates and conducting research to identify additional
product candidates. We have not yet demonstrated an ability to generate product revenue or successfully overcome many of the risks and
uncertainties frequently encountered by companies in new and rapidly evolving fields such as biopharmaceutical drug discovery and
development. Consequently, the ability to accurately assess our future operating results or business prospects is significantly more limited than if
we had a longer operating history or approved products on the market.
We expect that our financial condition and operating results will fluctuate significantly from period to period due to a variety of factors,
many of which are beyond our control, including, but not limited to:
·
·
·
·
·
the clinical outcomes from the continued development of our product candidates;
our ability to obtain, as well as the timeliness of obtaining, additional funding to develop and potentially manufacture and
commercialize our product candidates, including payments, if any, under our collaboration agreements;
competition from existing products as well as new products that may receive marketing approval;
the entry of generic or biosimilar versions of products that compete with our product candidates;
the timing of regulatory review and approval of our product candidates;
· market acceptance of our product candidates that receive regulatory approval, if any;
·
·
·
·
the ability of patients or healthcare providers to obtain coverage or sufficient reimbursement for our products;
the ability of third party manufacturers to manufacture in accordance with current good manufacturing practices (“cGMP”) our product
candidates, conduct clinical trials with good clinical practices (“GCP”) and, if approved, for successful commercialization;
our ability to maintain, expand and protect our intellectual property portfolio; and
our ability to attract and retain key personnel with appropriate expertise and experience to manage our business effectively.
27
Table of Contents
Accordingly, the likelihood of our success must be evaluated in light of many potential challenges and variables associated with an early
clinical-stage biopharmaceutical company, many of which are outside of our control, and past results, including operating or financial results,
should not be relied on as an indication of future results.
We are heavily dependent on the success of our product candidates in early-stage clinical development, and if any of these products fail to
receive regulatory approval or are not successfully commercialized, our business would be adversely affected.
We currently have no product candidates that are in registrational or pivotal clinical trials or are approved for commercial sale, and we may
never develop a marketable product. We expect that a substantial portion of our efforts and expenditures over the next few years will be devoted
to our current product candidates and the development of other product candidates. We cannot be certain that our product candidates will receive
regulatory approval or, if approved, be successfully commercialized. The research, testing, manufacturing, labeling, approval, sale, marketing and
distribution of our product candidates will remain subject to extensive regulation by the U.S. Food and Drug Administration (“FDA”) and other
regulatory authorities in the United States and other countries. In addition, even if approved, our pricing and reimbursement will be subject to
further review and discussions with payors. We are not permitted to market any product candidate in the United States until after approval of a
new drug application (“NDA”) from the FDA, or in any foreign countries until approval by corresponding regulatory authorities. We will need to
conduct larger, more extensive clinical trials in the target patient populations to support a potential application for regulatory approval by the
FDA or corresponding regulatory authorities, and we do not expect to be in a position to do so for the near term. We may not receive any
preferential or expedited review of any application for regulatory approval by virtue of the fact that our product candidates target biological
pathways that are also targeted by currently marketed injectable antibody drugs, and our product candidates will be subject to the regulatory
review processes applicable to completely new drugs.
We have not previously submitted an NDA to the FDA, or similar drug approval filings to comparable foreign authorities, for any product
candidate, and we cannot be certain that any of our product candidates will be successful in clinical trial or receive regulatory approval. Filing an
application and obtaining regulatory approval for a pharmaceutical product candidate is an extensive, lengthy, expensive and inherently uncertain
process, and the regulatory authorities may delay, limit or deny approval of our product candidates for many reasons, including:
·
·
·
·
·
·
·
we may not be able to demonstrate that any of our product candidates are safe and effective to the satisfaction of the FDA or
comparable foreign regulatory authorities;
the FDA or comparable foreign regulatory authorities may require additional pre-clinical studies or clinical trials prior to granting
approval, which would increase our costs and extend the pre-approval development process;
the results of our clinical trials may not meet the level of statistical or clinical significance required by the FDA or comparable foreign
regulatory authorities for approval;
the FDA may disagree with the number, design, size, conduct or statistical analysis of one or more of our clinical trials;
Fast Track designation, which we have received for PTG-300 for the treatment of beta-thalassemia, may not lead to faster development
or approval, and such designation may be revoked if we no longer meet the criteria for designation;
contract research organizations (“CROs”) that we retain to conduct clinical trials may take actions outside of our control that materially
and adversely impact our clinical trials;
the FDA or comparable foreign regulatory authorities may disagree with, or not accept, our interpretation of data from our pre-clinical
studies and clinical trials;
28
Table of Contents
·
·
·
·
the FDA may require development of a costly and extensive risk evaluation and mitigation strategy (“REMS”), as a condition of
approval;
the FDA or other regulatory authorities may require post-marketing studies as a condition of approval;
the FDA may identify deficiencies in our manufacturing processes or facilities or those of our third-party manufacturers which would
be required to be corrected prior to regulatory approval; and
the success or further approval of competitor products approved in indications in which we undertake development of our product
candidates may change the standard of care or change the standard for approval of our product candidate in our proposed indications.
Our product candidates will require additional research, clinical development, manufacturing activities, regulatory approval in multiple
jurisdictions, securing sources of commercial manufacturing supply and partnering with a commercial organization. We cannot assure you that
our clinical trials for our product candidates will be initiated or completed in a timely manner or successfully, or at all. Further we cannot be
certain that we plan to advance any other peptide-based product candidates into clinical trials. Moreover, any delay or setback in the development
of any product candidate would be expected to adversely affect our business and cause our stock price to fall. For example, the announcement of
the premature discontinuation of the global Phase 2 clinical trial of PTG-100 for the treatment of moderate-to-severe UC in March 2018 due to
the interim analysis meeting futility criteria on the primary endpoint of clinical remission (that was subsequently confirmed to be due to human
error in endoscopy reads by the original vendor) significantly depressed our stock price.
Clinical development is a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be
predictive of future trial results. Clinical failure can occur at any stage of clinical development.
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 development process. The results of pre-clinical studies and early clinical trials of our product candidates and studies and trials
of other products may not be predictive of the results of later-stage clinical trials. Any hypothesis formed from pre-clinical or early clinical
observations for any of our product candidates may prove to be incorrect, and the data generated in animal models or observed in limited patient
populations may be of limited value, and may not be applicable in clinical trials conducted under the controlled conditions required by applicable
regulatory requirements.
In addition to our planned pre-clinical studies and clinical trials, we expect to have to complete at least two large scale, well-controlled
clinical trials to demonstrate substantial evidence of efficacy and safety for each product candidate we intend to commercialize. Further, given the
patient populations for which we are developing therapeutics, we expect to have to evaluate long-term exposure to establish the safety of our
therapeutics in a chronic dose setting. We have never conducted a Phase 3 clinical trial or submitted an NDA, and as a result, we have no history
or track record to rely on when entering these phases of the development cycle. Product candidates in later stages of clinical trials may fail to
show the desired safety and efficacy traits despite having progressed through pre-clinical studies and initial clinical trials. Clinical trial failures
may result from a multitude of factors including, but not limited to, flaws in trial design, dose selection, placebo effect, patient enrollment criteria
and failure to demonstrate favorable safety and/or efficacy traits of the product candidate. Based upon negative or inconclusive results, we may
decide, or regulators may require us, to conduct additional clinical trials or pre-clinical studies.
We may experience delays in ongoing clinical trials, and we do not know whether planned clinical trials will begin on time, need to be
redesigned, enroll patients on time or be completed on schedule, if at all. Clinical trials can be delayed for a variety of reasons, including delays
related to:
·
obtaining regulatory approvals to commence a clinical trial;
29
Table of Contents
·
·
·
·
·
·
·
reaching agreement on acceptable terms with prospective 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;
fraud or negligence on the part of CROs, contract manufacturing organizations (“CMOs”), consultants or contractors;
obtaining institutional review board (“IRB”) or ethics committee (“EC”), approval at each site;
recruiting and retaining suitable patients to participate in a clinical trial;
having patients complete a clinical trial or return for post-treatment follow-up;
clinical sites deviating from the clinical trial protocol or dropping out of a clinical trial;
adding new clinical trial sites; or
· manufacturing sufficient quantities of product candidate for use in clinical trials.
We could encounter delays if a clinical trial is modified, suspended or terminated by us, by the IRBs or ECs of the institutions in which
such clinical trials are being conducted, by a Data Safety Monitoring Board, for such trial or by the FDA or other regulatory authorities. Such
authorities may impose a modification, suspension or termination due to a number of factors. In addition, there are a significant number of global
clinical trials in IBD and in hematologic disorders that are currently ongoing, especially in Phases 2 and 3, making it highly competitive and
challenging to recruit subjects. Furthermore, any negative results we may report in clinical trials of our product candidates, such as the premature
termination of our Phase 2 clinical trial of PTG-100 for the treatment of moderate-to-severe UC, may make it difficult or impossible to recruit
and retain patients in other clinical trials of that same product candidate. Delays or failures in planned patient enrollment or retention may result
in increased costs, program delays or both.
If we experience delays in the completion of, or termination of, any clinical trial of our product candidates, the commercial prospects of our
product candidates will be harmed and our ability to generate product revenue from any of these product candidates will be delayed. In addition,
any delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process and
jeopardize our ability to commence product sales and generate revenue. Any of these occurrences may harm our business, financial condition and
prospects significantly.
In addition, data obtained from trials and studies are susceptible to varying interpretations, and regulators may not interpret our data as
favorably as we do, which may delay, limit or prevent regulatory approval.
All of our peptide-based product candidates other than PTG-300, PTG-200 and PN-943 are in research or pre-clinical development and have
not entered into clinical trials. If we are unable to develop, test and commercialize our peptide-based product candidates, our business will be
adversely affected.
As part of our strategy, we seek to discover, develop and commercialize a portfolio of new peptide-based product candidates in addition to
PTG-300, PTG-200, and PN-943. Research programs to identify appropriate biological targets pathways and product candidates require
substantial scientific, technical, financial and human resources, whether or not any product candidates are ultimately identified. Our research
programs may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development for
many reasons.
Our proprietary peptide platform may not result in any products of commercial value.
We have developed a proprietary peptide technology platform to enable the identification, testing, design and development of new product
candidates. We cannot assure you that our peptide platform will work, nor that any of these potential targets or other aspects of our proprietary
drug discovery and design platform will yield product candidates that
30
Table of Contents
could enter clinical development and, ultimately, be commercially valuable. Although we expect to continue to enhance the capabilities of our
proprietary platform by developing and integrating existing and new research technologies, we may not be successful in any of our enhancement
and development efforts. If our enhancement or development efforts are unsuccessful, we may not be able to advance our drug discovery
capabilities as quickly as we expect or identify as many potential drug candidates as we desire.
Our product candidates may cause undesirable side effects or have other properties impacting safety that could delay or prevent their
regulatory approval, limit the commercial profile of an approved label, or result in limiting the commercial opportunity for our product
candidates if approved.
Undesirable side effects that may be caused by our product candidates or caused by similar approved drugs or product candidates in
development by other companies, could cause us, an independent data monitoring committee 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
authorities. Results of our clinical trials could reveal a high and unacceptable severity and prevalence of side effects or adverse events related to
our product candidates. In such an event, our clinical trials could be suspended or terminated and the FDA or comparable foreign regulatory
authorities could order us to cease further development of our product candidates for any or all targeted indications. In addition, drug-related side
effects could negatively affect patient recruitment or the ability of enrolled patients to complete the trial and even if our clinical trials are
completed and our product candidate is approved, drug-related side effects could restrict the label or result in potential product liability claims.
Any of these occurrences could significantly harm our business, financial condition and prospects significantly.
Moreover, since our product candidates PTG-200 and PN-943 have been developed for indications for which injectable antibody drugs
have been approved, we expect that our clinical trials would need to show a risk/benefit profile that is competitive with those existing products
and product candidates in order to obtain regulatory approval or, if approved, a product label that is favorable for commercialization.
We have focused our limited resources to pursue particular product candidates and indications, and consequently, we may fail to capitalize on
product candidates or indications that may be more profitable or for which there is a greater likelihood of success.
Because we have limited financial and managerial resources, we have focused on research programs and product candidates mainly on the
development of PTG-300 for treatment of certain rare blood disorders and the discovery and development of PTG-200, including any second-
generation compounds, and PN-943, GI-restricted drugs that target the same biological pathways as currently marketed injectable antibody drugs
for the treatment of IBD. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other 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. If we do not accurately evaluate the commercial potential or target market for a particular product
candidate, we may relinquish valuable rights to that product candidate through collaboration partnerships, 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 product
candidate.
Risks Related to Our Financial Position and Capital Requirements
We have incurred significant losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable
future. We have never generated any revenue from product sales and may never be profitable.
We have incurred significant operating losses since our inception. Our net loss for the years ended December 31, 2019, 2018 and 2017 was
$77.2 million, $38.9 million and $37.0 million, respectively. As of December 31, 2019 and 2018, we had an accumulated deficit of $217.7
million and $140.5 million, respectively. Our prior losses, combined with expected future losses, have had and will continue to have an adverse
effect on our stockholders’ equity and working capital. We expect to continue to incur significant research, development and other expenses
related to our ongoing operations and product development, including clinical development activities under the Janssen License and
31
Table of Contents
Collaboration Agreement, and as a result, we expect to continue to incur losses in the future as we continue our development of, and seek
regulatory approvals for, our peptide-based product candidates.
We do not anticipate generating revenue from sales of products for the foreseeable future, if ever, and we do not currently have any product
candidates in registration or pivotal clinical trials. If any of our peptide-based product candidates fail in clinical trials or do not gain regulatory
approval, or even if approved, fail to achieve market acceptance, we may never become profitable. Furthermore, any revenues generated from the
Janssen License and Collaboration Agreement may not be sufficient alone to sustain our operations as there can be no assurance that we will
receive any opt-in election fees, development, regulatory, or sales milestone payments, or royalties from Janssen in the future pursuant to the
Janssen License and Collaboration Agreement. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis. Failure to become and remain profitable may adversely affect the market price of our common stock and our ability to
raise capital and continue operations.
If one or more of our peptide-based product candidates is approved for commercial sale and we retain commercial rights, we anticipate
incurring significant costs associated with manufacturing and commercializing such approved peptide-based product candidate. Therefore, even
if we are able to generate revenue from the sale of any approved product, we may never become profitable.
We will require substantial additional funding, which may not be available to us on acceptable terms, or at all.
Our operations have consumed substantial amounts of cash since inception. Developing pharmaceutical product candidates, including
conducting pre-clinical studies and clinical trials, is expensive. We will require substantial additional future capital in order to complete clinical
development and, if we are successful, to commercialize any of our current product candidates. If the FDA or any foreign regulatory agency, such
as the European Medicines Agency (“EMA”), requires that we perform studies or trials in addition to those that we currently anticipate with
respect to the development of any of our product candidates, or repeat studies or trials, our expenses would further increase beyond what we
currently expect, and any delay resulting from such further or repeat studies or trials could also result in the need for additional
financing. Further, in the event our Janssen License and Collaboration Agreement is terminated, we may not receive any development fees,
milestone payments, or royalties under the Janssen License and Collaboration Agreement, and we would be required to fund all clinical
development, manufacturing, and commercial activities for PTG-200 and any second-generation compounds, which would require us to raise
additional capital or establish alternative collaborations with third-party collaboration partners, which may not be possible.
As of December 31, 2019, we had cash, cash equivalents and marketable securities of $133.0 million. Based upon our current operating
plan and expected expenditures, we believe that our existing cash, cash equivalents, and marketable securities and proceeds from our debt facility
will be sufficient to fund our operations for at least the next 12 months. However, we expect that we will need to raise substantial additional
funds in the future in order to complete clinical development or commercialize any of our product candidates. Our funding requirements and the
timing of our need for additional capital are subject to change based on a number of factors, including:
·
·
·
·
·
the scope, progress, results and costs of drug discovery, clinical development, laboratory testing and clinical trials for our product
candidates;
the number of product candidates that we intend to develop using our technology platform;
the costs, timing and outcome of any regulatory review of our product candidates;
the timing and achievement of development, regulatory, and sales milestones resulting in the payment to us from Janssen under the
Janssen License and Collaboration Agreement and the timing of receipt of such payments, if any;
the costs and timing of commercialization activities, including manufacturing, marketing, sales and distribution for any product
candidates that receive marketing approval;
32
Table of Contents
·
·
·
·
·
·
Janssen’s ability to successfully market and sell PTG-200 and any second-generation compounds upon regulatory approval and
clearance, in the United States and other countries;
the degree and rate of market acceptance of any products launched by us or our partners;
the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
our need and ability to hire and retain existing and additional personnel;
our ability to establish and maintain collaborations on favorable terms, if at all, and the payment and achievement of the fees,
milestone payments and royalties under those collaborations, including the Janssen License and Collaboration Agreement; and
the emergence of competing technologies or other adverse market developments.
Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our
peptide-based product candidates or technologies.
We may seek additional funding through a combination of equity offerings, debt financings, collaborations and/or licensing arrangements.
Additional funding may not be available to us on acceptable terms, or at all. The incurrence of indebtedness and/or the issuance of certain equity
securities could result in fixed payment obligations and could also result in certain additional restrictive covenants, such as limitations on our
ability to incur debt and/or issue additional equity, limitations on our ability to acquire or license intellectual property rights and other operating
restrictions that could adversely impact our ability to conduct our business. In addition, the issuance of additional equity securities by us, or the
possibility of such issuance, may cause the market price of our common stock to decline. In the event that we enter into collaborations and/or
licensing arrangements in order to raise capital, we may be required to accept unfavorable terms, including relinquishing or licensing to a third
party on unfavorable terms our rights to our proprietary technology platform or peptide-based product candidates that we otherwise would seek to
develop or commercialize ourselves or potentially reserve for future potential arrangements when we might be able to achieve more favorable
terms. To the extent that we raise additional capital through the sale of equity securities, including sales of common stock pursuant to our sales
agreement with Jefferies LLC (the “Sales Agreement”), your ownership interest will be diluted, and the terms may include liquidation or other
preferences that adversely affect your rights as a stockholder. If we issue common stock or securities convertible into common stock, our
common stockholders would experience additional dilution and, as a result, our stock price may decline.
Covenants in our credit and security agreement restrict our business and operations in many ways and if we do not effectively manage our
covenants, our financial conditions and results of operations could be adversely affected.
In October 2019, we entered into a credit and security agreement (the “Credit Agreement”) pursuant to which we have borrowed $10.0
million to date and an additional $40.0 million is available, subject to specified availability periods and the satisfaction of certain conditions. All
of our assets, except for intellectual property and certain other customary excluded property, are security for our borrowings under the Credit
Agreement. The Credit Agreement contains customary affirmative and negative covenants, including, among other things, restrictions on
indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness and dividends and other distributions, any of which
could restrict our business and operations, particularly our ability to respond to changes in our business or to take specified actions to take
advantage of certain business opportunities that may be presented to us.
Our failure to comply with any of the covenants could result in a default under the Credit Agreement, which would permit the lenders to
declare all or part of any outstanding borrowings to be immediately due and payable, or to refuse to permit additional borrowings under the loan
and security agreement. If we are unable to repay those amounts, the lenders under the Credit Agreement could proceed against the collateral
granted to them to secure that debt, which would seriously harm our business. In addition, before we borrow additional funds under the Credit
Agreement, we must first satisfy ourselves that we will have access to existing and future alternate sources of capital, including cash flow
33
Table of Contents
from our own operations, equity capital markets or debt capital markets in order to repay any principal borrowed, which we may be unable to do,
in which case, our liquidity and ability to fund our operations may be substantially impaired.
Risks Related to Our Reliance on Third Parties
If Janssen does not elect to continue the development of PTG-200 or any second-generation compounds, our business and business prospects
would be significantly harmed.
Under the terms of the Janssen License and Collaboration Agreement, Janssen may terminate the research program for second-generation
compounds after an agreed upon period, and retains the right to terminate the Janssen License and Collaboration Agreement for convenience and
without cause on written notice of a certain period. In addition, Janssen will generally retain control over the further clinical development of
PTG-200 and the clinical development of second-generation compounds. Janssen’s decisions with respect to such development will affect the
timing and availability of potential future opt-in, milestone and royalty payments, if any. If the research program or the Janssen License and
Collaboration agreement are terminated early, or if Janssen’s development activities are terminated early or suspended for an extended period of
time, or are otherwise unsuccessful, our business and business prospects would be materially adversely affected.
If there are any safety or efficacy results that cause the benefit-risk profile of PTG-200 or any second-generation compounds to become
unacceptable, clinical development would be delayed or halted, and as a result, Janssen may terminate the Janssen License and
Collaboration Agreement, which would severely and adversely affect our business prospects, and may cause us to cease operations.
PTG-200 or any second-generation compounds may prove to have undesirable or unintended side effects or other characteristics adversely
affecting its safety, efficacy or cost effectiveness that could prevent or limit its approval for marketing and successful commercial use, or that
could delay or prevent the commencement and/or completion of clinical trials. If regulatory submissions requesting approval to market PTG-200
or any such second-generation compounds are submitted, after reviewing the data in such submissions, the FDA and regulatory agencies in other
countries may conclude that the overall benefit-risk profile of treatment is unacceptable, and clinical development would be delayed or halted.
Any of these events would severely harm our business and prospects.
Clinical trials by their nature examine the effects of a potential therapy in a sample of the potential future patient population. As such,
clinical trials conducted with PTG-200 or any second-generation compounds may not uncover all possible adverse events that patients may
experience. We or Janssen may in the future observe or report dose-limiting or other safety issues in potential future clinical trials.
The occurrence of these events may cause Janssen to abandon its development of PTG-200 or any second-generation compounds entirely
and terminate the Janssen License and Collaboration Agreement. Any termination of the Janssen License and Collaboration Agreement by
Janssen would have a material adverse effect on our results of operations, financial condition, business prospects and the future of PTG-200 and
any second-generation compounds.
There may be disagreements between Janssen and Protagonist during the term of the Janssen License and Collaboration Agreement, and if
they are not settled amicably or in the favor of Protagonist, the result may harm our business.
We are subject to the risk of possible disagreements with Janssen, including those regarding the development, manufacture, and
commercialization of PTG-200 or any second-generation compounds, interpretation of the Janssen License and Collaboration Agreement, and
ownership of proprietary rights. In addition, in certain circumstances, we may believe that a particular milestone has been achieved and Janssen
may disagree with our belief. In that case, receipt of that milestone payment may be delayed or may never be received, which would adversely
affect our financial condition and may require us to adjust our operating plans. The joint governance structure contemplated by the Janssen
License and Collaboration Agreement will cease to have decision-making authority once the development term ends, which will preclude our
ability to participate in any further decision-making for PTG-200 and any second-generation
34
Table of Contents
compounds. As a result of possible disagreements with Janssen, we also may become involved in litigation or arbitration, which would be time-
consuming for our management and employees and expensive.
We may not be successful in obtaining or maintaining development and commercialization collaborations, any collaboration arrangements
we enter into in the future may not be successful, and any potential partner may not devote sufficient resources to the development or
commercialization of our product candidates or may otherwise fail in development or commercialization efforts, which could adversely affect
our ability to develop certain of our product candidates and our financial condition and operating results.
Other than our Janssen License and Collaboration Agreement, we have no active collaborations for any of our product candidates. Even if
we are able to establish other collaboration arrangements, any such collaboration may not ultimately be successful, which could have a negative
impact on our business, results of operations, financial condition and growth prospects. While we currently plan to enter into collaborations that
are limited to certain identified territories, there can be no assurance that we would maintain significant rights or control of future development
and commercialization of such product candidate. Accordingly, if we collaborate with a third party for development and commercialization of a
product candidate, we may relinquish some or all of the control over the future success of that product candidate to the third party, and that
partner may not devote sufficient resources to the development or commercialization of our product candidate or may otherwise fail in
development or commercialization efforts, in which event the development and commercialization of the product candidate in the collaboration
could be delayed or terminated and our business could be substantially harmed. In some cases, we may be responsible for continuing
development of a product candidate or research program under a collaboration, and the payments we receive from our partner may be insufficient
to cover the cost of this development or may result in a dispute between the parties. Moreover, collaborations and sales and marketing
arrangements are complex and time consuming to negotiate, document and implement, and they may require substantial resources to maintain,
which may be detrimental to the development of our other product candidates.
We are subject to a number of additional risks associated with our dependence on collaborations with third parties, the occurrence of which
could cause our collaboration arrangements to fail. Conflicts may arise between us and partners, such as conflicts concerning the implementation
of development plans, efforts and resources dedicated to the product candidate, interpretation of clinical data, the achievement of milestones, the
interpretation of financial provisions or the ownership of intellectual property developed during the collaboration. Any such disagreement
between us and a partner could result in one or more of the following, each of which could delay or prevent the development or
commercialization of our product candidates, and in turn prevent us from generating sufficient revenue to achieve or maintain profitability:
·
·
·
reductions in the payment of royalties or other payments we believe are due pursuant to the applicable collaboration arrangement;
actions taken by a partner inside or outside our collaboration which could negatively impact our rights or benefits under our
collaboration; or
unwillingness on the part of a partner to keep us informed regarding the progress of its development and commercialization activities
or to permit public disclosure of the results of those activities.
Any future collaborations that we enter into may not be successful. The success of our collaboration arrangements will depend heavily on
the efforts and activities of our collaborators. Collaborations are subject to numerous risks, which may include that:
·
·
collaborators have significant discretion in determining the efforts and resources that they will apply to collaborations;
collaborators may not pursue development and commercialization of our product candidates or may elect not to continue or renew
development or commercialization programs based on clinical trial results, changes in their strategic focus due to the acquisition of
competitive products, availability of funding or other external factors;
35
Table of Contents
·
·
·
·
·
·
·
collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial, abandon a product
candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing;
collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our products
or product candidates;
we could grant exclusive rights to our collaborators that would prevent us from collaborating with others;
collaborators may not properly maintain or defend our intellectual property rights or may use our intellectual property or proprietary
information in a way that gives rise to actual or threatened litigation that could jeopardize or invalidate our intellectual property or
proprietary information or expose us to potential liability;
disputes may arise between us and a collaborator that causes the delay or termination of the research, development or
commercialization of our current or future products or that results in costly litigation or arbitration that diverts management attention
and resources;
collaborations may be terminated, and, if terminated, may result in a need for additional capital to pursue further development or
commercialization of the applicable current or future products; and
a collaborator’s sales and marketing activities or other operations may not be in compliance with applicable laws resulting in civil or
criminal proceedings.
We rely on third parties to conduct our pre-clinical studies and clinical trials. If these third parties do not successfully carry out their
contractual duties or do not meet regulatory requirements or expected deadlines, we may not be able to obtain timely regulatory approval for
or commercialize our product candidates and our business could be substantially harmed.
We have relied upon and plan to continue to rely upon third party CROs to monitor and manage clinical trials and collect data for our pre-
clinical studies and clinical programs. We rely on these parties for execution of our pre-clinical studies and clinical trials, and control only certain
aspects of their activities. Nevertheless, we are responsible for ensuring that their conduct meets regulatory requirements and that each of our
studies and trials is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards, and our reliance on CROs
does not relieve us of our regulatory responsibilities. Thus, we and our CROs are required to comply with good clinical practices (“GCPs”),
which are regulations and guidelines promulgated by the FDA, the EMA and comparable foreign regulatory authorities for all of our product
candidates in clinical development. Regulatory authorities enforce these GCPs through periodic inspections of trial sponsors, principal
investigators and trial sites. If we or any of our CROs fail to comply with applicable GCPs, the clinical data generated in our clinical trials may
be deemed unreliable and the FDA, EMA or comparable foreign regulatory authorities may not accept the data or require us to perform
additional clinical trials before considering our filing for regulatory approval or approving our marketing application. We cannot assure you that
upon inspection by a regulatory authority, such regulatory authority will determine that any of our clinical trials complies with GCPs. While we
have agreements governing activities of our CROs, we may have limited influence over their actual performance and the qualifications of their
personnel conducting work on our behalf. In addition, significant portions of the clinical studies for our peptide-based product candidates are
expected to be conducted outside of the United States, which will make it more difficult for us to monitor CROs and perform visits of our clinical
trial sites and will force us to rely heavily on CROs to ensure the proper and timely conduct of our clinical trials and compliance with applicable
regulations, including GCPs. Failure to comply with applicable regulations in the conduct of the clinical studies for our peptide-based product
candidates may require us to repeat clinical trials, which would delay the regulatory approval process.
If any of our relationships with these third party CROs terminate, we may not be able to enter into arrangements with alternative CROs or
do so on commercially reasonable terms. In addition, our CROs are not our employees, and except for remedies available to us under our
agreements with such CROs, we cannot control whether or not they devote
36
Table of Contents
sufficient time and resources to our pre-clinical and clinical programs. If CROs do not successfully carry out their contractual duties or
obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised
due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, our clinical trials may be extended, delayed or
terminated and we may not be able to obtain regulatory approval for or successfully commercialize our peptide-based product candidates. As a
result, our results of operations and the commercial prospects for our peptide-based product candidates would be harmed, our costs could
increase substantially and our ability to generate revenue could be delayed significantly.
Switching or adding additional CROs involves additional cost and requires management time and focus. In addition, there is a natural
transition period when a new CRO commences work. As a result, delays occur, which can materially impact our ability to meet our desired
clinical development timelines. There can be no assurance that we will not encounter challenges or delays in the future or that these delays or
challenges will not have a material adverse impact on our business, financial condition and prospects.
We face a variety of manufacturing risks and rely on third parties to manufacture our drug substance and clinical drug product and we
intend to rely on third parties to produce commercial supplies of any approved peptide-based product candidate.
Our clinical trials must be conducted with product manufactured under cGMP and for Europe and other major regions, International
Council for Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use (“ICH”) guidelines, and we rely on
contract manufacturers to manufacture and provide product for us that meet these requirements. We do not currently have nor do we plan to
acquire the infrastructure or capability internally to manufacture our pre-clinical and clinical drug supplies and we lack the resources and the
capability to manufacture any of our peptide-based product candidates on a clinical or commercial scale. We expect to continue to depend on
contract manufacturers for the foreseeable future. As we proceed with the development and potential commercialization of our product
candidates, we will need to increase the scale at which the drug is manufactured which will require the development of new manufacturing
processes to potentially reduce the cost of goods. We will rely on our internal process research and development efforts and those of contract
manufacturers to develop the GMP manufacturing processes required for cost-effective and large scale production. If these efforts are not
successful in developing cost-effective processes and if the contract manufacturers are not successful in converting it to commercial scale
manufacturing, then our development and/or commercialization of our product candidates could be materially adversely affected. Moreover, our
contract manufacturers are the sole source of supply for our clinical product candidates. If we were to experience an unexpected loss of supply
for any reason, whether as a result of manufacturing, supply or storage issues, natural disasters, pandemics or otherwise, we could experience
delays, disruptions, suspensions or termination of our clinical study and planned development program, or be required to restart or repeat, any
ongoing clinical trials.
We also rely on our contract manufacturers to purchase from third party suppliers the materials necessary to produce our peptide-based
product candidates for our clinical trials. There are a limited number of suppliers for raw materials that we use to manufacture our drugs and
there may be a need to assess alternate suppliers to prevent a possible disruption of the manufacture of the materials necessary to produce our
peptide-based product candidates for our clinical trials, and if approved, for commercial sale. We do not have any control over the process or
timing of the acquisition of these raw materials by our manufacturers. Moreover, we currently do not have any agreements for the commercial
production of these raw materials. Although we generally do not begin a clinical trial unless we believe we have a sufficient supply of a peptide-
based product candidate to complete the clinical trial, any significant delay in the supply of a peptide-based product candidate, or the raw
material components thereof, for an ongoing clinical trial due to the need to replace a contract manufacturer or other third party manufacturer
could considerably delay completion of our clinical trials, product testing and potential regulatory approval of our peptide-based product
candidates. If our contract manufacturers or we are unable to purchase these raw materials after regulatory approval has been obtained for our
peptide-based product candidates, the commercial launch of our peptide-based product candidates would be delayed or there would be a shortage
in supply, which would impair our ability to generate revenue from the sale of our peptide-based product candidates.
If we submit an application for regulatory approval of any of our product candidates, the facilities used by our contract manufacturers to
manufacture our product candidates will be subject to inspection and approval by the FDA or
37
Table of Contents
other regulatory authorities. If the FDA or a comparable foreign regulatory authority does not approve these facilities for the manufacture of our
peptide-based product candidates or if it withdraws any such approval in the future, we may need to find alternative manufacturing facilities,
which would significantly impact our ability to develop, obtain regulatory approval for or market our peptide-based product candidates, if
approved.
Risks Related to Regulatory Approval
The regulatory approval processes of the FDA and comparable foreign authorities are lengthy, time consuming and inherently unpredictable,
and if we are ultimately unable to obtain regulatory approval for our product candidates, our business will be substantially harmed.
Our business and future profitability is substantially dependent on our ability to successfully develop, obtain regulatory approval for and
then successfully commercialize our peptide-based product candidates. We are not permitted to market or promote any of our peptide-based
product candidates before we receive regulatory approval from the FDA, the EMA or any other foreign regulatory authority, and we may never
receive such regulatory approval for any of our peptide-based product candidates. The time required to obtain approval by the FDA and
comparable foreign authorities is unpredictable, typically takes many years following the commencement of clinical trials and depends upon
numerous factors. Approval policies, regulations and the types and amount of clinical and manufacturing data necessary to gain approval may
change during the course of 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 product candidates we have in development or may seek to
develop in the future will ever obtain regulatory approval.
Our product candidates could fail to receive regulatory approval for many reasons, including the following:
·
·
·
·
·
·
·
·
the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials;
we may be unable to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that a product candidate is
safe and effective for its proposed indication;
the results of clinical trials may fail to achieve the level of statistical significance required by the FDA or comparable foreign
regulatory authorities for approval;
we may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;
the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data submitted in support of regulatory
approval;
the data collected from pre-clinical studies and clinical trials of our peptide-based product candidates may not be sufficient to support
the submission of an NDA, supplemental NDA, or other regulatory submissions necessary to obtain regulatory approval;
we or our contractors may not meet the GMP and other applicable requirements for manufacturing processes, procedures,
documentation and facilities necessary for approval by the FDA or comparable foreign regulatory authorities; and
changes to the approval policies or regulations of the FDA or comparable foreign regulatory authorities with respect to our product
candidates may result in our clinical data becoming insufficient for approval.
In addition, even if we were to obtain regulatory approval, regulatory authorities may approve our product candidates for fewer or more
limited indications than what we requested approval for, may include safety warnings or
38
Table of Contents
other restrictions that may negatively impact the commercial viability of our product candidates, including the potential for a favorable price or
reimbursement at a level that we would otherwise intend to charge for our products. Likewise, regulatory authorities may grant approval
contingent on the performance of costly post-marketing clinical trials or the conduct of an expensive REMS, which could significantly reduce the
potential for commercial success or viability of our product candidates. Any of the foregoing possibilities could materially harm the prospects for
our product candidates and business and operations.
We have not previously submitted an NDA, a Marketing Authorization Application (“MAA”), or any corresponding drug approval filing to
the FDA, the EMA or any comparable foreign authority for any peptide-based product candidate. Further, our product candidates may not receive
regulatory approval even if we complete such filings. If we do not receive regulatory approvals for our product candidates, we may not be able to
continue our operations.
Even if we obtain and maintain approval for any of our product candidates from the FDA, we may never obtain approval for our product
candidates outside of the United States, which would limit our market opportunities and adversely affect our business.
Sales of our product candidates outside of the United States will be subject to foreign regulatory requirements governing clinical trials and
marketing approval and, to the extent that we retain commercial rights following clinical development, we would plan to seek regulatory
approval to commercialize our peptide-based product candidates in the United States, the EU and additional foreign countries. Even if the FDA
grants marketing approval for a product candidate, comparable regulatory authorities of foreign countries must also approve the manufacturing
and marketing of the product candidates in those countries. Approval procedures vary among jurisdictions and can involve requirements and
administrative review periods different from, and greater than, those in the United States, including additional pre-clinical studies or clinical
trials. In many countries outside the United States, a product candidate must be approved for reimbursement before it can be approved for sale in
that country. Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays,
difficulties and costs for us and could delay or prevent the introduction of our products in certain countries. Further, clinical trials conducted in
one country may not be accepted by regulatory authorities in other countries and regulatory approval in one country does not ensure approval in
any other country, while a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory approval
process in others. If we fail to comply with the regulatory requirements in international markets or to receive applicable marketing approvals, our
target market will be reduced and our ability to realize the full market potential of our peptide-based product candidates will be harmed and our
business will be adversely affected.
We may fail to obtain orphan drug designations from the FDA and/or EU for our product candidates, as applicable, and even if we obtain
such designations, we may be unable to maintain the benefits associated with orphan drug designation, including the potential for market
exclusivity.
Our strategy includes filing for orphan drug designation where available for our product candidates. Under the Orphan Drug Act, the FDA
may grant orphan drug designation to a drug or biologic intended to treat a rare disease or condition, which is defined as one occurring in a
patient population of fewer than 200,000 in the United States, or a patient population greater than 200,000 in the United States where there is no
reasonable expectation that the cost of developing the drug or biologic will be recovered from sales in the United States. In the United States,
orphan drug designation entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages
and user-fee waivers. In addition, if a product that has orphan drug designation subsequently receives the first FDA approval for the disease for
which it has such designation, the product is entitled to orphan drug exclusivity, which means that the FDA may not approve any other
applications, including a full NDA or BLA, to market the same drug or biologic for the same indication for seven years, except in limited
circumstances, such as a showing of clinical superiority to the product with orphan drug exclusivity or where the manufacturer is unable to assure
sufficient product quantity.
PTG-300 has received orphan drug designation for the treatment of patients with beta-thalassemia from the FDA and EU. Despite this
designation, we may be unable to maintain the benefits associated with orphan drug status, including market exclusivity. We may not be the first
to obtain regulatory approval of a product candidate for the beta-thalassemia or any other orphan-designated indication that we may pursue due to
the uncertainties associated with
39
Table of Contents
developing pharmaceutical products. In addition, exclusive marketing rights in the United States may be limited if we seek approval for an
indication broader than the orphan-designated indication or may be lost if the FDA later determines that the request for designation was
materially defective or if we are unable to assure sufficient quantities of the product to meet the needs of patients with the orphan-designated
disease or condition. Further, even if we obtain orphan drug designation exclusivity for a product, that exclusivity may not effectively protect the
product from competition because different drugs with different active moieties may receive and be approved for the same condition, and only
the first applicant to receive approval will receive the benefits of marketing exclusivity. Even after an orphan-designated product is approved, the
FDA can subsequently approve a later drug with the same active moiety for the same condition if the FDA concludes that the later drug is
clinically superior if it is shown to be safer, more effective or makes a major contribution to patient care. In addition, while we may seek orphan
drug designation for our product candidates, we may never receive such designations.
Risks Related to Commercialization of our Product Candidates
We currently have no marketing and sales organization. To the extent any of our peptide-based product candidates for which we maintain
commercial rights is approved for marketing, if we are unable to establish marketing and sales capabilities or enter into agreements with
third parties to market and sell our peptide-based product candidates, we may not be able to effectively market and sell any peptide-based
product candidates, or generate product revenue.
We currently do not have a marketing or sales organization for the marketing, sales and distribution of pharmaceutical products. In order to
commercialize any peptide-based product candidates that receive marketing approval, we would have to build marketing, sales, distribution,
managerial and other non-technical capabilities or make arrangements with third parties to perform these services, and we may not be successful
in doing so. In the event of successful development of any of our product candidates, we may elect to build a targeted specialty sales force which
will be expensive and time consuming. Any failure or delay in the development of our internal sales, marketing and distribution capabilities
would adversely impact the commercialization of these products. With respect to our peptide-based product candidates, we may choose to partner
with third parties that have direct sales forces and established distribution systems, either to augment our own sales force and distribution systems
or in lieu of our own sales force and distribution systems, and in the case of the Janssen License and Collaboration Agreement, we may elect to
exercise our Co-Detailing Option (as described below), which would require us to establish a U.S. sales team. If we are not successful in
commercializing our peptide-based product candidates, either on our own or through collaborations with one or more third parties, our future
revenue will be materially and adversely impacted.
We have not yet negotiated our agreement with Janssen specifying all of the terms of our Co-Detailing Option and would need to develop our
own internal sales force.
Pursuant to the Janssen License and Collaboration Agreement, we have an option, which, if PTG-200 and/or any second-generation
compounds are approved for commercial sale, allows us to elect to provide up to 30% of the PTG-200 selling effort in the United States with
sales force personnel (the “Co-Detailing Option”). While the Janssen License and Collaboration Agreement includes the material terms of our
Co-Detailing Option, Janssen and we mutually agreed to negotiate a separate agreement specifying the detailed activities and responsibilities in
respect of the marketing and co-promotion following our election to exercise our Co-Detailing Option. We will need to negotiate this separate
agreement with Janssen and, as a result, Janssen may place restrictions or additional obligations on us, including financial obligations. Any
restrictions or additional obligations may restrict our co-detailing activities or involve more significant financial or other obligations than we
currently anticipate. There are risks involved with establishing our own sales force capabilities. Developing an internal sales force and function
will require substantial expenditures and will be time-consuming, may expose us to unforeseen costs and expenses, and we may not be able to
effectively recruit, train or retain sales personnel. Accordingly, we may be unable to establish our own sales force which could effectively
preclude our ability to take any advantage of participating in co-detailing PTG-200 and/or any second-generation compounds in the United
States. In addition, any sales force we establish may not be effective, or may be less effective than the any sales force that Janssen utilizes to
promote PTG-200 and/or any second-generation compounds. In such event, commercialization may be adversely affected, which could
materially and adversely affect any sales milestone payments or royalties we may receive under the Janssen License and Collaboration
Agreement.
40
Table of Contents
Even if our product candidates receive marketing approval, they may fail to achieve market acceptance by physicians, patients, government
payors (including Medicare and Medicaid programs), private insurers, and other third-party payors, or others in the medical community
necessary for commercial success.
If any of our product candidates receive marketing approval, they may nonetheless fail to gain sufficient market acceptance by physicians,
patients, government payors, other third-party payors and other healthcare providers. If any of our approved products fail to achieve an adequate
level of acceptance, we may not generate significant revenue to become profitable. The degree of market acceptance, if approved for commercial
sale, will depend on a number of factors, including but not limited to:
·
·
·
·
·
·
·
·
·
the efficacy and potential advantages compared to alternative treatments;
effectiveness of sales, marketing and distribution efforts;
the cost of treatment in relation to alternative treatments;
the convenience and ease of administration compared to alternative treatments;
the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;
the willingness of the medical community to offer customers our product candidates in addition to or in the place of current injectable
therapies;
the availability of government and third-party coverage and adequate reimbursement;
the prevalence and severity of any side effects; and
any restrictions on the use of our product candidates together with other medications.
Because we expect sales of our peptide-based product candidates, if approved, to generate revenue for us to achieve profitability, the failure
of our peptide-based product candidates to achieve market acceptance would harm our business and could require us to seek collaborations or
undertake additional financings sooner than we would otherwise plan.
Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our
product candidates and affect the prices we may obtain.
In the United States and some foreign jurisdictions, there have been, and we expect there will continue to be, a number of legislative and
regulatory changes and proposed changes regarding the healthcare system that could, among other things, prevent or delay marketing approval of
our product candidates, restrict or regulate post-approval activities and affect our ability to profitably sell any peptide-based product candidates
for which we obtain marketing approval.
For example, in the United States in March 2010, the ACA was enacted to increase access to health insurance, reduce or constrain the
growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for health care and the health
insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. The law has continued the
downward pressure on pharmaceutical pricing, especially under the Medicare program, and increased the industry’s regulatory burdens and
operating costs.
There remain judicial and Congressional challenges to certain aspects of the ACA, as well as efforts by the current administration to repeal
or replace certain aspects of the ACA. Since January 2017, the President has signed two Executive Orders and other directives designed to delay
the implementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the
ACA. Concurrently, Congress has
41
Table of Contents
considered legislation that would repeal or repeal and replace all or part of the ACA. While Congress has not passed comprehensive repeal
legislation, two bills affecting the implementation of certain taxes under the ACA have been enacted. The Tax Cuts and Jobs Act of 2017 (the
“Tax Act”) includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on certain
individuals who fail to maintain qualifying health coverage for all or part of a year. Additionally, the 2020 federal spending package permanently
eliminated, effective January 1, 2020, the ACA-mandated “Cadillac” tax on high-cost employer-sponsored health coverage and the medical
device tax and, effective January 1, 2021, also eliminates the health insurance tax. Further, the Bipartisan Budget Act of 2018 (the “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.” Congress may consider other legislation to repeal or replace other elements of the ACA. On December 14, 2018, a Texas U.S.
District Court Judge ruled that the ACA is unconstitutional in its entirety because the “individual mandate” was repealed by Congress as part of
the Tax Act. Additionally, on December 18, 2019, the U.S. Court of Appeals for the 5th Circuit upheld the District Court ruling that the
individual mandate was unconstitutional and remanded the case back to the District Court to determine whether the remaining provisions of the
ACA are invalid as well. It is unclear how this decision, future decisions, subsequent appeals and other efforts to repeal and replace the ACA will
impact the ACA and our business.
In addition, other legislative changes have been proposed and adopted in the United States since the ACA was enacted. These changes
included aggregate reductions to Medicare payments to providers of 2% per fiscal year, which went into effect in April 2013 and, due to
subsequent legislative amendments to the statute, including the BBA, will remain in effect through 2029 unless additional action is taken by
Congress. 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 and increased the statute of limitations period in which the government may recover overpayments to
providers from three to five years.
Further, there has been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products.
Such scrutiny has resulted in several recent Congressional inquiries and proposed and enacted federal and state legislation designed to, among
other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform
government program reimbursement methodologies for products. At the federal level, the current administration’s budget proposal for fiscal year
2021 includes a $135 billion allowance to support legislative proposals seeking to reduce drug prices, increase competition, lower out-of-pocket
drug costs for patients and increase patient access to lower-cost generic and biosimilar drugs. Further, the current administration released a
“Blueprint” to lower drug prices and reduce out-of-pocket costs of drugs that contains additional proposals to increase drug manufacturer
competition, increase the negotiating power of certain federal health programs, incentivize manufacturers to lower the list price of their products
and reduce the out-of-pocket costs of drug products paid by consumers. While some of the measures may require additional authorization to
become effective, Congress and the current administration have both stated that they will continue to seek new legislative and/or administrative
measures to control drug costs. At the state level, legislatures have become increasingly aggressive in passing legislation and implementing
regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts,
restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage
importation from other countries and bulk purchasing. The implementation of cost containment measures or other healthcare reforms may
prevent us from being able to generate revenue, attain profitability or commercialize our product candidates, if approved.
We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts
that federal and state governments will pay for healthcare therapies, which could result in reduced demand for our peptide-based product
candidates or additional pricing pressures.
Legislative and regulatory proposals have also 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 regulations,
guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any,
may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing
approval, as well as subject us to more stringent product labeling and post-marketing testing and other requirements.
42
Table of Contents
Governments outside the United States tend to impose strict price controls, which may adversely affect our revenues, if any.
In some countries, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations
with governmental authorities can take considerable time after the receipt of marketing approval for a product candidate. In addition, there can be
considerable pressure by governments and other stakeholders on prices and reimbursement levels. Political, economic and regulatory
developments may further complicate pricing negotiations, and pricing negotiations may continue after coverage and reimbursement have been
obtained. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-
effectiveness of our product candidate to other available therapies, which is time-consuming and costly. If coverage and reimbursement of our
product candidates are unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be harmed,
possibly materially.
We currently conduct, and intend to continue to conduct, a substantial portion of the clinical trials for our product candidates outside of the
United States. If approved, we may commercialize our product candidates abroad. We will thus be subject to the risks of doing business
outside of the United States.
We currently conduct, and intend to continue to conduct, a substantial portion of our clinical trials outside of the United States and, if
approved, we intend to also market our peptide-based product candidates outside of the United States. We are thus subject to risks associated with
doing business outside of the United States. Our business and financial results in the future could be adversely affected due to a variety of factors
associated with conducting development and marketing of our peptide-based product candidates, if approved, outside of the United States,
including:
· medical standard of care and diagnostic criteria may differ in foreign jurisdictions, which may impact our ability to enroll and
successfully complete trials designed for U.S. marketing;
·
·
·
·
·
·
·
·
·
efforts to develop an international sales, marketing and distribution organization may increase our expenses, divert our management’s
attention from the acquisition or development of peptide-based product candidates or cause us to forgo profitable licensing
opportunities in these geographies;
changes in a specific country’s or region’s political and cultural climate or economic condition;
unexpected changes in foreign laws and regulatory requirements;
difficulty of effective enforcement of contractual provisions and intellectual property protections in foreign countries;
trade-protection measures, import or export licensing requirements such as Export Administration Regulations promulgated by the
U.S. Department of Commerce and fines, penalties or suspension or revocation of export privileges;
regulations under the U.S. Foreign Corrupt Practices Act and similar foreign anti-corruption laws;
differing payor reimbursement regimes, governmental payors or patient self-pay systems and price controls;
the effects of applicable foreign tax structures and potentially adverse tax consequences; and
significant adverse changes in foreign currency exchange rates which could make the cost of our clinical trials, to the extent conducted
outside of the U.S., more expensive.
If we are unable to anticipate and address these risks properly, our business and financial results will be harmed.
43
Table of Contents
Our business could be adversely affected by the effects of health epidemics, including the recent coronavirus, or COVID-19, outbreak, in
regions where we or third parties on which we rely have significant manufacturing and distribution facilities, concentrations of clinical trial
sites or other business operations. We have clinical trial sites in countries that have been directly affected by COVID-19, and depend on
outsourced manufacturing operations, including China, for various stages of our supply chain. In addition, if COVID-19 becomes a
pandemic, it could materially affect our operations globally, including at our headquarters in the San Francisco Bay Area and at our clinical
trial sites throughout the globe.
Our business could be adversely affected by health epidemics in regions where we have significant manufacturing and distribution
facilities, concentrations of clinical trial sites or other business operations.
If the recent coronavirus, or COVID-19, outbreak continues to spread, we may need to limit operations or implement limitations, including
work from home policies. There is a risk that some countries or regions may be less effective at containing COVID-19, or it may be more
difficult to contain if the outbreak reaches a larger population or broader geography, in which case the risks described herein could be elevated
significantly.
In particular, some of our suppliers of certain materials, including certain critical active pharmaceutical ingredients, used in the production
of our drug products are located in China, and possibly other affected areas. While many of these materials may be obtained by more than one
supplier, including suppliers outside of China, port closures, country lockdowns, and other restrictions resulting from the COVID-19 outbreak in
a region may disrupt our supply chain or limit our ability to obtain sufficient materials for our drug products. While we are closely monitoring
developments and are implementing and evaluating new mitigation strategies, the full impact of this outbreak is uncertain at this time and any
prolonged disruption to our manufacturers and distributors could significantly disrupt our supply chain and could have a material adverse effect
on our development plans and business.
In addition, our clinical trials may be affected by the COVID-19 outbreak. Site initiation and patient enrollment may be delayed or
disrupted due to prioritization of hospital and medical resources toward the COVID-19 outbreak or inability to access hospital and other clinical
sites. Further, site initiation and patient enrollment may be delayed due to difficulties related to clinical site investigators, clinical site staff and
patients who may be reluctant to travel to medical sites to comply with clinical trial protocols or be monitored. If COVID-19 becomes a
pandemic, it may delay enrollment in our global clinical trials, some patients may not be able to comply with clinical trial protocols if quarantines
impede patient movement or interrupt healthcare services, and we may be unable to obtain data from blood samples or other required medical
procedures.
The ultimate impact of the COVID-19 outbreak or a similar health epidemic is highly uncertain and subject to change. We do not yet know
the full extent of potential delays or impacts on our business, our supply chain, clinical trials, healthcare systems or the global economy as a
whole. However, these effects could have a material impact on our operations, and, therefore, we will continue to monitor the COVID-19
situation closely and implement risk mitigation as needed.
44
Table of Contents
Risks Related to Our Business and Industry
We face significant competition from other biotechnology and pharmaceutical companies, and our operating results will suffer if we fail to
compete effectively.
The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. We
have competitors worldwide, including major multinational pharmaceutical companies, biotechnology companies, specialty pharmaceutical and
generic pharmaceutical companies as well as universities and other research institutions.
Many of our competitors have substantially greater financial, technical and other resources, such as larger research and development staff,
and experienced marketing and manufacturing organizations. As a result, these companies may obtain regulatory approval more rapidly than we
are able and may be more effective in selling and marketing their products. Smaller or early-stage companies may also prove to be significant
competitors, particularly through collaborative arrangements with large, established companies. Competition may increase further as a result of
advances in the commercial applicability of newer technologies and greater availability of capital for investment in these industries. Our
competitors may succeed in developing, acquiring or licensing, on an exclusive basis, pharmaceutical products that are easier to develop, more
effective or less costly than any product candidates that we are currently developing or that we may develop. If approved, our product candidates
are expected to face competition from commercially available drugs as well as drugs that are in the development pipelines of our competitors.
Pharmaceutical companies may invest heavily to accelerate discovery and development of novel compounds or to in-license novel
compounds that could make our product candidates less competitive. In addition, any new product that competes with an approved product must
demonstrate advantages in efficacy, convenience, tolerability or safety in order to overcome price competition and to be commercially successful.
If our competitors succeed in obtaining FDA, EMA or other regulatory approval or discovering, developing and commercializing drugs before
we do, there would be a material adverse impact on the future prospects for our product candidates and business.
We believe that our ability to successfully compete will depend on, among other things:
·
·
·
·
·
·
·
·
the efficacy and safety of our product candidates, in particular compared to competitor products;
the time it takes for our product candidates to complete clinical development and receive regulatory approval, if at all;
the ability to commercialize and market any of our product candidates that receive regulatory approval;
the price of our products, including in comparison to branded or generic competitors;
whether coverage and adequate levels of reimbursement are available under private and governmental health insurance plans, including
Medicare;
the ability to protect intellectual property rights related to our product candidates;
the ability to manufacture and sell commercial quantities of any of our product candidates that receive regulatory approval; and
acceptance of any of our approved product candidates by physicians, payors and other healthcare providers.
Because our research approach depends on our proprietary technology platform, it may be difficult for us to continue to successfully
compete in the face of rapid changes in technology. If we fail to continue to advance our technology platform, technological change may impair
our ability to compete effectively and technological advances or
45
Table of Contents
products developed by our competitors may render our technologies or product candidates obsolete, less competitive or not economical.
If we fail to comply with state and federal healthcare regulatory laws, we could face substantial penalties, damages, fines, disgorgement,
integrity oversight and reporting obligations, exclusion from participation in governmental healthcare programs, and the curtailment of our
operations, any of which could adversely affect our business, operations, and financial condition.
Healthcare providers, physicians and third-party payors will play a primary role in the recommendation and prescription of any future
product candidates we may develop or any product candidates for which we obtain marketing approval. Our arrangements with third-party payors
and customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may affect the business or
financial arrangements and relationships through which we would market, sell and distribute our products. 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. The laws that may affect our ability to
operate include, but are not limited to:
·
·
·
·
·
·
·
the federal Anti-Kickback Statute;
the federal false claims laws, including the False Claims Act;
the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”);
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and their implementing regulations,
which also imposes obligations, including mandatory contractual terms, on HIPAA-covered entities and their business associates with
respect to safeguarding the privacy, security and transmission of individually identifiable health information;
the federal civil monetary penalties statute;
the federal Physician Payments Sunshine Act; and
analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws.
Further, the ACA, among other things, amended the intent requirements of the federal Anti-Kickback Statute and certain criminal statutes
governing healthcare fraud. Any violations of these laws, or any action against us for violation of these laws, even if we successfully defend
against it, could result in a material adverse effect on our reputation, business, results of operations and financial condition.
We have entered into consulting and scientific advisory board arrangements with physicians and other healthcare providers, including some
who could influence the use of our product candidates, if approved. While we have worked to structure our arrangements to comply with
applicable laws, because of the complex and far-reaching nature of these laws, regulatory agencies may view these transactions as prohibited
arrangements that must be restructured, or discontinued, or for which we could be subject to other significant penalties. We could be adversely
affected if regulatory agencies interpret our financial relationships with providers who may influence the ordering of and use our product
candidates, if approved, to be in violation of applicable laws.
The scope and enforcement of each of these laws is uncertain and subject to rapid change in the current environment of healthcare reform.
Federal and state enforcement bodies have continued to increase their scrutiny of interactions between healthcare companies and healthcare
providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. Additionally, as a
result of these investigations, healthcare providers and entities may have to agree to additional onerous compliance and reporting requirements as
part
46
Table of Contents
of a consent decree or corporate integrity agreement. Any such investigation or settlement could increase our costs or otherwise have an adverse
effect on our business.
If our operations are found to be in violation of any of these laws or any other governmental laws and regulations that may apply to us, we
may be subject to significant civil, criminal and administrative penalties, damages, fines, disgorgement, imprisonment, integrity oversight and
reporting obligations, exclusion from government funded healthcare programs, such as Medicare and Medicaid, disgorgement, contractual
damages, reputational harm, diminished profits and the curtailment or restructuring of our operations. If, and to the extent that, Janssen or we are
unable to comply with these regulations, our ability to earn potential royalties from worldwide net sales of PTG-200 would be materially and
adversely impacted. If any of the physicians or other healthcare providers or entities with whom we expect to do business is found to be not in
compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government
funded healthcare programs. The imposition of any of these penalties or other commercial limitations could negatively impact our collaboration
with Janssen or cause Janssen to terminate the Janssen License and Collaboration Agreement, either of which would materially and adversely
affect our business, financial condition and results of operations.
Our future success depends on our ability to retain our executive officers and to attract, retain and motivate qualified 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 industry has experienced a high rate of turnover of management personnel in recent years. Our ability to compete in the highly
competitive biotechnology and pharmaceuticals industries depends upon our ability to attract and retain highly qualified managerial, scientific,
medical and regulatory personnel. We are highly dependent on our existing senior management team. In order to induce valuable employees to
continue their employment with us, we have provided stock options that vest over time. The value to employees of stock options that vest over
time is significantly affected by movements in our stock price that are beyond our control and may at any time be insufficient to maintain
retention incentives or counteract more lucrative offers from other companies. All of our employees may terminate their employment with us at
any time, with or without notice. The loss of the services of any of our executive officers or other key employees and our inability to find suitable
replacements would harm our research and development efforts, our collaboration efforts, as well as our business, financial condition and
prospects. Our success also depends on our ability to continue to attract, retain and motivate highly skilled and experienced personnel with
scientific, medical, regulatory, manufacturing and management training and skills.
We may not be able to attract or retain qualified personnel in the future due to the intense competition for a limited number of qualified
personnel among biopharmaceutical, biotechnology, pharmaceutical and other businesses. Many of the other biopharmaceutical and
pharmaceutical companies that we compete against for qualified personnel have greater financial and other resources, different risk profiles and a
longer history in the industry than we do. Any or all of these competing factors may limit our ability to continue to attract and retain high quality
personnel, which could negatively affect our ability to successfully develop and commercialize peptide-based product candidates and to grow our
business and operations as currently contemplated.
We may need to expand the size of our organization, and we may experience difficulties in managing this growth.
As of December 31, 2019, we had 73 full-time employees, including 54 employees engaged in research and development. As our
development and commercialization plans and strategies develop and we continue to operate as a public company, we expect to need additional
managerial, operational, scientific, sales, marketing, development, regulatory, manufacturing, financial and other resources. Future growth would
impose significant added responsibilities on members of management, including:
·
·
designing and managing our clinical trials effectively;
identifying, recruiting, maintaining, motivating and integrating additional employees;
· managing our manufacturing and development efforts effectively; and
47
Table of Contents
·
improving our managerial, development, operational and financial systems and controls.
As our operations expand, we expect that we will need to manage relationships with strategic collaborators, CROs, contract manufacturers,
suppliers, vendors and other third parties. Our future financial performance and our ability to develop and commercialize our peptide-based
product candidates and to compete effectively will depend, in part, on our ability to manage any future growth effectively. We may not be
successful in accomplishing these tasks in growing our company, and our failure to accomplish any of them could adversely affect our business
and operations.
Significant disruptions of information technology systems or breaches of data security could adversely affect our business.
Our business is increasingly dependent on critical, complex and interdependent information technology systems, including Internet-based
systems, to support business processes as well as internal and external communications. The size and complexity of our internal computer
systems and those of our CROs, contract manufacturers, collaboration partner, and other third parties on which we rely may make them
potentially vulnerable to breakdown, telecommunications and electrical failures, malicious intrusion and computer viruses that may result in the
impairment of key business processes. In addition, our systems are potentially vulnerable to data security breaches-whether by employees or
others-that may expose sensitive data to unauthorized persons. Such data security breaches could lead to the loss of trade secrets or other
intellectual property or could lead to the public exposure of personally identifiable information (including sensitive personal information) of our
employees, collaborators, clinical trial patients, and others. A data security breach or privacy violation that leads to disclosure or modification of
or prevents access to patient information, including personally identifiable information or protected health information, could harm our
reputation, compel us to comply with federal and/or state breach notification laws, subject us to mandatory corrective action, require us to verify
the correctness of database contents and otherwise subject us to liability under laws and regulations that protect personal data, resulting in
increased costs or loss of revenue. If we are unable to prevent such data security breaches or privacy violations or implement satisfactory
remedial measures, our operations could be disrupted, and we may suffer loss of reputation, financial loss and other regulatory penalties because
of lost or misappropriated information, including sensitive patient data. While we have implemented security measures to protect our data
security and information technology systems, such measures may not prevent such events. Any such disruptions and breaches of security could
have a material adverse effect on the development of our product candidates as well as our business and financial condition.
Our insurance policies are expensive and only protect us from some business risks, which will leave us exposed to significant uninsured
liabilities.
We do not carry insurance for all categories of risk that our business may encounter. Some of the policies we currently maintain include
general liability, employment practices liability, property, cyber, auto liability, workers’ compensation, clinical trial, products liability and
directors’ and officers’ insurance. We do not know, however, if we will be able to maintain insurance with adequate levels of coverage to insure
risks which could arise from our operations. Any significant uninsured losses or liabilities may require us to pay substantial amounts from
corporate cash intended to fund operations, which would adversely affect our financial position and results of operations.
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, and 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.
48
Table of Contents
If we, or our contractors or agents are unable to comply with federal, state and county environmental and safety laws and regulations,
including those governing laboratory procedures and the handling of biohazardous materials, chemicals and various radioactive compounds,
considerable additional costs or liabilities could be assessed that would have a material adverse effect on our financial condition. We, our
collaborators, contractors or agents may be required to incur significant costs to comply with current or future environmental laws and
regulations and may be adversely affected by the cost of compliance with these laws and regulations.
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 or other work-related injuries, this insurance may not provide adequate coverage against potential
liabilities. 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.
Our employees, independent contractors, principal investigators, consultants and vendors may engage in misconduct or other improper
activities, including noncompliance with regulatory standards and requirements, which could have a material adverse effect on our business.
We are exposed to the risk that our employees, independent contractors, principal investigators, consultants and vendors may engage in
fraudulent conduct or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure
of unauthorized activities to us that violates: (i) FDA laws and regulations or those of comparable foreign regulatory authorities, (ii)
manufacturing standards, (iii) federal and state data privacy, security, fraud and abuse and other healthcare laws and regulations established and
enforced by comparable foreign regulatory authorities, or (iv) laws that require the true, complete and accurate reporting of financial information
or data. Activities subject to these laws also involve the improper use or misrepresentation of information obtained in the course of clinical trials,
creating fraudulent data in our pre-clinical studies or clinical trials or illegal misappropriation of drug product, which could result in regulatory
sanctions and cause serious harm to our reputation. It is not always possible to identify and deter misconduct by employees and third-parties, and
the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in
protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or
regulations. Additionally, we are subject to the risk that a person or government could allege such fraud or other misconduct, even if none
occurred. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could
have a significant impact on our business and results of operations, including the imposition of significant fines or other sanctions.
If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of any
of our peptide-based product candidates, if approved.
We face an inherent risk of product liability as a result of the clinical testing of our peptide-based product candidates and will face an even
greater risk if we commercialize any products. For example, we may be sued if any product we develop allegedly causes injury or is found to be
otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of
defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of
warranties. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to stop
development or, if approved, limit commercialization of our peptide-based product candidates.
Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome,
liability claims may result in:
·
·
·
delay or termination of clinical studies;
injury to our reputation;
withdrawal of clinical trial participants;
49
Table of Contents
·
·
·
·
·
·
·
·
initiation of investigations by regulators;
costs to defend the related litigation;
a diversion of management’s time and our resources;
substantial monetary awards to trial participants or patients;
decreased demand for our peptide-based product candidates;
product recalls, withdrawals or labeling, marketing or promotional restrictions;
loss of revenue from product sales; and
the inability to commercialize any our peptide-based product candidates, if approved.
Our inability to obtain and retain sufficient product liability insurance at an acceptable cost to protect against potential product liability
claims could prevent or inhibit the development or commercialization of our peptide-based product candidates. We currently carry clinical trial
liability insurance for our clinical trials. Although we maintain such insurance, any claim that may be brought against us could result in a court
judgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits of our insurance
coverage. Our insurance policies also have various exclusions, and we may be subject to a product liability claim for which we have no coverage.
We will have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by
our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts.
Our headquarters and certain of our data storage facilities are located near known earthquake fault zones. The occurrence of an earthquake,
fire or any other catastrophic event could disrupt our operations or the operations of third parties who provide vital support functions to us,
which could have a material adverse effect on our business and financial condition.
We and some of the third party service providers on which we depend for various support functions, such as data storage, are vulnerable to
damage from catastrophic events, such as power loss, natural disasters, terrorism and similar unforeseen events beyond our control. Our
corporate headquarters and other facilities are located in the San Francisco Bay Area, which in the past has experienced severe earthquakes and
fires. We do not carry earthquake insurance. Earthquakes or other natural disasters could severely disrupt our operations, and have a material
adverse effect on our business, results of operations, financial condition and prospects.
If a natural disaster, power outage or other event occurred that prevented us from using all or a significant portion of our headquarters,
damaged critical infrastructure, such as our data storage facilities or financial systems, or that otherwise disrupted operations, it may be difficult
or, in certain cases, impossible for us to continue our business for a substantial period of time. We do not have a disaster recovery and business
continuity plan in place. We may incur substantial expenses as a result of the absence or limited nature of our internal or third party service
provider disaster recovery and business continuity plans, which, particularly when taken together with our lack of earthquake insurance, could
have a material adverse effect on our business. Furthermore, integral parties in our supply chain are operating from single sites, increasing their
vulnerability to natural disasters or other sudden, unforeseen and severe adverse events. If such an event were to affect our supply chain, it could
have a material adverse effect on our development plans and business.
50
Table of Contents
The insurance coverage and reimbursement status of newly approved products is uncertain. Failure to obtain or maintain adequate coverage
and reimbursement for our peptide-based product candidates could limit our ability to generate revenue.
The availability and extent of reimbursement by governmental and private payors is essential for most patients to be able to afford
medications and therapies. Sales of any of our peptide-based product candidates that receive marketing approval will depend substantially, both
in the United States and internationally, on the extent to which the costs of our peptide-based product candidates will be 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 third-party payors. If reimbursement is not available, or is available only to
limited levels, we may not be able to successfully commercialize our product candidates. Even if coverage is provided, the approved
reimbursement amount may not be high enough to allow us to establish or maintain adequate pricing that will allow us to realize a sufficient
return on our investment.
There is significant uncertainty related to the insurance coverage and reimbursement of newly approved products. In the United States, the
principal decisions about reimbursement for new products are typically made by the Centers for Medicare & Medicaid Services (“CMS”). CMS
decides whether and to what extent a new product will be covered and reimbursed under Medicare. Private payors tend to follow CMS to a
substantial degree, but also have their own methods and approval process. Therefore, coverage and reimbursement can differ significantly from
payor to payor. It is difficult to predict what CMS will decide with respect to reimbursement for novel products such as ours since there is no
body of established practices and precedents for these new products.
Outside the United States, international operations are generally subject to extensive governmental price controls and other market
regulations, and we believe the increasing emphasis on cost-containment initiatives in Europe, Canada and other countries may cause us to price
our product candidates on less favorable terms than we currently anticipate. In many countries, particularly the countries of the European Union,
the prices of medical products are subject to varying price control mechanisms as part of national health systems. In these countries, pricing
negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain
reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our
peptide-based product candidates to other available therapies. In general, the prices of products under such systems are substantially lower than in
the United States. Additional foreign price controls or other changes in pricing regulation could restrict the amount that we are able to charge for
our peptide-based product candidates. Accordingly, in markets outside the United States, the reimbursement for our products may be reduced
compared with the United States and may be insufficient to generate commercially reasonable revenues and profits.
Moreover, increasing efforts by governmental and third-party payors, in the United States and internationally, to cap or reduce healthcare
costs may cause such organizations to limit both coverage and level of reimbursement for new products approved and, as a result, they may not
cover or provide adequate payment for our product candidates. The downward pressure on healthcare costs in general, particularly prescription
drugs and surgical procedures and other treatments, has become very intense. As a result, increasingly high barriers are being erected to the entry
of new products into the healthcare market.
Risks Related to Our Intellectual Property
If we are unable to obtain or protect intellectual property rights related to our product candidates and technologies, we may not be able to
compete effectively in our markets.
We rely upon a combination of patent protection, trade secret protection and confidentiality agreements to protect the intellectual property
related to our product candidates and technologies. The strength of patents in the biotechnology and pharmaceutical field involves complex legal
and scientific questions and can be uncertain. The patent prosecution process is expensive and time-consuming, and we may not be able to file
and prosecute all necessary or desirable patent applications at a reasonable cost, in a timely manner, or in all jurisdictions. The patent applications
that we own or license may fail to result in issued patents in the United States or in other foreign countries, or they may fail to result in issued
patents with claims that cover our product candidates or technologies in the United States or in other foreign
51
Table of Contents
countries. There is no assurance that all the potentially relevant prior art relating to our patent and patent applications has been found, which can
invalidate a patent or prevent a patent from issuing from a pending patent application. Even if patents have been issued, or do successfully issue,
from 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, our patent and patent applications may not adequately
protect our intellectual property, provide exclusivity for our product candidates and technologies, or prevent others from designing around our
claims.
If the breadth or strength of protection provided by the patent and patent applications we hold, obtain or pursue with respect to our product
candidates and technologies is challenged, or if they fail to provide meaningful exclusivity for our product candidates and technologies, it could
threaten our ability to commercialize our product candidates and technologies. Several patent applications covering our product candidates and
technologies have been filed. We cannot offer any assurances about which, if any, patents will issue, the breadth of any such patent, or whether
any issued patents will be found invalid and unenforceable or will be threatened by third parties. Any successful opposition or other challenge to
these patents or any other patents owned by or, if applicable in the future, licensed to us could deprive us of rights necessary for the successful
commercialization of any product candidates and technologies that we may develop. Since patent applications in the United States and most other
countries are confidential for a period of time after filing, we cannot be certain that we or our licensors were the first to file any patent application
related to our product candidates and technologies.
In addition, patents have a limited lifespan. In the United States, the natural expiration of a patent is generally 20 years after it is filed.
Various extensions may be available however the life of a patent, and the protection it affords, is limited. Even if patents covering our product
candidates are obtained, once the patent life has expired for a product, we may be open to competition from generic medications. For example,
our granted U.S. patents covering PN-943 and PTG-200 expire in 2035, and our granted U.S. patent covering PTG-300 expires in 2034. In
addition, although upon issuance in the United States the life of a patent can be increased based on certain delays caused by the U.S. Patent and
Trademark Office (the “PTO”), this increase can be reduced or eliminated based on certain delays caused by the patent applicant during patent
prosecution. Further, if we encounter delays in our clinical trials or in gaining regulatory approval, the period of time during which we could
market any of our product candidates under patent protection, if approved, would be reduced.
We may not be able to protect our intellectual property rights throughout the world. Filing, prosecuting and defending patents on all of our
product candidates throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the
United States may be less extensive than those in the United States. Many companies have encountered significant problems in protecting and
defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do
not favor the enforcement of patent and other intellectual property rights, especially those relating to life sciences. In addition, the laws of some
foreign countries do not protect intellectual property rights, including trade secrets, to the same extent as federal and state laws of the United
States. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government
contractors. In these countries, patents may provide limited or no benefit. Moreover, our ability to protect and enforce our intellectual property
rights may be adversely affected by unforeseen changes in foreign intellectual property laws.
Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and,
further, may export otherwise infringing products to territories where we have patent protection but enforcement is not as strong as in the United
States. These products may compete with our products in jurisdictions where we do not have any issued patents and our patent claims or other
intellectual property rights may not be effective or sufficient to prevent them from so competing. Also, if our trade secrets are disclosed in a
foreign jurisdiction, competitors worldwide could have access to our proprietary information and we may be without satisfactory recourse. Such
disclosure could have a material adverse effect on our business. If, in the future, we obtain licenses from third parties, in some circumstances, we
may not have the right to control the preparation, filing and prosecution of patent applications or to maintain any patents, covering technology
that we license from third parties. We may also require the cooperation of our licensors to enforce any licensed patent rights, and such
cooperation may not be provided. Therefore, these patents and applications may not be prosecuted and enforced in a manner consistent with the
best interests of our
52
Table of Contents
business. Moreover, if we do obtain necessary licenses, we will likely have obligations under those licenses, and any failure to satisfy those
obligations could give our licensor the right to terminate the license. Termination of a necessary license could have a material adverse impact on
our business.
While we hold issued patents and have filed patent applications to protect certain aspects of our product candidates, we also rely on trade
secret protection and confidentiality agreements to protect proprietary scientific, business and technical information and know-how that is not or
may not be patentable or that we elect not to patent. For example, we primarily rely on trade secrets and confidentiality agreements to protect our
peptide therapeutics technology platform. Any disclosure to or misappropriation by third parties of our confidential proprietary information could
enable competitors to quickly duplicate or surpass our technological achievements, thus eroding our competitive position in our market. If we are
unable to protect the confidentiality of our trade secrets and proprietary know-how or if competitors independently develop viable competing
products, our business and competitive position may be harmed.
We seek to protect our proprietary information, data and processes, in part, by confidentiality agreements and invention assignment
agreements with our employees, consultants, scientific advisors, contractors and partners. Although these agreements are designed to protect our
proprietary information, we cannot be certain that our trade secrets and other confidential proprietary information will not be disclosed or that
competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques.
Although we require all of our employees to assign their inventions to us, and endeavor to execute confidentiality agreements with all of our
employees, consultants, advisors and any third parties who have access to our proprietary know-how and other confidential information related to
such technology, we cannot be certain that we have executed such agreements with all third parties who may have helped to develop our
intellectual property or who had access to our proprietary information, nor can be we certain that our agreements will not be breached. If any of
the parties to these confidentiality agreements breaches or violates the terms of such agreements, we may not have adequate remedies for any
such breach or violation, and we could lose our trade secrets as a result.
We also seek to preserve the integrity and confidentiality of our data, trade secrets and know-how by maintaining physical security of our
premises and physical and electronic security of our information technology systems. We cannot guarantee that our trade secrets and other
proprietary and confidential information will not be disclosed or that competitors will not otherwise gain access to our trade secrets.
Enforcing a claim that a third party illegally obtained and is using our trade secrets, like patent litigation, is expensive and time-consuming,
and the outcome is unpredictable. Further, the laws of some foreign countries do not protect proprietary rights to the same extent or in the same
manner as the laws of the United States. As a result, we may encounter significant problems in protecting and defending our intellectual property
both in the United States and abroad. Additionally, if the steps taken to maintain our trade secrets are deemed inadequate, we may have
insufficient recourse against third parties for misappropriating the trade secret. We cannot guarantee that our employees, former employees or
consultants will not file patent applications claiming our inventions. Because of the “first-to-file” laws in the United States, such unauthorized
patent application filings may defeat our attempts to obtain patents on our own inventions.
Trade secrets and know-how can be difficult to protect as trade secrets and know-how will over time be disseminated within the industry
through independent development, the publication of journal articles, and the movement of personnel skilled in the art from company to company
or academic to industry scientific positions. If any of our trade secrets 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. If we are unable to prevent material disclosure of the intellectual property related to our technologies to third parties, we
will not be able to establish or maintain a competitive advantage in our market, which could materially adversely affect our business, results of
operations and financial condition.
Even if we are able to adequately protect our trade secrets and proprietary information, our trade secrets could otherwise become known or
could be independently discovered by our competitors. Competitors could purchase our products and attempt to replicate some or all of the
competitive advantages we derive from our development efforts, willfully infringe our intellectual property rights, design around our protected
technology or develop their own
53
Table of Contents
competitive technologies that fall outside of our intellectual property rights. If any of our trade secrets were to be lawfully obtained or
independently developed by a competitor, in the absence of patent protection, we would have no right to prevent them, or those to whom they
communicate, from using that technology or information to compete with us. If our trade secrets are not adequately protected so as to protect our
market against competitors’ products, others may be able to exploit our proprietary peptide product candidate discovery technologies to identify
and develop competing product candidates, and thus our competitive position could be adversely affected, as could our business.
We may be involved in lawsuits to protect or enforce our intellectual property, which could be expensive, time consuming and unsuccessful.
Competitors may infringe our issued patents or any patents issued as a result of our pending or future patent applications. To counter
infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. In addition, in
an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable or may refuse to stop the other party in such
infringement proceeding 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 or defense proceedings could put one or more of our patents at risk of being invalidated, held unenforceable or interpreted
narrowly, and could put any of our patent applications at risk of not yielding an issued patent.
Interference or derivation proceedings provoked by third parties or brought by us, the PTO or any foreign patent authority may be
necessary to determine the priority or ownership of inventions with respect to our patent or patent applications. Our defense of litigation,
interference or derivation proceedings may fail and, even if successful, may result in substantial costs and distract our management and other
employees. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it from the prevailing
party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms, if any license is offered
at all.
Because of the expense and uncertainty of litigation, we may conclude that even if a third party is infringing our issued patents, any patents
that may be issued as a result of our pending or future patent applications or other intellectual property rights, the risk-adjusted cost of bringing
and enforcing such a claim or action may be too high or not in the best interest of our company or our stockholders. In such cases, we may decide
that the more prudent course of action is to simply monitor the situation or initiate or seek some other non-litigious action or solution.
We may not be able to prevent misappropriation of our intellectual property, trade secrets or confidential information, particularly in
countries where the laws may not protect those rights as fully as in the United States. 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 or
other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial
adverse effect on the price of our common stock.
Any issued patents covering our product candidates, including any patent that may issue as a result of our pending or future patent
applications, could be found invalid or unenforceable if challenged in court in the United States or abroad.
If we initiate legal proceedings against a third party to enforce a patent covering our product candidates or technologies, the defendant
could counterclaim that such patent is invalid or unenforceable. In patent litigation in the United States, defendant counterclaims alleging
invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory
requirements, including lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that
someone connected with prosecution of the patent withheld relevant information from the PTO, or made a misleading statement, during
prosecution. Third parties may also raise similar claims before administrative bodies in the United States or abroad, even outside the context of
litigation. Such mechanisms include re-examination, inter partes review, post grant review, and equivalent proceedings in foreign jurisdictions,
such as opposition or derivation proceedings. Such proceedings could result in revocation or amendment to our patents in such a way that they no
longer cover and protect our product candidates or technologies. The outcome following legal assertions of invalidity and unenforceability is
54
Table of Contents
unpredictable. With respect to the validity of our patents, for example, we cannot be certain that there is no invalidating prior art of which we, our
patent counsel, and the patent examiner were unaware of during prosecution. If a defendant were to prevail on a legal assertion of invalidity
and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our product candidates. Such a loss of patent
protection could have a material adverse impact on our business.
As more groups become engaged in scientific research and product development in fields related to our product candidates, such as IL-23R,
the risk of our patents, or patents that we have in-licensed, being challenged through patent interferences, derivation proceedings, oppositions, re-
examinations, litigation or other means will likely increase. An adverse outcome in a patent dispute could have a material adverse effect on our
business by:
·
·
·
·
·
causing us to lose patent rights in the relevant jurisdiction(s);
subjecting us to litigation, or otherwise preventing Janssen or us from commercializing PTG-200 or other product candidates in the
relevant jurisdiction(s);
requiring Janssen or us to obtain licenses to the disputed patents;
forcing Janssen or us to cease using the disputed technology; or
requiring Janssen or us to develop or obtain alternative technologies.
An adverse outcome in a patent dispute could severely harm our collaboration with Janssen or cause Janssen to terminate the Janssen
License and Collaboration Agreement.
Intellectual property disputes could cause us to spend substantial resources and distract our personnel from their normal responsibilities.
Litigation or other legal proceedings relating to intellectual property claims, with or without merit, are unpredictable and generally expensive and
time-consuming and, even if resolved in our favor, are likely to divert significant resources from our core business, including distracting our
technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of
hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it
could have a substantial adverse effect on the market price of our common stock. We may not have sufficient financial or other resources to
adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings
more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios.
Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating or from successfully
challenging our intellectual property rights. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings
could have a material adverse effect on our ability to compete in the marketplace.
Competitors could enter the market with generic versions of our product candidates, which may result in a material decline in sales of our
product candidates.
Under the Hatch-Waxman Act, a pharmaceutical manufacturer may file an abbreviated new drug application (“ANDA”), seeking approval
of a generic copy of an approved innovator product. Under the Hatch-Waxman Act, a manufacturer may also submit an NDA under section
505(b)(2) that references the FDA’s finding of safety and effectiveness of a previously approved drug. A 505(b)(2) NDA product may be for a
new or improved version of the original innovator product. Innovative small molecule drugs may be eligible for certain periods of regulatory
exclusivity (e.g., five years for new chemical entities, three years for changes to an approved drug requiring a new clinical study, seven years for
orphan drugs), which preclude FDA approval (or in some circumstances, FDA filing and review of) an ANDA or 505(b)(2) NDA relying on the
FDA’s finding of safety and effectiveness for the innovative drug. In addition to the benefits of regulatory exclusivity, an innovator NDA holder
may have patents claiming the active ingredient, product formulation or an approved use of the drug, which would be listed with the product in
the FDA publication, “Approved Drug Products with Therapeutic Equivalence Evaluations,” known as the “Orange Book.” If there are patents
listed in the Orange Book, a generic applicant that seeks to market its product before expiration of the patents must
55
Table of Contents
include in the ANDA or 505(b)(2) what is known as a “Paragraph IV certification,” challenging the validity or enforceability of, or claiming non-
infringement of, the listed patent or patents. Notice of the certification must be given to the innovator, too, and if within 45 days of receiving
notice the innovator sues to protect its patents, approval of the ANDA is stayed for 30 months, or as lengthened or shortened by the court.
Accordingly, if our product candidates are approved, competitors could file ANDAs for generic versions of our product candidates, or
505(b)(2) NDAs that reference our product candidates. If there are patents listed for our product candidates in the Orange Book, those ANDAs
and 505(b)(2) NDAs would be required to include a certification as to each listed patent indicating whether the ANDA applicant does or does not
intend to challenge the patent. We cannot predict whether any patents issuing from our pending patent applications will be eligible for listing in
the Orange Book, how any generic competitor would address such patents, whether we would sue on any such patents, or the outcome of any
such suit.
We may not be successful in securing or maintaining proprietary patent protection for products and technologies we develop or license.
Moreover, if any patents that are granted and listed in the Orange Book are successfully challenged by way of a Paragraph IV certification and
subsequent litigation, the affected product could more immediately face generic competition and its sales would likely decline materially. Should
sales decline, we may have to write off a portion or all of the intangible assets associated with the affected product and our results of operations
and cash flows could be materially and adversely affected.
Third party claims of intellectual property infringement may prevent or delay our drug discovery and development efforts.
Our commercial success depends in part on our ability to develop, manufacture, market and sell our drug candidates and use our proprietary
technologies without infringing or otherwise violating the patents and proprietary rights of third parties. There is a substantial amount of
litigation involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries, including patent infringement
lawsuits, interferences, derivation proceedings, post grant reviews, inter partes reviews, and reexamination proceedings before the PTO or
oppositions and other comparable proceedings in foreign jurisdictions. Numerous U.S. and foreign issued patents and pending patent
applications, which are owned by third parties, exist in the fields in which we are developing product candidates, and there may be third-party
patents or patent applications with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or
manufacture of our product candidates and technologies. Third parties, including our competitors, may initiate legal proceedings against us
alleging that we are infringing or otherwise violating their patent or other intellectual property rights. Given the vast number of patents in our
field of technology, we cannot assure you that marketing of our product candidates or practice of our technologies will not infringe existing
patents or patents that may be granted in the future. Because patent applications can take many years to issue and may be confidential for 18
months or more after filing, and because pending patent claims can be revised before issuance, there may be applications now pending of which
we are unaware that may later result in issued patents that may be infringed by the practice of our peptide therapeutics technology platform or the
manufacture, use or sale of our product candidates. In addition, third parties may obtain patents in the future and claim that our product
candidates or technologies infringe upon these patents. If any third-party patents were held by a court of competent jurisdiction to cover the
manufacturing process of any of our product candidates, any molecules formed during the manufacturing process or any final product or
formulation itself, the holders of any such patents may be able to block our ability to commercialize such product candidate unless we obtained a
license under the applicable patents, or until such patents expire. As our industry expands and more patents are issued, the risk increases that our
product candidates or technologies may give rise to claims of infringement of the patent rights of others.
Parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further practice
our technologies or develop and commercialize our product candidates. Defense of these claims, regardless of their merit, would involve
substantial litigation expense and would be a substantial diversion of employee resources from our business. Even if we are successful in
defending against any infringement claims, litigation is expensive and time-consuming and is likely to divert management’s attention and
substantial resources from our core business. In the event of a successful claim of infringement against us, we may have to pay substantial
damages, limit our uses, pay royalties or redesign our infringing product candidates, which may be impossible or require substantial
56
Table of Contents
time and monetary expenditure. We may choose to seek, or may be required to seek, a license from the third-party patent holder and would most
likely be required to pay license fees or royalties or both, each of which could be substantial. These licenses may not be available on
commercially reasonable terms, however, or at all. Even if we were able to obtain a license, the rights we obtain may be nonexclusive, which
would provide our competitors access to the same intellectual property rights upon which we are forced to rely. Furthermore, even in the absence
of litigation, we may need to obtain licenses from third parties to advance our research or allow commercialization of our product candidates, and
we have done so from time to time. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In such an
event, we would be unable to further practice our technologies or develop and commercialize any of our product candidates at issue, which could
harm our business significantly.
We may not identify relevant third party patents or may incorrectly interpret the relevance, scope or expiration of a third party patent which
might adversely affect our ability to develop and market our products.
We cannot guarantee that any of our patent searches or analyses, including the identification of relevant patents, the scope of patent claims
or the expiration of relevant patents, are complete or thorough, nor can we be certain that we have identified each and every third party patent and
pending application in the United States and abroad that is relevant to or necessary for the commercialization of our product candidates in any
jurisdiction.
The scope of a patent claim is determined by an interpretation of the law, the written disclosure in a patent and the patent’s prosecution
history. Our interpretation of the relevance or the scope of a patent or a pending application may be incorrect, which may negatively impact our
ability to market our products. We may incorrectly determine that our products are not covered by a third party patent or may incorrectly predict
whether a third party’s pending application will issue with claims of relevant scope. Our determination of the expiration date of any patent in the
United States or abroad that we consider relevant may be incorrect, which may negatively impact our ability to develop and market our product
candidates. Our failure to identify and correctly interpret relevant patents may negatively impact our ability to develop and market our products.
We may not be successful in obtaining or maintaining necessary rights to protect our product candidates through acquisitions and in-
licenses. We may find that our programs require the use of proprietary rights held by third parties or the growth of our business may depend in
part on our ability to acquire, in-license or use these proprietary rights. We may be unable to acquire or in-license compositions, methods of use,
processes or other third party intellectual property rights from third parties we identify as necessary for our product candidates. The licensing and
acquisition of third party intellectual property rights is a competitive area, and a number of more established companies are also pursuing
strategies to license or acquire third party intellectual property rights that we may consider attractive. In addition, companies that perceive us to
be a competitor may be unwilling to assign or license rights to us. We also may be unable to license or acquire third party intellectual property
rights on terms that would allow us to make an appropriate return on our investment. Even if we are able to obtain a license to intellectual
property of interest, we may not be able to secure exclusive rights, in which case others could use the same rights and compete with us.
If we are unable to successfully obtain rights to required third party intellectual property rights or maintain the existing intellectual property
rights we have, we may have to abandon development of that program and our business and financial condition could suffer.
Obtaining and maintaining 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.
The PTO 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. 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 PTO and various governmental patent agencies outside of the
United States in several stages over the lifetime of the patents and/or applications. We employ reputable law firms and other professionals and
rely on such third parties to help us comply with these requirements and effect payment of these fees with respect to the patent and patent
applications that we own, and if we in-license intellectual property we may have to rely upon our licensors to comply with these
57
Table of Contents
requirements and effect payment of these fees with respect to any patents and patent applications that we license. 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
noncompliance 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.
Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the
enforcement or defense of our issued patents.
On September 16, 2011, the Leahy-Smith America Invents Act (“Leahy-Smith Act”) was signed into law. The Leahy-Smith Act includes a
number of significant changes to United States patent law. These include provisions that affect the way patent applications are prosecuted and
may also affect patent litigation. The PTO has developed regulations and procedures to govern administration of the Leahy-Smith Act, but many
of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, did not become
effective until March 2013, 18 months after its enactment. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the
operation of our business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the
prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on
our business and financial condition.
Recent U.S. Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the
rights of patent owners in certain situations. Depending on decisions by the U.S. Congress, the federal courts, and the PTO, the laws and
regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing
patents and patents that we might obtain in the future.
Intellectual property rights do not necessarily address all potential threats to our competitive advantage.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations
and may not adequately protect our business or permit us to maintain our competitive advantage. The following examples are illustrative:
·
·
·
·
·
·
·
·
others may be able to make compounds that are similar to our product candidates but that are not covered by the claims of our issued
patents or any pending patent applications we may have;
we might not have been the first to make the inventions covered by the issued patents or pending patent applications that we own or
co-own;
we might not have been the first to file patent applications covering an invention;
others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our
intellectual property rights;
pending patent applications that we own or co-own may not lead to issued patents;
the issued patents that we own or any issued patents that we license may not provide us with any competitive advantages, or may be
held invalid or unenforceable, as a result of legal challenges by our competitors;
our competitors might conduct research and development activities in countries where we do not have patent rights and then use the
information learned from such activities to develop competitive products for sale in our major commercial markets;
we may not develop or in-license additional proprietary technologies that are patentable; and
58
Table of Contents
·
the patents of others may have an adverse effect on our business.
Should any of these events occur, they could significantly harm our business, results of operations and prospects.
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 former or other employers.
Many of our employees and consultants, including our senior management and our scientific founders, have been employed or retained at
universities or by other biotechnology or pharmaceutical companies, including potential competitors. Some of our employees and consultants,
including each member of our senior management and each of our scientific founders, executed proprietary rights, non-disclosure and non-
competition agreements in connection with such previous employment or retention. Although we try to ensure that our employees and
consultants do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or these
employees, consultants or independent contractors have used or disclosed intellectual property, including trade secrets or other proprietary
information, of any such employee’s or consultant’s former or other employer. We are not aware of any threatened or pending claims related to
these matters or concerning the agreements with our senior management or scientific founders, but in the future litigation may be necessary to
defend against such claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual
property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a
distraction to management.
We may be subject to claims challenging the inventorship or ownership of our issued patents, any patents issued as a result of our pending or
future patent applications and other intellectual property.
We may also be subject to claims that former employees, collaborators or other third parties have an ownership interest in our issued
patents, any patents issued as a result of our pending or future applications or other intellectual property. While we believe we have all rights to
any intellectual property related to our product candidates, a third party-contractor may claim they have ownership rights. We have had in the
past, and we may also have in the future, ownership disputes arising, for example, from conflicting obligations of consultants or others who are
involved in developing our product candidates and technologies. Litigation may be necessary to defend against these and other claims
challenging inventorship or ownership.
Some of our intellectual property was generated through government funded programs and thus may be subject to federal regulations such as
“march-in” rights, certain reporting requirements and a preference for U.S.-based companies. Compliance with such regulations may limit
our exclusive rights and limit our ability to contract with non-U.S. manufacturers.
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 our current or future product
candidates pursuant to the Bayh-Dole Act of 1980, or Bayh-Dole Act, and implementing regulations. 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 to require us or our licensors 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”). The U.S. government also has the right to take
title to these inventions if we, or the applicable licensor, fail to disclose the invention to the government and fail to file an application to register
the intellectual property within specified time limits. These time limits have recently been changed by regulation and may change in the future.
Intellectual property generated under a government funded program is also subject to certain reporting requirements, compliance with which may
require us or the applicable licensor 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 substantially in the United States. The manufacturing
preference
59
Table of Contents
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.
Our reliance on third parties requires us to share our trade secrets, which increases the possibility that a competitor will discover them or that
our trade secrets will be misappropriated or disclosed.
Because we expect to rely on third parties in the development and manufacture of our product candidates, we must, at times, share trade
secrets with them. We seek to protect our proprietary technology in part by entering into confidentiality agreements and, if applicable, material
transfer agreements, consulting agreements or other similar agreements with our advisors, employees, third-party contractors and consultants
prior to beginning research or disclosing proprietary information. These agreements typically limit the rights of the third parties to use or disclose
our confidential information, including our trade secrets. Despite the contractual provisions employed when working with third parties, the need
to share trade secrets and other confidential information increases the risk that such trade secrets become known by our competitors, are
inadvertently incorporated into the technology of others, or are disclosed or used in violation of these agreements. Given that our proprietary
position is based, in part, on our know-how and trade secrets, a competitor’s discovery of our trade secrets or other unauthorized use or disclosure
would impair our competitive position and may have an adverse effect on our business and results of operations.
In addition, these agreements typically restrict the ability of our advisors, employees, third-party contractors and consultants to publish data
potentially relating to our trade secrets, although our agreements may contain certain limited publication rights. Despite our efforts to protect our
trade secrets, our competitors may discover our trade secrets, either through breach of our agreements with third parties, independent
development or publication of information by any of our third-party collaborators. A competitor’s discovery of our trade secrets would impair our
competitive position and have an adverse impact on our business.
We have not yet registered trademarks for a commercial trade name for our product candidates and failure to secure such registrations could
adversely affect our business.
We have not yet registered trademarks for a commercial trade name for our product candidates. During trademark registration proceedings,
we may receive rejections. Although we would be given an opportunity to respond to those rejections, we may be unable to overcome such
rejections. In addition, in the PTO and in comparable agencies in many foreign jurisdictions, third parties are given an opportunity to oppose
pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our
trademarks, and our trademarks may not survive such proceedings. Moreover, any name we propose to use with our product candidates in the
United States must be approved by the FDA, regardless of whether we have registered it, or applied to register it, as a trademark. The FDA
typically conducts a review of proposed product names, including an evaluation of potential for confusion with other product names. If the FDA
objects to any of our proposed proprietary product names, we may be required to expend significant additional resources in an effort to identify a
suitable substitute name that would qualify under applicable trademark laws, not infringe the existing rights of third parties and be acceptable to
the FDA.
Risks Related to Ownership of our Common Stock
The price of our stock may be volatile, and you could lose all or part of your investment.
Our stock price has fluctuated in the past and is likely to be volatile in the future. The stock market in general and the market for
biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of
particular companies. As a result of this volatility, investors may experience losses on their investment in our common stock. In addition to the
factors discussed in these “Risk Factors” and elsewhere in this Annual Report on Form 10-K, these factors include, but are not limited to:
60
Table of Contents
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
the success of competitive products or technologies;
regulatory actions with respect to our product candidates or our competitors’ products and product candidates;
actual or anticipated results in our clinical trials or those of our competitors;
regulatory or legal developments in the United States and other countries;
disputes or developments concerning patent applications or other proprietary rights;
the level of expenses related to any of our product candidates or clinical development programs;
adverse regulatory decisions;
our dependence on third parties, including CROs as well as manufacturers;
our failure to successfully commercialize any of our peptide-based product candidates, if approved;
additions or departures of key scientific or management personnel;
variations in our financial results or those of companies that are perceived to be similar to us;
actual or anticipated variations in quarterly operating results;
announcement or expectation of additional financing efforts;
sales of our common stock by us or our stockholders in the future;
the trading volume of our common stock;
actual or anticipated changes in estimates as to financial results, timelines or recommendations by analysts;
changes in the structure of healthcare payment systems;
conditions or trends in the biotechnology and biopharmaceutical industries; and
general political and economic conditions.
Volatility in our share price could subject us to securities class action litigation.
Securities class action litigations have often been brought against companies following a decline in the market price of their securities. If
we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our
business.
61
Table of Contents
Our principal stockholders and management own a significant percentage of our stock and will be able to exert significant control over
matters subject to stockholder approval.
Our executive officers, directors and current beneficial owners of 5% or more of our common stock, in the aggregate, beneficially own a
significant percentage of our outstanding common stock. These persons, acting together, will be able to significantly influence all matters
requiring stockholder approval, including the election and removal of directors and any merger or other significant corporate transactions. The
interests of this group of stockholders may not coincide with the interests of other stockholders.
Future sales of our common stock may depress our share price.
Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales might occur, could
depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. At
December 31, 2019, we had a total of 27,217,649 shares of common stock outstanding, notwithstanding any potential exercises of outstanding
options and issuance of shares under the employee stock purchase plan.
If 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.
Any sales of securities by our stockholders could have an adverse effect on the trading price of our common stock. In addition, in the future
we may issue common stock or other securities, including sales of common stock pursuant to our Sales Agreement. The number of shares of our
new common stock issued in connection with raising additional capital could constitute a material portion of our then outstanding common stock.
We are an “emerging growth company” and as a result of the reduced disclosure and governance requirements applicable to emerging
growth companies, our common stock may be less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act and for as long as we continue to be an “emerging growth company,”
we intend to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging
growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404, reduced
disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of
holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously
approved. We will remain an emerging growth company, and thus may continue to rely on these exemptions, until the earlier of (1) the last day of
the fiscal year (a) following the fifth anniversary of the completion of the IPO, (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 means the market value of our common stock that is held by non-
affiliates exceeds $700.0 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible
debt during the prior three-year period. If some investors find our common stock less attractive as a result of our choices to reduce disclosure,
there may be a less active trading market for our common stock, and our stock price may be more volatile.
We are obligated to develop and maintain proper and effective internal controls over financial reporting and any failure to maintain the
adequacy of these internal controls may adversely affect investor confidence in our company and, as a result, the value of our common stock.
We are required, pursuant to Section 404 of the Sarbanes-Oxley Act (Section 404), to furnish a report by management on the effectiveness
of our internal control over financial reporting. This assessment needs to include disclosure of any material weaknesses identified by our
management in our internal control over financial reporting. Our independent registered public accounting firm will not be required to attest to
the effectiveness of our internal control over financial reporting until our first Annual Report required to be filed with the SEC following the date
we are no longer an “emerging growth company”. At such time as we are required to obtain auditor attestation, if we then have a
62
Table of Contents
material weakness, we would receive an adverse opinion regarding our internal control over financial reporting from our independent registered
accounting firm.
Our compliance with Section 404 requires that we incur substantial accounting expense and expend significant management efforts. We
currently do not have an internal audit group, and we will need to hire additional accounting and financial staff with appropriate public company
experience and technical accounting knowledge and continue the costly and challenging process of compiling the system and processing
documentation necessary to perform the evaluation needed to comply with Section 404. We may not complete our continued evaluation, testing
and any required remediation in a timely fashion.
During our evaluation of our internal control, if we identify one or more material weaknesses in our internal control over financial reporting
or fail to remediate any material weaknesses, we will be unable to assert that our internal control over financial reporting is effective. We cannot
assure you that there will not be material weaknesses in our internal control over financial reporting in the future. Any failure to maintain internal
control over financial reporting could severely inhibit our ability to accurately report our financial condition or results of operations. If we are
unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm
determines we have a material weakness in our internal control over financial reporting, we could lose investor confidence in the accuracy and
completeness of our financial reports, the market price of our ordinary shares could decline, and we could be subject to sanctions or
investigations by Nasdaq, the SEC or other regulatory authorities. Failure to remedy any material weakness in our internal control over financial
reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the
capital markets.
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by us in reports we file
or submit under the Exchange Act is accumulated and communicated to management, recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and
procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control
system are met.
These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of
simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or
by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or
fraud may occur and not be detected.
During the course of our review and testing, we may identify deficiencies and be unable to remediate them before we must provide the
required reports. Furthermore, we may not detect errors on a timely basis and our financial statements may be materially misstated. We or our
independent registered public accounting firm may not be able to conclude on an ongoing basis that we have effective internal control over
financial reporting, which could harm our operating results, cause investors to lose confidence in our reported financial information and cause the
trading price of our stock to fall. In addition, as a public company we are required to file accurate and timely Quarterly and Annual Reports with
the SEC under the Exchange Act. Any failure to report our financial results on an accurate and timely basis could result in sanctions, lawsuits,
delisting of our shares from The Nasdaq Global Market or other adverse consequences that would materially harm our business.
Any changes to existing accounting pronouncements or taxation rules or practices may cause adverse fluctuations in our reported results of
operations or affect how we conduct our business.
A change in accounting pronouncements or taxation rules or practices can have a significant effect on our reported results and may affect
our reporting of transactions completed before the change is effective. New accounting pronouncements, taxation rules and varying
interpretations of accounting pronouncements or taxation rules have occurred in the past and may occur in the future. The change to existing
rules, future changes, if any, or the need for us
63
Table of Contents
to modify a current tax or accounting position may adversely affect our reported financial results or the way we conduct our business.
Nasdaq may delist our securities from its exchange, which could limit investors’ ability to make transactions in our securities and subject us
to additional trading restrictions.
Our common stock is listed on The Nasdaq Global Market. We cannot assure you that, in the future, our securities will meet the continued
listing requirements to be listed on The Nasdaq Global Market. If The Nasdaq Global Market delists our common stock, we could face significant
material adverse consequences, including:
·
·
·
·
a limited availability of market quotations for our securities;
a determination that our common stock is a “penny stock” which will require brokers trading in our common stock to adhere to more
stringent rules and possibly resulting in a reduced level of trading activity in the secondary trading market for our common stock;
a limited amount of news and analyst coverage for our company; and
a decreased ability to issue additional securities or obtain additional financing in the future.
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 be influenced by the research and reports that securities or industry analysts publish about us
or our business. In the event one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about
our business, our stock price could be adversely affected. If one or more of these analysts cease coverage of our company or fail to publish
reports on us regularly, demand for our common stock could decrease, and we could lose visibility in the financial markets, which might cause
our stock price and trading volume to decline.
Because we do not anticipate paying any cash dividends on our common stock in the foreseeable future, capital appreciation, if any, would be
your sole source of gain.
We have never declared or paid any cash dividends on our common stock. We currently anticipate that we will retain future earnings for the
development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. As
a result, capital appreciation, if any, of our common stock would be your sole source of gain on an investment in our common stock for the
foreseeable future.
Provisions in our corporate charter documents could make an acquisition of us more difficult and may prevent attempts by our stockholders
to replace or remove our current management.
Provisions in our certificate of incorporation and our bylaws may discourage, delay or prevent a merger, acquisition or other change in
control of us that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their
shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby
depressing the market price of our common stock. In addition, these provisions may frustrate or prevent any attempts by our stockholders to
replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Because
our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by
our stockholders to replace current members of our management team.
64
Table of Contents
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for
substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for
disputes with us or our directors, officers or employees.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the exclusive
forum for any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action asserting a claim
against us arising pursuant to the Delaware General Corporation Law, our amended and restated certificate of incorporation or our bylaws; or any
action asserting a claim against us that is governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s
ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may
discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum
provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur
additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.
Provisions in our corporate charter documents and under Delaware law may prevent or frustrate attempts by our stockholders to change our
management or hinder efforts to acquire a controlling interest in us, and the market price of our common stock may be lower as a result.
There are provisions in our certificate of incorporation and bylaws that may make it difficult for a third party to acquire, or attempt to
acquire, control of our company, even if a change in control was considered favorable by our stockholders. Our charter documents also contain
other provisions that could have an anti-takeover effect, such as:
·
·
·
·
·
our board of directors has the right to elect directors to fill a vacancy created by the expansion of the board of directors or the
resignation, death or removal of a director;
our stockholders may not act by written consent or call special stockholders’ meetings;
our certificate of incorporation does not provide for cumulative voting in the election of directors;
stockholders must provide advance notice and additional disclosures in order to nominate individuals for election to the board of
directors or to propose matters that can be acted upon at a stockholders’ meeting; and
our board of directors may issue, without stockholder approval, shares of undesignated preferred stock.
Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General
Corporation Law, which prohibit a person who owns 15% or more of our outstanding voting stock from merging or combining with us for a
period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the
merger or combination is approved in a prescribed manner. Any provision in our certificate of incorporation or our bylaws or Delaware law that
has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of
our common stock, and could also affect the price that some investors are willing to pay for our common stock.
65
Table of Contents
The recently passed comprehensive tax reform bill could adversely affect our business and financial condition.
In December 2017, the Tax Act was enacted which significantly changes the Internal Revenue Code, as amended (the “Code”). The Tax
Act, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rates; limitation of the tax
deduction for interest expense for net operating losses generated after 2017; limitation of the deduction to 80% of current year taxable income;
indefinite carryforward of net operating losses and elimination of net operating loss carrybacks; changes in the treatment of offshore earnings
regardless of whether they are repatriated; mandatory capitalization of research and development expenses beginning in 2022; immediate
deductions for certain new investments instead of deductions for depreciation expense over time; further deduction limits on executive
compensation; and modifying, repealing and creating many other business deductions and credits, including the reduction in the orphan drug
credit from 50% to 25% of qualifying expenditures. We continue to examine the impact this tax reform legislation may have on our business.
Notwithstanding the reduction in the corporate income tax rate, the overall impact of the Tax Act is uncertain and our business and financial
condition could be adversely affected. The impact of this tax reform on holders of our common stock is also uncertain and could be adverse. This
Annual Report does not discuss any such tax legislation or the manner in which it might affect us or our stockholders in the future. We urge our
stockholders to consult with their legal and tax advisors with respect to such legislation.
Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.
We have incurred substantial losses during our history. We do not anticipate generating revenue from sales of products for the foreseeable
future, if ever, and we may never achieve profitability. To the extent that we continue to generate taxable losses, unused losses will carry forward
to offset future taxable income, if any, until such unused losses expire. Under Section 382 of the Code, if a corporation undergoes an “ownership
change” (generally defined as a greater than 50 percentage points change (by value) in its equity ownership over a rolling three-year period), the
corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income
may be limited. We may experience ownership changes in the future or subsequent shifts in our stock ownership, some of which are outside our
control. As of December 31, 2019, we had federal net operating loss carryforwards of approximately $164.1 million that could be limited if we
have experienced, or if in the future we experience, an ownership change, which could have an adverse effect on our future results of operations.
We may have additional tax liabilities.
Our effective income tax rate in the future could be adversely affected by a number of factors, including: interpretations of existing tax
laws, changes in tax laws and rates, future levels of research and development expenditures, changes in the valuation of deferred tax assets and
liabilities, our ability to use some or all of our accumulated net operating losses, changes in accounting standards and other items. The impact of
our income tax provision resulting from these items may be significant and could have a negative impact on our net operating results. We are also
subject to non-income based taxes, such as payroll, sales, use, property, and goods and services taxes in the United States. We may have
additional exposure to non-income based tax liabilities.
We are regularly subject to audits by tax authorities in the jurisdictions in which we conduct business. Although we believe our tax
positions are reasonable, the final outcome of tax audits and related litigation could be materially different than that reflected in our historical
income tax provisions and accruals, and we could be subject to assessments of additional taxes and/or substantial fines or penalties. The
resolution of any audits or litigation could have an adverse effect on our financial position and results of operations. We and our subsidiary are
engaged in intercompany transactions, the terms and conditions of which may be scrutinized by tax authorities, which could result in additional
tax and/or penalties becoming due.
Item 1B.
Unresolved Staff Comments
None.
66
Table of Contents
Item 2.
Properties
We lease approximately 42,877 square feet of office and laboratory space in Newark, California under a lease agreement that expires in
May 2024. We believe that our existing facilities are adequate to meet our business needs for at least the next 12 months and that additional space
will be available on commercially reasonable terms, if required.
Item 3.
Legal Proceedings
We may be involved in legal proceedings arising in the ordinary course of business.
Item 4.
Mine Safety Disclosures
Not applicable.
67
Table of Contents
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock began trading on The Nasdaq Global Market on August 11, 2016 and trades under the symbol “PTGX.” Prior to such
time, there was no public market for our common stock.
Stockholders
As of the close of business on February 28, 2020, there were 2 stockholders of record of our common stock. The number of stockholders of
record is based upon the actual number of stockholders registered at such date and does not include holders of shares in “street names” or
persons, partnerships, associates, or corporations, or other entities identified in security listings maintained by depositories.
Dividend Policy
We have never declared or paid any cash dividends. We currently expect to retain all future earnings, if any, for use in the operation and
expansion of our business, and therefore do not anticipate paying any cash dividends in the foreseeable future.
Performance Graph
The following is not deemed “filed” with the Securities and Exchange Commission and is not to be incorporated by reference into any
filing we make under the Securities Act of 1933, as amended, whether made before or after the date hereof and irrespective of any general
incorporation by reference language in such filing. The graph below shows the cumulative total stockholder return assuming the investment on
the date specified in each of our common stock, the Nasdaq Composite Index, the Nasdaq Biotechnology Index, and the Nasdaq Pharmaceutical
Index. The graph tracks the
68
Table of Contents
performance of a $100 investment in our common stock and in each index (with the reinvestment of all dividends) from August 11, 2016 to
December 31, 2019.
Sale of Unregistered Securities
None.
Repurchases of Shares or of Company Equity Securities
None.
69
Table of Contents
Item 6.
Selected Financial Data
The following selected consolidated statement of operations data for the years ended December 31, 2019, 2018, and 2017 and the
consolidated balance sheet data as of December 31, 2019 and 2018 are derived from our audited consolidated financial statements that are
included elsewhere in this report. The selected consolidated statement of operations data for the years ended December 31, 2016 and 2015 and
the consolidated balance sheet data at December 31, 2017, 2016 and 2015 have been derived from our audited consolidated financial statements
which are not included in this report. The data set forth below is not necessarily indicative of results of future operations and should be read in
conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial
Statements and Supplementary Data” included in this Annual Report on Form 10‑K to fully understand factors that may affect the comparability
of the information presented below:
Consolidated Statement of Operations Data:
License and collaboration revenue - related party
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Interest income
Interest expense
Other expense, net
Change in fair value of redeemable convertible
preferred stock tranche and warrant liabilities
Loss before income tax benefit
Income tax benefit
Net loss
Net loss attributable to common stockholders
Net loss per share attributable to common
stockholders, basic and diluted
Weighted-average shares used to compute net loss
per share attributable to common stockholders, basic
and diluted
(1)
(2)
_______________________
2019
2018
2017
2016 (1)
2015
(In thousands, except for share and per share data)
Year Ended December 31,
$
231 $
30,925 $
20,063 $
— $
—
65,003
15,749
80,752
(80,521)
2,813
(169)
(1)
—
(77,878)
691
(77,187) $
(77,187) $
59,497
13,697
73,194
(42,269)
2,566
—
(20)
—
(39,723)
799
(38,924) $
(38,924) $
46,181
11,779
57,960
(37,897)
948
—
(8)
25,705
6,961
32,666
(32,666)
242
—
(34)
—
(36,957)
—
(36,957) $
(36,957) $
(4,719)
(37,177)
—
(37,177) $
(37,735) $
11,831
2,963
14,794
(14,794)
19
—
—
(83)
(14,858)
—
(14,858)
(14,933)
(2.98) $
(1.74) $
(2.09) $
(5.80) $
(59.32)
$
$
$
25,894,024
22,364,515
17,694,505
6,501,796
251,717
(1)
The change in fair value of redeemable convertible preferred stock tranche and warrant liabilities consists of the remeasurement of the fair
value of financial liabilities related to our obligation to sell additional redeemable convertible preferred stock shares in subsequent closings
contingent upon the achievement of certain development milestones or approval of investors and warrants for the purchase of redeemable
convertible preferred stock. The change of $4.7 million for the year ended December 31, 2016 was due to the settlement of Series C
redeemable convertible preferred stock tranche liability in March 2016 and the fair value remeasurement of the outstanding warrant liability.
(2)
Net loss attributable to common stockholders is calculated by adjusting our net loss for the accretion of redeemable convertible preferred
common stock, if any.
70
Table of Contents
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable securities
Working capital
Total assets
Deferred revenue - related party
Long-term debt
Redeemable convertible preferred stock tranche liability
Redeemable convertible preferred stock warrant liability
Redeemable convertible preferred stock
Accumulated deficit
Total stockholders’ equity (deficit)
(3)
_______________________
(1)
(2)
2019
2018
December 31,
2017
(In thousands)
2016
2015
$
133,017 $
109,905
154,917
41,530
9,794
—
—
—
(217,661)
79,964
128,853 $
111,345
139,472
8,223
—
—
—
—
(140,474)
112,515
155,459 $
108,392
163,734
31,752
—
—
—
—
(101,550)
120,632
87,749 $
76,809
93,990
—
—
—
—
—
(64,593)
87,555
11,923
11,080
14,845
—
—
1,643
480
36,996
(27,416)
(27,400)
(1)
We determined that our obligation to issue additional shares of our redeemable convertible preferred stock represented a freestanding financial
instrument, which was accounted for as a liability. The freestanding redeemable convertible preferred stock tranche liability was initially
recorded at fair value, with fair value changes recognized in the consolidated statements of operations. At the time of the exercise or
expiration of the option, the fair value of the redeemable convertible preferred stock tranche liability is reclassified to redeemable convertible
preferred stock with no further remeasurement required.
(2)
We accounted for freestanding warrants to purchase shares of our redeemable convertible preferred stock as liabilities at fair value upon
issuance. At the end of each reporting period, changes in estimated fair value during the period were recorded in the consolidated statements
of operations. We continued to adjust the warrant liability for changes in fair value until the earlier of the exercise of the warrants or
expiration on May 10, 2016, and no further remeasurement was required.
(3)
Following the closing of our initial public offering in August 2016, all outstanding shares of redeemable preferred stock converted to common
stock and the related carrying value was reclassified to common stock and additional paid-in capital.
71
Table of Contents
Item 7.
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 “Item 6. Selected
Financial Data” and the consolidated financial statements and related notes included elsewhere in this Annual Report. This discussion contains
forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from
those anticipated in these forward-looking statements as a result of various factors, including those discussed in “Item 1A. Risk Factors” and in
other parts of this Annual Report.
Overview
We are a clinical-stage biopharmaceutical company that utilizes a proprietary technology platform to discover and develop novel peptide-
based drugs to address significant unmet medical needs and transform existing treatment paradigms for patients. We have three assets in various
stages of clinical development derived from this platform, and we expect to report results from six different Phase 2 studies by the end of 2021.
Our most advanced clinical asset, PTG-300, is an injectable hepcidin mimetic in development for the potential treatment of iron overload
and other blood disorders. PTG-300 mimics the effect of the natural hormone hepcidin, but with greater potency, solubility and stability. Hepcidin
is a key hormone in regulating iron equilibrium and is critical to the proper development of red blood cells. We are currently developing PTG-
300 for the treatment of ineffective erythropoiesis, chronic anemia and iron overload, with an initial focus on beta-thalassemia non-transfusion
dependent (“NTD”) and transfusion dependent (“TD”) patients where the primary endpoints are hemoglobin increases and transfusion burden
reductions, respectively. PTG-300 has received an orphan drug designation from the U.S. Food and Drug Administration (“FDA”) and European
Union (“EU”) regulatory authorities for the treatment of beta-thalassemia. The FDA has granted Fast Track designation to PTG-300 for the
treatment of beta-thalassemia. In the first quarter of 2019, we began dosing patients in a global Phase 2 study of PTG-300 in beta-thalassemia.
Preliminary results from this Phase 2 study reported in the fourth quarter of 2019 suggest that the dose related pharmacodynamic responses in
lowering serum iron and transferrin saturation (“TSAT”) warrant continued evaluation at higher and/or more frequent doses which will be
required to evaluate the rate and durability of clinical response in order to reach definitive conclusions. We expect to report clinical efficacy
results from this Phase 2 study in 2020. We initiated a Phase 2 study in polycythemia vera (“PV”) in the third quarter of 2019 and a Phase 2 study
in hereditary hemochromatosis (“HH”) in January 2020. We are working toward the initiation of an investigator-sponsored study (“IST”) of PTG-
300 in patients with myelodysplastic syndromes (“MDS”) in the first half of 2020. Assuming PTG-300 shows clinical efficacy in one or more of
the above indications, we intend to select our first indication in 2020 for a potential pivotal study to begin in 2021.
Our clinical assets PTG-200 and PN-943 are orally delivered drugs currently in development for inflammatory bowel disease (“IBD”), a
gastrointestinal (“GI”) disease consisting primarily of ulcerative colitis (“UC”) and Crohn’s disease (“CD”), that block biological pathways
currently targeted by marketed injectable antibody drugs. Our orally stable peptide approach offers targeted delivery to the GI tissue
compartment. We believe that, compared to antibody drugs, these product candidates have the potential to provide improved safety due to
minimal exposure in the blood, increased convenience and compliance due to oral delivery, and the opportunity for the earlier introduction of
targeted oral therapy. As a result, if approved, they may transform the existing treatment paradigm for IBD.
PTG-200 (also referenced as JNJ-67864238) is an orally delivered gut-restricted Interleukin-23 receptor (“IL-23R”) antagonist for the
treatment of IBD. In May 2017, we entered into a worldwide license and collaboration agreement with Janssen Biotech, Inc. (“Janssen”), a
Johnson & Johnson company, to co-develop and co-detail PTG-200 and any second-generation compounds for all indications, including IBD.
The agreement with Janssen was amended in May 2019 to expand the collaboration by supporting efforts towards second-generation IL-23R
antagonists, triggering a $25.0 million milestone payment to us. In January 2020, as part of the expanded research collaboration, we announced
the identification and nomination of an orally delivered, gut-restricted IL-23R antagonist peptide as a second-generation development candidate,
triggering a $5.0 million milestone payment to us. See Note 3 to the Consolidated Financial Statements included elsewhere in this Annual Report
on Form 10-K for additional information. In 2018, we completed a Phase 1 clinical study to evaluate the safety, pharmacokinetics and
pharmacodynamics of PTG-200 in healthy
72
Table of Contents
volunteers. Janssen submitted a U.S. Investigational New Drug application (“IND”) for PTG-200 in CD during the second quarter of 2019, which
took effect in July 2019. In collaboration with Janssen, we initiated a Phase 2 clinical study for PTG-200 in CD in the fourth quarter of 2019,
with results expected in the first half of 2021.
PN-943 is an orally delivered, gut-restricted, alpha-4-beta-7 (“α4β7”) specific integrin antagonist. We developed PN-943 as a potentially
more potent orally delivered, gut-restricted α4β7 backup compound to PTG-100, our first-generation orally delivered gut-restricted α4β7
inhibitor that was being developed for treatment of UC. In 2019, we completed a Phase 1 single ascending dose (“SAD”) and multiple ascending
dose (“MAD”) clinical study of PN-943 in healthy volunteers to evaluate safety, pharmacokinetics and pharmacodynamics. We reported results
of the SAD part of the study during the second quarter of 2019 and the MAD part of the study during the third quarter of 2019. The
pharmacodynamic results indicated that the administration of PN-943 was well tolerated, and results of target engagement were supportive of the
higher potency of PN-943 as compared to PTG-100. We submitted a U.S. IND for PN-943 in December 2019, which took effect in January 2020.
We anticipate initiating a Phase 2 proof of concept (“POC”) study in UC in the second quarter of 2020, with topline data expected in the second
half of 2021.
Our clinical assets are all derived from our proprietary discovery platform. Our platform enables us to engineer novel, structurally
constrained peptides that retain key advantages of both orally delivered small molecules and injectable antibody drugs, while overcoming many
of their limitations as therapeutic agents. Importantly, constrained peptides can be designed to alleviate the fundamental instability inherent in
traditional peptides to allow different delivery forms, such as oral, subcutaneous, intravenous, and rectal. We continue to use our peptide
technology platform to discover product candidates against targets in disease areas with significant unmet medical needs.
Operations
We have incurred net losses in each year since inception and we do not anticipate achieving sustained profitability in the foreseeable future.
Our net losses were $77.2 million, $38.9 million and $37.0 million for the years ended December 31, 2019, 2018 and 2017, respectively. As of
December 31, 2019, we had an accumulated deficit of $217.7 million. Substantially all of our net losses have resulted from costs incurred in
connection with our research and development programs and from general and administrative costs associated with our operations. We expect to
continue to incur significant research, development and other expenses related to our ongoing operations and product development, including
clinical development activities under our worldwide license and collaboration agreement with Janssen, and, as a result, we expect to continue to
incur losses in the future as we continue our development of, and seek regulatory approval for, our product candidates.
Janssen License and Collaboration Agreement
On May 26, 2017, we and Janssen, one of the Janssen Pharmaceutical Companies of Johnson & Johnson, entered into an exclusive license
and collaboration agreement for the clinical development, manufacture and potential commercialization of PTG-200 worldwide for the treatment
of CD and UC (the “Janssen License and Collaboration Agreement”), which was subsequently amended effective May 7, 2019 (the “First
Amendment”). Janssen is a related party to us as Johnson & Johnson Innovation - JJDC, Inc., a significant stockholder of ours, and Janssen are
both subsidiaries of Johnson & Johnson. During the third quarter of 2017, we received a non-refundable, upfront cash payment of $50.0 million
from Janssen. During the second quarter of 2019, we received a non-refundable cash payment of $25.0 million upon execution of the First
Amendment. During the fourth quarter of 2019, we became eligible to receive a cash payment of $5.0 million upon the successful nomination of
a second-generation development candidate. See Note 3 to the Consolidated Financial Statements included elsewhere in this Annual Report on
Form 10-K for additional information.
Critical Accounting Polices and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial
statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these
consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities
73
Table of Contents
at the date of the consolidated financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods.
Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies
discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving
management’s judgments and estimates.
Leases
We adopted Accounting Standards Codification Topic 842, Leases, (“ASC 842”) effective January 1, 2019. We determine if an
arrangement is a lease at inception. Pursuant to ASC 842, operating leases are included in operating lease right-of-use (“ROU”) assets, operating
lease liabilities, and noncurrent operating lease liabilities on the consolidated balance sheets. Operating lease ROU assets and operating lease
liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. If our
leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in
determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease
incentives and initial direct costs incurred. Lease terms include options to extend or terminate the lease when it is reasonably certain that we will
exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
We record tenant improvement allowances as a reduction to the ROU asset with the impact of the decrease recognized prospectively over
the remaining lease term. The leasehold improvements will be amortized over the shorter of their useful life or the remaining term of the lease.
Revenue Recognition
We follow Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”). Under ASC 606, we
recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we
expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the
scope of ASC 606, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in
the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v)
recognize revenue when (or as) we satisfy a performance obligation. We apply the five-step model to contracts when it is probable that we will
collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception, we assess the
goods or services promised within each contract, determine those that are performance obligations, and assess whether each promised good or
service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligations
when (or as) the performance obligations are satisfied. We constrain our estimate of the transaction price up to the amount (the “variable
consideration constraint”) that a significant reversal of recognized revenue is not probable.
Licenses of intellectual property: If a license to our intellectual property is determined to be distinct from the other performance
obligations identified in an arrangement, we recognize revenue from non-refundable, upfront fees allocated to the license when the license is
transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with other promises, we
utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is
satisfied over time or at a point in time and, if over time, the appropriate method of measuring proportional performance for purposes of
recognizing revenue from non-refundable, upfront fees. We evaluate the measure of proportional performance each reporting period and, if
necessary, adjust the measure of performance and related revenue recognition.
Milestone payments: At the inception of each arrangement or amendment that includes development, regulatory or commercial milestone
payments, we evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction
price. ASC 606 suggests two alternatives to use when estimating the amount of variable consideration: the expected value method and the most
likely amount method. Under the
74
Table of Contents
expected value method, an entity considers the sum of probability-weighted amounts in a range of possible consideration amounts. Under the
most likely amount method, an entity considers the single most likely amount in a range of possible consideration amounts. Whichever method is
used, it should be consistently applied throughout the life of the contract; however, it is not necessary for us to use the same approach for all
contracts. We expect to use the most likely amount method for development and regulatory milestone payments. If it is probable that a significant
revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our
control or the control of the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are
received. If there is more than one performance obligation, the transaction price is then allocated to each performance obligation on a relative
stand-alone selling price basis. We recognize revenue as or when the performance obligations under the contract are satisfied. At the end of each
subsequent reporting period, we re-evaluate the probability or achievement of each such milestone and any related constraint, and if necessary,
adjust our estimates of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect
revenues and earnings in the period of adjustment.
Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is
deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sales occur, or (ii) when
the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).
Upfront payments and fees are recorded as deferred revenue upon receipt or when due and may require deferral of revenue recognition to a
future period until we perform our obligations under these arrangements. Amounts payable to us are recorded as accounts receivable when our
right to consideration is unconditional. Amounts payable to us and not yet billed to the collaboration partner are recorded as contract assets. We
do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between
payment by the customer and the transfer of the promised goods or services to the customer will be one year or less.
Contractual cost sharing payments made to a customer or collaboration partner are accounted for as a reduction to the transaction price if
such payments are not related to distinct goods or services received from the customer or collaboration partner.
Contracts may be amended to account for changes in contract specifications and requirements. Contract modifications exist when the
amendment either creates new, or changes existing, enforceable rights and obligations. When contract modifications create new performance
obligations and the increase in consideration approximates the standalone selling price for goods and services related to such new performance
obligations as adjusted for specific facts and circumstances of the contract, the modification is considered to be a separate contract and revenue is
recognized prospectively. If a contract modification is not accounted for as a separate contract, we account for the promised goods or services not
yet transferred at the date of the contract modification (the remaining promised goods or services) prospectively, as if it were a termination of the
existing contract and the creation of a new contract, if the remaining goods or services are distinct from the goods or services transferred on or
before the date of the contract modification. We account for a contract modification as if it were a part of the existing contract if the remaining
goods or services are not distinct and, therefore, form part of a single performance obligation that is partially satisfied at the date of the contract
modification. In such case the effect that the contract modification has on the transaction price, and on the entity’s measure of progress toward
complete satisfaction of the performance obligation, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue)
at the date of the contract modification (the adjustment to revenue is made on a cumulative catch-up basis).
The period between when we transfer control of promised goods or services and when we receive payment is expected to be one year or
less, and that expectation is consistent with our historical experience. Upfront payment contract liabilities resulting from our license and
collaboration agreements do not represent a financing component as the payment is not financing the transfer of goods and services, and the
technology underlying the licenses granted reflects research and development expenses already incurred by us. As such, we do not adjust our
revenues for the effects of a significant financing component.
Stock-Based Compensation
75
Table of Contents
We recognize compensation costs related to stock options accounted for under Accounting Standards Codification Topic 718 – “Stock
Compensation” based on the estimated fair value of the awards on the date of grant. We estimate the fair value, and the resulting stock-based
compensation expense, using the Black-Scholes option-pricing model. The estimated fair value of the stock-based awards is generally recognized
on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards.
The Black-Scholes option-pricing model requires the use of subjective assumptions which determine the fair value of stock-based awards.
Expected volatility generally requires significant judgement to determine. Our expected volatility is estimated based on the average volatility for
comparable publicly traded biopharmaceutical companies over a period equal to the expected term of the stock option grants. The comparable
companies were chosen based on their similar size, stage in the life cycle, or area of specialty. We will continue to apply this process until a
sufficient amount of historical information regarding the volatility of our own stock price becomes available.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined
based on the differences between the financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse. We assess the likelihood that the resulting deferred tax assets will be
realized. A valuation allowance is provided when it is more likely than not that all or some portion of a deferred tax asset will not be realized.
At December 31, 2019, our total gross deferred tax assets were $55.2 million and our gross deferred tax liabilities were $1.3 million. Due to
our lack of earnings history and uncertainties surrounding our ability to generate future taxable income, our U.S. net deferred tax assets have
been offset by a valuation allowance of $52.5 million. The deferred tax assets were primarily comprised of federal and state tax net operating loss
and tax credit carryforwards. At December 31, 2019, we had $164.1 million of federal net operating loss carryforwards and $151.1 million of
state net operating loss carryforwards. $78.7 million of the federal net operating loss carryforwards will begin to expire in 2033, if not utilized,
and the remaining $85.4 million have not expiration date. The state net operating loss carryforwards will begin to expire in 2035, if not utilized.
As of December 31, 2019, we also had accumulated Australian tax losses of AUD 13.1 million ($9.2 million) available for carry forward against
future earnings, which under relevant tax laws do not expire but may not be available under certain circumstances.
Utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to ownership changes that may have
occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code (the “Code”), and similar state provisions.
These ownership change limitations may limit the amount of net operating loss carryforwards and other tax attributes that can be utilized
annually to offset future taxable income and tax, respectively. In general, an “ownership change” as defined by Section 382 of the Code results
from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points (by
value) of the outstanding stock of a company by certain stockholders.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements applicable to us is included in Note 2 to the Consolidated Financial Statements
included elsewhere in this Annual Report on Form 10-K.
Components of Our Results of Operations
License and Collaboration Revenue
Our license and collaboration revenue is derived from payments we receive under the Janssen License and Collaboration Agreement. See
Note 3 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additional information.
76
Table of Contents
Research and Development Expenses
Research and development expenses represent costs incurred to conduct research, such as the discovery and development of our product
candidates. We recognize all research and development costs as they are incurred, unless there is an alternative future use in other research and
development projects or otherwise. Non-refundable advance payments for goods and services that will be used in future research and
development activities are expensed when the activity has been performed or when the goods have been received rather than when payment has
been made. In instances where we enter into agreements with third parties to provide research and development services to us, costs are expensed
as services are performed. Amounts due under such arrangements may be either fixed fee or fee for service and may include upfront
payments, monthly payments, and payments upon the completion of milestones or the receipt of deliverables.
Research and development expenses consist primarily of the following:
·
·
·
·
·
·
expenses incurred under agreements with clinical study sites that conduct research and development activities on our behalf;
employee-related expenses, which include salaries, benefits and stock-based compensation;
laboratory vendor expenses related to the preparation and conduct of pre-clinical, non-clinical, and clinical studies;
costs related to production of clinical supplies and non-clinical materials, including fees paid to contract manufacturers;
license fees and milestone payments under license and collaboration agreements; and
facilities and other allocated expenses, which include expenses for rent and maintenance of facilities, information technology,
depreciation and amortization expense and other supplies.
We recognize the funds from grants under government programs as a reduction of research and development expenses when the related
research costs are incurred. In addition, we recognize the funds related to our Australian research and development tax incentive that are not
subject to refund provisions as a reduction of research and development expenses. The research and development tax incentives are recognized
when there is reasonable assurance that the incentives will be received, the relevant expenditure has been incurred and the amount of the
consideration can be reliably measured. We evaluate our eligibility under the tax incentive program as of each balance sheet date and make
accruals and related adjustments based on the most current and relevant data available. We may alternatively be eligible for a taxable credit in the
form of a non-cash tax incentive.
We allocate direct costs and indirect costs incurred to product candidates when they enter clinical development. For product candidates in
clinical development, direct costs consist primarily of clinical, pre-clinical, and drug discovery costs, costs of supplying drug substance and drug
product for use in clinical and pre-clinical studies, including clinical manufacturing costs, contract research organization fees, and other
contracted services pertaining to specific clinical and pre-clinical studies. Indirect costs allocated to our product candidates on a program specific
basis include research and development employee salaries, benefits, and stock-based compensation, and indirect overhead and other
administrative support costs. Program-specific costs are unallocated when the clinical expenses are incurred for our early stage research and drug
discovery projects, our internal resources, employees and infrastructure are not tied to any one research or drug discovery project and are
typically deployed across multiple projects. As such, we do not provide financial information regarding the costs incurred for early stage pre-
clinical and drug discovery programs on a program-specific basis prior to the clinical development stage.
We currently have three clinical assets in various stages of clinical development. We initiated a Phase 1 clinical study of PTG-300 during
the second quarter of 2017. We have presented separately in the table below costs associated
77
Table of Contents
with the PTG-300 program beginning in June 2017. We initiated a Phase 1 clinical study of PTG-200 during the fourth quarter of 2017. We have
presented separately in the table below costs associated with the PTG-200 program beginning in December 2017. Our development and
compound supply expenses incurred under the Janssen License and Collaboration Agreement prior to December 2017 are included in pre-clinical
and drug discovery research expense. During 2018, we elected to halt further development of PTG-100 and concurrently elected to replace
further development of PTG-100 with PN-943 based on an assessment of pre-clinical data from PN-943. We continued to experience expenses
and credits related to winding down the development and trials for PTG-100 in 2019. We initiated a Phase 1 study of PN-943 during the fourth
quarter of 2018. We have presented separately in the table below costs associated with the PN-943 program beginning in December 2018.
The following table summarizes our research and development expenses incurred during the periods indicated:
Clinical and development expense — PTG-300
Clinical and development expense — PN-943
Clinical and development expense — PTG-200
Clinical and development expense — PTG-100
Milestone payment obligation to former collaboration partner
Pre-clinical and drug discovery research expense
Grants and incentives reimbursement of expenses, net
Total research and development expenses
2019
30,325
20,924
9,414
288
—
4,162
(110)
65,003
Year Ended December 31,
2018
(Dollars in thousands)
14,304
$
523
16,120
20,443
500
9,837
(2,230)
59,497
$
$
$
$
$
2017
4,246
—
2,079
25,825
250
15,292
(1,511)
46,181
We expect our research and development expenses will increase as we progress our product candidates, including development activities
under the Janssen License and Collaboration Agreement, advance our discovery research projects into the pre-clinical stage and continue our
early stage research. The process of conducting research, identifying potential product candidates and conducting pre-clinical and clinical trials
necessary to obtain regulatory approval is costly and time intensive. We may never succeed in achieving marketing approval for our product
candidates. The probability of success of our product candidates may be affected by numerous factors, including pre-clinical data, clinical data,
competition, manufacturing capability and commercial viability. As a result, we are unable to determine the duration and completion costs of our
research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our
product candidates. Our research and development programs are subject to change from time to time as we evaluate our priorities and available
resources.
General and Administrative Expenses
General and administrative expenses consist of personnel costs, allocated facilities costs and other expenses for outside professional
services, including legal, human resources, audit and accounting services. Personnel costs consist of salaries, benefits and stock-based
compensation. Allocated expenses consist of expenses for rent and maintenance of facilities, information technology, depreciation and
amortization expense and other supplies. We expect to continue to incur expenses to support our continued operations as a public company,
including expenses related to existing and future compliance with rules and regulations of the SEC and those of the national securities exchange
on which our securities are traded, insurance expenses, investor relations, professional services and general overhead and administrative costs.
Interest Income
Interest income consists of interest earned on our cash, cash equivalents, and marketable securities.
Interest Expense
Interest expense consists of interest recognized on our long-term debt, which is comprised of contractual interest, amortization of
origination fees and other issuance costs, and accretion of final payment fees.
78
Table of Contents
Other Expense, Net
Other expense, net consists primarily of amounts related to foreign exchange gains and losses and related items.
Results of Operations
Comparison of the Year ended December 31, 2019 and 2018
License and collaboration revenue - related party
Operating expenses:
Research and development
General and administrative
Total operating expenses
(1)
(2)
Loss from operations
Interest income
Interest expense
Other expense, net
Loss before income tax benefit
Income tax benefit
Net loss
Year Ended
December 31,
2019
2018
(Dollars in thousands)
Dollar
Change
%
Change
$
231 $
30,925 $
(30,694)
65,003
15,749
80,752
(80,521)
2,813
(169)
(1)
(77,878)
691
(77,187) $
59,497
13,697
73,194
(42,269)
2,566
—
(20)
(39,723)
799
(38,924) $
5,506
2,052
7,558
(38,252)
247
(169)
19
(38,155)
(108)
(38,263)
$
(99)
9
15
10
90
10
100
(95)
96
(14)
98
(1)
(2)
Includes $4.4 million and $3.4 million of non-cash stock-based compensation expense for the year ended December 31, 2019 and 2018,
respectively.
Includes $4.0 million and $3.5 million of non-cash stock-based compensation expense for the year ended December 31, 2019 and 2018,
respectively.
License and Collaboration Revenue
License and collaboration revenue decreased $30.7 million, or 99%, from $30.9 million for the year ended December 31, 2018 to $0.2
million for the year ended December 31, 2019. The decrease in license and collaboration revenue was primarily due to a contract modification for
the First Amendment to the Janssen License and Collaboration Agreement and the related cumulative catchup adjustment during the second
quarter of 2019. The contract modification resulted in an increase in the transaction price and additional deliverables under the performance
obligation, leading to an overall corresponding decrease in the cumulative percentage of completion of our performance obligation for the
Janssen License and Collaboration Agreement.
We determined that the transaction price of the Janssen License and Collaboration Agreement was $112.9 million as of December 31, 2019,
an increase of $52.2 million from the transaction price of $60.7 million at December 31, 2018. In order to determine the transaction price, we
evaluated all payments to be received during the duration of the contract, net of Phase 2 development costs reimbursement expected to be
payable to Janssen. We determined that the transaction price includes the $50.0 million upfront payment, the $25.0 million payment received
upon the effectiveness of the First Amendment, the $5.0 million payment triggered by the successful nomination of a second-generation
compound, $18.3 million of reimbursement from Janssen for services performed for PTG-200 Phase 2 and for second-generation compound
research costs and other services, and $14.6 million of estimated variable consideration, which includes a $7.5 million milestone payment subject
to the completion of a Phase 1 study for a second-generation compound. The increase in transaction price from December 31, 2018 to December
31, 2019 was due to an increase in fixed and variable consideration related to the contract modification for First Amendment to the Janssen
License and Collaboration Agreement effective May 7, 2019. We re-evaluate the transaction price each reporting period and as uncertain events
are resolved or other changes in circumstances occur.
79
Table of Contents
Research and Development Expenses
Research and development expenses increased $5.5 million, or 9%, from $59.5 million for the year ended December 31, 2018 to $65.0
million for the year ended December 31, 2019. The increase included $20.4 million of PN-943 clinical trial and development expenses, an
increase of $16.0 million in PTG-300 clinical trial and development expenses and a $1.3 million reversal of previously recorded reductions to
research and development expenses in connection with the tax incentive from Australia, partially offset by a decrease of $20.1 million in PTG-
100 clinical trial and development expenses due to the halting of further development during 2018 and related credit adjustments, a decrease of
$6.7 million for PTG-200 clinical trial and development expenses under the Janssen License and Collaboration Agreement due to timing of
deliverables and a decrease of $5.7 million in pre-clinical and discovery research expenses. Research and development expenses for the year
ended December 31, 2019 included increased personnel costs due to an increase in research and development headcount from 49 employees at
December 31, 2018 to 54 employees at December 31, 2019.
General and Administrative Expenses
General and administrative expenses increased $2.0 million, or 15%, from $13.7 million for the year ended December 31, 2018 to $15.7
million for the year ended December 31, 2019 primarily due to increases of $1.0 million in personnel costs to support the growth of our
operations, $0.7 million in professional fees and $0.3 million in insurance expense. The increase in personnel costs for the year ended December
31, 2019 reflected an increase in general and administrative headcount from 15 employees at December 31, 2018 to 19 employees at December
31, 2019.
Interest Income
Interest income increased $0.2 million, or 10%, from $2.6 million for the year ended December 31, 2018 to $2.8 million for the year ended
December 31, 2019 primarily due to higher interest income related to an increase in marketable securities balances.
Income Tax Benefit
Income tax benefit decreased $0.1 million, or 14%, from $0.8 million for the year ended December 31, 2018, representing an effective
income tax rate of 2.0%, to $0.7 million for the year ended December 31, 2019, representing an effective income tax rate of 0.9%. Our effective
income tax rate differs from our federal statutory rate of 21%, primarily because our U.S. loss cannot be benefited due to the full valuation
allowance position and reduced by foreign taxes.
Comparison of the Years ended December 31, 2018 and 2017
License and collaboration revenue - related party
Operating expenses:
$
Year Ended
December 31,
2018
2017
(Dollars in thousands)
20,063 $
30,925 $
Dollar
Change
%
Change
10,862
54
Research and development
General and administrative
Total operating expenses
(1)
(2)
Loss from operations
Interest income
Other expense, net
Loss before income tax benefit
Income tax benefit
Net loss
59,497
13,697
73,194
(42,269)
2,566
(20)
(39,723)
799
$ (38,924)
$
46,181
11,779
57,960
(37,897)
948
(8)
(36,957)
—
13,316
1,918
15,234
(4,372)
1,618
(12)
(2,766)
799
(36,957) $ (1,967)
29
16
26
12
171
150
7
100
5
80
Table of Contents
(1)
(2)
Includes $3.4 million and $2.0 million of non-cash stock-based compensation expense for the year ended December 31, 2018 and 2017,
respectively.
Includes $3.5 million and $2.2 million of non-cash stock-based compensation expense for the year ended December 31, 2018 and 2017,
respectively.
License and Collaboration Revenue
License and collaboration revenue increased $10.8 million, or 54%, from $20.1 million for the year ended December 31, 2017 to $30.9
million for the year ended December 31, 2018. The increase was primarily due to deferred revenue and cost sharing revenue recognized in
connection with the completion of Phase 1 activities and delivery of compound supply services for Phase 2a activities under the Janssen License
and Collaboration Agreement, which became effective in July 2017.
We determined that the transaction price of the Janssen License and Collaboration Agreement was $60.7 million as of December 31, 2018,
an increase of $6.8 million from the transaction price of $53.9 million at December 31, 2017. In order to determine the transaction price, we
evaluated all payments to be received during the duration of the contract. We determined that the $50.0 million upfront payment, the $25.0
million payment payable upon filing of the IND, which was fully constrained as of December 31, 2018, and $10.7 million of estimated variable
consideration for cost-sharing payments from Janssen for agreed upon services related to Phase 2a activities as of December 31, 2018 constituted
consideration to be included in the transaction price, which is to be allocated to the combined performance obligation. The increase in transaction
price was due to an increase in variable consideration related to compound supply services, which was recognized as a cumulative catch-up
adjustment. During the year ended December 31, 2018, this increased overall variable consideration by $6.8 million and extended our projected
completion date into the first half of 2019. We will re-evaluate the transaction price at each reporting period and as uncertain events are resolved
or other changes in circumstances occur.
Research and Development Expenses
Research and development expenses increased $13.3 million, or 29%, from $46.2 million for the year ended December 31, 2017 to $59.5
million for the year ended December 31, 2018. The increase was primarily due to $14.0 million for PTG-200 Phase 1 clinical trial and
development expenses, $10.1 million for PTG-300 Phase 1 clinical trial and development expenses, $0.5 million for PN-943 Phase 1 clinical trial
and development expenses and an increase of $0.3 million in milestone payments to a former collaboration partner. These increases were
partially offset by a decrease of $5.5 million in pre-clinical and discovery research expense, including pre-clinical development activities for
PTG-200, PTG-300 PN-943 and our other product candidates, a decrease of $5.4 million in PTG-100 Phase 1 clinical trial and development
expenses and a decrease of $0.7 million in expense reimbursement under grants and incentives. Research and development expenses for the year
ended December 31, 2018 include an increase in personnel costs due to increased research and development headcount from 44 employees at
December 31, 2017 to 49 employees at December 31, 2018.
General and Administrative Expenses
General and administrative expenses increased $1.9 million, or 16%, from $11.8 million for the year ended December 31, 2017, to $13.7
million for the year ended December 31, 2018. The increase was primarily due to an increase of $2.4 million in personnel costs to support the
growth of our operations, partially offset by a $0.5 million decrease in legal fees primarily related to the Janssen License and Collaboration
Agreement. The increase in personnel costs for the year ended December 31, 2018 reflected an increase in general and administrative headcount
from 11 employees at December 31, 2017 to 15 employees at December 31, 2018 and included a $1.3 million increase in stock-based
compensation expense.
81
Table of Contents
Interest Income
Interest income increased $1.6 million, or 171%, from $0.9 million for the year ended December 31, 2017 to $2.5 million for the year
ended December 31, 2018. The increase in interest income was primarily due to the increasing interest rate environment during the year ended
December 31, 2018.
Income Tax Benefit
Income tax benefit for the year ended December 31, 2018 was $0.8 million. The income tax benefit was due primarily to the 2018 release
of the valuation allowance related to Protagonist Australia. We believe these deferred tax assets will be realized in the future due to expected
profitability for this subsidiary. No income tax provision was recorded for the year ended December 31, 2017.
Liquidity and Capital Resources
Liquidity and Capital Expenditures
As of December 31, 2019, we had $133.0 million of cash, cash equivalents and marketable securities and an accumulated deficit of $217.7
million. Our operations have been financed by net proceeds from the sale of shares of our capital stock, payments under the Janssen License and
Collaboration Agreement and proceeds from our long-term debt. During the third quarter of 2017 we received a non-refundable, upfront payment
of $50.0 million from Janssen. During the second quarter of 2019, we received a nonrefundable $25.0 million payment from Janssen upon
execution of the First Amendment. During the fourth quarter of 2019, we became eligible to receive a nonrefundable $5.0 million payment from
Janssen, which we received during the first quarter of 2020.
In September 2017, we filed a registration statement on Form S-3 with the Securities and Exchange Commission (File No. 333-220314)
that was declared effective as of October 5, 2017 and permits the offering, issuance, and sale by us of up to a maximum aggregate offering price
of $200.0 million of our common stock, preferred stock and certain debt securities (the “2017 Form S-3”). Up to a maximum of $50.0 million of
the maximum aggregate offering price of $200.0 million may be issued and sold pursuant to an at-the-market (“ATM”) financing facility under a
sales agreement (the “2017 Sales Agreement”). The 2017 Sales Agreement was terminated in 2019. During the year ended December 31, 2019,
prior to the termination of the 2017 Sales Agreement, we sold 2,846,641 shares of our common stock for net proceeds of $34.5 million, after
deducting issuance costs. We sold 151,273 shares of our common stock pursuant to the 2017 Sales Agreement during the year ended December
31, 2018 for net proceeds of $1.5 million, after deducting issuance costs. As of December 31, 2019, $72.0 million of common stock remained
available for sale under the 2017 Form S-3.
In October 2017, we completed an underwritten public offering of 3,530,000 shares of our common stock at a public offering price of
$17.00 per share. In November 2017, we issued an additional 529,500 shares of our common stock at a price of $17.00 per share following the
underwriters’ exercise of their option to purchase additional shares. Net proceeds, after deducting underwriting commissions and offering costs
paid by us, were $64.5 million.
In August 2018, we entered into a Securities Purchase Agreement with certain accredited investors (each, an “Investor” and, collectively,
the “Investors”), pursuant to which we sold an aggregate of 2,750,000 shares of our common stock at a price of $8.00 per share, for aggregate net
proceeds of $21.7 million, after deducting offering expenses payable by us. In a concurrent private placement, we issued the Investors warrants to
purchase an aggregate of 2,750,000 shares of our common stock (each, a “Warrant” and, collectively, the “Warrants”). Each Warrant is
exercisable from August 8, 2018 through August 8, 2023. Warrants to purchase 1,375,000 shares of our common stock have an exercise price of
$10.00 per share and Warrants to purchase 1,375,000 shares of our common stock have an exercise price of $15.00 per share. The exercise price
and number of shares of common stock issuable upon the exercise of the Warrants (the “Warrant Shares”) are subject to adjustment in the event
of any stock dividends and splits, reverse stock split, recapitalization, reorganization or similar transaction, as described in the Warrants. Under
certain circumstances, the Warrants may be exercisable on a “cashless” basis. In connection with the issuance and sale of the common stock and
Warrants, we granted the Investors certain registration rights with respect to the Warrants and the
82
Table of Contents
Warrant Shares. The common stock and Warrants are classified as equity in accordance with Accounting Standards Codification Topic 480,
Distinguishing Liabilities from Equity (“ASC 480”), and the net proceeds from the transaction were recorded as a credit to additional paid-in
capital. As of December 31, 2019, none of the Warrants have been exercised.
In December 2018, we entered into an exchange agreement (the “Exchange Agreement”) with an Investor and its affiliates (the
“Exchanging Stockholders”), pursuant to which we exchanged an aggregate of 1,000,000 shares of our common stock, par value $0.00001 per
share, owned by the Exchanging Stockholders for pre-funded warrants (the “Exchange Warrants”) to purchase an aggregate of 1,000,000 shares
of common stock (subject to adjustment in the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization or
similar transaction, as described in the Exchange Warrants), with an exercise price of $0.00001 per share. The Exchange Warrants will expire ten
years from the date of issuance. The Exchange Warrants are exercisable at any time prior to expiration except that the Exchange Warrants cannot
be exercised by the Exchanging Stockholders if, after giving effect thereto, the Exchanging Stockholders would beneficially own more than
9.99% of our common stock, subject to certain exceptions. In accordance with Accounting Standards Codification Topic 505, Equity , we
recorded the retirement of the common stock exchanged as a reduction of common stock shares outstanding and a corresponding debit to
additional paid-in-capital at the fair value of the Exchange Warrants on the issuance date. The Exchange Warrants are classified as equity in
accordance with ASC 480, and fair value of the Exchange Warrants was recorded as a credit to additional paid-in capital and is not subject to
remeasurement. We determined that the fair value of the Exchange Warrants is substantially similar to the fair value of the retired shares on the
issuance date due to the negligible exercise price for the Exchange Warrants. During the year ended December 31, 2019, Exchange Warrants to
purchase 600,000 shares were net exercised, resulting in the issuance of 599,997 shares of common stock. As of December 31, 2019, 400,000 of
the Exchange Warrants remain unexercised.
In October 2019, we filed a registration statement on Form S-3 (File no. 333-234414) that was declared effective as of November 22, 2019
and permits the offering, issuance, and sale by us of up to a maximum aggregate offering price of $250.0 million of our common stock, preferred
stock, debt securities and warrants (the “2019 Form S-3”). Up to a maximum of $75.0 million of the maximum aggregate offering price of $250.0
million may be issued and sold pursuant to an ATM financing facility under a sales agreement we entered into on November 27, 2019 (the “2019
Sales Agreement”). As of December 31, 2019, no offering, issuance or sale of common stock, preferred stock, debt securities or warrants was
made under the 2019 Form S-3 or the 2019 Sales Agreement.
In October 2019, we entered into a credit and security agreement pursuant to which the lenders party thereto agreed to make term loans
available to us for working capital and general business purposes, in a principal amount of up to $50.0 million, including a $10.0 million term
loan which was funded at closing (October 30, 2019), with the ability to access the remaining $40.0 million in two additional tranches of $20.0
million, subject to specified availability periods, the achievement of certain clinical development milestones, minimum cash requirements and
other customary conditions. Additional information about this credit facility and our long-term debt is presented in Note 8 to the consolidated
financial statements included elsewhere in this Annual Report on Form 10-K.
Our primary uses of cash are to fund operating expenses, primarily research and development 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.
We believe, based on our current operating plan and expected expenditures, that our existing cash, cash equivalents and marketable
securities and access to our debt facility will be sufficient to meet our anticipated operating and capital expenditure requirements for at least the
next 12 months from the date of this filing. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our
available capital resources sooner than we currently expect. If our planned pre-clinical and clinical trials are successful, or our other product
candidates enter clinical trials or advance beyond the discovery stage, we will need to raise additional capital as well as seek additional
collaborative or other arrangements with corporate sources in order to further advance our product candidates towards potential regulatory
approval. We will continue to require additional financing to advance our current product candidates through clinical development, to develop,
acquire or in-license other potential product candidates and to fund operations
83
Table of Contents
for the foreseeable future. We will continue to seek funds through equity or debt financings, collaborative or other arrangements with corporate
sources, or through other sources of financing, but such financing may not be available at terms acceptable to us, if at all. We anticipate that we
will need to raise substantial additional capital, the requirements of which will depend on many factors, including:
·
·
·
·
·
·
·
·
·
·
·
·
·
the progress, timing, scope, results and costs of our pre-clinical studies and clinical trials for our product candidates, including the
ability to enroll patients in a timely manner for our clinical trials;
the costs of and ability to obtain clinical and commercial supplies and any other product candidates we may identify and develop;
our ability to successfully commercialize the product candidates we may identify and develop;
the selling and marketing costs associated with our current product candidates and any other product candidates we may identify
and develop, including the cost and timing of expanding our sales and marketing capabilities;
the achievement of development, regulatory and sales milestones resulting in payments to us from Janssen under the Janssen
License and Collaboration Agreement, and the timing of receipt of such payments, if any;
the timing, receipt and amount of royalties under the Janssen License and Collaboration Agreement on worldwide net sales of
PTG‑200, including any second-generation compounds, upon regulatory approval or clearance, if any;
the amount and timing of sales and other revenues from our current product candidates and any other product candidates we may
identify and develop, including the sales price and the availability of adequate third-party reimbursement;
the cash requirements of any future acquisitions or discovery of product candidates;
the time and cost necessary to respond to technological and market developments;
the extent to which we may acquire or in-license other product candidates and technologies;
costs necessary to attract, hire and retain qualified personnel;
the costs of maintaining, expanding and protecting our intellectual property portfolio; and
the costs of ongoing general and administrative activities to support the growth of our business.
Adequate additional funding may not be available to us on acceptable terms, or at all. Any failure to raise capital as and when needed could
have a negative impact on our financial condition and on our ability to pursue our business plans and strategies. Further, our operating plans may
change, and we may need additional funds to meet operational needs and capital requirements for clinical trials and other research and
development activities. If we do raise additional capital through public or private equity offerings or convertible debt securities, the ownership
interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely
affect our stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our
ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Because of the numerous
risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts
of increased capital outlays and operating expenditures associated with our current and anticipated product development programs.
84
Table of Contents
The following table summarizes our cash flows for the periods indicated:
Cash (used in) provided by operating activities
Cash (used in) provided by investing activities
Cash provided by financing activities
Cash Flows from Operating Activities
$
2019
Year Ended December 31,
2018
(In thousands)
2017
(41,527) $
(53,710)
46,036
(49,947) $
2,213
24,115
3,872
15,823
65,554
Cash used in operating activities for the year ended December 31, 2019 was $41.5 million, consisting of our net loss of $77.2 million,
partially offset by a net change of $26.1 million in net operating assets and liabilities and non-cash charges of $9.5 million. The change in net
operating assets and liabilities was primarily due to a net increase of $33.5 million in deferred revenue related to the Janssen License and
Collaboration Agreement, a decrease of $1.4 million in research and development tax incentive receivable and an increase of $1.1 million in
accrued expenses and other payables, partially offset by an decrease of $3.0 million in accounts payable, an increase of $2.8 million in prepaid
expenses and other assets, an increase of $2.2 million in receivable from collaboration partner and a decrease of $1.9 million in operating lease
liability. Non-cash charges were primarily comprised of $8.4 million of stock-based compensation, $1.8 million of operating lease right-of-use
asset amortization and $0.7 million of depreciation and amortization, partially offset by a $0.8 million increase in deferred tax assets and $0.6
million of net accretion of discount on marketable securities.
Cash used in operating activities for the year ended December 31, 2018 was $49.9 million, consisting of our net loss of $38.9 million and a
net change of $18.0 million in net operating assets and liabilities, partially offset by non-cash charges of $7.0 million. The change in net
operating assets and liabilities was primarily due to a net decrease of $23.5 million in deferred revenue related to the Janssen License and
Collaboration Agreement and an increase of $2.8 million in receivable from collaboration partner, partially offset by an increase of $4.4 million
in accounts payable, an increase of $1.9 million in accrued expenses and other payables, an increase of $1.1 million in payable to collaboration
partner and a decrease of $1.1 million in prepaid expenses and other assets. Non-cash charges were primarily comprised of $6.9 million of stock-
based compensation, $0.5 million of depreciation and amortization and $0.2 million of net amortization of premium on marketable securities,
partially offset by a $0.7 million increase in deferred tax assets.
Cash provided by operating activities for the year ended December 31, 2017 was $3.9 million, consisting of a net change of $35.6 million
in net operating assets and liabilities and non-cash charges of $5.3 million, partially offset by our net loss of $37.0 million. The change in net
operating assets and liabilities was due primarily to an increase of $31.8 million in deferred revenue related to the Janssen License and
Collaboration Agreement, an increase of $4.8 million in accounts payable and accrued expenses related primarily to an increase in research and
development activities and other general and administrative professional services and a decrease of $1.1 million in the Australian research and
development tax incentive receivable, partially offset by an increase of $1.8 million in receivable from collaboration partner and an increase of
$0.3 million in prepaid expenses and other assets. The non-cash charges were primarily comprised of $4.2 million of stock-based compensation,
$0.7 million of net amortization of premium on marketable securities and $0.4 million of depreciation and amortization.
Cash Flows from Investing Activities
Cash used in investing activities for the year ended December 31, 2019 was $53.7 million, consisting of purchases of marketable securities
of $166.9 million and purchases of property and equipment of $1.0 million, partially offset by proceeds from maturities of marketable securities
of $114.2 million. Purchases of property and equipment were primarily related to purchases of scientific equipment and leasehold improvements.
Cash provided by investing activities for the year ended December 31, 2018 was $2.2 million, consisting of proceeds from marketable
securities of $73.8 million, partially offset by purchases of marketable securities of $71.1 million and purchases of property and equipment of
$0.5 million. Purchases of property and equipment were primarily related to purchases of scientific equipment.
85
Table of Contents
Cash provided by investing activities for the year ended December 31, 2017 was $15.8 million, consisting of proceeds from maturities of
marketable securities of $56.0 million, partially offset by purchases of marketable securities of $39.5 million and purchases of property and
equipment of $0.7 million. Purchases of property and equipment were primarily related to purchases of scientific equipment.
Cash Flows from Financing Activities
Cash provided by financing activities for the year ended December 31, 2019 was $46.0 million, consisting of $34.5 million of net proceeds
from sales of common stock through our ATM financing facility, $9.8 million of net proceeds from long-term debt and $1.8 million from the
issuance of common stock upon exercise of stock options and purchases of common stock under our employee stock purchase plan.
Cash provided by financing activities for the year ended December 31, 2018 was $24.1 million, consisting of $21.7 million of net proceeds
from issuance of our common stock and warrants in a private placement, $1.5 million of net proceeds from sales through our ATM financing
facility and $0.9 million from the issuance of common stock upon exercise of stock options and purchases of common stock under our employee
stock purchase plan.
Cash provided by financing activities for the year ended December 31, 2017 was $65.5 million, consisting of net proceeds of $64.5 million
from our public offering of common stock and proceeds of $1.0 million from the issuance of common stock upon exercise of stock options and
purchases of common stock under our employee stock purchase plan.
Contractual Obligations and Other Commitments
The following table summarizes our future minimum contractual obligations as of December 31, 2019.
Payments Due by Period
Contractual Obligations:
Debt payment obligations
Operating lease obligations
(1)
(2)
Total contractual obligations
________________
Less Than
1 Year
1 to 3 Years 3 to 5 Years
More Than
5 Years
Total
$
$
— $
1,941
1,941 $
(In thousands)
5,833 $
4,059
9,892 $
4,452 $
3,016
7,468 $
— $ 10,285
—
9,016
— $ 19,301
(1)
(2)
Represents principal and final payment fee on our long-term debt. See Note 8 to the consolidated financial statements included elsewhere in
this Annual Report on Form 10-K for additional information.
Represents minimum lease payments under our operating lease obligations. See Note 9 to the consolidated financial statements elsewhere in
this Annual Report on Form 10-K for additional information.
Potential Obligations Not Included in the Table Above
We enter into agreements in the normal course of business with contract research organizations for clinical trials and with vendors for pre-
clinical studies and other services and products for operating purposes, which are cancelable at any time by us, generally upon 30 to 60 days prior
written notice. Future potential payments under these agreements are not included in the table above.
Under the Janssen License and Collaboration Agreement, we share with Janssen certain development, regulatory and compound supply
costs. The actual amounts that we pay Janssen or that Janssen pays us will depend on numerous factors, some of which are outside of our control
and some of which are contingent upon the success of certain development and regulatory activities. Future development and commercialization
payments to Janssen are not included in the table above as the timing and amounts of such payments are not determinable.
In October 2013, the collaboration program under our Research Collaboration and License Agreement with Zealand Pharma A/S (Zealand)
was abandoned by Zealand. Pursuant to the terms of the agreement, we elected to assume the responsibility for the development and
commercialization of the product candidate. Upon Zealand’s abandonment,
86
Table of Contents
Zealand assigned to us certain intellectual property arising from the collaboration and also granted us an exclusive license to certain background
intellectual property rights of Zealand that relate to the products assumed by us. We did not record any research and development expense under
this agreement for the year ended December 31, 2019. For the years ended December 31, 2018 and 2017, we recorded research and development
expense of $500,000 and $250,000, respectively, under this agreement. We have the right, but not the obligation, to further develop and
commercialize the product candidate and, if we successfully develop and commercialize PTG‑300 without a partner, Zealand could be eligible to
receive up to an additional aggregate of $128.0 million for the achievement of certain development, regulatory and sales milestone events. In
addition, Zealand could be eligible to receive a low single digit royalty on worldwide net sales of the product. Future development, regulatory
and sales payments to Zealand are not included in the table above as the timing and amounts of such payments are not determinable.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements, as defined under SEC rules, including the use of structured finance, special
purpose entities or variable interest entities.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate sensitivities related to our
investments and borrowings.
We had $133.0 million and $128.9 million in cash, cash equivalents and marketable securities at December 31, 2019 and December 31,
2018, respectively. Cash and cash equivalents consist of cash, money market funds, commercial paper and government bonds. Marketable
securities consist of corporate bonds, commercial paper and government bonds. A portion of our investments may be subject to interest rate risk
and could fall in value if market interest rates increase. We had $9.8 million in long-term debt at December 31, 2019, which bears interest at an
annual rate of prime plus 2.91%, with a 4.94% prime rate floor. Based on our interest rate sensitivity analysis, a 1% increase or decrease in
interest rates would have a net impact of approximately $1.0 million on our results of operations.
Approximately $0.6 million and $0.4 million of our cash balance was located in Australia at December 31, 2019 and December 31, 2018,
respectively. Our expenses, except those related to our Australian operations, are generally denominated in U.S. dollars. For our operations in
Australia, the majority of the expenses are denominated in Australian dollars. To date, we have not had a formal hedging program with respect to
foreign currency, but we may do so in the future if our exposure to foreign currency becomes more significant. A 10% increase or decrease in
current exchange rates would not have a material effect on our results of operations.
87
Table of Contents
Item 8.
Financial Statements and Supplementary Data
PROTAGONIST THERAPEUTICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Supplementary Financial Data (unaudited)
88
Page
87
88
89
90
91
92
93
120
Table of Contents
To the Board of Directors and Stockholders of Protagonist Therapeutics, Inc.
9Report of Independent Registered Public Accounting Firm
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Protagonist Therapeutics, Inc. and its subsidiary (the “Company”) as of
December 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for
each of the three years in the period ended December 31, 2019, including the related notes (collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company
as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December
31, 2019 in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we
express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We
believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 10, 2020
We have served as the Company’s auditor since 2015.
89
Table of Contents
PROTAGONIST THERAPEUTICS, INC.
Consolidated Balance Sheets
(In thousands, except share data)
Assets
Current assets:
Cash and cash equivalents
Marketable securities
Restricted cash - current
Receivable from collaboration partner and contract asset - related party
Research and development tax incentive receivable, net
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Restricted cash - noncurrent
Operating lease right-of-use asset
Deferred tax asset
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Payable to collaboration partner - related party
Accrued expenses and other payables
Deferred revenue - related party - current
Operating lease liability - current
Total current liabilities
Long-term debt, net
Deferred revenue - related party - noncurrent
Operating lease liability - noncurrent
Deferred rent
Total liabilities
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $0.00001 par value, 10,000,000 shares authorized; no shares issued and outstanding
Common stock, $0.00001 par value, 90,000,000 shares authorized; 27,217,649 and 23,187,219 shares
issued and outstanding as of December 31, 2019 and December 31, 2018, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2019
2018
$
$
$
33,006
100,011
10
6,755
—
5,529
145,311
1,681
450
6,042
1,433
154,917
2,790
1,262
12,360
17,738
1,256
35,406
9,794
23,792
5,961
—
74,953
82,233
46,620
10
4,587
1,429
2,624
137,503
861
450
—
658
139,472
5,711
1,061
11,163
8,223
—
26,158
—
—
—
799
26,957
—
—
—
297,846
(221)
(217,661)
79,964
154,917
$
—
253,222
(233)
(140,474)
112,515
139,472
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
90
Table of Contents
PROTAGONIST THERAPEUTICS, INC.
Consolidated Statements of Operations
(In thousands, except share and per share data)
License and collaboration revenue - related party
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Interest income
Interest expense
Other expense, net
Loss before income tax benefit
Income tax benefit
Net loss
Net loss per share, basic and diluted
Weighted-average shares used to compute net loss per share, basic and diluted
2019
Year Ended December 31,
2018
2017
$
231 $
30,925 $
20,063
65,003
15,749
80,752
(80,521)
2,813
(169)
(1)
(77,878)
691
(77,187) $
(2.98) $
$
$
59,497
13,697
73,194
(42,269)
2,566
—
(20)
(39,723)
799
(38,924) $
(1.74) $
46,181
11,779
57,960
(37,897)
948
—
(8)
(36,957)
—
(36,957)
(2.09)
17,694,505
25,894,024
22,364,515
The accompanying notes are an integral part of these consolidated financial statements.
91
Table of Contents
PROTAGONIST THERAPEUTICS, INC.
Consolidated Statements of Comprehensive Loss
(In thousands)
Net loss
Other comprehensive loss:
(Loss) gain on translation of foreign operations
Unrealized gain (loss) on marketable securities
Comprehensive loss
$
$
Year Ended December 31,
2018
2019
(77,187) $
(44)
56
(77,175) $
(38,924)
$
(322)
95
(39,151)
$
2017
(36,957)
298
(59)
(36,718)
The accompanying notes are an integral part of these consolidated financial statements.
92
Table of Contents
PROTAGONIST THERAPEUTICS, INC.
Consolidated Statements of Stockholders’ Equity
(In thousands, except share and per share data)
Balance at December 31, 2016
Issuance of common stock upon public offering, net of issuance
costs
Issuance of common stock upon under equity incentive and
employee stock purchase plans
Stock-based compensation expense
Other comprehensive gain
Net loss
Balance at December 31, 2017
Issuance of common stock and warrants upon private placement,
net of issuance costs
Issuance of common stock under equity incentive and employee
stock purchase plans
Issuance of common stock pursuant to at-the-market offering, net
of issuance costs
Retirement of common stock in exchange for common stock
warrant
Issuance of common stock warrant in exchange for retirement of
common stock
Stock-based compensation expense
Other comprehensive loss
Net loss
Balance at December 31, 2018
Issuance of common stock pursuant to at-the-market offering, net
of issuance costs
Issuance of common stock under equity incentive and employee
stock purchase plans
Issuance of common stock upon exercise of Exchange Warrants
Stock-based compensation expense
Other comprehensive gain
Net loss
Balance at December 31, 2019
Common
Stock
Shares
16,722,280 $
4,059,500
306,526
—
—
—
21,088,306
2,750,000
197,640
151,273
(1,000,000)
—
—
—
—
23,187,219
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Total
Stockholders’
Equity
Amount
—
$
152,393 $
(245)
$
(64,593) $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
64,547
1,007
4,241
—
—
222,188
21,673
934
1,508
(6,670)
6,670
6,919
—
—
253,222
—
—
—
239
—
(6)
—
—
—
—
—
—
(227)
—
(233)
—
—
—
—
(36,957)
(101,550)
—
—
—
—
—
—
—
(38,924)
(140,474)
87,555
64,547
1,007
4,241
239
(36,957)
120,632
21,673
934
1,508
(6,670)
6,670
6,919
(227)
(38,924)
112,515
2,846,641
—
34,492
—
—
34,492
583,792
599,997
—
—
—
27,217,649 $
—
—
—
—
—
—
$
1,779
—
8,353
—
—
297,846 $
—
—
—
12
—
(221)
$
—
—
—
—
(77,187)
(217,661) $
1,779
—
8,353
12
(77,187)
79,964
The accompanying notes are an integral part of these consolidated financial statements.
93
Table of Contents
PROTAGONIST THERAPEUTICS, INC.
Consolidated Statements of Cash Flows
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Stock-based compensation
Operating lease right-of-use asset amortization
Depreciation and amortization
Amortization of issuance costs and accretion of final payment fee for long-term debt
Gain (loss) on disposal of property and equipment
Net (accretion of discount) amortization of premium on marketable securities
Change in deferred tax asset
Changes in operating assets and liabilities:
Research and development tax incentive receivable, net
Receivable from collaboration partner - related party
Prepaid expenses and other assets
Accounts payable
Payable to collaboration partner - related party
Accrued expenses and other payables
Deferred revenue - related party
Operating lease liability
Net cash (used in) provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of marketable securities
Proceeds from maturities of marketable securities
Purchases of property and equipment, net
Net cash (used in) provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from at-the-market offering, net of issuance costs
Proceeds from issuance of long-term debt, net of issuance costs
Proceeds from issuance of common stock upon exercise of stock options and purchases under employee stock
purchase plan
Proceeds from issuance of common stock and warrants in private placement, net of
issuance costs
Net cash provided by financing activities
Effect of exchange rate changes on cash, cash equivalents and restricted cash
Net (decrease) increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, beginning of period
Cash, cash equivalents and restricted cash, end of period
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING AND INVESTING INFORMATION:
Purchases of property and equipment in accounts payable and accrued liabilities
Deferred offering costs in accounts payable and accrued liabilities
Fair value of common stock retired in exchange for issuance of common stock warrant
Acquisition of new equipment upon trade-in for existing equipment
$
$
$
$
$
$
2019
Year Ended December 31,
2018
2017
$
(77,187)
$
(38,924)
$
(36,957)
8,353
1,792
703
29
8
(594)
(775)
1,411
(2,168)
(2,820)
(3,000)
201
1,098
33,307
(1,885)
(41,527)
(166,936)
114,193
(967)
(53,710)
34,492
9,765
1,779
—
46,036
(26)
(49,227)
82,693
33,466
70
100
80
—
—
6,919
—
527
—
—
206
(658)
(236)
(2,771)
1,117
4,430
1,061
1,911
(23,529)
—
(49,947)
(71,060)
73,759
(486)
2,213
1,508
—
4,241
—
406
—
(62)
687
—
1,070
(1,816)
(333)
91
—
4,793
31,752
—
3,872
(39,546)
56,035
(666)
15,823
—
—
934
1,007
21,673
24,115
(177)
(23,796)
106,489
82,693
—
24
—
6,670
—
$
$
$
$
$
$
64,547
65,554
146
85,395
21,094
106,489
—
—
66
—
185
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
94
Table of Contents
PROTAGONIST THERAPEUTICS, INC.
Notes to Consolidated Financial Statements
Note 1. Organization and Description of Business
Protagonist Therapeutics, Inc. (the “Company”) was incorporated in the state of Delaware on August 22, 2006 and is headquartered in
Newark, California. The Company is a clinical-stage biopharmaceutical company that utilizes a proprietary technology platform to discover and
develop novel peptide-based drugs to transform existing treatment paradigms for patients with significant unmet medical needs. Protagonist Pty
Limited (“Protagonist Australia”) is a wholly-owned subsidiary of the Company and is located in Brisbane, Queensland, Australia. Protagonist
Australia was incorporated in Australia in September 2001. The Company manages its operations as a single operating segment.
Liquidity
The Company has incurred net losses from operations since inception and has an accumulated deficit of $217.7 million as of December 31,
2019. The Company’s ultimate success depends on the outcome of its research and development and collaboration activities. The Company
expects to incur additional losses in the future and anticipates the need to raise additional capital to continue to execute its long-range business
plan. Since the Company’s initial public offering in August 2016, it has financed its operations through offerings of common stock, payments
received under a license and collaboration agreement and proceeds received from long-term debt.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Protagonist
Australia, and have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). All
intercompany balances and transactions have been eliminated upon consolidation.
Certain prior period amounts have been reclassified to conform to the current year presentation. There was no effect on net loss or
stockholders’ equity related to these reclassifications.
The financial statements of Protagonist Australia use the Australian dollar as the functional currency since the majority of expense
transactions occur in such currency. Gains and losses from foreign currency transactions were not material for all periods presented. The re-
measurement from Australian dollar to U.S. dollars is outlined below:
a. Equity accounts, except for the change in retained earnings during the year, have been translated using historical exchange
rates.
b. All other Australian dollar denominated assets and liabilities as of December 31, 2019 and 2018 have been translated using
the year-end exchange rate.
c. The consolidated statements of operations have been translated at the weighted average exchange rates in effect during
each year.
Foreign currency translation gains and losses are reported as a component of stockholders’ equity in accumulated other comprehensive loss
on the consolidated balance sheets.
95
Table of Contents
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates, assumptions
and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis,
management evaluates its estimates, including those related to revenue recognition, accruals for research and development activities, stock-based
compensation, income taxes, research and development tax incentives, marketable securities and leases. Estimates related to revenue recognition
include actual costs incurred versus total estimated costs of the Company’s deliverables to determine percentage of completion in addition to the
application and estimates of potential revenue constraints in the determination of the transaction price under its license and collaboration
agreements. Management bases these estimates on historical and anticipated results, trends and various other assumptions that the Company
believes are reasonable under the circumstances, including assumptions as to forecasted amounts and future events. Actual results may differ
significantly from those estimates.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents and marketable
securities. Substantially all of the Company’s cash is held by two financial institutions that management believes are of high credit quality. Such
deposits may, at times, exceed federally insured limits. The primary focus of the Company’s investment strategy is to preserve capital and to meet
liquidity requirements. The Company’s cash equivalents and marketable securities are managed by external managers within the guidelines of
the Company’s investment policy. The Company’s investment policy addresses the level of credit exposure by limiting concentration in any one
corporate issuer and establishing a minimum allowable credit rating. To manage its credit risk exposure, the Company maintains its portfolio of
cash equivalents and marketable securities in fixed income securities denominated and payable in U.S. dollars. Permissible investments of fixed
income securities include obligations of the U.S. government and its agencies, money market instruments including commercial paper and
negotiable certificates of deposit, and highly rated corporate debt obligations and money market funds.
Cash Equivalents
Cash equivalents that are readily convertible to cash are stated at cost, which approximates fair value. The Company considers all highly
liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Restricted Cash
Restricted cash consists of cash balances primarily held as security in connection with a letter of credit related to the Company’s facility
lease entered into in March 2017 and the Company’s corporate credit card.
Cash as Reported in Consolidated Statements of Cash Flows
Cash as reported in the consolidated statements of cash flows includes the aggregate amounts of cash and cash equivalents and the
restricted cash as presented on the consolidated balance sheets.
96
Table of Contents
Cash as reported in the consolidated statements of cash flows consists of (in thousands):
2019
Cash and cash equivalents
Restricted cash - current
Restricted cash - noncurrent
Cash balance in consolidated statements of cash flows
Marketable Securities
$
$
December 31,
2018
82,233 $
10
450
82,693 $
33,006 $
10
450
33,466 $
2017
106,029
10
450
106,489
All marketable securities have been classified as “available-for-sale” and are carried at estimated fair value as determined based upon
quoted market prices or pricing models for similar securities. Management determines the appropriate classification of its marketable securities at
the time of purchase and reevaluates such designation as of each balance sheet date. Short-term marketable securities have maturities greater than
three months but not longer than 365 days as of the balance sheet date. Long-term marketable securities have maturities of 365 days or longer as
of the balance sheet date. Unrealized gains and losses are excluded from earnings and are reported as a component of comprehensive loss.
Realized gains and losses and declines in fair value judged to be other than temporary, if any, on available-for-sale securities are included in
interest income. The cost of securities sold is based on the specific-identification method. Interest on marketable securities is included in interest
income.
Fair Value of Financial Instruments
Fair value accounting is applied to all financial assets and liabilities that are recognized or disclosed at fair value in the consolidated
financial statements on a recurring basis (at least annually). The carrying amount of the Company’s financial instruments, including cash
equivalents, receivable from collaboration partner, accounts payable, payable to collaboration partner and accrued expenses and other payables
approximate fair value due to their short-term maturities. See Note 4. to the Consolidated Financial Statements for additional information
regarding the fair value of the Company’s other financial assets and liabilities.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets, ranging from three to five years. Leasehold improvements are amortized over the shorter of the lease term
or the estimated useful lives of the assets. Maintenance and repairs are charged to expense as incurred. When assets are retired or otherwise
disposed of, the cost and accumulated depreciation are removed from the consolidated balance sheet and any resulting gain or loss is reflected in
operations in the period realized.
Leases
The Company adopted Accounting Standards Codification Topic 842, Leases, (“ASC 842”) effective January 1, 2019. The Company
determines if an arrangement is a lease at inception. Pursuant to ASC 842, operating leases are included in operating lease right-of-use (“ROU”)
assets, operating lease liabilities, and noncurrent operating lease liabilities on the consolidated balance sheets. Operating lease ROU assets and
operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement
date. If the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available
at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments
made and excludes lease incentives and initial direct costs incurred. Lease terms include options to extend or terminate the lease when it is
reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis
over the lease term.
97
Table of Contents
The Company records tenant improvement allowances as a reduction to the ROU asset with the impact of the decrease recognized
prospectively over the remaining lease term. The leasehold improvements will be amortized over the shorter of their useful life or the remaining
term of the lease.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, primarily comprised of property, equipment and operating lease right-of-use assets, for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is
measured by comparison of the carrying amount to the future net cash flows which the assets are expected to generate. If such assets are
considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the
projected discounted future net cash flows arising from the asset. There have been no such impairments of long-lived assets for any of the periods
presented.
Long Term Debt
The Company accounts for interest on its long-term debt under the effective interest method, with interest expense comprised of contractual
interest, amortization of origination fees and other issuance costs, and accretion of final payment fees.
Comprehensive Loss
Comprehensive loss includes net loss as well as other changes in stockholders’ equity that result from transactions and economic events
other than those from stockholders. The Company’s foreign currency translation and unrealized gains and losses on available-for-sale securities
represent the only components of other comprehensive loss that are excluded from reported net loss and that are presented in the consolidated
statements of comprehensive loss.
Income Taxes
The Company uses the asset and liability method to account for income taxes in accordance with the authoritative guidance for income
taxes. Under this method, deferred tax assets and liabilities are determined based on future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and tax loss and credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to the
amount expected to be realized.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized
income tax positions are measured at the largest amount that is greater than a 50% likelihood of being realized. Changes in recognition or
measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties related to
unrecognized tax benefits in income tax expense. To date, there have been no interest or penalties recorded in relation to unrecognized tax
benefits.
Revenue Recognition
The Company follows Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”). Under ASC
606, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the
consideration which the Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements
that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a
customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the
performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company
applies the five-step model to contracts when it is probable that the Company will collect the
98
Table of Contents
consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, the Company assesses the
goods or services promised within each contract, determines those that are performance obligations, and assesses whether each promised good or
service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance
obligations when (or as) the performance obligations are satisfied. The Company constrains its estimate of the transaction price up to the amount
(the “variable consideration constraint”) that a significant reversal of recognized revenue is not probable.
Licenses of intellectual property: If a license to the Company’s intellectual property is determined to be distinct from the other
performance obligations identified in an arrangement, the Company recognizes revenue from non-refundable, upfront fees allocated to the license
when the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with
other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined
performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring proportional
performance for purposes of recognizing revenue from non-refundable, upfront fees. The Company evaluates the measure of proportional
performance each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.
Milestone payments: At the inception of each arrangement or amendment that includes development, regulatory or commercial milestone
payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in
the transaction price. ASC 606 suggests two alternatives to use when estimating the amount of variable consideration: the expected value method
and the most likely amount method. Under the expected value method, an entity considers the sum of probability-weighted amounts in a range of
possible consideration amounts. Under the most likely amount method, an entity considers the single most likely amount in a range of possible
consideration amounts. Whichever method is used, it should be consistently applied throughout the life of the contract; however, it is not
necessary for the Company to use the same approach for all contracts. The Company expects to use the most likely amount method for
development and regulatory milestone payments. If it is probable that a significant revenue reversal would not occur, the associated milestone
value is included in the transaction price. Milestone payments that are not within the control of the Company or the licensee, such as regulatory
approvals, are not considered probable of being achieved until those approvals are received. If there is more than one performance obligation, the
transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis. The Company recognizes revenue
as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-
evaluates the probability or achievement of each such milestone and any related constraint, and if necessary, adjusts its estimates of the overall
transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of
adjustment.
Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is
deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur,
or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).
Upfront payments and fees are recorded as deferred revenue upon receipt or when due and may require deferral of revenue recognition to a
future period until the Company performs its obligations under these arrangements. Amounts payable to the Company are recorded as accounts
receivable when the Company’s right to consideration is unconditional. Amounts payable to the Company and not yet billed to the collaboration
partner are recorded as contract assets. The Company does not assess whether a contract has a significant financing component if the expectation
at contract inception is such that the period between payment by the customer and the transfer of the promised goods or services to the customer
will be one year or less.
Contractual cost sharing payments made to a customer or collaboration partner are accounted for as a reduction to the transaction price if
such payments are not related to distinct goods or services received from the customer or collaboration partner.
99
Table of Contents
Contracts may be amended to account for changes in contract specifications and requirements. Contract modifications exist when the
amendment either creates new, or changes existing, enforceable rights and obligations. When contract modifications create new performance
obligations and the increase in consideration approximates the standalone selling price for goods and services related to such new performance
obligations as adjusted for specific facts and circumstances of the contract, the modification is considered to be a separate contract. If a contract
modification is not accounted for as a separate contract, the Company accounts for the promised goods or services not yet transferred at the date
of the contract modification (the remaining promised goods or services) prospectively, as if it were a termination of the existing contract and the
creation of a new contract, if the remaining goods or services are distinct from the goods or services transferred on or before the date of the
contract modification. The Company accounts for a contract modification as if it were a part of the existing contract if the remaining goods or
services are not distinct and, therefore, form part of a single performance obligation that is partially satisfied at the date of the contract
modification. In such case the effect that the contract modification has on the transaction price, and on the entity’s measure of progress toward
complete satisfaction of the performance obligation, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue)
at the date of the contract modification (the adjustment to revenue is made on a cumulative catch-up basis).
The period between when the Company transfers control of promised goods or services and when the Company receives payment is
expected to be one year or less, and that expectation is consistent with the Company’s historical experience. Upfront payment contract liabilities
resulting from the Company’s license and collaboration agreements do not represent a financing component as the payment is not financing the
transfer of goods and services, and the technology underlying the licenses granted reflects research and development expenses already incurred
by the Company. As such, the Company does not adjust its revenues for the effects of a significant financing component.
Research and Development Costs
Research and development costs are expensed as incurred, unless there is an alternate future use in other research and development projects
or otherwise. Research and development costs include salaries and benefits, stock-based compensation expense, laboratory supplies and facility-
related overhead, outside contracted services including clinical trial costs, manufacturing and process development costs for both clinical and pre-
clinical materials, research costs, development milestone payments under license and collaboration agreements, and other consulting services.
The Company accrues for estimated costs of research and development activities conducted by third-party service providers, which include
the conduct of pre-clinical studies and clinical trials and contract manufacturing activities. The Company records the estimated costs of research
and development activities based upon the estimated services provided but not yet invoiced and includes these costs in accrued expenses and
other payables in the consolidated balance sheets and within research and development expense in the consolidated statements of operations. The
Company accrues for these costs based on factors such as estimates of the work completed and in accordance with agreements established with
its third-party service providers. As actual costs become known, the Company adjusts its accrued liabilities. The Company has not experienced
any material differences between accrued liabilities and actual costs incurred. However, the status and timing of actual services performed,
number of patients enrolled, the rate of patient enrollment and number and location of sites activated may vary from the Company’s estimates,
resulting in adjustments to expense in future periods. Changes in these estimates that result in material changes to the Company’s accruals could
materially affect the Company’s results of operations.
Research and Development Tax Incentive
The Company is eligible under the AusIndustry research and development tax incentive program to obtain either a refundable cash tax
incentive or a taxable credit in the form of a non-cash tax incentive from the Australian Taxation Office (“ATO”). The refundable cash tax
incentive is available to the Company on the basis of specific criteria with which the Company must comply. Specifically, the Company must
have annual turnover of less than AUD 20.0 million and cannot be controlled by income tax exempt entities. The refundable cash tax incentive is
recognized as a reduction to research and development expense when the right to receive has been attained and funds are considered to be
collectible. The tax incentive is denominated in Australian dollars and, therefore, the related receivable is remeasured into U.S. dollars as of each
reporting date. The Company may alternatively be eligible for a taxable credit in the form of a non-
100
Table of Contents
cash tax incentive in years when the annual turnover exceeds the limit. The Company evaluates its eligibility under tax incentive programs as of
each balance sheet date and makes accrual and related adjustments based on the most current and relevant data available.
SBIR Grants
The Company has received Small Business Innovation Research (“SBIR”) grants from the National Institutes of Health (“NIH”) in support
of its research activities. The Company recognizes a reduction to research and development expenses when expenses related to grants have been
incurred and the grant funds become contractually due from NIH.
Stock-based Compensation
The Company measures its stock-based awards made to employees based on the estimated fair values of the awards as of the grant date.
For stock option awards, the Company uses the Black-Scholes option-pricing model to estimate fair values. For restricted stock unit awards, the
estimated fair value is generally the fair market value of the underlying stock on the grant date. Stock-based compensation expense is recognized
over the requisite service period and is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. The
Company adopted Accounting Standards Update No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting (“ASU 2016-09”) effective January 1, 2017 and has elected to recognize forfeitures of stock-based awards as
they occur on a prospective basis.
Net Loss per Share
Basic net loss per share is calculated by dividing the Company’s net loss by the weighted average number of shares of common stock and
Exchange Warrants outstanding during the period, without consideration of potentially dilutive securities. In accordance with Accounting
Standards Codification Topic 260, Earnings Per Share, the Exchange Warrants are included in the computation of basic net loss per share
because the exercise price is negligible and they are fully vested and exercisable after the original issuance date. Diluted net loss per share is the
same as basic net loss per share for all periods presented since the effect of potentially dilutive securities is anti-dilutive given the net loss of the
Company in each period. See Note 11. Stockholders' Equity for additional information regarding the Exchange Warrants.
Recently Issued Accounting Pronouncements Adopted During the Year Ended December 31, 2019
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016‑02,
Leases (Topic 842). In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, which provides
clarification to ASU 2016-02. These ASUs (collectively, the new lease standard) require an entity to recognize a lease liability and a ROU asset
on the balance sheet for leases with lease terms of more than twelve months. Lessor accounting is largely unchanged, while lessees are no longer
provided with a source of off-balance sheet financing. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842) - Targeted
Improvements, which allows entities to elect an optional transition method where entities may continue to apply the existing lease guidance
during the comparative periods and apply the new lease requirements through a cumulative effect adjustment in the period of adoption rather than
in the earliest period presented. The Company adopted the new lease standard using the modified retrospective approach effective January 1,
2019 and elected the package of transitional practical expedients, such that, for leases existing prior to the adoption of ASC 842, the Company
did not need to reassess whether contracts are leases, retained historical lease classification and historical initial direct costs classification. The
Company did not elect the hindsight practical expedient to determine the lease term for existing leases. At January 1, 2019, the Company
derecognized its deferred rent liability in the amount of $0.8 million and recognized a ROU asset and related lease liability in the amount of $7.5
million and $8.3 million, respectively.
In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee
Share-Based Payment Accounting, which is intended to simplify the accounting for nonemployee share-based payment transactions by expanding
the scope of Accounting Standards Codification Topic 718 – Stock Compensation (“ASC 718”) include share-based payment transactions for
acquiring goods and services from
101
Table of Contents
nonemployees. The Company adopted this guidance prospectively as of January 1, 2019. The adoption of this guidance did not have a material
impact on the Company’s financial position, results of operations or liquidity.
Recently Issued Accounting Pronouncements Not Yet Adopted as of December 31, 2019
In June 2016, the FASB issued ASU No. 2016‑13, Financial Instruments - Credit Losses (Topic 326), which is intended to provide financial
statement users with more useful information about expected credit losses on financial assets held by a reporting entity at each reporting date.
The new standard replaces the existing incurred loss impairment methodology with a methodology that requires consideration of a broader range
of reasonable and supportable forward-looking information to estimate all expected credit losses. This guidance was originally effective for
fiscal years and interim periods within those years beginning after December 15, 2019, with early adoption permitted for fiscal years and interim
periods within those years beginning after December 15, 2018. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments –
Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which amended the mandatory
effective date of ASU No. 2016-13 to fiscal years and interim periods beginning after December 15, 2022. The Company is currently evaluating
the impact of this new guidance on its consolidated financial statements and disclosures.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the
Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements and is intended to
improve the effectiveness of disclosures, including the consideration of costs and benefits. The guidance is effective for the fiscal years and
interim periods within those years beginning after January 1, 2020. Early adoption is permitted, and an entity is permitted to early adopt any
removed or modified disclosures and delay adoption of additional disclosures until their effective date. The Company does not expect this new
guidance to impact its consolidated financial statements and is currently evaluating the impact on its disclosures.
In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic
808 and Topic 606, which is intended to clarify the circumstances under which certain transactions in collaborative arrangements should be
accounted for under the revenue recognition standard. Certain transactions between collaboration arrangement participants should be accounted
for as revenue under ASC Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account. This
guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2020. Early adoption is permitted. The
Company is in the process of assessing the impact of this new guidance on its consolidated financial statements and disclosures.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,
which removes certain exceptions and amends certain requirements in the existing income tax guidance to ease accounting requirements. This
guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 and must be applied on a
retrospective basis. The Company is in the process of assessing the impact of this new guidance on its consolidated financial statements and
disclosures.
Note 3. License and Collaboration Agreement
Agreement Terms
On May 26, 2017, the Company and Janssen Biotech, Inc., (“Janssen”), one of the Janssen Pharmaceutical Companies of Johnson &
Johnson, entered into an exclusive license and collaboration agreement (the “Janssen License and Collaboration Agreement”) for the
development, manufacture and potential commercialization of PTG-200 worldwide for the treatment of Crohn’s disease (“CD”) and ulcerative
colitis (“UC”). Janssen is a related party to the Company as Johnson & Johnson Innovation - JJDC, Inc., a significant stockholder of the
Company, and Janssen are both subsidiaries of Johnson & Johnson. PTG-200 is the Company’s orally delivered gut-restricted Interleukin 23
receptor (“IL 23R”) antagonist drug candidate currently in development. The Janssen License and Collaboration Agreement
102
Table of Contents
became effective on July 13, 2017. Upon the effectiveness of the agreement, the Company received a non-refundable, upfront cash payment of
$50.0 million from Janssen.
Under the Janssen License and Collaboration Agreement, the Company granted to Janssen an exclusive worldwide license to develop,
manufacture and commercialize PTG-200 and related IL 23R compounds for all indications, including CD and UC. The Company was
responsible, at its own expense, for the conduct of the Phase 1 clinical trial for PTG-200, and Janssen is responsible for the conduct of the Phase
2 clinical trial for PTG-200 in CD, including filing the U.S. Investigational New Drug application (“IND”). Development costs for the Phase 2
clinical trial are shared between the parties on an 80/20 basis, with Janssen assuming the larger share. Janssen submitted an IND for PTG-200 in
CD during the second quarter of 2019, which took effect in July 2019. The Company initiated a Phase 2 clinical study for PTG-200 in CD with
Janssen in the fourth quarter of 2019.
The Company entered into an amendment (the “First Amendment”) to the Janssen License and Collaboration Agreement effective May 7,
2019. The First Amendment builds upon the Company’s ongoing development collaboration with Janssen for PTG-200 and, upon the
effectiveness of the First Amendment, the Company became eligible to receive a $25.0 million payment from Janssen, which was received during
the second quarter of 2019. The First Amendment expanded the scope of the Janssen License and Collaboration Agreement by supporting
research efforts towards identifying and developing second-generation IL-23R antagonists (“second-generation compounds”).
As part of the services added in the First Amendment, Janssen will pay certain costs and milestones related to advancing pre-clinical
candidates from the second-generation research program through Phase 1 studies, including funding of a certain number of full-time equivalent
employees (“FTEs”) at the Company for a set period of time. The Company will pay 100% of the costs for the Phase 1 studies for the first
second-generation compound, and 50% of the costs of the Phase 1 studies for the second and third second-generation compounds; thereafter
Janssen will pay 100% of any further Phase 1 development costs. Development costs for the Phase 2 clinical trials for second-generation
compounds are shared between the parties on an 80/20 basis, with Janssen assuming the larger share. The Company’s Phase 1 and Phase 2
development costs are also limited by overall spending caps. In December 2019, the Company became eligible to receive a $5.0 million payment
trigged by the successful nomination of a second-generation development compound. The Company will be eligible to receive a $7.5 million
milestone payment at the completion of a Phase 1 study for the first second-generation compound.
Prior to the effectiveness of the First Amendment, the Company had been eligible to receive a $25.0 million milestone payment upon
Janssen’s filing of the IND. This amount had been considered constrained until a time at which the Company would have become eligible to
receive the $25.0 million payment from Janssen. Payments to the Company for research and development services are generally billed and
collected as services are performed or assets are delivered, including research activities and Phase 1 and Phase 2 development activities. Janssen
bills the Company for its 20% share of the Phase 2 development costs as expenses are incurred by Janssen. Milestone payments are received after
the related milestones are achieved.
Pursuant to the First Amendment, the Company will be eligible to receive clinical development, regulatory and sales milestones, if and as
achieved, and/or payments relating to Janssen’s elections to maintain or expand its license rights. The next such payment is a $50.0 million
payment based on Phase 2a clinical trial results, as follows:
•
Janssen can elect to advance PTG-200 into Phase 2b following receipt of the top line results of the CD Phase 2a clinical trial for
PTG-200 by paying a $50.0 million maintenance fee (the “Amended First Opt-in Election”); or
• Janssen would make a $50.0 million milestone payment following dosing of the third patient in first Phase 2b clinical trial for CD for a
second-generation product (the “Second-Generation Phase 2b Milestone”).
Janssen can also then elect to receive exclusive, world-wide commercial rights for both PTG-200 and second-generation products following
the Phase 2b completion date for PTG-200 or a second-generation product by paying a $50.0 million payment (the “Amended Second Opt-in
Election”). Formerly, the first and second opt-in payments were $125.0 million and $200.0 million, respectively. If Janssen does not make the
Amended Second Opt-in Election, with
103
Table of Contents
respect to either PTG-200 or a second-generation compound, the Janssen License and Collaboration Agreement would terminate.
The Company will also be eligible for certain additional milestone payments including a potential payment of either $100.0 million upon a
Phase 3 CD clinical trial meeting a primary clinical endpoint with respect to PTG-200 or $115.0 million upon a Phase 3 CD clinical trial meeting
a primary clinical endpoint with respect to a second-generation compound.
Pursuant to the First Amendment, the Company will be eligible to receive tiered royalties on net product sales at percentages ranging from
mid-single digits to ten percent. Under the terms of the First Amendment, the Company will be eligible to receive up to $1.0 billion in research,
development, regulatory and sales milestones.
The Janssen License and Collaboration Agreement remains in effect until the royalty obligations cease following patent and regulatory
expiry, unless terminated earlier. Upon a termination of the Janssen License and Collaboration Agreement, all rights revert back to the Company,
and in certain circumstances, if such termination occurs during ongoing clinical trials, Janssen would, if requested, provide certain financial and
operational support to the Company for the completion of such trials.
Revenue Recognition
The Company has concluded that the amended Janssen License and Collaboration Agreement continues to contain a single performance
obligation including the development license; second-generation compound research services; Phase 1 development services for PTG-200 and
potential second-generation compounds; the Company’s services associated with Phase 2 development for PTG-200 until Phase 2a; the
Company’s services associated with Phase 2 development for a second-generation product until the dosing of the third patient in Phase 2b; and all
other such services that the Company may perform at the request of Janssen to support the development of PTG-200, second-generation research
services, or the development of a second-generation compound. The Company concluded that the Amended First Opt-in Election and the
Amended Second Opt-in Election options are not considered to be material rights.
The Company determined that the license was not distinct from the added research and development services within the context of the
agreement because the added research and development services significantly increase the utility of the intellectual property. The Company also
determined that the remaining research and development services are not distinct from the partially delivered combined promise comprised under
the agreement prior to the First Amendment of the development license and PTG-200 services, including compound supply and other services.
Therefore, the First Amendment is treated as if it were part of the original Janssen License and Collaboration Agreement. The First Amendment
was accounted for as if it were an extension of services under the initial Janssen License and Collaboration Agreement by applying a cumulative
catch-up adjustment to revenue. As of the effective date of the First Amendment, the Company calculated the adjusted cumulative revenue under
the amended Janssen License and Collaboration Agreement by updating the transaction price for the incremental consideration to be received, net
of the incremental development cost reimbursement to be paid to Janssen, and an updated percentage complete, which resulted in a cumulative
adjustment recorded during the year ended December 31, 2019 that reduced revenue by $9.4 million.
The contract duration is defined as the period in which parties to the contract have present enforceable rights and obligations. For revenue
recognition purposes, the Company determined that the duration of the Janssen License and Collaboration Agreement, as amended, began on the
effective date of July 13, 2017 and ends upon the later of end of Phase 2a for PTG-200 or upon dosing of the third patient in Phase 2b for a
second-generation compound.
The Company uses the most likely amount method to estimate variable consideration included in the transaction price. Variable
consideration after the First Amendment consists of future milestone payments and cost sharing payments from Janssen for agreed upon services
offset by Phase 2 development costs reimbursement payable to Janssen. Cost sharing payments from Janssen relate to the agreed upon services
for Phase 2 activities that the Company performs within the duration of the contract are included in the transaction price at an amount equal to
80% of the estimated budgeted costs for these activities, including primarily internal full-time equivalent effort and third party contract costs.
104
Table of Contents
Cost sharing payments to Janssen relate to agreed upon services for Phase 2 activities that Janssen performs within the duration of the contract
are not a distinct service that Janssen transfers to the Company. Therefore, the consideration payable to Janssen is accounted for as a reduction in
the transaction price.
The Company determined that the transaction price of the Janssen License and Collaboration Agreement was $112.9 million as of
December 31, 2019, an increase of $52.2 million from the transaction price of $60.7 million at December 31, 2018 and $59.0 million from the
transaction price of $53.9 million at December 31, 2017. In order to determine the transaction price, the Company evaluated all payments to be
received during the duration of the contract, net of Phase 2 development costs reimbursement expected to be payable to Janssen. The Company
determined that the transaction price includes the $50.0 million upfront payment, the $25.0 million payment received upon the effectiveness of
the First Amendment, the $5.0 million payment triggered by the successful nomination of a second-generation compound, $18.3 million of
reimbursement from Janssen for services performed for PTG-200 Phase 2 and for second-generation compound research costs and other services,
and $14.6 million of estimated variable consideration, which includes a $7.5 million milestone payment subject to the completion of a Phase 1
study for a second-generation compound. The Company evaluated whether the variable component of the transaction price should be constrained
to ensure that a significant reversal of revenue recognized on a cumulative basis as of December 31, 2019 is not probable. The Company
concluded that the variable consideration constraint does not further decrease the estimated transaction price as of December 31, 2019. The
additional potential development, regulatory and sales milestone payments after the completion of Phase 2b activities that the Company would be
eligible to receive are currently outside the contract term as defined for revenue recognition purposes and as such have been excluded from the
transaction price. The increase in transaction price following the effectiveness of the First Amendment was primarily due to the collection of the
$25.0 million payment, the $5.0 million payment receivable as of December 31, 2019, the $7.5 million milestone payment for the successful
completion of a Phase 1 study for a second- generation compound and increases in reimbursable costs related to new and extended research and
development services, offset by Phase 2 development costs reimbursement payable to Janssen.
The Company re-evaluates the transaction price, including variable consideration, at the end of each reporting period and as uncertain
events are resolved or other changes in circumstances occur. The Company and Janssen make quarterly cost sharing payments to one another in
amounts necessary to ensure that each party bears its contractual share of the overall shared costs incurred.
The Company utilizes a cost-based input method to measure proportional performance and to calculate the corresponding amount of
revenue to recognize. In applying the cost-based input methods of revenue recognition, the Company uses actual costs incurred relative to
expected costs to fulfill the combined performance obligation. These costs consist primarily of internal FTE effort and third-party contract costs.
Revenue will be recognized based on actual costs incurred as a percentage of total estimated costs as the Company completes its performance
obligations. A cost-based input method of revenue recognition requires management to make estimates of costs to complete the Company’s
performance obligations. The Company believes this is the best measure of progress because other measures do not reflect how the Company
transfers its performance obligation to Janssen. In making such estimates, significant judgment is required to evaluate assumptions related to cost
estimates. The cumulative effect of revisions to estimated costs to complete the Company’s performance obligations will be recorded in the
period in which changes are identified and amounts can be reasonably estimated. A significant change in these assumptions and estimates could
have a material impact on the timing and amount of revenue recognized in future periods.
For the year ended December 31, 2019, the Company recognized $0.2 million of license and collaboration revenue. This amount included a
$9.4 million cumulative catchup adjustment as a reduction of revenue, offset by $8.0 million of license and collaboration revenue recognized
following the contract modification for the First Amendment and $1.6 million of collaboration revenue recognized during the first quarter of
2019 under the original Janssen License and Collaboration Agreement prior to the effectiveness of the First Amendment.
For the year ended December 31, 2018, the Company recognized $30.9 million of license and collaboration revenue. This amount included
$30.8 million of the transaction price for the Janssen License and Collaboration Agreement recognized based on proportional performance, and
$0.1 million, net, for other services related to Phase 2
105
Table of Contents
activities performed by the Company on behalf of Janssen that were not included in the performance obligations identified under the Janssen
License and Collaboration Agreement.
For the year ended December 31, 2017, the Company recognized $20.1 million of license and collaboration revenue. This amount included
$19.0 million of the transaction price for the Janssen License and Collaboration Agreement recognized based on proportional performance, and
$1.1 million for other services related to Phase 2 activities performed by the Company on behalf of Janssen that were not included in the
performance obligations identified under the Janssen License and Collaboration Agreement.
The following table presents changes in the Company’s contract assets and liabilities for the years ended December 31, 2019 and 2018 (in
thousands):
Year Ended December 31, 2019
Contract assets:
Receivable from collaboration partner - related party
Contract asset - related party
Contract liabilities:
Deferred revenue - related party
Payable to collaboration partner - related party
Year ended December 31, 2018
Contract assets:
Receivable from collaboration partner - related party
Contract asset - related party
Contract liabilities:
Deferred revenue - related party
Payable to collaboration partner - related party
Balance at
Beginning of
Period
Additions
Deductions
Balance at
End of
Period
$
$
$
$
2,042
2,545
8,223
1,061
$
$
$
$
36,837 $
800 $
(32,924) $
(2,545) $
5,955
800
42,456 $
1,468 $
(9,149) $
(1,267) $
41,530
1,262
Balance at
Beginning of
Period
Additions
Deductions
$
$
$
$
1,816
$
— $
6,665 $
2,545 $
(6,439) $
— $
31,752
$
— $
7,296 $
1,574 $
(30,825) $
(513) $
Balance at
End of
Period
2,042
2,545
8,223
1,061
During the year ended December 31, 2019, the Company recognized $1.6 million in revenue from the deferred revenue contract liability
balance at the beginning of the year, which represents the revenue recognized during the first quarter of 2019 prior to the effectiveness of the First
Amendment. During the year ended December 31, 2018, the Company recognized $23.5 million in revenue from the deferred revenue contract
liability balance at the beginning of the year. During the year ended December 31, 2017, the Company did not recognize any revenue from
amounts included in the contract asset and the contract liability balances at the beginning of the year or from performance obligations satisfied in
previous periods. None of the costs to obtain or fulfill the contract were capitalized.
Note 4. Fair Value Measurements
Financial assets and liabilities are recorded at fair value. The accounting guidance for fair value provides a framework for measuring fair
value, clarifies the definition of fair value and expands disclosures regarding fair value measurements. Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the
reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in
measuring fair value as follows:
Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2—Inputs (other than quoted market prices included in Level 1) are either directly or indirectly observable for the asset or liability
through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
106
Table of Contents
Level 3—Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the
measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
In determining fair value, the Company utilizes quoted market prices, broker or dealer quotations, or valuation techniques that maximize
the use of observable inputs and minimize the use of unobservable inputs to the extent possible and considers counterparty credit risk in its
assessment of fair value.
The following table presents the fair value of the Company’s financial assets determined using the inputs defined above (in thousands).
Assets:
Money market funds
Commercial paper
Corporate debt securities
U.S. Treasury and agency securities
Total financial assets
Assets:
Money market funds
Commercial paper
Corporate debt securities
U.S. Treasury and agency securities
Total financial assets
Level 1
December 31, 2019
Level 2
Level 3
$
$
12,964 $
—
—
—
12,964 $
— $
44,282
33,662
40,810
118,754 $
— $
—
—
—
— $
Total
12,964
44,282
33,662
40,810
131,718
Level 1
Level 2
Level 3
Total
December 31, 2018
$
$
25,390 $
—
—
—
25,390 $
— $
59,730
8,989
33,394
102,113 $
— $
—
—
—
— $
25,390
59,730
8,989
33,394
127,503
The Company’s commercial paper, corporate debt securities and U.S. Treasury and agency securities are classified as Level 2 as they were
valued based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets
that are not active and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by
observable market data for substantially the full term of the assets.
Fair Value of Other Financial Instruments
The carrying value of long-term debt approximates fair value because the Term Loan bears interest at a rate that approximates prevailing
market rates for instruments with similar characteristics and there is no significant change in the credit worthiness of the Company.
107
Table of Contents
Note 5. Balance Sheet Components
Cash Equivalents and Marketable Securities
Cash equivalents and marketable securities consisted of the following (in thousands):
Money market funds
Commercial paper
Corporate debt securities
U.S. Treasury and agency securities
Total cash equivalents and marketable securities
Classified as:
Cash equivalents
Marketable securities
Total cash equivalents and marketable securities
Money market funds
Commercial paper
Corporate debt securities
U.S. Treasury and agency securities
Total cash equivalents and marketable securities
Classified as:
Cash equivalents
Marketable securities
Total cash equivalents and marketable securities
Amortized
Cost
12,964 $
44,284
33,653
40,798
131,699 $
$
$
December 31, 2019
Gross Unrealized
Gains
Losses
Fair Value
— $
2
11
14
27 $
— $
(4)
(2)
(2)
(8) $
12,964
44,282
33,662
40,810
131,718
$
$
31,707
100,011
131,718
Amortized
Cost
25,390 $
59,730
8,997
33,423
127,540 $
$
$
December 31, 2018
Gross Unrealized
Gains
Losses
Fair Value
— $
—
—
—
— $
— $
—
(8)
(29)
(37) $
25,390
59,730
8,989
33,394
127,503
$
$
80,883
46,620
127,503
All marketable securities held as of December 31, 2019 and 2018 had contractual maturities of less than one year. There were no material
realized gains or realized losses from sales of marketable securities for the periods presented.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
Prepaid clinical and research related expenses
Prepaid insurance
Other prepaid expenses
Other receivable
Prepaid expenses and other current assets
108
December 31,
2019
2018
$
$
2,567 $
1,161
1,057
744
5,529 $
686
438
1,005
495
2,624
Table of Contents
Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
Laboratory equipment
Furniture and computer equipment
Leasehold improvements
Total property and equipment
Less: accumulated depreciation and amortization
Property and equipment, net
December 31,
2019
2018
$
$
2,947 $
512
863
4,322
(2,641)
1,681 $
2,533
338
67
2,938
(2,077)
861
Depreciation expense for the years ended December 31, 2019, 2018, and 2017 was $703,000, $527,000 and $406,000, respectively. As of
December 31, 2019, 2018 and 2017, $37,000, $200 and $1,200, respectively, of property and equipment, net, was located in Australia. The
remainder of the Company’s property and equipment is located in the United States.
Accrued Expenses and Other Payables
Accrued expenses and other payables consisted of the following (in thousands):
Accrued clinical and research related expenses
Accrued employee related expenses
Accrued professional service fees
Accrued interest payable
Other
Total accrued expenses and other payables
Note 6. Research Collaboration and License Agreement
December 31,
2019
7,232 $
4,637
301
68
122
12,360 $
2018
7,781
2,726
61
—
595
11,163
$
$
In October 2013, the Company’s former collaboration partner decided to abandon a collaboration program with the Company and, pursuant
to the terms of the agreement between the Company and the former collaboration partner, the Company elected to assume responsibility for the
development and commercialization of the product. Upon the former collaboration partner’s abandonment, it assigned to the Company certain
intellectual property that relates to the products arising from the collaboration. The Company has the right, but not the obligation, to further
develop and commercialize the product and, if the Company successfully develops and commercializes PTG‑300 without a partner, the former
collaboration partner could be eligible to receive up to an additional aggregate of $128.0 million for the achievement of certain development,
regulatory and sales milestone events. Milestone payments to collaboration partners are recorded as research and development expenses in the
period that the expense is incurred. No research and development expense was recorded under this agreement for the year ended December 31,
2019. For the years ended December 31, 2018 and 2017, the Company recorded research and development expense of $500,000 and $250,000,
respectively, under this agreement.
Note 7. Government Programs
Research and Development Tax Incentive
The Company recognized AUD 1.9 million ($1.3 million) of research and development expenses during the year ended December 31, 2019
in connection with a reversal of previously recorded reductions to research and development expenses related to the research and development
tax incentive from the ATO. The Company determined that it had exceeded the annual turnover limit to claim such amounts following the receipt
of certain payments under the Janssen License and Collaboration Agreement. The Company is eligible to apply for the taxable credit in the form
of a non-cash
109
Table of Contents
tax incentive from the ATO for the year ended December 31, 2019. For the years ended December 31, 2018 and 2017, the Company recognized
AUD 2.1 million ($1.6 million) and AUD 1.7 million ($1.3 million), respectively, as a reduction of research and development expenses in
connection with the research and development cash tax incentive from the ATO. As of December 31, 2018, the research and development tax
incentive receivable was AUD 2.0 million ($1.4 million). There was no research and development tax incentive receivable as of December 31,
2019.
SBIR Grant
In July 2016, the Company was awarded a Phase 1 SBIR grant from the National Heart, Lungs and Blood Institute (“NHLBI”) of the NIH
in support of pre-clinical research aimed at discovering and optimizing lead molecules as novel peptide mimetics of the hepcidin hormone. The
total grant award was $219,000 and was for the period from August 2016 to January 2017.
In May 2017, the Company was awarded a Phase 2 SBIR grant from the National Institute of Diabetes and Digestive and Kidney Diseases
of the NIH in support of research aimed at developing biomarkers that define IL-23R target engagement by orally delivered peptide antagonists
and the effects of that engagement of downstream signaling. The total grant award was $1.3 million and was originally for the period from May
2017 to April 2019. During the year ended December 31, 2019, the Company requested and received an extension of this grant through April
2020.
In September 2018, the Company was awarded a Phase 2 SBIR Grant from the NHLBI of the NIH in support of research aimed at
developing the Company’s novel hepcidin mimetic PTG-300 for the potential treatment of chronic anemia and iron overload in rare blood
disorders, including beta-thalassemia. The total grant award was $1.5 million and is for the period from September 2018 to August 2020.
The Company recognizes a reduction to research and development expenses when expenses related to the grants have been incurred and the
grant funds become contractually due from NIH. The Company recorded $1.4 million, $663,000 and $182,000 as a reduction of research and
development expenses for the years ended December 31, 2019, 2018 and 2017, respectively. The Company recorded a receivable for $304,000
and $309,000 as of December 31, 2019 and 2018, respectively, to reflect the eligible costs incurred under the grants that are contractually due to
the Company. This receivable is included in prepaid expenses and other current assets on the consolidated balance sheets.
Note 8. Debt
On October 30, 2019, the Company entered into a Credit and Security Agreement, dated as of October 30, 2019 (the “Closing Date”) by
and among the Company, MidCap Financial Trust, as a lender, Silicon Valley Bank, as a lender, the other lenders party thereto from time to time
and MidCap Financial Trust, as administrative agent and collateral agent (“Agent”) (the “Term Loan Credit Agreement”), which provides for a
$50.0 million term loan facility. The Term Loan Credit Agreement provides for (i) on the Closing Date, $10.0 million aggregate principal amount
of term loans, (ii) at the Company’s option, until December 31, 2020, an additional $20.0 million term loan facility subject to the satisfaction of
certain conditions, including clinical milestone achievement, and (iii) at the Company’s option, until September 30, 2021, an additional $20.0
million term loan facility subject to the satisfaction of certain conditions, including clinical milestone achievement, (collectively, the “Term
Loans”). The Company intends to use the proceeds of the Term Loans for general corporate purposes
The Term Loans are subject to an origination fee of 0.25% for each funded tranche under the Term Loan Credit Agreement and bear
interest at an annual rate based on prime rate plus 2.91%, subject to a prime rate floor of 4.94%. The Company will make interest-only payments
on the Term Loans for 24 months, followed by 24 months of principal and interest payments. At the Company’s option, the Company may prepay
the outstanding principal balance of the Term Loans in whole or in part, subject to a prepayment premium of 3.0% of any amount prepaid if the
prepayment occurs through and including the first anniversary of the closing date, 2.0% of the amount prepaid if the prepayment occurs after the
first anniversary of the closing date through and including the second anniversary of the closing date, and 1.0% of any amount prepaid after the
second anniversary of the closing date and prior to October 1, 2023. An additional fee of 2.85% of the amount of Term Loans advanced by the
Lenders will be due upon prepayment or repayment of the Term Loans.
110
Table of Contents
The Term Loan Credit Agreement requires the Company to maintain cash and cash equivalents of at least 35% of the outstanding Term
Loans at all times and is secured by a perfected security interest in all of the Company's assets except for intellectual property and certain other
customary excluded property pursuant to the terms of the Term Loan Credit Agreement. The Term Loan Credit Agreement contains other
covenants that limit the Company’s ability and the ability of its subsidiaries to perform certain actions, including obligations to not pay dividends
and to maintain unrestricted cash balance above certain threshold, non-occurrence of material adverse change, non-occurrence of change of
control and other customary affirmative and negative covenants. The violation of any provision of covenants will result in default for the
Company. The Term Loan Credit Agreement includes a clause which allows lenders to accelerate repayment upon the occurrence of certain
events of default. As of December 31, 2019, the Company was in compliance with the debt covenants, no event of default occurred and the
probability of occurrence of event of default was considered remote.
As of December 31, 2019, the Company’s long-term debt balance was as follows (dollars in thousands):
Term loan
Debt issuance costs, net of amortization
Accrued final payment fee
Long-term debt, net
Maturity
Date
10/1/2023
Annual
Interest Rate
7.85%
December 31,
2019
$
$
10,000
(222)
16
9,794
The Company incurred $235,000 of issuance costs related to the Term Loan. As of December 31, 2019, the carrying value of debt issuance
costs was $222,000 and was presented as a direct deduction from the carrying amount of long-term debt. For the year ended December 31, 2019,
$13,000 of debt issuance costs were amortized and recognized as interest expense in the statement of operations. In addition, $16,000 of accreted
final payment fees were recognized as interest expense in the statement of operations and included in the carrying amount of long-term debt for
the year ended December 31, 2019. The effective interest rate on long-term debt was 9.81% for the year ended December 31, 2019.
The following table summarizes the Company’s minimum future debt payment obligations including principal and final payment fee as of
December 31, 2019 (in thousands):
Year Ending December 31:
2020
2021
2022
2023
Total
Note 9. Leases
$
$
Amount
—
833
5,000
4,452
10,285
On January 1, 2019, the Company adopted ASC 842, which requires entities to recognize assets and liabilities for leases with lease terms
of more than 12 months on the balance sheet. Adoption of ASC 842 resulted in the recording of operating lease assets of $7.5 million and
operating lease liabilities of $8.3 million. The impact of the changes made
111
Table of Contents
to the consolidated balance sheet as of January 1, 2019 as a result of adopting the new guidance was as follows (in thousands):
Balance Sheet:
Operating lease right-of-use asset - noncurrent
Operating lease liability - current
Operating lease liability - noncurrent
Deferred rent - noncurrent
Balance at
December 31,
2018
Adjustments
Due to
ASC 842
Balance at
January 1,
2019
$
$
$
$
—
—
—
799
7,499 $
1,080 $
7,219 $
(799) $
7,499
1,080
7,219
—
The Company has one operating lease agreement entered into in March 2017 for laboratory and office space located in Newark, California.
The Company provided the landlord with a $450,000 letter of credit collateralized by restricted cash as security deposit for the lease, which
expires in May 2024. During 2019, the Company received $469,000 from the landlord for eligible leasehold improvements made to the leased
property. Leases with terms of 12 months or less are not recorded on the balance sheet, and the related lease expenses are recognized on a
straight-line basis over the lease term. During the year ended December 31, 2019, the Company recognized $64,000 of sublease income. The
Company did not recognize any sublease income for the years ended December 31, 2018 and 2017. Under the terms of the lease, we are
responsible for certain taxes, insurance and maintenance expenses.
The weighted average lease term and discount rate are as follows:
Operating Lease Term and Discount Rate:
Weighted-average remaining lease term
Weighted-average discount rate
December 31,
2019
4.4 years
11.0%
The following table summarizes the Company’s minimum lease payments and lease liability as of December 31, 2019 (in thousands):
Year Ending December 31:
2020
2021
2022
2023
2024
Thereafter
Total future minimum lease payments
Less: imputed interest
Present value of future minimum lease payments
Less: current portion of operating lease liability
Operating lease liability - noncurrent
112
Amount
1,941
2,000
2,059
2,121
895
—
9,016
(1,799)
7,217
(1,256)
5,961
$
$
Table of Contents
As previously disclosed in the Company’s 2018 Annual Report on Form 10-K and under the previous lease accounting standard, future
minimum operating leases having initial or remaining noncancelable lease terms in excess of one year would have been as follows (in
thousands):
Year Ending December 31:
2019
2020
2021
2022
2023
Thereafter
Total
Supplemental lease cost information is as follows (in thousands):
Operating lease cost
Supplemental balance sheet information is as follows (in thousands):
Operating Leases:
Operating lease right-of-use asset, non-current
Operating lease liability - current
Operating lease liability - noncurrent
Total operating lease liabilities
Supplemental cash flow information is as follows (in thousands):
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flow used by operating leases
Amount
1,941
2,000
2,059
2,121
2,185
922
11,228
$
$
Year Ended
December 31, 2019
$
1,792
December 31, 2019
6,042
1,256
5,961
7,217
Year Ended
December 31, 2019
1,885
$
$
$
$
Prior to the adoption of ASC 842, the Company’s rent expense was $1.9 million and $1.4 million for the years ended December 31, 2018
and 2017, respectively. Rent expense was recognized on a straight-line basis over the term of the lease and accordingly, the Company recorded
the difference between cash rent payments and the recognition of rent expense as a deferred rent liability.
Note 10. Commitments and Contingencies
In the ordinary course of business, the Company enters into agreements that may include indemnification provisions. Pursuant to such
agreements, the Company may indemnify, hold harmless and defend an indemnified party for losses suffered or incurred by the indemnified
party. Some of the provisions will limit losses to those arising from third party actions. In some cases, the indemnification will continue after the
termination of the agreement. The maximum potential amount of future payments the Company could be required to make under these provisions
is not determinable. The Company has also entered into indemnification agreements with its directors and officers that may require the Company
to indemnify its directors and officers against liabilities that may arise by reason of their status or
113
Table of Contents
service as directors or officers to the fullest extent permitted by California corporate law. The Company carries a directors’ and officers’
insurance policy. To date, the Company has not incurred material costs to defend lawsuits or settle claims related to the indemnification
agreements. The Company believes that the fair value of these indemnification agreements is minimal and has not accrued any amounts for the
obligations.
Note 11. Stockholders’ Equity
In September 2017, the Company filed a registration statement on Form S-3 with the Securities and Exchange Commission (File No. 333-
220314) that was declared effective as of October 5, 2017 and permits the offering, issuance, and sale by the Company of up to a maximum
aggregate offering price of $200.0 million of its common stock, preferred stock and certain debt securities (the “2017 Form S-3”). Up to a
maximum of $50.0 million of the maximum aggregate offering price of $200.0 million may be issued and sold pursuant to an at-the-market
(“ATM”) financing facility under a sales agreement (the “2017 Sales Agreement”). The 2017 Sales Agreement was terminated in 2019. During
the year ended December 31, 2019, prior to the termination of the 2017 Sales Agreement, the Company sold 2,846,641 shares of its common
stock for net proceeds of $34.5 million, after deducting issuance costs. The Company sold 151,273 shares of its common stock pursuant to the
2017 Sales Agreement during the year ended December 31, 2018 for net proceeds of $1.5 million, after deducting issuance costs. As of
December 31, 2019, $72.0 million of common stock remained available for sale under the 2017 Form S-3.
In October 2017, the Company completed an underwritten public offering of 3,530,000 shares of common stock at a public offering price
of $17.00 per share. In November 2017, the Company issued an additional 529,500 shares of its common stock at a price of $17.00 per share
following the underwriters’ exercise of their option to purchase additional shares. Net proceeds, after deducting underwriting commissions and
offering costs paid by the Company, were $64.5 million.
In August 2018, the Company entered into a Securities Purchase Agreement with certain accredited investors (each, an “Investor” and,
collectively, the “Investors”), pursuant to which the Company sold an aggregate of 2,750,000 shares of its common stock at a price of $8.00 per
share, for aggregate net proceeds of $21.7 million, after deducting offering expenses payable by the Company. In a concurrent private placement,
the Company issued the Investors warrants to purchase an aggregate of 2,750,000 shares of its common stock (each, a “Warrant” and,
collectively, the “Warrants”). Each Warrant is exercisable from August 8, 2018 through August 8, 2023. Warrants to purchase 1,375,000 shares of
the Company’s common stock have an exercise price of $10.00 per share and Warrants to purchase 1,375,000 shares of the Company’s common
stock have an exercise price of $15.00 per share. The exercise price and number of shares of common stock issuable upon the exercise of the
Warrants (the “Warrant Shares”) are subject to adjustment in the event of any stock dividends and splits, reverse stock split, recapitalization,
reorganization or similar transaction, as described in the Warrants. Under certain circumstances, the Warrants may be exercisable on a “cashless”
basis. In connection with the issuance and sale of the common stock and Warrants, the Company granted the Investors certain registration rights
with respect to the Warrants and the Warrant Shares. The common stock and warrants are classified as equity in accordance with Accounting
Standards Codification Topic 480, Distinguishing Liabilities from Equity (“ASC 480”), and the net proceeds from the transaction were recorded
as a credit to additional paid-in capital. As of December 31, 2019, none of the Warrants have been exercised.
In December 2018, the Company entered into an exchange agreement (the “Exchange Agreement”) with an Investor and its affiliates (the
“Exchanging Stockholders”), pursuant to which the Company exchanged an aggregate of 1,000,000 shares of the Company’s common stock, par
value $0.00001 per share, owned by the Exchanging Stockholders for pre-funded warrants (the “Exchange Warrants”) to purchase an aggregate
of 1,000,000 shares of common stock (subject to adjustment in the event of any stock dividends and splits, reverse stock split, recapitalization,
reorganization or similar transaction, as described in the Exchange Warrants), with an exercise price of $0.00001 per share. The Exchange
Warrants will expire ten years from the date of issuance. The Exchange Warrants are exercisable at any time prior to expiration except that the
Exchange Warrants cannot be exercised by the Exchanging Stockholders if, after giving effect thereto, the Exchanging Stockholders would
beneficially own more than 9.99% of the Company’s common stock, subject to certain exceptions. In accordance with Accounting Standards
Codification Topic 505, Equity , the Company recorded the retirement of the common stock exchanged as a reduction of common stock shares
outstanding and a corresponding debit to additional paid-in-capital at the fair value of the Exchange Warrants on
114
Table of Contents
the issuance date. The Exchange Warrants are classified as equity in accordance with ASC 480, and fair value of the Exchange Warrants was
recorded as a credit to additional paid-in capital and is not subject to remeasurement. The Company determined that the fair value of the
Exchange Warrants is substantially similar to the fair value of the retired shares on the issuance date due to the negligible exercise price for the
Exchange Warrants. During the year ended December 31, 2019, Exchange Warrants to purchase 600,000 shares were net exercised, resulting in
the issuance of 599,997 shares of common stock. As of December 31, 2019, 400,000 of the Exchange Warrants remain unexercised.
In October 2019, the Company filed a registration statement on Form S-3 (File no. 333-234414) that was declared effective as of
November 22, 2019 and permits the offering, issuance, and sale by the Company of up to a maximum aggregate offering price of $250.0 million
of its common stock, preferred stock, debt securities and warrants (the “2019 Form S-3”). Up to a maximum of $75.0 million of the maximum
aggregate offering price of $250.0 million may be issued and sold pursuant to an ATM financing facility under a sales agreement entered into by
the Company on November 27, 2019 (the “2019 Sales Agreement”). As of December 31, 2019, no offering, issuance or sale of common stock,
preferred stock, debt securities or warrants was made under the 2019 Form S-3 or the 2019 Sales Agreement.
Note 12. Equity Plans
Equity Incentive Plan
In May 2007, the Company established the 2007 Stock Option and Incentive Plan (“2007 Plan”) which provided for the granting of stock
options to employees and consultants of the Company. Options granted under the 2007 Plan were either incentive stock options (“ISOs”) or
nonqualified stock options (“NSOs”). ISOs were granted only to Company employees (including officers and directors who are also employees).
NSOs were granted to Company employees and consultants. Options under the 2007 Plan have a term of ten years and generally vest over a four-
year period with one-year cliff vesting.
In July 2016, the Company’s board of directors and stockholders approved the 2016 Equity Incentive Plan (“2016 Plan”) to replace the
2007 Plan. Under the 2016 Plan, 1,200,000 shares of the Company’s common stock were initially reserved for the issuance of stock options,
restricted stock units and other awards to employees, directors and consultants. Pursuant to the “evergreen” provision contained in the 2016 Plan,
the number of shares reserved for issuance under the 2016 Plan automatically increases on January 1 of each year, starting on January 1, 2017
and continuing through (and including) January 1, 2026, by 4% of the total number of shares of the Company’s capital stock outstanding on
December 31 of the preceding fiscal year, or a lesser number of shares determined by the Company’s board of directors. Upon adoption of the
2016 Plan, no additional stock awards were issued under the 2007 Plan. Options granted under the 2007 Plan that were outstanding on the date
the 2016 Plan became effective remain subject to the terms of the 2007 Plan. The number of options available for grant under the 2007 Plan was
ceased and the number was added to the common stock reserved for issuance under the 2016 Plan. As of December 31, 2019, approximately
602,091 shares of common stock were available for issuance under the 2016 Plan.
The 2016 Plan is administered by the board of directors or a committee appointed by the board of directors, which determines the types of
awards to be granted, including the number of shares subject to the awards, the exercise price and the vesting schedule. Options granted under the
2016 Plan expire no later than ten years from the date of grant. The exercise price of each option may not be less than 100% of the fair market
value of the common stock at the date of grant. Options may be granted to stockholders possessing more than 10% of the total combined voting
power of all classes of stocks of the Company at an exercise price at least 110% of the fair value of the common stock at the date of grant and the
options are not exercisable after the expiration of 10 years from the date of grant. Employee stock options generally vest 25% upon one year of
continued service to the Company, with the remainder in monthly increments over three additional years. Non-employee director initial stock
options generally vest monthly over a period of approximately three years, and non-employee director annual refresher stock options generally
vest over a period of approximately one year.
115
Table of Contents
Inducement Plan
In May 2018, the Company’s board of directors approved the 2018 Inducement Plan, a non-stockholder approved stock plan, under which
it reserved and authorized 750,000 shares of the Company’s common stock in order to award options and restricted stock unit awards to persons
that were not previously employees or directors of the Company, or following a bona fide period of non-employment, as an inducement material
to such persons entering into employment with the Company, within the meaning of Rule 5635(c)(4) of the Nasdaq Listing Rules. The 2018
Inducement Plan is administered by the board of directors or the Compensation Committee of the board, which determines the types of awards to
be granted, including the number of shares subject to the awards, the exercise price and the vesting schedule. Awards granted under the 2018
Inducement Plan expire no later than ten years from the date of grant. As of December 31, 2019, approximately 280,000 shares were available for
issuance under the 2018 Inducement Plan.
Stock Options
Activity under the Company’s equity incentive plans is set forth below:
Balances at December 31, 2018
Options granted
Options exercised
Options forfeited
Balances at December 31, 2019
Options exercisable – December 31, 2019
Options vested and expected to vest – December 31, 2019
____________________
Options
Outstanding
3,178,441 $
1,328,800
(307,055)
(518,665)
3,681,521 $
1,973,866 $
3,681,521
$
Weighted-
Average
Exercise
Price Per
Share
12.23
9.36
3.81
14.08
11.64
11.82
11.64
Weighted-
Average
Remaining
Contractual
Life (years)
7.52
Aggregate
Intrinsic
Value (1)
(in millions)
7.78
6.93
7.78
$
$
$
2.4
2.3
2.4
(1)
The aggregate intrinsic values were calculated as the difference between the exercise price of the options and the closing price of the
Company’s common stock on December 31, 2019. The calculation excludes options with an exercise price higher than the closing price of the
Company’s common stock on December 31, 2019.
The aggregate intrinsic value of options exercised was $2.6 million, $1.3 million and $3.5 million for the years ended December 31, 2019,
2018 and 2017, respectively.
During the years ended December 31, 2019, 2018 and 2017, the estimated weighted-average grant-date fair value of common stock
underlying options granted was $5.45, $8.12 and $7.74 per share, respectively.
Stock Options Valuation
The fair value of stock option awards accounted for under ASC 718 was estimated at the date of grant using a Black-Scholes option-pricing
model with the following assumptions:
Expected term (in years)
Expected volatility
Risk-free interest rate
Dividend yield
2019
5.00 - 6.08
61.0% - 64.8%
1.42% - 2.58%
Year Ended December 31,
2018
5.49 - 6.08
62.0% - 66.5%
2.42% - 3.03%
—
—
2017
5.50 - 6.08
61.6% - 65.4%
1.88% - 2.24%
—
116
Table of Contents
In determining the fair value of the options granted, the Company uses the Black-Scholes option-pricing model and assumptions discussed
below. Each of these inputs is subjective, and expected volatility generally requires significant judgment to determine.
Expected Term—The Company’s expected term represents the period that the Company’s options granted are expected to be outstanding
and is determined using the simplified method (based on the mid-point between the vesting date and the end of the contractual term). The
Company has limited historical information to develop reasonable expectations about future exercise patterns and post-vesting employment
termination behavior for its stock option grants.
Expected Volatility—Since the Company does not have a long trading history for its common stock, the expected volatility is estimated
based on the average volatility for comparable publicly traded biopharmaceutical companies over a period equal to the expected term of the stock
option grants. The comparable companies were chosen based on their similar size, stage in the life cycle or area of specialty.
Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for
periods corresponding with the expected term of option.
Expected Dividend—The Company has never paid dividends on its common stock and has no plans to pay dividends on its common stock.
Therefore, the Company used an expected dividend yield of zero.
Restricted Stock Units
The Company began issuing restricted stock units under the 2016 Plan during the year ended December 31, 2018. A restricted stock unit is
an agreement to issue shares of the Company’s common stock at the time of vesting. Restricted stock unit annual refresher awards vest in four
equal installments on approximately the first, second, third and fourth anniversaries of the grant date. Restricted stock unit incentive awards
granted during 2018 vest in three equal installments at six months intervals over a period of 18 months.
Restricted stock unit activity under the Company’s equity incentive plans is set forth below:
Unvested at December 31, 2018
Restricted grant units granted
Restricted grant units vested
Restricted grant units forfeited
Unvested at December 31, 2019
Number of
Shares
418,450
160,650
(197,703)
(102,915)
278,482
$
$
Weighted
Average
Grant Date
Fair Value
10.45
8.02
9.29
9.88
10.08
Stock-based compensation expense associated with restricted stock units is based on the fair value of the Company’s common stock on the
grant date, which equals the closing market price of the Company’s common stock on the grant date. For restricted stock units, the Company
recognizes compensation expense over the vesting period of the awards that are ultimately expected to vest.
Employee Stock Purchase Plan
In July 2016, the Company’s board of directors and stockholders approved the 2016 Employee Stock Purchase Plan (“2016 ESPP”). The
2016 ESPP is intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended, and
is administered by the Company’s board of directors and the Compensation Committee of the board of directors. Under the 2016 ESPP, 150,000
shares of the Company’s common stock were initially reserved for employee purchases of the Company’s common stock. Pursuant to the
“evergreen” provision contained in the 2016 ESPP, the number of shares reserved for issuance automatically increases on January 1 of each year,
starting on January 1, 2017 and continuing through (and including) January 1, 2026 by the lesser of (i) 1% of the total number of shares of
common stock outstanding on December 31 of the preceding fiscal year (ii) 300,000
117
Table of Contents
shares, or (iii) such other number of shares determined by the board of directors. The 2016 ESPP allows eligible employees to purchase shares of
the Company’s common stock at a discount through payroll deductions of up to 15% of their eligible compensation. At the end of each offering
period, eligible employees are able to purchase shares at 85% of the lower of the fair market value of the Company’s common stock at the
beginning of the offering period or at the end of each applicable purchase period. During the year ended December 31, 2019, 79,034 shares were
issued under the ESPP. As of December 31, 2019, 577,993 shares are available for issuance.
The fair value of the rights granted under the 2016 ESPP was calculated using the Black-Scholes option-pricing model with the following
assumptions:
Expected term (in years)
Expected volatility
Risk-free interest rate
Dividend yield
Stock-Based Compensation
2019
Year Ended December 31,
2018
0.50
58.9% -65.3%
1.89% -2.32%
—
0.50
49.0% -63.4%
1.89% -2.32%
—
2017
0.50
52.4%
0.89% - 1.16%
—
Total stock-based compensation expense was as follows (in thousands):
Research and development
General and administrative
Total stock-based compensation expense
Year Ended December 31,
2019
2018
2017
4,350 $
4,003
8,353 $
3,424 $
3,495
6,919 $
2,008
2,233
4,241
$
$
As of December 31, 2019, total unrecognized stock-based compensation expense was $12.3 million, which the Company expects to
recognize over a period of approximately 2.5 years.
Note 13. 401(k) Plan
The Company has a retirement and savings plan under Section of 401(k) of Internal Revenue Code (the “401(k) Plan”) covering all U.S.
employees. The 401(k) Plan allows employees to make pre- and post-tax contributions up to the maximum allowable amount set by the Internal
Revenue Service. The Company does not make matching contributions to the 401(k) Plan on behalf of participants.
Note 14. Income Taxes
The Company recorded an income tax benefit of $0.7 million for the year ended December 31, 2019 primarily due to research and
development tax credits and the recognition of deferred tax assets in Protagonist Australia. The Company believes these deferred tax assets will
be realized in the future due to expected profitability for this subsidiary.
The Company recorded an income tax benefit of $0.8 million for the year ended December 31, 2018 from the recognition of deferred tax
assets in Protagonist Australia. No provision for income taxes was recorded for the year ended December 31, 2017. The Company had incurred
net operating losses and did not reflect any benefit of operating loss carryforwards in the consolidated financial statements for the year ended
December 31, 2017. The Company continues to maintain a valuation allowance against its U.S. deferred tax assets due to the uncertainty
surrounding the realization of such assets.
118
Table of Contents
The following table presents domestic and foreign components of net loss before income taxes (in thousands):
Domestic
Foreign
Total net loss before taxes
2019
Year Ended December 31,
2018
(72,271)
(5,607)
(77,878)
$
$
(37,511)
(2,212)
(39,723)
$
$
$
$
2017
(34,556)
(2,401)
(36,957)
119
Table of Contents
The federal, state and foreign components of the income tax expense (benefit) are summarized as follows:
Current:
Federal
State
Foreign
Total current tax expense
Deferred:
Federal
State
Foreign
Total deferred tax benefit
Income tax benefit
2019
Year Ended December 31,
2018
2017
$
$
—
—
84
84
—
—
(775)
(775)
(691)
$
$
—
—
—
—
—
—
(799)
(799)
(799)
$
$
—
—
—
—
—
—
—
—
—
The effective tax rate of the provision for income taxes differs from the federal statutory rate as follows:
Federal statutory income tax rate
State taxes, net of federal benefit
Research and development credits
Foreign tax rate difference
Change in valuation allowance
Change in tax law
Other
Provision for income taxes
The components of the deferred tax assets are as follows (in thousands):
Deferred tax assets:
Net operating loss carryforwards
Depreciation and amortization
Accruals/other
Operating lease liability
Research and development credits
Total deferred tax assets
Deferred tax liabilities:
Operating right-of-use asset
Total deferred tax liabilities
Valuation allowance
Net deferred tax assets
Year Ended December 31,
2019
2018
2017
21.0 %
1.2
4.3
0.7
(23.8)
—
(2.5)
0.9 %
21.0 %
7.0
(1.3)
0.4
(22.2)
—
(2.9)
2.0 %
34.0 %
0.5
2.6
(1.2)
(5.2)
(31.2)
0.5
— %
December 31,
2019
2018
$
39,907 $
318
5,454
1,516
8,038
55,233
(1,269)
(1,269)
(52,531)
$
1,433 $
27,704
269
2,455
—
4,270
34,698
—
—
(34,040)
658
Realization of the deferred tax assets is dependent upon future taxable income, if any, the amount and timing of which are uncertain. The
Company has established a valuation allowance to offset U.S. deferred tax assets as of December 31, 2019 and 2018 due to the uncertainty of
realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets. The valuation allowance increased by
approximately $18.5 million, $8.2 million and $1.9 million during the years ended December 31, 2019, 2018 and 2017, respectively.
120
Table of Contents
Federal and state laws impose substantial restrictions on the utilization of net operating loss and tax credit carryforwards in the event of an
ownership change for tax purposes, as defined in Section 382 of the Internal Revenue Code. As a result of such ownership changes, the
Company’s ability to realize the potential future benefit of tax losses and tax credits that existed at the time of the ownership change may be
significantly reduced. Based on a review of the Company’s equity transactions since inception, the Company believes a portion of its net
operating loss carryforwards and credit carryforwards may be limited due to certain of its equity financing transactions.
At December 31, 2019, the Company had $164.1 million of federal net operating loss carryforwards and $151.1 million of state net
operating loss carryforwards. $78.7 million of the federal net operating loss carryforwards will begin to expire in 2033, if not utilized, and the
remaining $85.4 million have no expiration. The state net operating loss carryforwards will begin to expire in 2035, if not utilized.
At December 31, 2019, the Company also had accumulated Australian tax losses of AUD 13.1 million ($9.2 million) available for carry
forward against future earnings which, under relevant tax laws, do not expire but may be limited under certain circumstances.
As of December 31, 2019, the Company had $6.6 million of federal and $3.3 million of state research and development tax credit
carryforwards available to reduce future income taxes. The federal research and development tax credits will begin to expire in 2035, if not
utilized. The state research and development tax credits have no expiration date.
As of December 31, 2019, the Company had AUD 3.5 million ($2.5 million) of Australian research and development tax credit
carryforwards available to reduce future income taxes. The Australian research and development tax credits have no expiration date.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Balance at beginning of year
Increase based on tax positions related to prior years
Increase based on tax positions related to current year
Balance at end of year
2019
Year Ended December 31,
2018
2017
$
$
9,466
184
6,981
16,631
$
$
5,414
108
3,944
9,466
$
$
2,131
—
3,283
5,414
At December 31, 2019, the Company had unrecognized tax benefits of $16.6 million, of which $4.1 million would affect the effective tax
rate if recognized and $12.5 million is subject to a valuation allowance and would not affect the effective tax rate if recognized. The Company
does not anticipate that the total amounts of unrecognized tax benefits will significantly increase or decrease in the next 12 months. The
Company’s policy is to include interest and penalties related to unrecognized tax benefits within the provision for income taxes, as necessary.
Management determined that no accrual for interest or penalties was required as of December 31, 2019, 2018 and 2017.
The Company files income tax returns in the United States federal jurisdiction, the State of California and Australia. The Company is not
currently under examination by income tax authorities in federal, state or other jurisdictions. The Company’s tax returns remain open for
examination for all years.
121
Table of Contents
Note 15. Net Loss per Share
As the Company had net losses for the years ended December 31, 2019, 2018 and 2017, all potential common shares were determined to be
anti-dilutive. The following table sets forth the computation of basic and diluted net loss per share (in thousands, except share and per share
data):
Numerator:
Net loss
Denominator:
Weighted-average shares used to compute net loss per common share, basic and
diluted
Net loss per shares, basic and diluted
2019
Year Ended December 31,
2018
2017
(77,187)
$
(38,924) $
(36,957)
25,894,024
(2.98)
$
22,364,515
(1.74) $
17,694,505
(2.09)
$
$
The following outstanding shares of potentially dilutive securities have been excluded from diluted net loss per share calculations for
the years ended December 31, 2019, 2018 and 2017 because their inclusion would be anti-dilutive:
Options to purchase common stock
Common stock warrants
Restricted stock units
ESPP shares
Total
Note 16. Supplementary Financial Data (unaudited)
Year Ended December 31,
2019
3,681,521
2,750,000
278,482
40,275
6,750,278
2018
3,178,441
2,750,000
418,450
52,134
6,399,025
2017
2,438,151
—
—
24,938
2,463,089
The following table presents the selected quarterly financial data for the years ended December 31, 2019 and 2018 (in thousands, except
per share amounts):
2019
License and collaboration revenue - related party
Loss from operations
Net loss
Net loss per share of common stock, basic and diluted
2018
License and collaboration revenue - related party
Loss from operations
Net loss
Net loss per share of common stock, basic and diluted
(1)
(1)
Consolidated Statements of Operations
Quarter Ended
March 31
June 30
September 30 December 31
$
$
$
$
$
$
$
$
1,560 $
(14,648) $
(14,103) $
(0.58) $
(8,189) $
(31,407) $
(29,174) $
(1.18) $
4,141 $
(17,167) $
(16,409) $
(0.61) $
10,781 $
(8,229) $
(7,661) $
(0.36) $
11,674 $
(9,239) $
(8,663) $
(0.41) $
6,117 $
(9,389) $
(8,735) $
(0.38) $
2,719
(17,299)
(17,501)
(0.63)
2,353
(15,412)
(13,865)
(0.57)
_________________
(1)
Net loss per share amounts for the 2019 and 2018 quarters and full years have been computed separately. Accordingly, quarterly amounts may
not add to the annual amounts because of differences in the weighted average shares outstanding during each period.
122
Table of Contents
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
Evaluation of disclosure controls and procedures
Management, under the supervision and with the participation of our Chief Executive Officer (Principal Executive Officer) and Chief
Financial Officer (Principal Financial Officer), has evaluated the effectiveness of our disclosure controls and procedures (as defined in
Rules 13a‑15(e) and 15d‑15(e) under the Exchange Act) as of December 31, 2019. Based on the evaluation of our disclosure controls and
procedures, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of
December 31, 2019 were effective at the reasonable assurance level.
Management’s annual report on internal control over financial reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our management, including our Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria set forth in Internal Control-
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under
the criteria set forth in Internal Control-Integrated Framework, our management concluded that our internal control over financial reporting was
effective as of December 31, 2019.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of
the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report on Form 10-K.
Changes in internal control over financial reporting
There have been no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Other Information
None.
123
Table of Contents
Item 10.
Directors, Executive Officers, and Corporate Governance
PART III
Except as set forth below, the information required by this item is incorporated by reference from our definitive Proxy Statement to be filed
with the SEC in connection with our 2020 Annual Meeting of Stockholders within 120 days after the end of the fiscal year ended December 31,
2019.
We have adopted a Code of Business Conduct and Ethics that applies to all directors, officers and employees, including our principal
executive officer and principal financial officer. The Code of Business Conduct and Ethics is posted on our website at www.protagonist-inc.com.
We intend to satisfy the disclosure requirement under Item 5.05 of Form 8‑K regarding an amendment to, or waiver from, a provision of
this Code of Business Conduct and Ethics by posting such information on our website, at the address and location specified above and, to the
extent required by the listing standards of The Nasdaq Global Market, by filing a Current Report on Form 8‑K with the SEC, disclosing such
information.
Item 11.
Executive Compensation
The information required by this item is incorporated by reference from our definitive Proxy Statement to be filed with the SEC in
connection with our 2020 Annual Meeting of Stockholders within 120 days after the end of the fiscal year ended December 31, 2019.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference from our definitive Proxy Statement to be filed with the SEC in
connection with our 2020 Annual Meeting of Stockholders within 120 days after the end of the fiscal year ended December 31, 2019.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference from our definitive Proxy Statement to be filed with the SEC in
connection with our 2020 Annual Meeting of Stockholders within 120 days after the end of the fiscal year ended December 31, 2019.
Item 14.
Principal Accounting Fees and Services
The information required by this item is incorporated by reference from our definitive Proxy Statement to be filed with the SEC in
connection with our 2020 Annual Meeting of Stockholders within 120 days after the end of the fiscal year ended December 31, 2019.
124
Table of Contents
PART IV
Item 15.
Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of this report:
(1) FINANCIAL STATEMENTS
The financial statements filed as part of this Annual Report on Form 10‑K are included in Part II, Item 8 of this Annual Report on
Form 10‑K.
(2) FINANCIAL STATEMENT SCHEDULES
Financial statement schedules have been omitted in this Annual Report on Form 10‑K because they are not applicable, not required
under the instructions, or the information requested is set forth in the financial statements or related notes thereto.
(3) EXHIBITS
The exhibits listed in the accompanying Exhibit Index are filed as part of, or incorporated by reference into, this Annual Report on
Form 10‑K.
EXHIBIT INDEX
Exhibit
Number
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
10.1+
Amended and Restated Certificate of
Exhibit Description
Incorporation
Amended and Restated Bylaws
Specimen stock certificate evidencing the shares
of common stock
Third Amended and Restated Investor Rights
Agreement, by and among Protagonist
Therapeutics, Inc. and the stockholders named
therein, dated July 31, 2016.
Form of Indenture
Form of Class A Common Stock Purchase
Warrant
Form of Class B Common Stock Purchase
Warrant
Form of Warrant
Description of Protagonist Therapeutics, Inc.’s
Securities Registered Pursuant to Section 12 of
the Exchange Act
Protagonist Therapeutics, Inc. 2007 Stock Option
and Incentive Plan, as amended and restated, and
form of option agreement, exercise notice,
joinder, and adoption agreement thereunder.
125
Incorporation By Reference
Filed
Form
8‑K
SEC File No.
Exhibit
Filing Date
Herewith
001-37852
3.1
8/16/2016
S‑1/A
S‑1/A
333-212476
333-212476
S‑1/A
333-212476
S-3
8-K
333-220314
001-37852
8-K
001-37852
3.2
4.1
4.2
4.5
4.1
4.2
8/1/2016
8/1/2016
8/1/2016
9/1/2017
8/7/2018
8/7/2018
8-K
001-37852
4.1
12/31/2018
X
S‑1
333-212476
10.1
7/11/2016
Table of Contents
Exhibit
Number
10.2+
10.3+
10.4+
10.5+
10.6
10.7+
10.8+
10.9+
10.10†
10.11†
Exhibit Description
Protagonist Therapeutics, Inc. 2016 Equity
Incentive Plan and forms of stock option grant
notice, option agreement, notice of exercise,
restricted stock unit grant notice and restricted
stock unit agreement thereunder.
Protagonist Therapeutics, Inc. 2016 Employee
Stock Purchase Plan.
Form of Indemnity Agreement for Directors and
Officers.
Protagonist Therapeutics, Inc. 2018 Inducement
Plan, form of stock option grant notice, form of
option agreement, form of restricted stock unit
grant notice and form of restricted stock unit
agreement
Lease, dated March 6, 2017, by and between the
Registrant and BMR-Pacific Research Center LP.
Severance Agreement, dated August 1, 2016, by
and between the Registrant and Dinesh Patel.
Severance Agreement, dated August 1, 2016, by
and between the Registrant and David Y. Liu,
Ph.D.
Employment Offer Letter, dated May 21, 2018,
by and between the Registrant and Samuel Saks,
M.D.
Research and Collaboration Agreement, dated
June 16, 2012, by and among the Registrant,
Protagonist Pty. Ltd. and Zealand Pharma A/S.
Contract Extension Letter of Agreement, dated
June 1, 2013, by and among the Registrant,
Protagonist Pty. Ltd. and Zealand Pharma A/S.
10.12†
Agreement on Addition of Additional
10.13†
10.14†
Collaboration Program, dated September 16,
2013, by and among the Registrant, Protagonist
Pty. Ltd. and Zealand Pharma A/S.
Protagonist Assumption of Responsibility, dated
January 28, 2014, by and between the Registrant
and Zealand Pharma A/S.
Agreement to Assign Patent Applications, dated
February 7, 2014, by and between the Registrant,
Protagonist Pty. Ltd. and Zealand Pharma A/S.
Incorporation By Reference
Filed
Form
S‑1/A
SEC File No.
333-212476
Exhibit
Filing Date
Herewith
10.2
8/1/2016
S‑1/A
333-212476
10.3
8/1/2016
S‑1/A
333-212476
10.4
8/1/2016
S-8
333-225294
99.1
5/30/2018
10-K
001-37852
10.9
3/7/2017
S‑1/A
333-212476
10.9
8/1/2016
S‑1/A
333-212476
10.10
8/1/2016
10-Q
001-37852
10.2
8/7/2018
333-212476
10.17
7/11/2016
333-212476
10.18
7/11/2016
333-212476
10.19
7/11/2016
333-212476
10.20
7/11/2016
333-212476
10.21
7/11/2016
S‑1
S‑1
S‑1
S‑1
S‑1
126
Table of Contents
Exhibit
Number
Exhibit Description
10.15†
Abandonment Agreement, dated February 28,
Incorporation By Reference
Filed
Form
S‑1
SEC File No.
333-212476
Exhibit
Filing Date
Herewith
10.22
7/11/2016
10.16†
10.17
10.18
10.19
10.20
10.21+
10.22#
10.23+
10.24+
10.25
10.26
2014, by and among the Registrant, Protagonist
Pty. Ltd. and Zealand Pharma A/S.
Exclusive License and Collaboration Agreement,
dated May 26, 2017, by and between the
Registrant and Janssen Biotech, Inc.
Registration Rights Agreement, dated August 8,
2018, by and between the Registrant and certain
parties identified on the signature pages thereto
Securities Purchase Agreement, dated August 6,
2018, by and between the Registrant and certain
purchasers identified on the signature pages
thereto
Exchange Agreement, dated December 21, 2018,
by and between the Registrant and Biotechnology
Value Fund, L.P., Biotechnology Value Fund II,
L.P. and Biotechnology Value Trading Fund OS,
L.P.
First Amendment, dated January 31, 2019, to
Lease, dated March 6, 2017, by and between
Protagonist Therapeutics, Inc., as Tenant, and
BMR-Pacific Research Center LP, as Landlord.
Severance Agreement, dated March 14, 2019, by
and among Protagonist Therapeutics, Inc. and
Suneel Gupta, Ph.D.
First Amendment to Exclusive License and
Collaboration Agreement, by and between
Protagonist Therapeutics, Inc. and Janssen
Biotech, Inc., dated May 7, 2019.
Offer Letter, by and between Protagonist
Therapeutics Inc. and Donald Kalkofen, dated
May 20, 2019.
Severance Agreement, dated July 19, 2019, by
and between Protagonist Therapeutics, Inc. and
Samuel Saks, M.D.
Credit and Security Agreement, dated October 30,
2019, by and between Protagonist Therapeutics,
Inc., MidCap Financial, and Silicon Valley Bank.
Open Market Sale Agreement , dated November
27, 2019, by and between Protagonist
Therapeutics, Inc. and Jefferies LLC.
SM
21.1
List of Subsidiaries
127
8-K/A
001-37852
10.1
7/31/2017
8-K
001-37852
4.3
8/7/2018
S-3
333-227216
10.1
9/7/2018
8-K
001-37852
10.1
12/31/2018
10-Q
001-37852
10.3
5/8/2019
10-Q
001-37852
10.4
5/8/2019
10-Q
001-37852
10.1
8/7/2019
8-K
001-37852
10.1
5/29/2019
10-Q
001-37852
10.1
11/6/2019
8-K
001-37852
10.1
11/27/2019
X
X
Exhibit Description
Form
SEC File No.
Exhibit
Filing Date
Herewith
Incorporation By Reference
Filed
Table of Contents
Exhibit
Number
23.1
24.1
31.1
31.2
32.1*
Consent of Independent Registered Public
Accounting Firm
Power of Attorney (included in signature page of
this Form 10‑K)
Certification of Chief Executive Officer required
by Rule 13a‑14(a) or Rule 15d‑14(a) of the
Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Certification of Chief Financial Officer required
by Rule 13a‑14(a) or Rule 15d‑14(a) of the
Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Certification of Chief Executive Officer and Chief
Financial Officer, as required by Rule 13a‑14(b) or
Rule 15d‑14(b) and Section 1350 of Chapter 63 of Title
18 of the United States Code (18 U.S.C. §1350), as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase
Document
XBRL Taxonomy Extension Definition Linkbase
Document
XBRL Taxonomy Extension Labels Linkbase
Document
XBRL Taxonomy Extension Presentation Linkbase
Document
X
X
X
X
X
X
X
X
X
X
X
+ Indicates management contract or compensatory plan, contract or agreement.
† Confidential treatment has been granted for a portion of this exhibit.
* This certification attached as Exhibit 32.1 that accompanies this Annual Report on Form 10‑K is not deemed filed with the Securities and
Exchange Commission and is not to be incorporated by reference into any filing of Protagonist Therapeutics, Inc. under the Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of the Form 10‑K, irrespective
of any general incorporation language contained in such filing.
# Portions of this exhibit (indicated by hashtag) have been omitted as the registrant has determined that (i) the omitted information is
not material and (ii) the omitted information would likely cause competitive harm to the registrant if publicly disclosed.
Item 16.
Form 10-K Summary
None.
128
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: March 10, 2020
By:
/s/ Dinesh V. Patel, Ph.D.
PROTAGONIST THERAPEUTICS, INC.
Dinesh V. Patel, Ph.D.
President, Chief Executive Officer and Director
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dinesh V.
Patel and Don Kalkofen, and each of them, his true and lawful attorneys-in-fact, with full power of substitution, for him in any and all capacities,
to sign any and all amendments to this Annual Report on Form 10‑K, and to file the same, with exhibits thereto and other documents in
connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact or any of
them or their substitute or substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant in the capacities and on the dates indicated:
Signature
/s/ Dinesh V. Patel, Ph.D.
Dinesh V. Patel, Ph.D.
/s/ Don Kalkofen
Don Kalkofen
/s/ Harold E. Selick, Ph.D.
Harold E. Selick, Ph.D.
/s/ Bryan Giraudo
Bryan Giraudo
/s/ Chaitan Khosla, Ph.D.
Chaitan Khosla, Ph.D.
/s/ Sarah Noonberg, M.D., Ph.D.
Sarah Noonberg, M.D., Ph.D.
/s/ William D. Waddill
William D. Waddill
/s/ Lewis T. Williams, M.D., Ph.D.
Lewis T. Williams, M.D., Ph.D.
Title
President, Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date
March 10, 2020
March 10, 2020
Chairman of the Board of Directors
March 10, 2020
Director
Director
Director
Director
Director
129
March 10, 2020
March 10, 2020
March 10, 2020
March 10, 2020
March 10, 2020
DESCRIPTION OF THE REGISTRANT’S SECURITIES REGISTERED
PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF
1934
Exhibit 4.7
The following is a description of the authorized capital stock of Protagonist Therapeutics, Inc., a Delaware Corporation (“we,” “us,”
“our,” or the “Company”). The following summaries and descriptions are not complete and are subject to and qualified by reference to the
actual provisions of the Company’s Amended and Restated Certificate of Incorporation (the “Charter”) and Amended and Restated Bylaws
(the “Bylaws”), both of which have been filed with the Securities and Exchange Commission and are incorporated by reference herein. We
encourage you to read our Charter, our Bylaws, and the applicable provisions of the Delaware General Corporation Law for more
information.
General
Pursuant to the Company’s Charter, the Company is authorized to issue up to 90,000,000 shares of common stock, par value $0.00001
per share (the “Common Stock”), and up to 10,000,000 shares of preferred stock, par value $0.00001 per share (the Preferred Stock”). As of
December 31, 2019, there were 27,217,649 shares of our Common Stock were issued and outstanding. No Preferred Stock is currently
outstanding.
Common Stock
Voting Rights
Holders of our Common Stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders,
including the election of directors, and do not have cumulative voting rights. Accordingly, the holders of a majority of the outstanding
shares of Common Stock entitled to vote in any election of directors can elect all of the directors standing for election, if they so choose,
other than any directors that holders of any Preferred Stock we may issue may be entitled to elect.
Dividend Rights
Subject to preferences that may be applicable to any then outstanding Preferred Stock, holders of Common Stock are entitled to
receive ratably those dividends, if any, as may be declared by the board of directors out of legally available funds.
Liquidation
In the event of our liquidation, dissolution or winding up, the holders of Common Stock will be entitled to share ratably in the assets
legally available for distribution to stockholders after the payment of or provision for all of our debts and other liabilities, subject to the
prior rights of any Preferred Stock then outstanding.
Rights and Preferences
Holders of Common Stock have no preemptive or conversion rights or other subscription rights and there are no redemption or
sinking funds provisions applicable to the Common Stock. The rights, preferences and privileges of holders of Common Stock are subject to
and may be adversely affected by the rights of the holders of shares of any series of Preferred Stock that we may designate and issue in the
future.
Anti-Takeover Effects of Delaware Law and our Certificate of Incorporation and Bylaws
Some provisions of Delaware law, our certificate of incorporation and our bylaws contain provisions that could make the following
transactions more difficult: an acquisition of us by means of a tender offer; an acquisition of us by means of a proxy contest or otherwise; or
the removal of our incumbent officers and directors. It is possible that these provisions could make it more difficult to accomplish or could
deter transactions that stockholders may otherwise
consider to be in their best interest or in our best interests, including transactions which provide for payment of a premium over the market
price for our shares.
These provisions, summarized below, are intended to discourage coercive takeover practices and inadequate takeover bids. These
provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our board of directors. We believe
that the benefits of the increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal
to acquire or restructure us outweigh the disadvantages of discouraging these proposals because negotiation of these proposals could result
in an improvement of their terms.
Undesignated Preferred Stock—The ability to authorize undesignated Preferred Stock makes it possible for our board of directors to
issue Preferred Stock with voting or other rights or preferences that could impede the success of any attempt to change control of us. These
and other provisions may have the effect of deterring hostile takeovers or delaying changes in control or management of our company.
Stockholder Meetings—Our bylaws provide that a special meeting of stockholders may be called only by our chairman of the board,
chief executive officer or president, or by a resolution adopted by a majority of our board of directors.
Requirements for Advance Notification of Stockholder Nominations and Proposals—Our bylaws establish advance notice procedures
with respect to stockholder proposals to be brought before a stockholder meeting and the nomination of candidates for election as directors,
other than nominations made by or at the direction of the board of directors or a committee of the board of directors.
Elimination of Stockholder Action by Written Consent—Our certificate of incorporation and bylaws eliminate the right of stockholders
to act by written consent without a meeting.
Staggered Board—Our board of directors is divided into three classes. The directors in each class will serve for a three-year term, one
class being elected each year by our stockholders. This system of electing and removing directors may tend to discourage a third-party from
making a tender offer or otherwise attempting to obtain control of us, because it generally makes it more difficult for stockholders to replace
a majority of the directors.
Removal of Directors—Our certificate of incorporation provides 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 the
total voting power of all of our outstanding voting stock then entitled to vote in the election of directors.
Stockholders Not Entitled to Cumulative Voting—Our certificate of incorporation does not permit stockholders to cumulate their votes
in the election of directors. Accordingly, the holders of a majority of the outstanding shares of our Common Stock entitled to vote in any
election of directors can elect all of the directors standing for election, if they choose, other than any directors that holders of our Preferred
Stock may be entitled to elect.
Delaware Anti-Takeover Statute—We are subject to Section 203 of the Delaware General Corporation Law, which prohibits persons
deemed to be "interested stockholders" from engaging in a "business combination" with a publicly held Delaware corporation for three
years following the date these persons become interested stockholders unless the business combination is, or the transaction in which the
person became an interested stockholder was, approved in a prescribed manner or another prescribed exception applies. Generally, an
"interested stockholder" is a person who, together with affiliates and associates, owns, or within three years prior to the determination of
interested stockholder status did own, 15% or more of a corporation's voting stock. Generally, a "business combination" includes a merger,
asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. The existence of this provision may have
an anti-takeover effect with respect to transactions not approved in advance by the board of directors.
Choice of Forum—Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative form,
the Court of Chancery of the State of Delaware is the exclusive forum for the following types of actions or proceedings under Delaware
statutory or common law: (1) any derivative action or proceeding brought on our behalf; (2) any action asserting a claim of breach of a
fiduciary duty or other wrongdoing by any of our directors, officers, employees or agents to us or our stockholders; (3) any action asserting
a claim against us arising pursuant to any provision of the General Corporation Law of the State of Delaware or our certificate of
incorporation or 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 governed by the internal affairs doctrine. This provision does not apply to suits brought to enforce a duty or
liability created by the Exchange Act or any other claim for which the U.S. federal courts have exclusive jurisdiction. Our certificate of
incorporation also provides that any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be
deemed to have notice of and to have consented to this choice of forum provision. It is possible that a court of law could rule that the choice
of forum provision contained in our certificate of incorporation is inapplicable or unenforceable if it is challenged in a proceeding or
otherwise.
Amendment of Charter Provisions—The amendment of any of the above provisions, except for the provision making it possible for our
board of directors to issue Preferred Stock, would require approval by holders of at least two thirds of the total voting power of all of our
outstanding voting stock.
The provisions of Delaware law, our certificate of incorporation and our bylaws could have the effect of discouraging others from
attempting hostile takeovers and, as a consequence, they may also inhibit temporary fluctuations in the market price of our Common Stock
that often result from actual or rumored hostile takeover attempts. These provisions may also have the effect of preventing changes in the
composition of our board and management. It is possible that these provisions could make it more difficult to accomplish transactions that
stockholders may otherwise deem to be in their best interests.
Symbol and Listing
Our Common Stock is listed on The Nasdaq Global Market under the symbol “PTGX.”
Transfer Agent and Registrar
The transfer agent and registrar for our Common Stock is American Stock Transfer & Trust Company, LLC. The transfer agent and
registrar’s address is 6201 15 Avenue, Brooklyn, New York 11219. Telephone number is (800) 937-5449.
th
Exhibit 10.25
CREDIT AND SECURITY AGREEMENT
dated as of October 30, 2019
by and among
PROTAGONIST THERAPEUTICS, INC., as a Borrower
and any additional borrower that hereafter becomes party hereto,
and
MIDCAP FINANCIAL TRUST,
as Agent and as a Lender,
and
THE ADDITIONAL LENDERS
FROM TIME TO TIME PARTY HERETO
CREDIT AND SECURITY AGREEMENT
This CREDIT AND SECURITY AGREEMENT (this “Agreement”), dated as of October 30, 2019 (the “Closing Date”) by and among
MIDCAP FINANCIAL TRUST, a Delaware statutory trust (“MidCap”), as administrative agent, the Lenders listed on the Credit Facility
Schedule attached hereto and otherwise party hereto from time to time (each a “Lender”, and collectively the “Lenders”), and
PROTAGONIST THERAPEUTICS, INC., a Delaware corporation (“Protagonist Therapeutics”), and the other entities from time to
time party to this Agreement as borrowers (each individually and collectively in the singular, “Borrower”), provides the terms on which
Lenders agree to lend to Borrower and Borrower shall repay the Lenders. The parties agree as follows:
1.
ACCOUNTING AND OTHER TERMS
Accounting terms not defined in this Agreement shall be construed in accordance with GAAP. Calculations and determinations
must be made in accordance with GAAP. Capitalized terms not otherwise defined in this Agreement shall have the meanings set forth in
Article 15. All other capitalized terms contained in Article 4 and Exhibit A, unless otherwise indicated, shall have the meaning provided
by the Code to the extent such terms are defined therein. All headings numbered without a decimal point are herein referred to as
“Articles,” and all paragraphs numbered with a decimal point (and all subparagraphs or subsections thereof) are herein referred to as
“Sections.” All references herein to a merger, transfer, consolidation, amalgamation, assignment, sale or transfer, or analogous term, will
be construed to mean also a division of or by a limited liability company, as if it were a merger, transfer, consolidation, amalgamation,
assignment, sale or transfer, or similar term, as applicable. Any series of limited liability company shall be considered a separate Person.
2.
CREDIT FACILITIES AND TERMS
2.1
Promise to Pay. Borrower hereby unconditionally promises to pay to each Lender in accordance with each Lender’s
respective Pro Rata Share of each Credit Facility, the outstanding principal amount of all Credit Extensions made by the Lenders under such
Credit Facility and accrued and unpaid interest thereon and any other amounts due hereunder as and when due in accordance with this
Agreement.
2.2
Credit Facilities. Subject to the terms and conditions hereof, each Lender, severally, but not jointly, agrees to make
available to Borrower Credit Extensions in respect of each Credit Facility set forth opposite such Lender’s name on the Credit Facility
Schedule, in each case not to exceed such Lender’s commitment as identified on the Credit Facility Schedule (such commitment of each
Lender, as it may be amended to reflect assignments made in accordance with this Agreement or terminated or reduced in accordance with
this Agreement, its “Applicable Commitment”, and the aggregate of all such commitments of all Lenders, the “Applicable
Commitments”).
2.3
Credit Facilities.
(a)
Nature of Credit Facility; Credit Extension Requests. Credit Extensions in respect of a Credit Facility may be
requested by Borrower to be made by the applicable Lenders on any Business Day during the Draw Period for such Credit Facility, but no
Credit Extensions in respect of a Credit Facility shall be made before the applicable Commitment Commencement Date or after the
applicable Commitment Termination Date. For any Credit Extension requested under a Credit Facility (other than a Credit Extension on
the Closing Date), Agent must receive the completed Credit Extension Form by 12:00 noon (New York time) ten (10) Business Days
prior to the date the Credit Extension is to be funded (other than the Credit Extension made on the Closing Date). To the extent any
Credit Facility proceeds are repaid for any reason, whether voluntarily or involuntarily (including repayments from insurance or
condemnation proceeds), Agent and the Lenders shall have no obligation to re-advance such sums to Borrower.
(b)
Principal Payments. Principal payable on account of a Credit Facility shall be payable by Borrower to Agent,
for the account of the applicable Lenders in accordance with their respective Pro Rata Shares, immediately upon the earliest of (i) the
date(s) set forth in the Amortization Schedule for such Credit Facility, or (ii) the Maturity Date. Except as this Agreement may
specifically provide otherwise, all prepayments of Credit Extensions under the Credit Facilities shall be applied by Agent to the
applicable Credit Facility in inverse order of maturity. The monthly payments required under the Amortization Schedule shall continue in
the same amount (for so long as the
1
applicable Credit Facility shall remain outstanding) notwithstanding any partial prepayment, whether mandatory or optional, of the
applicable Credit Facility.
(c)
Mandatory Prepayment. If a Credit Facility is accelerated following the occurrence of an Event of Default,
Borrower shall immediately pay to Agent, for payment to each Lender in accordance with its respective Pro Rata Share, an amount equal
to the sum of: (i) all outstanding principal of the Credit Facility and all other Obligations, plus accrued and unpaid interest thereon, (ii)
any fees payable under the Fee Letters by reason of such prepayment, (iii) the Applicable Prepayment Fee as specified in the Credit
Facility Schedule for the Credit Facility being prepaid, and (iv) all other sums that shall have become due and payable, including
Protective Advances. Additionally, at the election of Agent, Borrower shall prepay the Credit Facilities (to be allocated pro rata among
the outstanding Credit Extensions under all Credit Facilities) in the following amounts: (A) within five (5) Business Days after the date
on which any Credit Party (or Agent as loss payee or assignee) receives any casualty proceeds in excess of Five Hundred Thousand
Dollars ($500,000) for property, in respect of assets upon which Agent has been granted a Lien, an amount equal to one hundred percent
(100%) of such proceeds (net of out-of-pocket expenses and, in the case of personal property, repayment of any permitted purchase
money debt encumbering the personal property that suffered such casualty), or such lesser portion of such proceeds as Agent shall elect to
apply to the Obligations; and (B) five (5) Business Days after receipt by any Credit Party of the proceeds of any asset disposition of
personal property not made in the Ordinary Course of Business (other than transfers permitted by Section 7.1) an amount equal to one
hundred percent (100%) of the net cash proceeds of such asset disposition (net of out-of-pocket expenses and repayment of any permitted
purchase money debt encumbering such asset), or such lesser portion as Agent shall elect to apply to the Obligations. Notwithstanding
the foregoing, (a) so long as no Default or Event of Default has occurred and is continuing, Borrower shall have the option of applying
the proceeds of any casualty policy up to Five Hundred Thousand Dollars ($500,000) in the aggregate with respect to any property loss in
any one (1) year, toward the replacement or repair of destroyed or damaged property; provided that any such replaced or repaired property
(x) shall be of greater, equal, or like value as the replaced or repaired Collateral and (y) shall be deemed Collateral in which Agent and the
Lenders have been granted a first priority security interest, and (b) after the occurrence and during the continuance of a Default or Event
of Default, all proceeds payable under such casualty policy shall, at the option of Agent, be payable to Agent, for the ratable benefit of the
Lenders, on account of the Obligations.
(d)
Permitted Prepayment. Except as provided below, Borrower shall have no right to prepay the Credit
Extensions made in respect of a Credit Facility. For the applicable Credit Facility as specified in the Credit Facility Schedule therefor,
Borrower shall have the option to prepay the Prepayable Amount (as defined below) of such Credit Facility advanced by the Lenders
under this Agreement, provided Borrower (i) provides irrevocable written notice to Agent and each Lender of its election to prepay the
Prepayable Amount at least ten (10) Business Days prior to such prepayment, and (ii) pays to Agent, for payment to each applicable
Lender in accordance with its respective Pro Rata Share, on the date of such prepayment, an amount equal to the sum of (A) the
Prepayable Amount, plus accrued interest thereon, (B) any fees payable under the Fee Letters by reason of such prepayment, (C) the
Applicable Prepayment Fee as specified in the Credit Facility Schedule for the Credit Facility being prepaid, and (D) all Protective
Advances. The term “Prepayable Amount” means the lesser of (x) all of the Credit Extensions and all other Obligations under all Credit
Facilities and (y) a portion of the Credit Extensions and related Obligations in amounts of no less than Five Million Dollars ($5,000,000)
of principal being prepaid.
2.4
2.5
2.6
Reserved.
Reserved.
Interest and Payments; Administration.
(a)
Interest; Computation of Interest. Each Credit Extension shall bear interest on the outstanding principal
amount thereof from the date when made until paid in full at a rate per annum equal to the Applicable Interest Rate. Each Lender may,
upon the failure of Borrower to pay any fees or interest as required herein, capitalize such interest and fees and begin to accrue interest
thereon until paid in full, which such interest shall be at a rate per annum equal to the Applicable Interest Rate unless and until the
Default Rate shall otherwise apply. All other Obligations shall bear interest on the outstanding amount thereof from the date they first
become payable by Borrower under the Financing Documents until paid in full at a rate per annum equal to the Applicable Interest Rate
unless and until the Default Rate shall otherwise apply. Interest on the Credit Extensions and all fees payable under
2
the Financing Documents shall be computed on the basis of a three hundred sixty (360) day year and the actual number of days elapsed in
the period during which such interest accrues. In computing interest on any Credit Extension or other advance, the date of the making of
such Credit Extension or advance shall be included and the date of payment shall be excluded; provided, however, that if any Credit
Extension or advance is repaid on the same day on which it is made, such day shall be included in computing interest on such Credit
Extension or advance. As of each Applicable Interest Rate Determination Date, Agent shall determine (which determination shall, absent
manifest error in calculation, be final, conclusive and binding upon all parties) the interest rate that shall apply to the Credit Extensions.
(b)
Default Rate. Upon the election of Agent following the occurrence and during the continuance of an Event of
Default, Obligations shall bear interest at a rate per annum which is two hundred basis points (2.00%) above the rate that is otherwise
applicable thereto (the “Default Rate”). Payment or acceptance of the increased interest rate provided in this subsection is not a
permitted alternative to timely payment and shall not constitute a waiver of any Event of Default or otherwise prejudice or limit any
rights or remedies of Agent or the Lenders.
(c)
Payments Generally. Except as otherwise provided in this Agreement, including pursuant to Section 2.6(c), or
as otherwise directed by Agent, all payments in respect of the Obligations shall be made to Agent for the account of the applicable
Lenders in accordance with their Pro Rata Share. Payments of principal and interest in respect of each Credit Facility shall be made to
each applicable Lender identified on the applicable Credit Facility Schedule. All Obligations are payable upon demand of Agent in the
absence of any other due date specified herein. All fees payable under the Financing Documents shall be deemed non-refundable as of
the date paid. Any payment required to be made to Agent or a Lender (and any servicer or trustee on behalf of a securitization vehicle
designated by either) under this Agreement may be made by debit or automated clearing house payment initiated by Agent or such
Lender (or any servicer designated or trustee on behalf of a securitization vehicle on behalf of either) from any of Borrower’s deposit
accounts, including the Designated Funding Account, and Borrower hereby authorizes Agent and each Lender (or any servicer or trustee
on behalf of a securitization vehicle designated on behalf of either) to debit any such accounts for any amounts Borrower owes hereunder
when due.. Without limiting the foregoing, Borrower shall tender to Agent and the Lenders any authorization forms as Agent or any
Lender may require to implement such debit or automated clearing house payment. These debits or automated clearing house payments
shall not constitute a set-off. Payments of principal and/or interest received after 12:00 noon New York time are considered received at
the opening of business on the next Business Day. When a payment is due on a day that is not a Business Day, the payment is due the
next Business Day and additional fees or interest, as applicable, shall continue to accrue until paid. All payments to be made by Borrower
under any Financing Document shall be made without set-off, recoupment or counterclaim, in lawful money of the United States and in
immediately available funds. The balance of the Obligations, as recorded in Agent’s books and records at any time, shall be conclusive
and binding evidence of the amounts due and owing to Agent and the Lenders by each Borrower absent manifest error; provided,
however, that any failure to so record or any error in so recording shall not limit or otherwise affect any Borrower’s duty to pay all
amounts owing hereunder or under any Financing Document. Agent shall endeavor to provide Borrower with a monthly statement
regarding the Credit Extensions (but neither Agent nor any Lender shall have any liability if Agent shall fail to provide any such
statement). Unless Borrower notifies Agent of any objection to any such statement (specifically describing the basis for such objection)
within ninety (90) days after the date of receipt thereof, it shall be deemed final, binding and conclusive upon Borrower in all respects as
to all matters reflected therein.
(d)
Interest Payments; Maturity Date. Commencing on the first (1 ) Payment Date following the funding of a
Credit Extension, and continuing on the Payment Date of each successive month thereafter through and including the Maturity Date,
Borrower shall make monthly payments of interest, in arrears, calculated as set forth in this Section 2.6. All unpaid principal and accrued
interest is due and payable in full on the Maturity Date or any earlier date specified herein. If the Obligations are not paid in full on or
before the Maturity Date, all interest thereafter accruing shall be payable immediately upon accrual.
st
Lender, as applicable, for their own accounts and not for the benefit of any other Lenders, the fees set forth in the Fee Letters.
(e)
Fees. Borrower shall pay, as and when due and payable under the terms of the Fee Letters, to Agent and each
3
(f)
Protective Advances. Borrower shall pay to Agent for the account of the Lenders all Protective Advances
(including reasonable attorneys’ fees and reasonable expenses for documentation and negotiation of this Agreement and the other
Financing Documents) when due under any Financing Document (and in the absence of any other due date specified herein, such
Protective Advances shall be due upon demand).
(g)
Maximum Lawful Rate. In no event shall the interest charged hereunder with respect to the Obligations
exceed the maximum amount permitted under the Laws of the State of New York. Notwithstanding anything to the contrary in any
Financing Document, if at any time the rate of interest payable hereunder (the “Stated Rate”) would exceed the highest rate of interest
permitted under any applicable Law to be charged (the “Maximum Lawful Rate”), then for so long as the Maximum Lawful Rate would
be so exceeded, the rate of interest payable shall be equal to the Maximum Lawful Rate; provided, however, that if at any time thereafter
the Stated Rate is less than the Maximum Lawful Rate, Borrower shall, to the extent permitted by Law, continue to pay interest at the
Maximum Lawful Rate until such time as the total interest received is equal to the total interest which would have been received had the
Stated Rate been (but for the operation of this provision) the interest rate payable. Thereafter, the interest rate payable shall be the Stated
Rate unless and until the Stated Rate again would exceed the Maximum Lawful Rate, in which event this provision shall again apply. In
no event shall the total interest received by any Lender exceed the amount which it could lawfully have received, had the interest been
calculated for the full term hereof at the Maximum Lawful Rate. If, notwithstanding the prior sentence, any Lender has received interest
hereunder in excess of the Maximum Lawful Rate, such excess amount shall be applied to the reduction of the principal balance of such
Lender’s Credit Extensions or to other amounts (other than interest) payable hereunder, and if no such Credit Extensions or other amounts
are then outstanding, such excess or part thereof remaining shall be paid to Borrower. In computing interest payable with reference to the
Maximum Lawful Rate applicable to any Lender, such interest shall be calculated at a daily rate equal to the Maximum Lawful Rate
divided by the number of days in the year in which such calculation is made.
(h)
Taxes; Additional Costs.
(i)
Any and all payments by or on account of any obligation of Borrower hereunder shall be made without
deduction or withholding for any Taxes, except as required by applicable law. For purposes of this Section 2.6(h), the term “applicable law”
shall include FATCA. If any applicable law (as determined in the good faith discretion of an applicable Withholding Agent) requires the
deduction or withholding of any Tax from any such payment by a Withholding Agent, then the applicable Withholding Agent shall be
entitled to make such deduction or withholding and shall timely pay the full amount deducted or withheld to the relevant Governmental
Authority in accordance with applicable law and, if such Tax is an Indemnified Tax, then the sum payable by Borrower shall be increased as
necessary so that after such deduction or withholding has been made (including such deductions and withholdings applicable to additional
sums payable under this Section 2.6(h)) the applicable Recipient receives an amount equal to the sum it would have received had no such
deduction or withholding been made.
or at the option of Agent timely reimburse it for the payment of, any Other Taxes.
(ii)
Borrower shall timely pay to the relevant Governmental Authority in accordance with applicable law,
(iii)
Borrower shall indemnify each Recipient, within ten (10) Business Days after demand therefor, for the
full amount of any Indemnified Taxes (including Indemnified Taxes imposed or asserted on or attributable to amounts payable under this
Section 2.6(h)) payable or paid by such Recipient or required to be withheld or deducted from a payment to such Recipient and
any reasonable and documented out-of-pocket expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes
were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or
liability delivered to Borrower by a Lender (with a copy to Agent), or by Agent on its own behalf or on behalf of a Lender, shall be
conclusive absent manifest error.
(iv)
Each Lender shall severally indemnify Agent, within ten (10) days after demand therefor, for (i) any
Indemnified Taxes attributable to such Lender (but only to the extent that Borrower has not already indemnified Agent for such Indemnified
Taxes and without limiting the obligation of Borrower to do so), (ii) any Taxes attributable to such Lender’s failure to comply with the
provisions of Section 13.1(c) relating to the maintenance of a Participant Register and (iii) any Excluded Taxes attributable to such Lender,
in each case, that are payable or paid by Agent in connection with this Agreement or any Obligation, and any reasonable expenses arising
therefrom
4
or with respect thereto, whether or not such Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A
certificate as to the amount of such payment or liability delivered to any Lender by Agent shall be conclusive absent manifest error. Each
Lender hereby authorizes Agent to set off and apply any and all amounts at any time owing to such Lender pursuant to this Agreement or
otherwise payable by Agent to the Lender from any other source against any amount due to Agent under this paragraph (iv).
As soon as practicable after any payment of Taxes by Borrower to a Governmental Authority pursuant
to this Section 2.6(h), upon Agent’s reasonable request, Borrower shall deliver to Agent the original or a certified copy of a receipt issued
by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment
reasonably satisfactory to Agent.
(v)
(vi)
Any Lender that is entitled to an exemption from or reduction of withholding Tax with respect to
payments made in connection with this Agreement or any Obligation shall deliver to Borrower and Agent, at the time or times prescribed by
applicable Law or reasonably requested by Borrower or Agent, such properly completed and executed documentation reasonably requested
by Borrower or Agent as will permit such payments to be made without withholding or at a reduced rate of withholding. In addition, any
Lender, if reasonably requested by Borrower or Agent, shall deliver such other documentation prescribed by applicable law or reasonably
requested by Borrower or Agent as will enable Borrower or Agent to determine whether or not such Lender is subject to backup
withholding or information reporting requirements. Notwithstanding anything to the contrary in the preceding two (2) sentences, the
completion, execution and submission of such documentation (other than such documentation set forth in Section 2.6(h)(vii)(A), (vii)(B)
and (vii)(D) below) shall not be required if in the Lender’s reasonable judgment such completion, execution or submission would subject
such Lender to any material unreimbursed cost or expense or would materially prejudice the legal or commercial position of such Lender.
(vii)
Without limiting the generality of the foregoing,
any Lender that is a U.S. Person shall deliver to Borrower and Agent on or prior to the date on
which such Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of Borrower or
Agent), executed copies of IRS Form W-9 certifying that such Lender is exempt from U.S. federal backup withholding tax;
(A)
any Foreign Lender shall, to the extent it is legally entitled to do so, deliver to Borrower and
Agent (in such number of copies as shall be requested by the recipient) on or prior to the date on which such Foreign Lender becomes a
Lender under this Agreement (and from time to time thereafter upon the reasonable request of Borrower or Agent), whichever of the
following is applicable:
(B)
in the case of a Foreign Lender claiming the benefits of an income tax treaty to which
the United States is a party (x) with respect to payments of interest under this Agreement or any Financing Document, executed copies of
IRS Form W-8BEN-E or W-8BEN, as applicable, establishing an exemption from, or reduction of, U.S. federal withholding Tax pursuant to
the “interest” article of such tax treaty and (y) with respect to any other applicable payments under this Agreement or any other Financing
Document, IRS Form W-8BEN-E or W-8BEN, as applicable, establishing an exemption from, or reduction of, U.S. federal withholding Tax
pursuant to the “business profits” or “other income” article of such tax treaty;
(1)
(2)
executed copies of IRS Form W-8ECI;
in the case of a Foreign Lender claiming the benefits of the exemption for portfolio
interest under Section 881(c) of the IRC, (x) executed copies of IRS Form W-8BEN-E or W-8BEN, as applicable and (y) a certification
reasonably satisfactory to Borrower and Agent to the effect that such Foreign Lender is not a “bank” within the meaning of Section 881(c)
(3)(A) of the IRC, a “10 percent shareholder” of Borrower within the meaning of Section 881(c)(3)(B) of the IRC, or a “controlled foreign
corporation” related to Borrower as described in Section 881(c)(3)(C) of the IRC, together with such Other Tax Certification as Borrower or
Agent may reasonably request from time to time; or
(3)
5
to the extent a Foreign Lender is not the beneficial owner, executed copies of IRS
Form W-8IMY, accompanied by IRS Form W-8ECI, IRS Form W-8BEN-E or W-8BEN, as applicable, IRS Form W-9, and/or such Other
Tax Certification from each beneficial owner as Borrower or Agent may reasonably request, as applicable; provided that if the Foreign
Lender is a partnership and one (1) or more direct or indirect partners of such Foreign Lender are claiming the portfolio interest exemption,
such Foreign Lender may provide such Other Tax Certification as may be reasonably required by Borrower or Agent on behalf of each such
direct and indirect partner;
(4)
(C)
any Foreign Lender shall, to the extent it is legally entitled to do so, deliver to Borrower and
Agent (in such number of copies as shall be requested by the recipient) on or prior to the date on which such Foreign Lender becomes a
Lender under this Agreement (and from time to time thereafter upon the reasonable request of Borrower or Agent), executed copies of any
other form prescribed by applicable law as a basis for claiming exemption from or a reduction in U.S. federal withholding Tax, duly
completed, together with such Other Tax Certification as may be prescribed by applicable law to permit Borrower or Agent to determine the
withholding or deduction required to be made; and
(D)
if a payment made to Agent or a Lender under any this Agreement would be subject to U.S.
federal withholding Tax imposed by FATCA if Agent or such Lender were to fail to comply with the applicable reporting requirements of
FATCA (including those contained in Section 1471(b) or 1472(b) of the IRC, as applicable), Agent or such Lender shall deliver to Borrower
and Agent on or prior to the date on which Agent or such Lender becomes a Lender under this Agreement at the time or times prescribed by
law and at such time or times reasonably requested by Borrower or Agent such documentation prescribed by applicable law (including as
prescribed by Section 1471(b)(3)(C)(i) of the IRC) and such Other Tax Certification reasonably requested by Borrower or Agent as may be
necessary for Borrower and Agent to comply with their obligations under FATCA and to determine that Agent or such Lender has complied
with Agent or such Lender’s obligations under FATCA or to determine the amount to deduct and withhold, if any, from such
payment. Solely for purposes of this clause (D), “FATCA” shall include any amendments made to FATCA after the date of this Agreement.
Agent and each Lender agrees that if any form or certification it previously delivered pursuant to this Section 2.6(h)(vi), (vii) or
(viii) expires or becomes obsolete or inaccurate in any respect, it shall promptly update such form or certification or promptly notify
Borrower and Agent, if applicable, in writing of its legal inability to do so.
On or prior to the date Agent becomes a party to this Agreement, Agent shall, in the event that Agent
is a U.S. Person, deliver an IRS Form W-9 to Borrower, and in the event Agent is not a U.S. Person, deliver to Borrower the appropriate
IRS Form W-8 certifying Agent’s exemption, if any, from U.S. withholding Taxes with respect to amounts payable under this Agreement.
(viii)
(ix)
If any party determines, in its sole discretion exercised in good faith, that it has received a refund of
any Taxes as to which it has been indemnified pursuant to this Section 2.6(h) (including by the payment of additional amounts pursuant to
this Section 2.6(h)), it shall pay to the indemnifying party an amount equal to such refund (but only to the extent of indemnity payments
made under this Section with respect to the Taxes giving rise to such refund), net of all reasonable and documented out-of-pocket expenses
(including Taxes) of such indemnified party and without interest (other than any interest paid by the relevant Governmental Authority with
respect to such refund). Such indemnifying party, upon the request of such indemnified party, shall repay to such indemnified party the
amount paid over pursuant to this paragraph (h) (plus any penalties, interest or other charges imposed by the relevant Governmental
Authority) in the event that such indemnified party is required to repay such refund to such Governmental Authority. Notwithstanding
anything to the contrary in this paragraph (h), in no event will the indemnified party be required to pay any amount to an indemnifying party
pursuant to this paragraph (h) the payment of which would place the indemnified party in a less favorable net after-Tax position than the
indemnified party would have been in if the Tax subject to indemnification and giving rise to such refund had not been deducted, withheld
or otherwise imposed and the indemnification payments or additional amounts with respect to such Tax had never been paid. This
paragraph shall not be construed to require any indemnified party to make available its Tax returns (or any other information relating to its
Taxes that it deems confidential) to the indemnifying party or any other Person.
6
(x)
If any Lender shall determine in its commercially reasonable judgment that the adoption or taking
effect of, or any change in, any applicable Law regarding capital adequacy, in each instance, after the Closing Date, or any change after the
Closing Date in the interpretation, administration or application thereof by any Governmental Authority, central bank or comparable agency
charged with the interpretation, administration or application thereof, or the compliance by any Lender or any Person controlling such
Lender with any request, guideline or directive regarding capital adequacy (whether or not having the force of law) of any such
Governmental Authority, central bank or comparable agency adopted or otherwise taking effect after the Closing Date, has or would have
the effect of reducing the rate of return on such Lender’s or such controlling Person’s capital as a consequence of such Lender’s obligations
hereunder to a level below that which such Lender or such controlling Person could have achieved but for such adoption, taking effect,
change, interpretation, administration, application or compliance (taking into consideration such Lender’s or such controlling Person’s
policies with respect to capital adequacy) then from time to time, upon written demand by such Lender (which demand shall be
accompanied by a statement setting forth the basis for such demand and a calculation of the amount thereof in reasonable detail, a copy of
which shall be furnished to Agent), Borrower shall promptly pay to such Lender such additional amount as will compensate such Lender or
such controlling Person for such reduction; provided, however, that notwithstanding anything in this Agreement to the contrary, (A) the
Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines or directives thereunder or issued in
connection therewith and (B) all requests, rules, guidelines or directives promulgated by the Bank for International Settlements, the Basel
Committee on Banking Supervision (or any successor or similar authority) or the United States or foreign regulatory authorities, in each
case pursuant to Basel III, shall in each case be deemed to be a “change in applicable Law”, regardless of the date enacted, adopted or
issued.
(xi)
If any Lender requires compensation under this subsection (h), or requires any Borrower to pay any
additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to this subsection (h), then, upon
the written request of Borrower, such Lender shall use reasonable efforts to designate a different lending office for funding or booking its
Credit Extensions hereunder or to assign its rights and obligations hereunder (subject to the terms of this Agreement) to another of its
offices, branches or affiliates, if, in the judgment of such Lender, such designation or assignment (A) would eliminate or materially reduce
amounts payable pursuant to any such subsection, as the case may be, in the future, and (B) would not subject such Lender to any
unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender (as determined in its sole discretion). Borrower
hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment.
or any assignment of rights by, or the replacement of, a Lender, and the repayment, satisfaction or discharge of all Obligations hereunder.
(xii)
Each party’s obligations under this Section 2.6(h) shall survive the resignation or replacement of Agent
(i)
Administrative Fees and Charges.
(i)
Subject to Section 6.2(c), Borrower shall pay to Agent, for its own account and not for the benefit of
any other Lenders, all reasonable and documented out-of-pocket fees and expenses in connection with audits and inspections of the books
and records of the Credit Parties, audits, valuations or appraisals of the Collateral, audits of Borrower’s compliance with applicable Laws
and such other matters as Agent shall deem appropriate, which shall be due and payable within thirty (30) days following the date of
issuance by Agent of a written request for payment thereof to any Borrower.
If payments of principal or interest due on the Obligations, or any other amounts due hereunder or
under the other Financing Documents, are not timely made and remain overdue for a period of five (5) Business Days, Borrower, without
notice or demand by Agent, promptly shall pay to Agent, for its own account and not for the benefit of any other Lenders, as additional
compensation to Agent in administering the Obligations, an amount equal to two percent (2.0%) of each delinquent payment.
(ii)
2.7
Secured Promissory Notes. At the election of any Lender made as to each Credit Facility for which it has made Credit
Extensions, each Credit Facility shall be evidenced by one (1) or more secured promissory notes in form and substance reasonably
satisfactory to Agent and the Lenders (each a “Secured Promissory Note”). Upon receipt of an affidavit of an officer of a Lender as to the
loss, theft, destruction, or mutilation of its Secured Promissory
7
Note, Borrower shall issue, in lieu thereof, a replacement Secured Promissory Note in the same principal amount thereof and of like tenor.
3.
CONDITIONS OF CREDIT EXTENSIONS
3.1
Conditions Precedent to Initial Credit Extension. Each Lender’s obligation to make the initial advance in respect of a
Credit Facility is subject to the condition precedent that Agent shall consent to or shall have received, in form and substance satisfactory to
Agent, such documents, and completion of such other matters, as Agent may reasonably deem necessary or appropriate, including, without
limitation, all items listed on the Closing Deliveries Schedule attached hereto.
3.2
Conditions Precedent to all Credit Extensions. The obligation of each Lender to make each Credit Extension, including
the initial Credit Extension, is subject to the following conditions precedent:
Facility Schedule, if any, in each case each in form and substance satisfactory to Agent and each Lender;
(a)
satisfaction of all Applicable Funding Conditions for the applicable Credit Extension as set forth in the Credit
(b)
timely receipt by Agent and each Lender of an executed Credit Extension Form in the form attached hereto;
(c)
for Credit Extensions made on the Closing Date, the representations and warranties in Article 5 and
elsewhere in the Financing Documents shall be true, correct and complete in all respects on the Closing Date; provided, however, that
those representations and warranties expressly referring to a specific date shall be true, correct and complete in all material respects as of
such date; provided, further, that such materiality qualifier shall not be applicable to any representations and warranties that already are
qualified or modified by materiality in the text thereof; and
(i)
for Credit Extensions made after the Closing Date, if any, the representations and warranties in Article
5 and elsewhere in the Financing Documents shall be true, correct and complete in all material respects on the date of the Credit Extension
Form and on the Funding Date of each Credit Extension; provided, however, that such materiality qualifier shall not be applicable to any
representations and warranties that already are qualified or modified by materiality in the text thereof; and provided, further that those
representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such
date. Each Credit Extension is Borrower’s representation and warranty on that date that the representations and warranties in Article 5 and
elsewhere in the Financing Documents remain true, accurate and complete in all material respects; provided, however, that such materiality
qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text
thereof; and provided, further that those representations and warranties expressly referring to a specific date shall be true, accurate and
complete in all material respects as of such date;
(d)
no Default or Event of Default shall have occurred and be continuing or result from the Credit Extension;
Credit Extensions, including pursuant to the Fee Letters;
(e)
payment in full of the fees owed to Agent and the Lenders in connection with the making of the applicable
(f)
Agent shall be satisfied with the results of any searches conducted under Section 3.5;
receipt by Agent of such evidence as Agent, in its good faith business judgment, shall reasonably request to
confirm that the deliveries made in Section 3.1 remain current, accurate and in full force and effect, or if not, updates thereto, each in
form and substance satisfactory to Agent; and
(g)
circumstance that could reasonably be expected to result in a Material Adverse Change.
(h)
as determined in such Lender’s sole but reasonable discretion, there has not occurred any fact, event or
8
3.3
Method of Borrowing. Each Credit Extension in respect of each Credit Facility shall be in an amount at least equal to the
applicable Minimum Credit Extension Amount for such Credit Facility as set forth in the Credit Facility Schedule or such lesser amount as
shall remain undisbursed under the Applicable Commitments for such Credit Facility. The date of funding for any requested Credit
Extension shall be a Business Day. To obtain a Credit Extension, Borrower shall deliver to Agent a completed Credit Extension Form
executed by a Responsible Officer. Agent may rely on any notice given by a person whom Agent reasonably believes is a Responsible
Officer or designee thereof. Agent and the Lenders shall have no duty to verify the authenticity of any such notice.
3.4
Funding of Credit Facilities. In Agent’s discretion, Credit Extensions may be funded by Agent on behalf of the Lenders
or by the Lenders directly. If Agent elects to fund any Credit Extension on behalf of the Lenders. Upon the terms and subject to the
conditions set forth in this Agreement, each Lender, severally and not jointly, shall make available to Agent its Pro Rata Share of the
requested Credit Extension, in lawful money of the United States of America in immediately available funds, prior to 11:00 a.m. (New York
time) on the specified date for the Credit Extension. Agent (or if Agent elects to have each Lender fund its Credit Extensions to Borrower
directly, each Lender) shall, unless it shall have determined that one of the conditions set forth in Section 3.1 or 3.2, as applicable, has not
been satisfied, by 2:00 p.m. (New York time) on the specified date for the Credit Extension, credit the amounts received by it in like funds
to Borrower by wire transfer to the Designated Funding Account (or to the account of Borrower in respect of the Obligations, if the Credit
Extension is being made to pay an Obligation of Borrower). A Credit Extension made prior to the satisfaction of any conditions set forth in
Section 3.1 or 3.2 shall not constitute a waiver by Agent or the Lenders of Borrower’s obligation to satisfy such conditions, and any such
Credit Extension made in the absence of such satisfaction shall be made in each Lender’s discretion.
3.5
Searches. Before the Closing Date, and thereafter (as and when determined by Agent in its reasonable discretion), Agent
shall have the right to perform, all at Borrower’s expense, the searches described in clauses (a), (b), and (c) below against Borrower and any
other Credit Party, the results of which are to be consistent with Borrower’s representations and warranties under this Agreement and the
reasonably satisfactory results of which shall be a condition precedent to all Credit Extensions requested by Borrower: (a) title
investigations, UCC searches and fixture filings searches and the equivalent thereof in any foreign jurisdiction; (b) judgment, pending
litigation, federal tax lien, personal property tax lien, and corporate and partnership tax lien searches, in each jurisdiction searched under
clause (a) above; and (c) searches of applicable corporate, limited liability company, partnership and related records to confirm the
continued existence, organization and good standing of the applicable Person and the exact legal name under which such Person is
organized.
4.
CREATION OF SECURITY INTEREST
4.1
Grant of Security Interest. Borrower hereby grants Agent, for the ratable benefit of the Lenders, to secure the payment
and performance in full of all of the Obligations, a continuing security interest in, and pledges to Agent, for the ratable benefit of the
Lenders, the Collateral, wherever located, whether now owned or hereafter acquired or arising, and all proceeds and products
thereof. Borrower represents, warrants, and covenants that the security interest granted herein is and shall at all times continue to be a first
priority perfected security interest in the Collateral, subject only to Permitted Liens that may have priority by operation of applicable Law
or by the terms of a written intercreditor or subordination agreement entered into by Agent.
4.2
Representations and Covenants.
(a)
As of the Closing Date , Borrower has no ownership interest in any Chattel Paper, letter of credit rights,
commercial tort claims, Instruments, documents or investment property (other than as disclosed on the Disclosure Schedule attached
hereto).
(b)
Borrower shall promptly (and in any event within ten (10) Business Days of acquiring any of the following)
deliver to Agent all tangible Chattel Paper and all Instruments and documents with an aggregate value in excess of One Million Dollars
($1,000,000) owned at any time by any Borrower and constituting part of the Collateral duly endorsed and accompanied by duly executed
instruments of transfer or assignment, all in form and substance satisfactory to Agent. Borrower shall provide Agent with “control” (as
defined in the Code) of all electronic Chattel Paper owned by any Borrower and constituting part of the Collateral by having Agent
identified as the assignee on the records pertaining to the single authoritative copy thereof and otherwise complying with the applicable
elements
9
of control set forth in the Code. Borrower also shall deliver to Agent all security agreements securing any such Chattel Paper and securing
any such Instruments. Borrower will mark conspicuously all such Chattel Paper and all such Instruments and Documents with a legend, in
form and substance satisfactory to Agent, indicating that such Chattel Paper and such Instruments and Documents are subject to the security
interests and Liens in favor of Agent created pursuant to this Agreement and the Financing Documents.
(c)
Borrower shall promptly (and in any event within ten (10) Business Days of acquiring any of the following)
deliver to Agent all letters of credit with an aggregate value in excess of One Million Dollars ($1,000,000) on which any Borrower is the
beneficiary and which give rise to letter of credit rights owned by such Borrower which constitute part of the Collateral in each case duly
endorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance satisfactory to
Agent. Borrower shall take any and all actions as may be necessary or desirable, or that Agent may request, from time to time, to cause
Agent to obtain exclusive “control” (as defined in the Code) of any such letter of credit rights in a manner acceptable to Agent.
(d)
Borrower shall promptly (and in any event within 10 Business Days) advise Agent upon any Borrower
becoming aware that it has any interests in any commercial tort claim that constitutes part of the Collateral, which may reasonably
exceed One Million Dollars ($1,000,000), which such notice shall include descriptions of the events and circumstances giving rise to such
commercial tort claim and the dates such events and circumstances occurred, the potential defendants with respect such commercial tort
claim and any court proceedings that have been instituted with respect to such commercial tort claims, and Borrower shall, with respect to
any such commercial tort claim, execute and deliver to Agent such documents as Agent shall request to perfect, preserve or protect the
Liens, rights and remedies of Agent with respect to any such commercial tort claim.
(e)
No Inventory or other Collateral shall at any time be in the possession or control of any warehouse, consignee,
bailee or any of Borrower’s agents without prior written notice to Agent and the receipt by Agent, if Agent has so requested, of warehouse
receipts, consignment agreements or bailee lien waivers (as applicable) satisfactory to Agent prior to the commencement of such possession
or control except for (w) any location where Borrower maintains Inventory or other Collateral with a value of less than One Million Dollars
($1,000,000), (x) locations outside of the United States, (y) clinical trial sites, and (z) contract manufacturers. Borrower shall, upon the
request of Agent, notify any such warehouse, consignee, bailee, agent of the security interests and Liens in favor of Agent created pursuant
to this Agreement and the Financing Documents, instruct such Person to hold all such Collateral for Agent’s account subject to Agent’s
instructions and shall, in Agent’s discretion, obtain an Access Agreement or other acknowledgement from such Person that such Person
holds the Collateral for Agent’s benefit.
(f)
Upon the reasonable request of Agent, Borrower shall promptly deliver to Agent any and all certificates of
title, applications for title or similar evidence of ownership of all such tangible personal property and shall cause Agent to be named as
lienholder on any such certificate of title or other evidence of ownership. Borrower shall not permit any such tangible personal
property with an aggregate value in excess of One Million Dollars ($1,000,000) to become fixtures to real estate unless such real estate is
subject to a Lien in favor of Agent.
(g)
As of the Closing Date and each subsequent date that the representations and warranties under this Agreement
are remade, all Deposit Accounts, Securities Accounts, Commodity Accounts or other bank accounts or investment accounts owned by
Borrower, together with the purpose of such accounts and the financial institutions at which such accounts reside, are listed on the
Disclosure Schedule.
(h)
Each Borrower hereby authorizes Agent to file without the signature of such Borrower one or more UCC
financing statements relating to its Liens on all or any part of the Collateral, which financing statements may list Agent as the “secured
party” and such Borrower as the “debtor” and which describe and indicate the collateral covered thereby as all or any part of the Collateral
under the Financing Documents, in such jurisdictions as Agent from time to time determines are appropriate, and to file without the
signature of such Borrower any continuations of or corrective amendments to any such financing statements, in any such case in order for
Agent to perfect, preserve or protect the Liens, rights and remedies of Agent with respect to the Collateral. Each Borrower also ratifies its
authorization for Agent to have filed in any jurisdiction any initial financing statements or amendments thereto if filed prior to the date
hereof. Any financing statement may include a notice that any disposition of the Collateral in contravention of this Agreement, by either
Borrower or any other Person, shall be deemed to violate the rights of Agent and the Lenders under the Code.
10
(i)
As of the Closing Date, no Borrower holds, and after the Closing Date Borrower shall promptly notify Agent
in writing upon creation or acquisition by any Borrower of, any Collateral which constitutes a claim against any Governmental Authority,
including, without limitation, the federal government of the United States or any instrumentality or agency thereof, the assignment of which
claim is restricted by any applicable Law, including, without limitation, the federal Assignment of Claims Act and any other comparable
Law. Upon the request of Agent, Borrower shall take such steps as may be necessary or desirable, or that Agent may request, to comply
with any such applicable Law.
(j)
Borrower shall furnish to Agent from time to time any statements and schedules further identifying or
describing the Collateral and any other information, reports or evidence concerning the Collateral as Agent may reasonably request from
time to time.
5.
REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows on the Closing Date, on the date of each Credit Extension, and on such other dates
when such representations and warranties under this Agreement are made or deemed to be made:
5.1
Due Organization, Authorization: Power and Authority.
(a)
Each Credit Party and each Subsidiary is duly organized, validly existing and in good standing (if applicable in
such entity’s jurisdiction of formation) as a Registered Organization in its respective jurisdiction of formation. Each Credit Party and each
Subsidiary has the power to own its assets and is qualified and licensed to do business and is in good standing (if applicable in such
jurisdiction) in any jurisdiction in which the conduct of its business or its ownership of property requires that it be qualified except where
the failure to do so could not reasonably be expected to have a Material Adverse Change. The Financing Documents have been duly
authorized, executed and delivered by each Credit Party and constitute legal, valid and binding agreements enforceable in accordance with
their terms. The execution, delivery and performance by each Credit Party of each Financing Document executed or to be executed by it is
in each case within such Credit Party’s powers.
(b)
The execution, delivery and performance by each Credit Party of the Financing Documents to which it is a
party do not (i) conflict with any of such Credit Party’s organizational documents; (ii) contravene, conflict with, constitute a default under
or violate any Law in any material respect; (iii) contravene, conflict or violate any applicable order, writ, judgment, injunction, decree,
determination or award of any Governmental Authority by which such Credit Party or any of its property or assets may be bound or
affected; (iv) require any action by, filing, registration, or qualification with, or Required Permit from, any Governmental Authority (except
such Required Permits which have already been obtained and are in full force and effect); or (v) constitute a default under or conflict with
any Material Agreement. No Credit Party is in default under any agreement to which it is a party or by which it is bound in which the
default would reasonably be expected to have a Material Adverse Change.
5.2
Litigation. Except as disclosed on the Disclosure Schedule or, after the Closing Date, pursuant to Section 6.7, there are
no actions, suits, proceedings or investigations pending or, to the knowledge of the Responsible Officers, threatened in writing by or against
any Credit Party which involves the possibility of any judgment or liability of more than One Million Dollars ($1,000,000). There are no
actions, suits, proceedings or investigations pending or, to the knowledge of the Responsible Officers, threatened in writing by or against
any Credit Party that could result in a Material Adverse Change, or which questions the validity of the Financing Documents or actions to
be taken pursuant to the Financing Documents.
5.3
No Material Deterioration in Financial Condition; Financial Statements. All financial statements for the Credit Parties
delivered to Agent or any Lender fairly present, in conformity with GAAP (and as to unaudited financial statements, subject to normal year-
end adjustments and the absence of footnote disclosures), in all material respects the consolidated financial condition and consolidated
results of operations of such Credit Party. There has been no material deterioration in the consolidated financial condition of any Credit
Party from the most recent financial statements and projections submitted to Agent or any Lender. There has been no material adverse
deviation from the most recent annual financial projections or business plan of Borrower delivered to Agent and the Lenders.
11
5.4
Solvency. The fair salable value of (a) Protagonist Therapeutics’s and (b) Protagonist Therapeutics’s and its Subsidiaries
(taken as a whole) assets exceeds, in each case, the fair value of their liabilities. After giving effect to the transactions described in this
Agreement, (i) neither Protagonist Therapeutics nor Protagonist Therapeutics and its Subsidiaries (taken as a whole) is left with
unreasonably small capital in relation to their business as presently conducted, and (ii) each of (x) Protagonist Therapeutics and (y)
Protagonist Therapeutics and its Subsidiaries (taken as a whole) are able to pay, in each case, their debts (including trade debts) as they
mature.
5.5
Subsidiaries; Investments; Margin Stock. Borrower and its Subsidiaries do not own any stock, partnership interest or
other equity securities, except for Permitted Investments. Without limiting the foregoing, Borrower and its Subsidiaries do not own or hold
any Margin Stock.
5.6
Tax Returns and Payments; Pension Contributions. Except as disclosed on the Perfection Certificate delivered to Agent
on the Closing Date, each Credit Party and its Subsidiaries has timely filed all required federal tax returns and all other material tax returns
and reports, and, except for those Taxes that are subject to a Permitted Contest, each Credit Party and its Subsidiaries has timely paid all
federal Taxes and all other material Taxes, assessments, deposits and contributions owed by such Credit Party or Subsidiary, as applicable.
For purposes of this Section 5.6, any foreign, state or local Taxes, assessment, deposit or contribution, and any return with respect thereto,
shall be considered “material” if it is equal to or greater than One Hundred Thousand Dollars ($100,000) in the aggregate for all Taxes;
provided that all foreign, state or local Tax, assessment, deposit or contribution, and any return with respect thereto shall be considered
“material” if the nonpayment thereof or failure to file could be reasonably be expected to result in a Material Adverse Change. Other than
as disclosed to Agent in accordance with Section 6.2 or on the Perfection Certificate on the Closing Date, Borrower is unaware of any
claims or adjustments proposed for any prior tax years of any Credit Party or any of its Subsidiaries which could result in additional Taxes
becoming due and payable by such Credit Party. No Credit Party nor any trade or business (whether or not incorporated) that is under
common control with any Credit Party within the meaning of Section 414(b) or (c) of the IRC (and Sections 414(m) and (o) of the IRC for
purposes of the provisions relating to Section 412 of the IRC) or Section 4001 of ERISA (an “ERISA Affiliate”) (i) has failed to satisfy the
“minimum funding standards” (as defined in Section 412 of or Section 302 of ERISA), whether or not waived, with respect to any Pension
Plan, (ii) has incurred liability with respect to the withdrawal or partial withdrawal of any Credit Party or ERISA Affiliate from any Pension
Plan or incurred a cessation of operations that is treated as a withdrawal, (iii) has incurred any liability under Title IV of ERISA (other than
for PBGC premiums due but not delinquent under Section 4007 of ERISA), (iv) has had any “reportable event” as defined in Section
4043(c) of ERISA (or the regulations issued thereunder) (other than an event for which the thirty (30) day notice requirement is waived)
occur with respect to any Pension Plan or (v) failed to maintain (1) each “plan” (as defined by Section 3(3) of ERISA) in all material
respects with the applicable provisions of ERISA, the IRC and other federal or state laws, and (2) the tax qualified status of each plan (as
defined above) intended to be so qualified.
5.7
Intellectual Property and License Agreements. A list of all Registered Intellectual Property of each Credit Party and all
material in-bound license or sublicense agreements, exclusive out-bound license or sublicense agreements, or other material rights of any
Credit Party to use Intellectual Property (but excluding in-bound licenses of over-the-counter software that is commercially available to the
public), as of the Closing Date and, as updated pursuant to Section 6.14, is set forth on the Intangible Assets Schedule. Such Intangible
Assets Schedule shall be prepared by Borrower in the form provided by Agent and contain all information required in such form. Except
for Permitted Licenses, each Credit Party is the sole owner of, or has valid license rights to, its Intellectual Property free and clear of any
Liens other than Permitted Liens. Each Patent is valid and enforceable and no part of the Material Intangible Assets has been judged
invalid or unenforceable, in whole or in part, and to the best of Borrower’s knowledge, no claim has been made that any part of the
Intellectual Property materially violates the rights of any third party.
5.8
Regulatory Status.
(a)
All of Borrower’s Products and material Regulatory Required Permits are listed on the Products Schedule
and Required Permits Schedule, respectively (as updated from time to time pursuant to Section 6.14), and Borrower has delivered to
Agent a copy of all Regulatory Required Permits reasonably requested by Agent as of the date hereof or to the extent requested by Agent
pursuant to Section 6.16.
12
such violation could not reasonably be expected to result in a Material Adverse Change.
(b)
None of the Borrowers or any Subsidiary thereof are in violation of any Healthcare Law, except where any
(c)
None of the Borrower’s or its Subsidiaries’ officers, directors, employees, or their agents or, to Borrower’s
knowledge, any of its affiliates has made an untrue statement of material fact or fraudulent statement to the FDA or failed to disclose a
material fact required to be disclosed to the FDA, committed an act, made a statement, or failed to make a statement that could reasonably
be expected to provide a basis for the FDA to invoke its policy respecting “Fraud, Untrue Statements of Material Facts, Bribery, and
Illegal Gratuities,” set forth in 56 Fed. Regulation 46191 (September 10, 1991).
(d)
With respect to each Product, (i) Borrower and its Subsidiaries have received, and such Product is the subject
of, all Regulatory Required Permits needed in connection with the testing, manufacture, marketing or sale of such Product as currently
being conducted by or on behalf of Borrower, and have provided Agent and each Lender with all material notices and other material
information required by Section 6.16, (ii) such Product is being tested, manufactured, marketed or sold, as the case may be, in material
compliance with all applicable Laws and Regulatory Required Permits.
(e)
As of the Closing Date, there have been no Regulatory Reporting Events.
5.9
No Default. No Event of Default, or to such Borrower’s knowledge, Default, has occurred and is continuing. No Credit
Party is in breach or default under or with respect to any contract, agreement, lease or other instrument to which it is a party or by which its
property is bound or affected, which breach or default could reasonably be expected to have a Material Adverse Change
5.10
Accuracy of Schedules and Perfection Certificate. All information set forth in the Disclosure Schedule, Intangible
Assets Schedule, the Required Permits Schedule and the Products Schedule is true, accurate and complete in all material respects as of
the Closing Date, the date of delivery of the last Compliance Certificate and any other subsequent date on which Borrower is requested to
update such certificate. All information set forth in the Perfection Certificate is true, accurate and complete in all material respects as of the
Closing Date, the date of each Credit Extension and each other subsequent date on which Borrower delivers an updated Perfection
Certificate pursuant to Agent’s request. Notwithstanding the foregoing, Borrower shall not be required to update information on any of the
Disclosure Schedule, Intangible Assets Schedule, the Required Permits Schedule and the Products Schedule, except as expressly required
by the Financing Documents.
6.
AFFIRMATIVE COVENANTS
Borrower covenants and agrees as follows:
6.1
Organization and Existence; Government Compliance.
(a)
Except as expressly permitted pursuant to Section 7.3, each Credit Party and its Subsidiaries shall maintain its
legal existence and good standing in its respective jurisdiction of formation and shall maintain qualification in each jurisdiction in which the
failure to so qualify could reasonably be expected to have a Material Adverse Change. If a Credit Party is not now a Registered
Organization but later becomes one, Borrower shall promptly notify Agent of such occurrence and provide Agent with such Credit Party’s
organizational identification number.
(b)
Each Credit Party and its Subsidiaries shall comply with all Laws, ordinances and regulations to which it or its
business locations are subject, the noncompliance with which could reasonably be expected to result in a Material Adverse Change. Each
Credit Party shall, and shall cause each Subsidiary to, obtain and keep in full force and effect and comply with all of the Required Permits,
except where failure to have or maintain compliance with or effectiveness of such Required Permit could not reasonably be expected to
result in a Material Adverse Change. Upon request of Agent or any Lender, each Credit Party shall promptly (and in any event within
five (5) Business Days of such request) provide copies of any such obtained Required Permits to Agent. Borrower shall notify Agent within
five (5) Business Days (but in any event prior to Borrower submitting any requests for Credit
13
Extensions or release of any reserves) of the occurrence of any facts, events or circumstances known to a Borrower, whether threatened in
writing, existing or pending, that could cause any Required Permit to become materially limited, suspended or revoked. Notwithstanding
the foregoing, each Credit Party shall comply with Section 6.16 as it relates to Regulatory Required Permits and to the extent that there is a
conflict between this Section and Section 6.16 as it relates to Regulatory Required Permits, Section 6.16 shall govern.
6.2
Financial Statements, Reports, Certificates.
(a)
Each Credit Party shall deliver to Agent and each Lender: (i) as soon as available, but no later than forty-five
(45) days after the last day of each quarter, a company prepared consolidated balance sheet, income statement and cash flow statement
covering such Credit Party’s consolidated operations for such quarter certified by a Responsible Officer and in a form acceptable to Agent
and each Lender; (ii) as soon as available, but no later than ninety (90) days after the last day of a Credit Party’s fiscal year, audited
consolidated financial statements prepared under GAAP, consistently applied, together with an unqualified opinion (other than a going
concern qualification based solely on Borrower having negative profits or a determination that Borrower has less than twelve months
liquidity) on the financial statements from an independent certified public accounting firm acceptable to Agent and each Lender in its
reasonable discretion, which is Pricewaterhouse Coopers LLP as of the Closing Date; (iii) as soon as available after approval thereof by
such Credit Party’s governing board, but no later than forty-five (45) days after the last day of such Credit Party’s fiscal year, and as
amended and/or updated, such Credit Party’s financial projections for the current fiscal year; (iv) within five (5) days of delivery, copies of
all statements, reports and notices made available to all of such Credit Party’s security holders or to any holders of Subordinated Debt; (v)
within five (5) days of filing, all reports on Form 10-K, 10-Q and 8‑K filed with the Securities and Exchange Commission (“SEC”) or a
link thereto on such Credit Party’s or another website on the Internet; (vi) as soon as available, but no later than forty-five (45) days after
the last day of each month, copies of the month-end account statements for each Collateral Account maintained by a Credit Party and each
deposit account and securities account maintained by a Restricted Foreign Subsidiary, which statements may be provided to Agent and each
Lender by Borrower or directly from the applicable institution(s); (vii) promptly (and in any event within ten (10) days of any request
therefor) such readily available board reviewed budgets, sales projections, operating plans, financial information and other information,
reports or statements regarding the Credit Parties or their respective businesses, contractors and subcontractors reasonably requested by
Agent or any Lender; and (viii) within ten (10) days after any Credit Party becomes aware of any claim or adjustment proposed for any
prior tax years of any Credit Party or any of their Subsidiaries which could result in additional Taxes becoming due and payable by such
Credit Party or Subsidiary, notice of such claim or adjustment. Notwithstanding anything to the contrary herein, documents required to be
delivered pursuant to Section 6.2(a)(i), (ii) or (v) (to the extent any such documents are included in materials filed with the SEC) may be
delivered electronically and if so delivered, shall be deemed to have been delivered on the date on which Borrower posts such documents,
or provides a link thereto, on Borrower’s website on the Internet at Borrower’s website address.
(b)
Within forty-five (45) days after the last day of each month, Borrower shall deliver to Agent and each Lender
a duly completed Compliance Certificate signed by a Responsible Officer, which for such delivery for the last month of each quarter shall
be delivered with the quarterly financial statements described in Section 6.2(a)(i) above.
(c)
Borrower shall cause each Credit Party to keep proper books of record and account in accordance with GAAP
(subject to normal year-end audit adjustments and the absence of footnotes with respect to unaudited financials) in which full, true and
correct entries shall be made of all dealings and transactions in relation to its business and activities. Upon at least three (3) Business Days’
prior written notice and during normal business hours (which such limitations shall not apply if a Default or Event of Default has occurred
and is continuing), Borrower shall allow, and cause each Credit Party to allow, Agent and the Lenders to visit and inspect any properties of
a Credit Party, to examine and make abstracts or copies from any Credit Party’s books, to conduct a collateral audit and analysis of its
operations and the Collateral to verify the amount and age of the accounts, the identity and credit of the respective account debtors, to
review the billing practices of the Credit Party and to discuss its respective affairs, finances and accounts with their respective officers,
employees and independent public accountants once per twelve (12) month period unless an Event of Default has occurred and is
continuing. Borrower shall reimburse Agent and each Lender for all reasonable costs and expenses associated with such visits and
inspections; provided, however, that Borrower shall be required to reimburse Agent and each Lender for such costs and expenses for no
more than one (1) such visits
14
and inspections per twelve (12) month period unless an Event of Default has occurred and is continuing at the time such an inspection or
visit occurs.
(d)
Borrower shall, and shall cause each Credit Party to, deliver to Agent and each Lender, within ten (10)
Business Days after the same are sent or received, copies of all material correspondence, reports, documents and other filings with any
Governmental Authority that could reasonably be expected to have a material adverse effect on any of the Required Permits material to
Borrower’s business or otherwise on the operations of Borrower or any of its Subsidiaries.
(e)
Borrower shall, and shall cause each Credit Party to, promptly, but in any event within five (5) Business Days,
after any Responsible Officer of any Borrower obtains knowledge of the occurrence of any event or change (including, without limitation,
any notice of any violation of Healthcare Laws) that has resulted or could reasonably be expected to result in, either in any case or in the
aggregate, a Material Adverse Change, a certificate of a Responsible Officer specifying the nature and period of existence of any such event
or change, or specifying the notice given or action taken by such holder or Person and the nature of such event or change, and what action
the applicable Credit Party or Subsidiary has taken, is taking or proposes to take with respect thereto.
(f)
Borrower shall, and shall cause each Credit Party to, promptly after the request by any Lender, provide all
documentation and other information that such Lender reasonably requests in order to comply with its ongoing obligations under applicable
“know your customer” and anti-money laundering rules and regulations, including, without limitation, the USA PATRIOT Act.
6.3
Maintenance of Property. Borrower shall, and shall cause each Credit Party to, cause all equipment and other tangible
personal property other than Inventory to be maintained and preserved in the same condition, repair and in working order as of the date
hereof, ordinary wear and tear excepted, and shall promptly make or cause to be made all repairs, replacements and other improvements in
connection therewith that are necessary or desirable to such end. Borrower shall cause each Credit Party to keep all material Inventory in
good and marketable condition, free from material defects. Returns and allowances between a Credit Party and its Account Debtors shall
follow the Credit Party’s customary practices as they exist at the Closing Date. Borrower shall promptly notify Agent of all returns,
recoveries, disputes and claims that involve more than One Million Dollars ($1,000,000) in the aggregate per fiscal year of Inventory
collectively among all Credit Parties.
6.4
Taxes; Pensions. Borrower shall timely file and cause each Credit Party to timely file, all required federal tax returns and
other material tax returns and reports and timely pay, and cause each Credit Party to timely pay, all federal Taxes and all other material
foreign, state, and local Taxes, assessments, deposits and contributions owed, and shall deliver to Agent promptly on demand, appropriate
certificates attesting to such payments; provided, however, that a Credit Party may defer payment of any contested Taxes, so long as such
Credit Party (a) in good faith contests its obligation to pay the Taxes by appropriate proceedings promptly and diligently instituted and
conducted, (b) notifies Agent in writing of the commencement of, and any material development in, the proceedings, and (c) posts bonds or
takes any other steps required to prevent the Governmental Authority levying such contested Taxes from obtaining a Lien upon any of the
Collateral other than a Permitted Lien (such contest, a “Permitted Contest”). For purposes of this Section 6.4(a), any foreign, state or local
Taxes, assessment, deposit or contribution, and any return with respect thereto, shall be considered “material” if it is equal to or greater than
$100,000 in the aggregate for all Taxes; provided that all foreign, state or local Tax, assessment, deposit or contribution, and any return with
respect thereto shall be considered “material” if the nonpayment thereof or failure to file could be reasonably be expected to result in a
Material Adverse Change. Borrower shall pay, and cause each Credit Party to pay, all amounts necessary to fund all present pension, profit
sharing and deferred compensation plans in accordance with their terms. Each Credit Party and their ERISA Affiliates shall timely make all
required contributions to each Pension Plan and shall maintain each “plan” (as defined by Section 3(3) of ERISA) in material compliance
with the applicable provisions of ERISA, the Internal Revenue Code and other federal and state laws. Borrower shall give written notice to
Agent and each Lender promptly (and in any event within five (5) Business Days) upon Borrower becoming aware of any (i) Credit Party’s
or any ERISA Affiliate’s failure to make any contribution required to be made with respect to any Pension Plan not having been timely
made, (ii) notice of the PBGC’s, any Credit Party’s or any ERISA Affiliate’s intention to terminate or to have a trustee appointed to
administer any such Pension Plan, or (iii) complete or partial withdrawal by any Credit Party or any ERISA Affiliate from any Pension
Plan.
15
6.5
Insurance. Borrower shall, and shall cause each Credit Party to, keep its business and the Collateral insured for risks and
in amounts standard for companies in Borrower’s industry and location and as Agent may reasonably request. Insurance policies shall be in
a form, with companies, and in amounts that are satisfactory to Agent. All property policies shall have a lender’s loss payable endorsement
showing Agent as sole lender’s loss payee and waive subrogation against Agent, and all liability policies shall show, or have endorsements
showing, Agent as an additional insured. No other loss payees may be shown on the policies unless Agent shall otherwise consent in
writing. If required by Agent, all policies (or the loss payable and additional insured endorsements) shall provide that the insurer shall
endeavor to give Agent at least twenty (20) days’ (ten (10) days’ for non-payment of premium) notice before canceling or declining to
renew its policy. At Agent’s request, Borrower shall deliver certified copies of all such Credit Party insurance policies and evidence of all
premium payments. If any Credit Party fails to obtain insurance as required under this Section 6.5 or to pay any amount or furnish any
required proof of payment to third persons and Agent, Agent may make all or part of such payment or obtain such insurance policies
required in this Section 6.5, and take any action under the policies Agent deems prudent.
6.6
Collateral Accounts.
(a)
Borrower shall, and shall cause each Credit Party to, provide Agent five (5) Business Days prior written notice
before establishing any Collateral Account at or with any bank or financial institution. In addition, for each Collateral Account that any
Credit Party at any time maintains (and in connection with any such Collateral Account established after the Closing Date, prior to opening
such Collateral Account), Borrower shall, and shall cause each Credit Party to, cause the applicable bank or financial institution at or with
which any Collateral Account is maintained to execute and deliver a Control Agreement or other appropriate instrument with respect to
such Collateral Account to perfect Agent’s Lien (for the ratable benefit of the Lenders) in such Collateral Account in accordance with the
terms hereunder, which Control Agreement, inter alia, (i) provides that, upon written notice from Agent, such bank or financial institution
shall comply with instructions originated by Agent directing disposition of the funds in such Collateral Account without further consent by
Borrower and (ii) may not be terminated without prior written consent of Agent. The provisions of the previous sentence requiring Control
Agreements shall not apply to (i) Deposit Accounts exclusively used for payroll, payroll taxes and, in Agent’s discretion, other employee
wage and benefit payments to or for the benefit of a Credit Party’s employees and identified to Agent by Borrower as such; provided,
however, that, at all times Borrower shall maintain one (1) or more separate Deposit Accounts to hold any and all amounts to be used for
payroll, payroll taxes and other employee wage and benefit payments, and shall not commingle any monies allocated for such purposes with
funds in any other Deposit Account, (ii) the Cash Collateral Accounts, and (iii) other Deposit Accounts of Credit Parties containing less
than Five Hundred Thousand Dollars ($500,000) of cash and Cash Equivalents in the aggregate with respect to all such Deposit Accounts.
(b)
Borrower shall, and shall cause each Credit Party to maintain its and all of its domestic Subsidiaries’ primary
banking relationship with Silicon Valley Bank, which relationship shall include (i) maintaining account balances in any operating and other
deposit accounts, and excess cash at or through Silicon Valley Bank or its Affiliates which accounts shall represent at least fifty-one percent
(51%) of the dollar value of Borrower’s and all of its Subsidiaries’ accounts at all financial institutions (the “Required Cash Balance
Percentage”); provided that, notwithstanding the foregoing, for a period of time not to exceed five (5) consecutive Business Days in any
calendar month, the dollar value of Borrower’s and its Subsidiaries’ accounts at Silicon Valley Bank may fall below the Required Cash
Balance Percentage but in any event not less than forty percent (40%) of the dollar value of Borrower’s and its Subsidiaries’ accounts at all
financial institutions (or such lower percentage as Silicon Valley Bank may, in its sole discretion, permit, in advance and in writing), and (ii)
obtaining its primary business credit cards, cash management services, and merchant processing services from Silicon Valley Bank,
provided Silicon Valley Bank has the ability to offer such products on competitive terms for current market conditions. Any Guarantor shall
maintain its primary banking relationship with Silicon Valley Bank and its Affiliates.
6.7
Notices of Material Agreements, Litigation and Defaults; Cooperation in Litigation.
(a)
Borrower shall promptly (and in any event within the time periods specified below) provide written notice to
Agent and each Lender that the following has occurred:
Default;
(i)
Within five (5) Business Days of Borrower becoming aware of the existence of any Default or Event of
16
(ii)
Within five (5) Business Days of Borrower becoming aware of (or having reason to believe any of the
following are pending or threatened in writing) any action, suit, proceeding or investigation by or against Borrower or any Credit Party
which involves the possibility of any judgment or liability of more than One Million Dollars ($1,000,000) or that could result in a Material
Adverse Change, or which questions the validity of any of the Financing Documents, or the other documents required thereby or any action
to be taken pursuant to any of the foregoing; and
(iii)
(A) Within ten (10) Business Days of Borrower receiving or delivering any notice of termination (due
to a breach or default and not from termination in accordance with its terms) or similar notice in connection with any Material Agreement,
and (B) together with delivery of the next Compliance Certificate, the execution of any new Material Agreement and/or any new
material amendment, consent, waiver or other modification to any Material Agreement not previously disclosed. Documents required to be
delivered pursuant to this Section 6.7(a)(iii) (to the extent any such documents are included in materials filed with the SEC) may be
delivered electronically and if so delivered, shall be deemed to have been delivered on the date on which Borrower posts such documents or
provides a link thereto, on Borrower’s website on the Internet at Borrower’s website address.
(b)
Borrower shall, and shall cause each Credit Party, to provide such further information (including copies of
such documentation) as Agent or any Lender shall reasonably request with respect to any of the events or notices described in clause
(a). From the date hereof and continuing through the termination of this Agreement, Borrower shall, and shall cause each Credit Party to,
make available to Agent and each Lender, without expense to Agent or any Lender, each Credit Party’s officers, employees and agents and
books, to the extent that Agent or any Lender may deem them reasonably necessary to prosecute or defend any third-party suit or
proceeding instituted by or against Agent or any Lender with respect to any Collateral or relating to a Credit Party.
6.8
Creation/Acquisition of Subsidiaries. Borrower shall provide Agent with at least ten (10) Business Days (or such shorter
period as Agent may accept in its sole discretion) prior written notice of its intention to create or, to the extent permitted pursuant to this
Agreement, acquire a new Subsidiary. Upon such creation or, to the extent permitted hereunder, acquisition of any Subsidiary, Borrower
and such Subsidiary shall promptly (and in any event within thirty (30) days of such creation or acquisition or such longer period
determined by Agent) take all such action as may be reasonably required by Agent or the Required Lenders to cause each such Subsidiary
(other than a Restricted Foreign Subsidiary) to either, in the discretion of the Required Lenders, become a co-Borrower hereunder or to
guarantee the Obligations of Borrower under the Financing Documents and, in each case, grant a continuing pledge and security interest in
and to the assets of such Subsidiary (substantially as described on Exhibit A hereto); and Borrower shall grant and pledge to Agent, for the
ratable benefit of the Lenders, a perfected security interest in the stock, units or other evidence of ownership of each Subsidiary (the
foregoing collectively, the “Joinder Requirements”); provided that Borrower shall not be permitted to make any Investment in such
Subsidiary until such time as Borrower has satisfied the Joinder Requirements.
6.9
Use of Proceeds. Borrower shall use the proceeds of the Credit Extensions solely for (a) transaction fees incurred in
connection with the Financing Documents, and (b) for working capital needs of Borrower and its Subsidiaries. No portion of the proceeds
of the Credit Extensions will be used for family, personal, agricultural or household use or to purchase Margin Stock.
6.10
Hazardous Materials; Remediation.
(a)
If any release or disposal of Hazardous Materials shall occur or shall have occurred on any real property or
any other assets of any Borrower or any other Credit Party, such Borrower will cause, or direct the applicable Credit Party to cause, the
prompt containment and removal of such Hazardous Materials and the remediation of such real property or other assets as is necessary to
comply in all material respects with all applicable Laws and to preserve the material value of such real property or other assets. Without
limiting the generality of the foregoing, each Borrower shall, and shall cause each other Credit Party to, comply in all material respects with
each applicable Law requiring the performance at any real property by any Borrower or any other Credit Party of activities in response to
the release or threatened release of a Hazardous Material.
(b)
Borrower will provide Agent within thirty (30) days after written demand therefor with a bond, letter of credit
or similar financial assurance evidencing to the reasonable satisfaction of Agent that sufficient
17
funds are available to pay the cost of removing, treating and disposing of any Hazardous Materials or Hazardous Materials Contamination
and discharging any assessment which may be established on any property as a result thereof, such demand to be made, if at all, upon
Agent’s determination that the failure to remove, treat or dispose of any Hazardous Materials or Hazardous Materials Contamination, or the
failure to discharge any such assessment could reasonably be expected to have a Material Adverse Change.
(c)
If there is any conflict between this Section 6.10 and any environmental indemnity agreement which is a
Financing Document, the environmental indemnity agreement shall govern and control.
6.11
Power of Attorney. Each of the officers of Agent is hereby irrevocably made, constituted and appointed the true and
lawful attorney for each Borrower (without requiring any of them to act as such) with full power of substitution to do the following: (a)
after the occurrence and during the continuance of an Event of Default, pay, contest or settle any Lien, charge, encumbrance, security
interest, and adverse claim in or to the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the
same; (b) so long as Agent has provided not less than three (3) Business Days’ prior written notice to Borrower to perform the same and
Borrower has failed to take such action, (i) execute in the name of any Person comprising Borrower any schedules, assignments,
instruments, documents, and statements that Borrower is obligated to give Agent under this Agreement or that Agent or any Lender deems
necessary to perfect or better perfect Agent’s security interest or Lien in any Collateral, (ii) after the occurrence and during the continuance
of an Event of Default, do such other and further acts and deeds in the name of Borrower that Agent may deem necessary or desirable to
enforce, protect or preserve any Collateral or its rights therein, including, but not limited to, to sign Borrower’s name on any invoice or bill
of lading for any Account or drafts against Account Debtors; and (iii) after the occurrence and during the continuance of an Event of
Default, (A) endorse the name of any Borrower upon any and all checks, drafts, money orders, and other instruments for the payment of
money that are payable to Borrower; (B) make, settle, and adjust all claims under Borrower’s insurance policies; (C) take any action any
Credit Party is required to take under this Agreement or any other Financing Document; (D) transfer the Collateral into the name of Agent
or a third party as the Code permits; (E) exercise any rights and remedies described in this Agreement or the other Financing Documents;
and (F) do such other and further acts and deeds in the name of Borrower that Agent may deem necessary or desirable to enforce its rights
with regard to any Collateral.
6.12
Further Assurances. Borrower shall, and shall cause each Credit Party and their Subsidiaries to, at its own cost and
expense, promptly and duly take, execute, acknowledge and deliver all such further acts, documents and assurances as may from time to
time be necessary or as Agent or Required Lenders may from time to time reasonably request in order to carry out the intent and purposes
of the Financing Documents and the transactions contemplated thereby, including all such actions to establish, create, preserve, protect and
perfect a first priority Lien (subject only to Permitted Liens) in favor of Agent for itself and for the benefit Lenders on the Collateral
(including Collateral acquired after the date hereof), including on any and all assets of each Credit Party, whether now owned or hereafter
acquired (subject to the limitations set forth in the Financing Documents).
6.13
Post-Closing Obligations. Borrower shall, and shall cause each Credit Party to, complete each of the post-closing
obligations and/or deliver to Agent each of the documents, instruments, agreements and information listed on the Post-Closing Obligations
Schedule attached hereto, on or before the date set forth for each such item thereon (as the same may be extended by Agent in writing in its
sole discretion), each of which shall be completed or provided in form and substance reasonably satisfactory to Agent and the Lenders.
6.14
Disclosure Schedule Updates. Borrower shall deliver to Agent, together with the each Compliance Certificate
delivered with respect to the last month of a calendar quarter under this Agreement, an update to the Disclosure Schedule correcting all
outdated, inaccurate, incomplete or misleading information therein. With respect to any proposed updates to the Disclosure Schedule
involving Permitted Liens, Permitted Indebtedness or Permitted Investments, Agent will replace the Disclosure Schedule attached hereto
with such proposed updates only if such updated information reflects transactions that are otherwise expressly permitted by the definitions
of, and limitations herein pertaining to, Permitted Liens, Permitted Indebtedness or Permitted Investments (it being understood that such
updates will not be deemed to amend the Disclosure Schedule as in effect on the Closing Date). With respect to any updates to the
Disclosure Schedule involving matters other than those set forth in the preceding sentence, Agent will replace the applicable portion of the
Disclosure Schedule attached hereto with such update upon Agent’s receipt and approval thereof.
18
6.15
Intellectual Property and Licensing.
(a)
Together with each Compliance Certificate required to be delivered pursuant to Section 6.2(b) delivered with
respect to the last month of a calendar quarter, to the extent (i) Borrower acquires and/or develops any new Registered Intellectual Property,
(ii) Borrower enters into or becomes bound by any additional in-bound license or sublicense agreement, any additional exclusive out-bound
license or sublicense agreement or other material agreement with respect to rights in Intellectual Property (other than over-the-counter
software that is commercially available to the public), or (iii) there occurs any other material change in Borrower’s Registered Intellectual
Property, in-bound licenses or sublicenses or exclusive out-bound licenses or sublicenses from that listed on the Intangible Assets
Schedule, together with such Compliance Certificate, deliver to Agent an updated Intangible Assets Schedule reflecting such updated
information.
(b)
If Borrower obtains any Registered Intellectual Property, Borrower shall promptly execute such documents
and provide such other information (including, without limitation, copies of applications) and take such other actions as Agent shall request
in its good faith business judgment to perfect and maintain a first priority perfected security interest in favor of Agent, for the ratable benefit
of Lenders, in the IP Proceeds pertaining thereto.
(c)
Borrower shall use commercially reasonable efforts to take such steps as Agent requests to obtain the consent
of, or waiver by, any person whose consent or waiver is necessary for (x) all licenses or agreements to be deemed “Collateral” and for
Agent to have a security interest in it that might otherwise be restricted or prohibited by Law or by the terms of any such license or
agreement, whether now existing or entered into in the future, and (y) Agent to have the ability in the event of a liquidation of any
Collateral to dispose of such Collateral in accordance with Agent’s rights and remedies under this Agreement and the other Financing
Documents.
(d)
Borrower shall own, or be licensed to use or otherwise have the right to use, all Material Intangible Assets
subject to Permitted Licenses. Borrower shall cause all Registered Intellectual Property to be duly and properly registered, filed or issued in
the appropriate office and jurisdictions for such registrations, filings or issuances, except where the failure to do so would not reasonably be
expected to result in a Material Adverse Change. Borrower shall at all times conduct its business without material infringement or claim of
infringement of any Intellectual Property rights of others. Borrower shall (i) protect, defend and maintain the validity and enforceability of
its Material Intangible Assets (ii) promptly advise Agent in writing of material infringements of its Material Intangible Assets, or of a
material claim of infringement by Borrower on the Intellectual Property rights of others, in each case to the extent Borrower has received
written notice from a third party thereof; and (iii) not allow any of Borrower’s Material Intangible Assets to be abandoned, invalidated,
forfeited or dedicated to the public or to become unenforceable. Borrower shall not become a party to, nor become bound by, any material
license or other agreement with respect to which Borrower is the licensee that prohibits or otherwise restricts Borrower from granting a
security interest in Borrower’s interest in such license or agreement or other property.
6.16
Regulatory Reporting and Covenants.
(a)
Borrower shall notify Agent and each Lender promptly, and in any event within five (5) Business Days of
receiving, becoming aware of or determining that, (each, a “Regulatory Reporting Event” and collectively, the “Regulatory Reporting
Events”):
(i)
any Governmental Authority, specifically including the FDA is conducting or has conducted (A) if
applicable, any investigation of Borrower’s or its Subsidiaries’ manufacturing facilities and processes for any Product (or any investigation
of the facility of a contract manufacturer engaged by Borrower or is Subsidiaries in respect of a Product of which Borrower and/or its
Subsidiaries are aware), which has disclosed any material deficiencies or violations of Laws and/or the Regulatory Required Permits related
thereto or (B) an investigation or review of any Regulatory Required Permit (other than routine reviews in the Ordinary Course of Business
associated with the renewal of a Regulatory Required Permit),
(ii)
any development, testing, and/or manufacturing of any Product should cease,
19
cease or such Product should be withdrawn from the marketplace,
(iii)
if a Product has been approved for marketing and sale, any marketing or sales of such Product should
modified or restricted,
(iv)
any Regulatory Required Permit has been suspended, revoked, withdrawn or adversely limited,
reasonably determines that such results have or could be reasonably be expected to result in a Material Adverse Change;
(v)
adverse clinical test results have occurred with respect to any Product to the extent that the Borrower
(vi)
receipt by Borrower or any Subsidiary thereof from the FDA a warning letter, Form FDA-483,
“Untitled Letter,” other correspondence or notice setting forth allegedly objectionable observations or alleged material violations of laws
and regulations enforced by the FDA, or any comparable correspondence from any state or local authority responsible for regulating drug
products and establishments, or any comparable correspondence from any foreign counterpart of the FDA, or any comparable
correspondence from any foreign counterpart of any state or local authority with regard to any Product or the manufacture, processing,
packing, or holding thereof;
discrete batches or lots that are not material in quantity or amount and are not made in conjunction with a larger recall) have occurred, or
(vii)
any Product recalls or voluntary Product withdrawals from any market (other than with respect to
any significant failures in the manufacturing of any Product have occurred such that the amount of
such Product successfully manufactured in accordance with all specifications thereof and the required payments to be made to Borrower
therefor in any month shall decrease significantly with respect to the quantities of such Product and payments produced in the prior month.
(viii)
Borrower shall provide to Agent or any Lender such further information (including copies of such documentation) as Agent or any Lender
shall reasonably request with respect to any such Regulatory Reporting Event promptly, but in any event within five (5) Business Days of,
upon such request.
(b)
Borrower shall have, and shall ensure that it and each of its Subsidiaries has, each material Required Permit
and other rights from, and have made all declarations and filings with, all applicable Governmental Authorities, all self-regulatory
authorities and all courts and other tribunals necessary to engage in all material respects in the ownership, management and operation of the
business or the assets of any Borrower and Borrowers shall take reasonable actions to ensure that no Governmental Authority has taken
action to limit, suspend or revoke any such Required Permit. Borrower shall ensure that all such Required Permits are valid and in full
force and effect and Borrowers are in material compliance with the terms and conditions of all such Required Permits in all material
respects.
(c)
Borrower will maintain in full force and effect, and free from restrictions, probations, conditions or known
conflicts which would materially impair the use or operation of Borrowers’ business and assets, all material Required Permits necessary
under Healthcare Laws to carry on the business of Borrowers as it is conducted on the Closing Date in all material respects.
(d)
Borrower shall, and shall cause each Credit Party to, obtain and comply with and, to the extent applicable, use
commercially reasonable efforts to cause all third parties to obtain and comply with, all Regulatory Required Permits at all times issued or
required to be issued by any Governmental Authority, specifically including the FDA, with respect to such development, testing,
manufacture, marketing or sales of such Product by such Borrower as such activities are at any such time being conducted by such
Borrower.
(e)
Borrowers will timely file or caused to be timely filed (after giving effect to any extension duly obtained), all
material notifications, reports, submissions, material Required Permit renewals and reports required by applicable Healthcare Laws (which
reports will be materially accurate and complete in all respects and not materially misleading in any respect and shall not remain open or
unsettled).
20
(f)
In the event Borrower or any Credit Party obtains any new Regulatory Required Permit or any information on
the Required Permits Schedule becomes outdated, inaccurate, incomplete or misleading, Borrower shall, together with the next quarterly
Compliance Certificate required to be delivered under this Agreement after such event, provide Agent with an updated Required Permits
Schedule including such updated information.
(g)
If, after the Closing Date, (i) Borrower determines to manufacture, sell, develop, test or market any new
Product (by itself or through a third party), Borrower shall deliver prior written notice to Agent of such determination (which shall include a
brief description of such Product) and, together with delivery of the next quarterly Compliance Certificate shall provide an updated
Intangible Assets Schedule, Products Schedule and Required Permits Schedule (and copies of such Required Permits as Agent may
request) reflecting updates related to such determination.
7.
NEGATIVE COVENANTS
Borrower shall not do, nor shall it permit any Credit Party or any of its Subsidiaries to do, any of the following:
7.1
Dispositions. Convey, sell, abandon, lease, license, transfer, assign or otherwise dispose of including by merger,
allocation of assets (including allocation of assets to any series of a limited liability company), division, consolidation or amalgamation)
(collectively, “Transfer”) all or any part of its business or property, except for (a) sales, transfers or dispositions of Inventory in the
Ordinary Course of Business; (b) sales or abandonment of (i) worn‑out, surplus or obsolete Equipment (ii) other Equipment that is no
longer used or useful in the business of Borrower with a fair salable value not to exceed One Million Dollars ($1,000,000) in the aggregate
per fiscal year for all such Equipment Transferred pursuant to clauses (i) and (ii); (c) to the extent constituting a Transfer, Permitted Liens;
(d) to the extent they may constitute a Transfer, the use of cash and Cash Equivalents to make Permitted Investments; (e) Permitted
Licenses, (f) Transfers of assets from any Subsidiary to Borrower, (g) Transfers between Guarantors, (h) Transfers from Credit Parties to
Borrowers, (i) sales or discounting of delinquent accounts receivables in the Ordinary Course of Business in an aggregate amount not to
exceed One Million Dollars ($1,000,000) in any fiscal year, (j) the expiration, forfeiture, invalidation, cancellation, or abandonment of
Intellectual Property (other than Material Intangible Assets) to the extent such Intellectual Property is no longer used or useful in the
business of Borrower, (k) mergers expressly permitted under Section 7.3, (l) Transfers by Borrower of Intellectual Property rights required
under the Janssen License, and (m) so long as no Event of Default has occurred and is continuing or would result therefrom, other Transfers
of tangible personal property in the Ordinary Course of Business with a fair market value not to exceed One Million Dollars ($1,000,000) in
the aggregate for all such property per fiscal year.
7.2
Changes in Business, Management, Ownership or Business Locations. (a) Engage in, or permit any of its Subsidiaries to
engage in, any business other than the businesses currently engaged in by Borrower, such Credit Party or such Subsidiary, as applicable, or
reasonably related thereto or a reasonable extension thereof; (b) liquidate or dissolve; provided that a Subsidiary that is not a Credit Party
may liquidate or dissolve so long as such Subsidiary distributes its assets to a Credit Party upon such liquidation or dissolution; (c) enter
into any transaction or series of related transactions which would result in a Change in Control unless the agreements with respect to such
transactions provide for, as a condition precedent to the consummation thereof, either (x) the indefeasible payment in full of the Obligations
or (y) the consent of Agent and the Lenders; (d) fail to deliver within sixty (60) days (or such longer time as approved by Agent) notice of
the addition of any new offices or business locations (other than locations with less than One Million Dollars ($1,000,000) of assets in the
aggregate with respect to all such locations, clinical trial sites or contract manufacturers), or of any new leases with respect to existing
offices or business locations, and a fully-executed Access Agreement to Agent (except as otherwise provided below); (e) without at least ten
(10) Business Days’ prior written notice to Agent of its intention to take such action and executing any and all documents, instruments and
agreements and taking any other actions which Agent may request after receiving such written notice in order to protect and preserve the
Liens, rights and remedies of Agent with respect to the Collateral, (i) change its jurisdiction of organization (provided that no Credit Party
shall change its jurisdiction of organization to a new country without Agent’s consent); (ii) change its organizational structure or type; (iii)
change its legal name; or (iv) change any organizational number (if any) assigned by its jurisdiction of organization. Notwithstanding the
foregoing in the case of subpart (d) above, provided that the applicable lease or license agreement, or applicable law, does not grant to the
landlord or licensor any Lien upon intangible assets of the tenant or licensee, subpart (d) shall not restrict leases or licenses for (i) such new
or existing offices or business locations (w) containing less than One Million Dollars
21
($1,000,000) in Borrower’s assets or property and not containing Borrower’s Books, (x) located outside of the United States, (y) consisting
of clinical trial sites or (z) contract manufacturers; provided that Borrower’s corporate headquarters shall, at all times (subject to Section
6.13), be subject to an Access Agreement; and (ii) any new or existing business location constituting a warehouse, consignee or bailee
location that does not contain any of Borrower’s Books and would not otherwise require an Access Agreement pursuant to the criteria set
forth in Section 4.2(e).
7.3
Mergers and Consolidations. Merge or consolidate with any other Person, provided, however, that (a) a Borrower may
merge or consolidate into another Borrower, (b) a Guarantor may merge or consolidate into another Credit Party, (c) a Restricted Foreign
Subsidiary may merge or consolidate into another Restricted Foreign Subsidiary and (d) a Subsidiary that is not a Credit Party may merge
or consolidate into a Credit Party, so long as, in each case of the foregoing (a)-(d), (i) Borrower has provided Agent and the Lenders with
prior written notice of such transaction, (ii) if a Credit Party is a party thereto, a Person already comprising a Credit Party shall be the
surviving legal entity, (iii) if Protagonist Therapeutics is a party thereto, Protagonist Therapeutics shall be the surviving legal entity, (iv) if a
Borrower is a party thereto, the Borrower shall be the surviving legal entity, (v) if a Credit Party is a party thereto, the surviving Credit
Party’s tangible net worth is not thereby materially reduced, (vi) no Event of Default has occurred and is continuing prior thereto or arises
as a result therefrom and (vii) Borrower shall be in compliance with the covenants set forth in this Agreement both before and after giving
effect to such transaction.
7.4
Indebtedness. (a) Create, incur, assume, or be liable for any Indebtedness other than Permitted Indebtedness or (b)
purchase, redeem, defease or prepay any principal of, premium, if any, interest or other amount payable in respect of any Indebtedness
(other than with respect to the Obligations as described in Section 2.3) prior to its scheduled maturity.
7.5
Encumbrance. (a) Create, incur, allow, or suffer any Lien on any of its property, except for Permitted Liens, (b) permit
any Collateral to fail to be subject to the first priority security interest granted herein except for Permitted Liens that may have priority by
operation of applicable Law or by the terms of a written intercreditor or subordination agreement entered into by Agent, or (c) enter into
any agreement, document, instrument or other arrangement (except with or in favor of Agent) with any Person which directly or indirectly
prohibits or has the effect of prohibiting Borrower or any Subsidiary from assigning, mortgaging, pledging, granting a security interest in or
upon, or encumbering any of Borrower’s or any Subsidiary’s property, except as is otherwise permitted in the definition of “Permitted
Liens” herein.
7.6
Maintenance of Collateral Accounts. Maintain any Collateral Account, except pursuant to the terms of Section 6.6
hereof.
7.7
Distributions; Investments and Acquisitions; Margin Stock.
redeem, retire or purchase or repurchase any of its equity interests other than Permitted Distributions.
Pay any dividends or make any distribution or payment (or set aside any funds for payment) with respect to or
Subsidiary) other than Permitted Investments
directly or indirectly make any Investment (including, without limitation, any additional Investment in any
(c)
directly or indirectly make any Acquisition other than Permitted Acquisitions.
Party to, purchase or carry Margin Stock.
Without limiting the foregoing, Borrower shall not, and shall not permit any of its Subsidiaries or any Credit
7.8
Transactions with Affiliates. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate
of any Credit Party, except for (a) transactions that are in the Ordinary Course of Business, upon fair and reasonable terms that are no less
favorable to Borrower than would be obtained in an arm’s length transaction with a non-affiliated Person, (b) transactions with Subsidiaries
that are designated as a Borrower hereunder and that are not otherwise prohibited by Article 7 of this Agreement, (c) transactions permitted
by Section
22
(a)
(b)
(d)
7.7(a) of this Agreement, (d) transactions constituting bona fide equity financings for capital raising purposes not otherwise in
contravention of this Agreement, and (e) reasonable and customary director, officer and employee compensation (including bonuses) and
other benefits (including retirement, health, stock option and other benefit plans and indemnification arrangements approved by the relevant
board of directors, board managers or equivalent corporate body in the Ordinary Course of Business).
7.9
Subordinated Debt. (a) Make or permit any payment (or set aside any funds for payment) on, or any distribution in
respect of, any Subordinated Debt, except to the extent expressly permitted to be made pursuant to the terms of the Subordination
Agreement to which such Subordinated Debt is subject, or (b) amend any provision in any document relating to the Subordinated Debt
other than as may be expressly permitted pursuant to the terms of any applicable Subordination Agreement to which such Subordinated
Debt is subject.
7.10
Compliance. Become an “investment company” or a company controlled by an “investment company”, under the
Investment Company Act of 1940, as amended or undertake as one of its important activities extending credit to purchase or carry Margin
Stock, or use the proceeds of any Credit Extension for that purpose; (i) fail, or permit any ERISA Affiliate to fail, to meet “minimum
funding standards” (as defined in Section 412 of the Internal Revenue Code or Section 302 of ERISA), whether or not waived, (ii) permit
(with respect to any Credit Party, any Subsidiary of any Credit Party or any ERISA Affiliate thereof) a “reportable event” as defined in
Section 4043(c) of ERISA (or the regulations issued thereunder) (other than an event for which the 30-day notice requirement is waived) to
occur, (iii) engage in any “prohibited transaction” within the meaning of Section 406 of ERISA or Section 4975 of the Internal Revenue
Code that could reasonably be expected to result in liability in excess of One Million ($1,000,000) in the aggregate or that could reasonably
be expected to result in a Material Adverse Change; (iv) fail to comply with the Federal Fair Labor Standards Act that could result in
liability in excess of One Million ($1,000,000) in the aggregate or that could reasonably be expected to result in a Material Adverse
Change; (v) permit (with respect to any Credit Party, any Subsidiary of any Credit Party or any ERISA Affiliate thereof) the withdrawal
from participation in any Pension Plan, or (vi) incur, or permit any Credit Party, any Subsidiary of any Credit Party or any ERISA Affiliate
thereof to incur, any liability under Title IV of ERISA (other than for PBGC premiums due but not delinquent under Section 4007 of
ERISA).
7.11
Amendments to Organization Documents and Material Agreements. Amend, modify or waive any provision of (a) any
Material Agreement in a manner that is materially adverse to Borrower or any of its Subsidiaries, that is adverse to Agent or any Lender,
that pertains to rights to assign or grant a security interest in such Material Agreement or that could or could reasonably be expected to
result in a Material Adverse Change, or (b) any of its organizational documents (other than a change in registered agents, or a change that
could not adversely affect the rights of Agent or the Lenders hereunder, but, for the avoidance of doubt, under no circumstances a change of
its name, type of organization or jurisdiction of organization), in each case, without the prior written consent of Agent. Borrower shall
provide to Agent copies of all amendments, waivers and modifications of any Material Agreement or organizational documents in
accordance with Section 6.7(a)(iii).
7.12
Compliance with Anti-Terrorism Laws. Directly or indirectly, knowingly enter into any documents, instruments,
agreements or contracts with any Person listed on the OFAC Lists. Borrower shall immediately notify Agent if Borrower has knowledge
that Borrower or any Subsidiary or Affiliate is listed on the OFAC Lists or (a) is convicted on, (b) pleads nolo contendere to, (c) is indicted
on, or (d) is arraigned and held over on charges involving money laundering or predicate crimes to money laundering. Borrower will not,
nor will Borrower permit any Subsidiary or Affiliate to, directly or indirectly, (i) conduct any business or engage in any transaction or
dealing with any Blocked Person, including, without limitation, the making or receiving of any contribution of funds, goods or services to
or for the benefit of any Blocked Person, (ii) deal in, or otherwise engage in any transaction relating to, any property or interests in property
blocked pursuant to Executive Order No. 13224, any similar executive order or other Anti-Terrorism Law, or (iii) engage in or conspire to
engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions set
forth in Executive Order No. 13224 or other Anti-Terrorism Law. Agent hereby notifies Borrower that pursuant to the requirements of Anti-
Terrorism Laws, and Agent’s policies and practices, Agent is required to obtain, verify and record certain information and documentation
that identifies Borrower and its principals, which information includes the name and address of Borrower and its principals and such other
information that will allow Agent to identify such party in accordance with Anti-Terrorism Laws.
23
7.13
Restricted Foreign Subsidiaries.
Subsidiaries to exceed Ten Million Dollars ($10,000,000) (or the equivalent thereof in any foreign currency), in the aggregate.
(a)
Borrower shall not permit, at any time, the cash and Cash Equivalents held by all Restricted Foreign
Assets.
(b)
No Restricted Foreign Subsidiary shall own, or have an exclusive license in respect of, any Material Intangible
No Credit Party shall Transfer any asset (including any Intellectual Property) to or make any Investment in
any Restricted Foreign Subsidiary other than Investments of cash and Cash Equivalents permitted to be made pursuant to clause (f) of the
definition of “Permitted Investment”.
(c)
cash or Cash Equivalents) with the assets of any Person other than a Credit Party.
(d)
No Borrower will, or will permit any Subsidiary, to commingle any of its assets (including any bank accounts,
Agent.
8.
9.
7.14
Fiscal Year. No Credit Party shall change its fiscal year end unless otherwise previously consented to in writing by
RESERVED
FINANCIAL COVENANTS
9.1
Minimum Cash. Borrower shall not permit Borrower Unrestricted Cash at any time during the term of this Agreement
to be less than an amount equal to thirty five percent (35%) the aggregate principal amount of all Credit Extensions outstanding at such
time. A breach of the covenant contained in this Section 9.1 shall be deemed to have occurred as of the date on which such breach
occurred, regardless of when the financial statements or Compliance Certificate reflecting such breach are delivered to Agent.
9.2
Evidence of Compliance. Borrower shall furnish to Agent, a Compliance Certificate in accordance with Section 6.2(b) as
evidence of Borrower compliance with the covenants in this Article 9. The Compliance Certificate shall include, without limitation, (i) a
statement and report, on a form approved by Agent, detailing Borrower’s calculations, (ii) the monthly cash and Cash Equivalents of
Borrower and Borrower and its consolidated Subsidiaries and, if requested by Agent, bank statements and (iii) if reasonably requested by
Agent, back-up documentation (including, without limitation, invoices, receipts and other evidence of costs incurred during such quarter as
Agent shall reasonably require) evidencing the propriety of the calculations.
10.
EVENTS OF DEFAULT
10.1
Events of Default. The occurrence of any of the following conditions and/or events, whether voluntary or involuntary, by
operation of law or otherwise, shall constitute an “Event of Default” and Credit Parties shall thereupon be in default under this Agreement
and each of the other Financing Documents:
Borrower fails to (i) make any payment of principal or interest on any Credit Extension on its due date, or
(ii) pay any other Obligations within three (3) Business Days after such Obligations are due and payable (which three (3) Business Day
grace period shall not apply to payments due on the Maturity Date or the date of acceleration pursuant to Section 10.2 hereof).
(a)
(b)
any Credit Party defaults in the performance of or compliance with any term contained in this Agreement or in
any other Financing Document (other than occurrences described in other provisions of this Section 10.1 for which a different grace or
cure period is specified or for which no grace or cure period is specified and thereby constitute immediate Events of Default) and such
default is not remedied by the Credit Party or waived by Agent within thirty (30) days after the earlier of (i) the date of receipt by any
Borrower of notice from Agent or the Required Lenders of such default, or (ii) the date an officer of such Credit Party becomes aware, or
through the exercise of reasonable diligence should have become aware, of such default;
24
6.6, 6.7(a), 6.8, 6.9, 6.10, 6.13, 6.15, 6.16, Article 7 or Article 9;
(c)
any Credit Party defaults in the performance of or compliance with any term contained in Section 6.2, 6.4, 6.5,
(d)
any representation, warranty, certification or statement made by any Credit Party or any other Person acting
for or on behalf of a Credit Party (i) in any Financing Document or in any certificate, financial statement or other document delivered
pursuant to any Financing Document, or (ii) to induce Agent and/or Lenders to enter into this Agreement or any Financing Document is
incorrect in any respect (or in any material respect if such representation, warranty, certification or statement is not by its terms already
qualified as to materiality) when made (or deemed made);
(e)
(i)(A) any Credit Party materially defaults under or materially breaches any Material Agreement (after any
applicable grace period contained therein and such default or breach is not effectively and permanently cured or waived by the applicable
counterparties to such Material Agreement within ten (10) Business Days of the occurrence of such default or breach), (B) a Material
Agreement shall be terminated by a third party or parties party thereto prior to the expiration thereof and such termination could
reasonably be expected to result in a Material Adverse Change, or (C) there is a loss of a material right of a Credit Party under any
Material Agreement to which it is a party, which loss could reasonably be expected to result in a Material Adverse Change, (ii) (A) any
Credit Party or any Subsidiary of a Credit Party fails to make (after any applicable grace period) any payment when due (whether due
because of scheduled maturity, required prepayment provisions, acceleration, demand or otherwise) on any Indebtedness (other than the
Obligations) of such Credit Party or such Subsidiary having an aggregate principal amount (including undrawn committed or available
amounts and including amounts owing to all creditors under any combined or syndicated credit arrangement) of more than One Million
Dollars ($1,000,000) (“Material Indebtedness”), (B) any other event shall occur or condition shall exist under any contractual obligation
relating to any such Material Indebtedness, if the effect of such event or condition is to accelerate, or to permit the acceleration of
(without regard to any subordination terms with respect thereto), the maturity of such Material Indebtedness or (C) any such Material
Indebtedness shall become or be declared to be due and payable, or be required to be prepaid, redeemed, defeased or repurchased (other
than by a regularly scheduled required payment), prior to the stated maturity thereof, (iii) the occurrence of any breach or default under
any terms or provisions of any Subordinated Debt Document or under any agreement subordinating the Subordinated Debt to all or any
portion of the Obligations, or the occurrence of any event requiring the prepayment of any Subordinated Debt, or the delivery of any
notice with respect to any Subordinated Debt or pursuant to any Subordination Agreement that triggers the start of any standstill or
similar period under any Subordination Agreement, or (iv) any Borrower makes any payment on account of any Indebtedness that has
been subordinated to any of the Obligations, other than payments specifically permitted by the terms of such subordination agreement;
(f)
(i) any Credit Party or any Subsidiary of a Credit Party shall generally not pay its debts as such debts become
due, shall admit in writing its inability to pay its debts generally, shall make a general assignment for the benefit of creditors, or shall
cease doing business as a going concern, (ii) any proceeding shall be instituted by or against any Credit Party or any Subsidiary of a
Credit Party in any jurisdiction seeking to adjudicate it a bankrupt or insolvent or seeking liquidation, winding up, reorganization,
arrangement, adjustment, protection, relief, composition of it or its debts or any similar order, in each case under any law relating to
bankruptcy, insolvency or reorganization or relief of debtors or seeking the entry of an order for relief or the appointment of a custodian,
receiver, trustee, conservator, liquidating agent, liquidator, other similar official or other official with similar powers, in each case for it or
for any substantial part of its property and, in the case of any such proceedings instituted against (but not by or with the consent of) such
Credit Party or such Subsidiary, either such proceedings shall remain undismissed or unstayed for a period of forty-five (45) days or more
or any action sought in such proceedings shall occur or (iii) any Credit Party or any Subsidiary of a Credit Party shall take any corporate
or similar action or any other action to authorize any action described in clause (i) or (ii) above;
(g)
(i) the service of process seeking to attach, execute or levy upon, seize or confiscate any Collateral Account,
any Intellectual Property with an estimated value in excess of One Million Dollars ($1,000,000) (including any Material Intangible
Assets), or any funds of any Credit Party on deposit with Agent, any Lender or any Affiliate of Agent or any Lender, or (ii) a notice of
lien, levy, or assessment is filed against any assets of a Credit Party with an estimated value in excess of Five Hundred Thousand Dollars
($500,000) by any government agency, and the same under subclauses (i) and (ii) hereof are not discharged or stayed (whether through
the posting of a bond or
25
otherwise) prior to the earlier to occur of thirty (30) days after the occurrence thereof or such action becoming effective;
(h)
(i) any court order enjoins, restrains, or prevents a Credit Party from conducting any material part of its
business, (ii) the institution by any Governmental Authority of criminal proceedings against any Credit Party or any Subsidiary of a
Credit Party, or (iii) one or more judgments or orders for the payment of money (not paid or fully covered by insurance and as to which
the relevant insurance company has acknowledged coverage in writing) aggregating in excess of than One Million Dollars
($1,000,000) shall be rendered against any or all Credit Parties or their Subsidiaries and either (A) enforcement proceedings shall have
been commenced and not effectively stayed by any creditor upon any such judgments or orders, or (B) there shall be any period of
twenty (20) consecutive days during which a stay of enforcement of any such judgments or orders, by reason of a pending appeal, bond or
otherwise, shall not be in effect;
(i)
any Lien created by any of the Financing Documents shall at any time fail to constitute a valid and perfected
Lien on all of the Collateral purported to be encumbered thereby, subject to no prior or equal Lien except Permitted Liens and other than
solely as a result of any action or inaction of Agent or Lenders provided that such action or inaction is not caused by a Credit Party’s
failure to comply with the terms of the Financing Documents, or any Credit Party shall so assert; any provision of any Financing
Document shall fail to be valid and binding on, or enforceable against, a Credit Party, or any Credit Party shall so assert;
(j)
a Change in Control occurs;
(k)
any Required Permit shall have been (i) revoked, rescinded, suspended, modified in a materially adverse
manner or not renewed in the Ordinary Course of Business for a full term, or (ii) subject to any decision by a Governmental Authority
that designates a hearing with respect to any applications for renewal of any of such Required Permit or that could reasonably be expected
to result in the Governmental Authority taking any of the actions described in clause (i) above, and such decision or such revocation,
rescission, suspension, modification or non-renewal has, or could reasonably be expected to have, a Material Adverse Change with
respect to clauses (i) and (ii);
(l)
(i) the voluntary withdrawal or institution of any action or proceeding by the FDA or similar Governmental
Authority to order the withdrawal of any Product or Product category from the market or to enjoin Borrower or its Subsidiaries from
manufacturing, marketing, selling or distributing any Product or Product category, in each case, which results in or could reasonably be
expected to result in a Material Adverse Change, (ii) the institution of any action or proceeding by any DEA, FDA, or any other
Governmental Authority to revoke, suspend, reject, withdraw, limit, or restrict any Regulatory Required Permit held by Borrower, its
Subsidiaries or any representative of Borrower or its Subsidiaries, which, in each case, results in or could reasonably be expected to result
in Material Adverse Change, or (iii) the commencement of any enforcement action against Borrower, its Subsidiaries or any
representative of Borrower or its Subsidiaries (with respect to the business of Borrower or its Subsidiaries) by DEA, FDA, or any other
Governmental Authority which results in or could reasonably be expected to result in a Material Adverse Change.
NASDAQ Stock Market; or
(m)
Protagonist Therapeutics’ equity securities fail to remain registered with the SEC and listed for trading on the
(n)
the occurrence of any fact, event or circumstance that results in a Material Adverse Change.
All cure periods provided for in this Section 10.1 shall run concurrently with any cure period provided for in any applicable Financing
Documents under which the default occurred.
10.2
Rights and Remedies.
direction of the Required Lenders shall, without notice or demand, do any or all of the following: (i)
(a)
Upon the occurrence and during the continuance of an Event of Default, Agent may, and at the written
26
deliver notice of the Event of Default to Borrower, (ii) by notice to any Borrower declare all Obligations immediately due and payable (but
if an Event of Default described in Section 10.1(f) occurs all Obligations shall be immediately due and payable without any action by Agent
or the Lenders), or (iii) by notice to any Borrower suspend or terminate the obligations, if any, of the Lenders to advance money or extend
credit for Borrower’s benefit under this Agreement or under any other agreement between any Credit Party and Agent and/or the Lenders
(but if an Event of Default described in Section 10.1(f) occurs all obligations, if any, of the Lenders to advance money or extend credit for
Borrower’s benefit under this Agreement or under any other agreement between Borrower and Agent and/or the Lenders shall be
immediately terminated without any action by Agent or the Lenders).
Without limiting the rights of Agent and the Lenders set forth in Section 10.2(a) above, upon the occurrence
and during the continuance of an Event of Default, Agent shall have the right, without notice or demand, to do any or all of the following:
(b)
with or without legal process, enter any premises where the Collateral may be and take possession of
and remove the Collateral from the premises or store it on the premises, and foreclose upon and/or sell, lease or liquidate, the Collateral, in
whole or in part;
(i)
apply to the Obligations (A) any balances and deposits of any Credit Party that Agent or any Lender or
any Affiliate of Agent or a Lender holds or controls, or (B) any amount held or controlled by Agent or any Lender or any Affiliate of Agent
or a Lender owing to or for the credit or the account of any Credit Party;
(ii)
settle, compromise or adjust and grant releases with respect to disputes and claims directly with
Account Debtors for amounts on terms and in any order that Agent considers advisable, notify any Person owing any Credit Party money of
Agent’s security interest in such funds, and verify the amount of such Account;
(iii)
(iv)
make any payments and do any acts it considers necessary or reasonable to protect the Collateral and/or
its security interest in the Collateral. Borrower shall assemble the Collateral if Agent requests and make it available as Agent
designates. Agent may also render any or all of the Collateral unusable at a Credit Party’s premises and may dispose of such Collateral on
such premises without liability for rent or costs. Borrower grants Agent a license to enter and occupy any of its premises, without charge, to
exercise any of Agent’s rights or remedies;
interest and pay all expenses incurred;
(v)
pay, purchase, contest, or compromise any Lien which appears to be prior or superior to its security
(vi)
ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, and/or advertise for sale, the
Collateral. Agent is hereby granted a non-exclusive, royalty-free license or other right to use, upon the occurrence and during the
continuance of an Event of Default, without charge, Borrower’s labels, patents, copyrights, mask works, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any similar property as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral (and including in such license access to all media in which any of the licensed
items may be recorded or stored and to all computer software and programs used for the compilation or printout thereof) and, in connection
with Agent’s exercise of its rights under this Article 10, Borrower’s rights under all licenses and all franchise agreements shall be deemed to
inure to Agent for the benefit of the Lenders, subject to any rights of third party licensors and licensees, as applicable;
place a “hold” on any account maintained with Agent or the Lenders or any Affiliate of Agent or a
Lender and/or deliver a notice of exclusive control, any entitlement order, or other directions or instructions pursuant to any Control
Agreement or similar agreements providing control of any Collateral;
(vii)
(viii)
demand and receive possession of the Books of Borrower and the other Credit Parties; and
27
equity, including all remedies provided under the Code (including disposal of the Collateral pursuant to the terms thereof).
(ix)
exercise all other rights and remedies available to Agent under the Financing Documents or at law or
10.3
Notices. Any notice that Agent is required to give to a Credit Party under the UCC of the time and place of any public
sale or the time after which any private sale or other intended disposition of the Collateral is to be made shall be deemed to constitute
reasonable notice if such notice is given in accordance with this Agreement at least ten (10) days prior to such action.
10.4
Protective Payments. If any Credit Party fails to pay or perform any covenant or obligation under this Agreement or any
other Financing Document, Agent may pay or perform such covenant or obligation, and all amounts so paid by Agent are Protective
Advances and immediately due and payable, bearing interest at the then highest applicable rate for the Credit Facilities hereunder, and
secured by the Collateral. No such payments or performance by Agent shall be construed as an agreement to make similar payments or
performance in the future or constitute Agent’s waiver of any Event of Default.
10.5
Liability for Collateral No Waiver; Remedies Cumulative. So long as Agent and the Lenders comply with reasonable
banking practices regarding the safekeeping of the Collateral in the possession or under the control of Agent and the Lenders, Agent and the
Lenders shall not be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage to the Collateral; (c) any
diminution in the value of the Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or other Person. Borrower bears all
risk of loss, damage or destruction of the Collateral. Agent’s failure, at any time or times, to require strict performance by Borrower of any
provision of this Agreement or any other Financing Document shall not waive, affect, or diminish any right of Agent thereafter to demand
strict performance and compliance herewith or therewith. No waiver hereunder shall be effective unless signed by Agent and then is only
effective for the specific instance and purpose for which it is given. Agent’s rights and remedies under this Agreement and the other
Financing Documents are cumulative. Agent has all rights and remedies provided under the Code, by Law, or in equity. Agent’s exercise of
one (1) right or remedy is not an election, and Agent’s waiver of any Event of Default is not a continuing waiver. Agent’s delay in
exercising any remedy is not a waiver, election, or acquiescence.
10.6
Application of Payments and Proceeds. Notwithstanding anything to the contrary contained in this Agreement, upon the
occurrence and during the continuance of an Event of Default, (i) Borrower, for itself and the other Credit Parties, irrevocably waives the
right to direct the application of any and all payments at any time or times thereafter received by Agent from or on behalf of Borrower of all
or any part of the Obligations, and, as between Borrower and the Credit Parties on the one hand and Agent and the Lenders on the other,
Agent shall have the continuing and exclusive right to apply and to reapply any and all payments received against the Obligations in such
manner as Agent may deem advisable notwithstanding any previous application by Agent, and (ii) unless Agent and the Lenders shall agree
otherwise, the proceeds of any sale of, or other realization upon all or any part of the Collateral shall be applied: first, to the Protective
Advances; second, to accrued and unpaid interest on the Obligations (including any interest which, but for the provisions of the United
States Bankruptcy Code, would have accrued on such amounts); third, to the principal amount of the Obligations outstanding; and fourth, to
any other indebtedness or obligations of the Credit Parties owing to Agent or any Lender under the Financing Documents. Borrower shall
remain fully liable for any deficiency. Any balance remaining shall be delivered to Borrower or to whomever may be lawfully entitled to
receive such balance or as a court of competent jurisdiction may direct. Unless Agent and the Lenders shall agree otherwise, in carrying out
the foregoing, (x) amounts received shall be applied in the numerical order provided until exhausted prior to the application to the next
succeeding category, and (y) each of the Persons entitled to receive a payment in any particular category shall receive an amount equal to its
pro rata share of amounts available to be applied pursuant thereto for such category.
10.7
Waivers.
(a)
Except as otherwise provided for in this Agreement and to the fullest extent permitted by applicable law, each
Borrower waives: (i) presentment, demand and protest, and notice of presentment, dishonor, intent to accelerate, acceleration, protest,
default, nonpayment, maturity, release, compromise, settlement, extension or renewal of any or all Financing Documents and hereby
ratifies and confirms whatever Agent or the Lenders may do in this regard; (ii) all rights to notice and a hearing prior to Agent’s or any
Lender’s entry upon the premises of a
28
Borrower, the taking possession or control of, or to Agent’s or any Lender’s replevy, attachment or levy upon, any Collateral or any bond or
security which might be required by any court prior to allowing Agent or any Lender to exercise any of its remedies; and (iii) the benefit of
all valuation, appraisal and exemption Laws. Each Borrower acknowledges that it has been advised by counsel of its choices and decisions
with respect to this Agreement, the other Financing Documents and the transactions evidenced hereby and thereby.
(b)
Each Borrower for itself and all its successors and assigns, (i) agrees that its liability shall not be in any
manner affected by any indulgence, extension of time, renewal, waiver, or modification granted or consented to by any Lender; (ii)
consents to any indulgences and all extensions of time, renewals, waivers, or modifications that may be granted by Agent or any Lender
with respect to the payment or other provisions of the Financing Documents, and to any substitution, exchange or release of the
Collateral, or any part thereof, with or without substitution, and agrees to the addition or release of any Borrower, endorsers, guarantors,
or sureties, or whether primarily or secondarily liable, without notice to any other Borrower and without affecting its liability hereunder;
(iii) agrees that its liability shall be unconditional and without regard to the liability of any other Borrower, Agent or any Lender for any
tax on the indebtedness; and (iv) to the fullest extent permitted by law, expressly waives the benefit of any statute or rule of law or equity
now provided, or which may hereafter be provided, which would produce a result contrary to or in conflict with the foregoing.
(c)
To the extent that Agent or any Lender may have acquiesced in any noncompliance with any requirements or
conditions precedent to the closing of the Credit Facilities or to any subsequent disbursement of Credit Extensions, such acquiescence
shall not be deemed to constitute a waiver by Agent or any Lender of such requirements with respect to any future Credit Extensions and
Agent may at any time after such acquiescence require Borrower to comply with all such requirements. Any forbearance by Agent or a
Lender in exercising any right or remedy under any of the Financing Documents, or otherwise afforded by applicable law, including any
failure to accelerate the maturity date of the Credit Facilities, shall not be a waiver of or preclude the exercise of any right or remedy nor
shall it serve as a novation of the Financing Documents or as a reinstatement of the Obligations or a waiver of such right of acceleration
or the right to insist upon strict compliance of the terms of the Financing Documents. Agent’s or any Lender’s acceptance of payment of
any sum secured by any of the Financing Documents after the due date of such payment shall not be a waiver of Agent’s and such
Lender’s right to either require prompt payment when due of all other sums so secured or to declare a default for failure to make prompt
payment. The procurement of insurance or the payment of taxes or other Liens or charges by Agent as the result of an Event of Default
shall not be a waiver of Agent’s right to accelerate the maturity of the Obligations, nor shall Agent’s receipt of any condemnation awards,
insurance proceeds, or damages under this Agreement operate to cure or waive any Credit Party’s default in payment of sums secured by
any of the Financing Documents.
(d)
Without limiting the generality of anything contained in this Agreement or the other Financing Documents,
each Borrower agrees that if an Event of Default is continuing (i) Agent and the Lenders shall not be subject to any “one action” or
“election of remedies” law or rule, and (ii) all Liens and other rights, remedies or privileges provided to Agent or the Lenders shall
remain in full force and effect until Agent or the Lenders have exhausted all remedies against the Collateral and any other properties
owned by Borrower and the Financing Documents and other security instruments or agreements securing the Obligations have been
foreclosed, sold and/or otherwise realized upon in satisfaction of Borrower’s obligations under the Financing Documents.
(e)
Neither Agent nor any Lender shall be under any obligation to marshal any assets in payment of any or all of
the Obligations. Nothing contained herein or in any other Financing Document shall be construed as requiring Agent or any Lender to
resort to any part of the Collateral for the satisfaction of any of Borrower’s obligations under the Financing Documents in preference or
priority to any other Collateral, and Agent may seek satisfaction out of all of the Collateral or any part thereof, in its absolute discretion in
respect of Borrower’s obligations under the Financing Documents. To the fullest extent permitted by law, each Borrower, for itself and its
successors and assigns, waives in the event of foreclosure of any or all of the Collateral any equitable right otherwise available to any
Credit Party which would require the separate sale of any of the Collateral or require Agent or the Lenders to exhaust their remedies
against any part of the Collateral before proceeding against any other part of the Collateral; and further in the event of such foreclosure
each Borrower does hereby expressly consent to and authorize, at the option of Agent, the foreclosure and sale either separately or
together of each part of the Collateral.
29
10.8
Injunctive Relief. The parties acknowledge and agree that, in the event of a breach or written threatened breach of any
Credit Party’s obligations under any Financing Documents, Agent and the Lenders may have no adequate remedy in money damages and,
accordingly, shall be entitled to an injunction (including, without limitation, a temporary restraining order, preliminary injunction, writ of
attachment, or order compelling an audit) against such breach or threatened breach, including, without limitation, maintaining any cash
management and collection procedure described herein. However, no specification in this Agreement of a specific legal or equitable
remedy shall be construed as a waiver or prohibition against any other legal or equitable remedies in the event of a breach or threatened
breach of any provision of this Agreement. Each Credit Party waives, to the fullest extent permitted by law, the requirement of the posting
of any bond in connection with such injunctive relief. By joining in the Financing Documents as a Credit Party, each Credit Party
specifically joins in this Section 10.8 as if this Section 10.8 were a part of each Financing Document executed by such Credit Party.
11.
NOTICES
All notices, consents, requests, approvals, demands, or other communication by any party to this Agreement or any other Financing
Document must be in writing and shall be deemed to have been validly served, given, or delivered: (a) upon the earlier of actual receipt and
three (3) Business Days after deposit in the U.S. mail, first class, registered or certified mail return receipt requested, with proper postage
prepaid; (b) upon transmission, when sent by electronic mail (if an email address is specified herein) or facsimile transmission; (c) one (1)
Business Day after deposit with a reputable overnight courier with all charges prepaid; or (d) when delivered, if hand-delivered by
messenger, all of which shall be addressed to the party to be notified and sent to the address, facsimile number, or email address indicated
below. Any of Agent, a Lender or Borrower may change its mailing or electronic mail address or facsimile number by giving the other
party written notice thereof in accordance with the terms of this Article 11.
If to Borrower:
Protagonist Therapeutics, Inc.
7707 Gateway Boulevard
Suite 140
Newark, CA 94560
Attn: Don Kalkofen
Email: d.kalkofen@ptgx-inc.com
If to Agent or to MidCap (or any of its Affiliates or Approved Funds) as a Lender:
MidCap Financial Trust
c/o MidCap Financial Services, LLC, as servicer
7255 Woodmont Ave, Suite 200
Bethesda, MD 20814
Attn: Account Manager for Protagonist transaction
Fax: 301-941-1450
Email: notices@midcapfinancial.com
With a copy to:
MidCap Financial Trust
c/o MidCap Financial Services, LLC, as servicer
7255 Woodmont Ave, Suite 200
Bethesda, MD 20814
Attn: Legal
Fax: 301-941-1450
Email: legalnotices@midcapfinancial.com
If to any Lender other than MidCap: at the address set forth on the signature pages to this Agreement or provided as a notice
address for such in connection with any assignment hereunder.
30
12.
CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER
12.1
THIS AGREEMENT, EACH SECURED PROMISSORY NOTE AND EACH OTHER FINANCING DOCUMENT
(EXCLUDING THOSE FINANCING DOCUMENTS THAT BY THEIR OWN TERMS ARE EXPRESSLY GOVERNED BY THE
LAWS OF ANOTHER JURISDICTION), AND THE RIGHTS, REMEDIES AND OBLIGATIONS OF THE PARTIES HERETO AND
THERETO, AND ANY CLAIM, CONTROVERSY OR DISPUTE ARISING UNDER OR RELATED TO THIS AGREEMENT OR
SUCH FINANCING DOCUMENT (EXCLUDING THOSE FINANCING DOCUMENTS THAT BY THEIR OWN TERMS ARE
EXPRESSLY GOVERNED BY THE LAWS OF ANOTHER JURISDICTION), THE RELATIONSHIP OF THE PARTIES, AND/OR THE
INTERPRETATION AND ENFORCEMENT OF THE RIGHTS AND DUTIES OF THE PARTIES AND ALL OTHER MATTERS
RELATING HERETO, THERETO OR ARISING THEREFROM (WHETHER SOUNDING IN CONTRACT LAW, TORT LAW OR
OTHERWISE), SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF
THE STATE OF NEW YORK, WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS (OTHER THAN SECTION 5-
1401 OF THE GENERAL OBLIGATIONS LAW). NOTWITHSTANDING THE FOREGOING, AGENT AND THE LENDERS SHALL
HAVE THE RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST BORROWER OR ITS PROPERTY IN THE COURTS OF
ANY OTHER JURISDICTION WHICH AGENT AND THE LENDERS (IN ACCORDANCE WITH THE PROVISIONS OF SECTION
12.1) DEEM NECESSARY OR APPROPRIATE TO REALIZE ON THE COLLATERAL OR TO OTHERWISE ENFORCE AGENT’S
AND LENDERS’ RIGHTS AGAINST BORROWER OR ITS PROPERTY. BORROWER EXPRESSLY SUBMITS AND CONSENTS IN
ADVANCE TO THE JURISDICTION OF THE FEDERAL AND STATE COURTS LOCATED IN THE STATE OF NEW YORK AND
ANY SUCH OTHER JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND BORROWER
HEREBY WAIVES ANY OBJECTION THAT IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER
VENUE, OR FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE
RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. BORROWER HEREBY WAIVES PERSONAL SERVICE OF THE
SUMMONS, COMPLAINTS, AND OTHER PROCESS ISSUED IN SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF
SUCH SUMMONS, COMPLAINTS, AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL
ADDRESSED TO BORROWER AT THE ADDRESS SET FORTH IN ARTICLE 11 OF THIS AGREEMENT AND THAT SERVICE SO
MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER TO OCCUR OF BORROWER’S ACTUAL RECEIPT THEREOF
OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAIL, PROPER POSTAGE PREPAID.
12.2
(a)
TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, BORROWER, AGENT AND THE
LENDERS EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF OR
BASED UPON THIS AGREEMENT, THE FINANCING DOCUMENTS OR ANY CONTEMPLATED TRANSACTION,
INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL
INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER
WITH ITS COUNSEL.
(b)
IN THE EVENT THAT ANY SUCH ACTION IS COMMENCED OR MAINTAINED IN ANY COURT IN
THE STATE OF CALIFORNIA, AND THE WAIVER OF JURY TRIAL SET FORTH IN THE SECTION ABOVE IS NOT
ENFORCEABLE, AND EACH PARTY TO SUCH ACTION DOES NOT SUBSEQUENTLY WAIVE IN AN EFFECTIVE MANNER
UNDER CALIFORNIA LAW ITS RIGHT TO A TRIAL BY JURY, THE PARTIES HERETO HEREBY ELECT TO PROCEED AS
FOLLOWS:
(i)
WITH THE EXCEPTION OF THE ITEMS SPECIFIED IN CLAUSE (II) BELOW, ANY
CONTROVERSY, DISPUTE OR CLAIM (EACH, A “CONTROVERSY”) BETWEEN THE PARTIES ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR ANY OTHER FINANCING DOCUMENT WILL BE RESOLVED BY A REFERENCE
PROCEEDING IN ACCORDANCE WITH THE PROVISIONS OF SECTIONS 638, ET SEQ. OF THE CALIFORNIA CODE OF CIVIL
PROCEDURE, OR THEIR SUCCESSOR SECTIONS, WHICH SHALL CONSTITUTE THE EXCLUSIVE REMEDY FOR THE
RESOLUTION OF ANY CONTROVERSY, INCLUDING WHETHER THE CONTROVERSY IS SUBJECT TO
31
THE REFERENCE PROCEEDING.
PROCEEDING WILL BE IN ANY COURT IN WHICH VENUE IS APPROPRIATE UNDER APPLICABLE LAW (THE “COURT”).
EXCEPT AS OTHERWISE PROVIDED ABOVE, VENUE FOR THE REFERENCE
(ii)
THE MATTERS THAT SHALL NOT BE SUBJECT TO A REFERENCE PROCEEDING ARE THE
FOLLOWING: (A) NON-JUDICIAL FORECLOSURE OF ANY SECURITY INTERESTS IN REAL OR PERSONAL PROPERTY; (B)
EXERCISE OF SELF HELP REMEDIES (INCLUDING SET-OFF); (C) APPOINTMENT OF A RECEIVER; AND (D) TEMPORARY,
PROVISIONAL OR ANCILLARY REMEDIES (INCLUDING WRITS OF ATTACHMENT, WRITS OF POSSESSION, TEMPORARY
RESTRAINING ORDERS OR PRELIMINARY INJUNCTIONS). THIS AGREEMENT DOES NOT LIMIT THE RIGHT OF ANY
PARTY TO EXERCISE OR OPPOSE ANY OF THE RIGHTS AND REMEDIES DESCRIBED IN CLAUSES (A) AND (B) OR TO
SEEK OR OPPOSE FROM A COURT OF COMPETENT JURISDICTION ANY OF THE ITEMS DESCRIBED IN CLAUSES (C) AND
(D). THE EXERCISE OF, OR OPPOSITION TO, ANY OF THOSE ITEMS DOES NOT WAIVE THE RIGHT OF ANY PARTY TO A
REFERENCE PROCEEDING PURSUANT TO THIS AGREEMENT.
(iii)
THE REFEREE SHALL BE A RETIRED JUDGE OR JUSTICE SELECTED BY MUTUAL
WRITTEN AGREEMENT OF THE PARTIES. IF THE PARTIES DO NOT AGREE WITHIN TEN (10) DAYS OF A WRITTEN
REQUEST TO DO SO BY ANY PARTY, THEN, UPON REQUEST OF ANY PARTY, THE REFEREE SHALL BE SELECTED BY THE
PRESIDING JUDGE OF THE COURT (OR HIS OR HER REPRESENTATIVE). A REQUEST FOR APPOINTMENT OF A REFEREE
MAY BE HEARD ON AN EX PARTE OR EXPEDITED BASIS, AND THE PARTIES AGREE THAT IRREPARABLE HARM WOULD
RESULT IF EX PARTE RELIEF IS NOT GRANTED.
(iv)
EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, THE REFEREE SHALL
DETERMINE THE MANNER IN WHICH THE REFERENCE PROCEEDING IS CONDUCTED INCLUDING THE TIME AND
PLACE OF HEARINGS, THE ORDER OF PRESENTATION OF EVIDENCE, AND ALL OTHER QUESTIONS THAT ARISE WITH
RESPECT TO THE COURSE OF THE REFERENCE PROCEEDING. ALL PROCEEDINGS AND HEARINGS CONDUCTED
BEFORE THE REFEREE, EXCEPT FOR TRIAL, SHALL BE CONDUCTED WITHOUT A COURT REPORTER, EXCEPT THAT
WHEN ANY PARTY SO REQUESTS, A COURT REPORTER WILL BE USED AT ANY HEARING CONDUCTED BEFORE THE
REFEREE, AND THE REFEREE WILL BE PROVIDED A COURTESY COPY OF THE TRANSCRIPT. THE PARTY MAKING SUCH
A REQUEST SHALL HAVE THE OBLIGATION TO ARRANGE FOR THE COURT REPORTER. SUBJECT TO THE REFEREE’S
POWER TO AWARD COSTS TO THE PREVAILING PARTY, THE CREDIT PARTIES WILL PAY THE COST OF THE REFEREE
AND ALL COURT REPORTERS.
(v)
THE REFEREE SHALL BE REQUIRED TO DETERMINE ALL ISSUES IN ACCORDANCE WITH
EXISTING APPLICABLE CASE LAW AND STATUTORY LAW. THE RULES OF EVIDENCE APPLICABLE TO PROCEEDINGS
AT LAW IN THE COURT WILL BE APPLICABLE TO THE REFERENCE PROCEEDING. THE REFEREE SHALL BE
EMPOWERED TO ENTER EQUITABLE AS WELL AS LEGAL RELIEF, ENTER EQUITABLE ORDERS THAT WILL BE BINDING
ON THE PARTIES AND RULE ON ANY MOTION THAT WOULD BE AUTHORIZED IN A COURT PROCEEDING. THE REFEREE
SHALL ISSUE A DECISION AT THE CLOSE OF THE REFERENCE PROCEEDING WHICH DISPOSES OF ALL CLAIMS OF THE
PARTIES THAT ARE THE SUBJECT OF THE REFERENCE PROCEEDING. PURSUANT TO CALIFORNIA CODE OF CIVIL
PROCEDURE SECTION 644, SUCH DECISION SHALL BE ENTERED BY THE COURT AS A JUDGMENT OR AN ORDER IN THE
SAME MANNER AS IF THE ACTION HAD BEEN TRIED BY THE COURT AND ANY SUCH DECISION WILL BE FINAL,
BINDING AND CONCLUSIVE. THE PARTIES RESERVE THE RIGHT TO APPEAL FROM THE FINAL JUDGMENT OR ORDER
OR FROM ANY APPEALABLE DECISION OR ORDER ENTERED BY THE REFEREE. THE PARTIES RESERVE THE RIGHT TO
FINDINGS OF FACT, CONCLUSIONS OF LAWS, A WRITTEN STATEMENT OF DECISION, AND THE RIGHT TO MOVE FOR A
NEW TRIAL OR A DIFFERENT JUDGMENT, WHICH NEW TRIAL, IF GRANTED, IS ALSO TO BE A REFERENCE PROCEEDING
UNDER THIS PROVISION.
CALIFORNIA LAW CONTAINED HEREIN SHALL BE DEEMED TO AFFECT OR LIMIT IN
(vi)
NEITHER THE INCLUSION OF THIS SECTION 12.2(b), NOR ANY REFERENCE TO
32
ANY WAY THE PARTIES’ CHOICE OF NEW YORK LAW OR IMPLY THAT THE CREDIT PARTIES HAVE AGREED TO VENUE
IN CALIFORNIA
12.3
California Waiver.
(a)
BY SIGNING BELOW, EACH BORROWER WAIVES ANY RIGHT, UNDER CALIFORNIA CIVIL CODE
SECTION 2954.10 OR OTHERWISE, TO PREPAY ANY PORTION OF THE OUTSTANDING PRINCIPAL BALANCE UNDER
THIS AGREEMENT WITHOUT A PREPAYMENT FEE. EACH BORROWER ACKNOWLEDGES THAT PREPAYMENT OF THE
PRINCIPAL BALANCE MAY RESULT IN AGENT AND/OR A LENDER INCURRING ADDITIONAL LOSSES, COSTS,
EXPENSES AND LIABILITIES, INCLUDING LOST REVENUE AND LOST PROFITS. EACH BORROWER THEREFORE
AGREES TO PAY A PREPAYMENT FEE AND HEREIN IF ANY PRINCIPAL AMOUNT IS PREPAID, WHETHER VOLUNTARILY
OR BY REASON OF ACCELERATION, INCLUDING ACCELERATION UPON ANY SALE OR OTHER TRANSFER OF ANY
INTEREST IN THE COLLATERAL.EACH BORROWER FURTHER AGREES THAT AGENT’S AND EACH LENDER’S
WILLINGNESS TO OFFER THE INTEREST RATE DESCRIBED HEREIN TO BORROWER IS SUFFICIENT AND
INDEPENDENT CONSIDERATION, GIVEN INDIVIDUAL WEIGHT BY AGENT AND THE LENDERS FOR THIS
WAIVER. EACH BORROWER UNDERSTANDS THAT AGENT AND THE LENDERS WOULD NOT OFFER SUCH AN
INTEREST RATE TO THE BORROWER ABSENT THIS WAIVER.
California Waiver; No Hearing Required. Each Borrower waives any right or defense it may have at Law or
equity, including California Code of Civil Procedure Section 580a, to a fair market value hearing or action to determine a deficiency
judgment after a foreclosure.
(b)
(c)
Borrower Acknowledgment. California Civil Code Section 2955.5(a) provides as follows: “No lender shall
require a borrower, as a condition of receiving or maintaining a loan secured by real property, to provide hazard insurance coverage
against risks to the improvements on that real property in an amount exceeding the replacement value of the improvements on the
property.” For purposes of the foregoing, (i) the term “hazard insurance coverage” means insurance against losses caused by perils which
are commonly covered in policies described as a “Homeowner’s Policy,” “General Property Form,” “Guaranteed Replacement Cost
Insurance,” “Special Building Form,” “Standard Fire,” “Standard Fire with Extended Coverage,” “Standard Fire with Special Form
Endorsement,” or comparable insurance coverage to protect the real property against loss or damage from fire and other perils covered
within the scope of a standard extended coverage endorsement, and (ii) the term “Improvements” means buildings or structures attached
to the real property. Each Borrower acknowledges having received this disclosure prior to execution of the Financing Documents to be
delivered by Borrower in connection with the Credit Facilities.
13.
GENERAL PROVISIONS
13.1
Successors and Assigns.
(a)
This Agreement binds and is for the benefit of the successors and permitted assigns of each party. Borrower
may not assign this Agreement or any rights or obligations under it without Agent’s prior written consent (which may be granted or
withheld in Agent’s discretion).Any Lender may at any time assign to one (1) or more Eligible Assignees all or any portion of such
Lender’s Applicable Commitment and/or Credit Extensions, together with all related obligations of such Lender hereunder. Borrower
and Agent shall be entitled to continue to deal solely and directly with such Lender in connection with the interests so assigned until
Agent shall have received and accepted an effective assignment agreement in form and substance acceptable to Agent, executed,
delivered and fully completed by the applicable parties thereto, and shall have received such other information regarding such Eligible
Assignee as Agent reasonably shall require. Notwithstanding anything set forth in this Agreement to the contrary, any Lender may at any
time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender,
including any pledge or assignment to secure obligations to a Federal Reserve Bank; provided, however, that no such pledge or
assignment shall release such Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as
a party hereto. If requested by Agent, Borrower agrees to (i) execute any documents reasonably required to effectuate and acknowledge
each assignment of an Applicable Commitment or Credit Extension to an assignee hereunder, (ii) make Borrower’s
33
management available to meet with Agent and prospective participants and assignees of Applicable Commitments or Credit Extensions and
(iii) assist Agent or the Lenders in the preparation of information relating to the financial affairs of Borrower as any prospective participant
or assignee of an Applicable Commitment or Credit Extension reasonably may request.
(b)
From and after the date on which the conditions described above have been met, (i) such Eligible Assignee
shall be deemed automatically to have become a party hereto and, to the extent of the interests assigned to such Eligible Assignee
pursuant to such assignment agreement, shall have the rights and obligations of a Lender hereunder, and (ii) the assigning Lender, to the
extent that rights and obligations hereunder have been assigned by it pursuant to such assignment agreement, shall be released from its
rights and obligations hereunder (other than those that survive termination). Upon the request of the Eligible Assignee (and, as
applicable, the assigning Lender) pursuant to an effective assignment agreement, each Borrower shall execute and deliver to Agent for
delivery to the Eligible Assignee (and, as applicable, the assigning Lender) secured notes in the aggregate principal amount of the
Eligible Assignee’s Credit Extensions or Applicable Commitments (and, as applicable, secured promissory notes in the principal amount
of that portion of the principal amount of the Credit Extensions or Applicable Commitments retained by the assigning Lender).
(c)
Agent, acting solely for this purpose as an agent of Borrower, shall maintain at its offices located in Bethesda,
Maryland a copy of each assignment agreement delivered to it and a Register for the recordation of the names and addresses of each
Lender, and the commitments of, and principal amount (and stated interest) of the Credit Extensions owing to, such Lender pursuant to
the terms hereof (the “Register”). The entries in such Register shall be conclusive, absent manifest error, and Borrower, Agent and the
Lenders may treat each Person whose name is recorded therein pursuant to the terms hereof as a Lender hereunder for all purposes of this
Agreement, notwithstanding notice to the contrary. Such Register shall be available for inspection by Borrower and any Lender, at any
reasonable time upon reasonable prior notice to Agent. Each Lender that sells a participation shall, acting solely for this purpose as an
agent of Borrower maintain a register on which it enters the name and address of each participant and the principal amounts (and stated
interest) of each participant’s interest in the Obligations (each, a “Participant Register”). The entries in the Participant Registers shall be
conclusive, absent manifest error. Each Participant Register shall be available for inspection by Borrower and Agent at any reasonable
time upon reasonable prior notice to the applicable Lender; provided that no Lender shall have any obligation to disclose all or any
portion of the Participant Register (including the identity of any participant or any information relating to a participant’s interest in any
commitments, loans, letters of credit or its other obligations under any Financing Document) to any Person (including Borrower) except
to the extent that such disclosure is necessary to establish that such commitment, loan, letter of credit or other obligation is in registered
form under Section 5f.103-1(c) of the United States Treasury Regulations. For the avoidance of doubt, Agent (in its capacity as Agent)
shall have no responsibility for maintaining a participant register.
(d)
Notwithstanding anything to the contrary contained in this Agreement, the Credit Extensions (including any
Secured Promissory Notes evidencing such Credit Extensions) are intended to be registered obligations, the right, title and interest of the
Lenders and their assignees in and to such Credit Extensions shall be transferable only upon notation of such transfer in the Register (or
an applicable Participant Register) and no assignment thereof shall be effective until recorded therein. It is intended that this Agreement
be construed so that the Credit Extensions are at all times maintained in “registered form” within the meaning of Sections 163(f), 871(h)
(2) and 881(c)(2) of the IRC and Section 5f.103-1(c) of the United States Treasury Regulations.
13.2
Indemnification.
(a)
Borrower hereby agrees to promptly pay (i) (A) all reasonable and documented costs and expenses of Agent
and Lenders (including, without limitation, the costs, expenses and reasonable fees of counsel to, and independent appraisers and
consultants retained by, Agent) in connection with the examination, review, due diligence investigation, documentation, negotiation,
closing and syndication of the transactions contemplated by the Financing Documents, and in connection with the continued
administration of the Financing Documents including (1) any amendments, modifications, consents and waivers to and/or under any and
all Financing Documents, and (2) any periodic public record searches conducted by or at the request of Agent (including, without
limitation, title investigations, UCC searches, fixture filing searches, judgment, pending litigation and tax lien searches and searches of
applicable corporate, limited liability, partnership and related records concerning the continued existence,
34
organization and good standing of certain Persons), and (B) reasonable and documented costs and expenses of Agent in connection with the
performance by Agent of its rights and remedies under the Financing Documents; (ii) without limitation of the preceding clause (i), all
reasonable and documented costs and expenses of Agent in connection with the creation, perfection and maintenance of Liens pursuant to
the Financing Documents; (iii) without limitation of the preceding clause (i), all costs and expenses of Agent in connection with (A)
protecting, storing, insuring, handling, maintaining or selling any Collateral, (B) any litigation, dispute, suit or proceeding relating to any
Financing Document, and (C) any workout, collection, bankruptcy, insolvency and other enforcement proceedings under any and all of the
Financing Documents; (iv) without limitation of the preceding clause (i), all reasonable and documented costs and expenses of Agent in
connection with Agent’s reservation of funds in anticipation of the funding of the Credit Extensions to be made hereunder; and (v) all costs
and expenses incurred by Agent or the Lenders in connection with any litigation, dispute, suit or proceeding relating to any Financing
Document and in connection with any workout, collection, bankruptcy, insolvency and other enforcement proceedings under any and all
Financing Documents, whether or not Agent or the Lenders are a party thereto. If Agent or any Lender uses in-house counsel for any of
these purposes, Borrower further agrees that the Obligations include reasonable charges for such work commensurate with the fees that
would otherwise be charged by outside legal counsel selected by Agent or such Lender for the work performed.
(b)
Borrower hereby agrees to indemnify, pay and hold harmless Agent and the Lenders and the officers,
directors, employees, trustees, agents, investment advisors, collateral managers, servicers, and counsel of Agent and the Lenders
(collectively called the “Indemnitees”) from and against any and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including the disbursements and
reasonable fees of counsel for such Indemnitee) in connection with any investigative, response, remedial, administrative or judicial matter
or proceeding, whether or not such Indemnitee shall be designated a party thereto and including any such proceeding initiated by or on
behalf of a Credit Party, and the reasonable expenses of investigation by engineers, environmental consultants and similar technical
personnel and any commission, fee or compensation claimed by any broker (other than any broker retained by Agent or the Lenders)
asserting any right to payment for the transactions contemplated hereby, which may be imposed on, incurred by or asserted against such
Indemnitee as a result of or in connection with the transactions contemplated hereby and the use or intended use of the proceeds of the
Credit Facilities, except that Borrower shall have no obligation hereunder to an Indemnitee with respect to any liability resulting from the
gross negligence or willful misconduct of such Indemnitee, as determined by a final non-appealable judgment of a court of competent
jurisdiction. To the extent that the undertaking set forth in the immediately preceding sentence may be unenforceable, Borrower shall
contribute the maximum portion which it is permitted to pay and satisfy under applicable Law to the payment and satisfaction of all such
Indemnified Liabilities incurred by the Indemnitees or any of them. No Indemnitee shall be liable for any damages arising from the use
by unintended recipients of any information or other materials distributed by it through telecommunications, electronic or other
information transmission systems in connection with this Agreement or the other Financing Documents or the transactions contemplated
hereby or thereby. This Section 13.2 shall not apply with respect to Taxes other than any Taxes that represent losses, claims, damages,
etc. arising from any non-Tax claim.
(c)
Notwithstanding any contrary provision in this Agreement, the obligations of Borrower under this Section
13.2 shall survive the payment in full of the Obligations and the termination of this Agreement. NO INDEMNITEE SHALL BE
RESPONSIBLE OR LIABLE TO ANY CREDIT PARTY OR TO ANY OTHER PARTY TO ANY FINANCING DOCUMENT, ANY
SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY
THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE
ALLEGED AS A RESULT OF CREDIT HAVING BEEN EXTENDED, SUSPENDED OR TERMINATED UNDER THIS
AGREEMENT OR ANY OTHER FINANCING DOCUMENT OR AS A RESULT OF ANY OTHER TRANSACTION
CONTEMPLATED HEREUNDER OR THEREUNDER.
(d)
Borrower for itself and all endorsers, guarantors and sureties and their heirs, legal representatives, successors
and assigns, hereby further specifically waives any rights that it may have under Section 1542 of the California Civil Code (to the extent
applicable), which provides as follows: “A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH
IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR,” and
further waives any similar rights under applicable Laws.
35
maximum extent permitted by law, expressly waives:
(e)
Without limiting the generality of Section 13.15 or any other provision hereof, each Borrower, to the
all rights and defenses arising out of an election of remedies by Agent, even though that election of
remedies, such as a nonjudicial foreclosure with respect to security for the Obligations, has destroyed such Borrower’s rights of subrogation
and reimbursement against any Borrower by the operation of Section 580d of the California Code of Civil Procedure or otherwise; and
(i)
(ii)
all rights and defenses that such Borrower may have relating to Obligations that are or become secured
by real property. This means, among other things: (A) Agent may collect from such Borrower without first foreclosing on any real property
or personal property collateral pledged by any other Borrower and (B) if Agent forecloses on any real property pledged by any Borrower or
any Guarantor: (1) the amount of the Obligations may be reduced only by the price for which such collateral is sold at the foreclosure sale,
even if such collateral is worth more than the sale price; and (2) Agent may collect from such Borrower even if Agent, by foreclosing on
any such real property, has destroyed any right such Borrower may have to collect from the other Borrower. This is an unconditional and
irrevocable waiver of any rights and defenses such Borrower may have relating to Obligations that are secured by real property. These
rights and defenses include, but are not limited to, any rights or defenses based upon Section 580a, 580b, 580d or 726 of the California
Code of Civil Procedure or any comparable statutes. As provided in Section 12.1 hereof, this Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York. The foregoing provisions are included solely out of an abundance of
caution and shall not be construed to mean that any of the above referenced provisions of California law are in any way applicable to this
Agreement or the Obligations.
13.3
Time of Essence. Time is of the essence for the payment and performance of the Obligations in this Agreement.
13.4
Severability of Provisions. Each provision of this Agreement is severable from every other provision in determining the
enforceability of any provision.
13.5
Correction of Financing Documents. Agent and the Lenders may correct patent errors and fill in any blanks in this
Agreement and the other Financing Documents consistent with the agreement of the parties.
13.6
Integration. This Agreement and the other Financing Documents represent the entire agreement about this subject matter
and supersede prior negotiations or agreements. All prior agreements, understandings, representations, warranties, and negotiations
between the parties about the subject matter of this Agreement and the Financing Documents merge into this Agreement and the Financing
Documents.
13.7
Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate
counterparts, each of which, when executed and delivered, is an original, and all taken together, constitute one Agreement. Delivery of an
executed signature page of this Agreement by facsimile transmission or electronic transmission shall be as effective as delivery of a
manually executed counterpart hereof.
13.8
Survival. All covenants, representations and warranties made in this Agreement continue in full force until this
Agreement has terminated pursuant to its terms and all Obligations (other than inchoate indemnity obligations for which no claim has yet
been made and any other obligations which, by their terms, are to survive the termination of this Agreement) have been satisfied. The
obligation of Borrower in Section 13.2 to indemnify each Lender and Agent shall survive until the statute of limitations with respect to such
claim or cause of action shall have run. All powers of attorney and appointments of Agent or any Lender as Borrower’s attorney in fact
hereunder, and all of Agent’s and Lenders’ rights and powers in respect thereof, are coupled with an interest, are irrevocable until all
Obligations (other than inchoate indemnity obligations for which no claim has yet been made and any other obligations which, by their
terms, are to survive the termination of this Agreement) have been fully repaid and performed and Agent’s and the Lenders’ obligation to
provide Credit Extensions terminates.
13.9
Confidentiality. In handling any confidential information of Borrower, each of the Lenders and Agent shall use all
reasonable efforts to maintain, in accordance with its customary practices, the confidentiality of
36
information obtained by it pursuant to any Financing Document and designated in writing by any Credit Party as confidential, but disclosure
of information may be made: (a) to the Lenders’ and Agent’s Subsidiaries or Affiliates; (b) to prospective transferees or purchasers of any
interest in the Credit Extensions, provided, however, that any such Persons are bound by obligations of confidentiality substantially the
same or more stringent than those set forth in this Section 13.9; (c) as required by Law, regulation, subpoena, order or other legal,
administrative, governmental or regulatory request; (d) to regulators or as otherwise required in connection with an examination, audit or
similar investigation by any Governmental Authority, or to any nationally recognized rating agency; (e) as Agent or any Lender considers
appropriate in exercising remedies under the Financing Documents; (f) to financing sources that are advised of the confidential nature of
such information and are instructed to keep such information confidential; (g) to third party service providers of the Lenders and/or Agent
so long as such service providers are bound to such Lender or Agent by obligations of confidentiality; (h) to the extent necessary or
customary for inclusion in league table measurements; and (i) in connection with any litigation or other proceeding to which such Lender or
Agent or any of their Affiliates is a party or bound, or to the extent necessary to respond to public statements or disclosures by Credit
Parties or their Affiliates referring to a Lender or Agent or any of their Affiliates. Confidential information does not include information
that either: (i) is in the public domain or in the Lenders’ and/or Agent’s possession when disclosed to the Lenders and/or Agent, or becomes
part of the public domain after disclosure to the Lenders and/or Agent; or (ii) is disclosed to the Lenders and/or Agent by a third party, if the
Lenders and/or Agent does not know that the third party is prohibited from disclosing the information. Agent and/or the Lenders may use
confidential information for the development of client databases, reporting purposes, and market analysis, so long as Agent and/or the
Lenders, as applicable, do not disclose Borrower’s identity or the identity of any Person associated with Borrower unless otherwise
permitted by this Agreement. The provisions of the immediately preceding sentence shall survive the termination of this Agreement. The
agreements provided under this Section 13.9 supersede all prior agreements, understanding, representations, warranties, and negotiations
between the parties about the subject matter of this Section 13.9.
13.10
Right of Set-off. Borrower hereby grants to Agent and to each Lender, a lien, security interest and right of set-off as
security for all Obligations to Agent and each Lender hereunder, whether now existing or hereafter arising upon and against all deposits,
credits, collateral and property, now or hereafter in the possession, custody, safekeeping or control of Agent or the Lenders or any entity
under the control of Agent or the Lenders (including an Agent or Lender Affiliate) or in transit to any of them. At any time after the
occurrence and during the continuance of an Event of Default, without demand or notice, Agent or the Lenders may set-off the same or any
part thereof and apply the same to any liability or obligation of Borrower even though unmatured and regardless of the adequacy of any
other collateral securing the Obligations. ANY AND ALL RIGHTS TO REQUIRE AGENT TO EXERCISE ITS RIGHTS OR
REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE OBLIGATIONS, PRIOR TO EXERCISING
ITS RIGHT OF SET-OFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF BORROWER, ARE
HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.
13.11
Publicity. Borrower will not directly or indirectly publish, disclose or otherwise use in any public disclosure, advertising
material, promotional material, press release or interview, any reference to the name, logo or any trademark of Agent or any Lender or any
of their Affiliates or any reference to this Agreement or the financing evidenced hereby, in any case except as required by applicable Law,
subpoena or judicial or similar order, in which case Borrower shall endeavor to give Agent prior written notice of such publication or other
disclosure. Each Lender and Borrower hereby authorize each Lender to publish the name of such Lender and Borrower, the existence of the
financing arrangements referenced under this Agreement, the primary purpose and/or structure of those arrangements, the amount of credit
extended under each facility, the title and role of each party to this Agreement, and the total amount of the financing evidenced hereby in
any “tombstone”, comparable advertisement or press release which such Lender elects to submit for publication. In addition, each Lender
and Borrower agree that each Lender may provide lending industry trade organizations with information necessary and customary for
inclusion in league table measurements after the Closing Date. With respect to any of the foregoing, such authorization shall be subject to
such Lender providing Borrower and the other Lenders with an opportunity to review and confer with such Lender regarding, and approve,
the contents of any such tombstone, advertisement or information, as applicable, prior to its initial submission for publication, but
subsequent publications of the same tombstone, advertisement or information shall not require Borrower’s approval.
13.12
No Strict Construction. The parties hereto have participated jointly in the negotiation and drafting of this Agreement. In
the event an ambiguity or question of intent or interpretation arises, this Agreement shall be
37
construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by
virtue of the authorship of any provisions of this Agreement.
13.13
Approvals. Unless expressly provided herein to the contrary, any approval, consent, waiver or satisfaction of Agent or
the Lenders with respect to any matter that is the subject of this Agreement or the other Financing Documents may be granted or withheld
by Agent and the Lenders in their sole and absolute discretion and credit judgment.
13.14
Amendments; Required Lenders; Inter-Lender Matters.
(a)
No amendment, modification, termination or waiver of any provision of this Agreement or any other
Financing Document, no approval or consent thereunder, or any consent to any departure by Borrower therefrom (in each case, other than
amendments, waivers, approvals or consents deemed ministerial by Agent), shall in any event be effective unless the same shall be in
writing and signed by Borrower, Agent and the Required Lenders. Except as set forth in clause (b) below, all such amendments,
modifications, terminations or waivers requiring the consent of the “Lenders” shall require the written consent of Required Lenders.
(b)
No amendment, modification, termination or waiver of any provision of this Agreement or any other
Financing Document shall, unless in writing and signed by Agent and by each Lender directly affected thereby: (i) increase or decrease
the Applicable Commitment of any Lender (which shall be deemed to affect all Lenders), (ii) reduce the principal of or rate of interest on
any Obligation or the amount of any fees payable hereunder, (iii) postpone the date fixed for or waive any payment of principal of or
interest on any Credit Extension, or any fees or reimbursement obligation hereunder, (iv) release all or substantially all of the Collateral,
or consent to a transfer of any of the Intellectual Property, in each case, except as otherwise expressly permitted in the Financing
Documents (which shall be deemed to affect all Lenders), (v) subordinate the lien granted in favor of Agent securing the Obligations
(which shall be deemed to affect all Lenders, except as otherwise provided below), (vi) release a Credit Party from, or consent to a Credit
Party’s assignment or delegation of, such Credit Party’s obligations hereunder and under the other Financing Documents or any Guarantor
from its guaranty of the Obligations (which shall be deemed to affect all Lenders) or (vii) amend, modify, terminate or waive this Section
13.14(b) or the definition of “Required Lenders” or “Pro Rata Share” or any other provision hereof specifying the number or percentage
of Lenders required to amend, waive or otherwise modify any rights hereunder or make any determination or grant any consent
hereunder, without the consent of each Lender. For purposes of the foregoing, no Lender shall be deemed affected by (i) waiver of the
imposition of the Default Rate or imposition of the Default Rate to only a portion of the Obligations, (ii) waiver of the accrual of late
charges, (iii) waiver of any fee solely payable to Agent under the Financing Documents, (iv) subordination of a lien granted in favor of
Agent; provided that such subordination is limited to equipment being financed by a third party providing Permitted Indebtedness.
Notwithstanding any provision in this Section 13.14 to the contrary, no amendment, modification, termination or waiver affecting or
modifying the rights or obligations of Agent hereunder shall be effective unless signed by Agent and the Required Lenders
(c)
Agent shall not grant its written consent to any deviation or departure by Borrower or any other Credit Party
from the provisions of Article 7 without the prior written consent of the Required Lenders. Required Lenders shall have the right to
direct Agent to take any action described in Section 10.2(b). Upon the occurrence of any Event of Default, Agent shall have the right to
exercise any and all remedies referenced in Section 10.2 without the written consent of Required Lenders following the occurrence of an
“Exigent Circumstance” (as defined below). All matters requiring the satisfaction or acceptance of Agent in the definition of
Subordinated Debt shall further require the satisfaction and acceptance of each Required Lender. Any reference in this Agreement to an
allocation between or sharing by the Lenders of any right, interest or obligation “ratably,” “proportionally” or in similar terms shall refer
to Pro Rata Share unless expressly provided otherwise. As used in this Section, “Exigent Circumstance” means any event or
circumstance that, in the reasonable judgment of Agent, imminently threatens the ability of Agent to realize upon all or any material
portion of the Collateral, such as, without limitation, fraudulent removal, concealment, or abscondment thereof, destruction or material
waste thereof, or failure of Borrower after reasonable demand to maintain or reinstate adequate casualty insurance coverage, or which, in
the judgment of Agent, could result in a material diminution in value of the Collateral.
13.15
Borrower Liability. If there is more than one (1) entity comprising Borrower, then (a) any Borrower may, acting singly,
request Credit Extensions hereunder, (b) each Borrower hereby appoints the other as agent for the
38
other for all purposes hereunder, including with respect to requesting Credit Extensions hereunder, (c) each Borrower shall be jointly and
severally obligated to pay and perform all obligations under the Financing Documents, including, but not limited to, the obligation to repay
all Credit Extensions made hereunder and all other Obligations, regardless of which Borrower actually receives said Credit Extensions, as if
each Borrower directly received all Credit Extensions, and (d) each Borrower waives (1) any suretyship defenses available to it under the
Code or any other applicable law, and (2) any right to require the Lenders or Agent to: (A) proceed against any Borrower or any other
person; (B) proceed against or exhaust any security; or (C) pursue any other remedy. The Lenders or Agent may exercise or not exercise
any right or remedy they have against any Credit Party or any security (including the right to foreclose by judicial or non-judicial sale) in
accordance with the terms of the Financing Documents without affecting any other Credit Party’s liability or any Lien against any other
Credit Party’s assets. Notwithstanding any other provision of this Agreement or other related document, until the indefeasible payment in
cash in full of the Obligations (other than inchoate indemnity obligations for which no claim has yet been made) and termination of the
Applicable Commitments, each Borrower irrevocably waives all rights that it may have at law or in equity (including, without limitation,
any law subrogating Borrower to the rights of the Lenders and Agent under this Agreement) to seek contribution, indemnification or any
other form of reimbursement from any other Credit Party, or any other Person now or hereafter primarily or secondarily liable for any of the
Obligations, for any payment made by any Credit Party with respect to the Obligations in connection with this Agreement or otherwise and
all rights that it might have to benefit from, or to participate in, any security for the Obligations as a result of any payment made by a Credit
Party with respect to the Obligations in connection with this Agreement or otherwise. Any agreement providing for indemnification,
reimbursement or any other arrangement prohibited under this Section shall be null and void. If any payment is made to a Credit Party in
contravention of this Section, such Credit Party shall hold such payment in trust for the Lenders and Agent and such payment shall be
promptly delivered to Agent for application to the Obligations, whether matured or unmatured.
13.16
Reinstatement. This Agreement shall remain in full force and effect and continue to be effective should any petition or
other proceeding be filed by or against any Credit Party for liquidation or reorganization, should any Credit Party become insolvent or make
an assignment for the benefit of any creditor or creditors or should an interim receiver, receiver, receiver and manager or trustee be
appointed for all or any significant part of any Credit Party’s assets, and shall continue to be effective or to be reinstated, as the case may be,
if at any time payment and performance of the Obligations, or any part thereof, is, pursuant to applicable law, rescinded or reduced in
amount, or must otherwise be restored or returned by any obligee of the Obligations, whether as a fraudulent preference reviewable
transaction or otherwise, all as though such payment or performance had not been made. In the event that any payment, or any part thereof,
is rescinded, reduced, restored or returned, the Obligations shall be reinstated and deemed reduced only by such amount paid and not so
rescinded, reduced, restored or returned.
13.17
USA PATRIOT Act Notification. Agent (for itself and not on behalf of any Lender) and each Lender hereby notifies each
Borrower that pursuant to the requirements of the USA PATRIOT Act, it is required to obtain, verify and record certain information and
documentation that identifies Borrower, which information includes the name and address of Borrower and such other information that will
allow Agent or such Lender, as applicable, to identify Borrower in accordance with the USA PATRIOT Act.
14.
AGENT
14.1
Appointment and Authorization of Agent. Each Lender hereby irrevocably appoints, designates and authorizes Agent to
take such action on its behalf under the provisions of this Agreement and each other Financing Document and to exercise such powers and
perform such duties as are expressly delegated to it by the terms of this Agreement or any other Financing Document, together with such
powers as are reasonably incidental thereto. The provisions of this Article are solely for the benefit of Agent and the Lenders and none of
Credit Parties nor any other Person shall have any rights as a third party beneficiary of any of the provisions hereof. The duties of Agent
shall be mechanical and administrative in nature. Notwithstanding any provision to the contrary contained elsewhere herein or in any other
Financing Document, Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall Agent have or be
deemed to have any fiduciary relationship with any Lender or participant, and no implied covenants, functions, responsibilities, duties,
obligations or liabilities shall be read into this Agreement or any other Financing Document or otherwise exist against Agent. Without
limiting the generality of the foregoing sentence, the use of the term “agent” herein and in the other Financing Documents with reference to
Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any
39
applicable Law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative
relationship between independent contracting parties. Without limiting the generality of the foregoing, Agent shall have the sole and
exclusive right and authority (to the exclusion of the Lenders), and is hereby authorized, to (a) act as collateral agent for Agent and each
Lender for purposes of the perfection of all liens created by the Financing Documents and all other purposes stated therein, (b) manage,
supervise and otherwise deal with the Collateral, (c) take such other action as is necessary or desirable to maintain the perfection and
priority of the liens created or purported to be created by the Financing Documents, (d) except as may be otherwise specified in any
Financing Document, exercise all remedies given to Agent and the other Lenders with respect to the Collateral, whether under the
Financing Documents, applicable law or otherwise and (e) execute any amendment, consent or waiver under the Financing Documents on
behalf of any Lender that has consented in writing to such amendment, consent or waiver; provided, however, that Agent hereby appoints,
authorizes and directs each Lender to act as collateral sub-agent for Agent and the Lenders for purposes of the perfection of all liens with
respect to the Collateral, including any deposit account maintained by a Credit Party with, and cash and Cash Equivalents held by, such
Lender, and may further authorize and direct the Lenders to take further actions as collateral sub-agents for purposes of enforcing such liens
or otherwise to transfer the Collateral subject thereto to Agent, and each Lender hereby agrees to take such further actions to the extent, and
only to the extent, so authorized and directed.
14.2
Successor Agent.
(a)
Agent may at any time assign its rights, powers, privileges and duties hereunder to (i) another Lender or an
Affiliate of Agent or any Lender or any Approved Fund, or (ii) any Person to whom Agent, in its capacity as a Lender, has assigned (or
will assign, in conjunction with such assignment of agency rights hereunder) fifty percent (50%) or more of the Credit Extensions or
Applicable Commitments then held by Agent (in its capacity as a Lender), in each case without the consent of the Lenders or
Borrower. Following any such assignment, Agent shall give notice to the Lenders and Borrower. An assignment by Agent pursuant to
this subsection (a) shall not be deemed a resignation by Agent for purposes of subsection (b) below.
(b)
Without limiting the rights of Agent to designate an assignee pursuant to subsection (a) above, Agent may at
any time give notice of its resignation to the Lenders and Borrower. Upon receipt of any such notice of resignation, Required Lenders
shall have the right to appoint a successor Agent. If no such successor shall have been so appointed by Required Lenders and shall have
accepted such appointment within ten (10) Business Days after the retiring Agent gives notice of its resignation, then the retiring Agent
may, on behalf of the Lenders, appoint a successor Agent; provided, however, that if Agent shall notify Borrower and the Lenders that no
Person has accepted such appointment, then such resignation shall nonetheless become effective in accordance with such notice from
Agent that no Person has accepted such appointment and, from and following delivery of such notice, (i) the retiring Agent shall be
discharged from its duties and obligations hereunder and under the other Financing Documents, and (ii) all payments, communications
and determinations provided to be made by, to or through Agent shall instead be made by or to each Lender directly, until such time as
Required Lenders appoint a successor Agent as provided for above in this subsection (b).
(c)
Upon (i) an assignment permitted by subsection (a) above, or (ii) the acceptance of a successor’s appointment
as Agent pursuant to subsection (b) above, such successor shall succeed to and become vested with all of the rights, powers, privileges
and duties of the retiring (or retired) Agent, and the retiring Agent shall be discharged from all of its duties and obligations hereunder and
under the other Financing Documents (if not already discharged therefrom as provided above in this subsection (c)). The fees payable by
Borrower to a successor Agent shall be the same as those payable to its predecessor unless otherwise agreed between Borrower and such
successor. After the retiring Agent’s resignation hereunder and under the other Financing Documents, the provisions of this Article shall
continue in effect for the benefit of such retiring Agent and its sub-agents in respect of any actions taken or omitted to be taken by any of
them while the retiring Agent was acting or was continuing to act as Agent.
14.3
Delegation of Duties. Agent may execute any of its duties under this Agreement or any other Financing Document by or
through its, or its Affiliates’, agents, employees or attorneys-in-fact and shall be entitled to obtain and rely upon the advice of counsel and
other consultants or experts concerning all matters pertaining to such duties. Agent shall not be responsible for the negligence or
misconduct of any agent or attorney-in-fact that it selects in the absence of gross negligence or willful misconduct. Any such Person to
whom Agent delegates a duty shall benefit from this Article 14 to the extent provided by Agent.
40
14.4
Liability of Agent. Except as otherwise provided herein, no “Agent-Related Person” (as defined below) shall (a) be
liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Financing
Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct in connection with its duties
expressly set forth herein), or (b) be responsible in any manner to any Lender or participant for any recital, statement, representation or
warranty made by any Credit Party or any officer thereof, contained herein or in any other Financing Document, or in any certificate, report,
statement or other document referred to or provided for in, or received by Agent under or in connection with, this Agreement or any other
Financing Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Financing
Document, or for any failure of any Credit Party or any other party to any Financing Document to perform its obligations hereunder or
thereunder. No Agent-Related Person shall be under any obligation to any Lender or participant to ascertain or to inquire as to the
observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Financing Document, or to
inspect the Collateral, other properties or books or records of any Credit Party or any Affiliate thereof. The term “Agent-Related Person”
means Agent, together with its Affiliates, and the officers, directors, employees, agents, advisors, auditors and attorneys-in-fact of such
Persons; provided, however, that no Agent-Related Person shall be an Affiliate of Borrower.
14.5
Reliance by Agent. Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing,
communication, signature, resolution, representation, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone
message, electronic mail message, statement or other document or conversation believed by it to be genuine and correct and to have been
signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to Borrower),
independent accountants and other experts selected by Agent. Agent shall be fully justified in failing or refusing to take any action under
any Financing Document (a) if such action would, in the opinion of Agent, be contrary to law or any Financing Document, (b) if such action
would, in the opinion of Agent, expose Agent to any potential liability under any law, statute or regulation or (c) if Agent shall not first have
received such advice or concurrence of all Lenders as it deems appropriate and, if it so requests, it shall first be indemnified to its
satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take
any such action. Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other
Financing Document in accordance with a request or consent of all Lenders (or Required Lenders where authorized herein) and such
request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders.
14.6
Notice of Default. Agent shall not be deemed to have knowledge or notice of the occurrence of any Default and/or Event
of Default, unless Agent shall have received written notice from a Lender or Borrower, describing such default or Event of Default. Agent
will notify the Lenders of its receipt of any such notice. While an Event of Default has occurred and is continuing, Agent may (but shall not
be obligated to) take such action, or refrain from taking such action, with respect to such Event of Default as Agent shall deem advisable or
in the best interests of the Lenders, including without limitation, satisfaction of other security interests, liens or encumbrances on the
Collateral not permitted under the Financing Documents, payment of taxes on behalf of Borrower or any other Credit Party, payments to
landlords, warehouseman, bailees and other Persons in possession of the Collateral and other actions to protect and safeguard the Collateral,
and actions with respect to insurance claims for casualty events affecting a Credit Party and/or the Collateral.
14.7
Credit Decision; Disclosure of Information by Agent. Each Lender acknowledges that no Agent-Related Person has
made any representation or warranty to it, and that no act by Agent hereafter taken, including any consent to and acceptance of any
assignment or review of the affairs of Borrower or any Affiliate thereof, shall be deemed to constitute any representation or warranty by any
Agent-Related Person to any Lender as to any matter, including whether Agent-Related Persons have disclosed material information in their
possession. Each Lender represents to Agent that it has, independently and without reliance upon any Agent-Related Person and based on
such documents and information as it has deemed appropriate, made its own appraisal of, and investigation into, the business, prospects,
operations, property, financial and other condition and creditworthiness of the Credit Parties, and all applicable bank or other regulatory
Laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to
Borrower hereunder. Each Lender also represents that it will, independently and without reliance upon any Agent-Related Person and based
on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and
decisions in taking or not taking action under this Agreement and the other Financing Documents, and to make such investigations as it
deems necessary to inform itself as to the business, prospects, operations, property, financial and
41
other condition and creditworthiness of Borrower. Except for notices, reports and other documents expressly required to be furnished to the
Lenders by Agent herein, Agent shall not have any duty or responsibility to provide any Lender with any credit or other information
concerning the business, prospects, operations, property, financial and other condition or creditworthiness of any Credit Party which may
come into the possession of any Agent-Related Person.
14.8
Indemnification of Agent. Whether or not the transactions contemplated hereby are consummated, each Lender shall,
severally and pro rata based on its respective Pro Rata Share, indemnify upon demand each Agent-Related Person (to the extent not
reimbursed by or on behalf of Borrower and without limiting the obligation of Borrower to do so), and hold harmless each Agent-Related
Person from and against any and all Indemnified Liabilities (which shall not include legal expenses of Agent incurred in connection with
the closing of the transactions contemplated by this Agreement) incurred by it; provided, however, that no Lender shall be liable for the
payment to any Agent-Related Person of any portion of such Indemnified Liabilities to the extent determined in a judgment by a court of
competent jurisdiction to have resulted from such Agent-Related Person’s own gross negligence or willful misconduct; provided, however,
that no action taken in accordance with the directions of the Required Lenders shall be deemed to constitute gross negligence or willful
misconduct for purposes of this Section. Without limitation of the foregoing, each Lender shall, severally and pro rata based on its
respective Pro Rata Share, reimburse Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including Protective
Advances incurred after the closing of the transactions contemplated by this Agreement) incurred by Agent (in its capacity as Agent, and
not as a Lender) in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether
through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any
other Financing Document, or any document contemplated by or referred to herein, to the extent that Agent is not reimbursed for such
expenses by or on behalf of Borrower. The undertaking in this Section shall survive the payment in full of the Obligations, the termination
of this Agreement and the resignation of Agent. The term “Indemnified Liabilities” means those liabilities described in Section 13.2(a) and
Section 13.2(b).
14.9
Agent in its Individual Capacity. With respect to its Credit Extensions, MidCap shall have the same rights and powers
under this Agreement as any other Lender and may exercise such rights and powers as though it were not Agent, and the terms “Lender”
and “Lenders” include MidCap in its individual capacity. MidCap and its Affiliates may lend money to, invest in, and generally engage in
any kind of business with, any Credit Party and any of their Affiliates and any person who may do business with or own securities of any
Credit Party or any of their Affiliates, all as if MidCap were not Agent and without any duty to account therefor to Lenders. MidCap and its
Affiliates may accept fees and other consideration from a Credit Party for services in connection with this Agreement or otherwise without
having to account for the same to the Lenders. Each Lender acknowledges the potential conflict of interest between MidCap as a Lender
holding disproportionate interests in the Credit Extensions and MidCap as Agent, and expressly consents to, and waives, any claim based
upon, such conflict of interest.
14.10
Agent May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy,
reorganization, arrangement, adjustment, composition or other judicial proceeding relative to any Credit Party, Agent (irrespective of
whether the principal of any Credit Extension, shall then be due and payable as herein expressed or by declaration or otherwise and
irrespective of whether Agent shall have made any demand on such Credit Party) shall be entitled and empowered, by intervention in such
proceeding or otherwise:
(a)
to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the
Credit Extensions and all other Obligations that are owing and unpaid and to file such other documents as may be necessary or advisable
in order to have the claims of the Lenders and Agent (including any claim for the reasonable compensation, expenses, disbursements and
advances of the Lenders and Agent and their respective agents and counsel and all other amounts due the Lenders and Agent allowed in
such judicial proceeding); and
the same;
(b)
to collect and receive any monies or other property payable or deliverable on any such claims and to distribute
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is
hereby authorized by each Lender to make such payments to Agent and, in the event that Agent shall consent to the making of such
payments directly to the Lenders, to pay to Agent any amount due for the reasonable compensation, expenses, disbursements and advances
of Agent and its agents and counsel, including
42
Protective Advances. To the extent that Agent fails timely to do so, each Lender may file a claim relating to such Lender’s claim.
14.11
Collateral and Guaranty Matters. The Lenders irrevocably authorize Agent, at its option and in its discretion, to release
(a) any Credit Party and any Lien on any Collateral granted to or held by Agent under any Financing Document upon the date that all
Obligations (other than inchoate indemnity obligations for which no claim has yet been made and any other obligations which, by their
terms, are to survive the termination of this Agreement) due hereunder have been fully and indefeasibly paid in full and no Applicable
Commitments or other obligations of any Lender to provide funds to Borrower under this Agreement remain outstanding, and (b) any Lien
on any Collateral that is transferred or to be transferred as part of or in connection with any transfer permitted hereunder or under any other
Financing Document. Upon request by Agent at any time, all Lenders will confirm in writing Agent’s authority to release its interest in
particular types or items of Collateral pursuant to this Section 14.11.
14.12
Advances; Payments; Non-Funding Lenders.
(a)
Advances; Payments. If Agent receives any payment for the account of the Lenders on or prior to 11:00 a.m.
(New York time) on any Business Day, Agent shall pay to each applicable Lender such Lender’s Pro Rata Share of such payment on such
Business Day. If Agent receives any payment for the account of the Lenders after 11:00 a.m. (New York time) on any Business Day,
Agent shall pay to each applicable Lender such Lender’s Pro Rata Share of such payment on the next Business Day. To the extent that
any Lender has failed to fund any Credit Extension (a “Non-Funding Lender”), Agent shall be entitled to set-off the funding short-fall
against that Non-Funding Lender’s Pro Rata Share of all payments received from Borrower.
(b)
Return of Payments.
(i)
If Agent pays an amount to a Lender under this Agreement in the belief or expectation that a related
payment has been or will be received by Agent from a Credit Party and such related payment is not received by Agent, then Agent will be
entitled to recover such amount (including interest accruing on such amount at the Federal Funds Rate for the first Business Day and
thereafter, at the rate otherwise applicable to such Obligation) from such Lender on demand without set-off, counterclaim or deduction of
any kind.
(ii)
If Agent determines at any time that any amount received by Agent under this Agreement must be
returned to a Credit Party or paid to any other person pursuant to any insolvency law or otherwise, then, notwithstanding any other term or
condition of this Agreement or any other Financing Document, Agent will not be required to distribute any portion thereof to any
Lender. In addition, each Lender will repay to Agent on demand any portion of such amount that Agent has distributed to such Lender,
together with interest at such rate, if any, as Agent is required to pay to a Credit Party or such other person, without set-off, counterclaim or
deduction of any kind.
14.13
Miscellaneous.
(a)
Neither Agent nor any Lender shall be responsible for the failure of any Non-Funding Lender to make a Credit
Extension or make any other advance required hereunder. The failure of any Non‑Funding Lender to make any Credit Extension or any
payment required by it hereunder shall not relieve any other Lender (each such other Lender, an “Other Lender”) of its obligations to
make the Credit Extension or payment required by it, but neither any Other Lender nor Agent shall be responsible for the failure of any
Non-Funding Lender to make a Credit Extension or make any other payment required hereunder. Notwithstanding anything set forth
herein to the contrary, a Non-Funding Lender shall not have any voting or consent rights under or with respect to any Financing
Document or constitute a “Lender” (or be included in the calculation of “Required Lender” hereunder) for any voting or consent rights
under or with respect to any Financing Document. At Borrower’s request, Agent or a person reasonably acceptable to Agent shall have
the right with Agent’s consent and in Agent’s sole discretion (but shall have no obligation) to purchase from any Non-Funding Lender,
and each Non-Funding Lender agrees that it shall, at Agent’s request, sell and assign to Agent or such person, all of the Applicable
Commitments and all of the outstanding Credit Extensions of that Non-Funding Lender for an amount equal to the principal balance of
the Credit Extensions held by such Non-Funding Lender and all accrued interest and fees with respect thereto through the date of sale,
such purchase and sale to be consummated pursuant to an executed assignment agreement reasonably acceptable to Agent.
43
(b)
Each Lender shall promptly remit to the other Lenders such sums as may be necessary to ensure the ratable
repayment of each Lender’s portion of any Credit Extension and the ratable distribution of interest, fees and reimbursements paid or made
by any Credit Party. Notwithstanding the foregoing, if this Agreement requires payments of principal and interest to be made directly to
the Lenders, a Lender receiving a scheduled payment shall not be responsible for determining whether the other Lenders also received
their scheduled payment on such date; provided, however, if it is determined that a Lender received more than its ratable share of
scheduled payments made on any date or dates, then such Lender shall remit to Agent (for Agent to redistribute to itself and the Lenders
in a manner to ensure the payment to Agent of any sums due Agent hereunder and the ratable repayment of each Lender’s portion of any
Credit Extension and the ratable distribution of interest, fees and reimbursements) such sums as may be necessary to ensure the ratable
payment of such scheduled payments, as instructed by Agent. If any payment or distribution of any kind or character, whether in cash,
properties or securities and whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise, shall be received by
a Lender in excess of its ratable share, then (i) the portion of such payment or distribution in excess of such Lender’s ratable share shall
be received by such Lender in trust for application to the payments of amounts due on the other Lender’s claims, or, in the case of
Collateral, shall hold such Collateral for itself and as agent and bailee for Agent and other Lenders and (ii) such Lender shall promptly
advise Agent of the receipt of such payment, and, within five (5) Business Days of such receipt and, in the case of payments and
distributions, such Lender shall purchase (for cash at face value) from the other Lenders (through Agent), without recourse, such
participations in the Credit Extension made by the other Lenders as shall be necessary to cause such purchasing Lender to share the
excess payment ratably with each of them in accordance with the respective Pro Rata Shares of the Lenders; provided, however, that if
all or any portion of such excess payment is thereafter recovered by or on behalf of a Credit Party from such purchasing Lender, the
purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest; provided, further, that the
provisions of this Section shall not be construed to apply to (x) any payment made by a Credit Party pursuant to and in accordance with
the express terms of this Agreement or the other Financing Documents, or (y) any payment obtained by a Lender as consideration for the
assignment of or sale of a participation in any of its Applicable Commitment pursuant to Section 13.1. Borrower agrees that any Lender
so purchasing a participation from another Lender pursuant to this Section may exercise all of its rights of payment (including the right of
set-off) with respect to such participation as fully as if such Lender were the direct creditor of Borrower in the amount of such
participation. No documentation other than notices and the like shall be required to implement the terms of this Section. Agent shall
keep records (which shall be conclusive and binding in the absence of manifest error) of participations purchased pursuant to this Section
and shall in each case notify the Lenders following any such purchases.
15.
DEFINITIONS
In addition to any terms defined elsewhere in this Agreement, or in any schedule or exhibit attached hereto, as used in this
Agreement, the following terms have the following meanings:
“Access Agreement” means a landlord consent, bailee letter or warehouseman’s letter, in form and substance reasonably
satisfactory to Agent, in favor of Agent executed by such landlord, bailee or warehouseman, as applicable, for any third party location.
“Account” means any “account”, as defined in the Code, with such additions to such term as may hereafter be made, and includes,
without limitation, all accounts receivable and other sums owing to Borrower.
“Account Debtor” means any “account debtor”, as defined in the Code, with such additions to such term as may hereafter be
made.
“Acquisition” means any transaction or series of related transactions for the purpose of or resulting, directly or indirectly, in (a) the
acquisition of all or substantially all of the assets of a Person, or of any business, line of business or division or other unit of operation of a
Person, (b) the acquisition of fifty percent (50%) or more of the equity interests of any Person, whether or not involving a merger or
consolidation with such other Person, or otherwise causing any Person to become a Subsidiary of a Credit Party, (c) any merger or
consolidation or any other combination with another Person or (d) the acquisition (including through licensing) of any product, product line
or Intellectual Property of or from any other Person.
“Affiliate” means, with respect to any Person, a Person that owns or controls directly or indirectly the Person,
44
any Person that controls or is controlled by or is under common control with the Person (whether through the ownership of voting
securities, by contract or otherwise), and each of that Person’s senior executive officers, directors, partners and, for any Person that is a
limited liability company, that Person’s managers and members.
“Agent” means, MidCap, not in its individual capacity, but solely in its capacity as agent on behalf of and for the benefit of the
Lenders, together with its successors and assigns.
“Agreement” has the meaning given it in the preamble of this Agreement.
“Anti-Terrorism Laws” means any Laws relating to terrorism or money laundering, including Executive Order No. 13224
(effective September 24, 2001), the USA PATRIOT Act, the Laws comprising or implementing the Bank Secrecy Act, and the Laws
administered by OFAC.
“Applicable Commitment” has the meaning given it in Section 2.2
“Applicable Floor” means for each Credit Facility the per annum rate of interest specified on the Credit Facility Schedule.
“Applicable Index Rate” means, for any Applicable Interest Period, the rate per annum determined by Agent equal to the
Applicable Prime Rate.
“Applicable Interest Period” means the period commencing as of the most recent Applicable Interest Rate Determination Date
and continuing until the next Applicable Interest Rate Determination.
“Applicable Interest Rate” means a per annum rate of interest equal to the Applicable Index Rate plus the Applicable Margin.
“Applicable Interest Rate Determination Date” means the date of any change in the Base Rate Index.
“Applicable Margin” for each Credit Facility has the meaning specified for that Credit Facility in the Credit Facility Schedule.
“Applicable Prepayment Fee”, for each Credit Facility, has the meaning given it in the Credit Facility Schedule for such Credit
Facility.
“Applicable Prime Rate” means, for any Applicable Interest Period, the rate per annum, determined by Agent (rounded upwards,
if necessary, to the next 1/100th%), equal to the greater of (a) the Applicable Floor and (b) the Base Rate Index.
“Approved Fund” means any (a) investment company, fund, trust, securitization vehicle or conduit that is (or will be) engaged in
making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the Ordinary Course of
Business, or (b) any Person (other than a natural person) which temporarily warehouses loans for any Lender or any entity described in the
preceding clause (a) and that, with respect to each of the preceding clauses (a) and (b), is administered or managed by (i) a Lender, (ii) an
Affiliate of a Lender or (iii) a Person (other than a natural person) or an Affiliate of a Person (other than a natural person) that administers or
manages a Lender.
“Banks Services Collateral Accounts” means, collectively, each segregated Deposit Account from time to time identified to
Agent in writing established by Borrower for the sole purpose of securing Borrower’s obligations under clause (h) of the definition
Permitted Contingent Obligations and containing only such cash or Cash Equivalents that have been required to be pledged to secure such
obligations of Borrower; provided, that the aggregate amount of cash or Cash Equivalents deposited in such Bank Services Collateral
Accounts does not, at any time, exceed One Million Dollars ($1,000,000) in the aggregate.
“Base Rate Index” means, for any Applicable Interest Period, the rate per annum, determined by Agent
45
(rounded upwards, if necessary, to the next 1/100th%) as being the rate of interest ,from time to time, published in the money rates section
of The Wall Street Journal or any successor publication thereto as the “prime rate” then in effect; provided that such rate of interest, as set
forth from time to time in the money rates section of The Wall Street Journal, becomes unavailable for any reason as determined by Agent,
the “Prime Rate” shall mean the rate of interest per annum announced by Wells Fargo Bank, N.A. (“Wells Fargo”) at its principal office in
San Francisco as its “prime rate,” with the understanding that the “prime rate” is one of Wells Fargo’s base rates (not necessarily the lowest
of such rates) and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto and is
evidenced by the recording thereof after its announcement in such internal publications as Wells Fargo may designate; provided, further,
that Agent and the Required Lenders may, upon prior written notice to any Borrower, choose a reasonably comparable index or source to
use as the basis for the Base Rate Index.
“Blocked Person” means: (a) any Person listed in the annex to, or is otherwise subject to the provisions of, Executive Order No.
13224, (b) a Person owned or controlled by, or acting for or on behalf of, any Person that is listed in the annex to, or is otherwise subject to
the provisions of, Executive Order No. 13224, (c) a Person with whom any Lender is prohibited from dealing or otherwise engaging in any
transaction by any Anti-Terrorism Law, (d) a Person that commits, threatens or conspires to commit or supports “terrorism” as defined in
Executive Order No. 13224, or (e) a Person that is named a “specially designated national” or “blocked person” on the most current list
published by OFAC or other similar list.
“Books” means all books and records of a Person, including ledgers, federal and state tax returns, records regarding the Person’s
assets or liabilities, the Collateral, business operations or financial condition, and all computer programs or storage or any equipment
containing such information.
“Borrower” mean the entity(ies) described in the first paragraph of this Agreement and each of their successors and permitted
assigns. The term “each Borrower” shall refer to each Person comprising the Borrower if there is more than one (1) such Person, or the sole
Borrower if there is only one (1) such Person. The term “any Borrower” shall refer to any Person comprising the Borrower if there is more
than one (1) such Person, or the sole Borrower if there is only one (1) such Person.
“Borrower Unrestricted Cash” means unrestricted cash and Cash Equivalents of Borrower that (a) are subject to Agent’s first
priority perfected lien and held in the name of Borrower in a Deposit Account or Securities Account that is subject to a Control Agreement
in favor of Agent at a bank or financial institution located in the United States, (b) are not subject to any Lien (other than a Lien in favor of
Agent), and (c) are not funds for the payment of a drawn or committed but unpaid draft, ACH or EFT transaction.
“Borrowing Resolutions” means, with respect to any Person, those resolutions, in form and substance satisfactory to Agent,
adopted by such Person’s Board of Directors or other appropriate governing body and delivered by such Person to Agent approving the
Financing Documents to which such Person is a party and the transactions contemplated thereby, as well as any other approvals as may be
necessary or desired to approve the entering into the Financing Documents or the consummation of the transactions contemplated thereby or
in connection therewith.
“Business Day” means any day that is not (a) a Saturday or Sunday or (b) a day on which Agent is closed.
“Cash Collateral Accounts” means, collectively, (a) the Bank Services Collateral Accounts and (b) the LC Cash Collateral
Accounts.
“Cash Equivalents” means (a) any readily-marketable securities (i) issued by, or directly, unconditionally and fully guaranteed or
insured by the United States federal government or (ii) issued by any agency of the United States federal government the obligations of
which are fully backed by the full faith and credit of the United States federal government, (b) any readily-marketable direct obligations
issued by any other agency of the United States federal government, any state of the United States or any political subdivision of any such
state or any public instrumentality thereof, in each case having a rating of at least “A-2” from S&P or at least “P-2” from Moody’s, (c) any
commercial paper rated at least “A-2” by S&P or “P-2”by Moody’s and issued by any Person organized under the laws of any state of the
United States, and any corporate notes and corporate bonds with long-term ratings of at least “A” by S&P or “A3” by Moody’s and issued
by any Person organized under the laws of any state of the United States (d) any United States dollar-denominated time deposit, insured
certificate of deposit, overnight bank deposit or
46
bankers’ acceptance issued or accepted by (i) any Lender or (ii) any commercial bank that is (A) organized under the laws of the United
States, any state thereof or the District of Columbia, and (B) “adequately capitalized” (as defined in the regulations of its primary federal
banking regulators), and (e) shares of any United States money market fund that (i) has substantially all of its assets invested continuously
in the types of investments referred to in clause (a), (b), (c) or (d) above, (ii) has net assets in excess of $500,000,000 and (iii) is rated at
least AAA or the equivalent thereof by a NRSRO.
“Change in Control” means an event or series of events by which: (a) any “person” or “group” (as such terms are used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) becomes the “beneficial owner” (as defined in Rules 13d-3 and 13d-5
under the Securities Exchange Act of 1934, except that a person or group shall be deemed to have “beneficial ownership” of all securities
that such person or group has the right to acquire, whether such right is exercisable immediately or only after the passage of time (such
right, an “option right”)), directly or indirectly, of forty percent (40%) or more of the combined voting power of all voting stock of
Protagonist Therapeutics or any other Borrower (as applicable) on a fully-diluted basis (and taking into account all such securities that such
person or group has the right to acquire pursuant to any option right); (b) during any period of twelve (12) consecutive months, a majority
of the members of the board of directors or other equivalent governing body of Borrower cease to be composed of individuals (i) who were
members of that board or equivalent governing body on the first day of such period, (ii) whose election or nomination to that board or
equivalent governing body was approved by individuals referred to in clause (i) above constituting at the time of such election or
nomination at least a majority of that board or equivalent governing body or (iii) whose election or nomination to that board or other
equivalent governing body was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or
nomination at least a majority of that board or equivalent governing body; (c) Borrower ceases to own and control, directly or indirectly, all
of the economic and voting rights associated with the outstanding securities of each of its Subsidiaries (except as otherwise permitted by
this Agreement), or (d) the occurrence of any “change in control”, “fundamental change” or any term or provision of similar effect under
any Subordinated Debt Document or Borrower’s Operating Documents.
“Closing Date” has the meaning given it in the preamble of this Agreement.
“Code” means the Uniform Commercial Code in effect on the date hereof, as the same may, from time to time, be enacted and in
effect in the State of New York; provided, however, that to the extent that the Code is used to define any term herein or in any Financing
Document and such term is defined differently in different Articles or Divisions of the Code, the definition of such term contained in Article
or Division 9 shall govern; and provided, further, that in the event that, by reason of mandatory provisions of Law, any or all of the
attachment, perfection, or priority of, or remedies with respect to, Agent’s Lien on any Collateral is governed by the Uniform Commercial
Code in effect in a jurisdiction other than the State of New York, the term “Code” shall mean the Uniform Commercial Code as enacted and
in effect in such other jurisdiction solely for purposes of the provisions thereof relating to such attachment, perfection, priority, or remedies
and for purposes of definitions relating to such provisions.
“Collateral” means all property, now existing or hereafter acquired, mortgaged or pledged to, or purported to be subjected to a
Lien in favor of, Agent, for the benefit of Agent and the Lenders, pursuant to this Agreement and the other Financing Documents (but
excluding Excluded Property), including, without limitation, all of the property described in Exhibit A hereto.
“Collateral Account” means any Deposit Account, Securities Account or Commodity Account.
“Commitment Commencement Date” has the meaning given it in the Credit Facility Schedule.
“Commitment Termination Date” has the meaning given it in the Credit Facility Schedule.
“Commodity Account” means any “commodity account”, as defined in the Code, with such additions to such term as may
hereafter be made.
47
“Competitor” means, at any time of determination, any Person engaged in the same or substantially the same line of business as
the Borrower and the other Credit Parties and such business accounts for all or substantially all of the revenue or net income of such Person
at the time of determination.
“Compliance Certificate” means a certificate, duly executed by an authorized officer of Borrower, appropriately completed and
substantially in the form of Exhibit B.
“Contingent Obligation” means, for any Person, any direct or indirect liability, contingent or not, of that Person for (a) any
indebtedness, lease, dividend, letter of credit or other obligation of another such as an obligation directly or indirectly guaranteed, endorsed,
co‑made, discounted or sold with recourse by that Person, or for which that Person is directly or indirectly liable; (b) any obligations for
undrawn letters of credit for the account of that Person; and (c) all obligations from any interest rate, currency or commodity swap
agreement, interest rate cap or collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; but “Contingent Obligation” does not include endorsements in the Ordinary
Course of Business. The amount of a Contingent Obligation is the stated or determined amount of the primary obligation for which the
Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability for it determined by the Person in good
faith; but the amount may not exceed the maximum of the obligations under any guarantee or other support arrangement.
“Control Agreement” means any control agreement, each of which shall be in form and substance satisfactory to Agent, entered
into among the depository institution at which Borrower maintains a Deposit Account or the securities intermediary or commodity
intermediary at which Borrower maintains a Securities Account or a Commodity Account, Borrower, and Agent pursuant to which Agent
obtains control (within the meaning of the Code) for the benefit of the Lenders over such Deposit Account, Securities Account or
Commodity Account.
“Credit Extension” means an advance or disbursement of proceeds to or for the account of Borrower in respect of a Credit
“Credit Extension Form” means that certain form attached hereto as Exhibit C, as the same may be from time to time revised by
Facility.
Agent.
“Credit Facility” means a term loan credit facility specified on the Credit Facility Schedule.
“Credit Facility Schedule” means each “Credit Facility Schedule” attached to this Agreement.
“Credit Party” means any Borrower, any Guarantor under a guarantee of the Obligations or any part thereof, and any other Person
(other than Agent, a Lender or a participant of a Lender), whether now existing or hereafter acquired or formed, that becomes obligated as a
borrower, guarantor, surety, indemnitor, pledgor, assignor or other obligor under any Financing Document; and “Credit Parties” means all
such Persons, collectively; provided, however, that in no event shall a Restricted Foreign Subsidiary be a “Credit Party” for purposes of this
Agreement or the other Financing Documents.
“DEA” means the Drug Enforcement Administration of the United States of America, any comparable state or local
Governmental Authority, any comparable Governmental Authority in any non-United States jurisdiction, and any successor agency of any
of the foregoing.
“Default” means any fact, event or circumstance which with notice or passage of time or both, could constitute an Event of
“Default Rate” has the meaning given it in Section 2.6(b).
“Deposit Account” means any “deposit account” as defined in the Code with such additions to such term as may hereafter be
Default.
made.
“Designated Funding Account” is Borrower’s Deposit Account, account number XXXXXX8780,
48
maintained with Silicon Valley Bank and over which Agent has been granted a Control Agreement.
“Disqualified Stock” means, with respect to any Person, any equity interest in such Person that, within less than 91 days after the
Maturity Date, either by its terms (or by the terms of any security or other equity interests into which it is convertible or for which it is
exchangeable) or upon the happening of any event or condition, (a) matures or is mandatorily redeemable (other than solely for Permitted
Indebtedness or other equity interests in such Person or of Protagonist Therapeutics that do not constitute Disqualified Stock and cash in
lieu of fractional shares of such equity interests), pursuant to a sinking fund obligation or otherwise, (b) is redeemable at the option of the
holder thereof, in whole or in part (other than solely for Permitted Indebtedness or other equity interests in such Person or of Protagonist
Therapeutics that do not constitute Disqualified Stock and cash in lieu of fractional shares of such equity interests), (c) provides for the
scheduled payments of dividends or distributions in cash, or (d) is or becomes convertible into or exchangeable for Indebtedness (other than
Permitted Indebtedness) or any other equity interests that would constitute Disqualified Stock.
“Dollars,” “dollars” and “$” each means lawful money of the United States.
“Draw Period” means, for each Credit Facility, the period commencing on the Commitment Commencement Date and ending on
the Commitment Termination Date.
“Drug Application” means a new drug application, an abbreviated drug application, or a product license application for any
Product, as appropriate, as those terms are defined in the FDCA.
“Eligible Assignee” means (a) a Lender, (b) an Affiliate of a Lender, (c) an Approved Fund, and (d) any other Person (other than a
natural person) approved by Agent; provided, however, that notwithstanding the foregoing, “Eligible Assignee” shall not include (x) any
Credit Party or any Subsidiary of a Credit Party or (y) so long as no Event of Default has occurred and is continuing, (i) any vulture hedge
fund (other than any Affiliate of a Lender or an Approved Fund) or (ii) a Person known by Agent to be a Competitor, in each case of (i) and
(ii) as reasonably determined by Agent. Notwithstanding the foregoing, in connection with assignments by a Lender due to a forced
divestiture at the request of any regulatory agency, the restrictions set forth herein shall not apply and Eligible Assignee shall mean any
Person or party becoming an assignee incident to such forced divestiture.
“Environmental Law” means each present and future law (statutory or common), ordinance, treaty, rule, regulation, order, policy,
other legal requirement or determination of an arbitrator or of a Governmental Authority and/or Required Permits imposing liability or
standards of conduct for or relating to the regulation and protection of human health, safety, the workplace, the environment and natural
resources, and including public notification requirements and environmental transfer of ownership, notification or approval statutes.
“Equipment” means all “equipment”, as defined in the Code, with such additions to such term as may hereafter be made, and
includes without limitation all machinery, fixtures, goods, vehicles (including motor vehicles and trailers), and any interest in any of the
foregoing.
“ERISA” means the Employee Retirement Income Security Act of 1974, and all regulations promulgated thereunder.
“ERISA Affiliate” has the meaning given it in Section 5.6.
“Event of Default” has the meaning given it in Section 10.1.
“Excluded Property” means:
(a)
all Intellectual Property except to the extent that it is necessary under applicable law to have a Lien and
security interest in any such Intellectual Property in order to have a perfected Lien and security interest in and to IP Proceeds, in which
case the Collateral shall automatically, and effective as of the Closing Date, include the Intellectual Property to the extent necessary to
permit perfection of Agent’s, for the ratable benefit of the Lenders, security interest in such IP Proceeds. Notwithstanding the foregoing
clause (a) or anything else to the
49
contrary in this Agreement, Agent shall have a Lien and security interest in, (A) all IP Proceeds, and (B) all payments with respect to IP
Proceeds that are received after the commencement of a bankruptcy or insolvency proceeding and in no event shall IP Proceeds or any
payments in respect thereof constitute Excluded Property;
(b)
any lease, license, contract, permit, letter of credit, purchase money arrangement, instrument or agreement to
which any Credit Party is a party or any of its rights or interests thereunder if and to the extent that the grant of such security interest shall
constitute or result in (i) the abandonment, invalidation or unenforceability of any right, title or interest of any Credit Party therein or (ii)
result in a breach or termination pursuant to the terms of, or default under, any such lease, license, contract, permit, letter of credit,
purchase money arrangement, instrument or agreement; and
may not validly possess a security interest in any such license, franchise, charter or authorization under applicable Law;
(c)
any governmental licenses or state or local franchises, charters and authorizations, to the extent that Agent
provided that (x) any such limitation described in the foregoing clauses (b) and (c) on the security interests granted hereunder shall apply
only to the extent that any such prohibition could not be rendered ineffective pursuant to the Code or any other applicable Law (including
Sections 9-406, 9-407 and 9-408 of the Code) or principles of equity, (y) in the event of the termination or elimination of any such
prohibition or the requirement for any consent contained in such contract, agreement, permit, lease or license or in any applicable Law, to
the extent sufficient to permit any such item to become Collateral hereunder, or upon the granting of any such consent, or waiving or
terminating any requirement for such consent, a security interest in such contract, agreement, permit, lease, license, franchise, authorization
or asset shall be automatically and simultaneously granted hereunder and shall be included as Collateral hereunder, and (z) all rights to
payment of money due or to become due pursuant to, and all rights to the proceeds from the sale of, all Excluded Property shall be and at
all times remain subject to the security interests created by this Agreement (unless such proceeds would independently constitute Excluded
Property).
“Excluded Taxes” means any of the following Taxes imposed on or with respect to a Recipient or required to be withheld or
deducted from a payment to a Recipient, (a) Taxes imposed on or measured by net income (however denominated), franchise Taxes, and
branch profits Taxes, in each case, (i) imposed as a result of such Recipient being organized under the laws of, or having its principal office
or, in the case of any Lender, its applicable lending office located in, the jurisdiction imposing such Tax (or any political subdivision
thereof) or (ii) that are Other Connection Taxes, (b) in the case of a Lender, U.S. federal withholding Taxes imposed on amounts payable to
or for the account of such Lender with respect to an applicable interest in a Credit Extension or Applicable Commitment pursuant to a law
in effect on the date on which (i) such Lender acquires such interest in the Credit Extension or Applicable Commitment or (ii) such Lender
changes its lending office, except in each case to the extent that, pursuant to Section 2.6(h)(i) or 2.6(h)(iii), amounts with respect to such
Taxes were payable either to such Lender’s assignor immediately before such Lender became a party hereto or to such Lender immediately
before it changed its lending office, (c) Taxes attributable to such Recipient’s failure to comply with Sections 2.6(h)(vi) and (vii) and (d) any
U.S. federal withholding Taxes imposed under FATCA.
“Exigent Circumstance” has the meaning given it in Section 13.14.
“FATCA” means Sections 1471 through 1474 of the IRC, as of the date of this Agreement (or any amended or successor version
that is substantively comparable and not materially more onerous to comply with), any current or future regulations or official
interpretations thereof and any agreements entered into pursuant to Section 1471(b)(1) of the IRC and any intergovernmental agreement
between the United States Internal Revenue Service, the U.S. Government and any governmental or taxation authority under any other
jurisdiction which agreement’s principal purposes deals with the implementation of such sections of the IRC.
“FDA” means the Food and Drug Administration of the United States of America, any comparable state or local Governmental
Authority, any comparable Governmental Authority in any non-United States jurisdiction, and any successor agency of any of the
foregoing.
“FDCA” means the Federal Food, Drug and Cosmetic Act, as amended, 21 U.S.C. Section 301 et seq., and all regulations
promulgated thereunder.
50
“Federal Funds Rate” means, for any day, the rate per annum equal to the weighted average of the rates on overnight Federal
funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal
Reserve Bank of New York on the Business Day next succeeding such day, provided that if no such rate is so published on such next
succeeding Business Day, the Federal Funds Rate for such day shall be the average rate quoted to Agent on such day on such transactions as
determined by Agent in a commercially reasonable manner.
“Fee Letters” means, collectively, the fee letter agreements among Borrower and Agent and Borrower and each Lender.
“Financing Documents” means, collectively, this Agreement, the Perfection Certificate, the Security Documents, each
Subordination Agreement and any subordination or intercreditor agreement pursuant to which any Indebtedness and/or any Liens securing
such Indebtedness is subordinated to all or any portion of the Obligations, the Fee Letter(s), each note and guarantee executed by one (1) or
more Credit Parties in connection with the indebtedness governed by this Agreement, and each other present or future agreement executed
by one (1) or more Credit Parties and, or for the benefit of, the Lenders and/or Agent in connection with this Agreement, all as amended,
restated, or otherwise modified from time to time.
“Foreign Lender” means a Lender that is not a U.S. Person.
“Funding Date” means any date on which a Credit Extension is made to or on account of Borrower which shall be a Business
Day.
“GAAP” means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other Person as may be approved by a significant segment of the accounting profession
in the United States, which are applicable to the circumstances as of the date of determination.
“General Intangibles” means all “general intangibles”, as defined in the Code, with such additions to such term as may hereafter
be made, and includes without limitation, all copyright rights, copyright applications, copyright registrations and like protections in each
work of authorship and derivative work, whether published or unpublished, any patents, trademarks, service marks and, to the extent
permitted under applicable Law, any applications therefor, whether registered or not, any trade secret rights, including any rights to
unpatented inventions, payment intangibles, royalties, contract rights, goodwill, franchise agreements, purchase orders, customer lists, route
lists, telephone numbers, domain names, claims, income and other tax refunds, security and other deposits, options to purchase or sell real
or personal property, rights in all litigation presently or hereafter pending (whether in contract, tort or otherwise), insurance policies
(including, without limitation, key man, property damage, and business interruption insurance), payments of insurance and rights to
payment of any kind.
“Governmental Authority” means any nation or government, any state or other political subdivision thereof, any agency,
authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or
administrative functions of or pertaining to government, any securities exchange and any self-regulatory organization.
“Guarantor” means any present or future guarantor of the Obligations.
“Hazardous Materials” means petroleum and petroleum products and compounds containing them, including gasoline, diesel fuel
and oil; explosives, flammable materials; radioactive materials; polychlorinated biphenyls and compounds containing them; lead and lead-
based paint; asbestos or asbestos-containing materials; underground or above-ground storage tanks, whether empty or containing any
substance; any substance the presence of which is prohibited by any Laws; toxic mold, any substance that requires special handling; and any
other material or substance now or in the future defined as a “hazardous substance,” “hazardous material,” “hazardous waste,” “toxic
substance,” “toxic pollutant,” “contaminant,” “pollutant” or other words of similar import within the meaning of any Environmental Law,
including: (a) any “hazardous substance” defined as such in (or for purposes of) CERCLA, or
51
any so-called “superfund” or “superlien” Law, including the judicial interpretation thereof; (b) any “pollutant or contaminant” as defined in
42 U.S.C.A. § 9601(33); (c) any material now defined as “hazardous waste” pursuant to 40 C.F.R. Part 260; (d) any petroleum or petroleum
by-products, including crude oil or any fraction thereof; (e) natural gas, natural gas liquids, liquefied natural gas, or synthetic gas usable for
fuel; (f) any “hazardous chemical” as defined pursuant to 29 C.F.R. Part 1910; (g) any toxic or harmful substances, wastes, materials,
pollutants or contaminants (including, without limitation, asbestos, polychlorinated biphenyls, flammable explosives, radioactive materials,
infectious substances, materials containing lead-based paint or raw materials which include hazardous constituents); and (h) any other toxic
substance or contaminant that is subject to any Environmental Laws or other past or present requirement of any Governmental Authority.
“Hazardous Materials Contamination” means contamination (whether now existing or hereafter occurring) of the
improvements, buildings, facilities, personalty, soil, groundwater, air or other elements on or of the relevant property by Hazardous
Materials, or any derivatives thereof, or on or of any other property as a result of Hazardous Materials, or any derivatives thereof, generated
on, emanating from or disposed of in connection with the relevant property.
“Healthcare Laws” means all applicable Laws relating to the procurement, development, provision, clinical and non-clinical
evaluation or investigation, product approval or clearance, manufacture, production, distribution, importation, exportation, use, handling,
quality, reimbursement, sale, labeling, advertising, promotion, or postmarket requirements of any product produced by a Credit Party or any
Subsidiary thereof (including, without limitation, any component of, or accessory to, the foregoing products) subject to regulation under the
Federal Food, Drug, and Cosmetic Act (21 U.S.C. et seq.) or FDCA), and similar state or foreign laws, controlled substances laws, and all
laws, policies, procedures, requirements and regulations pursuant to which Required Permits are issued, in each case, as the same may be
amended from time to time.
“Indebtedness” means (a) indebtedness for borrowed money (including the Obligations) or the deferred price of, or payment for,
property or services, such as reimbursement and other obligations for surety bonds and letters of credit, (b) obligations evidenced by notes,
bonds, debentures or similar instruments, (c) capital lease obligations, provided, however, that any obligations relating to a lease that was
accounted for by such Person as an operating lease in accordance with GAAP as of the Closing Date and any similar lease entered into after
the Closing Date by such Person shall be accounted for as obligations relating to an operating lease and not as a capital lease and shall not
be considered Indebtedness hereunder, (d) non-contingent obligations of such Person to reimburse any bank or other Person in respect of
amounts paid under a letter of credit, banker’s acceptance or similar instrument, (e) equity securities of such Person subject to repurchase or
redemption other than at the sole option of such Person and any other Disqualified Stock, (f) obligations secured by a Lien on any asset of
such Person, whether or not such obligation is otherwise an obligation of such Person, (g) “earnouts”, purchase price adjustments, deferred
purchase money amounts and similar payment obligations or continuing obligations of any nature of such Person arising out of purchase
and sale contracts, (h) all Indebtedness of others guaranteed by such Person, (i) off-balance sheet liabilities of such Person, (j) obligations in
respect of litigation settlement agreements or similar agreements, (k) obligations arising under bonus, deferred compensation, incentive
compensation or similar arrangements, other than those arising in the Ordinary Course of Business, and (l) Contingent Obligations.
“Indemnified Liabilities” has the meaning given it in Section 14.8.
“Indemnified Taxes” means (a) Taxes, other than Excluded Taxes, imposed on or with respect to any payment made by or on
account of any obligation of Borrower under this Agreement and (b) to the extent not otherwise described in (a), Other Taxes.
“Indemnitees” has the meaning given it in Section 13.2(b).
“Insolvency Proceeding” means any proceeding by or against any Person under the United States Bankruptcy Code, or any other
bankruptcy or insolvency Law, including assignments for the benefit of creditors, compositions, extensions generally with its creditors, or
proceedings seeking reorganization, arrangement, or other relief.
“Intellectual Property” means all copyright rights, copyright applications, copyright registrations and like
52
protections in each work of authorship and derivative work, whether published or unpublished, any patents, patent applications and like
protections, including improvements, divisions, continuations, renewals, reissues, extensions, and continuations-in-part of the same,
trademarks, trade names, service marks, mask works, rights of use of any name, domain names, or any other similar rights, any applications
therefor, whether registered or not, know-how, operating manuals, trade secret rights, clinical and non-clinical data, rights to unpatented
inventions, and any claims for damage by way of any past, present, or future infringement of any of the foregoing.
“Inventory” means all “inventory”, as defined in the Code, with such additions to such term as may hereafter be made, and
includes without limitation all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished
products, including without limitation such inventory as is temporarily out of Borrower’s custody or possession or in transit and including
any returned goods and any documents of title representing any of the above.
“Investment” means, with respect to any Person, directly or indirectly, (a) to purchase or acquire any stock or stock equivalents,
or any obligations or other securities of, or any interest in, any Person, including the establishment or creation of a Subsidiary, (b) to make
or commit to make any Acquisition or (c) to make or purchase any advance, loan, extension of credit or capital contribution to, or any other
investment in, any Person.
“IP Proceeds” means, collectively, all cash, Accounts, license and royalty fees, claims, products, awards, judgments, insurance
claims, and other revenues, proceeds or income, arising out of, derived from or relating to any Intellectual Property of any Credit Party, and
any claims for damage by way of any past, present or future infringement of any Intellectual Property of any Credit Party (including,
without limitation, all cash, royalty fees, other proceeds, Accounts and General Intangibles that consist of rights of payment to or on behalf
of a Credit Party and the proceeds from the sale, licensing or other disposition of all or any part of, or rights in, any Intellectual Property by
or on behalf of a Credit Party).
“IRC” means the Internal Revenue Code of 1986, as amended, and any successor provisions.
“IRS” means the United States Internal Revenue Service.
“Janssen License” means that certain License and Collaboration Agreement by and between Janssen Biotech, Inc. and Borrower,
dated as of May 27, 2017, as amended from time to time prior to the Closing Date and thereafter in a manner not adverse to Agent or the
Lenders and otherwise in accordance with Section 7.11 hereof.
“Joinder Requirements” has the meaning given it in Section 6.8.
“Laws” means any and all federal, state, provincial, territorial, local and foreign statutes, laws, judicial decisions, regulations,
guidance, guidelines, ordinances, rules, judgments, orders, decrees, codes, plans, injunctions, permits, concessions, grants, franchises,
governmental agreements and governmental restrictions, whether now or hereafter in effect, which are applicable to any Credit Party in any
particular circumstance.
“LC Cash Collateral Accounts” means Deposit Accounts from time to time identified to Agent in writing established by
Borrower for the sole purpose of securing Borrower’s obligations under clause (g) of the definition Permitted Contingent Obligations and
containing only such cash or cash equivalents that have been required to be pledged to secure such obligations of Borrower; provided, that
the aggregate amount of cash or Cash Equivalents deposited in such LC Cash Collateral Accounts does not, at any time, exceed One Million
Dollars ($1,000,000) in the aggregate.
“Lenders” means each of the Persons identified on the Credit Facility Schedule as amended from time to time to reflect
assignments made in accordance with this Agreement.
“Lien” means a claim, mortgage, deed of trust, lien, levy, charge, pledge, security interest or other encumbrance of any kind,
whether voluntarily incurred or arising by operation of Law or otherwise against any property.
53
“Margin Stock” means “margin stock” as such term is defined in Regulation T, U, or X of the Board of Governors of the Federal
Reserve System.
“Material Adverse Change” means (a) a material impairment in the perfection or priority of Agent’s Lien (or any Lender’s Lien
therein to the extent provided for in the Financing Documents) in the Collateral (other than solely as a result of any action or inaction of
Agent or Lenders provided that such action or inaction is not caused by a Credit Party’s failure to comply with the terms of the Financing
Documents); (b) a material impairment in the value of the Collateral; (c) a material adverse change in the business, operations, or financial
condition of the Credit Parties taken as a whole; or (d) a material impairment of the prospect of repayment of any portion of the Obligations.
“Material Agreement” means (a) the agreements listed in the Disclosure Schedule on the Closing Date and as updated from time
to time in accordance with Section 6.7(a)(iii), (b) the Janssen License, and (c) each agreement or contract to which such Credit Party or its
Subsidiaries is a party, the termination of which could reasonably be expected to result in a Material Adverse Change.
“Material Indebtedness” has the meaning given it in Section 10.1(e).
“Material Intangible Assets” means (a) all of Borrower’s and its Subsidiaries’ Intellectual Property and (b) each license or
sublicense agreements or other agreements with respect to rights in Intellectual Property, that, in the case of each of clauses (a) and (b), is
material to the financial condition, business or operations of Borrower and its Subsidiaries.
“Maturity Date” means October 1, 2023.
“Maximum Lawful Rate” has the meaning given it in Section 2.6(g).
“MidCap” has the meaning given it in the preamble of this Agreement.
“Monthly Cash Burn Amount” means, with respect to Borrowers, an amount equal to Borrowers’ change in cash and cash
equivalents, without giving effect to any increase resulting from equity contributions or proceeds of financings, for either (a) the
immediately preceding six (6) month period as determined as of the last day of the month immediately preceding the proposed
consummation of the Permitted Acquisition and based upon the financial statements delivered to Agent in accordance with this Agreement
for such period, or (b) the immediately succeeding six (6) month period based upon the Transaction Projections delivered with respect to
such proposed Permitted Acquisition, using whichever calculation as between clause (a) and clause (b) demonstrates a higher burn rate (or,
in other words, more cash used), in either case, divided by six (6).
“Multiemployer Plan” means any employee benefit plan of the type described in Section 4001(a)(3) or ERISA, to which any
Credit Party or any ERISA Affiliate has at any time (whether presently or in the past) sponsored, maintained, contributed to, or had an
obligation to make contributions to or to which any Credit Party or any ERISA Affiliate has any liability, contingent or otherwise.
“Obligations” means all of Borrower’s obligations to pay when due any debts, principal, interest, Protective Advances, fees,
indemnities and other amounts Borrower owes Agent or the Lenders now or later, under this Agreement or the other Financing Documents,
including, without limitation, interest accruing after Insolvency Proceedings begin (whether or not allowed) and debts, liabilities, or
obligations of Borrower assigned to the Lenders and/or Agent, and the payment and performance of each other Credit Party’s covenants and
obligations under the Financing Documents. “Obligations” does not include obligations under any warrants issued to Agent or a Lender.
“OFAC” means the U.S. Department of Treasury Office of Foreign Assets Control.
“OFAC Lists” means, collectively, the Specially Designated Nationals and Blocked Persons List maintained by OFAC pursuant to
Executive Order No. 13224, 66 Fed. Reg. 49079 (Sept. 25, 2001) and/or any other list of terrorists or other restricted Persons maintained
pursuant to any of the rules and regulations of OFAC or pursuant to any other applicable Executive Orders.
54
“Operating Documents” means, for any Person, such Person’s formation documents, as certified with the Secretary of State of
such Person’s state of formation on a date that is no earlier than thirty (30) days prior to the Closing Date, and (a) if such Person is a
corporation, its bylaws in current form, (b) if such Person is a limited liability company, its limited liability company agreement (or similar
agreement), and (c) if such Person is a partnership, its partnership agreement (or similar agreement), each of the foregoing with all current
amendments or modifications thereto.
“Ordinary Course of Business” means, in respect of any transaction involving any Credit Party, the ordinary course of business
of such Credit Party, as conducted by such Credit Party in accordance with past practices or then current business practices set forth in the
most recent operating plan of Borrower to the extent approved by Agent, which shall in any event be at arms-length.
“Other Connection Taxes” means, with respect to any Recipient, Taxes imposed as a result of a present or former connection
between such Recipient and the jurisdiction imposing such Tax (other than connections arising solely from such Recipient having executed,
delivered, become a party to, performed its obligations under, received payments under, received or perfected a security interest under,
engaged in any other transaction pursuant to or enforced this Agreement, or sold or assigned an interest in any Obligation hereunder).
“Other Tax Certification” means such certification or evidence, in each case in form and substance reasonably satisfactory to
Agent and Borrower, that any Lender or prospective Lender is exempt from, or eligible for a reduction in, U.S. federal withholding tax or
backup withholding tax, including evidence supporting the basis for such exemption or reduction.
“Other Taxes” means all present or future stamp, court or documentary, intangible, recording, filing or similar Taxes that arise
from any payment made under, from the execution, delivery, performance, enforcement or registration of, from the receipt or perfection of a
security interest under, or otherwise with respect to, this Agreement, except any such Taxes that are Other Connection Taxes imposed with
respect to an assignment (other than an assignment made pursuant to Section 2.6(h)(x)).
“Participant Register” has the meaning given it in Section 13.1(c).
“Payment Date” means the first (1st) calendar day of each calendar month.
“PBGC” means the Pension Benefit Guaranty Corporation, or any successor entity thereto.
“Pension Plan” means any employee benefit pension plan that is subject to the minimum funding standards under Section 412 of
the IRC or is covered by Title IV of ERISA (including a Multiemployer Plan) that any Credit Party or any ERISA Affiliate has, at any time
(whether presently or in the past) sponsored, maintained, contributed to, or had an obligation to make contributions to or to which any
Credit Party or any ERISA Affiliate has any liability (contingent or otherwise).
“Perfection Certificate” means the Perfection Certificate delivered to Agent as of the Closing Date, together with any
amendments thereto required under this Agreement.
“Permitted Acquisition” means any Acquisition by a Credit Party, in each case, to the extent that each of the following conditions
shall have been satisfied:
(a)
the Credit Parties shall have delivered to Agent and each Lender at least ten (10) Business Days prior
written notice (or such shorter period as Agent may determine in its sole discretion) before the execution of any documents (other than a
non-binding summary of terms, letter of intent or similar agreement) related to such proposed acquisition, including a reasonably detailed
description of the terms and conditions of such acquisition (which may be included in the notice provided);
(or such shorter time as Agent may agree), Credit Parties shall have provided to Agent such information
(b)
as soon as available, but at least ten (10) Business Days before the consummation of such Acquisition
55
and documents that Agent may reasonably request, including, without limitation, (i) legal due diligence materials then in existence, (ii)
applicable financial information, and sources of the funding, related to such Acquisition, and (iii) the respective agreements, documents and
instruments pursuant to which such Acquisition is to be consummated, all schedules to such agreements, documents or instruments and all
other material ancillary agreements, instruments and documents to be executed or delivered in connection therewith;
(c)
Credit Parties shall and shall cause their Subsidiaries (including any new Subsidiary as required by
Section 6.8) to execute and deliver the agreements, instruments and other documents required by the terms of this Agreement, including,
without limitation, Section 6.8 or and Section 6.12, and as otherwise necessary or desirable to ensure that Agent receives a first priority
perfected Lien in all entities and assets acquired in connection with the proposed Acquisition to the extent required by this Agreement;
with respect to any Acquisition involving an in-license to a Credit Party, all such in-licenses or
agreements related thereto shall constitute “Collateral” and Agent to have the ability in the event of a liquidation of any Collateral to
dispose of such Collateral in accordance with Agent’s rights and remedies under this Agreement and the other Financing Documents;
(d)
other than Permitted Indebtedness and Permitted Liens;
(e)
there is no Indebtedness or Liens incurred, created or assumed in connection with such acquisition
such acquisition shall not be hostile and shall have been approved by the board of directors (or other
similar body) and/or the stockholders or other equityholders of the Person being acquired, in each case as required by such Person’s
organizational documents;
(f)
giving effect to such Acquisition;
(g)
no Default or Event of Default shall have occurred, be continuing or would exist immediately after
applicable Law;
(h)
all transactions in connection with such Acquisition shall be consummated in accordance with
entity after such Acquisition;
(i)
the Acquisition would not result in a Change in Control and each Borrower remains a surviving legal
reasonably related or ancillary to the business of Credit Parties;
(j)
the target so acquired or the assets of the target so acquired, as the case may be, shall be in or
if the Acquisition is an equity purchase, the target and its Subsidiaries must have as its jurisdiction of
formation a state within the United States and if the Acquisition is an asset purchase or a merger, not less than 75% of the fair market value
of all of the assets so acquired shall be located within the United States;
(k)
(l)
the Credit Parties have provided Agent with written confirmation, supported by reasonably detailed
calculations, that on a pro forma basis, the Credit Parties would be in compliance with the financial covenant contained in Section 9.1
hereof, both immediately prior to, and immediately after the consummation of, such Acquisition; and
(m)
the sum of all cash and Cash Equivalents paid or payable in connection with all Permitted
Acquisitions (including all Indebtedness, liabilities and Contingent Obligations (in each case to the extent otherwise permitted hereunder)
incurred or assumed and the maximum amount of any deferred consideration, earn-out or comparable payment obligation in connection
therewith, regardless of whether or not reflected on a consolidated balance sheet of Borrower) shall not exceed (i) Ten Million
Dollars ($10,000,000) in the aggregate for any twelve (12) month period, or (ii) without limiting clauses (i), Twenty Million Dollars
($20,000,000) in the aggregate for all Acquisitions consummated during the term of this Agreement; provided that the foregoing shall not
prohibit or limit the issuance of common stock of Borrower as consideration in connection with such Acquisitions; and
56
(n)
Agent has received prior to the consummation of such Acquisition updated financial projections from
Borrower, in form and substance reasonably satisfactory to Agent, for the immediately succeeding twelve (12) months following the
proposed consummation of the Acquisition beginning with the month during which the Acquisition is to be consummated (the
“Transaction Projections”) and evidence reasonably satisfactory to Agent that Borrower has, immediately before and immediately after
giving effect to the consummation of such Acquisition, an aggregate amount of Borrower Unrestricted Cash equal to or greater than an
amount equal to the product of (x) twelve (12) multiplied by (y) the Monthly Cash Burn Amount (expressed as a positive number), as
determined as of the last day of the month immediately preceding such Acquisition.
“Permitted Contest” has the meaning given it in Section 6.4.
“Permitted Contingent Obligations” means:
Business;
(a)
Contingent Obligations resulting from endorsements for collection or deposit in the Ordinary Course of
Contingent Obligations incurred in the Ordinary Course of Business with respect to surety and appeal bonds,
performance bonds and other similar obligations not to exceed One Million Dollars ($1,000,000) in the aggregate at any time outstanding;
(b)
(c)
Contingent Obligations arising under indemnity agreements with title insurers;
connection with dispositions of personal property assets permitted under Article 7;
(d)
Contingent Obligations arising with respect to customary indemnification obligations in favor of purchasers in
(e)
Contingent Obligations arising under the Financing Documents;
(f)
so long as there exists no Event of Default both immediately before and immediately after giving effect to any
such transaction, Contingent Obligations existing or arising under any swap contract, provided, however, that such obligations are (or
were) entered into by Borrower or an Affiliate in the Ordinary Course of Business for the purpose of directly mitigating risks associated
with liabilities, commitments, investments, assets, or property held or reasonably anticipated by such Person and not for purposes of
speculation;
Contingent Obligations existing or arising in connection with any security deposit or letter of credit obtained
for the sole purpose of securing a lease of real property in an aggregate amount that does not at any time exceed One Million Dollars
($1,000,000);
(g)
Contingent Obligations existing or arising or in connection with ancillary bank services provided by a
depository bank in favor of a Credit Party, provided that the aggregate amount of all such Contingent Obligations does not at any time
exceed One Million Dollars ($1,000,000) outstanding;
(h)
Guaranties by a Credit Party of Permitted Indebtedness of another Credit Party incurred in the Ordinary
Course of Business; provided, any such Guaranty shall be subordinated to the Obligations to the same extent and on the same terms and
conditions as the Indebtedness guaranteed has been subordinated to the Obligations; and
(i)
Dollars ($1,000,000) in the aggregate at any time outstanding.
(j)
other Contingent Obligations not permitted by clauses (a) through (h) above, not to exceed One Million
“Permitted Distributions” means:
(a)
dividends payable solely in common stock and made in the Ordinary Course of Business;
57
repurchases of stock of former or current employees, directors, officers or consultants pursuant to stock
purchase agreements, employee stock purchase plans, employee restricted stock agreements or similar plans in an aggregate amount not
to exceed Five Hundred Thousand ($500,000) per fiscal year;
(a)
repurchases of stock of former or current employees, directors, officers or consultants pursuant to stock
repurchase agreements by the cancellation of indebtedness owed by such former employees, directors, officers or consultants (and not, for
the avoidance of doubt, by the payment of cash or Cash Equivalents by any Credit Party or Subsidiary thereof);
(a)
(b)
payment of dividends or the making of distributions by any Subsidiary to Borrower;
Disqualified Stock) pursuant to the terms of such convertible securities or otherwise in exchange thereof;
(c)
conversions of convertible securities (including warrants and options) into other equity securities (other than
issuance of other non-cash equity compensation (and acceleration of vesting thereof), including retention
bonuses, to its officers, directors and other employees to the extent not constituting Disqualified Stock and issued in the Ordinary Course
of Business;
(d)
(e)
de minimis cash payable in lieu of issuing fractional shares;
(f)
repurchases of stock deemed to occur upon exercise of stock options or warrants if such stock represents a
portion of the exercise price of such options or warrants and repurchases of stock deemed to occur upon the withholding of a portion of
the stock granted or awarded; provided that no cash or Cash Equivalents shall be paid by any Credit Party in connection with such
repurchase expect to the extent otherwise constituting a Permitted Distribution;
(g)
so long as no Event of Default has occurred and is continuing or would result therefrom, repurchases of stock
of Protagonist Therapeutics with identifiable net cash proceeds received by Protagonist Therapeutics from the sale of its stock (other than
Disqualified Stock) in a substantially concurrent equity offering; provided that (x) no cash or Cash Equivalents (other than such
identifiable net cash proceeds) shall be paid by any Credit Party or any Subsidiary thereof in connection with such repurchase and (y) the
aggregate amount of authorized or issued stock of Protagonist Therapeutics does not decrease as a result of such repurchase; and
the distribution of rights pursuant to a stockholder rights plan for no or nominal consideration (including, for
the avoidance of doubt, nominal cash consideration) but not, for the avoidance of doubt, any distributions in respect of the exercise of
such rights or the redemption thereof.
(h)
“Permitted Indebtedness” means:
(a)
(b)
Borrower’s Indebtedness to the Lenders and Agent under this Agreement and the other Financing Documents;
Indebtedness existing on the Closing Date and described on the Disclosure Schedule;
as no Event of Default has occurred and is continuing or would result from the incurrence of such Indebtedness;
(c)
Indebtedness secured by Liens permitted pursuant to clause (b) of the definition of “Permitted Liens” so long
(d)
(e)
(f)
Subordinated Debt;
unsecured Indebtedness to trade creditors incurred in the Ordinary Course of Business;
Permitted Contingent Obligations;
58
extensions, refinancings, modifications, amendments and restatements of any items of Permitted Indebtedness
set forth in (b) and (c) above, provided, however, that the principal amount thereof is not increased or the terms thereof are not modified
to impose more burdensome terms upon the obligors thereunder;
(g)
Indebtedness owed to any Person providing workers’ compensation, health, disability or other employee
benefits (other than ERISA) pursuant to reimbursement or indemnification obligations to such Person, in each case in the Ordinary
Course of Business;
(h)
(i)
unsecured earn-out obligations and other similar unsecured milestone or contingent obligations incurred in
connection with a Permitted Acquisition, in an amount not to exceed the cap set forth in clause (m) of the definition of Permitted
Acquisitions after taking into account all other consideration paid or payable by the Credit Parties in connection with Permitted
Acquisitions during the term of this Agreement; provided that no payment with respect to such obligations shall be made if a Specified
Event of Default has occurred and is continuing or would result from the making of such payments;
(j)
Indebtedness consisting of unsecured intercompany loans and advances incurred by (i) any Borrower owing to
any other Borrower, (ii) any Guarantor owing to any other Guarantor, (iii) any Restricted Foreign Subsidiary owing to any other
Restricted Foreign Subsidiary, or (iv) any Restricted Foreign Subsidiary owing to any Borrower or any Guarantor so long as such
Indebtedness constitutes a Permitted Investment of the applicable Credit Party pursuant to clause (f) of the definition of Permitted
Investments; provided, however, that (x) upon the request of Agent at any time, any such Indebtedness owed to a Borrower or Guarantor
shall be evidenced by promissory notes having terms reasonably satisfactory to Agent, the sole originally executed counterparts of which
shall be pledged and delivered to Agent, for the benefit of itself and the Lenders, as security for the Obligations and (y) any such
Indebtedness owed by a Credit Party shall be subordinated to the payment in full of the Obligations pursuant to documentation in form
and substance reasonably satisfactory to Agent;
(k)
Indebtedness in respect of netting services, overdraft protections, payment processing, automatic
clearinghouse arrangements, arrangements in respect of pooled deposit or sweep accounts, check endorsement guarantees, and otherwise
in connection with the deposit accounts or cash management services, in each case so long as such Indebtedness is incurred in the
Ordinary Course of Business and is unsecured;
finance companies not to exceed One Million Dollars ($1,000,000) at any time outstanding; and
(l)
Indebtedness to finance insurance premiums financed through the applicable insurance company or other
amount at any time outstanding.
(m)
Other unsecured Indebtedness not to exceed One Million Dollars ($1,000,000) in the aggregate principal
“Permitted Investments” means:
(a)
(b)
Investments existing on the Closing Date and described on the Disclosure Schedule;
the holding of Cash Equivalents to the extent constituting an Investment;
(c)
subject to compliance with the banking requirements set forth in Section 6.6(b) hereof, any Investments in
liquid assets, held in Securities Accounts that are subject to Control Agreements, permitted by Borrower’s investment policy, as amended
from time to time, provided that such investment policy (and any such amendment thereto) has been approved in writing by Agent
(provided that, under no circumstances shall Borrower be permitted to invest in or hold Margin Stock);
transactions in the ordinary course of any Credit Party;
(d)
Investments consisting of the endorsement of negotiable instruments for deposit or collection or similar
security interest except as otherwise provided by Section 6.6;
(e)
Investments consisting of deposit accounts or securities accounts in which Agent has a first priority perfected
59
(f)
Investments of cash and Cash Equivalents in a Restricted Foreign Subsidiary in amounts necessary to fund
the current operating expenses of such Restricted Foreign Subsidiary, including amounts necessary to fund clinical trial programs being
run through such Restricted Foreign Subsidiary, for the six (6) month period following the date on which such Investment is made (taking
into account their revenue from other sources); provided that aggregate amount of all such Investments made with respect to all
Restricted Foreign Subsidiaries does not exceed Ten Million Dollars ($10,000,000) in any fiscal year;
(g)
Investments consisting of (i) travel advances and employee relocation loans and other employee loans and
advances in the Ordinary Course of Business, and (ii) loans to employees, officers or directors relating to the purchase of equity securities
of Borrower or its Subsidiaries pursuant to employee stock purchase plans or agreements approved by Borrower’s board of directors in
the Ordinary Course of Business and in an aggregate amount not to exceed Five Hundred Thousand Dollars ($500,000) in any fiscal
year;
Investments (including debt obligations) received in connection with the bankruptcy or reorganization of
customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the
Ordinary Course of Business;
(h)
Investments consisting of accounts receivable created, acquired or made and trade credit extended to
customers and suppliers who are not Affiliates of a Credit Party in the Ordinary Course of Business and payable in accordance with
customary trade terms;
(i)
(j)
(k)
Permitted Acquisitions;
the granting of Permitted Licenses;
so long as no Event of Default exists at the time of such Investment or after giving effect to such Investment,
Investments of cash and Cash Equivalents in joint venture or strategic alliances; provided that the aggregate amount of such Investments
do not exceed Two Million Dollars ($2,000,000) per fiscal year; and
(l)
so long as no Event of Default exists at the time of such Investment or after giving effect to such Investment,
other Investments of cash and Cash Equivalents in an amount not exceeding One Million Dollars ($1,000,000) in the aggregate per fiscal
year.
(m)
“Permitted License” means:
any non-exclusive license of Intellectual Property rights of Borrower or its Subsidiaries so long as all such
Permitted Licenses (i) are granted to third parties in the Ordinary Course of Business, (ii) do not result in a legal transfer of title to the
licensed property, and (iii) have been granted in exchange for fair consideration and on commercially reasonable arms’ length terms;
(a)
(a)
any exclusive or co-exclusive license of Intellectual Property rights of Borrower or its Subsidiaries so long as
such Permitted License (i) has been granted to third parties in the Ordinary Course of Business, (ii) does not result in a legal transfer of
title to the licensed property, (iii) has been granted in exchange for fair consideration and on commercially reasonable arms’ length terms,
(iv) is exclusive or co-exclusive (as applicable) solely as to discrete geographical areas outside of North America (and not exclusive or
co-exclusive in any other respect), and (v) no Event of Default is existing at the time such license is granted or would result from the
granting thereof; and
(a)
licenses of Intellectual Property rights of Borrower granted by Borrower pursuant to the Janssen License.
“Permitted Liens” means:
(a)
and the other Financing Documents;
Liens existing on the Closing Date and shown on the Disclosure Schedule or arising under this Agreement
60
(b)
purchase money Liens or capital leases securing no more than One Million Dollars ($1,000,000) in the
aggregate amount outstanding at any time (i) on Equipment acquired or held by a Credit Party incurred for financing the acquisition of
the Equipment, or (ii) existing on Equipment when acquired, if the Lien is confined to the property and improvements and the proceeds of
the Equipment;
Liens for taxes, fees, assessments or other government charges or levies, either not delinquent or being
contested in good faith and for which adequate reserves are maintained on the Books of the Credit Party against whose asset such Lien
exists;
(c)
other Persons imposed without action of such parties, which are not due, or which are being contested in good faith;
(d)
statutory Liens securing claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and
leases or subleases of real property granted in the Ordinary Course of Business, and leases, subleases, non-
exclusive licenses or sublicenses of property (other than real property or Intellectual Property) granted in the Ordinary Course of
Business, if the leases, subleases, licenses and sublicenses do not prohibit granting Agent a security interest;
(e)
banker’s liens, rights of set-off and Liens in favor of financial institutions incurred made in the Ordinary
Course of Business arising in connection with a Credit Party’s Collateral Accounts provided that such Collateral Accounts are subject to a
Control Agreement to the extent required hereunder;
(f)
and other like obligations incurred in the Ordinary Course of Business (other than Liens imposed by ERISA);
(g)
Liens to secure payment of workers’ compensation, employment insurance, old-age pensions, social security
(h)
Liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default;
or encumbrances affecting real property not constituting a Material Adverse Change; and
easements, reservations, rights-of-way, restrictions, minor defects or irregularities in title and similar charges
operating leases or consignments of personal property entered into the Ordinary Course of Business;
purported Liens evidenced by the filing of precautionary UCC financing statements relating solely to
(i)
(j)
accounts in favor of banks, other depositary institutions and securities intermediaries arising in the Ordinary Course of Business;
(k)
Liens that are rights of set-off, bankers’ liens or similar non-consensual Liens relating to deposit or securities
duties in connection with the importation of goods in the Ordinary Course of Business;
(l)
Liens in favor of customs and revenue authorities arising as a matter of Law to secure payment of customs
granting of a Permitted License;
(m)
to the extent constituting a Lien and so long as no Event of Default has occurred and is continuing, the
financing of insurance premiums to the extent the financing is permitted in clause (k) of the definition of Permitted Indebtedness;
(n)
Liens granted in the Ordinary Course of Business on the unearned portion of insurance premiums securing the
this Agreement
(o)
customary indemnification obligations relating to any disposition expressly permitted pursuant to the terms of
Event of Default has occurred and is continuing at the time such deposit is made;
(p)
good faith deposits of cash required to be made in connection with any Permitted Acquisition so long as no
61
contested in good faith; and
(q)
deposits of cash as security for taxes subject to a Permitted Contest or import or customs duties being
Liens incurred in the extension, renewal or refinancing of the indebtedness secured by Liens described in (a)
and (b) above, but any extension, renewal or replacement Lien must be limited to the property encumbered by the existing Lien and the
principal amount of the Indebtedness may not increase.
(r)
“Person” means any individual, sole proprietorship, partnership, limited liability company, joint venture, company, trust,
unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or
government agency.
“Pledge Agreement” means that certain Pledge Agreement, dated as of the date hereof, executed by Borrower in favor of Agent,
for the benefit of Lenders, covering all the equity interests respectively owned by the Credit Parties, as amended, restated, or otherwise
modified from time to time.
“Pro Rata Share” means, as determined by Agent, with respect to each Credit Facility and Lender holding an Applicable
Commitment or Credit Extensions in respect of such Credit Facility, a percentage (expressed as a decimal, rounded to the ninth decimal
place) determined by dividing (a) in the case of fully-funded Credit Facilities, the amount of Credit Extensions held by such Lender in such
Credit Facility by the aggregate amount of all outstanding Credit Extensions for such Credit Facility, and (b) in the case of Credit Facilities
that are not fully-funded, the amount of Credit Extensions and unfunded Applicable Commitments held by such Lender in such Credit
Facility by the aggregate amount of all outstanding Credit Extensions and unfunded Applicable Commitments for such Credit Facility.
“Products” means any products manufactured, sold, developed, tested or marketed by any Borrower or any of its Subsidiaries,
including without limitation, those products set forth on the Products Schedule (as updated from time to time in accordance with Section
6.16); provided that, for the avoidance of doubt, any new Product not disclosed on the Products Schedule shall still constitute a “Product”
as herein defined.
“Protagonist Therapeutics” has the meaning set forth in the preamble to this Agreement.
“Protective Advances” means all audit fees and expenses, costs, and expenses (including reasonable attorneys’ fees and expenses)
of Agent and the Lenders for preparing, amending, negotiating, administering, defending and enforcing the Financing Documents
(including, without limitation, those incurred in connection with appeals or Insolvency Proceedings) or otherwise incurred by Agent or the
Lenders in connection with the Financing Documents.
“Recipient” means Agent and any Lender, as applicable.
“Register” has the meaning given it in Section 13.1(c).
“Registered Intellectual Property” means any registered patent, registered trademark or servicemark, registered copyright,
registered mask work, or any pending application for any of the foregoing.
“Registered Organization” means any “registered organization” as defined in the Code, with such additions to such term as may
hereafter be made.
“Regulatory Reporting Event” has the meaning given it in Section 6.16(a).
“Regulatory Required Permit” means any and all licenses, approvals and permits issued by the FDA, DEA or any other
applicable Governmental Authority, including without limitation Drug Applications, necessary for the testing, manufacture, marketing or
sale of any Product by any applicable Borrower(s) and its Subsidiaries as such activities are being conducted by such Borrower and its
Subsidiaries with respect to such Product at such time and any drug listings and drug establishment registrations under 21 U.S.C. Section
510, registrations issued by DEA under 21 U.S.C. Section 823 (if applicable to any Product), and those issued by State governments for the
conduct of Borrower’s or any Subsidiary’s business.
62
“Required Lenders” means, unless all of the Lenders and Agent agree otherwise in writing, Lenders having (a) more than sixty
percent (60%) of the Applicable Commitments of all Lenders, or (b) if such Applicable Commitments have expired or been terminated,
more than sixty percent (60%) of the aggregate outstanding principal amount of the Credit Extensions; provided, however, that so long as
Silicon Valley Bank and MidCap Financial Trust do not assign any portion of their Applicable Commitment or all or any part of their Credit
Extensions (other than, in each case, an assignment to any Affiliate or Approved Fund of such Lender), the “Required Lenders” shall
include such Lender (or such Affiliate or Approved Fund of such Lender).
“Required Permit” means all licenses, certificates, accreditations, product clearances or approvals, provider numbers or provider
authorizations, supplier numbers, provider numbers, marketing authorizations, other authorizations, registrations, permits, consents and
approvals of a Credit Party issued or required under Laws applicable to the business of Borrower or any of its Subsidiaries or necessary in
the manufacturing, importing, exporting, possession, ownership, warehousing, marketing, promoting, sale, labeling, furnishing, distribution
or delivery of goods or services under Laws applicable to the business of Borrower or any of its Subsidiaries. Without limiting the
generality of the foregoing, “Required Permits” includes any Regulatory Required Permit.
“Reserve Percentage” means, on any day, for any Lender, the maximum percentage prescribed by the Board of Governors of the
Federal Reserve System (or any successor Governmental Authority) for determining the reserve requirements (including any basic,
supplemental, marginal, or emergency reserves) that are in effect on such date with respect to eurocurrency funding (currently referred to as
“eurocurrency liabilities”) of that Lender, but so long as such Lender is not required or directed under applicable regulations to maintain
such reserves, the Reserve Percentage shall be zero.
“Responsible Officer” means any of the President and Chief Executive Officer or Chief Financial Officer of Borrower.
“Restricted Foreign Subsidiary” means (a) Protagonist Pty Limited, an Australian limited company and (b) each other direct and
indirect Subsidiary of Borrower not organized under the laws of the United States or any state thereof that Agent and Required Lenders may
agree (in their sole discretion) in writing from time to time after the Closing Date to designate as a “Restricted Foreign Subsidiary” for
purposes of this Agreement; unless and until such Subsidiary has been made a Credit Party hereunder in accordance with the provisions set
forth in Section 6.12.
“Secretary’s Certificate” means, with respect to any Person, a certificate, in form and substance satisfactory to Agent, executed
by such Person’s secretary (or other appropriate officer acceptable to Agent in its sole but reasonable discretion) on behalf of such Person
certifying (a) that such Person has the authority to execute, deliver, and perform its obligations under each of the Financing Documents to
which it is a party, (b) that attached to such certificate is a true, correct, and complete copy of the Borrowing Resolutions then in full force
and effect authorizing and ratifying the execution, delivery, and performance by such Person of the Financing Documents to which it is a
party, (c) the name(s) of the Person(s) authorized to execute the Financing Documents on behalf of such Person, together with a sample of
the true signature(s) of such Person(s), (d) that attached to such certificate are true, correct, and complete copies of the Operating
Documents of Borrower and good standing certificates of Borrower certified by the Secretary of State of the state(s) of organization of
Borrower as of a date no earlier than thirty (30) days prior to the Closing Date and (e) that a true, correct, and complete copy of each of the
Borrower’s Registration Rights Agreement/Investors’ Rights Agreement, voting agreements or other agreements among shareholders and
any amendments to the foregoing has been delivered to Agent.
“Secured Promissory Note” has the meaning given it in Section 2.7.
“Securities Account” means any “securities account”, as defined in the Code, with such additions to such term as may hereafter be
made.
“Security Documents” means, collectively, the Pledge Agreement, each Control Agreement, and each other agreement, document
or instrument executed concurrently herewith or at any time hereafter pursuant to which one (1) or more Credit Parties or any other Person
provides, as security for all or any portion of the Obligations, a Lien on any of its assets in favor of Agent for its own benefit and the benefit
of the Lenders, as any or all of the same may be amended, supplemented, restated or otherwise modified from time to time.
63
“Specified Event of Default” means an Event of Default described in Section 10.1(a), 10.1(c) solely with respect to a default
under Article 9, 10.1(f) or 10.1(n).
“Stated Rate” has the meaning given it in Section 2.6(g).
“Subordinated Debt” means indebtedness incurred by Borrower which shall be (a) in an amount satisfactory to Agent and the
Required Lenders, (b) made pursuant to documents in form and substance satisfactory to Agent and the Required Lenders (the
“Subordinated Debt Documents”), and (c) subordinated to all of Borrower’s now or hereafter indebtedness to Agent and the Lenders
pursuant to a Subordination Agreement.
“Subordination Agreement” means a subordination, intercreditor, or other similar agreement in form and substance, and on
terms, approved by Agent and the Required Lenders in writing.
“Subsidiary” means, with respect to any Person, any Person of which more than fifty percent (50.0%) of the voting stock or other
equity interests (in the case of Persons other than corporations) is owned or controlled, directly or indirectly, by such Person. Unless the
context otherwise requires, each reference to a Subsidiary shall be a reference to a Subsidiary of a Borrower.
“Taxes” means all present or future taxes, levies, imposts, duties, deductions, withholdings (including backup withholding),
assessments, fees or other charges imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable
thereto.
“Transfer” has the meaning given it in Section 7.1.
“U.S. Person” means any Person that is a “United States Person” as defined in Section 7701(a)(30) of the IRC.
“Withholding Agent” means Borrower and Agent.
[SIGNATURES APPEAR ON FOLLOWING PAGES]
64
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the Closing Date.
BORROWER:
PROTAGONIST THERAPEUTICS, INC.
By:
Name:
Title:
/s/Don Kalkofen
Don Kalkofen
Chief Executive Officer
CREDIT AGREEMENT
SIGNATURE PAGE
AGENT:
MIDCAP FINANCIAL TRUST
By:
its investment manager
Apollo Capital Management, L.P.,
By:
its general partner
Apollo Capital Management GP, LLC,
By:/s/Maurice Amsellem
Name: Maurice Amsellem
Title: Authorized Signatory
CREDIT AGREEMENT
SIGNATURE PAGE
LENDERS:
MIDCAP FINANCIAL TRUST
By:
its investment manager
Apollo Capital Management, L.P.,
By:
its general partner
Apollo Capital Management GP, LLC,
By:/s/Maurice Amsellem
Name: Maurice Amsellem
Title: Authorized Signatory
CREDIT AGREEMENT
SIGNATURE PAGE
LENDERS:
SILICON VALLEY BANK
By:/s/Peter Sletteland
Name: Peter Sletteland
Title: Vice President
CREDIT AGREEMENT
SIGNATURE PAGE
EXHIBITS AND SCHEDULES
EXHIBITS
Exhibit ACollateral
Exhibit BForm of Compliance Certificate
Exhibit C
Credit Extension Form
SCHEDULES
Credit Facility Schedule
Amortization Schedule (for each Credit Facility)
Post-Closing Obligations Schedule
Closing Deliveries Schedule
Disclosure Schedule
Intangible Assets Schedule
Products Schedule
Required Permits Schedule
EXHIBIT A
COLLATERAL
The Collateral consists of all assets of the Credit Parties (other than Excluded Property), including, without limitation, all of each
Credit Party’s right, title and interest in and to the following, whether now owned or hereafter created, acquired or arising:
(a)all Goods, Accounts (including health-care insurance receivables), Equipment, Inventory, Contracts together with all Contract
Rights or rights to payment of money, leases, license agreements, franchise agreements, General Intangibles, IP Proceeds, Commercial Tort
Claims (including each such claim listed on the Disclosure Schedule), Documents, Instruments (including any promissory notes), Chattel
Paper (whether tangible or electronic), Vehicles and title documents with respect to Vehicles, cash, Deposit Accounts, Securities Accounts,
Commodity Accounts and other Collateral Accounts, all certificates of deposit, Fixtures, Letters of Credit Rights (whether or not the letter
of credit is evidenced by a writing), Securities, equity interests, and all other Investment Property, Supporting Obligations, and Financial
Assets, whether now owned or hereafter acquired, wherever located;
(b)all of each Credit Party’s Books relating to the foregoing and all rights of access to such Credit Party’s Books; and
(c)any and all claims, rights and interests in any of the above and all substitutions for, additions, attachments, accessories,
accessions and improvements to and replacements, products, proceeds and insurance proceeds of any or all of the foregoing.
Pursuant to the terms of a certain negative pledge arrangement with Agent and the Lenders, Borrower has agreed not to encumber
any of its Intellectual Property without Agent’s and the Lenders’ prior written consent.
EXHIBIT B
COMPLIANCE CERTIFICATE
TO:
FROM:
DATE:
MidCap Financial Trust, as Agent
__________________________________
________________, 20__
The undersigned authorized officer of Protagonist Therapeutics, Inc., a Delaware corporation (“Borrower”) certifies that under the
terms and conditions of the Credit and Security Agreement between Borrower, Agent and the Lenders (as amended, restated, supplemented,
replaced or otherwise modified from time to time, the “Agreement”):
(1)
as noted below;
Borrower is in complete compliance with all required covenants for the month ending _______________, 201__, except
(2)
there are no Events of Default; except as set forth in Schedule 1 hereto, which includes a description of the nature and
period of existence of such Event of Default and what action Borrowers have taken, are undertaking and propose to take with respect
thereto;
(3)
all representations and warranties in the Agreement are true and correct in all material respects on this date except as
noted below; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties that already are
qualified or modified by materiality in the text thereof; and provided, further, that those representations and warranties expressly referring to
a specific date shall be true, accurate and complete in all material respects as of such date;
(4)
Each of Borrower and the other Credit Parties has timely filed all required tax returns and reports, and has timely paid all
foreign, federal, state and local taxes, assessments, deposits and contributions owed except as otherwise permitted pursuant to the terms of
the Agreement;
(5)
no Liens have been levied or claims made against Borrower or any of its Subsidiaries relating to unpaid employee payroll
or benefits of which Borrower has not previously provided written notification to Agent; and
(6)
[attached hereto is an updated [Disclosure Schedule][Required Permits Schedule][Products Schedule][Intangible Assets
Schedule][INSERT AS APPROPRIATE] as required to be updated pursuant to the terms of the Credit and Security Agreement.]
(7)
[attached hereto are copies of each new Material Agreement and/or any new material amendment, consent, waiver or
other modification to any Material Agreement not previously disclosed to Agent.]
(8)
(9)
the aggregate amount of Borrower Unrestricted Cash as of the date hereof is $__________.
the aggregate amount of cash and Cash Equivalents held by the Credit Parties as of the date hereof is $__________.
(10)
the aggregate amount of cash and Cash Equivalents held by the Restricted Foreign Subsidiaries as of the date hereof is
$__________ (or the equivalent thereof in foreign currency).
Attached are the required documents supporting the certifications set forth in this Compliance Certificate. [The undersigned
certifies, in his/her capacity as an officer of Borrower, that these financial statements are prepared
in accordance with GAAP consistently applied from one period to the next except as explained in an accompanying letter or footnotes and
subject to normal year-end audit adjustments and the absence of footnotes with respect to unaudited financials.] The undersigned
acknowledges, in his/her capacity as an officer of Borrower, that no borrowings may be requested at any time or date of determination that
Borrower is not in compliance with any of the terms of the Agreement, and that compliance is determined not just at the date this certificate
is delivered. Capitalized terms used but not otherwise defined herein shall have the meanings given them in the Agreement.
Please indicate compliance status by circling Yes/No under “Complies” column.
Reporting
Covenant
Quarterly Financial
Statements
Audited Financial
Statements
Board Approved
Projections
Compliance
Certificate
Minimum Cash
Required
Complies
Quarterly within
45 days after the last day
of each quarter
Annually within
90 days after FYE
Annually within
45 days after FYE
Monthly within
45 days
45 days
Monthly within
Yes No
Yes No
Yes No
Yes No
Yes No
The following are the exceptions with respect to the certification above: (If no exceptions exist, state “No exceptions to note.”)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
PROTAGONIST THERAPEUTICS,
AGENT USE ONLY
INC.
By:
Name:
Title:
Received by: _____________________
authorized signer
Date:
_________________________
Verified: ________________________
authorized signer
Date:
_________________________
Compliance Status:Yes No
EXHIBIT C
CREDIT EXTENSION FORM
Deadline is Noon New York Time
Date: __________________, 201__
Loan Advance:
Complete Outgoing Wire Request section below if all or a portion of the funds from this loan advance are for an outgoing wire.
From Account #________________________________To Account #_________________________________
(Loan Account #)(Deposit Account #)
Amount of Advance $___________________________
Requested Date of Advance (subject to requirements of Credit and Security Agreement): ______________
All of Borrower’s representations and warranties in the Credit and Security Agreement are true, correct and complete in all material respects on
the date of the request for an advance; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties that
already are qualified or modified by materiality in the text thereof; and provided, further, that those representations and warranties expressly referring to
a specific date shall be true, accurate and complete in all material respects as of such date:
Authorized Signature:
Print Name/Title:
Outgoing Wire Request:
Phone Number: _______
Complete only if all or a portion of funds from the loan advance above is to be wired.
Beneficiary Name: _____________________________
Beneficiary Lender: ____________________________ Account Number:
City and State:
Amount of Wire: $
Beneficiary Lender Transit (ABA) #:
(For International Wire Only)
Intermediary Lender:
For Further Credit to:
Special Instruction:
Beneficiary Lender Code (Swift, Sort, Chip, etc.):
Transit (ABA) #:
By signing below, I (we) acknowledge and agree that my (our) funds transfer request shall be processed in accordance with and subject to the
terms and conditions set forth in the agreements(s) covering funds transfer service(s), which agreements(s) were previously received and executed by me.
Authorized Signature: ___________________________2 Signature (if required): ________________________
Print Name/Title: ______________________________Print Name/Title: _______________________________
Telephone #:
Telephone #:
nd
CREDIT FACILITY SCHEDULE
The following Credit Facilities are specified on this Credit Facility Schedule:
Credit Facility #1:
Credit Facility and Type:
Term, Tranche 1
Lenders for and their respective Applicable Commitments to this Credit Facility:
Lender
Midcap Financial Trust
Silicon Valley Bank
Total:
Applicable Commitment
Five Million Dollars ($5,000,000)
Five Million Dollars ($5,000,000)
Ten Million Dollars ($10,000,000)
The following defined terms apply to this Credit Facility:
Applicable Floor: means four and ninety-four one hundredths percent (4.94%) per annum.
Applicable Margin: a rate of interest equal to two and ninety-one one hundredths percent (2.91%) per annum.
Applicable Prepayment Fee: means the following amount, calculated as of the date (the “Accrual Date”) that the Applicable Prepayment
Fee becomes payable in the case of prepayments required under the Financing Documents or the date any voluntary prepayment is
made: (a) for an Accrual Date on or after the Closing Date through and including the date which is twelve (12) months after the Closing
Date, three percent (3.0%) multiplied by the amount of the outstanding principal of the Credit Extension prepaid or required to be prepaid
(whichever is greater); (b) for an Accrual Date on or after the date which is twelve (12) months after the Closing Date through and including
the date which is twenty-four (24) months after the Closing Date, two percent (2.0%) multiplied by the amount of the outstanding principal
of the Credit Extension prepaid or required to be prepaid (whichever is greater); and (c) for an Accrual Date on or after the date which is
twenty-four (24) months after the Closing Date through and including the date immediately preceding the Maturity Date, one percent
(1.0%) multiplied by the amount of the outstanding principal of the Credit Extension prepaid or required to be prepaid (whichever is
greater).
Commitment Commencement Date: Closing Date.
Commitment Termination Date:
the close of the Business Day following the Closing Date.
Minimum Credit Extension Amount: $10,000,000.
Credit Facility #2:
Credit Facility and Type:
Term, Tranche 2
Lenders for and their respective Applicable Commitments to this Credit Facility:
Lender
Midcap Financial Trust
Silicon Valley Bank
Total:
Applicable Commitment
Ten Million Dollars ($10,000,000)
Ten Million Dollars ($10,000,000)
Twenty Million Dollars ($20,000,000)
The following defined terms apply to this Credit Facility:
Applicable Funding Conditions:
means the following:
respect to a Phase 2 clinical trial for PN-943 in Ulcerative Colitis (the “PN-943 Phase 2 Trial Date”);
(a)
Agent and each Lender has received evidence satisfactory to it that Borrower has dosed the first patient with
(b)
Agent and each Lender has received evidence reasonably satisfactory to it that, immediately after giving
effect to the funding of the Credit Extension under this Credit Facility #2, Borrower Unrestricted Cash will be greater than the an amount
equal to the product of (x) the aggregate amount of the Credit Extensions funded under this Agreement, including, for the avoidance of
doubt, the Credit Extensions made under this Credit Facility #2, multiplied by (y) two (2).
Applicable Floor: means four and ninety-four one hundredths percent (4.94%) per annum.
Applicable Margin: a rate of interest equal to two and ninety-one one hundredths percent (2.91%) per annum.
Applicable Prepayment Fee: means the following amount, calculated as of the date (the “Accrual Date”) that the Applicable Prepayment
Fee becomes payable in the case of prepayments required under the Financing Documents or the date any voluntary prepayment is
made: (a) for an Accrual Date on or after the Closing Date through and including the date which is twelve (12) months after the Closing
Date, three percent (3.0%) multiplied by the amount of the outstanding principal of the Credit Extension prepaid or required to be prepaid
(whichever is greater); (b) for an Accrual Date on or after the date which is twelve (12) months after the Closing Date through and including
the date which is twenty-four (24) months after the Closing Date, two percent (2.0%) multiplied by the amount of the outstanding principal
of the Credit Extension prepaid or required to be prepaid (whichever is greater); and (c) for an Accrual Date on or after the date which is
twenty-four (24) months after the Closing Date through and including the date immediately preceding the Maturity Date, one percent
(1.0%) multiplied by the amount of the outstanding principal of the Credit Extension prepaid or required to be prepaid (whichever is
greater).
Commitment Commencement Date: The date on which the Applicable Funding Conditions for this Credit Facility are satisfied.
Commitment Termination Date: The earliest to occur of (a) the date that is 90 days after the PN-943 Phase 2 Trial Date, (b) the date on
which Agent delivers to Borrower a written notice terminating the Applicable Commitments following an Event of Default that has not
been waived or cured at the time such notice is delivered, and (c) December 31, 2020.
Minimum Credit Extension Amount: $20,000,000
Credit Facility #3:
Credit Facility and Type:
Term, Tranche 3
Lenders for and their respective Applicable Commitments to this Credit Facility:
Lender
Midcap Financial Trust
Silicon Valley Bank
Total:
Applicable Commitment
Ten Million Dollars ($10,000,000)
Ten Million Dollars ($10,000,000)
Twenty Million Dollars ($20,000,000)
The following defined terms apply to this Credit Facility:
Applicable Funding Conditions:
means the following:
Agent and each Lender has received evidence satisfactory to it that Borrower has dosed the first patient with
respect to a pivotal/registrational study for PTG-300 in Beta Thalassemia, Polycythemia Vera or Hereditary Hemochromatosis (the
“PTG-300 Study Commencement Date”);
(a)
(b)
Agent and each Lender has received evidence reasonably satisfactory to it that, immediately after giving
effect to the funding of the Credit Extension under this Credit Facility #3, Borrower Unrestricted Cash will be greater than the an amount
equal to the product of (x) the aggregate amount of the Credit Extensions funded under this Agreement, including, for the avoidance of
doubt, the Credit Extensions made under this Credit Facility #3, multiplied by (y) two (2).
Applicable Floor: means four and ninety-four one hundredths percent (4.94%) per annum.
Applicable Margin: a rate of interest equal to two and ninety-one one hundredths percent (2.91%) per annum.
Applicable Prepayment Fee: means the following amount, calculated as of the date (the “Accrual Date”) that the Applicable Prepayment
Fee becomes payable in the case of prepayments required under the Financing Documents or the date any voluntary prepayment is
made: (a) for an Accrual Date on or after the Closing Date through and including the date which is twelve (12) months after the Closing
Date, three percent (3.0%) multiplied by the amount of the outstanding principal of the Credit Extension prepaid or required to be prepaid
(whichever is greater); (b) for an Accrual Date on or after the date which is twelve (12) months after the Closing Date through and including
the date which is twenty-four (24) months after the Closing Date, two percent (2.0%) multiplied by the amount of the outstanding principal
of the Credit Extension prepaid or required to be prepaid (whichever is greater); and (c) for an Accrual Date on or after the date which is
twenty-four (24) months after the Closing Date through and including the date immediately preceding the Maturity Date, one percent
(1.0%) multiplied by the amount of the outstanding principal of the Credit Extension prepaid or required to be prepaid (whichever is
greater).
Commitment Commencement Date: The date on which the Applicable Funding Conditions for this Credit Facility are satisfied.
Commitment Termination Date: The earliest to occur of (a) the date that is 90 days after PTG-300 Study Commencement Date, (b) the
date on which Agent delivers a written notice to Borrower terminating the Applicable Commitments following an Event of Default that has
not been waived or cured at the time such notice is delivered, and (c) September 30, 2021.
Minimum Credit Extension Amount: $20,000,000
Credit Facility #1
AMORTIZATION SCHEDULE (FOR EACH CREDIT FACILITY)
Commencing on November 1, 2021 and continuing on the first day of each calendar month thereafter, an amount equal to the aggregate
principal amount advanced under Credit Facility #1 divided by twenty-four (24).
Credit Facility #2:
Commencing November 1, 2021 and continuing on the first day of each calendar month thereafter, an amount equal to the aggregate
principal amount advanced under Credit Facility #2 divided by twenty-four (24).
Credit Facility #3:
Commencing November 1, 2021 and continuing on the first day of each calendar month thereafter, an amount equal to the aggregate
principal amount advanced under Credit Facility #2 divided by twenty-four (24).
Notwithstanding anything to the contrary contained in the foregoing, the entire remaining outstanding principal balance under all Credit
Extensions shall mature and be due and payable upon the Maturity Date.
POST-CLOSING OBLIGATIONS SCHEDULE
Borrower shall satisfy and complete each of the following obligations, or provide Agent with each of the items listed below, as
applicable, on or before the date indicated below, all to the satisfaction of Agent in its sole and absolute discretion:
1. Borrower shall, within thirty (30) days after the Closing Date (or such later date as Agent may agree in writing), provide
Agent with endorsements to Borrowers’ property insurance policies naming Agent as lender loss payee and endorsements to
Borrowers’ liability insurance policies naming Agent as additional insured in accordance Section 6.5.
2. Borrower shall, within sixty (60) days after the Closing Date (or such later date as Agent may agree in writing), deliver to
Agent all Pledged Collateral (as defined in the Pledge Agreement, dated as of the Closing Date, among the Protagonist
Therapeutics and Agent in connection with this Agreement) consisting of certificated stock, debt instruments and investment
property in each case properly endorsed for transfer to Agent.
3. Borrower shall, within thirty (30) days after the Closing Date (or such later date as Agent may agree in writing), deliver to
Agent a landlord Access Agreement, in form and substance reasonably satisfactory to Agent, executed in favor of Agent in
respect of Borrower’s facilities located at 7707 Gateway Boulevard, Suite 140, Newark, CA 94560.
Borrower’s failure to complete and satisfy any of the above obligations on or before the date indicated above, or Borrower’s failure
to deliver any of the above listed items on or before the date indicated above, shall constitute an immediate and automatic Event of Default.
CLOSING DELIVERIES SCHEDULE
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
duly executed signatures to the Financing Documents to which Borrower is a party;
duly executed signatures to the Control Agreements with Silicon Valley Bank and Morgan Stanley;
the Operating Documents of Borrower and good standing certificates of Borrower certified by the Secretary of State of the state(s)
of organization of Borrower as of a date no earlier than thirty (30) days prior to the Closing Date;
good standing certificates dated as of a date no earlier than thirty (30) days prior to the Closing Date to the effect that Borrower is
qualified to transact business in all states in which the nature of Borrower’s business so requires;
duly executed Borrowing Resolutions for Borrower;
certified copies, dated as of a recent date, of financing statement searches, as Agent shall request, accompanied by written evidence
(including any UCC termination statements) that the Liens indicated in any such financing statements either constitute Permitted
Liens or have been or, in connection with the initial Credit Extension, will be terminated or released;
the Perfection Certificate executed by Borrower;
a duly executed legal opinion of Borrower’s counsel dated as of the Closing Date together with the duly executed signatures
thereto;
evidence satisfactory to Agent that the insurance policies required by Article 6 are in full force and effect, together with
appropriate evidence showing loss payable and/or additional insured clauses or endorsements in favor of Agent, for the ratable
benefit of the Lenders;
payment of the fees and expenses of Agent and the Lenders then accrued, including pursuant to the Fee Letters;
a duly executed original Secretary’s Certificate dated as of the Closing Date which includes copies of the completed Borrowing
Resolutions for Borrower;
timely receipt by Agent of an executed disbursement letter;
a certificate executed by a Responsible Officer of Borrower, in form and substance satisfactory to Agent, which shall certify as to
certain conditions to the funding of the Credit Extensions on the Closing Date;
all possessory collateral required to be delivered to Agent with corresponding endorsements pursuant to Section 4.2(b)
DISCLOSURE SCHEDULE
[To be completed by Borrower]
Scheduled Collateral Accounts
Bank Name
Account Type
Account Number
Scheduled Permitted Liens
Debtor
Secured Party
Collateral
State and
Jurisdiction
Filing Date and Number
(include original file date
and continuations,
amendments, etc.)
Scheduled Permitted Indebtedness
Debtor
Creditor
Amount of Indebtedness
outstanding as of _____ __, ____
Maturity Date
Schedule Permitted Investments
Debtor
Type of Investment
Date
Amount Outstanding as of
_______
Scheduled Material Agreements
1.
2.
3.
Scheduled Litigation
1.
2.
3.
Scheduled ownership interest in any Chattel Paper, letter of credit rights, commercial tort claims, Instruments, documents or
investment property
1.
2.
3
INTANGIBLE ASSETS SCHEDULE
INTELLECTUAL PROPERTY (REGISTRATIONS AND APPLICATIONS)
Borrower that is
Owner of IP
Name / Identifier of IP
Type of IP (e.g.,
patent, TM, ©,
mask work)
Registration/Publication or
Application Number
Filing
Date/Expiration
Date
INTANGIBLE ASSETS SCHEDULE (CONTINUED)
LICENSE AND SIMILAR AGREEMENTS
INBOUND LICENSE # 1 [COMPLETE FOR EACH AGREEMENT]
Name and Date of License
Agreement:
Borrower that is Licensee:
Name and address of
Licensor:
Expiration Date of License
Exclusive License [Y/N]?
Restrictions on:
Right to Grant a Lien
[Y/N]?
Right to Assign [Y/N]?
Right to Sublicense
[Y/N]?
Does Default or Termination
Affect Agent’s Ability to sell
[Y/N]?
Name / Identifier of IP
Describe Licensed Intellectual Property For This License
Type of IP (e.g.,
patent, TM, ©, mask
work)
Registration/
Publication or Application Number
Filing Date/Expiration Date
INBOUND LICENSE # 2 [COMPLETE FOR EACH AGREEMENT]
Name and Date of License
Agreement:
Borrower that is Licensee:
Name and address of
Licensor:
Expiration Date of License
Exclusive License [Y/N]?
Restrictions on:
Right to
Grant a Lien
[Y/N]?
Right to
Assign
[Y/N]?
Right to
Sublicense
[Y/N]?
Does Default or Termination
Affect Agent’s Ability to sell
[Y/N]?
Name / Identifier of IP
Describe Licensed Intellectual Property For This License
Type of IP (e.g.,
patent, TM, ©, mask
work)
Registration/
Publication or Application Number
Filing Date/Expiration Date
[REPEAT ABOVE FOR EACH INBOUND LICENSE AGREEMENT]
OUTBOUND LICENSE # 1 [COMPLETE FOR EACH AGREEMENT]
Name and Date of License
Agreement:
Borrower that is Licensor:
Name and address of
Licensee:
Expiration Date of License
Exclusive License [Y/N]?
Restrictions on:
Right to
Grant a Lien
[Y/N]?
Right to
Assign
[Y/N]?
Right to
Sublicense
[Y/N]?
Does Default or Termination
Affect Agent’s Ability to sell
[Y/N]?
Name / Identifier of IP
Describe Licensed Intellectual Property For This License
Type of IP (e.g.,
patent, TM, ©, mask
work)
Registration/
Publication or Application Number
Filing Date/Expiration Date
[REPEAT ABOVE FOR EACH OUTBOUND LICENSE AGREEMENT]
PRODUCTS SCHEDULE
REQUIRED PERMITS SCHEDULE
SUBSIDIARIES OF PROTAGONIST THERAPEUTICS, INC.
Subsidiary
Protagonist Pty Limited
Jurisdiction of Formation/Organization
Australia
Exhibit 21.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-230213, No. 333-213120, No. 333-
216532, No. 333-223500 and No. 333-225294) and Form S-3 (No. 333-220314, No. 333-227216 and No. 333-234414) of Protagonist
Therapeutics, Inc. of our report dated March 10, 2020 relating to the financial statements, which appears in Protagonist Therapeutics, Inc.’s
Annual Report on Form 10-K for the year ended December 31, 2019.
/s/ PricewaterhouseCoopers LLP
San Jose, CA
March 10, 2020
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Dinesh V. Patel, certify that:
1. I have reviewed this Annual Report on Form 10-K of Protagonist Therapeutics, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an Annual Report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 10, 2020
/s/ Dinesh V. Patel, Ph.D.
Dinesh V. Patel, Ph.D.
President, Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Don Kalkofen, certify that:
1. I have reviewed this Annual Report on Form 10-K of Protagonist Therapeutics, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an Annual Report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 10, 2020
/s/ Don Kalkofen
Don Kalkofen
Chief Financial Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) and
Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), Dinesh V. Patel, Chief Executive Officer of Protagonist
Therapeutics, Inc. (the “Company”), and Don Kalkofen, Chief Financial Officer of the Company, each hereby certify that, to the best of his
knowledge:
1. The Company’s Annual Report on Form 10-K for the period ended December 31, 2019 (the “Annual Report”), to which this Certification is
attached as Exhibit 32.1, fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act; and
2. The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Exhibit 32.1
Date: March 10, 2020
Date: March 10, 2020
/s/ Dinesh V. Patel, Ph.D.
Dinesh V. Patel, Ph.D.
President, Chief Executive Officer
/s/ Don Kalkofen.
Don Kalkofen
Chief Financial Officer
This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to
be incorporated by reference into any filing of Protagonist Therapeutics, Inc. under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-K), irrespective of any general incorporation language
contained in such filing.