UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 4 TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES EXCHANGE ACT OF 1934
SUNSHINE HEART, INC.
(Exact name of registrant as specified in its charter)
Delaware |
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68-0533453 |
(State or other jurisdiction of |
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(I.R.S. Employer |
12988 Valley View Road |
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Eden Prairie, Minnesota |
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55344 |
(Address of principal executive offices) |
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(zip code) |
(952) 345-4200
(Issuers telephone number, including area code)
Securities to be registered under Section 12(b) of the Act:
Title of each class |
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Name of each exchange on which |
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Common stock, par value $0.0001 per share |
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The NASDAQ Stock Market LLC |
Securities to be registered under Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o |
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Accelerated filer o |
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Non-accelerated filer o (Do not check if a smaller reporting company) |
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Smaller reporting company x |
Cautionary Note Regarding Forward-Looking Statements
This registration statement contains 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. In some cases, you can identify forward-looking statements by the following words: anticipate, believe, continue, could, estimate, expect, intend, may, ongoing, plan, potential, predict, project, should, will, would, or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Forward-looking statements are not a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time the statements are made and involve known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance or achievements to be materially different from the information expressed or implied by the forward-looking statements in this registration statement. These factors include:
· our ability to obtain additional financing;
· the cost, timing and results of our clinical trials, regulatory submissions and approvals;
· our ability to develop sales, marketing and distribution capabilities;
· continued manufacturing services and supplies of critical components from our business partners;
· the rate of market acceptance of our C-Pulse System;
· our ability to obtain adequate reimbursement from third party payers;
· the cost of defending, in litigation or otherwise, any claims that we infringe third-party patent or other intellectual property rights or that our product is defective;
· our ability to protect and enforce our intellectual property rights;
· our ability to effectively manage our growth;
· our estimates regarding our capital requirements and our need for additional financing; and
· other risk factors included under Risk Factors in this registration statement.
You should read the matters described in Risk Factors and the other cautionary statements made in this registration statement as being applicable to all related forward-looking statements wherever they appear in this registration statement. We cannot assure you that the forward-looking statements in this registration statement will prove to be accurate and therefore you are encouraged not to place undue reliance on forward-looking statements. You should read this registration statement completely. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future.
Trademarks
C-Pulse® and Sunshine HeartTM and other trademarks or service marks of Sunshine Heart appearing in this registration statement are the property of Sunshine Heart, Inc. Trade names, trademarks and service marks of other companies appearing in this registration statement are the property of the respective owners.
Market Data
We obtained industry and market data used throughout this registration statement through our research, surveys and studies conducted by third parties and industry and general publications. We have not independently verified market and industry data from third-party sources.
Reverse Stock Split
On January 27, 2012, we effected a reverse stock split of our common stock of 200 for 1. Except as otherwise indicated, all of the share and per share information referenced throughout this registration statement has been adjusted to reflect this reverse stock split.
Fiscal Year
Historically, our fiscal years have consisted of 12-month periods ending June 30. In September 2011, we changed our fiscal year to coincide with the calendar year. As a result, June 30, 2011 was our last fiscal year that will end on June 30, we had a six-month fiscal year that began on July 1, 2011 and ended on December 31, 2011, and all future fiscal years will begin on January 1 and end on December 31 of that year. Except as otherwise indicated, all references in this registration statement to fiscal 2010 or 2010 refer to the 12-month period ended December 31, 2010 and all references to a year or fiscal year prior to 2010 refer to the 12-month period ended on December 31 of the year referenced.
Currency
Unless otherwise indicated in this registration statement, all references to AUD, AU$ or A$ are to Australian Dollars, the lawful currency of the Commonwealth of Australia, and all references to $ or dollars are to U.S. Dollars.
Other Information
In this registration statement, we, our, us and company refer to Sunshine Heart, Inc. and its subsidiary, except where the context otherwise requires.
The information in this registration statement speaks only as of the date it is filed with the U.S. Securities and Exchange Commission unless the information specifically indicates that another date applies.
ITEM 1 BUSINESS
Overview
We are an early stage medical device company focused on developing, manufacturing and commercializing our C-Pulse Heart Assist System, for treatment of Class III and ambulatory Class IV heart failure. The C-Pulse Heart Assist System utilizes the scientific principles of intra-aortic balloon counter-pulsation applied in an extra-aortic approach to assist the left ventricle by reducing the workload required to pump blood throughout the body, while increasing blood flow to the coronary arteries.
We are conducting clinical trials of our C-Pulse System in the U.S., which we expect to extend into 2016 before we will have a determination if it can be marketed in the U.S. We completed enrollment of the feasibility phase of our clinical trial in the first half of 2011. In November 2011, we obtained the results of the six-month follow-up period for the feasibility phase and we submitted the test data to the United States Food and Drug Administration, or FDA. We believe the results of the six-month follow up demonstrate the feasibility of the C-Pulse implantation procedure and provide indications of the safety and efficacy of the C-Pulse System in patients with moderate to severe heart failure. We expect to submit an investigational device exemption, or IDE, application to the FDA in early 2012 for approval to initiate our pivotal trial.
We are seeking CE Mark for the C-Pulse and anticipate that we will obtain approval in the first half of 2012. We have taken initial steps to evaluate the market potential for our product in targeted countries that accept the CE Mark in anticipation of commencing commercial sales of the C-Pulse in Europe following CE Mark approval.
We incurred net losses of $7.6 million and $5.3 million in the years ended December 31, 2010 and 2009, respectively, and $11.0 million for the nine months ended September 30, 2011. All of our revenue for the years ended December 31, 2010 and 2009 was derived solely from sales of the C-Pulse System to hospitals and clinics under contract in conjunction with our feasibility clinical trial. We expect to continue to incur net losses as we complete our clinical trials.
The Heart Failure Market
Heart failure is a progressive disease caused by impairment in the hearts ability to pump blood to the various organs of the body. Patients with heart failure commonly experience shortness of breath, fatigue, difficulty exercising and swelling of the legs. The heart becomes weak or stiff and enlarges over time making it harder to pump the blood needed for the body to function properly.
Heart failure is one of the leading causes of death in the U.S. and other developed countries. The American Heart Association estimates that 5.7 million people in the U.S. age 20 and over are affected by heart failure, with an estimated 670,000 new cases diagnosed each year. Nearly 30% of heart failure patients are below the age of 60, and congestive heart failure is the highest U.S. chronic healthcare expense category. In addition, the Journal of Cardiac Failure reported in January 2011 that a recent analysis of all Medicare fees for service readmission to hospitals showed heart failure is the number one cause of rehospitalization in the U.S.
The severity of heart failure depends on how well a persons heart is able to pump blood throughout the body. A common measure of heart failure severity is New York Heart Association, or NYHA, Class guideline. Patients are classified as follows based on their symptoms and functional limitations.
· Class I (Mild) Patients have no limits to daily activities and are able to do all normal daily activities without becoming tired, short of breath or having heart palpitations.
· Class II (Mild) Patients have some limits to daily activities. Patients are comfortable at rest, but normal activities may cause them to be tired, short of breath or have heart palpitations.
· Class III (Moderate) Patients daily activities are significantly limited. Patients are comfortable at rest, but are unable to do daily activities without becoming tired, short of breath or having heart palpitations.
· Class IV (Severe) Patients are unable to do any physical activity without discomfort. Patients become tired, short of breath and possibly have heart palpitations even when they are at rest. Any physical activity makes discomfort worse.
Our C-Pulse Heart Assist System targets Class III and ambulatory Class IV patients as defined by the NYHA. It is estimated that approximately 1.5 million heart failure patients in the U.S. fall into this classification range, and we believe approximately 5 million worldwide are similarly affected. In addition to the symptoms described above, patients with Class III and ambulatory Class IV heart failure typically experience dizziness, low blood pressure and fluid retention.
Treatment alternatives currently available for Class III heart failure patients in the U.S. consist primarily of pharmacological therapies and pacing devices that are designed to stimulate the heart. Although these devices have shown to provide symptomatic relief and prolong the life of patients, these treatments do not always halt the progression of congestive heart failure. Circulatory assist devices, specifically left ventricular assist devices, or LVADs, have been used to treat Class IV patients in the U.S., and recently one product received FDA approval in the U.S. for Class IIIb patients. These devices are designed to take over some or all of the pumping function of the heart by mechanically pumping blood into the aorta. Although such devices are effective in increasing blood flow, these devices are implanted in the patients body and by design are in contact with the patients bloodstream, increasing the risk of adverse events, including thrombosis, bleeding and neurologic events.
Our Product
The C-Pulse Heart Assist System utilizes the scientific principles of intra-aortic balloon counter-pulsation applied in an extra-aortic approach to assist the left ventricle by reducing the workload required to pump blood throughout the body, while increasing blood flow to the coronary arteries. Combined, these potential benefits may help reverse the heart failure process or maintain the patients current condition, thereby potentially preventing the need for later stage heart failure devices, such as LVADs, artificial hearts or transplants.
We initially implanted the C-Pulse System in patients via a full sternotomy. We have developed tools to allow the C-Pulse to be implanted via a small pacemaker-like incision between the patients ribs and sternum rather than a full sternotomy, and we completed our first implant using this less invasive procedure in 2010. Patients implanted via our minimally invasive procedure typically require a hospital stay of three to four days in connection with implantation of the C-Pulse System, after which they return home. This less invasive procedure can reduce procedural time, hospital stays, overall cost and patient risk as compared to treatment options that require a full sternotomy.
Once implanted, the C-Pulse cuff is positioned on the outside of the patients ascending aorta above the aortic valve. An electrocardiogram sensing lead is then attached to the heart to determine timing for cuff inflation and deflation in synchronization with the heartbeat. As the heart fills with blood, the C-Pulse cuff inflates to push blood from the aorta to the rest of the body and to the heart muscle and to the coronary arteries. Just before the heart pumps, the C-Pulse cuff deflates to open up the aorta and reduce the hearts workload, allowing the heart to pump with less effort. The C-Pulse cuff and electrical leads are connected to a single line that is run through the abdomen wall to connect to a power driver outside the body. The systems driver can be placed inside a carrying bag.
The C-Pulse System distinguishes itself from other mechanical heart failure therapies because it is not inserted into a patients vascular system. The C-Pulse cuff is placed outside a patients ascending aorta and assists the hearts normal pumping function, rather than being inserted into the vascular system and replacing heart function in a manner similar to other devices such as LVADs. Because the C-Pulse System remains outside the vascular system, there is potentially less risk of complications such as blood clots, stroke and thrombosis in comparison to other mechanical devices that reside or function inside the vascular system.
The C-Pulse System is an earlier intervention than other mechanical therapies, such as LVADs. Our product assists the hearts natural function rather than completely replacing it. The C-Pulse System device may be turned on or off at any time allowing the patient intervals of freedom to perform certain activities such as bathing. Patients are not required to visit a medical facility when turning our device on or off or using the device. However, patients are advised to keep the C-Pulse System on for at least 80% of each day to experience maximum benefit from the product. Patients might experience a return of their heart failure symptoms, a loss of any improvement in their condition resulting from use of our product or an overall worsening of their heart failure symptoms compared to when they began using our product if the C-Pulse System is not turned on for the prescribed period of time.
Clinical Development
The feasibility phase of our clinical trial is primarily designed to assess safety and provide indications of performance of the C-Pulse System in moderate to severe heart failure patients who suffer from symptoms such as shortness of breath and reduced mobility. We completed enrollment and implantation of 20 patients in the North American feasibility phase of our trial in the first half of 2011. In April 2011, the FDA approved an expansion protocol to allow us to implant up to 20 additional patients and add two additional centers to our feasibility study. We have not implanted any additional patients, and currently do not have plans to implant any additional patients, permitted by this approval. If we implant any additional patients permitted by the FDAs April 2011 approval, the patients would be part of our feasibility trial and not included in the results for our planned pivotal trial. The additional centers approved by the FDA in April 2011 for our feasibility trial might participate in our planned pivotal trial, but the protocol for our planned pivotal trial remains subject to FDA approval and the inclusion of any particular center in the pivotal trial cannot be determined with certainty at this time.
In November 2011, we obtained the results of the six-month follow-up period for the feasibility phase of our clinical trial. The table below summarizes results from the six-month follow up:
Measure |
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Responders |
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Non-Responders |
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Indeterminant(7) |
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NYHA Class Ranking |
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12 |
(1) |
0 |
(2) |
8 |
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Minnesota Living with Heart Failure Quality of Life Score (MLHF score) |
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13 |
(3) |
1 |
(4) |
6 |
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Six-Minute Hall Walk Test Distance |
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5 |
(5) |
1 |
(6) |
14 |
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(1) For purposes of this measure, responders were deemed to include any patient whose NYHA class at the six-month follow-up decreased by at least one class relative to the patients NYHA class prior to implantation of the C-Pulse.
(2) For purposes of this measure, non-responders were deemed to include any patient whose NYHA class at the six-month follow-up increased by at least one class relative to the patients NYHA class prior to implantation of the C-Pulse.
(3) The MLHF score is derived from a questionnaire that asks each patient to indicate, using a six-point scale (zero to five), how much each of 21 facets prevents the patient from living as desired. For purposes of this measure, responders were deemed to include any patient whose aggregate MLHF score decreased by at least seven points at the six-month follow-up relative to the patients MLHF score prior to implantation of the C-Pulse.
(4) For purposes of this measure, non-responders were deemed to include any patient whose aggregate MLHF score increased by at least seven points at the six-month follow-up relative to the patients MLHF score prior to implantation of the C-Pulse.
(5) For purposes of this measure, responders were deemed to include any patient whose six-minute hall walk distance at the six-month follow-up increased by at least 50 meters relative to the patients distance for this measure prior to implantation of the C-Pulse.
(6) For purposes of this measure, non-responders were deemed to include any patient whose six-minute hall walk distance at the six-month follow-up decreased by at least 50 meters relative to the patients distance for this measure prior to implantation of the C-Pulse.
(7) For each measure, patients that were neither responders nor non-responders were classified as indeterminant.
As of the end of the six-month follow up period, nine patients reported a major infection in connection with the implantation and use of the C-Pulse System and there was one death of a patient enrolled in the trial resulting from infection related to implantation of our device. Two other patients participating in the feasibility trial died prior to the end of the six-month follow up period due to causes determined to be unrelated to the implantation or use of our product. These two patients were classified as responders, non-responders or indeterminant in the data above based on the results from their most recent follow up prior to death. We believe the results of the six-month follow up demonstrate the feasibility of the C-Pulse implantation procedure and provide indications of safety and efficacy of the C-Pulse in patients with moderate to severe heart failure.
We expect to submit an IDE application to the FDA for approval to initiate our pivotal trial in early 2012. Once the IDE application has been filed with the FDA, the FDA, following its review, will notify us that the IDE application is unconditionally approved, approved with certain conditions, or that there exist deficiencies in the application that must be addressed prior to approval. If the FDA identifies deficiencies, we will be provided the opportunity to submit additional information to the FDA to respond to the filing deficiencies. It is common for the FDA to require additional information before approving an IDE, and thus final FDA approval on a submission commonly extends beyond the initial 30 days. We anticipate that we will have pivotal study IDE approval in the first half of 2012, begin enrollment promptly thereafter and complete our pivotal trial in 2015.
We are seeking CE Mark for the C-Pulse System. We have engaged a notified body and received documentation from our notified body that data from our 20-patient North American feasibility clinical trial could support approval of CE Mark for the product. We submitted data from our feasibility clinical trial and documentation relating to the design and manufacturing of our product to our notified body in January 2012. We anticipate that we will obtain CE Mark approval in the first half of 2012.
Research and Development
Our research and development expense in the years ended December 31, 2010 and 2009 totaled $6.2 million and $3.4 million, respectively, and was $7.9 million and $3.9 million for the nine months ended September 30, 2011 and 2010, respectively. Research and development costs include activities related to research, development, design, testing and manufacturing of prototypes of our products as well as costs associated with certain clinical and regulatory activities.
In June 2011 we completed an initial animal study of a next-generation, fully implantable C-Pulse System. This next-generation system would be powered by a wireless, external battery unit, with the power driver and cuff implanted in the patients body. A fully implantable system would eliminate the need for wires to breach the patients skin, reducing the risk of infection and increasing the patients comfort. The study resulted in an increase to the animals heart function. While we continue to focus on commercializing our current C-Pulse System, we believe development of a next-generation, fully implantable C-Pulse System would benefit our business and prospects.
We expect our research and development expenses to increase as we continue to conduct clinical trials and perform research and develop on improvements to our C-Pulse Heart Assist System, such as the development of a fully implantable system.
Sales and Marketing
Our C-Pulse Heart Assist System is not approved for sale in any jurisdiction. To date, all of our sales of the C-Pulse System have been to U.S. hospitals and clinics under contract in conjunction with our clinical trials. We have solicited hospitals and clinics for our trials through our employees, selecting hospitals and clinics for participation in our trials based on our assessment of their expertise in the area of moderate and severe heart failure and their understanding of our product. Enrollment in our feasibility clinical trial was completed in the first half of 2011 and we did not generate any revenue from sales of our product during the nine months ended September 30, 2011.
We expect to commence the pivotal clinical trial in the first half of 2012, which is projected to extend into 2015. We do not expect to market our product in the U.S. prior to 2016.
We have retained consultants to analyze the conditions in various European countries for potential reimbursement for our product and the capabilities of existing hospitals and clinics to implant the C-Pulse System properly and understand the potential benefits of our product. We have not identified the European countries in which we initially will sell our product following CE Mark approval and we have not obtained approval for reimbursement from any European third party payors. If we obtain CE Mark approval, we intend to market our product as soon as possible in targeted European countries, which we expect to begin in the middle of 2012. The degree and timing of any commencement or expansion of sales in Europe, however, cannot be predicted with certainty. We plan to sell the C-Pulse System in Europe through a direct sales force or through experienced distributors in countries where our product is approved for reimbursement or where we otherwise believe there might be a potentially profitable market for our product. We also intend to leverage the CE Mark approval to enter other targeted markets throughout the world, although the timing for our entry into other markets is uncertain and will depend on, among other factors, the success of our initial sales efforts in Europe, our ability to obtain funding and the other factors described in the Risk Factors section of this registration statement.
Manufacturers and Suppliers
Our products currently are utilized only in connection with clinical trials. We outsource the manufacture of our products to suppliers with our activities directed toward supply chain management and distribution of our products to clinics and hospitals. A number of critical components of our C-Pulse System, including the balloon, driver unit, cuff and interface lead are provided by outside suppliers and tested by us in-house. Our suppliers include large and small U.S.-based manufacturers of medical device components. The components for our product do not require significant customization for use in our product or necessitate any raw materials for which we believe our suppliers could not readily find alternative sources. We purchase from our suppliers primarily on a purchase order basis. We do not second source any components of our product, although we believe we could find alternative suppliers for each component of our product other than the balloon without materially interrupting production of our products at current levels. If the manufacturer of the balloon used in our product was unwilling or unable to supply this component for any reason, however, our business could be adversely affected. If we obtain regulatory approvals necessary to commercialize our C-Pulse Heart Assist System, all of our outsourced manufacturers will need to increase their production of our product or we will need to develop capabilities to manufacture the product ourselves.
Intellectual Property
We have established an intellectual property portfolio through which we seek to protect our products and technology. As of January 27, 2012, our portfolio consisted of 29 issued patents, of which 11 were issued in the U.S. and 18 were issued in other countries including Australia, Canada, India, Japan and Mexico. We also have 29 patent applications pending, including 10 in the United States. and the remaining in the countries previously listed as well as in China, the European Union and the United Kingdom. Our patents and patent applications cover various aspects of both the methodology as well as the design of the C-Pulse Heart Assist System device and related components.
We have developed technical knowledge that although non-patentable, we consider to be significant in enabling us to compete. It is our policy to enter into confidentiality agreements with each of our employees and consultants prohibiting the disclosure of any confidential information or trade secrets. In addition, these agreements provide that any inventions or discoveries by employees and consultants relating to our business will be assigned to us and become our sole property.
Despite our patent rights and policies with regard to confidential information, trade secrets and inventions, we may be subject to challenges to the validity of our patents, claims that our products allegedly infringe the patent rights of others and the disclosure of our confidential information or trade secrets. These and other risks are described more fully under the heading Risks Relating to our Intellectual Property in the Risks Factors section of this registration statement.
At this time we are not a party to any material legal proceedings that relate to patents or proprietary rights.
Competition
Competition from medical device and medical device divisions of healthcare companies, pharmaceutical companies and gene- and cell-based therapies is intense and is expected to increase. The vast majority of Class III and Class IV heart failure patients still receive pharmacological treatment and a smaller percentage are treated with LVADs and other medical devices. We are not aware of any direct competitors that offer devices residing outside the vascular system for treatment of Class III and Class IV heart failure, and therefore we continue to expect new competitors both from the pharmacological and the medical device space. Among the medical device competitors are Thoratec Corporation, HeartWare International Inc., CircuLite, Inc., and to a lesser extent, AbioMed, Inc., Jarvik Heart, Inc., MicroMed Technology, Inc., SynCardia Systems, Inc., Terumo Heart, Inc. and WorldHeart Corporation in the U.S. and Europe and Berlin Heart GmbH in Europe, and a range of other small, specialized medical device companies with devices at varying stages of development. Some of these competitors are larger than we are and have greater financial resources and name recognition than we do. Our product is not approved for sale in any jurisdiction and the efficacy and potential competitive disadvantages of the C-Pulse System are not fully known at this time.
If approved for sale, we believe that key competitive factors of the C-Pulse will be the following:
· the C-Pulses lower risk profile resulting from its position outside a patients vascular system;
· the ability to disconnect the C-Pulse without harm to the patient, which is not possible with later stage approved circulatory support heart failure treatments, and which we believe improves patients quality of life and the convenience of using our device as compared to many other devices; and
· the minimally invasive manner in which the C-Pulse can be implanted, which involves only small incisions to the chest rather than a full sternotomy.
Third-Party Reimbursement
If approved in the U.S., the C-Pulse is expected to be purchased primarily by customers, such as hospitals, who then would bill various third party payers for the services provided to the patients. These payers, which include Medicare, Medicaid, private health insurance companies and managed care organizations, would then reimburse our customers based on established payment formulas that take into account part or all of the cost associated with these devices and the related procedures performed.
The agency responsible for administering the Medicare program, the Centers for Medicare & Medicaid Services, and a majority of private insurers have approved reimbursement for our C-Pulse in clinical trials. The FDA has assigned the C-Pulse System to a Category B designation under IDE number G070096. By assigning the C-Pulse System a Category B designation, the FDA determined that the C-Pulse System is non-experimental/investigational. A non-experimental/investigational device refers to a device believed to be in Class I or Class II, or a device believed to be in Class III for which the incremental risk is the primary risk in question (that is, underlying questions of safety and effectiveness of that device type have been resolved), or it is known that the device type can be safe and effective because, for example, other manufacturers have obtained FDA approval for that device type.
With an IDE number assigned, providers are allowed to seek coverage and reimbursement for the C-Pulse System under the Medicare program from their Medicare fiscal intermediary for hospital services, carrier for physician services, or Medicare Administrative Contractor, for both services. We cannot be assured, however, that fiscal intermediaries will make payment.
We are analyzing the potential for third party reimbursement in various European countries in anticipation of receiving CE Mark approval in the first half of 2012. Third party reimbursement requirements vary from country to country in Europe and we are not approved for reimbursement by any European third party payors at this time. Healthcare laws in the U.S. and other countries are subject to ongoing changes, including changes to the amount of reimbursement for hospital services. Legislative proposals can substantially change the way healthcare is financed by both governmental and private insurers and may negatively impact payment rates for our products. Also, from time to time there are a number of legislative, regulatory and other proposals both at the federal and state levels; it remains uncertain whether there will be any future changes that will be proposed or finalized and what effect, if any, such legislation or regulations would have on our business. However, in the U.S. and international markets, we expect that both government and third-party payors will continue to attempt to contain or reduce the costs of healthcare by challenging the prices charged for healthcare products and services.
Government Regulations
Regulation by governmental authorities in the U.S. and foreign countries is a significant factor in the manufacture and marketing of our current and future products and in our ongoing product research and development activities. All of our proposed products will require regulatory approval prior to commercialization. In particular, medical devices are subject to rigorous pre-clinical testing as a condition of approval by the FDA and by similar authorities in foreign countries.
United States
In the U.S., the FDA regulates the design, manufacture, distribution and promotion of medical devices pursuant to the Federal Food, Drug, and Cosmetic Act, or FDCA, and its regulations. Our C-Pulse Heart Assist System is regulated as a medical device. To obtain FDA approval to market the C-Pulse, the FDA requires proof of safety and efficacy in human clinical trials performed under an IDE. An IDE application must contain pre-clinical test data supporting the safety of the product for human investigational use, information on manufacturing processes and procedures, proposed clinical protocols and other information. If the IDE application is approved, human clinical trials may begin. The trials must be conducted in compliance with FDA regulations and with the approval of institutional review boards. Clinical trials are subject to central registration requirements. The results obtained from these trials are submitted to the FDA in support of a PMA application.
Products must be manufactured in registered establishments and must be manufactured in accordance with Quality System Regulations, or QSR. Furthermore, the FDA may at any time inspect our facilities to determine whether we have adequate compliance with FDA regulations, including the QSR, which requires manufacturers to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the design and manufacturing process.
We are also subject to regulation by various state authorities, which may inspect our facilities and manufacturing processes and enforce state regulations. Failure to comply with applicable state regulations may result in seizures, injunctions or other types of enforcement actions.
Healthcare Regulation
Our business is subject to extensive federal and state government regulation. This includes the federal Anti-Kickback Law and similar state anti-kickback laws, the federal False Claims Act, and the Health Insurance Portability and Accountability Act of 1996, or HIPAA, and similar state laws addressing privacy and security. Although we believe that our operations materially comply with the laws governing our industry, it is possible that non-compliance with existing laws or the adoption of new laws or interpretations of existing laws could adversely affect our financial performance.
Fraud and Abuse Laws
The healthcare industry is subject to extensive federal and state regulation. In particular, the federal Anti-Kickback Law prohibits persons from knowingly and willfully soliciting, receiving, offering or providing remuneration, directly or indirectly, to induce either the referral of an individual, or the furnishing, recommending or arranging for a good or service, for which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs. The definition of remuneration has been broadly interpreted to include anything of value, including for example gifts, discounts, the furnishing of supplies or equipment, credit arrangements, payments of cash, waivers of payments, ownership interests, and providing anything at less than its fair market value. In addition, there is no one generally accepted definition of intent for purposes of finding a violation of the Anti-Kickback Law. For instance, one court has stated that an arrangement will violate the Anti-Kickback Law where any party has the intent to unlawfully induce referrals. In contrast, another court has opined that a party must engage in the proscribed conduct with the specific intent to disobey the law in order to be found in violation of the Anti-Kickback Law. The lack of uniform interpretation of the Anti-Kickback Law makes compliance with the law difficult. The penalties for violating the Anti-Kickback Law can be severe. These sanctions include criminal penalties and civil sanctions, including fines, imprisonment and possible exclusion from the Medicare and Medicaid programs.
The Anti-Kickback Law is broad, and it prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. Recognizing that the Anti-Kickback Law is broad and may technically prohibit many innocuous or beneficial arrangements within the healthcare industry, the U.S. Department of Health and Human Services issued regulations in July of 1991, which the Department has referred to as safe harbors. These safe harbor regulations set forth certain provisions which, if met in form and substance, will assure healthcare providers and other parties that they will not be prosecuted under the federal Anti-Kickback Law. Additional safe harbor provisions providing similar protections have been published intermittently since 1991. Our arrangements with physicians, physician practice groups, hospitals and other persons or entities who are in a position to refer may not fully meet the stringent criteria specified in the various safe harbors. Although full compliance with these provisions ensures against prosecution under the federal Anti-Kickback Law, the failure of a transaction or arrangement to fit within a specific safe harbor does not necessarily mean that the transaction or arrangement is illegal or that prosecution under the federal Anti-Kickback Law will be pursued. Conduct and business arrangements that do not fully satisfy one of these safe harbor provisions may result in increased scrutiny by government enforcement authorities such as the U.S. Department of Health and Human Services Office of Inspector General.
Many states have adopted laws similar to the federal Anti-Kickback Law. Some of these state prohibitions apply to referral of patients for healthcare services reimbursed by any source, not only the Medicare and Medicaid programs. Although we believe that we comply with both federal and state anti-kickback laws, any finding of a violation of these laws could subject us to criminal and civil penalties or possible exclusion from federal or state healthcare programs. Such penalties would adversely affect our financial performance and our ability to operate our business.
HIPAA created new federal statutes to prevent healthcare fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from government sponsored programs such as the Medicare and Medicaid programs. The false statements statute prohibits 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 healthcare benefits, items or services. A violation of this statute is a felony and may result in fines or imprisonment or exclusion from government sponsored programs. Both federal and state government agencies are continuing
heightened and coordinated civil and criminal enforcement efforts. As part of announced enforcement agency work plans, the federal government will continue to scrutinize, among other things, the billing practices of hospitals and other providers of healthcare services. The federal government also has increased funding to fight healthcare fraud, and it is coordinating its enforcement efforts among various agencies, such as the U.S. Department of Justice, the Office of Inspector General and state Medicaid fraud control units. We believe that the healthcare industry will continue to be subject to increased government scrutiny and investigations.
Federal False Claims Act
Another trend affecting the healthcare industry is the increased use of the federal False Claims Act and, in particular, actions under the False Claims Acts whistleblower provisions. Those provisions allow a private individual to bring actions on behalf of the government alleging that the defendant has defrauded the federal government. After the individual has initiated the lawsuit, the government must decide whether to intervene in the lawsuit and to become the primary prosecutor. If the government declines to join the lawsuit, then the individual may choose to pursue the case alone, in which case the individuals counsel will have primary control over the prosecution, although the government must be kept apprised of the progress of the lawsuit. Whether or not the federal government intervenes in the case, it will receive the majority of any recovery. If the litigation is successful, the individual is entitled to no less than 15%, but no more than 30%, of whatever amount the government recovers. The percentage of the individuals recovery varies, depending on whether the government intervened in the case and other factors. Recently, the number of suits brought against healthcare providers by private individuals has increased dramatically. In addition, various states are considering or have enacted laws modeled after the federal False Claims Act. Under the Deficit Reduction Act of 2005 states are being encouraged to adopt false claims acts similar to the federal False Claims Act, which establish liability for submission of fraudulent claims to the State Medicaid program and contain whistleblower provisions. Even in instances when a whistleblower action is dismissed with no judgment or settlement, we may incur substantial legal fees and other costs relating to an investigation. Future actions under the False Claims Act may result in significant fines and legal fees, which would adversely affect our financial performance and our ability to operate our business.
Further, on May 20, 2009, President Obama signed into law the Fraud Enforcement and Recovery Act of 2009, which greatly expanded the types of entities and conduct subject to the False Claims Act. We strive to ensure that we meet applicable billing requirements. However, the costs of defending claims under the False Claims Act, as well as sanctions imposed under the Act, could significantly affect our financial performance.
Health Insurance Portability and Accountability Act of 1996
In addition to creating the new federal statutes discussed above, HIPAA also establishes uniform standards governing the conduct of certain electronic healthcare transactions and protecting the security and privacy of individually identifiable health information maintained or transmitted by healthcare providers, health plans and healthcare clearinghouses. Three standards have been promulgated under HIPAA with which we currently are required to comply. We must comply with the Standards for Privacy of Individually Identifiable Health Information, or Privacy Standards, which restrict our use and disclosure of certain individually identifiable health information. We have been required to comply with the Privacy Standards since April 14, 2003.
The American Recovery and Reinvestment Act of 2009, signed into law on February 17, 2009, dramatically expanded, among other things, (1) the scope of HIPAA to also include business associates, or independent contractors who receive or obtain protected health information in connection with providing a service to the covered entity, (2) substantive security and privacy obligations, including new federal security breach notification requirements to affected individuals and Department of Health and Human Services and potentially media outlets, (3) restrictions on marketing communications and a prohibition on covered entities or business associates from receiving remuneration in exchange for protected health information, and (4) the civil and criminal penalties that may be imposed for HIPAA violations, increasing the annual cap in penalties from $25,000 to $1.5 million per year. We believe that we are not generally a business associate under HIPAA and we believe that we are in compliance with all of the applicable HIPAA standards, rules and regulations. However, if we fail to comply with these standards, we could be subject to criminal penalties and civil sanctions. In addition to federal regulations issued under HIPAA, some states have enacted privacy and security statutes or regulations that, in some cases, are more stringent than those issued under HIPAA. In those cases it may be necessary to modify our operations and procedures to comply with the more stringent state laws, which may entail significant and costly changes for us. We
believe that we are in compliance with such state laws and regulations. However, if we fail to comply with applicable state laws and regulations, we could be subject to additional sanctions.
International Regulations
We are also subject to regulation in each of the foreign countries where we intend to distribute the C-Pulse. These regulations relate to product standards, packaging and labeling requirements, import restrictions, tariff regulations, duties and tax requirements. Many of the regulations applicable to our products in these countries are similar to those of the FDA. The national health or social security organizations of certain countries require our products to be qualified before they can be marketed in those countries.
The primary regulatory environment in Europe is that of the European Union, which consists of 27 member states in Europe. The European Union has adopted two directives that cover medical devicesDirective 93/42/EEC covering medical devices and Directive 90/385/EEC for active implantable medical devices, as well as numerous standards that govern and harmonize the national laws and standards regulating the design, manufacture, clinical trials, labeling, adverse event reporting and post market surveillance activities for medical devices that are marketed in member states. Medical devices that comply with the requirements of the national law of the member state in which they are first marketed will be entitled to bear CE Marking, indicating that the device conforms to applicable regulatory requirements, and, accordingly, can be commercially marketed within EU states and other countries that recognize this mark for regulatory purposes. We are currently seeking CE Marking for the C-Pulse Heart Assist System which we have targeted to be complete in the first half of 2012.
Other Regulations
We are also subject to various federal, state and local laws and regulations relating to such matters as safe working conditions, laboratory and manufacturing practices and the use, handling and disposal of hazardous or potentially hazardous substances used in connection with our research and development and manufacturing activities. Specifically, the manufacture of our biomaterials is subject to compliance with federal environmental regulations and by various state and local agencies. Although we believe we are in compliance with these laws and regulations in all material respects, we cannot provide assurance that we will not be required to incur significant costs to comply with environmental laws or regulations in the future.
Employees
As of December 31, 2011, we had 25 employees, consisting of 22 full-time and 3 part-time employees. None of our employees are covered by a collective bargaining agreement. We consider relations with our employees to be good.
Corporate Information
Sunshine Heart, Inc. was incorporated in Delaware on August 22, 2002. We began operating our business through Sunshine Heart Company Pty Ltd, which currently is a wholly owned Australian subsidiary of Sunshine Heart, Inc., in November 1999. Since September 2004, Chess Depositary Instruments, or CDIs, representing beneficial ownership of our common stock have been have traded on the Australian Securities Exchange, or ASX, under the symbol SHC. Historically, each CDI represented one share of our common stock. In connection with the 200 for 1 reverse stock split we effected on January 27, 2012 we changed this ratio so that each CDI represents 1/200th of a share of our common stock.
Our principal executive offices are located at 12988 Valley View Road, Eden Prairie, Minnesota 55344, and our telephone number is (952) 345-4200. Our website address is www.sunshineheart.com. The information on, or that may be accessed through, our website is not incorporated by reference into and should not be considered a part of this registration statement.
Legal Proceedings
We are not currently involved in any material legal proceedings.
ITEM 1A RISK FACTORS
Our business faces many risks. We believe the risks described below are the material risks we face. However, the risks described below may not be the only risks we face. Additional unknown risks or risks that we currently consider immaterial may also impair our business operations. If any of the events or circumstances described below actually occurs, our business, financial condition or results of operations could suffer, and the trading price of our shares of common stock could decline significantly. Investors should consider the specific risk factors discussed below, together with the Cautionary Note Regarding Forward-Looking Statements and the other information contained in this Form 10 and the other documents that we will file from time to time with the Securities and Exchange Commission.
Risks Relating to Our Business
We have incurred operating losses since our inception and anticipate that we will continue to incur operating losses for the foreseeable future.
We are an early stage company with a history of incurring net losses. We have incurred net losses since our inception, including net losses of $7.6 million and $5.3 million for the years ended December 31, 2010 and 2009, respectively, and $11.0 million for the nine months ended September 30, 2011. As of September 30, 2011, our accumulated deficit was $60.0 million. We do not have any products that have been approved for marketing, and we continue to incur research and development and general and administrative expenses related to our operations. We expect to continue to incur significant and increasing operating losses for the foreseeable future as we incur costs associated with the conduct of clinical trials, continue our product research and development programs, seek regulatory approvals, expand our sales and marketing capabilities, increase manufacturing of our products and comply with the requirements related to being a U.S. public company listed on the ASX and, if our listing application is approved, the Nasdaq Capital Market. To become and remain profitable, we must succeed in developing and commercializing products with significant market potential. This will require us to succeed in a range of challenging activities, including conducting clinical trials, obtaining regulatory approvals, manufacturing products and marketing and selling commercial products. We may never succeed in these activities, and we may never generate revenues sufficient to achieve profitability. If we do achieve profitability, we may not be able to sustain it.
We will need additional funding to continue operations, which may not be available to us on favorable terms or at all.
Currently, we have no products available for commercial sale, and to date we have generated only limited product revenue from our feasibility study. We believe our cash and cash equivalents on hand will not be sufficient to fund our operations beyond the first half of 2012. In addition, the report of our independent registered public accounting firm contains a going concern opinion in connection with its audit of our financial statements for the fiscal year ended December 31, 2010. Our continued operations are dependent on our ability to obtain additional funding during 2012. However, additional funding may not be available on terms favorable to us, or at all, and concern about our ability to continue as a going concern may place additional constraints on operations and make it more difficult for us to meet our obligations or adversely affect the terms of possible funding. If we raise additional funding through the issuance of equity securities, our stockholders may suffer dilution and our ability to use our net operating losses to offset future income may be limited. If we raise additional funding through debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness, force us to maintain specified liquidity or other ratios or restrict our ability to pay dividends or make acquisitions. If we are unable to secure additional funding, our product development programs and our commercialization efforts would be delayed, reduced or eliminated.
We have limited sales, marketing and distribution experience.
To develop and increase internal sales, distribution and marketing capabilities, we would have to invest significant amounts of financial and management resources. In developing these sales, marketing and distribution functions ourselves, we could face a number of risks, including:
· we may not be able to attract and build a significant marketing or sales force;
· the cost of establishing, training and providing regulatory oversight for a marketing or sales force may be substantial; and
· there are significant legal and regulatory risks in medical device marketing and sales that we have never faced, and any failure to comply with all legal and regulatory requirements for sales, marketing and distribution could result in enforcement action by the European countries, the FDA or other authorities that could jeopardize our ability to market the product or could subject us to substantial liability.
We plan to commercialize our products outside of the United States, which will expose us to risks associated with international operations.
We plan to commercialize our products outside of the United States and expect to commence clinical trials in certain European countries in addition to the U.S. and Canada. Conducting international operations subjects us to risks, including:
· costs of complying with varying regulatory requirements and potential, unexpected changes to those requirements;
· fluctuations in currency exchange rates;
· potentially adverse tax consequences, including the complexities of foreign value added tax systems and restrictions on the repatriation of earnings;
· government-imposed pricing controls on sales of our products;
· longer payment cycles and difficulties in collecting accounts receivable;
· difficulties in managing and staffing international operations;
· increased financial accounting and reporting burdens and complexities; and
· reduced or varied protection for intellectual property rights in some countries.
The occurrence of any one of these risks could negatively affect our international operations. Additionally, operating in international markets also requires significant management attention and financial resources. We cannot be certain that our operations in other countries will produce desired levels of revenues or profitability.
We depend on a limited number of manufacturers and suppliers of various critical components for our C-Pulse System. The loss of any of these manufacturer or supplier relationships could delay future clinical trials or prevent or delay commercialization of our C-Pulse System.
We rely entirely on third parties to manufacture our C-Pulse System and to supply us with all of the critical components of our C-Pulse System, including the balloon, driver, cuff and interface lead. We primarily purchase our components and products on a purchase order basis and do not second source any components of our product. If the supplier of the balloon used in our product was unable or unwilling to meet our demand for this component, or if the components or finished products provided by any of our suppliers do not meet quality and other specifications, clinical trials or commercialization of our product could be delayed and increase our expenses. Alternatively, if we have to switch to a replacement manufacturer or replacement supplier for any of our product components, we may face additional regulatory delays, and the manufacture and delivery of our C-Pulse System could be interrupted for an extended period of time and become significantly more
expensive, which could delay completion of future clinical trials or commercialization of our C-Pulse System and adversely affect our results of operations. In addition, we may be required to use different suppliers or components to obtain regulatory approval from the FDA.
If our manufacturers or our suppliers are unable to provide an adequate supply of our product following the start of commercialization, our growth could be limited and our business could be harmed.
In order to produce our C-Pulse System in the quantities that we anticipate will be required to meet market demand, we will need our manufacturers to increase, or scale-up, the production process by a significant factor over the current level of production. There are technical challenges to scaling-up manufacturing capacity and developing commercial-scale manufacturing facilities that may require the investment of substantial additional funds by our manufacturers and hiring and retaining additional management and technical personnel who have the necessary manufacturing experience. If our manufacturers are unable to do so, we may not be able to meet the requirements for the launch of the product or to meet future demand, if at all. We also may represent only a small portion of our suppliers or manufacturers business and if they become capacity constrained they may choose to allocate their available resources to other customers that represent a larger portion of their business. We currently anticipate that we will continue to rely on third-party manufacturers and suppliers for the production of our C-Pulse System following commercialization. If we develop and obtain regulatory approval for our product and are unable to obtain a sufficient supply of our product, our revenue, business and financial prospects would be adversely affected.
If we are unable to manage our expected growth, we may not be able to commercialize our products.
We have expanded, and expect to continue to expand, our operations and grow our research and development, product development, regulatory, manufacturing, sales, marketing and administrative operations. This expansion has placed, and is expected to continue to place, a significant strain on our management and operational and financial resources. To manage any further growth and to commercialize our products, we will be required to improve existing and implement new operational and financial systems, procedures and controls and expand, train and manage our growing employee base. In addition, we will need to manage relationships with various manufacturers, suppliers and other organizations. Our ability to manage our operations and growth will require us to improve our operational, financial and management controls, as well as our internal reporting systems and controls. We may not be able to implement such improvements to our management information and internal control systems in an efficient and timely manner and may discover deficiencies in existing systems and controls. Our failure to accomplish any of these tasks could materially harm our business.
We compete against companies that have longer operating histories, more established products and greater resources than we do, which may prevent us from achieving further market penetration or improving operating results.
Competition in the medical device industry is intense. Our products will compete against current therapies, including pharmacological therapies, as well as products offered by public companies, such as Thoratec Corporation and HeartWare International, Inc., and several smaller specialized private companies, such as CircuLite, Inc. Some of these competitors have significantly greater financial and human resources than we do and have established reputations, as well as worldwide distribution channels and sales and marketing capabilities that are larger and more established than ours. Additional competitors may enter the market, and we are likely to compete with new companies in the future. We also face competition from other medical therapies which may focus on our target market as well as competition from manufacturers of pharmaceutical and other devices that have not yet been developed. Competition from these companies could adversely affect our business.
Our ability to compete effectively depends upon our ability to distinguish our company and our products from our competitors and their products. Factors affecting our competitive position include:
· financial resources;
· product performance and design;
· product safety;
· sales, marketing and distribution capabilities;
· manufacturing and assembly costs;
· success and timing of new product development and introductions;
· regulatory approvals; and
· intellectual property protection.
The competition for qualified personnel is particularly intense in our industry. If we are unable to retain or hire key personnel, we may not be able to sustain or grow our business.
Our ability to operate successfully and manage our potential future growth depends significantly upon our ability to attract, retain and motivate highly skilled and qualified research, technical, clinical, regulatory, sales, marketing, managerial and financial personnel. We face intense competition for such personnel, and we may not be able to attract, retain and motivate these individuals. We compete for talent with numerous companies, as well as universities and nonprofit research organizations. Our future success also depends on the personal efforts and abilities of the principal members of our senior management and scientific staff to provide strategic direction, manage our operations and maintain a cohesive and stable environment. We do not maintain key man life insurance on the lives of any of the members of our senior management. The loss of key personnel for any reason or our inability to hire, retain and motivate additional qualified personnel in the future could prevent us from sustaining or growing our business.
Product defects could adversely affect the results of our operations.
The design, manufacture and marketing of medical devices involve certain inherent risks. Manufacturing or design defects, unanticipated use of our products, or inadequate disclosure of risks relating to the use of the product can lead to injury or other adverse events. These events could lead to recalls or safety alerts relating to our products (either voluntary or required by the FDA or similar governmental authorities in other countries), and could result, in certain cases, in the removal of a product from the market. Any recall could result in significant costs, as well as negative publicity and damage to our reputation that could reduce demand for our products. Personal injuries relating to the use of our products can also result in product liability claims being brought against us. In some circumstances, such adverse events could also cause delays in new product approvals.
We may be sued for product liability, which could adversely affect our business.
The design, manufacture and marketing of medical devices carries a significant risk of product liability claims. Our products treat Class III and ambulatory Class IV heart failure for patients who typically have serious medical issues. As a result, our exposure to product liability claims may be heightened because the people who use our products have a high risk of suffering adverse outcomes, regardless of the safety or efficacy of our products.
We may be held liable if any product we develop and commercialize causes injury or is found otherwise unsuitable during product testing, manufacturing, marketing, sale or consumer use. The safety studies we must perform and the regulatory approvals required to commercialize our medical safety products will not protect us from any such liability. We carry product liability insurance with a $10 million aggregate limit. However, if there were to be product liability claims against us, our insurance may be insufficient to cover the expense of defending against such claims, or may be insufficient to pay or settle such claims. Furthermore, we may be unable to obtain adequate product liability insurance coverage for commercial sales of any of our approved products. If such insurance is insufficient to protect us, our results of operations will suffer. If any product liability claim is made against us, our reputation and future sales will be damaged, even if we have adequate insurance coverage. Even if a product liability claim against us is without merit or if we are not found liable for any damages, a product liability claim could result in decreased demand for our products, injury to our reputation, diversion of managements attention from operation or our business, withdrawal of clinical trial participants, significant costs of related litigation, loss of revenue or the inability to commercialize our products under development.
Risks Relating to Regulation
We have no products approved for commercial sale, and our success will depend heavily on the success of our feasibility trials and a subsequent pivotal trial for our C-Pulse System. If we are unable to complete our feasibility trials, commence and complete our pivotal trial, or experience significant delays in either trial, or if the results of a trial do not meet its safety and efficacy endpoints, our ability to obtain regulatory approval to commercialize our product and to generate revenues will be harmed.
Our device, the C-Pulse System, is currently undergoing feasibility clinical trials at sites in the United States and Canada. Our United States feasibility clinical trial protocol requires us to obtain clinical data from at least 20 patients to assess device safety and potential efficacy from data collected. Upon completion of the six-month follow-up period for our feasibility trials, we submitted the test data to the FDA on November 29, 2011 and we expect to submit an IDE application to the FDA for approval of a pivotal trial in the first quarter of 2012.
Completion of either trial could be delayed or adverse events during the trial could cause us to modify the existing design, repeat or terminate the trial. If a clinical trial is delayed, if it must be repeated or if it is terminated, our costs associated with the trial will increase, and it will take us longer to obtain regulatory approvals and commercialize the product. Our clinical trials may also be suspended or terminated at any time by regulatory authorities or by us. FDA scrutiny of IDE applications has intensified in recent years, increasing the risk of delay.
Even if we commence and complete a pivotal clinical trial, it must demonstrate the safety and efficacy of the C-Pulse System by meeting the trials endpoints before we can commercial the C-Pulse System. The inability to achieve the safety or efficacy endpoints in a pivotal trial could delay our timeline for obtaining regulatory approval to commercialize our products.
In addition to successfully completing our clinical trials, we will need to receive approval from regulatory agencies in each country in which we seek to sell our products. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods. The time required to obtain approval varies from country to country and approval in one country does not ensure regulatory approval in another. In addition, a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in others. We cannot assure you when, or if, we will be able to commence sales in any jurisdiction within or outside the United States.
Any failure or significant delay in successfully completing clinical trials for our products or obtaining regulatory approvals could harm our financial results and our prospects and cause us to seek additional funding.
Even if our feasibility clinical trial is successful and we obtain foreign regulatory approvals, we will need to obtain FDA approval to commercialize our product in the United States, which will require us to receive FDA approval to conduct clinical trials in the United States and to complete those trials successfully. If we fail to obtain approval from the FDA, we will not be able to market and sell our products in the United States.
We do not have the necessary regulatory approvals to commercialize our C-Pulse System in the United States, which we believe is the largest potential market for our C-Pulse System. We intend to use the data from our North American feasibility trial to support an IDE application for FDA approval of a pivotal trial the C-Pulse System, but we can offer no assurance that our IDE application will be approved or that we will ever obtain FDA approval of the C-Pulse System or any future products.
In order to obtain FDA approval for our C-Pulse System, we will be required to receive a PMA from the FDA. A PMA must be supported by pre-clinical and clinical trials to demonstrate safety and efficacy. A clinical trial will be required to support an application for a PMA, and we will be seeking FDA approval of our IDE that will allow us to commence a clinical trial in the United States. We intend to commence our U.S. pivotal trial in the first half of 2012, but there can be no assurance that our U.S. pivotal trial will begin or be completed on schedule or at all. Even if completed, we do not know if this trial will produce clinically meaningful results sufficient to show the safety and efficacy of our products so as to support an application for a PMA.
The process of obtaining a PMA from the FDA for our C-Pulse System, or any future products or enhancements or modifications to any products, could:
· take a significant period of time;
· require the expenditure of substantial resources;
· involve rigorous pre-clinical and clinical testing;
· require changes to our products; and
· result in limitations on the indicated uses of the products.
In addition, recent, widely-publicized events concerning the safety of certain drug, food and medical device products have raised concerns among members of Congress, medical professionals, and the public regarding the FDAs handling of these events and its perceived lack of oversight over regulated products. The increased attention to safety and oversight issues could result in a more cautious approach by the FDA to approvals for devices such as ours, which could delay or prevent FDA approval of our C-Pulse System.
There can be no assurance that we will receive the required approvals from the FDA or if we do receive the required approvals, that we will receive them on a timely basis. The failure to receive product approval by the FDA could have a material adverse effect on our business, financial condition or results of operations.
We may be unable to enroll and complete our planned U.S. pivotal trial for the C-Pulse System or other clinical trials, which could prevent or delay regulatory approval of the C-Pulse System and impair our financial position.
We intend to commence our U.S. pivotal trial in the first half of 2012. The trial is designed to be a randomized trial that includes 270 patents and is expected to involve more than 20 locations. Conducting a clinical trial of this size is a complex and uncertain process.
The commencement of our trial could be delayed for a variety of reasons, including:
· reaching agreement on acceptable terms with prospective clinical trial sites;
· manufacturing sufficient quantities of our C-Pulse System;
· obtaining institutional review board approval to conduct the trial at a prospective site; and
· obtaining sufficient patient enrollment, which is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the trial.
Once the trial has begun, the completion of the trial, and our other ongoing clinical trials, could be delayed, suspended or terminated for several reasons, including:
· ongoing discussions with regulatory authorities regarding the scope or design of our preclinical results or clinical trial or requests for supplemental information with respect to our preclinical results or clinical trial results;
· our failure or inability to conduct the clinical trials in accordance with regulatory requirements;
· sites currently participating in the trial may drop out of the trial, which may require us to engage new sites or petition the FDA for an expansion of the number of sites that are permitted to be involved in the trial;
· patients may not remain in or complete, clinical trials at the rates we expect;
· patients may experience serious adverse events or side effects during the trial, which, whether or not related to our product, could cause the FDA or other regulatory authorities to place the clinical trial on hold; and
· clinical investigators may not perform our clinical trials on our anticipated schedule or consistent with the clinical trial protocol and good clinical practice requirements.
If our clinical trials are delayed it will take us longer to ultimately commercialize a product or the delay could result in our being unable to do so. Moreover, our development costs will increase if we have material delays in our clinical trials or if we need to perform more or larger clinical trials than planned. Any of the foregoing could harm our financial results and our prospects and cause us to seek additional funding.
We depend on clinical investigators and clinical sites to enroll patients in our clinical trials, and on other third parties to manage the trials and to perform related data collection and analysis, and, as a result, we may face costs and delays that are outside of our control.
We have and plan to continue to rely on clinical investigators and clinical sites to enroll patients in our clinical trials, including our planned U.S. pivotal trial, and other third parties to manage the trials and to perform related data collection and analysis. However, we may not be able to control the amount and timing of resources that clinical sites may devote to our clinical trials. If these clinical investigators and clinical sites fail to enroll a sufficient number of patients in our clinical trials, to ensure compliance by patients with clinical protocols or comply with regulatory requirements, we will be unable to complete these trials, which could prevent us from obtaining regulatory approvals for our product. Our agreements with clinical investigators and clinical trial sites for clinical testing place substantial responsibilities on these parties and, if these parties fail to perform as expected, our trials could be delayed or terminated. If these clinical investigators, clinical sites or other third parties do not carry out their contractual duties or obligations or fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to their failure to adhere to our clinical protocols, regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated, or the clinical data may be rejected by the FDA, and we may be unable to obtain regulatory approval for, or successfully commercialize, our product.
Our manufacturers and suppliers might not meet regulatory quality standards applicable to manufacturing and quality processes, which could have an adverse effect on our financial results and prospects.
Even after products have received marketing approval or clearance, product approvals and clearances by the FDA can be withdrawn due to failure to comply with regulatory standards. We rely entirely on third parties to manufacture our C-Pulse System and those manufacturers are required to demonstrate and maintain compliance with the FDAs Quality System Regulation, or QSR. The QSR is a complex regulatory scheme that covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of our products. The FDA enforces the QSR through periodic unannounced inspections. Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic inspections by the FDA. A failure by our manufacturers to comply with the QSR or to take satisfactory corrective action in response to an adverse QSR inspection could cause a significant delay in our ability to have our product manufactured and to complete our clinical trials, which would harm our financial results and our prospects. In addition, suppliers of components of, and products used to manufacture, our products must also comply with FDA and foreign regulatory requirements, which often require significant time, money and record-keeping and quality assurance efforts and subject us and our suppliers to potential regulatory inspections and stoppages.
We plan to operate in multiple regulatory environments that require costly and time consuming approvals.
Even if we obtain regulatory approvals to commercialize the C-Pulse System or any other product that we may develop, sales of our products in other jurisdictions will be subject to regulatory requirements that vary from country to country. The time and cost required to obtain approvals from these countries may be longer or shorter than that required for FDA approval, and requirements for licensing may differ from those of the FDA. Laws and regulations regarding the manufacture and sale of our products are subject to future changes, as are administrative interpretations and policies of regulatory agencies. If we fail to comply with applicable foreign, federal, state or local market laws or regulations, we could be subject to enforcement actions. Enforcement actions could include
product seizures, recalls, withdrawal of clearances or approvals, and civil and criminal penalties, which in each case would harm our business.
The C-Pulse System may never achieve market acceptance even if we obtain regulatory approvals.
Even if we obtain regulatory approvals to commercialize the C-Pulse System or any other product that we may develop, our products may not gain market acceptance among physicians, patients, health care payers or the medical community. The degree of market acceptance of any of the devices that we may develop will depend on a number of factors, including:
· the perceived effectiveness of the product;
· the prevalence and severity of any side effects;
· potential advantages over alternative treatments;
· the strength of marketing and distribution support; and
· sufficient third party coverage or reimbursement.
If our C-Pulse System, or any other product that we may develop, is approved but does not achieve an adequate level of acceptance by physicians, patients, health care payers and the medical community, we may not generate product revenue and we may not become profitable or be able to sustain profitability.
If we fail to obtain an adequate level of reimbursement for our product by third party payers, there may be no commercially viable markets for our product or the markets may be much smaller than expected.
The availability and levels of reimbursement by governmental and other third party payers affect the market for our product. The FDA has assigned the C-Pulse System to a Category B designation under IDE number G070096. By assigning the C-Pulse System a Category B designation, the FDA determined that the C-Pulse System is non-experimental/investigational. A non-experimental/investigational device refers to a device believed to be in Class I or Class II, or a device believed to be in Class III for which the incremental risk is the primary risk in question (that is, underlying questions of safety and effectiveness of that device type have been resolved), or it is known that the device type can be safe and effective because, for example, other manufacturers have obtained FDA approval for that device type.
Reimbursement and health care payment systems in international markets vary significantly by country, and include both government sponsored health care and private insurance. To obtain reimbursement or pricing approval in some countries, we may be required to produce clinical data, which may involve one or more clinical trials, that compares the cost-effectiveness of our products to other available therapies. We may not obtain international reimbursement or pricing approvals in a timely manner, if at all. Our failure to receive international reimbursement or pricing approvals would negatively impact market acceptance of our products in the international markets in which those approvals are sought.
We believe that future reimbursement may be subject to increased restrictions both in the United States and in international markets. Future legislation, regulation or reimbursement policies of third party payers may adversely affect the demand for our products currently under development and limit our ability to sell the C-Pulse System or any future products on a profitable basis. In addition, third party payers continually attempt to contain or reduce the costs of health care by challenging the prices charged for health care products and services. If reimbursement for our products is unavailable in any market or limited in scope or amount or if pricing is set at unsatisfactory levels, market acceptance of our products would be impaired and our future revenues, if any, would be adversely affected.
We may be subject, directly or indirectly, to U.S. federal and state healthcare fraud and abuse and false claims laws and regulations. Prosecutions under such laws have increased in recent years and we may become subject to such litigation. If we are unable to, or have not fully complied with such laws, we could face substantial penalties.
If we are successful in achieving regulatory approval to market our C-Pulse System, our operations will be directly, or indirectly through our customers, subject to various state and federal fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute and federal False Claims Act. These laws may impact, among other things, our proposed sales, marketing and education programs.
The federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing or arranging for a good or service, for which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs. Several courts have interpreted the statutes intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the statute has been violated. The Anti-Kickback Statute is broad and, despite a series of narrow safe harbors, prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. Penalties for violations of the federal Anti-Kickback Statute include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs. Many states have also adopted laws similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare items or services reimbursed by any source, not only the Medicare and Medicaid programs.
The federal False Claims Act prohibits persons from knowingly filing, or causing to be filed, a false claim to, or the knowing use of false statements to obtain payment from the federal government. Suits filed under the False Claims Act, known as qui tam actions, can be brought by any individual on behalf of the government and such individuals, commonly known as whistleblowers, may share in any amounts paid by the entity to the government in fines or settlement. The frequency of filing qui tam actions has increased significantly in recent years, causing greater numbers of medical device, pharmaceutical and healthcare companies to have to defend a False Claim Act action. When an entity is determined to have violated the federal False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties for each separate false claim. Various states have also enacted laws modeled after the federal False Claims Act.
We are unable to predict whether we could be subject to actions under any of these laws, or the impact of such actions. If we are found to be in violation of any of the laws described above and other applicable state and federal fraud and abuse laws, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from government healthcare reimbursement programs and the curtailment or restructuring of our operations.
We will incur increased costs as a result of being a U.S. reporting company and we have no experience as a U.S. reporting company.
Upon the effectiveness of this registration statement, we will become subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Although we have been listed on the ASX for several years and have been required to file financial information and make certain other filings with the ASX, our status as a U.S. reporting company under the Exchange Act will cause us to incur additional legal, accounting and other expenses that we have not previously incurred, including costs related to compliance with the requirements of the Sarbanes-Oxley Act of 2002. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We also expect these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers. We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
Risks Relating to our Intellectual Property
We may not be able to protect our intellectual property rights effectively, which could have an adverse effect on our business, financial condition or results of operations.
Our success depends in part on our ability to obtain and maintain protection in the United States and other countries of the intellectual property relating to or incorporated into our technology and products. As of January 27, 2012, we owned 11 issued patents in the United States and 10 patent applications in the United States, as well as 18 issued patents and 19 patent applications in foreign jurisdictions. We estimate that the U.S. patents expire between June 9, 2020 and October 28, 2024. Our pending and future patent applications may not issue as patents or, if issued, may not issue in a form that will provide us any competitive advantage. Even if issued, existing or future patents may be challenged, narrowed, invalidated or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of terms of patent protection we may have for our products. Changes in patent laws or their interpretation in the United States and other countries could also diminish the value of our intellectual property or narrow the scope of our patent protection. In addition, the legal systems of certain countries do not favor the aggressive enforcement of patents, and the laws of foreign countries may not protect our rights to the same extent as the laws of the United States. As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours. In order to preserve and enforce our patent and other intellectual property rights, we may need to make claims or file lawsuits against third parties. This can entail significant costs to us and divert our managements attention from developing and commercializing our products.
Intellectual property litigation could be costly and disruptive to us.
In recent years, there has been significant litigation involving medical device patents and other intellectual property rights. From time to time, third parties may assert patent, copyright, trademark and other intellectual property rights to technologies used in our business. Any claims, with or without merit, could be time-consuming, result in costly litigation, divert the efforts of our technical and management personnel or require us to pay substantial damages. If we are unsuccessful in defending ourselves against these types of claims, we may be required to do one or more of the following:
· stop our ongoing or planned clinical trials or delay or abandon commercialization of the product that is the subject of the suit;
· attempt to obtain a license to sell or use the relevant technology or substitute technology, which license may not be available on reasonable terms or at all; or
· redesign those products that use the relevant technology.
In the event a claim against us was successful and we could not obtain a license to the relevant technology on acceptable terms or license a substitute technology or redesign our products to avoid infringement, our business would be significantly harmed.
If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.
In addition to patented technology, we rely on our unpatented proprietary technology, trade secrets, processes and know-how. We generally seek to protect this information by confidentiality agreements with our employees, consultants, scientific advisors and third parties. These agreements may be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently developed by competitors. To the extent that our employees, consultants or contractors 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.
Risk Factors Related to Ownership of Our Common Stock
An active trading market for our shares of common stock in the United States may not develop and the trading price of our shares of common stock may fluctuate significantly.
Prior to the effective date of this registration statement, our shares have not been listed on any U.S. securities exchange and we have not registered any of our shares of common stock for sale in the United States. Our common stock has been listed on the ASX in the form of CDIs since 2004 and has experienced limited trading volume. The reported average daily trading volume in our common stock on the ASX (in the form of CDIs) for the three month period ended December 31, 2011, was approximately 1,261 shares. All of our shares of common stock that we have sold have been sold in reliance on exemptions from registration under the Securities Act of 1933, as amended, which we refer to as the Securities Act. As of February 8, 2012,
· 2,836,355 shares of our common stock in the form of CDIs were held by persons or entity other than our directors, officers and other affiliates and were eligible for sale in the public market;
· 988,953 shares of our common stock in the form of CDIs were held by persons or entity other than our directors, officers and other affiliates and were subject to re-sale restrictions of Rule 144 under the Securities Act; and
· 2,451,230 shares of our common stock in the form of CDIs were held by our directors, officers and other affiliates and were subject to re-sale restrictions of Rule 144 under the Securities Act.
Although we have applied to list our shares of common stock on Nasdaq Capital Market and intend to file with the SEC registration statements on Form S-8 covering approximately 1 million shares of our common stock issuable under our equity plans, there can be no assurance that a liquid public market for our shares will develop in the United States. If an active trading market does not develop in the United States, the market price and liquidity of our shares may be adversely affected.
The price of our common stock may fluctuate significantly.
Our common stock in the form of CDIs has been traded on the ASX in the form of CDIs since 2004. The price of our CDIs has been, and is likely to continue to be, volatile, which means that it could decline substantially within a short period of time. For example, our closing per CDI price ranged from A$6.00 to A$12.60 for the 12 months ended December 31, 2011. The price of our common stock could fluctuate significantly for many reasons, including the following:
· future announcements concerning us or our competitors;
· regulatory developments, enforcement actions bearing on advertising, marketing or sales, and disclosure regarding completed, ongoing or future clinical trials;
· quarterly variations in operating results, which we have experienced in the past and expect to experience in the future;
· introduction of new products;
· acquisition or loss of significant manufacturers, distributors or suppliers;
· business acquisitions or divestitures;
· changes in third party reimbursement practices;
· fluctuations of investor interest in the medical device sector; and
· fluctuations in the economy, world political events or general market conditions.
In addition, stock markets in general and the market for shares of health care stocks in particular, have experienced extreme price and volume fluctuations in recent years, fluctuations that frequently have been unrelated to the operating performance of the affected companies. These broad market fluctuations may adversely affect the market price of our common stock. The market price of our common stock could decline below its current price and the market price of our shares may fluctuate significantly in the future. These fluctuations may be unrelated to our performance.
Our directors and executive officers hold substantial control over us and could limit your ability to influence the outcome of key transactions, including changes of control.
As of February 8, 2012, our executive officers and directors and entities affiliated with them beneficially owned, in the aggregate (including options or warrants exercisable currently or within 60 days of February 8, 2012), approximately 51.6% of our outstanding common stock. Our executive officers, directors and affiliated entities, if acting together, would be able to influence significantly all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other significant corporate transactions. The concentration of ownership of our common stock may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders and CDI holders of an opportunity to receive a premium for their common stock and CDIs as part of a sale of our company and may affect the market price of our common stock and CDIs. This significant concentration of stock ownership may adversely affect the trading price of our common stock and CDIs due to investors perception that conflicts of interest may exist or arise.
If there are substantial sales of shares of our common stock, our share price could decline.
If our existing stockholders sell a large number of shares of our common stock or CDIs if the public market, should one develop, perceives that existing stockholders might sell a large number of shares or CDIs the price at which our common stock or CDIs trade could decline significantly. Sales of substantial amounts of our common stock by stockholders in the public market, or even the potential for such sales, are likely to adversely affect the market price of our common stock and CDIs.
In general, beginning 90 days after the effective date of this registration statement, under Rule 144 a person who is not one of our directors, officers or other affiliates at any time during the three months preceding a sale, and who has beneficially owned shares of our common stock for at least six months, would be entitled to sell an unlimited number of shares of our common stock that currently are restricted from being sold in the public market, provided current public information about us is available. Beginning 90 days after the effective date of this registration statement, our directors, officers and other affiliates who have beneficially owned shares of our common stock for at least six months will be entitled to sell within any three-month period a number of shares that does not exceed the greater of:
· one percent of the number of shares of our common stock then outstanding; and
· the average weekly trading volume of our common stock on all national securities exchanges and/or reported through the automated quotation system of a registered securities exchange during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale, or if no such notice is required, the date of receipt of the order to execute the sale.
We do not intend to pay cash dividends on our common stock in the foreseeable future.
We have never declared or paid any cash dividends on our common stock, and we currently do not anticipate paying any cash dividends in the foreseeable future. We intend to retain any earnings to finance the development and expansion of our products and business. Accordingly, our stockholders and CDI holders will not realize a return on their investment unless the trading price of our common stock and CDIs appreciate.
We may be subject to arbitrage risks.
Investors may seek to profit by exploiting the difference, if any, between the price of our CDIs on the ASX and the price of our shares available for sale in the U.S., whether such sales would take place on a U.S. securities exchange or in the over-the-counter market or otherwise. Such arbitrage activities could cause our share price in the market with the higher value to decrease to the price set by the market with the lower value.
Investors could lose confidence in our financial reports, and the value of our common stock may be adversely affected, if our internal controls over financial reporting are found not to be effective by management or by an independent registered public accounting firm or if we make disclosure of existing or potential significant deficiencies or material weaknesses in those controls.
In connection with becoming a company required to file reports with the SEC, we will be required to comply with the internal control evaluation and certification requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We continue to evaluate our existing internal controls over financial reporting against the standards adopted by the Public Company Accounting Oversight Board. During the course of our ongoing evaluation of the internal controls, we may identify areas requiring improvement, and may have to design enhanced processes and controls to address issues identified through this review. Remediating any deficiencies, significant deficiencies or material weaknesses that we or our independent registered public accounting firm may identify may require us to incur significant costs and expend significant time and management resources. We cannot assure you that any of the measures we implement to remedy any such deficiencies will effectively mitigate or remedy such deficiencies. The existence of one or more material weaknesses could affect the accuracy and timing of our financial reporting. Investors could lose confidence in our financial reports, and the value of our common stock and CDIs may be adversely affected, if our internal controls over financial reporting are found not to be effective by management or by an independent registered public accounting firm or if we make disclosure of existing or potential significant deficiencies or material weaknesses in those controls.
Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders ability to obtain a favorable judicial forum for disputes with the Company.
Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, or (iv) any other action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to the provisions described above. This forum selection provision may limit our stockholders ability to obtain a judicial forum that they find favorable for disputes with us or our directors, officers or other employees or stockholders.
Our certificate of incorporation, bylaws, and the Delaware General Corporation Law may delay or deter a change of control transaction.
Certain provisions of our certificate of incorporation and bylaws may have the effect of deterring takeovers, such as those provisions authorizing our board of directors to issue, from time to time, any series of preferred stock and fix the designation, powers, preferences and rights of the shares of such series of preferred stock; prohibiting stockholders from acting by written consent in lieu of a meeting; requiring advance notice of stockholder intention to put forth director nominees or bring up other business at a stockholders meeting; prohibiting stockholders from
calling a special meeting of stockholders; requiring a 66 2/3% majority stockholder approval in order for stockholders to amend certain provisions of our certificate of incorporation or bylaws or adopt new bylaws; providing that, subject to the rights of preferred shares, the directors will be divided into three classes and the number of directors is to be fixed exclusively by our board of directors; and providing that none of our directors may be removed without cause. Section 203 of the Delaware General Corporation Law, from which we did not elect to opt out, provides that if a holder acquires 15% or more of our stock without prior approval of our board of directors, that holder will be subject to certain restrictions on its ability to acquire us within three years. These provisions may delay or deter a change of control of us, and could limit the price that investors might be willing to pay in the future for shares of our common stock.
It may be difficult to effect service of U.S. process and enforce U.S. legal process against our directors.
Five of our eight directors reside outside of the United States, principally in the Commonwealth of Australia. A substantial portion of the assets of our directors also are located outside of the United States. Therefore, it may not be possible to effect service of process within the United States upon these persons in order to enforce judgments of U.S. courts against these persons based on the civil liability provisions of the U.S. federal securities laws. In addition, there is doubt as to the enforceability in Australia, in original actions or in actions to enforce judgments of U.S. courts, of claims predicated solely upon U.S. federal securities laws.
ITEM 2 FINANCIAL INFORMATION
Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated and condensed financial statements and related notes appearing elsewhere in this registration statement. This discussion and analysis includes certain forward-looking statements that involve risks, uncertainties and assumptions. You should review the Risk Factors section of this registration statement for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by such forward-looking statements. See Cautionary Note Regarding Forward-Looking Statements at the beginning of this registration statement.
Overview
We are an early stage medical device company focused on developing, manufacturing and commercializing our C-Pulse Heart Assist System, for treatment of Class III and ambulatory Class IV heart failure. The C-Pulse Heart Assist System utilizes the scientific principles of intra-aortic balloon counter-pulsation applied in an extra-aortic approach to assist the left ventricle by reducing the workload required to pump blood throughout the body, while increasing blood flow to the coronary arteries.
We are conducting clinical trials of our C-Pulse System in the U.S., which we expect to extend into 2016 before we will have a determination if it can be marketed in the U.S. We completed enrollment of the feasibility phase of our clinical trial in the first half of 2011. In November 2011, we obtained the results of the six-month follow-up period for the feasibility phase and we submitted the test data to the FDA. We believe the results of the six-month follow up demonstrate the feasibility of the C-Pulse implantation procedure and provide indications of the safety and efficacy of the C-Pulse System in patients with moderate to severe heart failure. We expect to submit an IDE application to the FDA in early 2012 to initiate approval of our pivotal trial.
We are seeking CE Mark for the C-Pulse and anticipate that we will obtain approval in the first half of 2012. We have taken initial steps to evaluate the potential market for our product in targeted countries in Europe in anticipation of commencing commercial sales of the C-Pulse in Europe following CE Mark approval.
Critical Accounting Policies and Estimates
Revenue Recognition: We recognize revenue when (i) persuasive evidence of a customer arrangement exists; (ii) the price is fixed or determinable and free of contingencies or uncertainties; (iii) collectability is reasonably assured; and (iv) product delivery has occurred, which is when product title transfers to the customer, or services have been rendered. Sales are not conditional based on customer acceptance provisions or installation
obligations. Our C-Pulse Heart Assist System is not approved for commercial sale. Our revenue consists solely of sales of the C-Pulse to hospitals and clinics under contract in conjunction with our clinical trials. For clinical trial implant revenue, the product title generally transfers on the date the product is implanted. We do not charge hospitals and clinics for shipping. We expense shipping costs at the time we report the related revenue and record such costs in cost of sales.
Foreign Currency Translation and Transactions: Foreign denominated monetary assets and liabilities are translated at the rate of exchange prevailing at the balance sheet date. Results of operations are translated using the average rates prevailing during the reporting period. Our Australian subsidiarys functional currency is the Australian Dollar. Translation adjustments result from translating the subsidiarys financial statements into our reporting currency, the U.S. Dollar. The translation adjustment has not been included in determining our net loss, but has been reported separately and is accumulated in a separate component of equity.
Effective January 1, 2011, we concluded that the functional currency of our U.S. based parent company is the U.S. Dollar. We have concluded that the functional currency of the Australian subsidiary remains the Australian Dollar.
Comprehensive Income (Loss): The components of comprehensive income (loss) include net income (loss) and the effects of foreign currency translation adjustments.
Stock-Based Compensation: We recognize all share-based payments, including grants of stock options in the income statement as an operating expense based on their fair value over the requisite service period.
We compute the estimated fair values of stock options using the Black-Scholes option pricing model. No tax benefit has been recorded due to the full valuation allowance on deferred tax assets that we have recorded.
Stock-based compensation expense is based on awards ultimately expected to vest and is reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Equity instruments issued to non-employees, and for services and goods are shares of our common stock, warrants or options to purchase shares of our common stock. These shares, warrants or options are either fully-vested and exercisable at the date of grant or vest over a certain period during which services are provided. We expense the fair market value of these securities over the period in which the related services are received.
Going Concern: Our financial statements have been prepared and presented on a basis assuming we continue as a going concern.
During the years ended December 31, 2010 and 2009, and the nine months ended September 30, 2011, we incurred losses from operations and net cash outflows from operating activities as disclosed in the consolidated statements of operations and cash flows, respectively.
Our ability to continue as a going concern is dependent on our ability to raise additional capital based on the achievement of existing milestones as and when required. Our directors, after due consideration, believe that we will be able to raise new equity capital as required to fund our business plan. Should the future capital raising not be successful, we may not be able to continue as a going concern. Furthermore, our ability to continue as a going concern is subject to our ability to develop and successfully commercialize the product being developed. If we are unable to obtain such funding of an amount and timing necessary to meet our future operational plans, or to successfully commercialize our intellectual property, we may be unable to continue as a going concern. No adjustments have been made relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should we not continue as a going concern.
Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board, or FASB, issued additional guidance for the presentation of comprehensive income. The new guidance changes the way other comprehensive income (OCI)
appears within the financial statements. Companies will be required to show net income, OCI and total comprehensive income in one continuous statement or in two separate but consecutive statements. Components of OCI may no longer be presented solely in the statement of changes in shareholders equity. Any reclassification between OCI and net income will be presented on the face of the financial statements. The new guidance is effective for our company beginning January 1, 2012. The adoption of the new guidance will not impact the measurement of net income or other comprehensive income.
In January 2010, FASB issued Accounting Standards Update, or ASU, 2010-06, Improving Disclosure about Fair Value Measurements. ASU 2010-06 revises two disclosure requirements concerning fair value measurements and clarifies two others. It requires separate presentation of significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such transfers. It also requires the presentation of purchases, sales, issuances and settlements within Level 3 on a gross basis rather than a net basis. The amendments also clarify that disclosures should be disaggregated by class of asset or liability and that disclosures about inputs and valuation techniques should be provided for both recurring and non-recurring fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for certain Level 3 activity disclosure requirements that will be effective for reporting periods beginning after December 15, 2010.
In May 2011, FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. This accounting update generally aligns the principles for fair value measurements and the related disclosure requirements under U.S. GAAP and International Financial Reporting Standards. From a U.S. GAAP perspective, the amendments are largely clarifications, but some could have a significant effect on certain companies. A number of new disclosures also are required. Except for certain disclosures, the guidance applies to public and nonpublic companies and is to be applied prospectively. For public companies and nonpublic companies, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early adoption by public companies is not permitted. Nonpublic companies may apply the amendments early, but no earlier than for interim periods beginning after December 15, 2011.
Financial Overview
We are an early stage medical device company focused on developing, manufacturing and commercializing our C-Pulse Heart Assist System, for treatment of Class III and ambulatory Class IV heart failure. Our activities since inception have consisted principally of raising capital, performing research and development and conducting preclinical and clinical trials. At September 30, 2011, we had an accumulated deficit of $60.0 million and we expect to incur losses for the foreseeable future. To date, we have been funded by private and public equity financings. Although we believe that we will be able to successfully fund our operations, there can be no assurance that we will be able to do so or that we will ever operate profitably.
Results of Operations
Comparison of Nine Months Ended September 30, 2011 to Nine Months Ended September 30, 2010
Revenue
Nine Months Ended |
|
Nine Months Ended |
|
Increase (Decrease) |
|
% Change |
| |||
$ |
|
|
$ |
354,000 |
|
$ |
(354,000 |
) |
N/A |
|
Our decrease in revenue for the nine months ended September 30, 2011 compared to the same period in 2010 was primarily caused by completion of enrollment in our feasibility clinical trial in March 2011, after which we had no reimbursable implants. Our revenue during the nine months ended September 30, 2010 consisted solely of sales of the C-Pulse System to hospitals and clinics under contract in conjunction with our feasibility trial. We expect our revenue will be minimal until we begin enrolling patients in our pivotal clinical trials, expected to commence in the first half of 2012.
Research and Development Expense
Nine Months Ended |
|
Nine Months Ended |
|
Increase (Decrease) |
|
% Change |
| |||
$ |
7,939,000 |
|
$ |
3,851,000 |
|
$ |
4,088,000 |
|
106.2 |
% |
Our increase in research and development expense for the nine months ended September 30, 2011 compared to the same period in 2010 was primarily caused by increased development activities related to our C-Pulse device and the accelerated development of a fully implantable model. We also increased regulatory and clinical personnel to support the completion of our feasibility clinical trial and to prepare for our pivotal clinical trial. We expect our research and development expense will increase in future periods as we add personnel to support our pivotal clinical trial and pursue our development efforts.
Selling, General and Administrative Expense
Nine Months Ended |
|
Nine Months Ended |
|
Increase (Decrease) |
|
% Change |
| |||
$ |
3,250,000 |
|
$ |
1,537,000 |
|
$ |
1,713,000 |
|
111.5 |
% |
Our increase in selling, general and administrative expense for the nine months ended September 30, 2011 compared to the same period in 2010 was primarily caused by increased stock-based compensation expense resulting from current year stock option grants, and increased professional fees and personnel costs as we develop our infrastructure and prepare for our pivotal clinical and Nasdaq listing. We expect our selling, general and administrative expense will increase in future periods as we further develop our infrastructure, invest in developing a sales force in Europe and incur professional fees and expenses associated with being listed on both the Nasdaq Capital Market and the ASX.
Interest Income
Nine Months Ended |
|
Nine Months Ended |
|
Increase (Decrease) |
|
% Change |
| |||
$ |
228,000 |
|
$ |
113,000 |
|
$ |
115,000 |
|
101.8 |
% |
Our increase in other income for the nine months ended September 30, 2011 compared to the same period in 2010 was primarily caused by increased interest income earned from our increased cash balances following the completion of our financing in September 2010.
Income Tax Expense/(Benefit)
Nine Months Ended |
|
Nine Months Ended |
|
Increase (Decrease) |
|
% Change |
| ||
|
|
$ |
(670,000 |
) |
$ |
(670,000 |
) |
N/A |
|
Our income tax benefit for the nine months ended September 30, 2010 resulted from a research and development tax credit in Australia. We have not completed the tax return for our Australian subsidiary for the year ended June 30, 2011 and cannot be sure that the research and development expenditures of our subsidiary during that period will be less than the A$2 million threshold that results in a tax refund rather than a tax credit, for which we would maintain a full valuation allowance. We therefore did not recognize a tax benefit for the nine months ended September 30, 2011. During 2011, Australian authorities amended the applicable law relating to research and development tax credits and, assuming no further changes to the applicable law, we expect to receive tax refunds in the future in amounts that vary based on research and development expenditures in Australia.
Comparison of Year Ended December 31, 2010 to Year Ended December 31, 2009
Revenue
Year Ended |
|
Year Ended |
|
Increase (Decrease) |
|
% Change |
| |||
$ |
407,000 |
|
$ |
224,000 |
|
$ |
183,000 |
|
81.7 |
% |
Our increase in revenue for the year ended December 31, 2010 compared to the prior year was primarily caused by increased enrollments in our feasibility clinical trial during 2010. All of our revenue during 2009 and 2010 was derived solely from sales of the C-Pulse System to hospitals and clinics under contract in conjunction with our feasibility trial.
Research and Development Expense
Year Ended |
|
Year Ended |
|
Increase (Decrease) |
|
% Change |
| |||
$ |
6,229,000 |
|
$ |
3,425,000 |
|
$ |
2,804,000 |
|
81.9 |
% |
Our increase in research and development expense for the year ended December 31, 2010 compared to the prior year was primarily caused by increased development activities related to our C-Pulse device and the recruitment of research and development, regulatory and clinical personnel, including executive level positions, to support the completion of our feasibility clinical trial and to prepare for our pivotal clinical trial.
Selling, General and Administrative Expense
Year Ended |
|
Year Ended |
|
Increase (Decrease) |
|
% Change |
| |||
$ |
2,598,000 |
|
$ |
2,232,000 |
|
$ |
366,000 |
|
16.4 |
% |
Our increase in selling, general and administrative expense for the year ended December 31, 2010 compared to the prior year was primarily caused by increased professional fees and personnel costs as we developed our infrastructure and transitioned our headquarter operations from California to Minnesota.
Interest Income
Year Ended |
|
Year Ended |
|
Increase (Decrease) |
|
% Change |
| |||
$ |
150,000 |
|
$ |
91,000 |
|
$ |
59,000 |
|
64.8 |
% |
Our increase in other income for the year ended December 31, 2010 compared to the prior year was primarily caused by increased interest income earned from our increased cash balances following the completion of our financing in September 2010.
Income Tax Benefit
Year Ended |
|
Year Ended |
|
Increase (Decrease) |
|
% Change |
| ||
$ |
670,000 |
|
|
|
$ |
670,000 |
|
N/A |
|
Our income tax benefit increased for the year ended December 31, 2010 compared to the prior year was primarily due to a research and development tax credit in Australia that we received in 2010 that we did not receive in the prior year period.
Liquidity and Capital Resources
Sources of Liquidity
We have funded our operations primarily through a series of equity issuances, including the issuance of common shares in the form of CDIs for net proceeds of $11.9 million in 2010 and $7.4 million through the first nine months of 2011. As of September 30, 2011 and December 31, 2010 and 2009, cash and cash equivalents were $10.3 million, $12.4 million and $7.0 million, respectively. We believe that our cash on hand will be sufficient to fund our operations through substantially all of the first half of 2012 as we prepare for the pivotal clinical trial, but that we will require additional financing within the next 12 months to sufficiently fund our operations. We expect to obtain additional financing as needed through sales of our common stock or other securities. Although we have successfully financed our operations through the issuance of common stock to date, we cannot be assured that we will be able to continue to be successful in financing our operations in the future.
Cash Flows from Operating Activities
Net cash used in operating activities was $7.2 million in 2010, $5.8 million in 2009, and $9.7 million and $5.1 million in the nine months ended September 30, 2011 and 2010, respectively. The net cash used in each of these periods primarily reflects the net loss for those periods, offset in part by depreciation, non-cash stock-based compensation and the effects of changes in operating assets and liabilities.
Cash Flows from Investing Activities
Net cash used in investing activities was $7,000 in 2010, $3,000 in 2009, and $34,000 and $3,000 for the nine months ended September 30, 2011 and 2010, respectively. Cash used in investing activities is related to purchases of property and equipment.
Cash Flows from Financing Activities
Net cash provided by financing activities was $11.9 million in 2010, $8.0 million in 2009, and $7.6 million and $0 in the nine months ended September 30, 2011 and 2010, respectively. Net cash provided by financing activities was primarily attributable to proceeds from sales of our common stock.
Capital Resource Requirements
As of December 31, 2010, we did not have any material commitments for capital expenditures.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
ITEM 3 PROPERTIES
We lease a 10,000 square foot facility in Eden Prairie, Minnesota that previously housed our corporate headquarters and substantially all of our functional areas, with the exception of a portion of our research and development activities. The lease expires September 30, 2012 and requires a monthly payment of approximately $11,000. On October 21, 2011 we entered into a lease for a 23,000 square foot facility also located in Eden Prairie, Minnesota. The lease period commenced December 1, 2011 and extends through March 31, 2016. This facility houses substantially all of our functional areas and replaced our corporate headquarters previously located at the other facility we lease in Eden Prairie. Monthly rent and electricity for our new headquarters total approximately $21,000.
ITEM 4 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the number of shares and percentage ownership of our common stock that were beneficially owned as of February 8, 2012 by each of our directors, by each of our executive officers named in the Summary Compensation Table under the heading Item 6. Executive Compensation below and by all of our
directors and executive officers as a group. Unless otherwise noted, the persons listed in the table have sole voting and investment power with respect to the shares owned by them.
Beneficial Ownership of Directors and Executive Officers
The following table sets forth certain information with respect to the beneficial ownership of our outstanding common stock as of February 8, 2012 by (i) each of our named executive officers listed in the Summary Compensation Table below; (ii) each of our directors; and (iii) all of our executive officers and directors as a group. Beneficial ownership is determined in accordance with the rules of the SEC. To our knowledge and subject to applicable community property laws, each of the holders of stock listed below has sole voting and investment power as to the stock owned unless otherwise noted. The address for each of our directors and named executive officers is c/o Sunshine Heart, Inc., 12988 Valley View Road, Eden Prairie, Minnesota 55344.
Name of Beneficial Owner |
|
Number of Shares |
|
Percent(1) |
|
Dr. Geoffrey Brooke |
|
1,458,954 |
(2) |
22.3 |
% |
Paul Buckman |
|
2,922 |
(3) |
* |
|
Nicholas Callinan |
|
52,148 |
(4) |
* |
|
Dr. Mark Harvey |
|
1,879,222 |
(5) |
28.2 |
% |
Jeffrey Mathiesen |
|
31,832 |
(6) |
* |
|
Donal ODwyer |
|
62,282 |
(7) |
1.0 |
% |
Dr. William Peters |
|
84,610 |
(8) |
1.3 |
% |
David Rosa |
|
77,113 |
(9) |
1.2 |
% |
Gregory Waller |
|
974 |
(10) |
* |
|
All directors, director nominees, named executive officers and other executive officers as a group (12 persons) |
|
3,673,946 |
(11) |
51.6 |
% |
* Less than 1%.
(1) Based on 6,276,538 shares outstanding as of February 8, 2012.
(2) Includes 1,194,760 shares owned by GBS Bioventures II A/C and GBS Bioventures III A/C, which we collectively refer to as GBS; 3,285 shares subject to outstanding options exercisable within 60 days of February 8, 2012; 248,909 shares subject to outstanding options held by GBS exercisable within 60 days of February 8, 2012; and 12,000 shares acquirable upon exercise of outstanding warrants held by GBS exercisable within 60 days of February 8, 2012. Dr. Brooke is the managing director of GBS Venture Partners Pty Ltd, which manages each of GBS Bioventures II A/C and GBS Bioventures III A/C. Dr. Brooke disclaims beneficial ownership of the shares held by GBS except to the extent of his pecuniary interest therein.
(3) Includes 2,922 shares subject to outstanding options exercisable within 60 days of February 8, 2012.
(4) Includes 29,596 shares owned by Beraleigh Pty Ltd. and 22,501 shares subject to outstanding options exercisable within 60 days of February 8, 2012. Mr. Callinan is a director of Beraleigh Pty Ltd.
(5) Includes 750 shares owned by Dr. Harveys pension fund, for which he has the power to make investment and voting decisions; 1,500,712 shares owned by venture capital funds affiliated with CM Capital; 339,286 shares subject to outstanding options owned by CM Capital and its affiliated funds exercisable within 60 days of February 8, 2012; 37,500 outstanding warrants held by CM Capital and its affiliated funds exercisable within 60 days of February 8, 2012; and 974 shares subject to outstanding options exercisable within 60 days of February 8, 2012. Dr. Harvey disclaims beneficial ownership of the shares held by CM Capital and its affiliates except to the extent of his pecuniary interest therein.
(6) Includes 13,144 shares subject to outstanding options exercisable within 60 days of February 8, 2012 and 4,313 shares acquirable on exercise of outstanding warrants exercisable within 60 days of February 8, 2012.
(7) Includes 8,146 shares held by a family trust, for which Mr. ODwyer serves as a trustee, 38,791 shares held by a pension fund for which Mr. ODwyer and his wife jointly have the power to make investment and voting decisions, and 12,435 subject to outstanding options exercisable within 60 days of February 8, 2012.
(8) Includes 7,250 shares owned by Dr. William Peters and Szigetvary Trustee Services Ltd as trustees to Peters JAM Trust; 2,450 shares owned by Szigetvary Trustee Services Ltd; 35 shares owned by Dr. William Peters for the benefit of Ava Peters; 35 shares owned by Dr. William Peters for the benefit of Michael Peters; 53 owned by Dr. William Peters for the benefit of James Peters; 33,433 owned by Dr. William Peters and Apollo Trustees No. 1 Limited as trustees to Peters Apollo Trust; 1,400 shares acquirable upon exercise of outstanding warrants exercisable within 60 days of February 8, 2012; and 39,933 shares subject to outstanding options exercisable within 60 days of February 8, 2012.
(9) Includes 76,113 shares subject to outstanding options exercisable within 60 days of February 8, 2012.
(10) Includes 974 shares subject to outstanding options exercisable within 60 days of February 8, 2012.
(11) Consists of (i) 2,836,280 shares beneficially owned by the current directors and executive officers; and (ii) 837,591 shares issuable upon exercise of outstanding options or warrants that are exercisable within 60 days of February 8, 2012.
Beneficial Owners of More than Five Percent of Our Common Stock
Based on information filed with the ASX and provided to us by certain of our directors, the following table sets forth certain information with respect to the beneficial ownership of persons known by us to be beneficial owners of more than 5% of our common stock as of February 8, 2012. Beneficial ownership is determined in accordance with the rules of the SEC.
Name of Beneficial Owner |
|
Number of Shares |
|
Percent(1) |
|
GBS Venture Partners Pty Ltd |
|
1,455,669 |
(2) |
22.3 |
% |
Funds affiliated with CM Capital |
|
1,877,498 |
(3) |
28.2 |
% |
Funds affiliated with Straus & Partners |
|
653,059 |
(4) |
10.1 |
% |
New Emerging Medical Opportunities Fund LP |
|
406,250 |
(5) |
6.4 |
% |
(1) Based on 6,276,538 shares outstanding as of February 8, 2012.
(2) Includes 248,909 shares subject to outstanding options exercisable within 60 days of February 8, 2012 and 12,000 shares acquirable upon exercise of outstanding warrants exercisable within 60 days of February 8, 2012. Dr. Geoff Brooke and Brigitte Smith of GBS Venture Partners Pty Ltd. hold voting and investment power with respect to these shares. The address for GBS Venture Partners Pty Ltd is Harley House, Level 5, 71 Collins Street, Melbourne Vic 3000, Australia.
(3) Includes 339,286 shares subject to outstanding options exercisable within 60 days of February 8, 2012 and 37,500 shares acquirable upon exercise of outstanding warrants exercisable within 60 days of February 8, 2012. Michel Begun, Andy Jane, Carrie Hillyard, Mark Gill and Dr. Mark Harvey are the partners of CM Capital Investments Pty Ltd and hold voting investment power with respect to these shares. The address for CM Capital is Level 9, 545 Queen Street, Brisbane QLD 4000, Australia.
(4) Based upon share registry provided to us by our transfer agent, Link Market Services. Includes 114,052 shares subject to outstanding warrants held by Straus Healthcare Partners, L.P. 95,302 shares subject to outstanding warrants held by Straus Partners LLP. Ravinder Holder and Melville Straus, Partner and Managing Prinicipal, respectively, of Straus Capital Management LLC share voting and investment power over the shares due to their affiliate relationships. The address for Straus & Partners is 767 Third Avenue, 21st Floor, New York, NY 10017.
(5) Based upon share registry provided to us by our transfer agent, Link Market Services. Includes 93,750 shares subject to outstanding warrants. Jérôme G.P Fund, Director and CEO of Sectoral Asset Management holds investment and voting power over these shares as investment manager for New Emerging Medical Opportunities Fund LP. The address for New Emerging Medical Opportunities Fund LP is 1000 Sherbrooke St. West, #2120, Montreal, QC Canada H3A 3G4.
ITEM 5 DIRECTORS AND EXECUTIVE OFFICERS
Directors and Executive Officers
Our directors and executive officers are as follows:
Name |
|
Age |
|
Position |
Kevin Bassett |
|
44 |
|
Senior Vice President, Technology & Operations |
Debra Kridner |
|
59 |
|
Vice President Research & Regulatory Affairs |
Jim Yearick |
|
49 |
|
Vice President Marketing & Sales |
Jeffrey Mathiesen |
|
51 |
|
Chief Financial Officer and Secretary |
Paul Buckman |
|
56 |
|
Director |
Dr. Geoffrey Brooke |
|
56 |
|
Director |
Nicholas Callinan |
|
65 |
|
Chairman of the Board, Director |
Dr. Mark Harvey |
|
46 |
|
Director |
Dr. William Peters |
|
46 |
|
Director; Chief Technology Officer & Medical Director |
Donal ODwyer |
|
58 |
|
Director |
David Rosa |
|
48 |
|
Director; Chief Executive Officer |
Gregory Waller |
|
62 |
|
Director |
The principal occupation and business experience of each officer, director and key employee of the Company is as follows:
Executive Officers
Kevin Bassett: Mr. Basset is our Senior Vice President of Technology and Operations, a position he has held since January 2012. From October 2010 until December 2011, Mr. Bassett served as our Vice President of Research, Development and Quality Assurance. From 2006 to 2010, Mr. Bassett served as the Senior Vice President of Research and Development, Operations, and Quality Assurance at Acorn Cardiovascular, a medical device company that develops treatments for patients with heart failure.
Debra Kridner: Ms. Kridner is our Vice President of Clinical Research and Regulatory Affairs, a position she has held since November 2009 on a consultant basis and since March 2010 as an employee of our company. From 2008 to 2009, Ms. Kridner worked as a consultant for her company Kridner Consulting LLC, which performed consulting services for medical device companies. From 2004 to 2008, Ms. Kridner served as the Vice President of Clinical Research and Regulatory Affairs for St. Jude Medicals Cardiac Surgery and Interventional Cardiology for the Cardiovascular Division.
Jeffrey Mathiesen: Since March 2011, Mr. Mathiesen has served as our Chief Financial Officer and Secretary. From December 2005 through April 2010, Mr. Mathiesen served as Vice President and Chief Financial Officer for Zareba Systems, Inc., a manufacturer and marketer of medical products, perimeter fencing and security systems. Zareba was a publicly traded company that was purchased by Woodstream Corporation in April 2010. Previous positions held by Mr. Mathiesen include Vice President and Chief Financial Officer for Delphax Technologies, Inc., a print solutions provider, from July 2004 to December 2005.
Jim Yearick: Since September 2011, Mr. Yearick has served as our Vice President of Marketing and Sales. From 2008 to September 2011, Mr. Yearick served as Vice President of Global Product Marketing for Medtronics Cardiac Rhythm Management division. Previously, from 2005 to 2008, Mr. Yearick served as Vice President Asia for Medtronics Cardiac Rhythm Management division.
Directors
Dr. Geoff Brooke: Director since September 2003. Dr. Brooke is a managing director of GBS Venture Partners Pty Ltd., an Australian venture capital firm that seeks out investments in life sciences companies. Dr. Brooke co-founded the venture capital firm in October 1996.
Dr. Brookes qualifications to serve on our board of directors include his experience in financial matters and fund raising as a fund manager and his experience with clinical medicine.
Paul Buckman: Director since February 2011. Mr. Buckman has served as Chief Executive Officer and Director of Pathway Medical Technologies, Inc., a medical device company focused on treatment of peripheral arterial disease, since September 2008. From December 2006 until September 2008, Mr. Buckman served as Chief Executive Officer of Devax, Inc., a developer and manufacturer of drug eluting stents, while also serving as Chairman of the Board of Directors for Pathway Medical Technologies, Inc. From August 2004 to December 2006, Mr. Buckman served as President of the Cardiology Division of St. Jude Medical, Inc., a diversified medical products company. Prior to joining St. Jude Medical, Mr. Buckman served as Chairman of the Board of Directors and Chief Executive Officer of ev3, LLC, a Minnesota-based medical device company focused on endovascular therapies that Mr. Buckman founded and developed into an $80 million business, from January 2001 to January 2004. Mr. Buckman has worked in the medical device industry for over 30 years, including 10 years at Scimed Life Systems, Inc. and Boston Scientific Corporation, where he held several executive positions before becoming President of the Cardiology Division of Boston Scientific in January 2000. In addition to Pathway Medical Technologies, Inc., Mr. Buckman also currently serves as a Director for SentreHeart, Inc., Conventus, and also as a Business Advisory Board member for Bio Star Ventures. In the past, Mr. Buckman has served on the boards of Velocimed, Inc., where he was a co-founder, EndiCor, Inc., Microvena, Inc., and Micro Therapeutics, Inc.
Mr. Buckmans qualifications to serve on our board of directors include his extensive experience in the management of medical device companies, including his collective eleven years of experience as a Chief Executive Officer for Pathway Medical and Devax, Inc.
Nicholas Callinan: Director since October 2008. Mr. Callinan is the chairman of our board of directors. Since 2004, he has served as Principal at Collins Hill Pty Ltd., a private equity advisory and consulting firm. From 2001 to 2003, Mr. Callinan served as the Senior Vice President and Chief Executive of SIV for Shell Internet Ventures, a company that invested in information technology companies worldwide. Previously, Mr. Callinan served as the Managing Director and Chief Executive of Central and Eastern European funds for Advent International Corporation, a company focused on private equity and venture capital fund management and investment.
Mr. Callinans qualifications to serve on our board of directors include his experience as a Chief Executive Officer, a fund manager, and a board member for private companies throughout the world. In these roles, Mr. Callinan has aided numerous companies in developing their governance structure.
Dr. Mark Harvey: Director since September 2011. Since 2006, Dr. Harvey has served as a partner of CM Capital, an Australian venture capital firm that focuses on life sciences, telecommunications, information technology, and renewable energy ventures. In this role, Dr. Harvey has gained extensive experience in the formation, fund raising, and management of numerous life science companies.
Dr. Harveys qualifications to serve on our board of directors include his extensive experience in the life sciences industry and general business experience due to his board service for other medical technology companies such as Osprey Medical Inc. since June 2007, and Pathway Therapeutics Ltd. since July 2010.
Donal ODwyer: Director since July 2004. Mr. ODwyer retired as worldwide President of Cordis Cardiology, the cardiology division of the Johnson & Johnson subsidiary, in 2003. Cordis is a developer and manufacturer of breakthrough stents, catheters and guidewires for interventional medicine, minimally invasive computer-based imaging, and electrophysiology. Prior to joining Cordis, Mr. ODwyer served as President of the Cardiovascular Group, Europe of Baxter International Inc., a global healthcare company that uses its expertise in medical devices, pharmaceuticals and biotechnology to create products that advance patient care worldwide.
Mr. ODwyers qualifications to serve on our board of directors include his extensive experience in the medical technology industry and general business experience due to his board service for other medical technology companies such as Angioblast Systems Inc. from November 2004 to January 2011, Atcor Medical Holdings Ltd since July 2004, Cochlear Limited since August 2005, and Mesoblast Ltd. since November 2004.
Dr. William Peters: Director since August 2002. Since 2002, Dr. Peters has served as our Chief Technical Officer and Medical Director. In addition to his role within our company, Dr. Peters is an honorary clinical research fellow with the Green Lane Cardiothoracic Surgical Unit at Auckland City Hospital in New Zealand.
Dr. Peters qualifications to serve on our board of directors include his extensive experience with and expertise in cardiac medical technology, including his invention and development of devices and methods to achieve minimally cardiac surgery and his recognition in our industry gained from his authorship of numerous published articles regarding cardiac surgery and heart failure.
David Rosa: Director since July 2010. Mr. Rosa is our Chief Executive Officer, a position he has held since November 2009. From 2008 to November 2009, Mr. Rosa served as the Chief Executive Officer of Milksmart, Inc., a medical device company that specializes in medical devices for animals. From 2004 to 2008, Mr. Rosa served as the Vice President of Global Marketing for cardiac surgery and cardiology for St. Jude Medical.
Mr. Rosas qualifications to serve on our board of directors include his experience in the medical device industry and his previous leadership experiences within medical device companies.
Gregory Waller: Director since August 2011. From 2006 to 2011, Mr. Waller was the Chief Financial Officer and Treasurer of Universal Building Products, Inc., which was a manufacturer of concrete forms and accessories for the residential and commercial projects in North America. Mr. Waller previously served as the Vice President of Finance, Chief Financial Officer, and Treasurer for Sybron Dental Specialties, Inc., a manufacturer of high technology dental, dental implant, and infection prevention products, from 1980 to 2005. Mr. Waller has served on the board of directors of Endologix Inc. since 2003. Mr. Waller also served on the board of directors of Clarient, Inc. and SenoRx, Inc. from 2006 until 2010. From 2006 to 2009, Mr. Waller served as a member of the board of directors of Alsius, Inc., and from 2009 to 2010, he served as a member of the board of directors of Biolase, Inc.
Mr. Wallers qualifications to serve on our board of directors include his 35 years of financial and management experience, including his experiences as a Chief Financial Officer for Universal Building Products, Inc. and Sybron Dental Specialties, Inc., and his familiarity with public company board functions from his services on the boards of other public companies.
As described above, Mr. Waller was the Chief Financial Officer and Treasurer of Universal Building Products from 2006 to 2011. Universal Building Products filed a voluntary petition for bankruptcy on August 4, 2010. Except as described in the preceding sentence, no other event has occurred during the past ten years requiring disclosure pursuant to Item 401(f) of Regulation S-K.
Director Classification
Our board of directors is divided into three classes with staggered three-year terms. At each annual general meeting of stockholders, the successors to directors whose terms then expire will be elected to serve from the time
of election and qualification until the third annual meeting following election. Our directors are divided among the three classes as follows:
· The Class II directors are Dr. Brooke and Mr. Rosa and their terms expire at the annual meeting of stockholders to be held in 2012;
· The Class III directors are Messrs. Callinan, ODwyer and Waller and their terms expire at the annual meeting of stockholders to be held in 2013; and
· The Class I directors are Dr. Peters, Mr. Buckman and Dr. Harvey and their terms expire at the annual meeting of stockholders to be held in 2014;
Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors.
There is no family relationship between any director, executive officer or person nominated to become a director or executive officer.
Director Compensation
The following table sets forth certain information regarding compensation of each person who served as one of our non-employee directors during the fiscal year ended December 31, 2011. During the fiscal years ended June 30, 2011 and December 31, 2011, we did not provide any separate compensation to our directors who were also employees.
Name |
|
Fiscal Year Ended |
|
Fees Earned or Paid in |
|
Option |
|
Total |
|
Geoffrey Brooke, MD |
|
12/31/11 |
|
12,649 |
|
73,445 |
|
86,094 |
|
|
|
6/30/11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul Buckman |
|
12/31/11 |
|
25,963 |
|
76,626 |
|
102,589 |
|
|
|
6/30/11 |
|
19,542 |
|
|
|
19,542 |
|
|
|
|
|
|
|
|
|
|
|
Nicholas Callinan |
|
12/31/11 |
|
51,375 |
|
125,939 |
|
177,314 |
|
|
|
6/30/11 |
|
103,234 |
|
|
|
103,234 |
|
|
|
|
|
|
|
|
|
|
|
Dr. Mark Harvey(2) |
|
12/31/11 |
|
12,649 |
|
76,887 |
|
89,536 |
|
|
|
6/30/11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crispin Marsh(3) |
|
12/31/11 |
|
8,129 |
|
73,445 |
|
81,574 |
|
|
|
6/30/11 |
|
50,853 |
|
|
|
50,853 |
|
|
|
|
|
|
|
|
|
|
|
Donal ODwyer |
|
12/31/11 |
|
12,649 |
|
73,445 |
|
86,094 |
|
|
|
6/30/11 |
|
49,941 |
|
|
|
49,941 |
|
|
|
|
|
|
|
|
|
|
|
Gregory Waller(4) |
|
12/31/11 |
|
21,042 |
|
74,784 |
|
95,826 |
|
|
|
6/30/11 |
|
|
|
|
|
|
|
(1) Represents the grant date fair value of the awards granted during the period computed in accordance with FASB ASC Topic 718. For a discussion of the relevant assumptions used to determine the valuation of our option awards for accounting purposes please refer to Note 3 to the Notes to Consolidated Financial Statements filed with this registration statement.
(2) Dr. Harvey became a director of our company in September 2011.
(3) Mr. Marsh retired from our board of directors in September 2011.
(4) Mr. Waller became a director of our company in August 2011.
All amounts for cash payments in the table above were converted from Australian Dollars to U.S. Dollars using the conversion rate in effect on the date of invoices submitted by the directors.
Pursuant to our director compensation policy approved by our stockholders in 2004, our non-employee directors were collectively entitled to receive a maximum of A$250,000 (approximately $267,500 based on a conversion rate of AUD1 to $1.07) in cash compensation for their service on our board of directors during the year ended June 30, 2011. In August 2011, in accordance with the ASX Listing Rules, our stockholders approved an increase to the maximum aggregate cash amount payable to our directors to $500,000 per fiscal year. Our board of directors has the authority to allocate up to the maximum aggregate compensation among the directors in its discretion. For the fiscal year ended December 31, 2011, our board of directors paid each of our directors other than our Chairman and our directors affiliated with venture capital funds A$50,000 in equally quarterly installments. Our Chairman was paid A$100,000 annually in equal quarterly installments. We historically have not provided cash compensation to our directors affiliated with venture capital funds in connection with their service on our board. However, effective October 1, 2011, we revised this policy so that our venture capital affiliated directors are compensated on the same basis as our other directors as described above.
Our board grants directors stock options or equity awards from time to time, but we
do not have a policy of regularly granting of equity or equity-based awards to our directors. All equity compensation awarded to our directors requires approval by our stockholders pursuant to the ASX Listing Rules.
During our six-month fiscal year ended December 31, 2011, we granted stock options to each of our non-employee directors. The stock options granted to each of our non-employee directors other than Dr. Harvey and Mr. Waller have an exercise price of A$7.00 per share, representing a 20% premium to the closing price for one of our CDIs on the date the board approved the option grant, have a 10-year term and vest in equal monthly installments over a four-year period. Our stockholders approved these options grants at a special meeting held in August 2011. Prior to these option grants, the last time we granted stock options to non-employee directors generally was in July 2008. We also granted stock options to Mr. Waller and Dr. Harvey during our fiscal year ended December 31, 2011 in connection with their appointments to our board of directors in August and September 2011, respectively. Each of these options has an exercise price of A$8.20 per share, representing the closing price for one of our CDIs on the date the board approved the option grant, has a 10-year term and vests in equal monthly installments over a four-year period. Our stockholders approved these options grants at our annual meeting held in November 2011. Although we previously had a practice of granting stock options to our non-employee directors with a per share exercise price that was greater than the closing price of one of our CDIs on the date the board approved the option grant, which we believe is a typical practice for companies listed on the ASX, we intend to grant future stock options to our non-employee directors and other award recipients with exercise prices equal to the closing price of our common stock on the date of grant consistent with what we believe is common practice for public companies listed on a U.S. stock exchange.
As of December 31, 2011, each individual who served as a non-employee director during our fiscal year ended December 31, 2011 held options to purchase up to the aggregate number of shares of common stock indicated below:
· Dr. Brooke 11,685 shares, 2,585 of which were unvested;
· Mr. Buckman 11,685 shares, 2,191 of which were unvested;
· Mr. Callinan 36,705 shares, 21,101 of which were unvested;
· Dr. Harvey 11,685 shares, 731 of which were unvested;
· Mr. Marsh 16,734 shares, 7,634 of which were unvested;
· Mr. ODwyer 11,685 shares, 2,585 of which were unvested; and
· Mr. Waller 11,685 shares, 974 of which were unvested.
ITEM 6 EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information regarding compensation for the fiscal years ended June 30, 2011 and December 31, 2011, provided to our Chief Executive Officer and the two other most highly compensated executive officers who received remuneration exceeding $100,000 during the fiscal year ended December 31, 2011, who we refer to as our named executive officers.
Name and Principal |
|
Fiscal |
|
Salary |
|
Option |
|
Non-Equity |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
David Rosa |
|
12/31/11 |
|
156,550 |
|
1,012,821 |
|
79,825 |
|
1,249,196 |
|
Chief Executive Officer |
|
6/30/11 |
|
280,000 |
|
47,146 |
|
70,000 |
|
397,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
William Peters, MD (3) |
|
12/31/11 |
|
143,542 |
(4) |
529,493 |
|
28,663 |
(4) |
701,698 |
|
Chief Medical Officer |
|
6/30/11 |
|
275,433 |
(4) |
|
|
|
|
275,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey Mathiesen (5) |
|
12/31/11 |
|
106,667 |
|
344,766 |
|
44,000 |
|
495,433 |
|
Chief Financial Officer |
|
6/30/11 |
|
59,879 |
|
|
|
|
|
59,879 |
|
(1) Represents the grant date fair value of the awards granted during the period computed in accordance with FASB ASC Topic 718. For a discussion of the relevant assumptions used to determine the valuation of our option awards for accounting purposes please refer to Note 3 to the Notes to Consolidated Financial Statements filed with this registration statement.
(2) Amounts in this column for the fiscal year ended June 30, 2011 represent amounts earned by the named executive officer for performance during calendar year 2010, which amounts were paid in early 2011. Amounts in this column for the fiscal year ended December 31, 2011 represent amounts earned by the named executive officer for performance during calendar year 2011, which amounts will be paid in early 2012. Historically, our named executive officers have been awarded incentive compensation based on their performance during calendar years rather our fiscal years, which is one reason we changed our fiscal year end from June 30 to December 31.
(3) All amounts were paid to WSP Trading Limited, an entity that Dr. Peters owns.
(4) Amount was converted from Australian Dollars to U.S. Dollars using the conversion rate in effect on the date of payment.
(5) Mr. Mathiesen joined our company as Chief Financial Officer in March 2011.
We have an employment agreement with David Rosa, our Chief Executive Officer, which provides that his annual salary initially will be $250,000 and is subject to annual review by our board of directors. The board established Mr. Rosas initial annual base salary of $250,000 in late 2009 in connection with negotiating his employment agreement. The board believed Mr. Rosas initial base salary was less than the salaries paid to other chief executive officers of small public companies and was appropriate because Mr. Rosa previously had not served as a chief executive officer of a public company. Effective January 1, 2011, the board increased Mr. Rosas salary for calendar year 2011 to $310,000 per year in recognition of our companys progress towards its goals during 2010, which included the expansion of our management team, development of a less invasive procedure to implant our product and progress on our feasibility clinical trial, as well as to closer align Mr. Rosas base salary with those of chief executive officers of other small public companies as determined by the board based on its collective experiences and industry knowledge.
Our employment agreement with Mr. Rosa also provides
that he will be eligible to participate in our short-term incentive bonus scheme with a maximum of up to 25% of his annual salary. The amount of the bonus is determined by our board of directors based on goals agreed upon by Mr. Rosa and our board. Mr. Rosas goals for calendar year 2010 related to development projects, relocation of our headquarters to Eden Prairie, Minnesota, development of a minimally invasive procedure to implant our product, and building our executive management team. Our board determined that Mr. Rosa achieved all of these goals and awarded him the maximum cash incentive payment provided in his employment agreement for the year. For calendar year 2011, Mr. Rosas goals related to successful completion of our feasibility trial and progress on our planned pivotal trial, continued financing of our operations and product development. Our board determined that Mr. Rosa achieved all of these goals and awarded him the maximum cash incentive payment provided in his employment agreement for calendar year 2011.
Mr. Rosa is entitled to participate in the benefit plans available to our employees generally. His employment agreement is terminable (i) by either party for any reason with one months notice, by mutual agreement of us and Mr. Rosa; (ii) by mutual agreement between us and Mr. Rosa; (iii) immediately by us for cause (as defined in the agreement) if Mr. Rosa has not cured the conduct giving rise to a termination for cause; (iv) by us for Mr. Rosas disability (as defined in the agreement); or (v) immediately by Mr. Rosa for good reason (as defined in the agreement) if we have not cured the conduct giving rise to a termination for good reason. The agreement also provides that, for one year following his termination, Mr. Rosa will not compete with us during the term of his employment with us and he will not solicit any person who was one of our employees during the term of his employment.
For calendar year 2011, our board determined the salary for Mr. Mathiesen pursuant to negotiations with Mr. Mathiesen in connection with his hiring in March 2011. Our board determined Dr. Peters calendar year 2011 salary primarily based on the salary recommendation provided by our Chief Executive Officer. At the beginning of each calendar year, our Chief Executive Officer evaluates three primary factors when recommending salaries for the other named executive officers for the year. Those factors are an evaluation of:
· salaries of persons occupying similar positions at other small medical device companies;
· the overall performance of our company for the prior year; and
· the individuals contributions to our results for the prior year.
Our Chief Executive Officers evaluation of salaries for persons occupying similar positions at other small public medical device companies is based on his general industry knowledge and consultation of proxy statements filed by U.S. publicly traded companies with the SEC. Our Chief Executive Officer uses this market information to help determine whether the salaries he recommends for our other named executive officers are, in his opinion, significantly above or below the salaries of persons occupying similar positions at the companies consulted and that any variations to what the Chief Executive Officer considers to be a market salary are in his opinion justified. Historically, our Chief Executive Officer has not targeted compensation at a specified point relative to the market information he has gathered or used studies or compilations of information prepared by third parties to evaluate salaries paid by our competitors.
Our Chief Executive Officers evaluation of our companys performance is a subjective evaluation of our progress toward commercializing our product and meeting our business plan. The completion of enrollment of our feasibility clinical trial, commencement of exploration of possibilities to commercialize the C-Pulse System in Europe and commencement of preparations for our pivotal trial all favorably impacted our Chief Executive Officers and boards evaluation of our performance during calendar year 2011.
Our Chief Executive Officer evaluates the contribution of the other named executive officers for the year by examining our progress in that officers functional area. For calendar year 2011, Dr. Peters contributions for the same period were significant in light of the development of a minimally invasive procedure to implant our product and progress made on developing a next-generation fully implantable device.
Based on the foregoing, our Chief Executive Officer recommended the salary paid to Dr. Peters for calendar year 2011, and our board agreed with Mr. Rosas evaluation of the factors described and approved Dr. Peters salary.
Dr. Peters non-equity incentive plan compensation award for calendar year 2011 provided for a payment of up to 10% of his annual salary, based on goals agreed upon by Dr. Peters and our Chief Executive Officer. Dr. Peters goals for calendar year 2011 were tied to our clinical trial and research and development activities. Based on Dr. Peters work training and supporting physicians at sites participating in our feasibility trial, his work summarizing and presenting clinical trial data, the successful animal test for our next-generation fully implantable device and improvements to our existing product developed by Dr. Peters during the year, our board awarded Dr. Peters his maximum possible payment under the non-equity incentive plan.
Mr. Mathiesens non-equity incentive plan compensation award for calendar year 2011 provided for a payment of up to 20% of his annual salary. Our board determined that Mr. Mathiesen improved our financial reporting processes and successfully performed his duties for the year and awarded Mr. Mathiesen his maximum possible non-equity incentive payment.
The following table sets forth certain information concerning equity awards held by our named executive officers that were outstanding as of December 31, 2011.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
|
|
Option Awards |
| ||||||||
Name |
|
Number of |
|
Number of |
|
Option |
|
Option Expiration Date |
| ||
David Rosa |
|
37,500 |
(2) |
12,500 |
|
$ |
10.70 |
|
11/29/20 |
| |
|
|
28,960 |
(3) |
125,490 |
|
$ |
7.49 |
|
8/17/21 |
| |
|
|
|
(5) |
29,210 |
|
$ |
13.70 |
|
8/17/21 |
| |
|
|
|
(5) |
43,000 |
|
$ |
8.77 |
|
11/28/21 |
| |
|
|
|
|
|
|
|
|
|
| ||
William Peters, MD |
|
3,990 |
(4) |
|
|
$ |
3.32 |
|
1/30/13 |
| |
|
|
3,880 |
(4) |
|
|
$ |
53.50 |
|
7/5/14 |
| |
|
|
2,200 |
(4) |
|
|
$ |
38.52 |
|
11/1/16 |
| |
|
|
280 |
(4) |
|
|
$ |
64.20 |
|
1/31/17 |
| |
|
|
3,000 |
(4) |
|
|
$ |
64.20 |
|
4/18/17 |
| |
|
|
488 |
(4) |
|
|
$ |
42.80 |
|
7/9/18 |
| |
|
|
3,869 |
(5) |
857 |
|
$ |
17.12 |
|
8/20/18 |
| |
|
|
80,745 |
(3) |
65,605 |
|
$ |
7.49 |
|
8/17/21 |
| |
|
|
|
|
|
|
|
|
|
| ||
Jeffrey Mathiesen |
|
|
(5) |
52,575 |
|
$ |
7.49 |
|
8/17/21 |
| |
|
|
|
(5) |
5,000 |
|
$ |
8.77 |
|
11/1/21 |
| |
(1) Amount converted from AUD to U.S. Dollars using a conversion rate of AU$1.00 to $1.07.
(2) This option vested as to 50% of the shares on November 29, 2010, the date of grant, and 25% on November 1, 2011, and the remaining 25% will vest on November 1, 2012.
(3) This option vests as to 1/48th of the shares per month until fully vested.
(4) Option fully vested as of December 31, 2011.
(5) This option vests as to 25% of the shares on the first anniversary of the date of grant, and 1/48th of the shares per month thereafter until fully vested.
Change in Control Agreements
We have entered into change in control agreements with each of our named executive officers that will require us to provide compensation to them in the event of a change in control of our company. Each agreement has a term that runs from its effective date through the later of (i) the five-year anniversary of the effective date or (ii) if a change in control occurs on or prior to the five-year anniversary, the one-year anniversary of the effective date
of the change in control. The agreements will be automatically extended for successive two-year periods until notice of non-renewal is given by either party at least 60 days prior to the end of the then-effective term.
Under the change in control agreements, change in control means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events: (i) subject to certain exceptions, any person or groups acquisition, directly or indirectly, of more than 50% of the combined voting power of our outstanding securities other than by virtue of a merger, consolidation or similar transaction; (ii) the consummation of a merger, consolidation, or similar transaction involving our company and immediately after the consummation of such merger, consolidation or similar transaction, our stockholders immediately prior thereto do not directly own or beneficially own, either (A) outstanding voting securities representing more than 50% of the combined outstanding voting power of the surviving entity in such merger, consolidation or similar transaction; or (B) more than 50% of the combined outstanding voting power of the parent of the surviving entity in such merger, consolidation or similar transaction, in each case in substantially the same proportions as their ownership of our outstanding voting securities immediately prior to such transaction; (iii) there is consummated a sale, lease, exclusive license or other disposition of all or substantially all of the consolidated assets of our company, other than a sale, lease, license or other disposition of all or substantially all of our consolidated assets to an entity, more than 50% of the combined voting power of the voting securities of which are owned by our stockholders in substantially the same proportions as their ownership of our outstanding voting securities immediately prior to such transaction; or (iv) individuals who, on March 17, 2011, were members of our board of directors cease to constitute at least a majority of the members of our board, provided that if the appointment, election or nomination for election of any new board member was approved or recommended by a majority of the members of the board as of March 17, 2011, the board member will be treated as being a board member as of March 17, 2011. Notwithstanding the foregoing, the term change in control will not include a sale of assets, merger or other transaction effected exclusively for the purpose of changing our domicile.
Our change in control agreement with David Rosa, our Chief Executive Officer, provides that, if a change in control occurs during the term of his agreement and if Mr. Rosas employment terminates anytime during the one year period after the effective date of the change in control and if such termination is involuntary at our initiative without cause or is due to a voluntary resignation for good reason, we will (1) pay in a lump sum his salary for 18 months and any other earned but unpaid compensation; (2) pay in a lump sum an amount equal to the incentive bonus payment received by Mr. Rosa for the fiscal year immediately preceding the fiscal year in which the termination occurs; and (3) provide healthcare benefits to him and his family for the shorter of (i) 18 months after his termination; or (ii) until the date Mr. Rosa is and/or Mr. Rosas covered dependents are eligible to receive group medical and/or dental insurance coverage by a subsequent employer.
We have also entered into change in control agreements with each of our named executive officers other than Mr. Rosa, which provide that if a change in control occurs during the term of the officers agreement and if the officers employment terminates anytime during the one year period after the effective date of the change in control and if such termination is involuntary at our initiative without cause or is due to a voluntary resignation for good reason, we will (1) pay in a lump sum such officers salary for 12 months and any other earned but unpaid compensation; (2) pay in a lump sum an amount equal to the incentive bonus payment received by such officer for the fiscal year immediately preceding the fiscal year in which the termination occurs; and (3) provide healthcare benefits to such officer and such officers family for the shorter of (i) 12 months after the termination; or (ii) until the date the officer is and/or the officers covered dependents are eligible to receive group medical and/or dental insurance coverage by a subsequent employer.
Additionally, if any named executive officer terminates employment with us (i) during the term of the officers change in control agreement due to a voluntary resignation for good reason or due to an involuntary termination of an officers employment by us without cause prior to a change in control and the expiration of the agreements term (provided that the officer reasonably demonstrates that such termination arose in connection with or in anticipation of a change in control); (ii) a change in control occurs within 90 days after the officers termination; and (iii) a change in control occurs within 90 days after the termination and occurs during the term of the officers change in control agreement, then we will provide our named executive officers the applicable payments and health benefits described above.
Under the change in control agreements cause for termination exists upon the occurrence of any of the following events, if such event results in a demonstrably harmful impact on our business or reputation: (i) such officers commission of any felony or any crime involving fraud, dishonesty or moral turpitude; (ii) such officers attempted commission of, or participation in, a fraud or act of dishonesty against us; (iii) such officers intentional, material violation of any contract or agreement between us and such officer or of any statutory duty owed to us; (iv) such officers unauthorized use or disclosure of our confidential information or trade secrets; or (v) such officers gross misconduct.
Each named executive officer may tender resignation for good reason after any of the following are undertaken without such officers written consent: (i) a significant diminution in officers employment role with us as in effect immediately prior to the effective date of the change in control; (ii) a greater than 5% aggregate reduction by us in the officers annual base salary, as in effect on the effective date of the change in control or as increased thereafter unless the reduction is pursuant to an across-the-board proportionate salary reduction for all officers, management-level and other salaried employees due to our financial condition, a greater than 10% aggregate reduction by us of the officers annual base salary will be required for good reason to exist; (iii) any failure by us to continue in effect any benefit plan or program, including fringe benefits, incentive plans and plans with respect to the receipt of our securities, in which the officer is participating immediately prior to the effective date of the change in control, or any action by us that would adversely affect the officers participation in or reduce his benefits under those benefit plans unless we offer a range of benefit plans and programs that, taken as a whole, is comparable to the benefit plans in effect in which the officer is participating immediately prior to the change in control; or (iv) a non-temporary relocation of the officers business office to a location more than 50 miles from the location at which the officer performs duties as of the effective date of the change in control, except for required travel by officer on our business to an extent substantially consistent with the officers business travel obligations prior to the change in control.
In addition to the payments described above, the change in control agreements with the named executive officers provide that if a change in control occurs while such officer is actively employed by us, such change in control will cause the immediate acceleration of the vesting of 100% of any unvested portion of any stock option awards held by the officer on the effective date of such change in control.
We will not make any of the payments described above unless: (i) the named executive officer signs a full release of any and all claims in favor of us; (ii) all applicable consideration periods and rescission periods have expired; and (iii) as of the dates we provide any payments to the named executive officer, the officer is in strict compliance with the terms of the applicable change in control agreement and any proprietary information agreement the officer has entered into with us.
Compensation Committee Interlocks and Insider Participation
The board members who served on our Remuneration and Nomination Committee during the fiscal year ended December 31, 2011 were Dr. Geoffrey Brooke, Paul Buckman, Nicholas Callinan and Dr. Mark Harvey. During the fiscal year ended December 31, 2011, no person who served as a member of our Remuneration and Nomination Committee was, during such period, an officer or employee of our company, or has ever been one of our officers, and no such person had any transaction with us required to be disclosed in Item 7 Certain Relationships and Related Transactions below. During the fiscal year ended December 31, 2011, (i) none of our executive officers served as a member of the compensation committee of another entity, one of whose executive officers served on our Remuneration and Nomination Committee; (ii) none of our executive officers served as a director of another entity, one of whose executive officers served on our Remuneration and Nomination Committee; and (iii) none of our executive officers served as a member of the compensation committee of another entity, one of whose executive officers served as one of our directors.
ITEM 7 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Director Independence
Our board of directors currently consists of eight directors. Our board of directors has determined that six of our eight directors are independent directors, as defined under the applicable rules of the Nasdaq Capital Market.
The independent directors are Dr. Geoffrey Brooke, Paul Buckman, Nicholas Callinan, Dr. Mark Harvey, Donal ODwyer, and Gregory Waller.
We are also subject to the corporate governance requirements of the ASX, which include guidelines for the determination of whether a director should be considered independent. Under these guidelines, in order for a director to be independent, the board should consider, among other things, whether the director is a substantial shareholder or an officer of, or otherwise directly associated with, a substantial shareholder. The holdings of a shareholder are typically considered substantial if they exceed 5% of the voting securities. As a result, Dr. Geoffrey Brooke and Dr. Mark Harvey may not be considered independent for ASX purposes. However, our board has determined that these directors are independent notwithstanding their association with certain stockholders.
Related Party Transactions
Since July 1, 2008, we have entered into the following transactions with our directors, executive officers, holders of more than five percent of our voting securities, and affiliates of our directors, executive officers and five percent stockholders:
In February 2012, we sold 62,500 shares of our common stock and warrants to purchase 18,750 shares of our common stock to Funds affiliated with Straus & Partners for an aggregate purchase price of A$500,000 as part of a private placement. Funds affiliated with Straus & Partners beneficially own more than 5% of our common stock.
In September 2011, we sold 14,375 shares of our common stock to Jeffrey Mathiesen, our Chief Financial Officer, at the price of A$8.00 per share as part of a private placement.
In August, 2011, we entered into indemnification agreements with each of our directors and executive officers that provide, in general, that we will indemnify them to the fullest extent permitted by law in connection with their service to us or on our behalf.
We are party to an agreement with WSP Trading Limited pursuant to which WSP Trading Limited performs technical and medical advisory services for us and we pay WSP A$283,272 annually effective as of January 1, 2012. This agreement requires that Dr. William Peters serve as our Medical Director and Chief Technical Officer. We make payments to WSP rather than to Dr. Peters directly for Dr. Peters services to our company as Medical Director and Chief Technical Officer. Dr. Peters is a director of our company and WSP, and Dr. Peters owns all of the equity of WSP.
ITEM 8 LEGAL PROCEEDINGS
We are not party to any material pending legal proceedings.
ITEM 9 MARKET PRICE OF AND DIVIDENDS ON THE COMPANYS COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Market Information
Since September 2004, our shares of common stock have traded on the ASX in the form of CDIs under the symbol SHC.
The following table sets forth, for the periods indicated, the high and low closing prices for our CDIs as reported on the ASX, in Australian dollars and as converted into United States dollars. All currency conversions are based on the prevailing Australian dollar to the U.S. Dollar rate on the last day of each respective quarter.
|
|
High |
|
Low |
|
High |
|
Low |
| ||
Period |
|
(A$) |
|
(A$) |
|
(US$) |
|
(US$) |
| ||
Year Ending December 31, 2012: |
|
|
|
|
|
|
|
|
| ||
First Quarter (through February 7, 2012) |
|
$ |
8.40 |
|
7.20 |
|
$ |
9.00 |
|
7.40 |
|
Year Ended December 31, 2011: |
|
|
|
|
|
|
|
|
| ||
First Quarter |
|
9.00 |
|
6.00 |
|
9.40 |
|
6.20 |
| ||
Second Quarter |
|
12.60 |
|
7.80 |
|
13.60 |
|
8.40 |
| ||
Third Quarter |
|
11.00 |
|
7.00 |
|
10.80 |
|
6.80 |
| ||
Fourth Quarter |
|
9.40 |
|
6.40 |
|
9.20 |
|
6.60 |
| ||
Year Ended December 31, 2010: |
|
|
|
|
|
|
|
|
| ||
First Quarter |
|
8.20 |
|
6.20 |
|
8.00 |
|
6.00 |
| ||
Second Quarter |
|
7.40 |
|
5.80 |
|
6.20 |
|
4.80 |
| ||
Third Quarter |
|
7.20 |
|
4.60 |
|
7.00 |
|
4.40 |
| ||
Fourth Quarter |
|
7.80 |
|
4.60 |
|
8.00 |
|
4.80 |
| ||
As of February 8, 2012, we had 6,276,538 shares of common stock issued and outstanding, and there was one holder of record of our common stock, which was Chess Depositary Nominees, or CDN. CDN held shares of our common stock on behalf of approximately 1,200 CDI holders. As of February 8, 2012, there were outstanding options to purchase 2,123,128 shares of our common stock and warrants to purchase 387,710 shares of our common stock.
After this registration statement becomes effective, we intend to file with the SEC registration statements on Form S-8 covering approximately 1 million shares of our common stock.
We have not registered any of our outstanding shares of common stock under U.S. federal or state securities laws and all of our outstanding shares are restricted securities for purposes of Rule 144 under the Securities Act. As of February 8, 2012, 2,836,355 shares of our common stock could be sold by our existing stockholders who are not affiliates of our company without restrictions under U.S. federal securities laws pursuant to Rule 144. In addition, beginning 90 days after the effective date of this registration statement, under Rule 144 as in effect on the date this registration statement is filed with the SEC, a person who is not one of our affiliates at any time during the three months preceding a sale, and who has beneficially owned shares of our common stock for at least six months, would be entitled to sell an unlimited number of shares of our common stock provided current public information about us is available and, after owning such shares for at least one year, would be entitled to sell an unlimited number of shares of our common stock without restriction. Beginning 90 days after the date of this effective date of this registration statement, under Rule 144 as in effect on the date this registration statement is filed with the SEC, our affiliates who have beneficially owned shares of our common stock for at least six months would be entitled to sell within any three-month period a number of shares that does not exceed the greater of:
· one percent of the number of shares of our common stock then outstanding; and
· the average weekly trading volume of our common stock on all national securities exchanges and/or reported through the automated quotation system of a registered securities exchange during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale, or if no such notice is required, the date of receipt of the order to execute the sale.
Sales under Rule 144 by our affiliates are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us.
We cannot estimate the number of shares of our common stock that our existing stockholders will elect to sell under Rule 144.
We have submitted a listing application to the Nasdaq Capital Market for listing of our common stock. There can be no assurance that the listing application will be approved or that a U.S. trading market for our common stock will develop.
Dividends
We currently intend to retain any earnings to finance research and development and the operation and expansion of our business and do not anticipate paying any cash dividends for the foreseeable future. The declaration and payment of any dividends in the future by us will be subject to the sole discretion of our board of directors and will depend upon many factors, including our financial condition, earnings, capital requirements of our
operating subsidiaries, covenants associated with any debt obligations, legal requirements, regulatory constraints and other factors deemed relevant by our board of directors. Moreover, if we determine to pay any dividend in the future, there can be no assurance that we will continue to pay such dividends.
Equity Compensation Plan Information
The following table provides information as of December 31, 2011 with respect to our equity compensation plans. See Note 3 to our consolidated financial statements included elsewhere is this registration statement for further information.
|
|
|
|
|
|
Number of Securities |
| |
|
|
|
|
|
|
Remaining Available for |
| |
|
|
Number of Securities |
|
|
|
Future Issuance Under |
| |
|
|
to be Issued Upon |
|
Weighted-Average |
|
Equity Compensation |
| |
|
|
Exercise of |
|
Exercise Price of |
|
Plans (Excluding |
| |
|
|
Outstanding Options, |
|
Outstanding Options, |
|
Securities Reflected in |
| |
Plan Category |
|
Warrants and Rights |
|
Warrants and Rights |
|
Column (a)) |
| |
|
|
(a) |
|
(b) |
|
(c) |
| |
Equity compensation plans approved by security holders |
|
887,425 |
|
$ |
10.67 |
|
132,431 |
|
Equity compensation plans not approved by security holders |
|
|
|
n/a |
|
|
| |
Total |
|
887,425 |
|
10.67 |
|
132,431 |
| |
ITEM 10 RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this registration statement, we issued the securities indicated below that were not registered under the Securities Act.
Name or Class |
|
Type of |
|
Amount of |
|
Date of |
|
Exercise |
|
Aggregate |
Institutional and high net worth Australian investors |
|
Common Stock |
|
1,226,795 |
|
Aug.-Sept. 2009 |
|
N/A |
|
A$9,810,200 |
|
|
|
|
|
|
|
|
|
|
|
Institutional and high net worth Australian investors |
|
Common Stock upon exercise of options |
|
9,975 |
|
12/3/09 |
|
$A3.40 per share purchase price for Common Stock |
|
A$34,019 |
|
|
|
|
|
|
|
|
|
|
|
Accredited Investors party to Securities Purchase Agreement dated 9/15/10 |
|
Common Stock and Warrants to purchase Common Stock |
|
667,103 Common Shares
333,552 Warrants |
|
11/15/10 |
|
A$5.60 per share purchase price for Common Stock
|
|
A$3,735,774 |
|
|
|
|
|
|
|
|
|
|
|
Summer Street Research Partners |
|
Warrants to purchase Common Stock |
|
19,974 Warrants |
|
11/13/10 |
|
A$5.60 |
|
N/A |
Name or Class |
|
Type of |
|
Amount of |
|
Date of |
|
Exercise |
|
Aggregate |
|
|
|
|
|
|
|
|
|
|
|
Matthew Dormer |
|
Warrants to Purchase Common Stock |
|
3,525 Warrants |
|
11/13/10 |
|
A$5.60 |
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
Institutional and high net worth Australian investors |
|
Common Stock |
|
1,701,473 Common Shares
850,737 Warrants |
|
12/8/10 |
|
A$5.60 |
|
A$9,528,249 |
|
|
|
|
|
|
|
|
|
|
|
Institutional and high net worth Australian investors |
|
Common Stock |
|
17,858 Common Shares |
|
1/25/11 |
|
N/A |
|
A$100,000 |
|
|
|
|
|
|
|
|
|
|
|
Institutional and high net worth Australian investors |
|
Common Stock |
|
119 Common Shares |
|
1/25/11 |
|
N/A |
|
A$759 |
|
|
|
|
|
|
|
|
|
|
|
Institutional and high net worth Australian investors |
|
Common Stock |
|
140 Common Shares |
|
2/22/11 |
|
N/A |
|
A$891 |
Name or Class |
|
Type of |
|
Amount of |
|
Date of |
|
Exercise |
|
Aggregate |
|
|
|
|
|
|
|
|
|
|
|
Institutional and high net worth Australian investors |
|
Common Stock |
|
6,900 Common Shares |
|
5/9/11 |
|
N/A |
|
A$44,157 |
|
|
|
|
|
|
|
|
|
|
|
Institutional and high net worth Australian investors |
|
Common Stock |
|
5,000 Common Shares |
|
5/23/11 |
|
N/A |
|
A$32,000 |
|
|
|
|
|
|
|
|
|
|
|
Institutional and high net worth Australian investors |
|
Common Stock |
|
53 Common Shares |
|
6/6/11 |
|
N/A |
|
A$335 |
|
|
|
|
|
|
|
|
|
|
|
Malcolm Legget |
|
Common Stock |
|
194 Common Shares |
|
6/22/11 |
|
N/A |
|
A$586 |
|
|
|
|
|
|
|
|
|
|
|
Accredited Investors party to Securities Purchase Agreement dated 7/25/11 |
|
Common Stock and Warrants to purchase Common Stock |
|
572,222 Common Shares
171,667 Warrants |
|
7/27/11 |
|
A$8.00 per share purchase price for Common Stock
|
|
A$4,577,774 |
Name or Class |
|
Type of |
|
Amount of |
|
Date of |
|
Exercise |
|
Aggregate |
|
|
|
|
|
|
|
|
|
|
|
Summer Street Research Partners |
|
Warrants to purchase Common Stock |
|
9,091 Warrants |
|
7/27/11 |
|
A$8.00 |
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
Institutional and high net worth Australian investors |
|
Common Stock and Warrants to purchase Common Stock |
|
154,030 Common Shares
46,209 Warrants |
|
9/9/11 |
|
A$8.00 per share purchase price for Common Stock
A$11.20 per share exercise price for Warrants |
|
A$1,232,240 |
|
|
|
|
|
|
|
|
|
|
|
Accredited Investors party to Securities Purchase Agreement dated 7/25/11 |
|
Common Stock and Warrants to purchase Common Stock |
|
125,000 Common Shares
37,500 Warrants |
|
9/13/11 |
|
A$8.00 per share purchase price for Common Stock
A$11.20 per share exercise price for Warrants |
|
A$1,000,000 |
Name or Class |
|
Type of |
|
Amount of |
|
Date of |
|
Exercise |
|
Aggregate |
|
|
|
|
|
|
|
|
|
|
|
Accredited Investors party to Securities Purchase Agreement dated 7/25/11 |
|
Common Stock and Warrants to purchase Common Stock |
|
70,414 Common Shares
21,125 Warrants |
|
9/16/11 |
|
A$8.00 per share purchase price for Common Stock
A$11.20 per share exercise price for Warrants |
|
A$563,309 |
|
|
|
|
|
|
|
|
|
|
|
Summer Street Research Partners |
|
Warrants to Purchase Common Stock |
|
1,532 Warrants |
|
9/16/11 |
|
A$8.00 |
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
Institutional and high net worth Australian Investors |
|
Common Stock |
|
2,581 |
|
9/23/11 |
|
N/A |
|
A$16,514 |
|
|
|
|
|
|
|
|
|
|
|
Australian Investor under employee stock option agreement |
|
Common Stock |
|
266 |
|
9/23/11 |
|
N/A |
|
A$1,858 |
|
|
|
|
|
|
|
|
|
|
|
Institutional and high net worth Australian Investors |
|
Common Stock |
|
86 Common Shares |
|
11/2/11 |
|
N/A |
|
A$549 |
|
|
|
|
|
|
|
|
|
|
|
Australian Investor under employee stock option agreement |
|
Common Stock |
|
591 Common Shares |
|
11/2/11 |
|
N/A |
|
A$4,136 |
|
|
|
|
|
|
|
|
|
|
|
Institutional Australian Investor |
|
Common Stock and Warrants to purchase Common Stock |
|
12,500 Common Shares
3,750 Warrants |
|
2/8/12 |
|
A$8.00 per share purchase price for Common Stock
A$11.20 per share exercise price for Warrants |
|
A$100,00 |
|
|
|
|
|
|
|
|
|
|
|
Accredited Investors party to Securities Purchase Agreement dated 2/6/12 |
|
Common Stock and Warrants to purchase Common Stock |
|
244,375 Common Shares
73,313 Warrants |
|
2/8/12 |
|
A$8.00 per share purchase price for Common Stock
A$11.20 per share exercise price for Warrants |
|
A$1,955,000 |
|
|
|
|
|
|
|
|
|
|
|
Summer Street Research Partners |
|
Warrants to purchase Common Stock |
|
7,525 Warrants |
|
2/8/12 |
|
A$8.00 |
|
N/A |
Shares of our common stock indicated in the table above were issued in the form of CDIs.
No underwriters were used in connection with the transactions described above. Summer Street Research Partners and Matthew Dormer were the placement agents for the November 15, 2010 and July 27, 2011 transactions. The securities issued to the placement agents were made in reliance upon Section 4(2) of the Securities Act because no public offering of the securities was made and the placement agents are sophisticated persons with adequate information about us and the securities were not acquired with a view to any distribution thereof, and appropriate legends were affixed to the share certificates and instruments issued in such sales. All other sales other than to the placement agents were for cash.
The transactions described above that occurred on November 15, 2010, July 27, 2011, September 13, 2011, September 16, 2011 and to the Accredited Investors on February 8, 2012 were made in reliance upon the exemption from registration requirements of the Securities Act available under Section 4(2) of the Securities Act and Rule 506 of Regulation D. The purchasers of the securities in these transactions made in reliance upon Section 4(2) of the Securities Act and Rule 506 of Regulation D represented that they were sophisticated persons and that they intended to acquire the securities for investment only and not with a view to, or for sale in connection with, any distribution thereof, and appropriate legends were affixed to the share certificates and instruments issued in such sales. We believe that these purchasers either received adequate information about us or had adequate access, through their relationships with us, to such information.
The transactions described above that occurred during August and September 2009 and on each of December 3, 2009, December 8, 2010, January 25, 2010, February 22, 2011, May 9, 2011, May 23, 2011, June 6, 2011, June 22, 2011, September 9, 2011 September 23, 2011, November 2, 2011 and to the Institutional Australian Investor on February 8, 2012 were made in reliance upon the exemption from registration requirements of the Securities Act available under Rule 903 of Regulation S. The purchasers of the securities in these transactions represented that they were outside of the United States when each such person originated its buy order for the securities, no offers were made to persons in the United States, the Company implemented the offering restrictions required by Regulation S, the purchasers agreed offer or sell the securities acquired only in compliance with the restrictions and conditions imposed by Regulation S during the applicable distribution compliance period and we agreed to refuse to register any transfer of the securities not made in accordance with Regulation S, pursuant to registration under the Securities Act, or pursuant to an available exemption from registration.
All other sales of common stock described above were made pursuant to the exercise of stock options granted under the 2002 Plan to our officers, directors, employees and consultants in reliance upon an available exemption from the registration requirements of the Securities Act, including those contained in Rule 701 promulgated under Section 3(b) of the Securities Act. Among other things, we relied on the fact that, under Rule 701, companies that are not subject to the reporting requirements of Section 13 or Section 15(d) of the Exchange Act are exempt from registration under the Securities Act with respect to certain offers and sales of securities pursuant to compensatory benefit plans as defined under that rule. We believe that the 2002 Plan qualifies as a compensatory benefit plan under Rule 701.
The following table sets forth information on the stock options issued by us to our officers, directors, employees and consultants during the three years preceding the filing of this registration statement.
Date of Issuance |
|
Number of |
|
Exercise Price per |
|
11/29/10 |
|
50,000 |
|
A$10.00 |
|
8/18/11 |
|
580,590 |
|
A$7.00 |
|
8/18/11 |
|
11,685 |
|
A$9.60 |
|
8/18/11 |
|
15,000 |
|
A$10.40 |
|
8/19/11 |
|
29,210 |
|
A$12.80 |
|
11/2/11 |
|
92,255 |
|
A$8.20 |
|
11/29/11 |
|
66,370 |
|
A$8.20 |
|
1/10/12 |
|
29,375 |
|
A$7.40 |
|
No consideration was paid to us by any recipient of any of the foregoing options for the grant of such options. All of the stock options described above were granted under the 2002 Plan or our 2011 Plan to our officers, directors, employees and consultants in reliance upon an available exemption from the registration requirements of the Securities Act, including those contained in Rule 701 promulgated under Section 3(b) of the Securities Act. Among other things, we relied on the fact that, under Rule 701, companies that are not subject to the reporting requirements of Section 13 or Section 15(d) of the Exchange Act are exempt from registration under the Securities Act with respect to certain offers and sales of securities pursuant to compensatory benefit plans as defined under that rule. We believe that our 2001 Stock Option Plan and our 2011 Plan qualify as a compensatory benefit plans.
ITEM 11 DESCRIPTION OF SECURITIES TO BE REGISTERED
General
The following description of our capital stock is a summary only and is qualified in its entirety by reference to our certificate of incorporation, as amended, and amended and restated bylaws, which are included as Exhibits 3.1 and 3.2 of this registration statement.
As of February 8, 2012, we had outstanding 6,276,538 shares of our common stock held by one holder of record, which was CDN. CDN held shares of our common stock on behalf of approximately 1,200 CDI holders. As of February 8, 2012, we had outstanding options to acquire 2,836,355 shares of common stock held by employees, directors, consultants and investors granted options to purchase our common stock outside of our equity plans, as well as outstanding warrants to purchase 387,710 shares of common stock.
Common Stock
We are authorized to issue up to 100,000,000 shares of common stock, with a par value of $0.0001 per share.
Holders of our common stock are entitled to receive dividends when and as declared by our board of directors out of funds legally available.
Holders of our common stock are entitled to one vote for each share on each matter properly submitted to our stockholders for their vote; provided however, that except as otherwise required by law, holders of our common stock will not be entitled to vote on any amendment to our certificate of incorporation (including any certificate of designation filed with respect to any series of preferred stock) that relates solely to the terms of a series of outstanding preferred stock if the holders of such affected series are entitled, either separately or together as a class with the holders of one or more other such series, to vote thereon by law or pursuant to our certificate of incorporation (including any certificate of designation filed with respect to any series of preferred stock).
Subject to the voting restrictions described above, holders of our common stock may adopt, amend or repeal our bylaws and/or alter certain provisions of our certificate of incorporation with the affirmative vote of the stockholders of at least 66 2/3% of the voting power of all of the then-outstanding shares of our capital stock entitled to vote generally in the election of directors, voting together as a single class, in addition to any vote of the holders of a class or series of our stock required by law or our certificate of incorporation. The provisions of our certificate of incorporation that may be altered only by the super-majority vote described above relate to:
· the number of directors on our board of directors, the classification of our board of directors and the term of the members of our board of directors;
· the limitations on removal of any of our directors described below under Anti-Takeover Effects of Certain Provisions of Delaware Law and Our Certificate of Incorporation and Bylaws;
· the ability of our directors to fill any vacancy on our board of directors by the affirmative vote of a majority of the directors then in office under certain circumstances;
· the ability of our board of directors to adopt, amend or repeal our bylaws and the super-majority vote of our stockholders required to adopt, amend or repeal our bylaws described above;
· the limitation on action of our stockholders by written action described below under Anti-Takeover Effects of Certain Provisions of Delaware Law and Our Certificate of Incorporation and Bylaws;
· the choice of forum provision described below under Choice of Forum;
· the limitations on director liability and indemnification described below under the heading Item 12. Indemnification of Directors and Officers; and
· the super-majority voting requirement to amend our certificate of incorporation described above.
Holders of our common stock do not have any conversion, redemption or preemptive rights pursuant to our organizational documents. In the event of our dissolution, liquidation or winding up, holders of our common stock are entitled to share ratably in any assets remaining after the satisfaction in full of the prior rights of creditors and the aggregate of any liquidation preference pursuant to the terms of any certificate of designation filed with respect to any series of preferred stock. The rights, preferences, and privileges of the holders of our 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.
All outstanding shares of our common stock are fully paid and non-assessable.
Preferred Stock
We are authorized to issue up to 40,000,000 shares of preferred stock, with a par value of $0.0001 per share. We may issue any class of preferred stock in any series. Our board of directors has the authority to establish and designate series, and to fix the number of shares included in each such series and to determine or alter for each such series, such voting powers, designation, preferences, and relative participating, optional, or other rights and such qualifications, limitations or restrictions thereof. Our board of directors is not restricted in repurchasing or redeeming such stock while there is any arrearage in the payment of dividends or sinking fund installments. Our board of directors is authorized to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. The number of authorized shares of preferred stock may be increased or decreased, but not below the number of shares thereof then outstanding, by the affirmative vote of the holders of a majority of the common stock, without a vote of the holders of the preferred stock, or of any series thereof, unless a vote of any such holders is required pursuant to the terms of any certificate of designation filed with respect to any series of preferred stock.
CDIs
In order for our shares of common stock in the form of CDIs to trade electronically on the ASX, we participate in the electronic transfer system known as the Clearing House Electronic Subregister System, or CHESS, operated by ASX Settlement and Transfer Corporation Pty Limited, or ASTC. ASTC provides settlement services for ASX markets to assist participants and issuers to understand the operation of the rules and procedures governing settlement facilities. The ASX Settlement Operating Rules form part of the overall listing and market rules which we are required to comply with as an entity listed on ASX.
CHESS is an electronic system which manages the settlement of transactions executed on ASX and facilitates the paperless transfer of legal title to ASX quoted securities. CHESS cannot be used directly for the transfer of securities of companies domiciled in certain jurisdictions outside of Australia, such as the United States. Accordingly, to enable our shares of common stock to be cleared and settled electronically through CHESS, we have issued and will continue to issue depositary interests called CDIs.
CDIs confer the beneficial ownership in the shares of common stock on the CDI holder, with the legal title to such shares held by CDN, a subsidiary of ASX, to act as our Australian depositary and issue CDIs.
A holder of CDIs who does not wish to have their trades settled in CDIs may request that their CDIs be converted into shares of common stock, in which case legal title to the shares of common stock will be transferred to the holder of CDIs and stock certificates representing the shares of common stock will be issued.
Anti-Takeover Effects of Certain Provisions of Delaware Law and Our Certificate of Incorporation and Bylaws
Certificate of Incorporation and Bylaws
Certain provisions of our certificate of incorporation and bylaws may be considered as having an anti-takeover effect, such as those provisions:
· providing for our board of directors to be divided into three classes with staggered three-year terms, with only one class of directors being elected at each annual meeting of our stockholders and the other classes continuing for the remainder of their respective three-year terms;
· authorizing our board of directors to issue from time to time any series of preferred stock and fix the voting powers, designation, powers, preferences and rights of the shares of such series of preferred stock;
· prohibiting stockholders from acting by written consent in lieu of a meeting;
· requiring advance notice of stockholder intention to put forth director nominees or bring up other business at a stockholders meeting;
· prohibiting stockholders from calling a special meeting of stockholders;
· requiring a 66 2/3% super-majority stockholder approval in order for stockholders to alter, amend or repeal certain provisions of our certificate of incorporation;
· requiring a 66 2/3% super-majority stockholder approval in order for stockholders to adopt, amend or repeal our bylaws;
· providing that, subject to the rights of the holders of any series of preferred stock to elect additional directors under specified circumstances, neither the board of directors nor any individual director may be removed without cause;
· creating the possibility that our board of directors could prevent a coercive takeover of the Company due to the significant amount of authorized, but unissued shares of our common stock and preferred stock;
· providing that, subject to the rights of the holders of any series of preferred stock, the number of directors shall be fixed from time to time exclusively by our board of directors pursuant to a resolution adopted by a majority of the total number of authorized directors; and
· providing that any vacancies on our board of directors under certain circumstances will be filled only by a majority of our board of directors then in office, even less than a quorum, and not by the stockholders.
Delaware Law
We are also subject to Section 203 of the Delaware General Corporation Law, which in general prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless:
· prior to that date, our board of directors approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder;
· upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of our voting stock outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding (but not the outstanding voting stock owned by the interested stockholder) those shares owned by (i) persons who are directors and also officers and (ii) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or
· on or subsequent to that date, the business combination is approved by our board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder.
In general, Section 203 defines an interested stockholder as an entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by any of these entities or persons.
The above-summarized provisions of the Delaware General Corporation Law and our certificate of incorporation and bylaws could make it more difficult to acquire us by means of a tender offer, a proxy contest or otherwise, or to remove incumbent officers and directors. These provisions are expected to discourage certain types of coercive takeover practices and takeover bids that our board of directors may consider inadequate and to encourage persons seeking to acquire control of us to first negotiate with our board of directors. We believe that the benefits of increased protection of our ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging takeover or acquisition proposals because, among other things, negotiation of these proposals could result in an improvement of their terms.
Preemptive Right Pursuant to Securities Purchase Agreements
Pursuant to securities purchase agreements, dated July 21, 2011 and February 8, 2012, between us and the purchasers party thereto, the purchasers have a preemptive right to purchase equity or equity-based securities we offer after the date of the applicable agreement through the first anniversary of the closing at which the applicable purchaser purchased our securities. Prior to our offering any equity or equity-based securities during this time, or within 30 days after the closing of any sale of such securities, we must offer to issue to the purchasers, on the terms we are offering the securities to third parties, an aggregate of 25% of the securities we are offering. The number of offered securities which each purchaser will have a right to subscribe for will be based on the purchasers pro rata portion of the aggregate number of common shares purchased under the applicable securities purchase agreement by all purchasers party thereto. If a purchaser fails to purchase its pro rata share of the securities subject to the preemptive right, then such holder will no longer have preemptive rights pursuant to the applicable securities purchase agreement for any subsequent placement of our securities. The preemptive right provided by each securities purchase agreement is subject to certain exceptions, including for securities issued pursuant to convertible securities issued prior to the date of the applicable securities purchase agreement, securities issued pursuant to certain commercial arrangements and securities issued under our Amended and Restated 2002 Stock Plan and our Amended and Restated 2011 Equity Incentive Plan.
Choice of Forum
Our certificate of incorporation provides that, unless we consent in writing otherwise, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for any (i) derivative action or proceeding brought on our behalf; (ii) action asserting a breach of fiduciary duty owed by any of our directors, officers or other employees or any of our stockholders; (iii) action asserting a claim pursuant to the Delaware General Corporation Law; or (iv) action asserting a claim that is governed by the internal affairs doctrine.
Listing
We have applied to list our common stock on the Nasdaq Capital Market under the symbol of SSH. Our shares of common stock in the form of CDIs are listed on the ASX under the symbol SHC.
Transfer Agent and Registrar
The transfer agent and registrar for transactions in our CDIs on the ASX is Link Market Services Limited, or Link. Links address is Level 12, 680 George Street, Sydney NSW 2000, Australia, and its telephone number is +61 2 8280 7111. If our application to list on the Nasdaq Capital Market is approved, we intend to appoint American Stock Transfer & Trust Company, LLC, or AST, to serve as our transfer agent with respect to transfers of shares of our common stock. ASTs address is 6201 15th Avenue, Brooklyn, New York 11219 and its telephone number is (800) 937-5449.
ITEM 12 INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our certificate of incorporation limits the liability of our directors to the fullest extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except for liability for any:
· breach of their duty of loyalty to us or our stockholders;
· act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;
· unlawful payment of dividends or redemption of shares as provided in Section 174 of the Delaware General Corporation Law; or
· transaction from which the directors derived an improper personal benefit.
These limitations of liability do not apply to liabilities arising under federal securities laws and do not affect the availability of equitable remedies such as injunctive relief or rescission.
Our bylaws provide that we will indemnify and advance expenses to our directors and officers to the fullest extent permitted by law or, if applicable, pursuant to indemnification agreements. They further provide that we may choose to indemnify our other employees or agents from time to time. Subject to certain exceptions and procedures,
our bylaws also require us to advance to any person who was or is a party, or is threatened to be made a party, to any proceeding by reason of the persons service as one of our directors or officers all expenses incurred by the person in connection with such proceeding.
Section 145(g) of the Delaware General Corporation Law and our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in connection with their services to us, regardless of whether our bylaws permit indemnification. We maintain a directors and officers liability insurance policy.
We entered into indemnification agreements with each of our directors and executive officers that provide, in general, that we will indemnify them to the fullest extent permitted by law in connection with their service to us or on our behalf and, subject to certain exceptions and procedures, that we will advance to them all expenses that they incur in connection with any proceeding to which they are, or are threatened to be, a party.
At present, there is no pending litigation or proceeding involving any of our directors or officers as to which indemnification is required or permitted, and we are not aware of any threatened litigation or proceeding that may result in a claim for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission this indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
ITEM 13 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See our consolidated financial statements beginning on page F-1.
ITEM 14 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 15 FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
See our consolidated financial statements beginning on page F-1.
(b) Exhibits
Refer to the Exhibit Index immediately following the signature page of this report, which is incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this amendment no. 4 to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.
|
SUNSHINE HEART, INC. | ||
|
| ||
Date: February 8, 2012 |
By: |
/s/ Jeffrey Mathiesen | |
|
|
Name: |
Jeffrey Mathiesen |
|
|
Title: |
Chief Financial Officer |
EXHIBIT INDEX
Exhibit No. |
|
Description |
3.1 |
|
Certificate of Incorporation, as amended.+ |
3.2 |
|
Amended and Restated Bylaws.+ |
10.1 |
|
Form of Indemnity Agreement between the registrant and each of its officers and directors.*+ |
10.2 |
|
Sunshine Heart, Inc. Amended and Restated 2002 Stock Plan.*+ |
10.3 |
|
Form of Notice of Stock Option Grant and Option Agreement for Amended and Restated 2002 Stock Plan.*+ |
10.4 |
|
Amended and Restated Sunshine Heart, Inc. 2011 Equity Incentive Plan.*+ |
10.5 |
|
Form of Stock Option Grant Notice and Option Agreement for 2011 Equity Incentive Plan.*+ |
10.6 |
|
Form of Senior Management Stock Option Grant Notice and Option Agreement for 2011 Equity Incentive Plan.*+ |
10.7 |
|
Form of Change in Control Agreement for the registrants executive officers.*+ |
10.8 |
|
Form of Warrant to Purchase Common Stock issued to investors pursuant to Securities Purchase Agreement dated September 15, 2010.+ |
10.9 |
|
Form of Warrant to Purchase Common Stock issued to Summer Street Research Partners.+ |
10.10 |
|
Form of Securities Purchase Agreement, dated July 21, 2011, between the registrant and the purchasers party thereto.+ |
10.11 |
|
First Amendment to Securities Purchase Agreement dated July 21, 2011.+ |
10.12 |
|
Form of Warrant to Purchase Common Stock issued to investors pursuant to Securities Purchase Agreement dated July 21, 2011.+ |
10.13 |
|
Form of Warrant to Purchase Common Stock issued to Matthew Dormer and Summer Street Research Partners.+ |
10.14 |
|
Employment Agreement, dated November 1, 2009, by and between the registrant and David A. Rosa.*+ |
10.15 |
|
Letter Agreement, dated August 3, 2004, between the registrant and WSP Trading Limited.*+ |
10.16 |
|
Lease Agreement, dated September 15, 2010, by and between the registrant and CSM Properties, Inc.+ |
10.17 |
|
License, Supply & Manufacturing Agreement, dated April 26, 2010, by and between the registrant and DSM PTG, Inc.#+ |
10.18 |
|
Lease Agreement, dated October 21, 2011, by and between the registrant and Silver Prairie Crossroads, LLC.+ |
10.19 |
|
Form of Securities Purchase Agreement, dated February 6, 2012. |
10.20 |
|
Form of Warrant to Purchase Common Stock issued to investors pursuant to Securities Purchase Agreement dated February 6, 2012. |
21 |
|
Subsidiaries of the registrant.+ |
* Indicates management contract or compensatory plan or arrangement.
+ Previously filed.
# Confidential treatment has been requested with respect to certain portions of this exhibit. The omitted portions have been filed separately with the Securities and Exchange Commission.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Sunshine Heart, Inc.
We have audited the accompanying consolidated balance sheets of Sunshine Heart, Inc. and subsidiary as of December 31, 2010 and 2009, and the related statements of operations, stockholders equity, and cash flows for each of the years then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Companys internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sunshine Heart, Inc. at December 31, 2010 and 2009, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Companys recurring losses from operations and projected future capital requirements raise substantial doubt about its ability to continue as a going concern. The financial statements do not contain any adjustments that might result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
September 30, 2011, except for Note 7 as to which the date is February 1, 2012
SUNSHINE HEART, INC. AND SUBSIDIARY
Consolidated Balance Sheets
|
|
Dec 31, |
|
Dec 31, |
|
September 30, |
| |||
Dollars in thousands, except per share amounts |
|
2010 |
|
2009 |
|
2011 |
| |||
|
|
|
|
|
|
(unaudited) |
| |||
Current assets |
|
|
|
|
|
|
| |||
Cash and cash equivalents |
|
$ |
12,350 |
|
$ |
7,028 |
|
$ |
10,344 |
|
Accounts receivable, net |
|
247 |
|
124 |
|
|
| |||
Other current assets |
|
182 |
|
88 |
|
191 |
| |||
Total current assets |
|
12,779 |
|
7,240 |
|
10,535 |
| |||
Property, plant and equipment |
|
120 |
|
145 |
|
121 |
| |||
TOTAL ASSETS |
|
$ |
12,899 |
|
$ |
7,385 |
|
$ |
10,656 |
|
|
|
|
|
|
|
|
| |||
Current liabilities |
|
|
|
|
|
|
| |||
Accounts payable |
|
$ |
696 |
|
$ |
230 |
|
$ |
968 |
|
Accrued salaries, wages, and other compensation |
|
114 |
|
84 |
|
310 |
| |||
Total current liabilities |
|
810 |
|
314 |
|
1,278 |
| |||
Total liabilities |
|
810 |
|
314 |
|
1,278 |
| |||
|
|
|
|
|
|
|
| |||
Stockholders equity |
|
|
|
|
|
|
| |||
Preferred stock as of September 30, 2011, December 31, 2010 and December 31, 2009, $0.0001 par value per share; authorized 40,000,000 shares |
|
|
|
|
|
|
| |||
Common stock as of September 30, 2011, December 31, 2010 and December 31, 2009, par value $0.0001 per share; authorized 100,000,000 shares; issued and outstanding 6,018,740, 5,063,968, and 2,695,392, respectively |
|
506 |
|
270 |
|
602 |
| |||
Additional paid-in capital |
|
59,581 |
|
47,822 |
|
67,690 |
| |||
Accumulated other comprehensive income: |
|
|
|
|
|
|
| |||
Foreign currency translation adjustment |
|
995 |
|
372 |
|
1,040 |
| |||
Accumulated deficit |
|
(48,993 |
) |
(41,393 |
) |
(59,954 |
) | |||
Total stockholders equity |
|
12,089 |
|
7,071 |
|
9,378 |
| |||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
12,899 |
|
$ |
7,385 |
|
$ |
10,656 |
|
See notes to the consolidated financial statements
SUNSHINE HEART, INC. AND SUBSIDIARY
Consolidated Statements of Operations
|
|
Year ended |
|
Nine months ended |
| ||||||||
|
|
Dec 31, |
|
Dec 31, |
|
September 30, |
|
September 30, |
| ||||
In thousands, except per share amounts |
|
2010 |
|
2009 |
|
2011 |
|
2010 |
| ||||
|
|
|
|
(unaudited) |
| ||||||||
Net sales |
|
$ |
407 |
|
$ |
224 |
|
$ |
|
|
$ |
354 |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating expenses |
|
|
|
|
|
|
|
|
| ||||
Selling, general and administrative |
|
2,598 |
|
2,232 |
|
3,250 |
|
1,537 |
| ||||
Research and development |
|
6,229 |
|
3,425 |
|
7,939 |
|
3,851 |
| ||||
Total operating expenses |
|
8,827 |
|
5,657 |
|
11,189 |
|
5,388 |
| ||||
Loss from operations |
|
(8,420 |
) |
(5,433 |
) |
(11,189 |
) |
(5,034 |
) | ||||
Interest income |
|
150 |
|
91 |
|
228 |
|
113 |
| ||||
Loss before income taxes |
|
(8,270 |
) |
(5,342 |
) |
(10,961 |
) |
(4,921 |
) | ||||
Income tax expense/(benefit) |
|
(670 |
) |
|
|
|
|
(670 |
) | ||||
Net loss |
|
$ |
(7,600 |
) |
$ |
(5,342 |
) |
$ |
(10,961 |
) |
$ |
(4,251 |
) |
|
|
|
|
|
|
|
|
|
| ||||
Basic and diluted loss per share |
|
$ |
(2.63 |
) |
$ |
(2.97 |
) |
$ |
(2.09 |
) |
$ |
(1.58 |
) |
Weighted average shares outstanding - basic and diluted |
|
2,885 |
|
1,798 |
|
5,249 |
|
2,695 |
|
See notes to the consolidated financial statements
SUNSHINE HEART, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders Equity
(In thousands) |
|
Outstanding |
|
Common |
|
Additional |
|
Accumulated |
|
Accumulated |
|
Stockholders |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance December 31, 2008 |
|
1,459 |
|
$ |
146 |
|
$ |
39,868 |
|
$ |
(477 |
) |
$ |
(36,051 |
) |
$ |
3,486 |
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net loss |
|
|
|
|
|
|
|
|
|
(5,342 |
) |
(5,342 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Foreign currency translation adjustment |
|
|
|
|
|
|
|
849 |
|
|
|
849 |
| |||||
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
(4,493 |
) | |||||
Stock based compensation |
|
|
|
|
|
128 |
|
|
|
|
|
128 |
| |||||
Issuance of common stock, net |
|
1,237 |
|
124 |
|
7,826 |
|
|
|
|
|
7,950 |
| |||||
Balance December 31, 2009 |
|
2,696 |
|
270 |
|
47,822 |
|
372 |
|
(41,393 |
) |
7,071 |
| |||||
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net loss |
|
|
|
|
|
|
|
|
|
(7,600 |
) |
(7,600 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Foreign currency translation adjustment |
|
|
|
|
|
|
|
623 |
|
|
|
623 |
| |||||
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
(6,977 |
) | |||||
Stock based compensation |
|
|
|
|
|
78 |
|
|
|
|
|
78 |
| |||||
Issuance of common stock, net |
|
2,368 |
|
236 |
|
11,681 |
|
|
|
|
|
11,917 |
| |||||
Balance December 31, 2010 |
|
5,064 |
|
506 |
|
59,581 |
|
995 |
|
(48,993 |
) |
12,089 |
| |||||
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net loss |
|
|
|
|
|
|
|
|
|
(10,961 |
) |
(10,961 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Foreign currency translation adjustment |
|
|
|
|
|
|
|
45 |
|
|
|
45 |
| |||||
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
(10,916 |
) | |||||
Stock based compensation |
|
|
|
|
|
555 |
|
|
|
|
|
555 |
| |||||
Issuance of common stock, net |
|
955 |
|
96 |
|
7,554 |
|
|
|
|
|
7,650 |
| |||||
Balance September 30, 2011 (unaudited) |
|
6,019 |
|
$ |
602 |
|
$ |
67,690 |
|
$ |
1,040 |
|
$ |
(59,954 |
) |
$ |
9,378 |
|
See notes to the consolidated financial statements
SUNSHINE HEART, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
|
|
Year ended |
|
Nine months ended |
| ||||||||
|
|
Dec 31, |
|
Dec 31, |
|
September 30, |
|
September 30, |
| ||||
(In thousands) |
|
2010 |
|
2009 |
|
2011 |
|
2010 |
| ||||
|
|
|
|
(unaudited) |
| ||||||||
|
|
|
|
|
|
|
|
|
| ||||
Reconciliation of net loss to net cash provided by (used in) operations |
|
|
|
|
|
|
|
|
| ||||
Net loss |
|
$ |
(7,600 |
) |
$ |
(5,342 |
) |
$ |
(10,961 |
) |
$ |
(4,251 |
) |
Adjustments to reconcile net loss to cash flows from operating activities: |
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization |
|
32 |
|
11 |
|
25 |
|
35 |
| ||||
Loss on disposal of equipment |
|
|
|
|
|
6 |
|
|
| ||||
Stock based compensation expense |
|
78 |
|
128 |
|
555 |
|
42 |
| ||||
Changes in asset and liabilities: |
|
|
|
|
|
|
|
|
| ||||
Accounts receivable |
|
(123 |
) |
(118 |
) |
259 |
|
(211 |
) | ||||
Other current assets |
|
(94 |
) |
(12 |
) |
(24 |
) |
(785 |
) | ||||
Accounts payable and accrued expenses |
|
496 |
|
(477 |
) |
480 |
|
67 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net cash used in operations |
|
(7,210 |
) |
(5,810 |
) |
(9,660 |
) |
(5,103 |
) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash flows used in investing activities: |
|
|
|
|
|
|
|
|
| ||||
Purchase of property and equipment |
|
(7 |
) |
(3 |
) |
(34 |
) |
(3 |
) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net cash used in investing activities |
|
(7 |
) |
(3 |
) |
(34 |
) |
(3 |
) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash flows provided by financing activites: |
|
|
|
|
|
|
|
|
| ||||
Net proceeds from the sale of common stock |
|
11,917 |
|
7,950 |
|
7,650 |
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net cash provided by financing activities |
|
11,917 |
|
7,950 |
|
7,650 |
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Effect of exchange rate changes on cash |
|
623 |
|
849 |
|
38 |
|
139 |
| ||||
Net increase (decrease) in cash and cash equivalents |
|
5,322 |
|
2,986 |
|
(2,006 |
) |
(4,967 |
) | ||||
Cash and cash equivalents - beginning of period |
|
7,028 |
|
4,042 |
|
12,350 |
|
7,028 |
| ||||
Cash and cash equivalents - end of period |
|
$ |
12,350 |
|
$ |
7,028 |
|
$ |
10,344 |
|
$ |
2,061 |
|
See notes to the consolidated financial statements
SUNSHINE HEART, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(in thousands, except share and per share data)
Note 1 - Nature of Business and Significant Accounting Policies
Nature of Business: Sunshine Heart (the Company) was founded in November 1999 and incorporated in Delaware in August 2002. We are headquartered in Eden Prairie, MN and have a wholly owned subsidiary, Sunshine Heart Company Pty Ltd, located in St Leonards, New South Wales, Australia. We are a medical device company developing innovative technologies for cardiac and coronary disease. The companys primary product, the C-Pulse® Heart Assist System, is an implantable, non-blood contacting, heart assist therapy for the treatment of moderate to severe heart failure which can be implanted using a minimally invasive procedure. C-Pulse is designed to relieve the symptoms of heart failure through the use of counter-pulsation technology by enabling an increase in cardiac output, an increase in coronary blood flow, and a reduction in the hearts pumping load. The Company has received approval from the U.S. Food and Drug Administration to conduct a U.S. feasibility clinical trial with the C-Pulse System. Our shares of common stock in the form of CHESS Depositary Interests (CDIs) have been publicly traded in Australia on the Australian Securities Exchange (ASX) since September 2004.
Going Concern: The Companys financial statements have been prepared and presented on a basis assuming it continues as a going concern.
During the years ended December 31, 2010 and 2009, and the nine months ended September 30, 2011, the Company incurred losses from operations and net cash outflows from operating activities as disclosed in the consolidated statements of operations and cash flows, respectively. At September 30, 2011, we had an accumulated deficit of $60.0 million and we expect to incur losses for the foreseeable future. To date, we have been funded by private and public equity financings. Although we believe that we will be able to successfully fund our operations, there can be no assurance that we will be able to do so or that we will ever operate profitably.
The Companys ability to continue as a going concern is dependent on the Companys ability to raise additional capital based on the achievement of existing milestones as and when required. Should the future capital raising not be successful, the Company may not be able to continue as a going concern. Furthermore, the ability of the Company to continue as a going concern is subject to the ability of the Company to develop and successfully commercialize the product being developed. If the Company is unable to obtain such funding of an amount and timing necessary to meet its future operational plans, or to successfully commercialize its intellectual property, the Company may be unable to continue as a going concern. No adjustments have been made relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company not continue as a going concern.
Basis of Presentation: The accompanying consolidated financial statements include the accounts of Sunshine Heart, Inc. and its wholly-owned subsidiary, Sunshine Heart Company Pty Ltd. (collectively, Sunshine Heart or the Company). All inter-company accounts and transactions between consolidated entities have been eliminated.
Unaudited Interim Consolidated Financial Information: The interim balance sheet as of September 30, 2011, statements of operations and cash flows for the nine months ended September 30, 2011 and 2010 and stockholders equity (deficit) for the nine months ended September 30, 2011 and related interim information contained in the notes to these financial statements are unaudited. In the opinion of management, such unaudited interim consolidated information has been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and includes all adjustments consisting of normal recurring accruals necessary for the fair presentation of this interim information when read in conjunction with the audited financial statements and notes thereto. Results for the nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011 or any other interim period or for any other future year.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
Fair Value of Financial Instruments: Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities. We believe that the carrying amounts of the financial instruments approximate their respective current fair values due to their relatively short maturities.
Pursuant to the requirements of the Fair Value Measurements and Disclosures Topic of the FASB Codification, the Companys financial assets and liabilities measured at fair value on a recurring basis are classified and disclosed in one of the following three categories:
Level 1: Financial instruments with unadjusted quoted prices listed on active market exchanges.
Level 2: Financial instruments lacking unadjusted, quoted prices from active market exchanges, including over the counter traded financial instruments. The prices for the financial instruments are determined using prices for recently traded financial instruments with similar underlying terms as well as directly or indirectly observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3: Financial instruments that are not actively traded on a market exchange. This category includes situations where there is little, if any, market activity for the financial instrument. The prices are determined using significant unobservable inputs or valuation techniques.
All cash and cash equivalents are considered Level 1 measurements for all periods presented. We do not have any financial instruments classified as Level 2 or Level 3 and there were no movements between these categories.
Cash and Cash Equivalents: Cash and cash equivalents consist of cash, money market funds and term deposits with original maturities of three months or less. The carrying value of these instruments approximates fair value. The balances, at times, may exceed federally insured limits. We have not experienced any losses on our cash and cash equivalents.
Accounts Receivable: Accounts receivable are unsecured, are recorded at net realizable value, and do not bear interest. We make judgments as to our ability to collect outstanding receivables based upon significant patterns of uncollectiblity, historical experience, and managements evaluation of specific accounts and will provide an allowance for credit losses when collection becomes doubtful. The Company performs credit evaluations of its customers financial condition on an as-needed basis. Payment is generally due 30 days from the invoice date and accounts past 30 days are individually analyzed for collectability. When all collection efforts have been exhausted, the account is written off against the related allowance. No allowance for doubtful accounts was considered necessary as of September 30, 2011, December 31, 2010 or December 31, 2009.
Other Current Assets: Other current assets represent prepayments and deposits made by the Company.
Property, Plant and Equipment: Property and equipment is stated at cost less accumulated depreciation. Depreciation is computed based upon the estimated useful lives of the respective assets. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the assets. Repairs and maintenance costs are expensed as incurred. Major betterments and improvements, which extend the useful life of the item, are capitalized and depreciated. The cost and accumulated depreciation of property, plant and equipment retired or otherwise disposed of are removed from the related accounts, and any residual values are charged or credited to expenses. Depreciation expense has been calculated using the following estimated useful lives:
Office furniture and equipment |
|
10-15 years |
|
Computer equipment |
|
3-4 years |
|
Laboratory and research equipment |
|
3-15 years |
|
Depreciation expense was $32, $11, $25, and $35 for the years ended December 31, 2010 and 2009, and for the nine months ended September 30, 2011 and 2010, respectively.
Impairment of Long-lived Assets: Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the impairment tests indicate that the carrying value of the asset is greater than the expected undiscounted cash flows to be generated by such asset, an impairment loss would be recognized. The impairment loss is determined as the amount by which the carrying value of such asset exceeds its fair value. We generally measure fair value by considering sale prices for similar assets or by discounting estimated future cash flows from such assets using an appropriate discount rate. Assets to be disposed of are carried at the lower of their carrying value or fair value less costs to sell. Considerable management judgment is necessary to estimate the fair value of assets, and accordingly, actual results could vary significantly from such estimates. There have been no impairment losses for long-lived assets, for the years ended December 31, 2010 and 2009, or for the nine months ended September 30, 2011.
Revenue Recognition: We recognize revenue when (i) persuasive evidence of a customer arrangement exists; (ii) the price is fixed or determinable and free of contingencies or uncertainties; (iii) collectability is reasonably assured; and (iv) product delivery has occurred, which is when product title transfers to the customer, or services have been rendered. Sales are not conditional based on customer acceptance provisions or installation obligations. Our C-Pulse Heart Assist System is not approved for commercial sale. Our revenue consists solely of sales of the C-Pulse to hospitals and clinics under contract in conjunction with our clinical trials. For clinical trial implant revenue, the product title generally transfers on the date the product is implanted. We do not charge hospitals and clinics for
shipping. We expense shipping costs at the time we report the related revenue and record them in cost of sales.
Foreign Currency Translation and Transactions: Foreign denominated monetary assets and liabilities are translated at the rate of exchange prevailing at the balance sheet date. Results of operations are translated using the average rates prevailing during the reporting period. The translation adjustment has not been included in determining the Companys net loss, but has been reported separately and is accumulated in a separate component of equity. Effective January 1, 2011, we concluded that the functional currency of our US based parent company is the US dollar. Prior to that date the functional currency of both the US based parent company and the Companys Australian subsidiary was the Australian dollar. For financial reporting purposes, the reporting currency of the company is the US dollar. When a transaction is denominated in a currency other than the entitys functional currency, the Company recognizes a transaction gain or loss in net earnings.
Comprehensive Income (Loss): The components of comprehensive income (loss) include net income (loss) and the effects of foreign currency translation adjustments.
Stock-Based Compensation: The Company recognizes all share-based payments, including grants of stock options, to in the income statement as an operating expense, based on their fair value over the requisite service period.
The Company computes the estimated fair values of stock options using the Black-Scholes option pricing model. No tax benefit has been recorded due to the full valuation allowance on deferred tax assets that the Company has recorded.
Stock-based compensation expense is based on awards ultimately expected to vest and is reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Equity instruments issued to non-employees, and for services and goods are shares of the Companys common stock, warrants or options to purchase shares of the Companys common stock. These shares, warrants or options are either fully-vested and exercisable at the date of grant or vest over a certain period during which services are provided. The Company expenses the fair market value of these securities over the period in which the related services are received.
See Note 3 for further information regarding the assumptions used to calculate the fair value of share-based compensation.
Income Taxes: Deferred income taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards. Deferred tax liabilities are recognized for taxable temporary differences, which are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Net Loss per Share: Basic net loss attributable to common stockholders, on a per share basis, is computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Shares issued during the period and shares reacquired during the period are weighted for the portion of the period that they were outstanding. The computation of diluted earnings per share, or EPS, is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued and computed in accordance with the treasury stock method. In addition, in computing the dilutive effect of convertible securities, the numerator is adjusted to add back the after-tax amount of interest recognized in the period associated with any convertible debt. Shares reserved for outstanding stock warrants and options totaling 1,310,987, 78,790, 2,216,615 and 174,790 for the years ended December 31, 2010 and 2009 and the nine months ended September 30, 2011 and 2010, respectively, were excluded from the computation of loss per share as their effect was antidilutive due to the Companys net loss in each of those years.
Research and Development: Research and development expenses consist primarily of development personnel and non-employee contractor costs related to the development of new products and services, enhancement of existing products and services, quality assurance and testing. The Company incurred research and development expenses of $6,229, $3,425, $7,939, and $3,851 for the years ended December 31, 2010 and 2009, and for the nine months ended September 30, 2011 and 2010, respectively.
Subsequent Events: The Company evaluates events through the date the financial statements are filed for events requiring adjustment to or disclosure in the financial statements. See Note 7, Subsequent Events for additional information.
New Accounting Pronouncements: In June 2011, the FASB issued additional guidance for the presentation of comprehensive income. The new guidance changes the way other comprehensive income (OCI) appears within the financial statements. Companies will be required to show net income, OCI and total comprehensive income in one continuous statement or in two separate but consecutive statements. Components of OCI may no longer be presented solely in the statement of changes in shareholders equity. Any reclassification between OCI and net income will be presented on the face of the financial statements. The new guidance is effective for the Company beginning January 1, 2012. The adoption of the new guidance will not impact the measurement of net income or other comprehensive income.
In January 2010, FASB issued Accounting Standards Update, or ASU, 2010-06, Improving Disclosure about Fair Value Measurements, or ASU 2010-06. ASU 2010-06 revises two disclosure requirements concerning fair value measurements and clarifies two others. It requires separate presentation of significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such transfers. It also requires the presentation of purchases, sales, issuances and settlements within Level 3 on a gross basis rather than a net basis. The amendments also clarify that disclosures should be disaggregated by class of asset or liability and that disclosures about inputs and valuation techniques should be provided for both recurring and non-recurring fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for certain Level 3 activity disclosure requirements that will be effective or reporting periods beginning after December 15, 2010.
In May 2011, FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. This accounting update generally aligns the principles for fair value measurements and the related disclosure requirements under U.S. GAAP and International Financial Reporting Standards. From a U.S. GAAP perspective, the amendments are largely clarifications, but some could have a significant effect on certain companies. A number of new disclosures also are required. Except for certain disclosures, the guidance applies to public and nonpublic companies and is to be applied prospectively. For public companies and nonpublic companies, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early adoption by public companies is not permitted. Nonpublic companies may apply the amendments early, but no earlier than for interim periods beginning after December 15, 2011.
Note 2 - Balance Sheet Information
Property, Plant and Equipment
Property, plant and equipment were as follows:
|
|
Dec. 31, |
|
Dec. 31, |
|
September 30, |
| |||
|
|
|
|
|
|
(unaudited) |
| |||
Library |
|
$ |
1 |
|
$ |
1 |
|
$ |
1 |
|
Office Furniture & Fixtures |
|
90 |
|
79 |
|
91 |
| |||
Leasehold Improvements |
|
78 |
|
69 |
|
76 |
| |||
Software |
|
28 |
|
25 |
|
35 |
| |||
Production Equipment |
|
179 |
|
157 |
|
173 |
| |||
Computer Equipment |
|
65 |
|
51 |
|
84 |
| |||
Total |
|
$ |
441 |
|
$ |
382 |
|
$ |
460 |
|
Accumulated Depreciation |
|
(321 |
) |
(237 |
) |
(339 |
) | |||
|
|
$ |
120 |
|
$ |
145 |
|
$ |
121 |
|
Note 3 - Equity
Private Placement
In August and September 2009, the Company placed 1,225,825 shares of common stock (in the form of CDIs) for proceeds, net of transaction costs, of $7,915.
In November and December, 2010, the Company placed 2,368,576 shares of common stock (in the form of CDIs) for proceeds, net of transaction costs, of $11,917.
In January 2011, the Company placed 17,858 shares of common stock (in the form of CDIs) for proceeds, net of transaction costs, of $99.
In July 2011, the Company placed 572,222 shares of common stock (in the form of CDIs) for proceeds, net of transaction costs, of $4,597.
In September 2011, the Company placed 349,444 shares of common stock (in the form of CDIs) for proceeds, net of transaction costs, of $2,838.
Stock Options
The Company recognized share-based compensation expense related to stock options and grants of common stock to employees, directors and consultants of $78, and $128 during the years ended December 31, 2010 and 2009, respectively, and $555 and $42 during the nine month periods ended September 30, 2011 and 2010, respectively. The following table summarizes the stock-based compensation expense which was recognized in the Consolidated Statements of Operations for the years ended December 31, 2010 and 2009 and the nine months ended September 30, 2011 and 2010:
|
|
Dec 31, 2010 |
|
Dec 31, 2009 |
|
September 30, 2011 |
|
September 30, 2010 |
| ||||
|
|
|
|
|
|
(unaudited) |
| ||||||
Selling, general and administrative |
|
$ |
55 |
|
$ |
96 |
|
$ |
385 |
|
$ |
25 |
|
Research and development |
|
23 |
|
32 |
|
170 |
|
17 |
| ||||
Total |
|
$ |
78 |
|
$ |
128 |
|
$ |
555 |
|
$ |
42 |
|
As of September 30, 2011 and December 31, 2010 the total compensation cost related to all nonvested awards not yet recognized was $3,552 and $94, respectively. This amount is expected to be recognized over the remaining weighted-average period of 1.11 years as of September 30, 2011 and 1.19 years as of December 31, 2010.
The Company has granted stock options to certain employees and directors under the Amended and Restated 2002 Stock Plan and its 2011 Equity Incentive Plan (collectively the Plans). The Plans are designed to assist in the motivation and retention of employees and to recognize the importance of employees to the long-term performance and success of the Company. The Company has also granted stock options to certain consultants outside of the Plans. The majority of the options to purchase common stock vest on the anniversary of the date of grant, which ranges from one to four years. Additionally, certain stock options vest upon the closing price of the Companys common stock reaching certain minimum levels, as defined in the agreements. Finally, certain other stock options vest upon the meeting of certain Company milestones such as the signing of specific agreements and the completion of the Companys anticipated listing on a U.S. stock exchange. As of September 30, 2011, the Company expects that all such market and performance conditions will be met. Share-based compensation expense related to these awards is recognized on a straight-line basis over the related vesting term. It is the Companys policy to issue new shares upon the exercise of options.
The following is a summary of the Plan and non-Plan stock option activity during the year ended December 31, 2010 and 2009, and for the nine months ended September 30, 2011.
|
|
Options |
|
Weighted |
|
Remaining |
|
Aggregate |
| ||
Outstanding, December 31, 2008 |
|
147,241 |
|
$ |
39.71 |
|
|
|
|
| |
2009 Grants |
|
|
|
|
|
|
|
|
| ||
2009 Exercises |
|
10,945 |
|
3.10 |
|
|
|
|
| ||
2009 Forfeitures/expiration |
|
57,507 |
|
49.12 |
|
|
|
|
| ||
Outstanding, December 31, 2009 |
|
78,789 |
|
37.94 |
|
|
|
|
| ||
2010 Grants |
|
50,000 |
|
10.72 |
|
|
|
|
| ||
2010 Exercises |
|
|
|
|
|
|
|
|
| ||
2010 Forfeitures/expiration |
|
2,091 |
|
36.70 |
|
|
|
|
| ||
Outstanding, December 31, 2010 |
|
126,698 |
|
28.00 |
|
7.26 |
|
$ |
819 |
| |
Exercisable at December 31, 2010 |
|
90,427 |
|
6.94 |
|
6.54 |
|
819 |
| ||
2011 Grants (unaudited) |
|
610,590 |
|
6.10 |
|
|
|
|
| ||
2011 Exercises (unaudited) |
|
969 |
|
12.95 |
|
|
|
|
| ||
2011 Forfeitures/expiration (unaudited) |
|
28,231 |
|
10.33 |
|
|
|
|
| ||
Outstanding, September 30, 2011 (unaudited) |
|
708,088 |
|
$ |
9.93 |
|
1.11 |
|
$ |
1,485 |
|
Exercisable at September 30, 2011 (unaudited) |
|
143,729 |
|
$ |
20.86 |
|
3.44 |
|
$ |
161 |
|
The aggregate intrinsic value is defined as the difference between the market value of the Companys common stock (based on the trading price of the Companys CDIs on ASX) as of the end of the period and the exercise price of the in-the-money stock options. The total intrinsic value of stock options exercised during the years ended December 31, 2010 and 2009 and for the nine months ended September 30, 2011 and 2010 was $0, $48, $4 and $0, respectively. Of the 564,359 non vested options, 56 are held by consultants, the majority of which vest in 2012. Total cash proceeds from exercised options were $0, $34, $1, and $0 for the years ended December 31, 2010 and 2009 and the nine months ended September 30, 2011 and 2010, respectively.
The weighted-average fair value of stock options granted during the year December 31, 2010 was $10.72. No options were issued during 2009. During the nine months ended September 30, 2011, the weighted-average fair value of stock options granted was $6.10.
The fair value of each stock option is estimated at the grant date using the Black-Scholes option pricing model. The Company has not historically paid dividends to its shareholders, and, as a result assumed a dividend yield of 0%. The risk free interest rate is based upon the rates of Australian bonds with a term equal to the expected term of the option. The expected volatility is based upon the historical price of the Companys CDIs. The expected term of the stock options to purchase common stock is based upon the outstanding contractual term of the stock option on the date of grant. The Company used the following weighted-average assumptions in calculating the fair value of options granted during the years ended December 31 , 2010 and 2009, and for the nine months ended September 30, 2011 and 2010.
|
|
Year ended December 31 |
|
Nine Months ended September 30, |
| ||||
|
|
2010 |
|
2009 |
|
2011 |
|
2010 |
|
Expected dividend yield |
|
0 |
% |
N/A |
|
0 |
% |
N/A |
|
Risk-free interest rate |
|
4.97 |
% |
N/A |
|
1.43 |
% |
N/A |
|
Expected volatility |
|
65 |
% |
N/A |
|
100 |
% |
N/A |
|
Expected life (in years) |
|
5 |
|
N/A |
|
6.5 |
|
N/A |
|
Warrants
On November 10, 2010, the Company issued 357,050 warrants at an exercise price of AU$6.40 and a term of 4 years as part of the private placements previously described.
Attached to these warrants is a requirement to file a Form 10-12G registering the Companys common stock with the Securities and Exchange Commission and file an application to list on a US exchange by September 30, 2011. In the event the Company does not satisfy these requirements, the number of warrants issued in the placement will increase by 10%.
Also, as part of the private placements completed during 2010, the Company issued 850,737 warrants to purchase common stock at an exercise price of AU$6.40 per share. The warrants have a stated life of four years.
As part of the private placement completed during 2011, the Company issued 10,622 warrants to purchase common stock at an exercise price of AU$8.20 per share and 276,500 warrants to purchase common stock at an exercise price of AU$11.20 per share. The warrants have a stated life of four years.
Additional warrants to purchase common stock were issued in connection with the issuance of $800 convertible promissory notes in June 2004, which were issued as a bridging loan prior to the initial public offering of the Companys CDIs on the ASX. These warrants were issued to related party entities affiliated with certain directors of the Company and to one unrelated party. The warrants entitle the holders to receive 16,000 shares at an exercise price of AU$5.00. The warrants have an exercise period of ten years and expire in June 2014. No warrants were exercised during the year.
During the nine months ended September 30, 2011, 14,282 warrants were exercised at a price of AU$6.40 for total proceeds of $99.
Note 4 - Income Taxes
The components of income tax expense for the years ended December 31, 2010 and 2009, and the nine months ended September 30, 2011, consist of the following:
|
|
December 31, |
|
December 31, |
|
September 30, |
|
|
|
|
|
|
|
(unaudited) |
|
Income tax provision: |
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
U.S. and state |
|
|
|
|
|
|
|
Foreign |
|
(670 |
) |
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
U.S. and state |
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
|
Total income tax expense |
|
(670 |
) |
|
|
|
|
Actual income tax expense differs from statutory federal income tax benefit for the years ended December 31, 2010 and 2009 and the nine months ended September 30, 2011 as follows:
|
|
December 31, |
|
December 31, |
|
September 30, |
|
|
|
|
|
|
|
(unaudited) |
|
Statutory federal income tax benefit |
|
(2,812 |
) |
(1,816 |
) |
(3,726 |
) |
State tax benefit, net of federal taxes |
|
(417 |
) |
(259 |
) |
(595 |
) |
Foreign tax |
|
225 |
|
199 |
|
147 |
|
R&D tax credit rebate |
|
(670 |
) |
|
|
|
|
Nondeductible expenses |
|
|
|
|
|
(4 |
) |
Valuation allowance increase |
|
3,033 |
|
1,787 |
|
3,999 |
|
Other |
|
(29 |
) |
89 |
|
179 |
|
Total income tax expense |
|
(670 |
) |
|
|
|
|
Deferred taxes as of December 31, 2010 and 2009, and September 30, 2011, consist of the following:
|
|
December 31, |
|
December 31, |
|
September 30, |
|
|
|
|
|
|
|
(unaudited) |
|
Deferred tax assets (liabilities): |
|
|
|
|
|
|
|
Accrued expenses |
|
120 |
|
84 |
|
153 |
|
Stock based compensation |
|
385 |
|
332 |
|
487 |
|
Capitalized patent costs |
|
140 |
|
132 |
|
130 |
|
Other |
|
7 |
|
7 |
|
8 |
|
Net operating losses |
|
16,210 |
|
11,852 |
|
20,644 |
|
|
|
16,862 |
|
12,407 |
|
21,422 |
|
Less: valuation allowance |
|
(16,862 |
) |
(12,407 |
) |
(21,422 |
) |
|
|
|
|
|
|
|
|
As of September 30, 2011, we had U.S. net operating loss (NOL) carryforwards of approximately $11,004 for U.S. income tax purposes, which expire in 2023 through 2031, and NOLs in the Commonwealth of Australia of approximately $52,670 which we can carry forward indefinitely. U.S. net operating loss carryforwards cannot be used to offset taxable income in foreign jurisdictions. In addition, future utilization of net operating loss carryforwards in the U.S. may be subject to certain limitations under Section 382 of the Internal Revenue Code. This section generally relates to a 50 percent change in ownership of a company over a three-year period. No formal study has been prepared as of the balance sheet date to determine any applicable limitations on the utilization of the U.S. net operating losses.
We received a $670 fully refundable research and development tax credit in 2010, determined as a combined average of 44% of qualified research and development expenditures of our Australian subsidiary for its tax period ended June 30, 2010. The Australian research and development tax credit is paid as a refundable credit to small and medium enterprises for tax years ending on or before June 30, 2011, when total research and development expenses of the Australian subsidiary are less than A$2 million for the tax period. If total eligible research and development expenses exceed A$2 million, the tax credit is instead applied as a carryforward reduction against future income taxes. We have not completed the Australian tax return for the period ended June 30, 2011, and cannot be assured that our total eligible research and development expenses will be less than A$2 million. Therefore, we have reflected $0 net benefit related to the research and development credit for 2011.
We provide for a valuation allowance when it is more likely than not that we will not realize a portion of the deferred tax assets. We have established a valuation allowance for U.S. and foreign deferred tax assets due to the uncertainty that enough taxable income will be generated in those taxing jurisdictions to utilize the assets. Therefore, we have not reflected any benefit of such deferred tax assets in the accompanying financial statements. For the years ended December 31, 2010 and 2009, and the nine months ended September 30, 2011, the valuation allowance increased by $4,455, $4,663 and $4,560, respectively. Changes in the valuation allowance do not equal the amounts reflected in the statutory rate reconciliation due to fluctuating currency exchange rates.
The Company has adopted accounting guidance related to uncertain tax positions. This accounting guidance prescribes a recognition threshold and measurement attribute for recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The adoption of uncertain tax position guidance did not have a material impact on the Companys consolidated financial statements. Additionally, the adoption of the guidance had no impact on retained earnings. The Company had no material uncertain tax positions as of September 30, 2011, December 31, 2010 or December 31, 2009.
We recognize interest and penalties on unrecognized tax benefits as well as interest received from favorable tax settlements within income tax expense. Upon adoption of this guidance, we recognized no interest or penalties related to uncertain tax positions. During the years ended December 31, 2010 and 2009, and the nine months ended September 30, 2011, we recorded no accrued interest or penalties related to uncertain tax positions.
The fiscal tax years ended June 30, 2007 through June 30, 2011 remain open to examination by the Internal Revenue Service. For the states of California and Minnesota, the fiscal tax year ended June 30, 2006 is also still open to examination. Additionally, the returns of the Companys Australian subsidiary are subject to examination by Australian tax authorities for the fiscal tax years ended June 30, 2007 through June 30, 2011.
Note 5 Commitments and Contingencies
Leases
We lease office space under non-cancelable operating leases that expire at various times through September 2012. Rent expense related to operating leases was approximately $186, $151, $176 and $129 for the years ended December 31, 2010 and 2009, and the nine months ended September 30, 2011 and 2010, respectively. Future minimum lease payments under non-cancelable operating leases as of September 30, 2011 were approximately $59 through December 31, 2011, and $99 for the year ending December 31, 2012. At September 30, 2011 we did not have any significant lease obligation beyond 2012. See Note 7 for additional discussion.
Employee Benefits
All Australian employees are entitled to varying levels of benefits on retirement, disability or death. The superannuation plans provide accumulated benefits. Employees contribute to the plans at various percentages of their wages and salaries. Contributions by the Company of up to 9% of employees wages and salaries are legally enforceable in Australia. For the years ended December 31, 2010 and 2009, and for the nine months ended September 30, 2011 and 2010, the Company incurred expense of $64, $57, $64, and $44, respectively.
Note 6 Related Party Transaction
During the year ended December 31, 2010 and 2009, and the nine month periods ended September 30, 2011 and 2010, we paid $4, $5, $0, and $4 to SCP Technology and Growth Pty Limited, a company controlled by a director of our Australian subsidiary, for the provision of intellectual property and patent services. There were no amounts outstanding to this entity at September 30, 2011 or December 31, 2010. At December 31, 2009, we had outstanding accounts payable of $5 due to the related party. In September 2011, we sold 2,875,000 shares of our common stock to Jeffrey Mathiesen, our Chief Financial Officer, at the price of A$0.04 per share as part of a private placement.
Note 7 Subsequent Events
On October 21, 2011 we entered into a lease for a 23,000 square foot facility in Eden Prairie, Minnesota. The lease period commenced December 1, 2011 and extends through March 31, 2016. This facility will house substantially all of our functional areas and will replace our current corporate headquarters. We expect to move our operations to this facility in late December 2011. Monthly rent and electricity for this facility total approximately $21,000.
On January 24, 2012, the board of directors declared a 1-for-200 reverse stock split and a corresponding inverse change in the transmutation ratio of Chess Depositary Instruments (CDIs) trading on the ASX in Australia such that one CDI will represent 1/200th of a share. The reverse split and change in transmutation ratio became effective for trading on the ASX on January 30, 2012. All share and per share data included in the consolidated financial statements and accompanying notes have been adjusted to reflect this reverse stock split.
Note 8 Segment and Geographic Information
The Company has one reportable segment, cardiac and coronary disease products. The Companys geographic regions include the United States and Australia.
Revenue earned relating to reimbursement of clinical trials is earned primarily in the United States. Interest income is primarily earned in Australia.
Long-lived assets are located primarily in Australia.
Exhibit 10.19
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (this Agreement), dated as of February 6, 2012, is made by and among SUNSHINE HEART, INC., a Delaware corporation, with its principal offices at 12988 Valley View Road, Eden Prairie, Minnesota 55344 (the Company), and the investors (individually, a Purchaser and collectively, the Purchasers) listed on the Schedule of Purchasers attached hereto as EXHIBIT A (the Schedule of Purchasers).
RECITALS
The Company and each Purchaser is executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by Section 4(2) of the Securities Act of 1933, as amended (the Securities Act), and Rule 506 of Regulation D (Regulation D) as promulgated by the United States Securities and Exchange Commission (the SEC) under the Securities Act; and in reliance upon, and in conformity with, the requirements of Regulation S (Regulation S) under the Securities Act.
On the terms and conditions stated in this Agreement, the Company wishes to sell and the Purchasers wish to purchase shares of the Companys Common Stock, par value US$0.0001 per share (the Common Shares) and warrants, in substantially the form attached hereto as EXHIBIT B (the Warrants), to acquire up to that number of additional shares of the Companys Common Stock equal to thirty percent (30%) of the number of Common Shares purchased by such Purchaser (rounded down to the nearest whole share)(the shares of the Companys Common Stock issuable upon exercise of or otherwise pursuant to the Warrants collectively are referred to herein as the Warrant Shares which, together with the Common Shares and the Warrants are collectively referred to herein as the Securities). The Common Shares and Warrant Shares are to be issued to CHESS Depositary Nominees Pty Ltd. (CDN) which will hold legal title to the Common Shares and Warrant Shares on behalf of the Purchasers for their benefit through the issue of CHESS Depositary Interests (CDIs) that will be quoted on the stock market of the Australian Securities Exchange (the ASX). Two hundred (200) CDIs will be issued for each one (1) Common Share purchased under this Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises, representations, warranties, and covenants hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1. PURCHASE AND SALE OF COMMON SHARES AND ISSUANCE OF WARRANTS.
(a) Purchase Price. The Company hereby agrees to issue and sell to the Purchasers and, subject to and in reliance upon the representations, warranties, covenants, terms and conditions hereof, at the Closing (as hereinafter defined), the Purchasers, severally and not jointly, agree to purchase from the Company the number of Common Shares set forth opposite such Purchasers name on the Schedule of Purchasers at a purchase price of A$8.00 (in Australian dollars) per share (the Per Share Purchase Price).
(b) Closing. Subject to the satisfaction (or waiver) of the conditions set forth in Sections 6 and 7 below, the closing of the sale and purchase of Securities under this Agreement in an amount resulting in net proceeds to the Company of no less than One Million Six Hundred Thousand United States Dollars ($1,600,000) (the Closing) shall take place on February 7, 2012 (or such other date and time as is mutually agreed to by the Company and the Purchasers). The Closing shall be held at the offices of Honigman Miller Schwartz and Cohn LLP at 350 East Michigan Avenue, Suite 300, Kalamazoo, MI 49007 at 10:00 a.m., local time, or at such other time and place, or remotely by facsimile or other electronic transmission, as the Company and the Purchasers shall agree. At the Closing, the Company shall issue and sell to
each Purchaser, and each Purchaser severally, but not jointly, shall purchase from the Company, that number of Common Shares as is set forth opposite such Purchasers name in column (3) on the Schedule of Purchasers. The Common Shares shall be issued to CDN and the Purchasers shall be issued a corresponding number of CDIs at a rate of two hundred (200) CDIs for each one (1) Common Share. In addition, subject to the satisfaction (or waiver) of the conditions set forth in Sections 6 and 7 below, at the Closing each Purchaser shall receive a Warrant to purchase a number of Warrant Shares as indicated in column (4) on the Schedule of Purchasers. The Warrants shall have an exercise price equal to A$11.20 (in Australian dollars), subject to applicable adjustments.
(c) Form of Payment. Except as may otherwise be agreed to among the Company and one or more of the Purchasers, on the date of the Closing, each Purchaser shall wire its Subscription Amount (as defined below) in United States Dollars (determined using the rate of conversion from Australian Dollars to United States Dollars published in the Wall Street Journal (U.S.) on the date of this Agreement) and in immediately available funds, to the account set forth on EXHIBIT C hereto. On the date of the Closing, the Company shall irrevocably instruct its transfer agent to deliver to CDN one or more stock certificates, free and clear of all restrictive and other legends (except as expressly provided in Section 2(i) hereof), evidencing the number of Common Shares each Purchaser is purchasing at the Closing, as is set forth on such Purchasers signature page to this Agreement next to the heading Number of Common Shares to be Acquired, with a corresponding number of CDIs (determined at a rate of two hundred (200) CDIs for each one (1) Common Share) to be issued to the Purchaser as set forth on the Securities Certificate Questionnaire included as EXHIBIT D hereto, with the holding statements for CDIs sent to the Purchasers within three (3) Business Days (as defined below) after the Closing. Subscription Amount means with respect to each Purchaser, the aggregate amount to be paid for the Common Shares and Warrants purchased hereunder at the Closing as indicated on such Purchasers signature page to this Agreement next to the heading Aggregate Purchase Price (Subscription Amount).
(d) Closing Deliveries of the Company. On or prior to the Closing, the Company shall issue, deliver or cause to be delivered to each Purchaser the following (the Company Deliverables):
(i) this Agreement, duly executed by the Company;
(ii) facsimile copies of one or more stock certificates, free and clear of all restrictive and other legends (except as provided in Section 2 hereof), evidencing the Common Shares subscribed for by Purchaser hereunder, registered in the name of CDN and with a corresponding number of CDIs (determined at a rate of two hundred (200) CDIs for each one (1) Common Share) to be issued to the Purchaser as set forth on the Securities Certificate Questionnaire included as EXHIBIT D hereto (the Stock Certificates), with the holding statements for CDIs sent to the Purchasers within three (3) Business Days of the Closing;
(iii) a Warrant, executed by the Company and registered in the name of such Purchaser as set forth on the Securities Certificate Questionnaire included as EXHIBIT D hereto, pursuant to which such Purchaser shall have the right to acquire such number of Warrant Shares as indicated in column (4) on the Schedule of Purchasers;
(iv) a certificate of the Secretary of the Company (the Secretarys Certificate), dated as of the date of the Closing, (a) certifying the resolutions adopted by the Board of Directors of the Company or a duly authorized committee thereof approving the transactions contemplated by this Agreement and the other Transaction Documents, as defined herein, and the issuance of the Common Shares and Warrants, (b) certifying the current versions of the Companys Certificate of Incorporation (the Certificate of Incorporation), as amended, and Bylaws of the Company (the Bylaws) and (c) certifying as to the signatures and authority of persons signing the Transaction Documents and related documents on behalf of the Company;
(v) the Officers Certificate referred to in Section 7(e); and
(vi) a certified copy of the Certificate of Incorporation, as certified by the Secretary of State of the State of Delaware, as of a date within ten (10) Business Days of the date of the Closing.
(e) Closing Deliveries of the Purchasers. On or prior to the Closing, each Purchaser shall deliver or cause to be delivered to the Company the following (the Purchaser Deliverables):
(i) this Agreement, duly executed by such Purchaser;
(ii) its Subscription Amount by wire transfer to the account set forth on EXHIBIT C attached hereto; and
(iii) a fully completed and duly executed Securities Certificate Questionnaire and Investor Questionnaire, reasonably satisfactory to the Company in the forms attached hereto as EXHIBIT D and EXHIBIT E, respectively.
2. PURCHASERS REPRESENTATIONS AND WARRANTIES. Each Purchaser hereby, for itself and for no other Purchaser, represents and warrants as of the date hereof and as of the date of the Closing, to the Company as follows:
(a) Organization and Good Standing. If the Purchaser is an entity, such Purchaser is a corporation, partnership or limited liability company duly incorporated or organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization.
(b) Authorization and Power. Each Purchaser has the requisite power and authority to enter into and perform the Transaction Documents (as defined below) to which such Purchaser is a party and to purchase the Common Shares and Warrants being sold to it hereunder and any Warrant Shares to be issued upon exercise of Warrants. If Purchaser is an entity, the execution, delivery and performance of the Transaction Documents to which such Purchaser is a party by such Purchaser and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate or partnership action, and no further consent or authorization of such Purchaser or its Board of Directors, stockholders or partners, as the case may be, is required.
(c) No Public Sale or Distribution. Such Purchaser is acquiring the Securities for its own account and not with a view towards, or for resale in connection with, the public sale or distribution thereof, except pursuant to sales registered or exempted under the Securities Act; provided, however, that by making the representations herein, such Purchaser does not agree to hold any of the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration statement or an exemption under the Securities Act and pursuant to the applicable terms of the Transaction Documents. Such Purchaser is acquiring the Common Shares and Warrants hereunder, and any Warrant Shares to be issued upon exercise of Warrants, in the ordinary course of its business. Such Purchaser does not presently have any agreement or understanding, directly or indirectly, with any Person to distribute any of the Securities. As used in this Agreement, Person means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof.
(d) Accredited Investor Status. Such Purchaser represents and warrants that it is an accredited investor within the meaning of Rule 501 of Regulation D, as promulgated under the Securities Act. Each Purchaser that is an entity formed for the specific purpose of purchasing the Common Shares and Warrants under this Agreement and any Warrant Shares to be issued upon exercise of Warrants represents and warrants that, to the best of such Purchasers knowledge (after due inquiry), each equity owner of such Purchaser is also an accredited investor within the meaning of Regulation D, as promulgated under the Securities Act.
(e) Reliance on Exemptions. Such Purchaser understands that the Securities are being offered and sold to it in reliance on specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying in part upon the truth and accuracy of, and such Purchasers compliance with, the representations, warranties, agreements, acknowledgments and understandings of such Purchaser set forth herein in order to determine the availability of such exemptions and the eligibility of such Purchaser to acquire the Securities.
(f) Information and Exculpation.
(i) Such Purchaser and its advisors, if any, have been furnished with all materials relating to the business, finances, prospects and operations of the Company and materials relating to the offer and sale of the Securities that have been requested by such Purchaser as it has deemed necessary or appropriate to conduct its due diligence investigation and has sufficient knowledge and experience in investing in companies similar to the Company in terms of the Companys stage of development so as to be able to evaluate the risks and merits of its investment in the Company. Such Purchaser and its advisors, if any, have been afforded the opportunity to ask questions of the Company. Such Purchaser has sought such accounting, legal and tax advice as it has considered necessary to make an informed investment decision with respect to its acquisition of the Securities.
(ii) Such Purchaser acknowledges that it is making such investment based on the results of its own due diligence investigation of the Company, and such Purchaser has not relied on any information or advice furnished by or on behalf of the Agent (as defined
below) in connection with the transactions contemplated hereby. Such Purchaser acknowledges that Agent has not made, and will not make, any representations and warranties with respect to the Company or the transactions contemplated hereby, and such Purchaser will not rely on any statements made by Agent, orally or in writing, to the contrary. Such Purchaser further acknowledges that Agent will not be responsible for the ultimate success of its investment in the Company. In light of the foregoing, to the fullest extent permitted by law, such Purchaser releases Agent, its employees, officers and affiliates from any liability with respect to such Purchasers participation in the transactions contemplated hereby.
(g) No Governmental Review. Such Purchaser understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Securities or the fairness or suitability of the investment in the Securities nor have such authorities passed upon or endorsed the merits of the offering of the Securities.
(h) Transfer or Resale. Such Purchaser understands that: (i) the Securities have not been and are not being registered under the Securities Act or any state securities laws, and may not be offered for sale, sold, assigned or transferred unless (A) subsequently registered thereunder, (B) such Purchaser shall have delivered to the Company an opinion of counsel, in a form reasonably acceptable to the Company, to the effect that such Securities to be sold, assigned or transferred may be sold, assigned or transferred pursuant to an exemption from such registration, or (C) such Purchaser provides the Company with reasonable assurance that such Securities can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A promulgated under the Securities Act, as amended, (or a successor rule thereto) (collectively, Rule 144); (ii) any sale of the Securities made in reliance on Rule 144 may be made only in accordance with the terms of Rule 144 and further, if Rule 144 is not applicable, any resale of the Securities under circumstances in which the seller (or the Person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the Securities Act) may require compliance with some other exemption under the Securities Act or the rules and regulations of the SEC thereunder; and (iii) neither the Company nor any other Person is under any obligation to register the Securities under the Securities Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder. The Securities may be pledged in connection with a bona fide margin account or other loan or financing arrangement secured by the Securities and such pledge of Securities shall not be deemed to be a transfer, sale or assignment of the Securities hereunder, and no Purchaser effecting a pledge of Securities shall be required to provide the Company with any notice thereof or otherwise make any delivery to the Company pursuant to this Agreement or any other Transaction Document, including, without limitation, this Section 2(h); provided, that such Purchaser and its pledgees make such pledge in accordance with applicable laws.
(i) Legends. Such Purchaser understands that the certificates or other instruments representing the Securities, until such time as the resale of the Securities have been registered under the Securities Act or are eligible for sale pursuant to Rule 144, shall bear any legend as required by the blue sky laws of any state and a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of such stock certificates):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.
The legend set forth above shall be removed and the Company shall issue a certificate without such legend to the holder of the Securities upon which it is stamped or issue to such holder by electronic delivery at the applicable balance account at the Depository Trust Company (DTC) or CDN, as applicable, if, unless otherwise required by state securities laws, (i) such Securities are registered for resale under the Securities Act, (ii) in connection with a sale, assignment or other transfer, such holder provides the Company with an opinion of a law firm reasonably acceptable to the Company, in a form reasonably acceptable to the Company, to the effect that such sale, assignment or transfer of the Securities may be made without registration under the applicable requirements of the Securities Act, or (iii) such holder provides the Company with reasonable assurance that the Securities can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A. Any fees (with respect to the transfer agent, Company counsel or otherwise) associated with the issuance of such opinion or the removal of such legend shall be borne by the Company. If a legend is no longer required pursuant to the foregoing, the Company will no later than three (3) Business Days following the delivery by a Purchaser to the Company or the transfer agent (with notice to the Company) of a legended certificate or instrument representing such Securities (endorsed or with stock powers attached, signatures guaranteed, and otherwise in form necessary to affect the reissuance and/or transfer) deliver or cause to be delivered to such Purchaser a certificate or instrument (as the case may be) representing such Securities that is free from all restrictive legends. The Company may not make any notation on its records or give instructions to the transfer agent that enlarge the restrictions on transfer set forth in this Section 2(i). Certificates for Securities free from all restrictive legends may be transmitted by the transfer agent to a Purchaser by crediting the account of the Purchasers prime broker with DTC as directed by such Purchaser.
(j) Regulation S. Each Purchaser with an address outside the United States further represents and warrants that:
(i) Such Purchaser is not a U.S. Person, as defined in SEC Rule 902 and is not purchasing the Securities for the account or benefit of a U.S. Person.
(ii) Such Purchaser acknowledges its understanding that the offer and sale of the Securities is intended to be exempt from the registration requirements of the Securities Act, by virtue of the exemption from registration provided by Regulation S promulgated thereunder. Such Purchaser is aware and understands that the Securities may be resold, pledged, assigned or otherwise disposed of to a U.S. Person or for the account or benefit of a U.S. Person prior to the expiration of the one (1)-year Distribution Compliance Period, as defined in Regulation S, which shall be for one (1) year following the date after sale pursuant to this Agreement, and thereafter only if the Securities are subsequently registered under the Securities Act or an exemption from such registration is available pursuant to Regulation S
promulgated under the Securities Act or pursuant to another available exemption from registration. Such Purchaser further agrees not to engage in any hedging transactions with regard to the Securities prior to the expiration of the Distribution Compliance Period unless in compliance with the Securities Act. Upon request of such Purchaser, upon receipt by the Company of an opinion of counsel reasonably satisfactory to the Company to the effect that such legend is no longer required under the Securities Act or applicable state laws, as the case may be, the Company shall promptly cause the legend to be removed from any certificate for any Securities to be so transferred.
(iii) Such Purchaser understands that the certificates or other instruments representing the Securities shall bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of such stock certificates):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT), OR ANY STATE SECURITIES LAWS AND NEITHER SUCH SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE TRANSFERRED EXCEPT (1) IN ACCORDANCE WITH THE PROVISIONS OF REGULATION S PROMULGATED UNDER THE SECURITIES ACT, AND BASED ON AN OPINION OF COUNSEL, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT THE PROVISIONS OF REGULATION S HAVE BEEN SATISFIED, (2) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR (3) PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS, IN WHICH CASE THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE COMPANY AN OPINION OF COUNSEL, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH SECURITIES MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE TRANSFERRED IN THE MANNER CONTEMPLATED PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS. HEDGING TRANSACTIONS INVOLVING THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE SECURITIES ACT.
(k) Validity; Enforcement. This Agreement has been duly and validly authorized, executed and delivered on behalf of such Purchaser and shall constitute the legal, valid and binding obligations of such Purchaser enforceable against such Purchaser in accordance with its terms, except as such enforceability may be limited by general principles of equity or to applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and other similar laws relating to, or affecting generally, the enforcement of applicable creditors rights and remedies.
(l) No Conflicts. The execution, delivery and performance by such Purchaser of this Agreement and the consummation by such Purchaser of the transactions contemplated hereby will not (i) result in a violation of the organizational documents of such Purchaser or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which
such Purchaser is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws) applicable to such Purchaser, except in the case of clauses (ii) and (iii) above, for such conflicts, defaults, rights or violations which would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the ability of such Purchaser to perform its obligations hereunder.
(m) Residency. Such Purchaser is a resident of that jurisdiction specified below its address on the Schedule of Purchasers.
(n) No General Solicitation. Each Purchaser acknowledges that the Securities were not offered to such Purchaser by means of any form of general or public solicitation or general advertising, or publicly disseminated advertisements or sales literature, including (i) any advertisement, article, notice or other communication published in any newspaper, magazine, website, or similar media, or broadcast over television or radio, or (ii) any seminar or meeting to which such Purchaser was invited by any of the foregoing means of communications.
(o) Independent Investment. No Purchaser has (i) agreed to act with any other Purchaser for the purpose of acquiring, holding, voting or disposing of the Securities purchased hereunder for purposes of Section 13(d) under the Securities Exchange Act of 1934, as amended (the Exchange Act); (ii) entered or agreed to enter into a relevant agreement with any other Purchaser or other party for the purpose of controlling or influencing the composition of the Companys board or the conduct of the Companys affairs for the purposes of the Corporations Act 2001 (Cth); or (iii) acted, is acting or is proposing to act in concert with any other Purchaser or other party in relation to the Companys affairs for the purposes of the Corporations Act (Cth) 2001, and each Purchaser is acting independently with respect to its investment in the Securities.
(p) Brokers. Each Purchaser has no knowledge of any brokerage or finders fees or commissions that are or will be payable by the Company or any of its Subsidiaries to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other Person or entity, other than the Agent, with respect to the transactions contemplated by this Agreement.
(q) Additional Acknowledgement. Each Purchaser acknowledges and accepts that the Company may offer its securities to other U.S. investors and various Australian investors upon substantially similar terms and conditions as the Common Shares and Warrants being purchased pursuant to this Agreement.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants as of the date hereof (except for the representations and warranties that speak as of a specific date, which shall be made as of such date), to each of the Purchasers the following, except (i) as set forth in the Schedules delivered herewith; or (ii) disclosed in the reports and other documents filed by the Company with the Australian Securities and Investments Commission (the ASIC); or (iii) disclosed in the Form 10 filed by the Company with the United States Securities and Exchange Commission, as amended (the Form 10). The Schedules shall be arranged in sections corresponding to the lettered subsections contained in
this Section 3, and the disclosures in any subsection of the schedules shall qualify other subsections in this Section 3 to the extent it is reasonably apparent from a reading of the disclosure that such disclosure is applicable to such other subsections.
(a) Organization and Qualification. Each of the Company and its Subsidiaries (which for purposes of this Agreement means any entity (i) in which the Company, directly or indirectly, owns not less than 25% of the capital stock or holds a corresponding equity or similar interest and (ii) which has operations and material assets) are entities duly incorporated or organized, as the case may be, and validly existing in good standing under the laws of the jurisdiction in which they are incorporated or organized, as applicable, and have the requisite power and authority to own their properties and to carry on their business as now being conducted. Each of the Company and its Subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which its ownership of property or the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not reasonably be expected to have a Material Adverse Effect. As used in this Agreement, Material Adverse Effect means any material adverse effect on the business, properties, assets, operations, results of operations, condition (financial or otherwise) of the Company and its Subsidiaries, taken as a whole, or on the transactions contemplated hereby and the other Transaction Documents or by the agreements and instruments to be entered into in connection herewith or therewith, or on the authority or ability of the Company to perform its obligations under the Transaction Documents. The Company has no Subsidiaries except as set forth on SCHEDULE 3(A) or as disclosed in the Form 10 or the ASIC Documents (as defined below).
(b) Authorization; Enforcement; Validity. The Company has the requisite corporate power and authority to enter into and perform its obligations under this Agreement and the Irrevocable Transfer Agent Instructions (as defined in Section 5(b)) (collectively, the Transaction Documents) and to issue the Securities in accordance with the terms hereof and thereof. The execution and delivery of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated hereby and thereby, including, without limitation, the issuance of the Securities, have been duly authorized by the Companys Board of Directors and no further filing, consent or authorization is required by the Company, its Board of Directors or its stockholders. This Agreement and the other Transaction Documents have been duly executed and delivered by the Company constitute the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of applicable creditors rights and remedies.
(c) Issuance of Securities. The Securities are duly authorized and, upon issuance in accordance with the terms hereof, shall be validly issued and free from all preemptive or similar rights, taxes, liens and charges with respect to the issue thereof and the Securities shall be fully paid and nonassessable with the holders being entitled to all rights accorded to a holder of Securities. Assuming the accuracy of each of the representations and warranties set forth in Section 2 of this Agreement, the offer and issuance by the Company of the Securities is exempt from registration under the Securities Act.
(d) No Conflicts. The execution, delivery and performance of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated hereby and thereby (including, without limitation, the issuance of the Securities) will not (i) result in a violation of any certificate of incorporation, certificate of formation, any certificate of designations or other constituent documents of the Company or any of its Subsidiaries, any capital stock of the Company or any of its Subsidiaries or bylaws of the Company or any of its Subsidiaries, or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its Subsidiaries is a party, or (iii) result in a violation of any applicable law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations and the rules and regulations of The Australian Securities Exchange (the Principal Market) applicable to the Company or any of its Subsidiaries or by which any property or asset of the Company or any of its Subsidiaries is bound or affected, except in the cases of clauses (ii) and (iii) such as would not reasonably be expected to have a Material Adverse Effect.
(e) Consents. The Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court, governmental agency or any regulatory or self-regulatory agency or any other Person in order for it to execute, deliver or perform any of its obligations under or contemplated by the Transaction Documents, in each case in accordance with the terms hereof or thereof (other than (w) the Principal Markets approval for quotation of the CDIs, (x) any consent, authorization or order that has been obtained as of the date hereof, (y) any filing or registration that has been made as of the date hereof or (z) any filings which may be required to be made by the Company with the SEC, the ASIC, state securities administrators or the Principal Market, subsequent to the Closing; provided that, for purposes of the representation made in this sentence, the Company is assuming and relying upon the accuracy of the relevant representations and agreements of the Purchasers herein). The Company is not in violation of the listing requirements of the Principal Market and has no knowledge of any facts that would reasonably lead to delisting or suspension of the Companys Common Stock on the Principal Market in the foreseeable future.
(f) No General Solicitation; Placement Agents Fees. Neither the Company nor any of its Subsidiaries, or to the Companys knowledge, any of its or their affiliates, nor any Person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with the offer or sale of the Securities. The Company shall be responsible for the payment of any placement agents fees, financial advisory fees, or brokers commissions (other than for Persons engaged by any Purchaser or its investment advisor) relating to or arising out of the transactions contemplated hereby. The Company acknowledges that it has engaged Summer Street Research Partners, Inc. and RBS Morgans Limited, as placement agents (collectively, the Agent) in connection with the sale of the Common Shares and Warrants. Other than the Agent, neither the Company nor any of its Subsidiaries has engaged any other placement agent in connection with the sale of the Common Shares and Warrants.
(g) ASIC Documents; Financial Statements. During the one (1) year prior to the date hereof, the Company has timely filed all reports, schedules, forms, statements and
other documents required to be filed by it with the ASIC pursuant to the reporting requirements of the securities law of Australia (all of the foregoing filed during the one (1) year prior to the date hereof or prior to the date of the Closing and all exhibits included therein and financial statements, notes and schedules thereto and documents incorporated by reference therein being hereinafter referred to as the ASIC Documents). As of their respective filing dates, the ASIC Documents complied in all material respects with the requirements of the rules and regulations of the ASIC applicable to the ASIC Documents, and none of the ASIC Documents, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. As of their respective filing dates, the financial statements of the Company included in the ASIC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the ASIC with respect thereto. Such financial statements have been prepared in accordance with Australian generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments, which would not be material, either individually or in the aggregate, and to the extent that such unaudited statements exclude footnotes). There is no transaction, arrangement, or other relationship between the Company (or any Subsidiary) and an unconsolidated or other off balance sheet entity that is required to be disclosed by the Company in its ASIC filings and is not so disclosed and would have or reasonably be expected to have a Material Adverse Effect.
(h) Absence of Certain Changes. Since December 31, 2011, other than as disclosed in the Form 10, the ASIC Documents or documents lodged with the Australian Securities Exchange, (i) there has been no material adverse change and no material adverse development in the business, properties, operations, condition (financial or otherwise) or results of operations of the Company or its Subsidiaries, (ii) the Company and its Subsidiaries have not paid or declared any dividends or other distributions with respect to their capital stock and (iii) there has not been any change in the capital stock of the Company or its Subsidiaries other than the sale of the Common Shares and Warrants hereunder and grants, exercises, terminations, or forfeitures of securities under the Companys equity or compensation plans. Neither the Company nor any of its Subsidiaries has taken any steps to seek protection pursuant to any bankruptcy law nor does the Company have any knowledge or reason to believe that its creditors intend to initiate involuntary bankruptcy proceedings or any actual knowledge of any fact that would reasonably lead a creditor to do so. The Company is not, and after giving effect to the transactions contemplated hereby to occur at the Closings, the Company will not be, Insolvent (as defined below). For purposes of this Section 3(h), Insolvent means, with respect to any Person, (i) the present fair saleable value of such Persons assets is less than the amount required to pay such Persons total Indebtedness, (ii) such Person is unable to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured, (iii) such Person intends to incur or believes that it will incur debts that would be beyond its ability to pay as such debts mature or (iv) such Person has unreasonably small capital with which to conduct the business in which it is engaged as such business is now conducted and
is proposed to be conducted. For purposes of this Agreement: Indebtedness of any Person means, without duplication (A) all indebtedness for borrowed money, (B) all obligations issued, undertaken or assumed as the deferred purchase price of property or services, including (without limitation) capital leases in accordance with generally accepted accounting principles (other than trade payables entered into in the ordinary course of business), (C) all reimbursement or payment obligations with respect to letters of credit, surety bonds and other similar instruments, (D) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses, (E) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to any property or assets acquired with the proceeds of such indebtedness (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property), (F) all monetary obligations under any leasing or similar arrangement which, in connection with generally accepted accounting principles, consistently applied for the periods covered thereby, is classified as a capital lease, (G) all indebtedness referred to in clauses (A) through (F) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any mortgage, lien, pledge, charge, security interest or other encumbrance upon or in any property or assets (including accounts and contract rights) owned by any Person, even though the Person which owns such assets or property has not assumed or become liable for the payment of such indebtedness, and (H) all Contingent Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses (A) through (G) above; and Contingent Obligation means, as to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to any indebtedness, lease, dividend or other obligation of another Person if the primary purpose or intent of the Person incurring such liability, or the primary effect thereof, is to provide assurance to the obligee of such liability that such liability will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such liability will be protected (in whole or in part) against loss with respect thereto.
(i) Conduct of Business; Regulatory Permits. Neither the Company nor any of its Subsidiaries is in material violation of any term of or in default under its Certificate of Incorporation, any certificate of designations of any outstanding series of preferred stock of the Company or the Bylaws or their organizational charter or bylaws, respectively. Except as described in the Form 10 or the ASIC Documents, neither the Company nor any of its Subsidiaries is in violation of any judgment, decree or order or any statute, ordinance, rule or regulation applicable to the Company or its Subsidiaries, and neither the Company nor any of its Subsidiaries will conduct its business in violation of any of the foregoing, except for possible violations which would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Without limiting the generality of the foregoing, except as described in the Form 10 or the ASIC Documents or documents lodged with the Australian Securities Exchange, the Company is not in violation of any of the rules, regulations or requirements of the Principal Market and has no knowledge of any facts or circumstances that would reasonably lead to delisting or suspension of the Companys Common Stock (represented by CDIs) by the Principal Market in the foreseeable future. During the past two (2) years prior to the date hereof, (i) the Companys Common Stock represented by CDIs has been designated for quotation or included for listing on the Principal Market, (ii) trading in the CDIs representing the Companys Common Stock has not been suspended by the ASIC or the Principal Market and (iii) the
Company has received no communication, written or oral, from the ASIC or the Principal Market regarding the suspension or delisting of the CDIs representing the Companys Common Stock from the Principal Market. Except as described in the Form 10 or the ASIC Documents or documents lodged with the Australian Securities Exchange, the Company and its subsidiaries hold, and are operating in material compliance with, such permits, registrations, licenses, accreditations, franchises, approvals, authorizations and clearances of applicable governmental authorities (collectively, the Permits) required for the conduct of their respective businesses as currently conducted, except where the failure to possess such Permits would not reasonably be expected to have a Material Adverse Effect, and all such Permits are in full force and effect. Except as described in the ASIC Documents or documents lodged with the Australian Securities Exchange, neither the Company nor any Subsidiary has received, or has any reason to believe that it will receive, any notice of proceedings relating to the revocation or modification of, or non-compliance with, any such Permit which, individually or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would reasonably be expected to result in a Material Adverse Effect.
(j) Equity Capitalization. As of the date hereof, the authorized capital stock of the Company consists of One Hundred Million (100,000,000) shares of Common Stock and Forty Million (40,000,000) shares of preferred stock. As of the date hereof, no shares of preferred stock are issued and outstanding. As of the date hereof, (w) Six Million Nineteen Thousand Six Hundred Sixty Three (6,019,663)] shares of Common Stock were issued and outstanding, (x) Three Hundred Three Thousand One Hundred Twenty-Two (303,122) shares were reserved for issuance pursuant to outstanding warrants, and (y) Two Million One Hundred Twenty Three Thousand One Hundred Twenty-Eight (2,123,128) shares were reserved for issuance pursuant to outstanding options. All of such outstanding shares have been, or upon issuance will be, validly issued and are fully paid and nonassessable. Except as set forth above in this Section 3(j) or on SCHEDULE 3(J), or as disclosed in the Form 10, the ASIC Documents or documents lodged with the Australian Securities Exchange: (i) none of the Companys capital stock is subject to preemptive rights or any other similar rights or any liens or encumbrances suffered or permitted by the Company; (ii) there are no outstanding options, warrants, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, or exercisable or exchangeable for, any capital stock of the Company or any of its Subsidiaries, (iii) there are no contracts, commitments, understandings or arrangements by which the Company or any of its Subsidiaries is or may become bound to issue additional capital stock of the Company or any of its Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, or exercisable or exchangeable for, any capital stock of the Company or any of its Subsidiaries; (iv) there are no agreements or arrangements under which the Company or any of its Subsidiaries is obligated to register the sale of any of their securities under the Securities Act; (v) there are no outstanding securities or instruments of the Company or any of its Subsidiaries which contain any redemption or similar provisions, and there are no contracts, commitments, understandings or arrangements by which the Company or any of its Subsidiaries is or may become bound to redeem a security of the Company or any of its Subsidiaries; (vi) the Company does not have any stock appreciation rights or phantom stock plans or agreements or any similar plan or agreement; and (vii) the Company has no liabilities or obligations required to be disclosed in the ASIC Documents but not so disclosed in the Form 10 or the ASIC Documents, which, individually or in the aggregate, will have or would reasonably be expected to have a
Material Adverse Effect. Except as otherwise contemplated by this Agreement, there are no securities or instruments containing anti-dilution or similar provisions that will be triggered by the issuance of the Securities. The Company has furnished or made available to the Purchasers upon the Purchasers request, true, correct and complete copies of the Certificate of Incorporation, as amended and as in effect on the date hereof, and the Bylaws, as amended and as in effect on the date hereof, and the terms of all securities convertible into, or exercisable or exchangeable for, shares of Common Stock and the material rights of the holders thereof in respect thereto.
(k) Absence of Litigation. Except as set forth in SCHEDULE 3(K) or as disclosed in the Form 10, the ASIC Documents or documents lodged with the Australian Securities Exchange, there is no action, suit, proceeding, inquiry or investigation before or by the Principal Market, any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries, the Companys Common Stock or any of the Companys Subsidiaries or any of the Companys or its Subsidiaries officers or directors in their capacities as such.
(l) Insurance. The Company and each of its Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company and its Subsidiaries are engaged. Except as disclosed in the Form 10 or the ASIC Documents, neither the Company nor any such Subsidiary has been refused any insurance coverage sought or applied for and neither the Company nor any such Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not reasonably be expected to have a Material Adverse Effect.
(m) Employee Relations.
(i) Neither the Company nor any of its Subsidiaries is a party to any collective bargaining agreement or employs any member of a union. The Company and its Subsidiaries believe that their relations with their employees are good. No named executive officer of the Company or any of its Subsidiaries has notified the Company or any such Subsidiary that such officer intends to leave the Company or any such Subsidiary or otherwise terminate such officers employment with the Company or any such Subsidiary. No executive officer of the Company or any of its Subsidiaries, to the knowledge of the Company or any of its Subsidiaries, is, or is now expected to be, in violation of any material term of any employment contract, confidentiality, disclosure or proprietary information agreement, non-competition agreement, or any other contract or agreement or any restrictive covenant, and the continued employment of each such executive officer does not subject the Company or any of its Subsidiaries to any liability with respect to any of the foregoing matters.
(ii) The Company and its Subsidiaries, to their knowledge, are in compliance with all federal, state, local and foreign laws and regulations respecting labor, employment and employment practices and benefits, terms and conditions of employment and
wages and hours, except where failure to be in compliance would not, either individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect.
(n) Title. The Company and its Subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them which is material to the business of the Company and its Subsidiaries, in each case free and clear of all liens, encumbrances and defects except such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company and any of its Subsidiaries. Any real property and facilities held under lease by the Company and any of its Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its Subsidiaries.
(o) Intellectual Property Rights. Except as specifically disclosed in the Form 10 or the ASIC Documents (i) the Company owns or possesses sufficient rights to use all patents, patent rights, trademarks, copyrights, licenses, inventions, trade secrets, trade names and know-how (including trade secrets and other unpatented and/or unpatentable property or confidential information, systems, processes or procedures) (collectively, Intellectual Property) described or referred to in the Form 10 or the ASIC Documents as owned or possessed by them or that are necessary for the conduct of its business as now conducted as described in the Form 10 or the ASIC Documents, except where the failure to currently own or possess would not have a Material Adverse Effect, (ii) to its knowledge, the Company is not infringing, and have not received any notice of any asserted infringement by the Company of any rights of a third party with respect to any Intellectual Property that, individually or in the aggregate, would have a Material Adverse Effect and (iii) the Company has not received any notice of, and has no knowledge of, infringement by a third party with respect to any Intellectual Property rights of the Company that, individually or in the aggregate, would have a Material Adverse Effect.
(p) Compliance in Clinical Trials. Except as described in the Form 10, the ASIC Documents or documents lodged with the Australian Securities Exchange (and solely to the extent any information contained in the Form 10 or such ASIC Documents has not been amended, modified, supplemented, corrected, rescinded or otherwise withdrawn in subsequent material filed by the Company with the SEC or ASIC), the studies, tests and preclinical and clinical trials conducted by or on behalf of the Company and its Subsidiaries were and, if still pending, are being conducted in compliance with experimental protocols, procedures and controls pursuant to accepted professional scientific standards and all applicable laws and authorizations, including, without limitation, the Federal Food, Drug and Cosmetic Act and the rules and regulations promulgated thereunder, except where the failure to be in compliance has not resulted and would not reasonably be expected to result in a Material Adverse Effect and the Company and its Subsidiaries have not received any notices or correspondence from any applicable governmental authority requiring the termination, suspension or material modification of any studies, tests or preclinical or clinical trials conducted by or on behalf of the Company or its Subsidiaries.
(q) Subsidiary Rights. The Company has the unrestricted right to vote, and (subject to limitations imposed by applicable law) to receive dividends and distributions on, all capital securities of its Subsidiaries as owned by the Company.
(r) Tax Status. The Company and each of its Subsidiaries (i) has made or filed all foreign, federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject or has properly requested extensions thereof, (ii) has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and (iii) has set aside on its books provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim.
(s) U.S. Real Property Holding Corporation. The Company is not, nor has it ever been, a U.S. real property holding corporation within the meaning of Section 897 of the Internal Revenue Code of 1986, as amended, and the Company shall so certify upon any Purchasers request.
(t) No Integrated Offering. None of the Company, its Subsidiaries or any of their affiliates, nor any Person acting on their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would require registration of the issuance of any of the Securities under the Securities Act, whether through integration with prior offerings or otherwise, or cause this offering of the Securities to require approval of stockholders of the Company under any applicable stockholder approval provisions, including, without limitation, under the rules and regulations of any exchange or automated quotation system on which any of the securities of the Company are listed or designated. None of the Company, its Subsidiaries, their affiliates nor any Person acting on their behalf will take any action or steps referred to in the preceding sentence that would require registration of the issuance of any of the Securities under the Securities Act or cause the offering of any of the Securities to be integrated with other offerings.
(u) Application of Takeover Protections; Rights Agreements. Except as set forth in SCHEDULE 3(U), the Company has not adopted any stockholder rights plan or similar arrangement relating to accumulations of beneficial ownership of the Companys Common Stock or a change in control of the Company. The Company and its Board of Directors have taken all necessary action, if any, in order to render inapplicable any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under the Companys certificate of incorporation or other organizational documents or the laws of the jurisdiction of its incorporation or otherwise which is or could become applicable to any Purchaser solely as a result of the transactions contemplated by this Agreement, including, without limitation, the Companys issuance of the Securities and any Purchasers ownership of the Securities.
(v) Environmental Matters. Except as disclosed in the Form 10, the ASIC Documents or documents lodged with the Australian Securities Exchange, neither the Company
nor any of its Subsidiaries (i) is in violation of any statute, rule, regulation, decision or order of any governmental agency or body or any court, domestic or foreign, relating to the use, disposal or release of hazardous or toxic substances or relating to the protection or restoration of the environment or human exposure to hazardous or toxic substances (collectively, Environmental Laws), (ii) owns or operates any real property contaminated with any substance that is in violation of any Environmental Laws, (iii) is liable for any off-site disposal or contamination pursuant to any Environmental Laws, or (iv) is subject to any claim relating to any Environmental Laws; in each case, which violation, contamination, liability or claim has had or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; and, to the Companys knowledge, there is no pending or threatened investigation that might lead to such a claim.
(w) Investment Company Status. The Company is not, and upon consummation of the sale of the Securities will not be, an investment company, an affiliate of an investment company, a company controlled by an investment company or an affiliated person of, or promoter or principal underwriter for, an investment company as such terms are defined in the Investment Company Act of 1940, as amended.
(x) Shell Company Status. The Company is not, and has never been, an issuer identified in Rule 144(i)(1).
(y) No Additional Agreements. The Company has no other agreements or understandings (including, without limitation, side letters) with any Purchaser to purchase Securities on terms that are different from those set forth herein.
(z) Disclosure. The Company confirms that neither it nor any of its officers or directors nor any other Person acting on its or their behalf has provided, and it has not authorized the Agent to provide, any Purchaser or its respective agents or counsel with any information that it believes constitutes or could reasonably be expected to constitute material, non-public information except insofar as the existence, provisions and terms of the Transaction Documents and the proposed transactions hereunder may constitute such information. The Company understands and confirms that each of the Purchasers will rely on the foregoing representations in effecting transactions in securities of the Company.
(aa) Reservation of Warrant Shares. The Company will reserve, free of any preemptive or similar rights of shareholders of the Company, a number of unissued shares of Common Stock, sufficient to issue and deliver the Warrant Shares upon the exercise of the Warrants.
(bb) Transactions With Affiliates and Employees. Except as set forth in the Form 10, the ASIC Documents or documents lodged with the Australian Securities Exchange, none of the officers or directors of the Company and, to the Companys knowledge, none of the employees of the Company is presently a party to any transaction (or to a presently contemplated transaction) with the Company or any Subsidiary (other than for services as employees, officers and directors).
(cc) Unlawful Payments. Neither the Company nor any of its Subsidiaries, nor any directors, officers, nor to the Companys knowledge, employees, agents or other Persons acting at the direction of or on behalf of the Company or any of its Subsidiaries has, in the course of its actions for, or on behalf of, the Company: (a) directly or indirectly, used any corporate funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to foreign or domestic political activity; (b) made any direct or indirect unlawful payments to any foreign or domestic governmental officials or employees or to any foreign or domestic political parties or campaigns from corporate funds; (c) violated any provision of the Foreign Corrupt Practices Act of 1977, as amended; or (d) made any other unlawful bribe, rebate, payoff, influence payment, kickback or other material unlawful payment to any foreign or domestic government official or employee.
(dd) Money Laundering Laws. The operations of each of the Company and any Subsidiary are and have been conducted at all times in compliance with the money laundering statutes of applicable jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any applicable governmental agency (collectively, the Money Laundering Laws) and to the Companys knowledge, no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company and/or any Subsidiary with respect to the Money Laundering Laws is pending or threatened.
(ee) OFAC. Neither the Company nor any Subsidiary nor, to the Companys knowledge, any director, officer, agent, employee, affiliate or Person acting on behalf of the Company or any Subsidiary is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department (OFAC); and the Company will not knowingly directly or indirectly use the proceeds of the sale of the Securities, or lend, contribute or otherwise make available such proceeds to any Subsidiary, joint venture partner or other Person or entity, towards any sales or operations in any country sanctioned by OFAC or for the purpose of financing the activities of any Person currently subject to any U.S. sanctions administered by OFAC.
4. COVENANTS.
(a) Best Efforts. Each party shall use its best efforts timely to satisfy each of the covenants and conditions to be satisfied by it as provided in Sections 6 and 7 of this Agreement.
(b) Form D and Blue Sky. The Company agrees to file a Form D with respect to the Securities as required under Regulation D and to provide a copy thereof to any Purchaser upon request. The Company, on or before the date of the Closing, shall take such action as the Company shall reasonably determine is necessary in order to obtain an exemption for or to qualify the Common Shares and Warrants for sale to the Purchasers pursuant to this Agreement under applicable securities or Blue Sky laws of the states of the United States (or to obtain an exemption from such qualification), and shall provide evidence of any such action so taken upon Purchasers request. The Company shall make all filings and reports as it reasonably determines are necessary relating to the offer and sale of the Common Shares and Warrants required under applicable securities or Blue Sky laws of the states of the United States
following the Closing; provided, however, the Company shall not for any such purpose be required to qualify generally to transact business as a foreign corporation in any jurisdiction where it is not so qualified or to consent to general service of process in any such jurisdiction.
(c) Listing. The Company will use commercially reasonable efforts to have the Common Shares, the Warrant Shares and the CDIs representing such shares approved for quotation on ASX promptly after the Closing and maintain the quotation of such shares and CDIs on the ASX. Each Purchaser acknowledges that they cannot deal in the CDIs representing Common Shares until official quotation is granted in respect of the CDIs representing the Common Shares.
(d) Certain Fees and Expenses. The Company shall pay all transfer agent fees, stamp or transfer taxes and other taxes (not including income or similar taxes) and duties levied in connection with the sale and issuance of the applicable Securities. Except as otherwise expressly set forth in the Transaction Documents, each party to this Agreement shall bear its own fees and expenses in connection with the sale and issuance of the Securities to the Purchasers (including, without limitation, each partys legal, accounting and other expenses).
(e) Confidential Information. Each Purchaser represents to the Company that, at all times during the Companys offering of the Common Shares and Warrants, the Purchaser (i) has maintained in confidence all non-public information regarding the Company received by the Purchaser from the Company or its agents, including, without limitation, the existence of the transactions contemplated therein, (ii) has used all such non-public information only in connection with the evaluation of the transactions contemplated therein, and (iii) has not purchased or sold the Companys securities or any securities convertible or exchangeable for any of the Companys securities while in possession of such information, and that it will continue to comply with (i), (ii) and (iii) above until such information (x) becomes generally publicly available other than through a violation of this provision by the Purchaser or its agents or (y) is required to be disclosed in legal proceedings (such as by deposition, interrogatory, request for documents, subpoena, civil investigation demand, filing with any governmental authority or similar process), provided, however, that before making any use or disclosure in reliance on this subparagraph (y) the Purchaser shall give the Company prior written notice specifying the circumstances giving rise thereto and will furnish only that portion of the non-public information which is legally required in the opinion of counsel to the Purchaser.
(f) Use of Proceeds. The Company intends to use the net proceeds from the sale of the Securities hereunder for general corporate purposes.
(g) Publicity. By 9:00 a.m., New York City time, on the Business Day immediately following the execution of this Agreement, the Company shall issue one or more press releases (collectively, the Press Release) reasonably acceptable to the Purchasers disclosing all material terms of the transactions contemplated hereby and any other material, nonpublic information that the Company may have provided any Purchaser at any time prior to the filing of the Press Release. Notwithstanding the foregoing, the Company shall not publicly disclose the name of any Purchaser or any affiliate or investment adviser of any Purchaser, or include the name of any Purchaser or any affiliate or investment adviser of any Purchaser in any press release or filing with any regulatory agency or trading market, without the prior written
consent of such Purchaser, except as required by law, in which case the Company shall provide such Purchaser with prior written notice of such disclosure. From and after the issuance of the Press Release, no Purchaser shall be in possession of any material, non public information received from the Company, any Subsidiary or any of their respective officers, directors or employees.
(h) Indemnification. In consideration of each Purchasers execution and delivery of the Transaction Documents and acquiring the Securities thereunder and in addition to all of the Companys other obligations under this Agreement, the Company shall defend, protect, indemnify and hold harmless each Purchaser and each other holder of the Securities and all of their stockholders, partners, members, officers, directors, employees and direct or indirect investors and any of the foregoing Persons agents or other representatives (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the Indemnitees) from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective of whether any such Indemnitee is a party to the action for which indemnification hereunder is sought), and including reasonable attorneys fees and disbursements (the Indemnified Liabilities), incurred by any Indemnitee as a result of, or arising out of, or relating to (i) any material misrepresentation or breach of any representation or warranty made by the Company in this Agreement or (ii) any breach of any covenant, agreement or obligation of the Company contained in this Agreement. The Company will not be liable to any Purchaser under this Agreement to the extent that a loss, claim, damage or liability is attributable to any Purchasers breach of any of the representations, warranties, covenants or agreements made by such Purchaser in this Agreement or in the other Transaction Documents.
(i) Participation Right. From the date hereof through the first anniversary of the date of the Closing, neither the Company nor any of its Subsidiaries shall, directly or indirectly, effect any Subsequent Placement (as defined below) unless the Company shall have first complied with this Section 4(i). The Company acknowledges and agrees that the right set forth in this Section 4(i) is a right granted by the Company, separately, to each Purchaser. Subsequent Placement means the issuance, offer, sale, grant of any option or right to purchase, or other disposition of any equity security or any equity-linked or related security (including, without limitation, any equity security (as that term is defined under Rule 405 promulgated under the Securities Act), any Convertible Securities (as defined below), any debt, any preferred stock or any purchase rights. Convertible Securities means any capital stock or other security of the Company or any of its Subsidiaries that is at any time and under any circumstances directly or indirectly convertible into, exercisable or exchangeable for, or which otherwise entitles the holder thereof to acquire, any capital stock or other security of the Company (including, without limitation, Common Stock) or any of its Subsidiaries.
(i) At least five (5) Business Days prior to any proposed or intended Subsequent Placement, the Company shall deliver to each Purchaser a written notice of its proposal or intention to effect a Subsequent Placement (each such notice, a Pre-Notice), which Pre-Notice shall not contain any information (including, without limitation, material, non-public information) other than: (i) a statement that the Company proposes or intends to effect a Subsequent Placement and (ii) a statement informing such Purchaser that it is entitled to receive an Offer Notice (as defined below) with respect to such Subsequent Placement upon its written
request. Upon the written request of a Purchaser within three (3) Business Days after the Companys delivery to such Purchaser of such Pre-Notice, and only upon a written request by such Purchaser, the Company shall promptly, but no later than one (1) Business Day after such request, deliver to such Purchaser an irrevocable written notice (the Offer Notice) of any proposed or intended issuance or sale or exchange (the Offer) of the securities being offered (the Offered Securities) in a Subsequent Placement, which Offer Notice shall (w) identify and describe the Offered Securities, (x) describe the price and other terms upon which they are to be issued, sold or exchanged, and the number or amount of the Offered Securities to be issued, sold or exchanged, (y) identify the Persons (if known) to which or with which the Offered Securities are to be offered, issued, sold or exchanged and (z) offer to issue and sell to or exchange with such Purchaser in accordance with the terms of the Offer an aggregate of twenty-five percent (25%) of the Offered Securities, provided that the number of Offered Securities which such Purchaser shall have the right to subscribe for under this Section 4(i) shall be based on such Purchasers pro rata portion of the aggregate number of Common Shares purchased hereunder by all Purchasers (the Basic Amount).
(ii) To accept an Offer, in whole or in part, such Purchaser must deliver a written notice to the Company prior to the end of the third (3rd) Business Day after such Purchasers receipt of the Offer Notice (the Offer Period), setting forth the portion of such Purchasers Basic Amount that such Purchaser elects to purchase (the Notice of Acceptance). Notwithstanding the foregoing, if the Company desires to modify or amend the terms and conditions of the Offer prior to the expiration of the Offer Period, the Company may deliver to each Purchaser a new Offer Notice and the Offer Period shall expire on the third (3rd) Business Day after such Purchasers receipt of such new Offer Notice.
(iii) The Company shall have five (5) Business Days from the expiration of the Offer Period above (i) to offer, issue, sell or exchange all or any part of such Offered Securities as to which a Notice of Acceptance has not been given by a Purchaser (the Refused Securities) pursuant to a definitive agreement(s) (the Subsequent Placement Agreement), but only to the offerees described in the Offer Notice (if so described therein) and only upon terms and conditions (including, without limitation, unit prices and interest rates) that are not more favorable to the acquiring Person or Persons or less favorable to the Company than those set forth in the Offer Notice and (ii) to publicly announce via press release (a) the execution of such Subsequent Placement Agreement, and (b) either (x) the consummation of the transactions contemplated by such Subsequent Placement Agreement or (y) the termination of such Subsequent Placement Agreement.
(iv) In the event the Company shall propose to sell less than all the Refused Securities (any such sale to be in the manner and on the terms specified in Section 4(i)(iii) above), then such Purchaser may, at its sole option and in its sole discretion, reduce the number or amount of the Offered Securities specified in its Notice of Acceptance to an amount that shall be not less than the number or amount of the Offered Securities that such Purchaser elected to purchase pursuant to Section 4(i)(ii) above multiplied by a fraction, (i) the numerator of which shall be the number or amount of Offered Securities the Company actually proposes to issue, sell or exchange (including Offered Securities to be issued or sold to Purchasers pursuant to this Section 4(i) prior to such reduction) and (ii) the denominator of which shall be the original amount of the Offered Securities. In the event that any Purchaser so elects to reduce the number
or amount of Offered Securities specified in its Notice of Acceptance, the Company may not issue, sell or exchange more than the reduced number or amount of the Offered Securities unless and until such securities have again been offered to the Purchasers in accordance with Section 4(i)(i) above.
(v) Upon the closing of the issuance, sale or exchange of all or less than all of the Refused Securities, such Purchaser shall acquire from the Company, and the Company shall issue to such Purchaser, the number or amount of Offered Securities specified in its Notice of Acceptance. The purchase by such Purchaser of any Offered Securities is subject in all cases to the preparation, execution and delivery by the Company and such Purchaser of a separate purchase agreement relating to such Offered Securities reasonably satisfactory in form and substance to such Purchaser and its counsel.
(vi) Any Offered Securities not acquired by a Purchaser or other Persons in accordance with this Section 4(i) may not be issued, sold or exchanged until they are again offered to such Purchaser under the procedures specified in this Agreement.
(vii) Notwithstanding anything to the contrary in this Section 4(i) and unless otherwise agreed to by such Purchaser, the Company shall either confirm in writing to such Purchaser that the transaction with respect to the Subsequent Placement has been abandoned or shall publicly disclose its intention to issue the Offered Securities, in either case in such a manner such that such Purchaser will not be in possession of any material, non-public information, by the tenth (10th) Business Day following delivery of the Offer Notice. If by such tenth (10th) Business Day, no public disclosure regarding a transaction with respect to the Offered Securities has been made, and no notice regarding the abandonment of such transaction has been received by such Purchaser, such transaction shall be deemed to have been abandoned and such Purchaser shall not be in possession of any material, non-public information with respect to the Company or any of its Subsidiaries. Should the Company decide to pursue such transaction with respect to the Offered Securities, the Company shall provide such Purchaser with another Offer Notice in accordance with, and subject to, the terms of this Section 4(i) and such Purchaser will again have the right of participation set forth in this Section 4(i). The Company shall not be permitted to deliver more than one Offer Notice to such Purchaser in any sixty (60) day period, except as expressly contemplated by the last sentence of Section 4(i)(ii).
(viii) The restrictions contained in this Section 4(i) shall not apply in connection with the issuance of any Excluded Securities (as defined below). The Company shall not circumvent the provisions of this Section 4(i) by providing terms or conditions to one Purchaser that are not provided to all. Excluded Securities means (A) shares of Common Stock or options to purchase Common Stock (including the issuance of Common Stock upon the exercise of such options) to consultants directors, officers or employees of the Company in their capacity as such pursuant to an Approved Share Plan (as defined below), provided that the exercise price of any such options is not lowered, none of such options are amended to increase the number of shares issuable thereunder and none of the terms or conditions of any such options are otherwise materially changed in any manner that adversely affects any of the Purchasers; (B) shares of Common Stock issued upon the conversion or exercise of Convertible Securities (other than standard options to purchase Common Stock issued pursuant to an Approved Share Plan that are covered by clause (A) above) issued prior to the date hereof, provided that the
conversion or exercise price of any such Convertible Securities is not lowered, none of such Convertible Securities are amended to increase the number of shares issuable thereunder and none of the terms or conditions of any such Convertible Securities are otherwise materially changed in any manner that adversely affects any of the Purchasers; (C) the Common Shares, (D) the Warrants, (E) the Warrant Shares (F) any securities of the Company issued or issuable pursuant to any rights or agreements, options, warrants or convertible securities outstanding as of the date of this Agreement, (G) shares of the Companys Common Stock issued or issuable in connection with any stock split, stock dividend or subdivision of the Companys Common Stock, (H) shares of the Companys Common Stock issued or issuable pursuant to any equipment loan or leasing arrangement, real property leasing arrangement or debt financing from a bank or similar financial institution or equipment lessor approved by the board of Directors of the Company and (I) any equity securities of the Company issued for consideration other than cash pursuant to a merger, consolidation, acquisition or similar business combination approved by the board of directors of the Company. Approved Share Plan means the Companys 2002 Stock Plan, the Companys 2011 Equity Incentive Plan, the Companys employee stock purchase plan and any other employee benefit plan which has been approved by the board of directors of the Company prior to or subsequent to the date hereof pursuant to which shares of Common Stock and options to purchase Common Stock may be issued to any consultant, employee, officer or director for services provided to the Company in their capacity as such.
(ix) Notwithstanding the forgoing, in lieu of giving notice to the Purchasers prior to any Subsequent Placement as provided in Section 4(i), the Company may elect to give notice to the Purchasers within thirty (30) days after the closing of an Subsequent Placement. Such notice shall describe the type, price and terms of the Subsequent Placement. Each Purchaser shall have twenty (20) days from the date of receipt of such notice to elect to purchase up to the number of shares that such Purchaser would have been entitled to purchase under the terms and conditions of this Section 4(i). Such purchase shall be on the same terms and conditions and at the same price as the Subsequent Placement. The closing of such sale shall occur within sixty (60) days of the date of notice to the Purchasers.
(x) Unless the Board of Directors of the Company elects otherwise, in the event Purchaser fails to purchase its pro rata share pursuant to this Section 4(i), then such Purchaser shall no longer have any rights pursuant to this Section 4 relating to any Subsequent Placement.
(xi) Notwithstanding the foregoing, the Company shall not be required to offer or sell any securities to any Purchaser that would cause the Company to be in violation of applicable federal or state securities laws by virtue of such offer or sale.
5. REGISTRAR; TRANSFER AGENT INSTRUCTIONS.
(a) Transfer Agent. The Company shall engage and maintain, at its expense, a registrar and transfer agent for the Common Stock.
(b) Transfer Agent Instructions. The Company shall issue irrevocable instructions to its transfer agent, and any subsequent transfer agent, to issue certificates or credit shares to the applicable balance accounts at the DTC, registered in the name of CDN, for the
Common Shares and Warrant Shares in such amounts as specified from time to time by each Purchaser to the Company in the form of EXHIBIT F attached hereto (the Irrevocable Transfer Agent Instructions). The Company represents and warrants that no instruction other than the Irrevocable Transfer Agent Instructions referred to in this Section 5, and stop transfer instructions to give effect to Section 2(h) hereof, will be given by the Company to its transfer agent with respect to the Common Shares or Warrant Shares, and that the Common Shares and Warrant Shares shall otherwise be freely transferable on the books and records of the Company as and to the extent provided in this Agreement and the other Transaction Documents.
(c) Breach. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to a Purchaser. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Section 5 will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Section 5, that a Purchaser shall be entitled, in addition to all other available remedies, to an order and/or injunction restraining any breach and requiring immediate issuance and transfer, without the necessity of showing economic loss and without any bond or other security being required.
6. CONDITIONS TO THE COMPANYS OBLIGATION TO CLOSE. The obligation of the Company hereunder to issue and sell the Common Shares and Warrants to each Purchaser at the Closing is subject to the satisfaction, at or before the Closing, of each of the following conditions, provided that these conditions are for the Companys sole benefit and may be waived by the Company at any time in its sole discretion by providing each Purchaser with prior written notice thereof:
(a) Such Purchaser shall have executed each of the Transaction Documents to which it is a party and delivered the same to the Company.
(b) Such Purchaser and each other Purchaser shall have delivered to the Company the applicable Subscription Amount for the Common Shares and Warrants being purchased by the Purchasers at the Closing by wire transfer of immediately available funds pursuant to the wire instructions provided by the Company in an amount resulting in net proceeds to the Company of no less than One Million Six Hundred Thousand United States Dollars ($1,600,000).
(c) The representations and warranties of such Purchaser shall be true and correct in all material respects as of the date when made and as of the date of the Closing as though made at that time (except for representations and warranties that speak as of a specific date, which shall be true and correct as of such specified date), and such Purchaser shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by such Purchaser at or prior to the date of the Closing.
(d) Such Purchaser shall have delivered its Purchaser Deliverables in accordance with Section 1(e).
7. CONDITIONS TO EACH PURCHASERS OBLIGATION TO CLOSE. The obligation of each Purchaser hereunder to purchase the Common Shares and Warrants at the Closing is subject to the satisfaction, at or before the date of the Closing, of each of the following conditions, provided that these conditions are for such Purchasers sole benefit and may be waived by such Purchaser at any time in its sole discretion by providing the Company with prior written notice thereof:
(a) The Company shall have duly executed and delivered to such Purchaser each of (i) the Transaction Documents and (ii) the Common Shares (in such amounts as indicated on the Schedule of Purchasers) and the Warrants to be issued to such Purchaser at the Closing.
(b) The Company shall have delivered to such Purchaser a copy of the Irrevocable Transfer Agent Instructions, in the form of EXHIBIT F attached hereto, which instructions shall have been delivered to and acknowledged in writing by the Companys transfer agent.
(c) The Common Stock represented by CDIs (i) shall be approved for quotation on the Principal Market and (ii) shall not have been suspended, as of the date of the Closing, by the ASIC or the Principal Market from trading on the Principal Market nor shall suspension by the ASIC or the Principal Market have been threatened, as of the date of the Closing, either (A) in writing by the ASIC or the Principal Market or (B) by falling below the minimum listing maintenance requirements of the Principal Market.
(d) The Company shall have delivered the Company Deliverables in accordance with Section 1(d).
(e) The representations and warranties of the Company shall be true and correct as of the date when made and as of the date of the Closing as though made at that time (except for representations and warranties that speak as of a specific date, which shall be true and correct as of such specified date) and the Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by the Company at or prior to the date of the Closing. Such Purchaser shall have received a certificate, executed by the Chief Executive Officer of the Company, dated as of the date of the Closing, to the foregoing effect and as to such other matters as may be reasonably requested by such Purchaser, in the form attached hereto as EXHIBIT G.
(f) No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction that prohibits the consummation of any of the transactions contemplated by the Transaction Documents.
8. TERMINATION. In the event that the Closing shall not have occurred on or before February 8, 2012, this Agreement shall terminate.
9. MISCELLANEOUS.
(a) Governing Law; Jurisdiction. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by the internal laws
of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of New York. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in The City of New York, Borough of Manhattan for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper.
(b) Counterparts. This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other parties; provided that a facsimile signature shall be considered due execution and shall be binding upon the signatory thereto with the same force and effect as if the signature were an original, not a facsimile signature.
(c) Headings. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement.
(d) Severability. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction.
(e) Entire Agreement; Amendments. This Agreement and the other Transaction Documents supersede all other prior oral or written agreements between the Purchasers, the Company, their affiliates and Persons acting on their behalf with respect to the matters discussed herein, and this Agreement, the other Transaction Documents and the instruments referenced herein and therein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor any Purchaser makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be amended other than by an instrument in writing signed by the Company and the Purchasers holding Common Shares representing at least a majority of the amount of the Common Shares purchased pursuant to this Agreement, or, if prior to the date of the Closing, the Purchasers listed on the Schedule of Purchasers as being obligated to purchase at least a majority of the amount of the Common Shares. No provision hereof may be waived other than by an instrument in writing signed by the party against whom enforcement is sought. No consideration shall be offered or paid to any Person to amend or consent to a waiver or modification of any provision of any of the Transaction Documents unless the same consideration also is offered to all of the parties to the Transaction Documents or holders of Common Shares, as the case may be. The Company has not, directly or indirectly, made any agreements with any Purchasers relating to the terms or conditions of the transactions contemplated by the Transaction Documents except as set forth in the Transaction Documents. Without limiting the foregoing, the Company confirms that, except
as set forth in this Agreement, no Purchaser has made any commitment or promise or has any other obligation to provide any financing to the Company or otherwise.
(f) Notices. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one Business Day after deposit with an overnight courier service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be:
if to the Company:
Sunshine Heart, Inc.
12998 Valley View Road
Eden Prairie, Minnesota 55344
Telephone: (952) 345-4201
Facsimile: (952) 244-0181
Attention: David A. Rosa, CEO
with a copy (for informational purposes only) to:
Honigman Miller Schwartz and Cohn LLP
350 East Michigan Avenue, Suite 300
Kalamazoo, Michigan 49007
Telephone: (269) 337-7702
Facsimile: (269) 337-7703
Attention: Phillip D. Torrence, Esq.
if to the Transfer Agent:
Link Market Services Limited
Level 12, 680 George Street, Sydney, NSW 2000
Telephone: +61 2 8280 7447
Facsimile: +61 2 9287 0305
Attention: Rakitha Amaranath
if to a Purchaser, to its address and facsimile number set forth on the Schedule of Purchasers, with copies to such Purchasers representatives as set forth on the Schedule of Purchasers;
or to such other address and/or facsimile number and/or to the attention of such other Person as the recipient party has specified by written notice given to each other party five (5) days prior to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically generated by the senders facsimile machine containing the time, date, recipient facsimile number and an image of the first page of such transmission or (C) provided by an overnight courier service shall be rebuttable evidence of personal service, receipt by facsimile or receipt from an overnight courier service in accordance with clause (i), (ii) or (iii) above, respectively.
(g) Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns, including any purchasers of the Common Shares and Warrants. The Company shall not assign this Agreement or any rights or obligations hereunder without the prior written consent of the holders of at least a majority of the aggregate number of Common Shares issued and issuable hereunder. A Purchaser may assign some or all of its rights hereunder without the consent of the Company, in which event such assignee shall be deemed to be a Purchaser hereunder with respect to such assigned rights. Notwithstanding the foregoing, the representations and warranties of the Company set forth in this Agreement shall not extend to any successors or assigns.
(h) No Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other Person, other than each Indemnitees referred to in Section 4(h), except that the Agent may rely upon the representations and warranties contained in Sections 2 and 3 hereof.
(i) Survival. Unless this Agreement is terminated under Section 8, the representations and warranties of the Company contained in Section 3 and the representations and warranties of the Purchasers contained in Section 2 shall survive the Closing for twelve (12) months, and the representations, warranties, agreements and covenants set forth in Sections 4, 5 and 9 shall survive the Closing indefinitely. Each Purchaser shall be responsible only for its own representations, warranties, agreements and covenants hereunder.
(j) Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as any other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.
(k) No Strict Construction. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.
(l) Remedies. Each Purchaser and each holder of the Securities shall have all rights and remedies set forth in the Transaction Documents and all rights and remedies which such holders have been granted at any time under any other agreement or contract and all of the rights which such holders have under any law. Any Person having any rights under any provision of this Agreement shall be entitled to enforce such rights specifically (without posting a bond or other security), to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law. Furthermore, the Company recognizes that in the event that it fails to perform, observe, or discharge any or all of its obligations under the Transaction Documents, any remedy at law may prove to be inadequate relief to the Purchasers. The Company therefore agrees that the Purchasers shall be entitled to seek temporary and permanent injunctive relief in any such case without the necessity of proving actual damages and without posting a bond or other security.
(m) Payment Set Aside. To the extent that the Company makes a payment or payments to the Purchasers hereunder or pursuant to any of the other Transaction Documents or the Purchasers enforce or exercise their rights hereunder or thereunder, and such payment or payments or the proceeds of such enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to the Company, a trustee, receiver or any other Person under any law (including, without limitation, any bankruptcy law, foreign, state or federal law, common law or equitable cause of action), then to the extent of any such restoration the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred.
(n) Independent Nature of Purchasers Obligations and Rights. The obligations of each Purchaser under any Transaction Document are several and not joint with the obligations of any other Purchaser, and no Purchaser shall be responsible in any way for the performance of the obligations of any other Purchaser under any Transaction Document. Nothing contained herein or in any other Transaction Document, and no action taken by any Purchaser pursuant hereto or thereto, shall be deemed to constitute the Purchasers as, and the Company acknowledges that the Purchasers do not so constitute, a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Purchasers are in any way acting in concert or as a group, and the Company will not assert any such claim with respect to such obligations or the transactions contemplated by the Transaction Documents and the Company acknowledges that the Purchasers are not acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Documents. The Company acknowledges and each Purchaser confirms that it has independently participated in the negotiation of the transaction contemplated hereby with the advice of its own counsel and advisors. Each Purchaser shall be entitled to independently protect and enforce its rights, including, without limitation, the rights arising out of this Agreement or out of any other Transaction Documents, and it shall not be necessary for any other Purchaser to be joined as an additional party in any proceeding for such purpose. The use of a single agreement to effectuate the purchase and sale of the Securities contemplated hereby was solely in the control of the Company, not the action or decision of any Purchaser, and was done solely for the convenience of the Company and not because it was required or requested to do so by any Purchaser. It is expressly understood and agreed that each provision contained in this Agreement and in each other Transaction Document is between the Company and a Purchaser, solely, and not between the Company and the Purchasers collectively and not between and among the Purchasers. Notwithstanding the foregoing, nothing in this subsection (n) shall be construed to alter or affect the closing condition set forth in Section 6(b) hereof.
SIGNATURES ON THE FOLLOWING PAGE
IN WITNESS WHEREOF, each Purchaser and the Company have caused their respective signature pages to this Securities Purchase Agreement to be duly executed as of the date first written above.
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SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT
IN WITNESS WHEREOF, each Purchaser and the Company have caused their respective signature page to this Securities Purchase Agreement to be duly executed as of the date first written above.
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SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT
Exhibit 10.20
NEITHER THIS SECURITY NOR THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT), OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OR (B) AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS OR BLUE SKY LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY AND ITS TRANSFER AGENT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.
SUNSHINE HEART, INC.
WARRANT TO PURCHASE COMMON STOCK
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SUNSHINE HEART, INC., a Delaware corporation (the Company), hereby certifies that, for value received, or its permitted registered assigns (the Holder), is entitled to purchase from the Company up to a total of shares (subject to adjustment as provided herein) of common stock, US$0.0001 par value per share (the Common Stock), of the Company (each such share, a Warrant Share and all such shares, including any additional shares, if any, to be issued pursuant to the immediately following paragraph, the Warrant Shares) at an exercise price equal to A$11.20 per share (as adjusted from time to time as provided in Section 9 herein, the Exercise Price), at any time and from time to time on or after the date hereof (the Trigger Date) and through and including 5:30 P.M., New York City time, on February 29, 2016 (the Expiration Date), and subject to the following terms and conditions:
This Warrant (this Warrant) is one of a series of similar warrants issued pursuant to that certain Securities Purchase Agreement, dated February 6, 2012, by and among the Company and the Purchasers identified therein (the Purchase Agreement). All such warrants are referred to herein, collectively, as the Warrants.
1. DEFINITIONS. In addition to the terms defined elsewhere in this Warrant, capitalized terms that are not otherwise defined herein have the meanings given to such terms in the Purchase Agreement. All dollar amounts set forth herein shall refer to Australian currency.
2. REGISTRATION OF WARRANTS. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the Warrant Register), in the name of the record Holder (which shall include the initial Holder or, as the case may be, any registered
assignee to which this Warrant is permissibly assigned hereunder) from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.
3. REGISTRATION OF TRANSFERS. Subject to compliance with all applicable securities laws, the Company shall register the transfer of all or any portion of this Warrant in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached as Schedule 2 hereto duly completed and signed, to the Companys transfer agent or to the Company at its address specified in the Purchase Agreement and (x) delivery, at the request of the Company, of an opinion of counsel reasonably satisfactory to the Company to the effect that the transfer of such portion of this Warrant may be made pursuant to an available exemption from the registration requirements of the Securities Act and all applicable state securities or blue sky laws and (y) delivery by the transferee of a written statement to the Company certifying that the transferee is an accredited investor as defined in Rule 501(a) under the Securities Act, to the Company at its address specified in the Purchase Agreement. Upon any such registration or transfer, a new warrant to purchase Common Stock in substantially the form of this Warrant (any such new warrant, a New Warrant) evidencing the portion of this Warrant so transferred shall be issued to the transferee, and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. Any New Warrant issued pursuant to a partial exercise of this Warrant or as a result of a transfer of this Warrant shall be deemed to have the Original Issue Date of [ ], 2012 which is the date that this Warrant was initially issued to such Holder or its predecessor. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance by such transferee of all of the rights and obligations in respect of the New Warrant that the Holder has in respect of this Warrant. The Company shall prepare, issue and deliver at its own expense any New Warrant under this Section 3.
4. EXERCISE AND DURATION OF WARRANTS.
(a) All or any part of this Warrant shall be exercisable by the registered Holder in any manner permitted by Section 10 of this Warrant at any time and from time to time on or after the Trigger Date and through and including 5:30 P.M. New York City time, on the Expiration Date. At 5:30 P.M., New York City time, on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value and this Warrant shall be terminated and no longer outstanding.
(b) The Holder may exercise this Warrant by delivering to the Company (i) an exercise notice (whether via facsimile or otherwise), in the form attached as Schedule 1 hereto (the Exercise Notice), completed and duly signed, and (ii) payment of the Exercise Price for the number of Warrant Shares as to which this Warrant is being exercised (which may take the form of a cashless exercise if so indicated in the Exercise Notice and if a cashless exercise may occur at such time pursuant to Section 10 below), and the date on which the last of such items is delivered to the Company (as determined in accordance with the notice provisions hereof) is an Exercise Date. The Holder shall not be required to deliver the original Warrant in order to effect an exercise hereunder. Execution and delivery of the Exercise Notice shall
have the same effect as cancellation of the original Warrant and issuance of a New Warrant evidencing the right to purchase the remaining number of Warrant Shares.
5. DELIVERY OF WARRANT SHARES.
(a) Upon exercise of this Warrant, the Company shall promptly (but in no event later than three Trading Days after the Exercise Date) issue or cause to be issued and cause to be delivered to or upon the written order of the Holder and in such name or names as the Holder may designate (provided that, if a Registration Statement covering the resale of the Warrant Shares is not effective and the Holder directs the Company to deliver a certificate for the Warrant Shares in a name other than that of the Holder or an Affiliate of the Holder, it shall deliver to the Company on the Exercise Date an opinion of counsel reasonably satisfactory to the Company to the effect that the issuance of such Warrant Shares in such other name may be made pursuant to an available exemption from the registration requirements of the Securities Act and all applicable state securities or blue sky laws), (i) a certificate for the Warrant Shares issuable upon such exercise, free of restrictive legends, or (ii) an electronic delivery of the Warrant Shares to the Holders account at either CHESS Depositary Nominees Pty Ltd. which will hold legal title to the Warrant Shares on behalf of the Holder for its benefit through the issue of CHESS Depositary Interests that will be quoted on the stock market of the Australian Securities Exchange or the Depository Trust Company (DTC) or a similar organization, unless in the case of clause (i) and (ii) a registration statement covering the resale of the Warrant Shares and naming the Holder as a selling stockholder thereunder is not then effective or the Warrant Shares are not freely transferable without volume and manner of sale restrictions pursuant to Rule 144 under the Securities Act, in which case such Holder shall receive a certificate for the Warrant Shares issuable upon such exercise with appropriate restrictive legends. The Holder, or any Person permissibly so designated by the Holder to receive Warrant Shares, shall be deemed to have become the holder of record of such Warrant Shares as of the Exercise Date. If the Warrant Shares are to be issued free of all restrictive legends, the Company shall, upon the written request of the Holder, use its reasonable best efforts to deliver, or cause to be delivered, Warrant Shares hereunder electronically through DTC or another established clearing corporation performing similar functions, if available; provided, that, the Company may, but will not be required to, change its transfer agent if its current transfer agent cannot deliver Warrant Shares electronically through such a clearing corporation. For purposes of this Warrant, Trading Day shall mean any day on which the Warrant Shares are traded on a U.S. stock exchange or, if inapplicable, the principal securities exchange or securities market on which the Warrant Shares are then traded.
(b) In addition to any other rights available to the Holder, if by the close of the third Trading Day after delivery of an Exercise Notice and the payment of the aggregate exercise price in any manner permitted by Section 10 of this Warrant, the Company fails to deliver to the Holder a certificate (or make an electronic delivery) representing the required number of Warrant Shares in the manner required pursuant to Section 5(a), and if after such third Trading Day and prior to the receipt of such Warrant Shares, the Holder or the Holders brokerage firm purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a Buy-In), then the Company shall, within three (3) Trading Days after the Holders request and in the Holders sole discretion, either (1) pay in cash to the Holder an amount equal to the Holders total purchase price (including brokerage commissions, if any) for the shares of
Common Stock so purchased (the Buy-In Price), at which point the Companys obligation to deliver such certificate (or make an electronic delivery) (and to issue such Warrant Shares) shall terminate or (2) promptly honor its obligation to deliver to the Holder a certificate or certificates (or make an electronic delivery) representing such Warrant Shares and pay cash to the Holder in an amount equal to the excess (if any) of the Buy-In Price over the product of (A) the number of shares of Common Stock purchased in the Buy-In, times (B) the closing bid price of a share of Common Stock on the Exercise Date.
6. CHARGES, TAXES AND EXPENSES. Issuance and delivery of certificates for shares of Common Stock upon exercise of this Warrant shall be made without charge to the Holder for any issue or transfer tax, transfer agent fee or other incidental tax or expense in respect of the issuance of such certificates, all of which taxes and expenses shall be paid by the Company; provided, however, that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or the Warrants in a name other than that of the Holder or an Affiliate thereof. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof.
7. REPLACEMENT OF WARRANT. If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction (in such case) and, in each case, a customary and reasonable indemnity or surety bond, if requested by the Company. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable third-party costs as the Company may prescribe. If a New Warrant is requested as a result of a mutilation of this Warrant, then the Holder shall deliver such mutilated Warrant to the Company as a condition precedent to the Companys obligation to issue the New Warrant.
8. RESERVATION OF WARRANT SHARES. The Company represents, warrants, covenants and agrees that it will at all times reserve and keep available out of the aggregate of its authorized but unissued and otherwise unreserved Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares that are issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other contingent purchase rights of persons other than the Holder (taking into account the adjustments of Section 9). The Company covenants that all Warrant Shares so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price (including by cashless exercise if permitted hereunder) in accordance with the terms hereof, be duly and validly authorized, issued and fully paid and nonassessable. The Company, without requiring any action to be taken or expense to be incurred by Holder, will take all such action as may be reasonably necessary to assure that such shares of Common Stock may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of any securities exchange or automated quotation system upon which the Common Stock may be listed.
9. CERTAIN ADJUSTMENTS. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 9.
(a) Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding, (i) pays a stock dividend on its Common Stock or otherwise makes a distribution on any class of capital stock that is payable in shares of Common Stock, (ii) subdivides its outstanding shares of Common Stock into a larger number of shares, (iii) combines its outstanding shares of Common Stock into a smaller number of shares or (iv) issues by reclassification of shares of Common Stock any shares of capital stock of the Company, then in each such case the Exercise Price shall be multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately before such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to clause (i) of this paragraph shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution, and any adjustment pursuant to clause (ii), (iii) or (iv) of this paragraph shall become effective immediately after the effective date of such subdivision or combination or reclassification.
(b) Pro Rata Distributions. If the Company, at any time while this Warrant is outstanding, distributes to all holders of Common Stock for no consideration (i) evidences of its indebtedness, (ii) any security (other than a distribution of Common Stock covered by the preceding paragraph) or (iii) rights, options or warrants to subscribe for or purchase any security, or (iv) any other asset (including cash or cash dividends) (in each case, Distributed Property), then, upon any exercise of this Warrant that occurs after the record date fixed for determination of stockholders entitled to receive such distribution, the Holder shall be entitled to receive, in addition to the Warrant Shares otherwise issuable upon such exercise (if applicable), the Distributed Property that such Holder would have been entitled to receive in respect of such number of Warrant Shares had the Holder been the record holder of such Warrant Shares immediately prior to such record date without regard to any limitation on exercise contained therein.
(c) Change in Control. For the purpose of this Warrant, Change in Control means a merger or consolidation of the Company with or into any other corporation or corporations in which the stockholders of the Company immediately prior to the merger or consolidation do not own more than fifty percent (50%) of the outstanding voting power (assuming conversion of all convertible securities and the exercise of all outstanding options) of the surviving corporation or the sale, lease, licensing, transfer or other disposition of all or substantially all the assets of the Company, unless the requisite stockholders of the Company elect, pursuant to the Certificate of Incorporation (as defined below), for such transaction or transactions not to be a Change in Control of the Company.
(i) Upon the written request of the Company, the Holder agrees that, in the event of a Change in Control that is not an asset sale and in which the sole consideration is cash, either (a) the Holder shall exercise its conversion or purchase right under this Warrant and such exercise will be deemed effective immediately prior to the consummation of such Change in Control or (b) if the Holder elects not to exercise the Warrant, this Warrant will expire upon
the consummation of such Change in Control. The Company shall provide the Holder with written notice of its request relating to the foregoing (together with such reasonable information as such Holder may request in connection with such contemplated Change in Control giving rise to such notice), which is to be delivered to the Holder not less than ten (10) days prior to the closing of the proposed Change in Control.
(ii) Upon the written request of the Company, the Holder agrees that, in the event of a Change in Control that is an arms length sale of all or substantially all of the Companys assets (and only its assets) to a third party that is not an Affiliate (as defined below) of the Company (a True Asset Sale), either (a) the Holder shall exercise its conversion or purchase right under this Warrant and such exercise will be deemed effective immediately prior to the consummation of such Change in Control or (b) if the Holder elects not to exercise the Warrant, this Warrant will continue until the Expiration Date if the Company continues as a going concern following the closing of any such True Asset Sale. The Company shall provide the Holder with written notice of its request relating to the foregoing (together with such reasonable information as such Holder may request in connection with such contemplated Change in Control giving rise to such notice), which is to be delivered to the Holder not less than ten (10) days prior to the closing of the proposed Change in Control. As used herein Affiliate shall mean any person or entity that owns or controls directly or indirectly ten (10) percent or more of the stock of the Company, and any person or entity that controls or is controlled by or is under common control with such persons or entities.
(iii) Upon the written request of the Company, the Holder agrees that, in the event of a stock for stock Change in Control of the Company by a publicly traded acquirer if, on the record date for the Change in Control, the fair market value of the Warrant Shares (or other securities issuable upon exercise of this Warrant) is equal to or greater than two (2) times the Exercise Price, the Company may require the Warrant to be deemed automatically exercised and the Holder shall participate in the Change in Control as a holder of the Warrant Shares (or other securities issuable upon exercise of the Warrant) on the same terms as other holders of the same class of securities of the Company.
(iv) Upon the closing of any Change in Control other than those particularly described in subsections (i), (ii) and (iii) above, the successor entity, if any, and if applicable, shall assume the obligations of this Warrant, and this Warrant shall be exercisable for the same securities, cash, and property as would be payable for the Warrant Shares issuable upon exercise of the unexercised portion of this Warrant as if such Warrant Shares were outstanding on the record date for the Change in Control and subsequent closing. The Exercise Price and/or number of Warrant Shares shall be adjusted accordingly.
(d) Number of Warrant Shares. Simultaneously with any adjustment to the Exercise Price pursuant to paragraph (a) of this Section 9, the number of Warrant Shares that may be purchased upon exercise of this Warrant shall be increased or decreased proportionately, so that after such adjustment the aggregate Exercise Price payable hereunder for the increased or decreased number of Warrant Shares shall be the same as the aggregate Exercise Price in effect immediately prior to such adjustment.
(e) Calculations. All calculations under this Section 9 shall be rounded to the nearest cent or up to the next share, as applicable.
(f) Notice of Adjustments. Upon the occurrence of each adjustment pursuant to this Section 9, the Company at its expense will promptly notify the Holders of the applicable adjustment, compute such adjustment, in good faith, in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment, including a statement of the adjusted Exercise Price and adjusted number or type of Warrant Shares or other securities issuable upon exercise of this Warrant (as applicable), describing the transactions giving rise to such adjustments and showing in detail the facts upon which such adjustment is based. Upon written request, the Company will promptly deliver a copy of each such certificate to the Holder and to the Companys transfer agent.
(g) Notice of Corporate Events. If, while this Warrant is outstanding, the Company (i) declares a dividend or any other distribution of cash, securities or other property in respect of its Common Stock, including, without limitation, any granting of rights or warrants to subscribe for or purchase any capital stock of the Company or any subsidiary, (ii) authorizes or approves, enters into any agreement contemplating or solicits stockholder approval for any Change in Control or (iii) authorizes the voluntary dissolution, liquidation or winding up of the affairs of the Company, then, except if such notice and the contents thereof shall be deemed to constitute material non-public information, the Company shall deliver to the Holder a notice of such transaction at least ten (10) business days prior to the applicable record or effective date on which a Person would need to hold Common Stock in order to participate in or vote with respect to such transaction and the Company will take all reasonable steps to give Holder the practical opportunity to exercise this Warrant prior to such time; provided, however, that the failure to deliver such notice or any defect therein shall not affect the validity of the corporate action required to be described in such notice.
(h) Special ASX Provision. For so long as shares of the Companys capital stock (or CHESS Depositary Interests representing such shares) are listed or otherwise quoted on the stock market of the Australian Securities Exchange (the ASX), the following provisions of this Section 9(h) shall apply.
(i) The Company will, in accordance with the listing rules of the ASX (the ASX Listing Rules), make an application to have the Warrant Shares that are issued pursuant to an exercise of this Warrant, listed for official quotation on the market conducted by ASX. In the case of any pro-rata issue (other than a bonus issue), the Exercise Price will be reduced according to the formula set out for making such an adjustment in the ASX Listing Rules. In the case of a bonus issue, the number of Warrant Shares over which this Warrant is exercisable will, in accordance with the ASX Listing Rules, be increased by the number of Warrant Shares which the Holder would have received if this Warrant had been exercised before the record date for the bonus issue. The Company will notify the ASX of the adjustments in accordance with the ASX Listing Rules.
(ii) In the event of any reorganisation (including consolidation, subdivisions, reduction or return) of the authorised or issued capital of the Company, the rights
of the Holder will be changed to the extent necessary to comply with the ASX Listing Rules applying to a reorganisation of capital at the time of the reorganisation.
(iii) Upon reorganisation of the Companys capital, the rights of the Holder will, as required, be changed to comply with the ASX Listing Rules.
Other than as permitted under the ASX Listing Rules, the Warrant does not give the Holder any right to vote, receive dividends, participate in new share issues or grant any other rights to the Holder as a shareholder until Warrant Shares are allotted pursuant to the exercise of the Warrant. In the event the terms and conditions of this Section 9(h) conflict with the terms and conditions set forth in Sections 9(a)-(d) of this Warrant, the terms and conditions of this Section 9(h) shall control.
10. PAYMENT OF EXERCISE PRICE. The Holder shall pay the Exercise Price in immediately available funds; provided, however, that if, on any Exercise Date there is not an effective registration statement registering, or no current prospectus available for, the resale of the Warrant Shares by the Holder or if on any Exercise Date, the Warrant Shares (or CHESS Depository Interests representing the Warrant Shares) are not listed or quoted on the ASX, then the Holder may, in its sole discretion, satisfy its obligation to pay the Exercise Price through a cashless exercise, in which event the Company shall issue to the Holder the number of Warrant Shares determined as follows:
X = Y [(A-B)/A]
where:
X = the number of Warrant Shares to be issued to the Holder.
Y = the total number of Warrant Shares with respect to which this Warrant is being exercised.
A = the average of the Closing Sale Prices of the shares of Common Stock (as reported by Bloomberg Financial Markets) for the five (5) consecutive Trading Days ending on the date immediately preceding the Exercise Date.
B = the Exercise Price then in effect for the applicable Warrant Shares at the time of such exercise.
For purposes of this Warrant, Closing Sale Price means, for any security as of any date, the last trade price for such security on the principal securities exchange or trading market for such security, as reported by Bloomberg Financial Markets, or, if such exchange or trading market begins to operate on an extended hours basis and does not designate the last trade price, then the last trade price of such security prior to 4:00 P.M., New York City time, as reported by Bloomberg Financial Markets, or if the foregoing do not apply, the last trade price of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg Financial Markets, or, if no last trade price is reported for such security
by Bloomberg Financial Markets, the average of the bid prices, or the ask prices, respectively, of any market makers for such security as reported in the pink sheets by Pink Sheets LLC. If the Closing Sale Price cannot be calculated for a security on a particular date on any of the foregoing bases, the Closing Sale Price of such security on such date shall be the fair market value as mutually determined by the Company and the Holder. If the Company and the Holder are unable to agree upon the fair market value of such security, then the Board of Directors of the Company shall use its good faith judgment to determine the fair market value. The Board of Directors determination shall be binding upon all parties absent demonstrable error. All such determinations shall be appropriately adjusted for any stock dividend, stock split, stock combination or other similar transaction during the applicable calculation period.
Notwithstanding anything herein to the contrary, on the Expiration Date, this Warrant shall be automatically exercised via cashless exercise pursuant to this Section 10.
11. LIMITATIONS ON EXERCISE.
(a) Notwithstanding anything to the contrary contained in this Warrant (other than the provisions of Section 11(b) below), the Company shall not effect any exercise of this Warrant, and the Holder shall not have the right to exercise any portion of this Warrant to the extent (but only to the extent) that, after giving effect to such issuance after exercise, the Holder (together with any person acting as a group with the Holder or the Holders Affiliates) would beneficially own in excess of 9.99% (the Maximum Percentage) of the outstanding shares of Common Stock. To the extent the above limitation applies, the determination of whether this Warrant shall be exercisable (vis-à-vis other convertible, exercisable or exchangeable securities owned by the Holder) and of which warrants shall be exercisable (as among all warrants owned by the Holder) shall, subject to such Maximum Percentage limitation, be determined on the basis of the first submission to the Company for conversion, exercise or exchange (as the case may be). No prior inability to exercise this Warrant pursuant to this paragraph shall have any effect on the applicability of the provisions of this paragraph with respect to any subsequent determination of exercisability. For the purposes of this paragraph, beneficial ownership and all determinations and calculations (including, without limitation, with respect to calculations of percentage ownership and as to the determination of any group) shall be determined by the Holder in accordance with Section 13(d) of the Securities Exchange Act of 1934 (the Exchange Act) and the rules and regulations promulgated thereunder. The provisions of this paragraph shall be implemented in a manner otherwise than in strict conformity with the terms of this paragraph to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Maximum Percentage beneficial ownership limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such Maximum Percentage limitation. For any reason at any time, upon the written or oral request of the Holder, the Company shall within one (1) Business Day confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding, including by virtue of any prior conversion or exercise of convertible or exercisable securities into Common Stock, including, without limitation, pursuant to this Warrant or securities issued pursuant to the Securities Purchase Agreement. Each delivery of an Exercise Notice by the Holder will constitute a representation by the Holder that it has evaluated the limitation set forth in this paragraph and determined that issuance of the full number of Warrant Shares requested by the Holder in such Exercise Notice is permitted under this paragraph.
(b) The provisions of Section 11(a) above shall not apply to any exercise by any Holder whose beneficial ownership of Common Stock immediately prior to the issuance of this Warrant (together with any person acting as a group with such Holder and such Holders Affiliates) exceeds the Maximum Percentage (an Existing MP Holder), provided, however, if at any time after the date hereof an Existing MP Holder and its Affiliates and any other persons or entities whose beneficial ownership of Common Stock would be aggregated with such Holders for purposes of Section 13(d) of the Exchange Act (including shares held by any group of which the Holder is a member, but excluding shares beneficially owned by virtue of the ownership of securities or rights to acquire securities that have limitations on the right to convert, exercise or purchase similar to the limitation set forth herein) shall collectively beneficially own the Maximum Percentage or less, then such Holder may deliver a written notice to the Company (an MP Notice) providing that such Holder irrevocably elects to be subject to the provisions of Section 11(a).
(c) Notwithstanding anything to the contrary contained in this Warrant, the Company shall not effect any exercise of this Warrant (including if held by an Existing MP Holder that has not delivered an MP Notice), and the Holder shall not have the right to exercise any portion of this Warrant to the extent (but only to the extent) that, after giving effect to such issuance after exercise, the Holder (together with any person acting as a group with the Holder or the Holders Affiliates) would beneficially own in excess of 19.99% (the Applicable Percentage) of the outstanding shares of Common Stock. To the extent the above limitation applies, the determination of whether this Warrant shall be exercisable (vis-à-vis other convertible, exercisable or exchangeable securities owned by the Holder) and of which warrants shall be exercisable (as among all warrants owned by the Holder) shall, subject to such Applicable Percentage limitation, be determined on the basis of the first submission to the Company for conversion, exercise or exchange (as the case may be). No prior inability to exercise this Warrant pursuant to this paragraph shall have any effect on the applicability of the provisions of this paragraph with respect to any subsequent determination of exercisability. For the purposes of this paragraph, beneficial ownership and all determinations and calculations (including, without limitation, with respect to calculations of percentage ownership and as to the determination of any group) shall be determined by the Holder in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. The provisions of this paragraph shall be implemented in a manner otherwise than in strict conformity with the terms of this paragraph to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Applicable Percentage beneficial ownership limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such Applicable Percentage limitation. For any reason at any time, upon the written or oral request of the Holder, the Company shall within one (1) Business Day confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding, including by virtue of any prior conversion or exercise of convertible or exercisable securities into Common Stock, including, without limitation, pursuant to this Warrant or securities issued pursuant to the Securities Purchase Agreement. Each delivery of an Exercise Notice by a Holder will constitute a representation by such Holder that it has evaluated the limitation set forth in this paragraph and determined that issuance of the full number of Warrant Shares requested by the Holder in such Exercise Notice is permitted under this paragraph.
12. NO FRACTIONAL SHARES. No fractional Warrant Shares will be issued in connection with any exercise of this Warrant. In lieu of any fractional shares that would, otherwise be issuable, the number of Warrant Shares to be issued shall be rounded down to the next whole number and the Company shall pay the Holder in cash the fair market value (based on the Closing Sale Price) for any such fractional shares.
13. NOTICES. Any and all notices or other communications or deliveries hereunder (including, without limitation, any Exercise Notice) shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in the Purchase Agreement prior to 5:30 P.M., New York City time, on a Trading Day, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in the Purchase Agreement on a day that is not a Trading Day or later than 5:30 P.M., New York City time, on any Trading Day, (iii) the Trading Day following the date of mailing, if sent by nationally recognized overnight courier service specifying next business day delivery, or (iv) upon actual receipt by the party to whom such notice is required to be given, if by hand delivery. The address and facsimile number of a party for such notices or communications shall be as set forth in the Purchase Agreement unless changed by such party by two (2) Trading Days prior notice to the other party in accordance with this Section 13.
14. WARRANT AGENT. The Company shall serve as warrant agent under this Warrant. Upon thirty (30) days notice to the Holder, the Company may appoint a new warrant agent. Any corporation into which the Company or any new warrant agent may be merged or any corporation resulting from any consolidation to which the Company or any new warrant agent shall be a party or any corporation to which the Company or any new warrant agent transfers substantially all of its corporate trust or shareholders services business shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holders last address as shown on the Warrant Register.
15. MISCELLANEOUS.
(a) No Rights as a Stockholder. Unless otherwise permitted in this Warrant, the Holder, solely in such Persons capacity as a holder of this Warrant, shall not be entitled to vote or receive dividends or be deemed the holder of share capital of the Company for any purpose, nor shall anything contained in this Warrant be construed to confer upon the Holder, solely in such Persons capacity as the Holder of this Warrant, any of the rights of a stockholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger, amalgamation, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise, prior to the issuance to the Holder of the Warrant Shares which such Person is then entitled to receive upon the due exercise of this Warrant. In addition, nothing contained in this Warrant shall be construed as imposing any liabilities on the Holder to purchase any securities (upon exercise of this Warrant or otherwise) or as a stockholder of the Company, whether such liabilities are asserted by the Company or by creditors of the Company.
(b) Authorized Shares.
(i) The Company covenants that during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the trading market upon which the Common Stock may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).
(ii) Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (b) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant, and (c) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant.
(iii) Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.
(c) Successors and Assigns. Subject to compliance with applicable securities laws, this Warrant may be assigned by the Holder. This Warrant may not be assigned by the Company without the written consent of the Holder except to a successor in the event of a Change in Control. This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and assigns. Subject to the preceding sentence, nothing in this Warrant shall be construed to give to any Person other than the Company and the Holder any legal or equitable right, remedy or cause of action under this Warrant. This Warrant may be amended only in writing signed by the Company and the Holder, or their successors and assigns.
(d) Amendment and Waiver. Except as otherwise provided herein, the provisions of the Warrant may be amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company has obtained the written consent of the Holder.
(e) Acceptance. Receipt of this Warrant by the Holder shall constitute acceptance of and agreement to all of the terms and conditions contained herein.
(f) Governing Law; Jurisdiction. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW THEREOF. EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS SITTING IN THE CITY OF NEW YORK, BOROUGH OF MANHATTAN, FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR WITH ANY TRANSACTION CONTEMPLATED HEREBY OR DISCUSSED HEREIN (INCLUDING WITH RESPECT TO THE ENFORCEMENT OF ANY OF THE TRANSACTION DOCUMENTS), AND HEREBY IRREVOCABLY WAIVES, AND AGREES NOT TO ASSERT IN ANY SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF ANY SUCH COURT.
(g) Headings. The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof.
(h) Severability. In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby, and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant.
(i) Remedies. The Company stipulates that the remedies at law of the Holder of this Warrant in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate and that, to the fullest extent permitted by law, such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise.