As confidentially submitted to the Securities and Exchange Commission on October 16, 2013

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

ContraFect Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   2834   39-2072586

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

28 Wells Avenue, Third Floor

Yonkers, New York 10701

(914) 207-2300

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

 

 

Robert C. Nowinski, Ph.D., Chief Executive Officer

ContraFect Corporation

28 Wells Avenue, Third Floor

Yonkers, New York 10701

(914) 207-2300

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

 

 

With copies to:

Jonathan DeSantis, Esq.

Shearman & Sterling LLP

599 Lexington Avenue

New York, New York 10022

Telephone: (212) 848-4000

Fax: (646) 848-5085

 

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after the effective date of this Registration Statement.

 

 

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

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum

Aggregate
Offering Price (1) (2)

 

Amount of

Registration Fee (3)

Common Stock, par value $0.002 per share

  $   $

 

 

(1) Estimated solely for the purpose of calculating the registration fee under Rule 457(o) under the Securities Act.
(2) Includes the offering price of shares of common stock that may be sold if the over-allotment option granted by the company to the underwriters is exercised.
(3) Calculated pursuant to Rule 457(a) under the Securities Act based on an estimate of the proposed maximum aggregate offering price.

 

 

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

 

 

 


The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED                     , 2013

             Shares

 

LOGO

ContraFect Corporation

Common Stock

 

 

This is the initial public offering of shares of our common stock. We are offering              shares of our common stock. Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $         and $         per share. We will apply to list our common stock on the NASDAQ Global Market under the symbol “         .”

We are an “emerging growth company,” as that term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, have elected to comply with certain reduced public company reporting requirements.

 

 

Investing in our common stock involves risks. See “Risk Factors” on page 10.

 

     Per
Share
     Total  

Initial public offering price

   $                    $                

Underwriting discount

   $         $     

Proceeds, before expenses, to ContraFect

   $         $     

The underwriters may also purchase up to an additional              shares of our common stock from us at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments, if any.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Delivery of the shares of common stock will be made on or about                     , 2013.

 

 

The date of this prospectus is                     , 2013


[INSIDE COVER ART TO COME]


PROSPECTUS SUMMARY

     1   

RISK FACTORS

     10   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     34   

USE OF PROCEEDS

     36   

DIVIDEND POLICY

     37   

CAPITALIZATION

     38   

DILUTION

     40   

SELECTED HISTORICAL FINANCIAL AND OTHER DATA

     42   

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     43   

BUSINESS

     56   

MANAGEMENT

     80   

EXECUTIVE COMPENSATION

     88   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     96   

PRINCIPAL STOCKHOLDERS

     99   

DESCRIPTION OF CAPITAL STOCK

     101   

SHARES ELIGIBLE FOR FUTURE SALE

     104   

MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES FOR NON-U.S. HOLDERS

     106   

UNDERWRITING

     110   

LEGAL MATTERS

     111   

EXPERTS

     111   

WHERE YOU CAN FIND MORE INFORMATION

     111   

INDEX TO FINANCIAL STATEMENTS

     F-1   

 

 

We have not, and the underwriters and their affiliates have not, authorized anyone to provide you with any information or to make any representation not contained in this prospectus. We do not, and the underwriters and their affiliates do not, take any responsibility for, and can provide no assurances as to, the reliability of any information that others may provide you. We are not, and the underwriters and their affiliates are not, making an offer to sell, or seeking offers to buy, these securities in any jurisdiction where the offer or sale is not permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common stock. Our business, financial condition, operating results and prospects may have changed since that date.

 

 

Dealer Prospectus Delivery Obligation

Until                     , 2013 (25 days after the commencement of the offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

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

 

i


INDUSTRY AND OTHER DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market share, is based on information from our own management estimates and research, as well as from industry and general publications and research, surveys and studies conducted by third parties. Management estimates are derived from publicly available information, our knowledge of our industry and assumptions based on such information and knowledge, which we believe to be reasonable. Our management estimates have not been verified by any independent source, and we have not independently verified any third-party information. In addition, assumptions and estimates of our and our industry’s future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause our future performance to differ materially from our assumptions and estimates. See “Special Note Regarding Forward-Looking Statements.”

TRADEMARKS AND TRADE NAMES

This prospectus includes our trademark and service mark, CONTRAFECT®, which is protected under applicable intellectual property laws and is the property of ContraFect. This prospectus also contains trademarks, service marks, trade names and copyrights of other companies, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or TM symbols. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.

 

ii


PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. You should read this entire prospectus, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding to invest in our common stock. Some of the statements in this summary constitute forward-looking statements, with respect to which you should review the section of this prospectus entitled “Special Note Regarding Forward-Looking Statements.” Except where the context otherwise requires or where otherwise indicated, the terms “ContraFect” “we,” “us,” “our,” “issuer,” “our Company” and “our business” refer to ContraFect Corporation.

Our Company

We are an IND-stage biotechnology company focused on protein and antibody therapeutic products for life-threatening infectious diseases, particularly those treated in hospital-based settings. We intend to address antibiotic-resistant infections using our novel bacteriophage lysins alone and in combination with standard of care antibiotics. Lysins are bacteriophage enzymes that digest (or “lyse”) the bacterial cell wall. Lysins are fundamentally different than standard of care antibiotics discovered to date, in that they have the ability to kill bacteria immediately upon contact. We believe our most advanced product candidate, CF-301, for which we hold global rights, will be the first systemic lysin to enter human clinical trials. We believe CF-301’s unique properties will lead us into additional indications such as pneumonia, skin and skin structure infections, osteomyelitis, and biofilm-related indications for infected prosthetic joints, indwelling devices and catheters. In addition to lysins, we are exploring therapy with monoclonal antibodies (“Mabs”) that block and disarm virulence factors of bacteria and viruses, rendering them vulnerable to the natural immune balance of the body. We are currently focused on Mabs for influenza.

Our Products

CF-301’s lead indication is Staphylococcus aureus (“Staph aureus”) bacteremia, a gram-positive blood borne infection, which caused 119,000 hospitalizations in 2011 and 30,000 deaths per year in the United States. We filed our Investigational New Drug (“IND”) application with the U.S. Food and Drug Administration (“FDA”) on March 7, 2013, and are currently in discussions with the FDA regarding additional information and data needed to enter Phase 1 clinical trials in 2014. Our pre-clinical studies to date have shown that CF-301 has the following attributes:

 

    Rapid bactericidal activity. CF-301 kills millions of bacteria in seconds upon contact. Traditional antibiotics, and most cytotoxic agents, require bacterial cell division and metabolism to exert their effect and can take hours or days to be effective. Lysins, however, are fundamentally different in that they have the ability to kill bacteria immediately upon contact. We believe our lysins, combined with standard of care antibiotics, have the potential to shorten treatment times and reduce the length of hospital stays.

 

    Highly specific to all forms of Staph aureus bacteria. CF-301 exhibits activity specific to all forms of Staph aureus, including methicillin-resistant (“MRSA”) and vancomycin-resistant isolates (“VISA/VRSA”). Significantly, our lysins digest only the specific type of target bacteria, which we believe will avoid damaging side effects that often occur when conventional antibiotic treatments kill the body’s healthy, desirable bacteria.

 

    Minimal resistance. To date, bacteria show minimal resistance to CF-301’s killing activity.

 

   

Synergy with current standard-of-care antibiotics. We have discovered a strong synergistic interaction between lysins and several standard-of-care antibiotics, including daptomycin, vancomycin and oxacillin. Synergy is defined as the interaction of two or more agents so that their combined effect is greater than the sum of their individual effects. When used in combination, lysins and antibiotics offer

 

 

1


 

a dual attack on pathogenic bacteria that is far greater than the sum of their individual contributions. We believe that the use of CF-301 in combination with, rather than as a replacement for, standard-of-care antibiotics, may help speed adoption of our product by physicians.

 

    Eradicates biofilms. CF-301 eradicates biofilms that protect bacterial infections on indwelling devices from antibiotics. Biofilms render infections up to 1,000-fold more resistant to penetration by antibiotics. Infected human tissues, such as the heart valve in endocarditis or bone in osteomyelitis, or indwelling medical devices, such as central venous catheters, prosthetic joints and pacemakers, are common sites for biofilm formation, providing a hurdle for effective treatment with antibiotics alone.

 

    Additional lysin programs for human therapeutics. We have acquired worldwide exclusive rights to nine lysins from The Rockefeller University. Each lysin targets a specific gram-positive bacteria, including drug-sensitive and drug-resistant forms of Staph aureus, pneumococcus, group B streptococcus, enterococcus and anthrax. We also have an in-house lysin discovery platform. We are currently examining recent discoveries of lysins to target gram-negative bacteria. The goal of our CF-301 program is to treat Staph aureus bacteremia and then to expand CF-301 treatment to additional indications, including pneumonia, skin and skin structure infections and osteomyelitis.

 

    Additional focus on influenza. We are developing new treatments for influenza. We currently have more than 60 Mabs in our research pipeline that cross-react with the three principal strains of influenza (H1, H3 and B). These Mabs react with the principal protein (hemagglutinin) on the surface of influenza at a region (referred to as the hemagglutinin stalk) which is genetically stable and does not vary from one season to another. Consequently, these Mabs have several advantages over conventional Mabs, vaccines, and antivirals, including: (1) bypassing the effects of seasonal change, which allows a single Mab to neutralize decades of different influenza strains; and (2) providing for the production of a single therapeutic cocktail of only three Mabs (covering influenza Types A H1 and H3, and Type B).

Our Platform

Lysins

We have an in-house lysin discovery platform that employs functional metagenomic-based techniques for large scale identification of lysins, enabling the production of lysin banks specific for any particular bacterial pathogen. The ability to rapidly identify lysins specific for any bacteria of interest provides a steady pipeline of novel lysins for consideration as potential antimicrobial therapeutic candidates. In addition to our in-house lysin discovery program, we have an active sponsored research agreement for the discovery of new lysins with Dr. Vincent Fischetti’s Laboratory of Bacterial Pathogenesis and Immunology at The Rockefeller University, where we have the first right to negotiate a license to all discoveries concerning lysins through October 2016. We are currently examining recent discoveries of lysins to target gram-negative bacteria.

Monoclonal Antibodies

In addition to lysins, we are exploring combination therapy with Mabs that block and disarm virulence factors of bacteria and viruses, rendering them vulnerable to the natural immune balance of the body.

Our antibodies are generated by genetic engineering using phage display libraries or other available technologies, enabling the screening of billions of human Mabs with different binding sites. As these Mabs are generated by genetic engineering, we have the ability to develop antibodies with a common backbone structure, providing for a similar pharmacokinetic profile (half-life, absorption, biodistribution, metabolism and excretion). The common properties provide for a unique ability to create a therapeutic utilizing a combination of Mabs. We are currently focused on developing Mabs for influenza.

 

 

2


Our Competitive Strengths

We believe the following strengths position us for sustainable growth:

 

    CF-301 demonstrates rapid bactericidal activity. CF-301 has been shown to kill millions of Staph aureus bacteria in seconds upon contact, which has the potential to reduce treatment time and therefore, shorten hospital stays. The average length of time for hospitalization due to Staph aureus bacteremia is 21 days and the average total cost of hospitalization is $114,000.

 

    Lead program suggests minimal resistance to date. Based on our current research and experiments, Staph aureus bacteria have shown minimal resistance to our drug, CF-301, due to the conserved binding sites.

 

    Lysins are highly specific. A key feature of our lysins that distinguishes them from many standard-of-care antibiotics is their ability to target antibiotic-resistant bacteria, as well as those that are antibiotic-sensitive.

 

    Minimal competition. There are only two FDA approved drugs for MRSA bacteremia. MRSA have shown resistance to both drugs. Additionally, we expect to seek approval for the use of CF-301 in combination with these standard-of-care antibiotics for Staph aureus bacteremia. We believe the use of CF-301 in combination with, rather than as a replacement for, standard-of-care antibiotics may help to speed adoption of our product by physicians.

 

    Diverse research pipeline behind our lead product. Our lysin discovery platform provides a steady pipeline of novel lysins for research consideration and has recently generated gram negative lysins of research interest. Our Mab platform and strategy have resulted in an innovative research program for a therapeutic combination of Mabs to combat influenza.

 

    Deep patent portfolio. We have a deep patent portfolio consisting of 14 families of patents and patent applications in the United States and certain foreign jurisdictions, which include patents filed by us and those licensed from The Rockefeller University and the Mount Sinai School of Medicine. The portfolio includes six issued U.S. patents. Upon issuance, the CF-301 patent will have patent protection through 2032.

 

    Adequate supply of CF-301 for Phase 1 and Phase 2 trials. CF-301’s properties allow us to manufacture high yields of our drug in a two-step process with 99% purity at a low cost. We have a sufficient supply of manufactured drug product available for our currently planned Phase 1 and Phase 2 clinical trials.

 

    Substantial market opportunity. Our market opportunity has accelerated and expanded as antibiotic resistance has become a major threat to global public health. Due to drug-resistant and newly-emerging pathogens, infections in the hospital are already the fourth leading cause of death in the United States, following heart disease, cancer and stroke. Recently, these pathogens have become a significant threat outside the hospital, moving rapidly into the general community at large.

 

    Proven leadership team. We have assembled a management team and Board of Directors that have founded nine companies which have gone on to produce multibillion dollar drugs such as Cialis, Tobi, Revlimid and Thalomid.

Our Strategy

Our strategy is to achieve a leadership position in first-in-class drugs against resistant, life-threatening infectious diseases. We plan to pursue commercialization of therapeutic products through discovery, acquisition and development of protein and antibody products using three new paradigms:

 

  1) Advance products from our lysin technology by entering our lead product, CF-301, into clinical trials;

 

  2) Demonstrate superiority over any one of the standard-of-care drugs alone by combining CF-301 with standard-of-care antibiotics to enhance their speed and potency; and

 

 

3


  3) Acquire or discover Mabs that block and disarm virulence factors of bacteria and viruses, rendering them vulnerable to the natural immune balance of the body. The strategies of our Mab program include: (a) targeting conserved regions of the virus or bacteria which are not prone to mutation; and (b) targeting multiple proteins expressed from different genes within a bacteria or virus, allowing for multiplier effects.

Our Management

Our management team has extensive experience in leading the development of innovative therapeutics and significant expertise in operational, financial and corporate development functions. Our founder and Chief Executive Officer, Robert C. Nowinski, Ph.D., has founded seven biotechnology companies, including Genetic Systems Corporation (acquired in 1987 for $310 million by The Bristol-Myers Squibb Company); PathoGenesis Corporation (acquired in 2000 for $660 million by Chiron Corporation); and ICOS Corporation (acquired in 2006 for $2.2 billion by Eli Lilly and Company). Collectively, these companies have developed and marketed eight diagnostic tests and two therapeutic drugs (Cialis for erectile dysfunction and TOBI, the leading drug for cystic fibrosis). Our Executive Vice President and Chief Financial Officer, Julia P. Gregory, has extensive experience in management, operation, finance and corporate development as President and Chief Executive Officer at Five Prime Therapeutics, Inc. and Executive Vice President and Chief Financial Officer at Lexicon Pharmaceuticals, Inc. Our Senior Vice President and Chief Medical officer, David Huang, led development efforts of Zyvox at Pfizer Inc. and Aptivus and Viramune for HIV infections at Boehringer Ingelheim GmbH. Our Chairman, Sol Barer, and board member Sir Richard Sykes, have significant scientific and executive leadership experience in the pharmaceutical industry at Celgene Corporation and GlaxoSmithKline, respectively.

Risks Associated with Our Business

Our business and ability to execute our business strategy are subject to a number of risks of which you should be aware before you decide to buy our common stock. In particular, you should consider the following risks, which are discussed more fully in the section entitled “Risk Factors” in this prospectus:

 

    We are heavily dependent on the success of CF-301. The approval process of the FDA and comparable foreign regulatory authorities is lengthy, time consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for CF-301, our business will be substantially harmed.

 

    We have incurred significant losses since our inception. We have not yet generated any revenues from product sales. We expect to incur losses for at least the next several years and may never achieve or maintain profitability.

 

    We have a need for substantial additional funding. If we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts.

 

    If clinical trials of CF-301, or any other product candidate that we develop, fail to demonstrate safety and efficacy to the satisfaction of the FDA or similar regulatory authorities outside the United States or do not otherwise produce positive results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of CF-301 or any other product candidate.

 

    Our future success depends on our ability to attract and retain key employees.

 

    If we are unable to obtain and maintain patent protection for our technology and products, or if the scope of the patent protection is not sufficiently broad, our competitors could develop and commercialize technology and products similar or identical to ours, and our ability to successfully commercialize our technology and products may be adversely affected.

 

 

4


Corporate Information

We were incorporated as a Delaware corporation on March 5, 2008. Our corporate headquarters is located at 28 Wells Avenue, Third Floor, Yonkers, New York 10701. Our telephone number is (914) 207-2300. Our website address is http://www.contrafect.com. The information on our website is not deemed, and you should not consider such information, to be part of this prospectus.

Implications of Being an Emerging Growth Company

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:

 

    being permitted to present only two years of audited financial statements and only two years of related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus;

 

    not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”);

 

    reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and

 

    exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of delayed adoption of new or revised accounting standards and, therefore, we will be subject to the same requirements to adopt new or revised accounting standards as other public companies that are not emerging growth companies.

We will remain an emerging growth company until the earliest to occur of: (i) our reporting $1 billion or more in annual gross revenues; (ii) the end of fiscal year 2018; (iii) our issuance, in a three year period, of more than $1 billion in non-convertible debt; and (iv) the end of the fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million on the last business day of our second fiscal quarter.

 

 

5


THE OFFERING

 

Common stock offered

             shares.

 

Common stock to be outstanding after this offering

             shares (or              shares if the underwriters exercise their overallotment option in full).

 

Overallotment option

We have granted the underwriters a 30-day option to purchase up to an additional              shares of our common stock at the initial public offering price to cover over-allotments, if any.

 

Use of proceeds

We currently intend to use the net proceeds from this offering, together with our existing cash and cash equivalents, to fund the costs of early stage clinical development of CF-301, to fund research and development, to build our product platform and to advance our other research programs and for working capital and general corporate purposes. See the “Use of Proceeds” section in this prospectus for a more complete description of the intended use of proceeds from this offering.

 

Proposed NASDAQ Global Market symbol

“            .”

 

Risk Factors

See “Risk Factors” beginning on page 10 and other information included in this prospectus for a discussion of factors that you should consider carefully before deciding to invest in our common stock.

The number of shares of our common stock to be outstanding after this offering is based on 7,084,240 actual shares of our common stock outstanding as of June 30, 2013, and includes 31,884,144 shares of our common stock issuable upon the automatic conversion of all outstanding shares of our preferred stock upon the closing of this offering.

The number of shares of our common stock to be outstanding after this offering excludes:

 

    15,340,920 shares of our common stock issuable upon the exercise of stock options outstanding as of June 30, 2013 at a weighted average exercise price of $0.76 per share;

 

    5,028,398 shares of our common stock issuable upon the exercise of warrants outstanding as of June 30, 2013 at a weighted average exercise price of $0.92 per share;

 

    434,219 shares of our common stock available for future issuance under our equity compensation plans as of June 30, 2013;

 

    the automatic conversion of all outstanding Convertible Notes due 2015 (as defined under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Convertible Notes due 2015”), together with any accrued and unpaid interest thereon, into an aggregate of              shares of our common stock upon the closing of this offering;

 

    the              shares of our common stock issuable upon the exercise of warrants issued in relation to the sale of the Convertible Notes due 2015 and outstanding as of June 30, 2013 at a weighted average exercise price of              per share; and

 

    an additional              shares of our common stock that will be made available for future issuance under our equity compensation plans upon the closing of this offering.

 

 

6


Unless otherwise indicated, all information in this prospectus assumes:

 

    no exercise of the outstanding options or warrants described above;

 

    no exercise by the underwriters of their option to purchase up to              shares of our common stock to cover over-allotments, if any;

 

    the automatic conversion of all outstanding shares of our Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock into an aggregate of 31,884,144 shares of our common stock upon the closing of this offering; and

 

    the amendment and restatement of our certificate of incorporation and by-laws upon the closing of this offering.

 

 

7


SUMMARY FINANCIAL DATA

The summary historical data presented below should be read in conjunction with the sections entitled “Risk Factors,” “Selected Historical Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and the related notes and other financial data included in this prospectus. We have derived the statements of operations data for the years ended December 31, 2011 and 2012 from our audited financial statements included elsewhere in this prospectus. We have derived the statements of operations data for the six months ended June 30, 2012 and 2013 and the balance sheet data as of June 30, 2013 from our unaudited financial statements included elsewhere in this prospectus. The unaudited financial data include, in the opinion of our management, all adjustments, including normal recurring adjustments, which are necessary for a fair statement of our financial position and results of operations for these periods. Our historical results are not necessarily indicative of the results that may be expected in the future and results of interim periods are not necessarily indicative of the results for the entire year.

Statement of Operations Data

 

    Year Ended December 31,     Six Months Ended June 30,     Period From
March 17, 2008
(Inception) to
June 30, 2013
 
    2011     2012     2012     2013    
                (unaudited)     (unaudited)     (unaudited)  

Operating expenses:

         

Research and development

  $ 6,618,172      $ 13,211,111      $ 4,616,140      $ 4,492,708      $ 25,479,597   

General and administrative

    3,887,307        5,943,062        2,859,901        3,783,777        16,649,009   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    10,505,479        19,154,173        7,476,041        8,276,485        42,128,606   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (10,505,479     (19,154,173     (7,476,041     (8,276,485     (42,128,606

Interest expense, net

    (111,450     (129,281     (75,883     (54,701     (422,789
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (10,616,929   $ (19,283,454   $ (7,551,924   $ (8,331,186   $ (42,551,395
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share, basic and diluted

  $ (1.63   $ (2.74   $ (1.07   $ (1.18  

Shares used to compute basic and diluted net loss per share

    6,505,204        7,045,177        7,045,177        7,080,985     
 

 

 

   

 

 

   

 

 

   

 

 

   

Balance Sheet Data

 

     As of June 30, 2013  
     Actual     Pro
Forma (1)
     Pro Forma As
Adjusted (2)
 

Cash and cash equivalents

   $ 9,591,898      $                    $                

Working capital

     4,490,132        

Total assets

     16,117,394        

Senior convertible notes

     7,585,725        

Total debt (3)

     8,960,160        

Convertible preferred stock

     39,892,327        

Accumulated deficit

     (42,551,395     

Total stockholders’ (deficit) equity

     (39,715,633     

 

(1) Amounts calculated on a pro forma basis to give effect to:

 

    the automatic conversion of all outstanding shares of our Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock into an aggregate of 31,884,144 shares of our common stock upon the closing of this offering; and

 

 

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    the automatic conversion of all outstanding Convertible Notes due 2015, together with any accrued and unpaid interest thereon, into an aggregate of              shares of our common stock upon the closing of this offering.

 

(2) Amounts calculated on a pro forma as adjusted basis to give further effect to our issuance and sale of shares of our common stock in this offering at an assumed initial public offering price of $         per share, which is the midpoint of the price range listed on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
(3) Total debt includes our Convertible Notes due 2015 and the outstanding balances of our commercial bank lease and note payable on an actual basis and the outstanding balances of our commercial bank lease and note payable on a pro forma and pro forma as adjusted basis. On September 6, 2013, we repaid all amounts outstanding under our Master Lease Agreement with Sterling National Bank. On October 4, 2013, we repaid all amounts outstanding under our Loan and Security Agreement with Silicon Valley Bank.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this prospectus, including our financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding whether to invest in our common stock. The occurrence of any of the events or developments described below could harm our business, financial condition, results of operations and growth prospects. In such an event, the market price of our common stock could decline and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.

Risks Related to Our Financial Position and Need for Additional Capital

We have incurred significant losses since our inception. We have not yet generated any revenues from product sales. We expect to incur losses for at least the next several years and may never achieve or maintain profitability.

Since inception, we have incurred significant operating losses. Our net loss was $19.3 million for the year ended December 31, 2012. As of June 30, 2013, we had a deficit accumulated during the development stage of $42.6 million. To date, we have not generated any revenues and have financed our operations primarily through private placements of our outstanding securities. We have devoted substantially all of our efforts to research and development. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We anticipate that our expenses will increase substantially in connection with commencing clinical trials of CF-301 for the treatment of patients with Staph aureus bacteremia. Our expenses also will increase if and as we:

 

    maintain, expand and protect our intellectual property portfolio;

 

    in-license or acquire other products and technologies;

 

    initiate clinical trials for our product candidates;

 

    seek marketing approvals for any of our product candidates that successfully complete clinical trials;

 

    hire additional clinical, quality control and scientific personnel; and

 

    add operational, financial and management information systems and personnel, including personnel to support our product development and planned future commercialization efforts.

We may never generate revenues that are significant enough to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital to expand our business or continue our operations. A decline in the value of our company could also cause you to lose all or part of your investment.

We have a need for substantial additional funding. If we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts.

We expect our expenses to increase in connection with our ongoing activities, particularly as we commence the clinical development of CF-301 and, possibly, other product candidates. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts.

Our future capital requirements will depend on many factors, including:

 

    the complexity, timing and results of our clinical trials of CF-301;

 

    the costs, timing and outcome of regulatory review of CF-301;

 

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    the costs of developing CF-301 for additional indications;

 

    our ability to establish scientific or business collaborations on favorable terms, if at all;

 

    the costs of preparing, filing and prosecuting patent or other intellectual property applications, maintaining and protecting our intellectual property rights and defending against intellectual property-related claims;

 

    the extent to which we in-license or acquire other products and technologies; and

 

    the scope, progress, results and costs of product development for our product candidates.

Conducting clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results to obtain marketing approval and achieve product sales. In addition, if approved, CF-301 or any other product candidate that we develop may not achieve commercial success. Accordingly, we may need to continue to rely on additional financing to achieve our business objectives. In addition, we may seek additional capital due to favorable market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans. Adequate additional financing may not be available to us on acceptable terms, or at all.

Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Our short operating history may make it difficult for you to evaluate the success of our business to date and to assess our future viability.

We were incorporated in 2008 and commenced active research operations in 2010. Our operations to date have been limited to organizing and staffing our company, business planning, raising capital and acquiring and developing CF-301 and other potential products. We have not yet demonstrated our ability to successfully complete Phase 1, Phase 2 or Phase 3 clinical trials, obtain marketing approval, manufacture a commercial scale product, or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. Consequently, any predictions you make about our future success or viability may not be as accurate as they could be if we had a longer operating history.

In addition, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors. We will need to transition from a company with a product development focus to a company capable of supporting commercial activities. We may not be successful in such a transition.

 

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The timing of the milestone and royalty payments we are required to make under our licenses and sponsored research agreements, including to The Rockefeller University, is uncertain and could adversely affect our cash flows and results of operations.

As described under “Business—Intellectual Property,” we are party to certain licenses and sponsored research agreements, including with The Rockefeller University, pursuant to which we have acquired licenses to certain patent applications and other intellectual property related to a series of compounds, including CF-301, to develop and commercialize licensed therapeutics. Under our license and sponsored research agreements with The Rockefeller University, Mount Sinai School of Medicine and MorphoSys AG, we have an obligation to make payments upon achievement of specified development, regulatory and commercialization milestones, totaling approximately $26.4 million, which assumes one product achieving all development and regulatory milestones under each agreement.

The timing of milestone payments under our licenses and sponsored research agreements, including to The Rockefeller University, is subject to factors relating to the clinical and regulatory development and commercialization of products, including CF-301, many of which are beyond our control. We may become obligated to make a milestone payment when we do not have the cash on hand to make such payment, which could require us to delay our clinical trials, curtail our operations, scale back our commercialization and marketing efforts or seek funds to meet these obligations on terms unfavorable to us.

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

Under Section 382 and related provisions of the Internal Revenue Code of 1986, as amended (the “Code”), if a corporation undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in its equity ownership over a three year period), the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. As a result of our past transactions, we may have experienced, and, upon completion of this offering, may experience, an “ownership change.” At this time, we have not completed a study to assess whether an ownership change under Section 382 of the Code has occurred, or whether there have been multiple ownership changes since our formation, due to the costs and complexities associated with such a study. We may also experience ownership changes in the future as a result of subsequent shifts in our stock ownership. Thus, our ability to utilize carryforwards of our net operating losses and other tax attributes to reduce future tax liabilities may be substantially restricted. Further, U.S. tax laws limit the time during which these carryforwards may be applied against future taxes. Therefore, we may not be able to take full advantage of these carryforwards for federal or state tax purposes. As of December 31, 2012, we had federal and state net operating loss carryforwards of approximately $35.2 million and $32.5 million, respectively, and federal research and development credits of approximately $0.7 million, the use of which could be limited or eliminated by virtue of one or more “ownership changes.”

Risks Related to the Discovery, Development and Commercialization of Our Product Candidates

We are heavily dependent on the success of CF-301. The approval process of the FDA and comparable foreign regulatory authorities is lengthy, time consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for CF-301, our business will be substantially harmed.

We have no products that have been approved for sale. Our near-term business prospects are substantially dependent on our ability to develop and commercialize CF-301. We cannot market or sell CF-301 in the United States without FDA approval, but this approval, if ever issued, is at least several years away. To commercialize CF-301 outside of the United States, we will need applicable foreign regulatory approvals. The clinical development of CF-301 is susceptible to the inherent risks of any drug development program, including a failure to achieve efficacy across a broad population of patients, the potential occurrence of severe adverse events and the risks that the FDA or any applicable foreign regulatory authority will determine that a drug product is not approvable.

The process required to obtain approval for commercialization from the FDA and similar foreign authorities is unpredictable, and typically takes many years following the commencement of clinical trials, depending on numerous factors. In addition, approval policies, regulations, or the type and amount of clinical data necessary to

 

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obtain regulatory approval may change during the course of a product’s clinical development. We may fail to obtain regulatory approval for CF-301 or any other product candidates for many reasons, including the following:

 

    we may not be able to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that CF-301 or any other product candidate is safe and effective for any indication;

 

    the results of clinical trials may not meet the level of clinical or statistical significance required for approval by the FDA or comparable foreign regulatory authorities;

 

    the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials;

 

    we may not be able to demonstrate that CF-301 or any other product candidate’s clinical and other benefits outweigh its safety risks;

 

    we may not be able to demonstrate that CF-301 or any other product candidate is superior or non-inferior to the current standard-of-care or future competitive therapies in development;

 

    the data collected from clinical trials of CF-301 or any other product candidate that we develop may not be sufficient to support the submission of a biologic license application (“BLA”), or other submission or to obtain regulatory approval in the United States or elsewhere;

 

    the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient for approval;

 

    the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from pre-clinical studies or clinical trials;

 

    the FDA or comparable foreign regulatory authorities may identify deficiencies in data generated at our clinical trial sites;

 

    the FDA or comparable foreign regulatory authorities may identify deficiencies in the clinical practices of the third party contract research organizations (“CROs”), we use for clinical trials; and

 

    the FDA or comparable foreign regulatory authorities may identify deficiencies in the manufacturing processes or facilities of third-party manufacturers with which we or our collaborators enter into agreements for clinical and commercial supplies.

This lengthy approval process as well as the unpredictability of future clinical trial results may prevent us from obtaining regulatory approval to market CF-301 or any future product candidates, which would significantly harm our business.

If clinical trials of CF-301, or any other product candidate that we develop, fail to demonstrate safety and efficacy to the satisfaction of the FDA or similar regulatory authorities outside the United States or do not otherwise produce positive results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of CF-301 or any other product candidate.

Before obtaining marketing approval from regulatory authorities for the sale of CF-301 or any other product candidate, we must complete preclinical development and conduct extensive clinical trials to demonstrate the safety and efficacy of our product candidates in humans. Clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failure of one or more clinical trials can occur at any stage of testing. The outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval of their products.

 

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We may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent our ability to receive marketing approval or commercialize our product candidates, including:

 

    clinical trials of our product candidates may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon product development programs;

 

    the number of patients required for clinical trials of our product candidates may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipate or participants may drop out of these clinical trials at a higher rate than we anticipate;

 

    our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;

 

    regulators or institutional review boards (“IRBs”) may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;

 

    we may have delays in reaching or fail to reach agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites;

 

    we may voluntarily suspend or terminate clinical trials of our product candidates for various reasons, including a finding that the participants are being exposed to unacceptable health risks;

 

    regulators or IRBs may require that we or our investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements or a finding that the participants are being exposed to unacceptable health risks;

 

    the cost of clinical trials of our product candidates may be greater than we anticipate;

 

    the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient or inadequate; and

 

    our product candidates may have undesirable side effects or other unexpected characteristics, causing us or our investigators, regulators or IRBs to suspend or terminate the trials.

If we are required to conduct additional clinical trials or other testing of CF-301 or any other product candidate that we develop beyond those that we contemplate, if we are unable to successfully complete clinical trials of our product candidates or other testing, if the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, we may:

 

    be delayed in obtaining marketing approval for our product candidates;

 

    not obtain marketing approval at all;

 

    obtain approval for indications or patient populations that are not as broad as intended or desired;

 

    obtain approval with labeling that includes significant use or distribution restrictions or safety warnings, including boxed warnings;

 

    be subject to additional post-marketing testing requirements; or

 

    have the product removed from the market after obtaining marketing approval.

Our product development costs will also increase if we experience delays in testing or marketing approvals. We do not know whether any clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all. Significant clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring products to market before we do and impair our ability to successfully commercialize our product candidates and may harm our business and results of operations.

 

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Delays in clinical trials are common and have many causes, and any such delays could result in increased costs to us and jeopardize, delay or prevent our ability to obtain regulatory approval and commence product sales as currently contemplated.

We may experience delays in clinical trials of our product candidates. Our planned clinical trials might not begin on time, might need to be redesigned, might not enroll a sufficient number of patients or might not be completed on schedule, if at all. Clinical trials can be delayed for a variety of reasons, including the following:

 

    imposition of a clinical hold by the FDA or other regulatory authorities;

 

    delays in reaching agreement on acceptable terms with prospective CROs and clinical trial sites;

 

    delays in recruiting suitable patients to participate in a trial;

 

    delays in having patients complete participation in a trial or return for post-treatment follow-up;

 

    clinical sites dropping out of a trial to the detriment of enrollment;

 

    time required to add new sites;

 

    delays in obtaining sufficient supplies of clinical trial materials; or

 

    delays resulting from negative or equivocal findings of the data safety monitoring board for a trial.

For example, our IND application for CF-301 has been placed on clinical hold by the FDA because the FDA believes that the results of the pre-clinical studies we submitted do not provide sufficient information to assess the risks to subjects in our proposed clinical trial. We are currently in discussions with the FDA regarding additional information and data needed to enter Phase 1 clinical trials.

Patient enrollment, a significant factor in the timing of clinical trials, is affected by many factors, including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating. Any of these delays in completing our clinical trials could increase our costs, slow down our product development and approval process and jeopardize our ability to commence product sales and generate revenues.

We may be required to suspend or discontinue clinical trials due to adverse side effects or other safety risks that could preclude approval of CF-301 or any other product candidates.

Our clinical trials may be suspended at any time for a number of reasons. A clinical trial may be prevented from commencing or may be suspended or terminated by us, our collaborators, IRBs, the FDA or other regulatory authorities due to an unacceptable safety risk to participants, a failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, presentation of unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using the investigational drug, changes in governmental regulations or administrative actions, lack of adequate funding to continue the clinical trial, or negative or equivocal findings of the data safety monitoring board or IRBs for a clinical trial. We may voluntarily suspend or terminate our clinical trials if at any time we believe that they present an unacceptable risk to participants. If we elect or are forced to suspend or terminate any clinical trial of any product candidates that we develop, the commercial prospects of such product candidates will be harmed and our ability to generate product revenues, if at all, from any of these product candidates will be delayed or eliminated. Any of these occurrences may significantly harm our business.

We are significantly dependent on our license agreements with The Rockefeller University that relate to CF-301.

Under our various license agreements with The Rockefeller University, we are obligated to use our diligent efforts to develop and commercialize licensed products, including CF-301. The Rockefeller University may

 

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terminate the agreement in the event of our breach of the terms of the license agreements. In the event of such termination, The Rockefeller University has the right to retain its license and other rights under the agreement, subject to continuing royalties and other obligations. Our breach of the agreement, including non-payment of any milestone payment, and The Rockefeller University’s subsequent termination of the agreement, could result in the loss of our rights to develop and commercialize CF-301, which would seriously harm our ability to generate revenues or achieve profitability.

We rely on CROs to conduct our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may be delayed in obtaining, or may ultimately not be able to obtain, regulatory approval for or commercialize CF-301 or any other product candidates.

We have relied and will continue to rely on CROs for the execution of our pre-clinical studies and to recruit patients and monitor and manage data for our clinical programs for CF-301. We control only certain aspects of our CROs’ activities, but we are responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol and legal, regulatory and scientific standards. Our reliance on the CROs does not relieve us of these regulatory responsibilities. We and our CROs are required to comply with the FDA’s regulations and current good clinical practices (“GCPs”), which is an international guideline meant to protect the rights and health of clinical trial subjects. The FDA enforces its regulations and GCPs through periodic inspections of trial sponsors, principal investigators and clinical trial sites. If we or our CROs fail to comply with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable, and the FDA may require us to perform additional clinical trials before approving our product candidates. We cannot assure you that, upon inspection, the FDA will determine that any of our clinical trials comply with GCPs. In addition, to evaluate the safety and effectiveness of CF-301 to a statistically significant degree our clinical trials will require an adequately large number of test subjects. Any clinical trial that a CRO conducts abroad on our behalf is subject to similar regulation. Accordingly, if our CROs fail to comply with these regulations or recruit a sufficient number of patients, we may have to repeat clinical trials, which would delay the regulatory approval process.

In addition, our CROs are not our employees and we cannot control whether or not they devote sufficient time and resources to our non-clinical, pre-clinical or clinical programs. Our CROs may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical studies or other drug development activities, which could impede their ability to devote appropriate time to our clinical programs. If our CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements, or for other reasons, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize CF-301 or any other product candidates that we seek to develop. As a result, our financial results and the commercial prospects for CF-301 or any other product candidates that we seek to develop would be harmed, our costs could increase and our ability to generate revenues could be delayed or ended.

We have no experience as a company in bringing a drug to regulatory approval.

As a company, we have never obtained regulatory approval for, or commercialized, a drug or biologic. It is possible that the FDA may refuse to accept any or all of our planned biologics license applications (“BLAs”) for substantive review or may conclude after review of our data that our application is insufficient to obtain regulatory approval of CF-301 or any future product candidates. If the FDA does not accept or approve any or all of our planned BLAs, it may require that we conduct additional pre-clinical, clinical or manufacturing validation studies, which may be costly, and submit that data before it will reconsider our applications. Depending on the extent of these or any other FDA required studies, approval of any BLA or application that we submit may be significantly delayed, possibly for several years, or may require us to expend more resources than we have available. Any delay in obtaining, or an inability to obtain, regulatory approvals would prevent us from meeting our timelines for commercializing CF-301 and our other products candidates, generating revenues and achieving and sustaining profitability.

 

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Even if the FDA approves CF-301 or any of our other product candidates, adverse effects discovered after approval could adversely affect our markets.

If we obtain regulatory approval for CF-301 or any other product candidate that we develop, and we or others later discover that our products cause adverse effects, a number of potentially significant negative consequences could result, including:

 

    regulatory authorities may withdraw their approval of the product;

 

    regulatory authorities may require the addition of labeling statements, such as warnings or contraindications or imposition of a risk management strategy;

 

    we may be required to change the way the product is administered, conduct additional clinical studies or restrict the distribution of the product;

 

    we could be sued and held liable for harm caused to patients and our liability insurance may not adequately cover those claims; and

 

    our reputation may suffer.

Any of these events could prevent us from maintaining market acceptance of the affected product candidate and could substantially increase the costs of, or prevent altogether, the commercialization of our product candidates.

Although clinical materials for Phase 1 and Phase 2 human trials of CF-301 have been produced, we have not yet manufactured Phase 3 supplies, scaled up the process for manufacture, validated the process, or contractually secured third parties for manufacture and commercial supply.

We do not currently have nor do we plan to build the infrastructure or capability internally to manufacture CF-301. We employ the services of Fujifilm Diosynth Biotechnologies UK LTD (“Fujifilm UK”) to supply the active pharmaceutical ingredient for CF-301. We do not yet have contracts to produce a commercial supply of the active pharmaceutical ingredient of CF-301; however, we intend to pursue agreements with Fujifilm UK to do so.

We employ the services of CanGene bioPharma (“CanGene”) to produce CF-301 in its final vialed drug product form. We do not have contracts for the commercial supply of CF-301 drug product. We intend to pursue agreements with third-party manufacturers regarding commercial supply at an appropriate future time. We intend to locate second fill finish third-party manufacturers to supply other world regions such as the European Union or Asia.

Late stage process development activities, including manufacturing process scale up and validation of the CF-301 bulk drug substance, pose inherent risks that may be greater for biological products such as CF-301 than for small molecules. The process will undergo a 35-fold scale up from the current clinical process and then be repeated under protocol successfully three times for validation.

There are underlying risks associated with the manufacture of CF-301, which could include cost overruns, new impurities, difficulties in scaling up or reproducing manufacturing processes and lack of timely availability of raw materials.

In addition, regulatory requirements could pose barriers to the manufacture of our active pharmaceutical ingredient and finished drug product for CF-301. Our third-party manufacturers are required to comply with current good manufacturing practices (“cGMPs”). As a result, the manufacturing facilities and processes used by Fujifilm UK and any of our future manufacturers to manufacture CF-301 must pass inspection by the FDA as part of our BLA review and before approval of CF-301. Similar regulations apply to manufacturers of our products for use or sale in foreign countries. If our manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA and any applicable foreign

 

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regulatory authority, we will not be able to secure the applicable approval for CF-301. If these facilities are not deemed compliant with cGMPs for the commercial manufacture of CF-301, we may need to find alternative manufacturing facilities, which would result in significant delays of up to several years in obtaining approval. In addition, our manufacturers will be subject to ongoing periodic unannounced inspections by the FDA and corresponding state and foreign agencies for compliance with cGMPs and similar regulatory requirements.

If Fujifilm UK or any alternate supplier of active pharmaceutical ingredient or finished drug product for CF-301 experiences any significant difficulties in its respective manufacturing processes, does not comply with the terms of its agreement with us or does not devote sufficient time, energy and care to providing our manufacturing needs, we could experience significant interruptions in the supply of CF-301, which could impair our ability to supply CF-301 at the levels required for our clinical trials and commercialization and prevent or delay its successful development and commercialization.

Developments by competitors, many of which have greater financial and other resources than we do, may render our products or technologies obsolete or non-competitive.

The pharmaceutical and biotechnology industries are intensely competitive. We compete directly and indirectly with other pharmaceutical companies, biotechnology companies and academic and research organizations in developing therapies to treat diseases. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. Many of our competitors have substantially greater financial, technical and other resources, such as larger research and development staff and experienced marketing and manufacturing organizations and well-established sales forces. We compete with companies that have products on the market or in development for the same indications as our product candidates. We may also compete with organizations that are developing similar technology platforms. Competitors may develop more effective, more affordable or more convenient products or may achieve earlier patent protection or commercialization of their products. These competing products may render our product candidates obsolete or limit our ability to generate revenue from our product candidates. Mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in our competitors. Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries. Our competitors may succeed in developing, acquiring or licensing, on an exclusive basis, drug products that are more effective or less costly than CF-301 and our other product candidates.

The commercial success of CF-301 and any other product candidates that we develop will depend upon attaining significant market acceptance of these products among physicians and payors.

Even if CF-301 or any other product candidates that we develop is approved by the appropriate regulatory authorities for marketing and sale, physicians may not prescribe the approved product. Market acceptance of CF-301 and any other product candidates that we develop by physicians, patients and payors will depend on a number of factors, many of which are beyond our control, including:

 

    the indications for which the product is approved;

 

    acceptance by physicians and payors of each product as a safe and effective treatment;

 

    the availability, efficacy and cost of competitive drugs;

 

    the effectiveness of our or any third-party partner’s sales force and marketing efforts;

 

    the extent to which the product is approved for inclusion on formularies of hospitals and managed care organizations;

 

    whether the product is designated under physician treatment guidelines as a first-line therapy or as a second- or third-line therapy for particular infections;

 

    the availability of adequate reimbursement by third parties, such as insurance companies and other health care payors, and/or by government health care programs, including Medicare and Medicaid;

 

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    limitations or warnings contained in a product’s FDA-approved labeling; and

 

    prevalence and severity of adverse side effects.

Even if the medical community accepts that CF-301 is safe and efficacious for its approved indication(s), physicians may not immediately be receptive to the use or may be slow to adopt CF-301 as an accepted treatment for Staph aureus bacteremia (or other indications). While we believe CF-301 has significant advantages, we cannot assure you that any labeling approved by the FDA will permit us to promote CF-301 as being superior to competing products. In addition, our efforts to educate the medical community and third-party payors on the benefits of CF-301 or other product candidates that we develop may require significant resources and may never be successful.

Reimbursement may not be available for CF-301 or any other product candidates that we develop, which could make it difficult for us to sell our products profitably.

Market acceptance and sales of CF-301 or any other product candidates that we develop will depend on reimbursement policies and may be affected by health care reform measures. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which drugs they will pay for and establish reimbursement levels. We cannot be sure that reimbursement will be available for CF-301 or any other product candidates that we develop. Also, we cannot be sure that the amount of reimbursement available, if any, will not reduce the demand for, or the price of, our products. If reimbursement is not available or is available only at limited levels, we may not be able to successfully commercialize CF-301 or any other product candidates that we develop.

In both the United States and some foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the health care system in ways that could affect our ability to sell our products profitably. In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, also called the Medicare Modernization Act (“MMA”), changed the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly and introduced a new reimbursement methodology based on average sales prices for physician-administered drugs. In addition, this legislation provided authority for limiting the number of drugs that will be covered in any therapeutic class. As a result of this legislation and the expansion of federal coverage of drug products, we expect that there will be additional pressure to contain and reduce costs. These cost reduction initiatives and other provisions of this legislation could decrease the coverage and price that we receive for any approved products and could seriously harm our business. While the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policies and payment limitations in setting their own reimbursement rates, and therefore any reduction in reimbursement that results from the MMA may result in a similar reduction in payments from private payors.

In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (collectively, the “PPACA”), became law in the United States. The goal of PPACA is to reduce the cost of health care and substantially change the way health care is financed by both governmental and private insurers. While we cannot predict what impact on federal reimbursement policies this legislation will have in general or on our business specifically, the PPACA may result in downward pressure on pharmaceutical reimbursement, which could negatively affect market acceptance of CF-301 or any future products.

We expect to experience pricing pressures in connection with the sale of CF-301 and any other products that we develop, due to the trend toward managed health care, the increasing influence of health maintenance organizations and additional legislative proposals. If we fail to successfully secure and maintain reimbursement coverage for our products or are significantly delayed in doing so, we will have difficulty achieving market acceptance of our products and our business will be harmed.

 

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Even if we obtain FDA approval of CF-301, or any other product candidate, we may never obtain approval or commercialize our products outside of the United States, which would limit our ability to realize their full market potential.

In order to market CF-301 or any other products outside of the United States, we must comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy. Clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one country does not mean that regulatory approval will be obtained in any other country. Approval procedures vary among countries and can involve additional product testing and validation and additional administrative review periods. Seeking foreign regulatory approvals could result in significant delays, difficulties and costs for us and require additional pre-clinical studies or clinical trials which would be costly and time consuming. Regulatory requirements can vary widely from country to country and satisfying these and other regulatory requirements is costly, time consuming, uncertain and subject to unanticipated delays. In addition, our failure to obtain regulatory approval in the United States or any foreign country may delay or have negative effects on the process for regulatory approval in other countries. We do not have any product candidates approved for sale in the United States or any foreign country and we do not have experience as a company in obtaining regulatory approval in international markets.

We currently have no marketing and sales organization and have no experience in marketing drug products. If we are unable to establish our own marketing and sales capabilities, or enter into agreements with third parties, to market and sell our products after they are approved, we may not be able to generate revenues.

We do not have the capabilities to market, sell and distribute any of our drug products. In order to commercialize any products, we must develop these capabilities on our own or make arrangements with third parties for the marketing, sales and distribution of our products. The establishment and development of our own sales force would be expensive and time consuming and could delay any product launch, and we cannot be certain that we would be able to successfully develop this capability. As a result, we may seek one or more licensing partners to handle some or all of the sales, marketing or distribution for CF-301 in the United States or elsewhere. However, we may not be able to enter into arrangements with third parties to sell CF-301 on favorable terms or at all. In the event we are unable to develop our own marketing and sales force or collaborate with a third-party marketing and sales organization, we would not be able to commercialize CF-301 or any other product candidates that we develop, which would negatively impact our ability to generate product revenues. Further, whether we commercialize products on our own or rely on a third party to do so, our ability to generate revenue will be dependent on the effectiveness of the sales force. In addition, to the extent we rely on third parties to commercialize our approved products, we will likely receive less revenues or profits than if we commercialized these products ourselves.

We may form or seek strategic alliances in the future, and we may not realize the benefits of such alliances.

We may form or seek strategic alliances, create joint ventures or collaborations or enter into licensing arrangements with third parties that we believe will complement or augment our development and commercialization efforts with respect to CF-301 and any future product candidates that we may develop. Any of these relationships may require us to incur non-recurring and other charges, increase our near-and long-term expenditures, issue securities that dilute our existing stockholders or disrupt our management and business. In addition, we face significant competition in seeking appropriate strategic partners and the negotiation process is time-consuming and complex. Moreover, we may not be successful in our efforts to establish a strategic partnership or other alternative arrangements for CF-301 because it may be deemed to be at too early of a stage of development for collaborative effort and third parties may not view CF-301 as having the requisite potential to demonstrate safety and efficacy. Any delays in entering into new strategic partnership agreements could delay the development and commercialization of CF-301 and other product candidates that we develop, which would harm our business prospects, financial condition and results of operations.

 

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Risks Related to Regulatory Approval of Our Product Candidates and Other Legal Compliance Matters

If we are not able to obtain, or if there are delays in obtaining, required regulatory approvals, we will not be able to commercialize, or will be delayed in commercializing, CF-301 and other potential product candidates, and our ability to generate revenue will be materially impaired.

CF-301 and other product candidates that we develop and the activities associated with their development and commercialization, including their design, testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale, distribution, importation and exportation are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by comparable authorities in other countries. Failure to obtain marketing approval for a product candidate will prevent us from commercializing the product candidate. We have not received approval to market any product from regulatory authorities in any jurisdiction. Securing regulatory approval requires the submission of extensive preclinical and clinical data and supporting information to the various regulatory authorities for each therapeutic indication to establish the product candidate’s safety and efficacy. Securing regulatory approval also requires the submission of information about the product manufacturing process to, and inspection of manufacturing facilities by, the relevant regulatory authority. CF-301 and other product candidates that we develop may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects or other characteristics that may preclude our obtaining marketing approval or prevent or limit commercial use.

The process of obtaining marketing approvals, both in the United States and abroad, is expensive, may take many years, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidates involved. Changes in marketing approval policies during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for each submitted product application, may cause delays in the approval or rejection of an application. The FDA and comparable authorities in other countries have substantial discretion in the approval process and may refuse to accept any application or may decide that our data is insufficient for approval and require additional preclinical, clinical or other studies. If we experience delays in obtaining approvals or if we fail to obtain approval of our product candidates that we develop, our ability to generate revenues will be materially impaired.

Even if we obtain regulatory approval for a product candidate, we will still face extensive regulatory requirements and our products may face future development and regulatory difficulties.

Even if we obtain regulatory approval in the United States, the FDA may still impose significant restrictions on the indicated uses or marketing of the approved product, or impose ongoing requirements for potentially costly post-approval studies or post-market surveillance. The holder of an approved BLA is obligated to monitor and report Adverse Events (“AEs”) and any failure of a product to meet the specifications in the BLA. The holder of an approved BLA must also submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process. Advertising and promotional materials must comply with FDA rules and are subject to FDA review, in addition to other potentially applicable federal and state laws.

In addition, drug product manufacturers and their facilities are subject to payment of user fees and continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMPs and adherence to commitments made in the BLA. If we or a regulatory agency discovers previously unknown problems with a product such as AEs of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions relative to that product or the manufacturing facility, including requiring recall or withdrawal of the product from the market or suspension of manufacturing.

If the FDA or a comparable foreign regulatory authority approves any of our product candidates, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising,

 

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promotion and recordkeeping for the product will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration requirements and continued compliance with cGMPs and GCPs for any clinical trials that we conduct post-approval.

If we or our partners fail to comply with applicable regulatory requirements following approval of any of our future product candidates, a regulatory agency may:

 

    issue a warning letter asserting that we are in violation of the law;

 

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

 

    suspend or withdraw regulatory approval;

 

    suspend any ongoing clinical trials;

 

    refuse to approve a pending BLA or supplements to a BLA submitted by us;

 

    seize product; or

 

    refuse to allow us to enter into supply contracts, including government contracts.

Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. The occurrence of any event or penalty described above may inhibit our ability to commercialize our future products and generate revenues.

If foreign approval for CF-301 or any other product candidates is obtained, there are inherent risks in conducting business in international markets.

If approved for commercialization in a foreign country, we intend to enter into agreements with third parties to market CF-301 whenever it may be approved and wherever we have the right to market it. Consequently, we expect that we will be subject to additional risks related to entering into international business relationships, including:

 

    potentially reduced protection for intellectual property rights;

 

    the potential for so-called parallel importing, which is what happens when a local seller, faced with high or higher local prices, opts to import goods from a foreign market (with low or lower prices) rather than buying them locally;

 

    unexpected changes in tariffs, trade barriers and regulatory requirements;

 

    economic weakness, including inflation, or political instability in particular foreign economies and markets;

 

    compliance with laws for employees working and traveling abroad;

 

    foreign taxes, including withholding of payroll taxes;

 

    foreign currency fluctuations, which could result in increased operating expenses and reduced revenues;

 

    workforce uncertainty in countries where labor unrest is more common than in the United States;

 

    production shortages resulting from any events affecting active pharmaceutical ingredient and/or finished drug product supply or manufacturing capabilities abroad;

 

    business interruptions resulting from geo-political actions, including war and terrorism, or natural disasters including earthquakes, typhoons, floods and fires; and

 

    failure to comply with the rules and regulations of the Office of Foreign Asset Control, the Foreign Corrupt Practices Act and other applicable anti-bribery rules and regulations in other jurisdictions.

 

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These and other risks may materially adversely affect our ability to attain or sustain revenue from international markets and therefore materially adversely affect our business.

Product liability lawsuits against us could divert our resources, cause us to incur substantial liabilities and limit commercialization of any products that we may develop.

We face an inherent risk of product liability exposure related to the testing of CF-301 and any other product candidate that we develop in human clinical trials and we will face higher degrees of this risk if we commercially sell any products that we develop. If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

    distraction of our management or other internal resources from pursuing our business strategies;

 

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

 

    injury to our reputation and significant negative media attention;

 

    withdrawal of clinical trial participants;

 

    significant costs to defend the related litigation;

 

    substantial monetary awards to trial participants or patients;

 

    loss of revenue; and

 

    the inability to commercialize any products that we may develop.

We currently hold $5.0 million in product liability insurance coverage, which may not be adequate to cover all liabilities that we may incur. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise.

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

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

Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for environmental liability or toxic tort claims.

In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair our research, development or production efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.

 

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

Healthcare providers, physicians and third-party payors play a primary role in the recommendation and prescription of any product candidates for which we obtain marketing approval. Our future arrangements with third-party payors and customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute our products for which we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations, include the following:

 

    the federal healthcare anti-kickback statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under federal and state healthcare programs such as Medicare and Medicaid;

 

    the federal False Claims Act imposes criminal and civil penalties, including through civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;

 

    the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;

 

    the federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services;

 

    the federal transparency requirements under the Affordable Care Act requires manufacturers of drugs, devices, biologics and medical supplies to report to the Department of Health and Human Services information related to physician payments and other transfers of value and physician ownership and investment interests; and

 

    analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments to physicians and other health care providers or marketing expenditures.

Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any of the physicians or other providers or entities with whom we expect to do business are found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.

 

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Risks Related to Employee Matters and Managing Growth

Our future success depends on our ability to attract and retain qualified personnel.

We are dependent on Robert C. Nowinski, Ph.D., our Chief Executive Officer, as well as the other principal members of our management and scientific teams. Although we have formal employment agreements with our executive officers, these agreements do not prevent them from terminating their employment with us at any time. We do not maintain “key person” insurance for any of our executives or other employees. The loss of the services of any of these persons could impede the achievement of our development and commercialization objectives.

Recruiting and retaining qualified scientific, clinical, and sales and marketing personnel will be critical to our success. We may not be able to attract and retain these personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also compete for the hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us.

We expect to expand our development, regulatory and sales, marketing and distribution capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.

We expect to experience growth in the number of our employees and the scope of our operations, particularly in the areas of drug discovery, drug development, regulatory affairs and commercialization. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Due to our limited financial resources and the limited experience of our management team in managing a company with significant anticipated growth, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The physical expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.

Risks Related to Our Intellectual Property

If we are unable to obtain and maintain patent protection for our technology and products, or if the scope of the patent protection is not sufficiently broad, our competitors could develop and commercialize technology and products similar or identical to ours, and our ability to successfully commercialize our technology and products may be adversely affected.

Our success depends in large part on our ability to obtain and maintain patent protection in the United States and other countries with respect to our proprietary technology and products. We seek to protect our proprietary position by filing patent applications in the United States and abroad related to our novel technologies and product candidates that are important to our business. This process is expensive and time-consuming, and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development output before it is too late to obtain patent protection. Moreover, if we license technology or product candidates from third parties in the future, these license agreements may not permit us to control the preparation, filing and prosecution of patent applications, or to maintain the patents, covering this intellectual property. These agreements could also give our licensors the right to enforce the licensed patents without our involvement, or to decide not to enforce the patents without our consent. Therefore, in these circumstances, we could not be certain that these patents and applications would be prosecuted and enforced in a manner consistent with the best interests of our business.

 

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The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and has in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain. Our pending and future patent applications may not result in patents being issued which protect our technology or products, in whole or in part, or which effectively prevent others from commercializing competitive technologies and products. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection.

The laws of foreign countries may not protect our rights to the same extent as the laws of the United States. For example, European patent law restricts the patentability of methods of treatment of the human body more than United States law does. Assuming the other requirements for patentability are met, historically, in the United States, the first to make the claimed invention was entitled to the patent, while outside the United States, the first to file a patent application is entitled to the patent. The United States currently uses a first-inventor-to-file system in which, assuming the other requirements for patentability are met, the first inventor to file a patent application will be entitled to the patent. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot be certain that we were the first to make the inventions claimed in our patents or pending patent applications, or that we were the first to file for patent protection of such inventions. Moreover, we may be subject to a third party preissuance submission of prior art to the U.S. Patent and Trademark Office, or become involved in opposition, derivation, reexamination, litigation, inter partes review or interference proceedings, in the United States or elsewhere, challenging our patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third parties to commercialize our technology or products and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patent rights. In addition, if the breadth or strength of protection provided by our patents and patent applications is threatened, it could dissuade companies from collaborating with us to license, develop or commercialize current or future product candidates.

Even if our patent applications issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors from competing with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our owned or licensed patents by developing similar or alternative technologies or products in a non-infringing manner.

The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our owned and licensed patents may be challenged in the courts or patent offices in the United States and abroad. Such challenges may result in loss of exclusivity or freedom to operate or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and products. Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.

We may become involved in lawsuits to protect or enforce our patents or other intellectual property, which could be expensive, time consuming and unsuccessful, and which could result in our patents or other intellectual property rights becoming invalidated.

Competitors may infringe our patents, trademarks, copyrights or other intellectual property. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time consuming. Any claims we assert against perceived infringers could provoke these parties to assert counterclaims against us alleging that we infringe their patents or other intellectual property rights. In addition, in

 

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a patent infringement proceeding, a court may decide that a patent of ours is invalid or unenforceable, in whole or in part, construe the patent’s claims narrowly, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question and therefore cannot be infringed. Similarly, if we assert trademark infringement claims, a court may determine that the marks we have asserted are invalid, unenforceable, or not infringed, or that the party against whom we have asserted trademark infringement claims has superior rights to the marks in question. In this case, we could ultimately be forced to cease use of such marks. In any infringement litigation, any award of monetary damages may be unlikely or very difficult to obtain, and any such award we may receive may not be commercially valuable. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation.

Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on the success of our business.

Our commercial success depends upon our ability and the ability of our collaborators to develop, manufacture, market, and sell our product candidates and use our proprietary technologies without infringing the intellectual property and other proprietary rights of third parties. There is considerable intellectual property litigation in the biotechnology and pharmaceutical industries, and we may become party to, or threatened with, future adversarial proceedings or litigation regarding intellectual property rights with respect to our products and technology, including interference proceedings before the U.S. Patent and Trademark Office. Third parties may assert infringement claims against us based on existing or future intellectual property rights.

If we are found to infringe a third party’s intellectual property rights, we could be required to obtain a license from such third party to continue developing and marketing our products and technology. However, we may not be able to obtain any required license on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. We could be forced, including by court order, to cease commercializing the infringing technology or product. In addition, we could be found liable for monetary damages, including treble damages and attorneys’ fees if we are found to have willfully infringed a patent or other intellectual property rights of a third party. A finding of infringement could prevent us from commercializing our product candidates or force us to cease some of our business operations, which could materially harm our business. Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business.

We may be subject to claims by third parties asserting that we or our employees have misappropriated their intellectual property, or claiming ownership of what we regard as our own intellectual property.

Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although we use customary non-disclosure agreements and try to ensure that our employees do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or these employees have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such employee’s former employer. Litigation may be necessary to defend against these claims.

In addition, while we typically require our employees and contractors who may be involved in the development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who in fact develops intellectual property that we regard as our own, or such agreements may be inadequately drafted at times thereby not ensuring assignment to us of all potential intellectual property rights. If we fail in prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in prosecuting or defending against such claims, litigation could result in substantial costs and be a distraction to management.

 

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Intellectual property litigation could cause us to spend substantial resources and could distract our personnel from their normal responsibilities.

Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development, sales, marketing or distribution activities. We may not have sufficient financial or other resources to adequately conduct or defend such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.

In addition to seeking patents for some of our technology and products, we also rely on trade secrets, including unpatented know-how, technology and other proprietary information, to maintain our competitive position. We seek to protect these trade secrets, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, corporate collaborators, outside scientific collaborators, contract manufacturers, consultants, advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants. However, we cannot guarantee that we have executed these agreements with each party that may have or have had access to our trade secrets, nor can we guarantee that such agreements will always be adequately drafted so as to be enforceable.

Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, because of potential differences in laws in different jurisdictions, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent them, or those to whom they communicate it, from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position would be harmed.

We have not yet registered our trademarks in all of our potential markets, and failure to secure those registrations could adversely affect our business.

Our trademark applications may not be allowed for registration, and our registered trademarks may not be maintained or enforced. During trademark registration proceedings, we may receive rejections from the U.S. Patent and Trademark Office or other applicable foreign intellectual property offices. Although we are given an opportunity to respond to those rejections, we may be unable to overcome such rejections, or have to expend additional resources to secure registrations, such as commencing cancellation proceedings against third party trademark registrations to remove them as obstacles to our trademark applications. In addition, in the U.S. Patent and Trademark Office and in comparable agencies in many foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings. If we do not secure registrations for our trademarks, we may encounter more difficulty in enforcing them against third parties than we otherwise would.

In addition, we have not yet proposed a proprietary name for CF-301 in any jurisdiction. Any proprietary name we propose to use with CF-301 in the United States must be approved by the FDA, regardless of whether we have registered it, or applied to register it, as a trademark. The FDA typically conducts a review of proposed product names, including an evaluation of potential for confusion with other product names. If the FDA objects

 

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to any of our proposed proprietary product names, we may be required to expend significant additional resources in an effort to identify a suitable proprietary product name that would qualify under applicable trademark laws, not infringe the existing rights of third parties and be acceptable to the FDA.

Risks Relating to Our Common Stock and this Offering

The price of our common stock may be volatile, and you may not be able to sell your shares at or above the public offering price.

There has been significant volatility in the market price and trading volume of equity securities, which is unrelated to the financial performance of the companies issuing the securities. In addition, equity markets have experienced significant price and volume fluctuations that have affected the market prices for the securities of newly public companies for a number of reasons, including reasons that may be unrelated to the business or operating performance of the companies. These broad market fluctuations may negatively affect the market price of our common stock. The public offering price for the shares of our common stock being sold in this offering will be determined by negotiations between the representatives of the underwriters and us and may not be indicative of prices that will prevail in the open market following this offering. You may not be able to resell your shares at or above the public offering price due to fluctuations in the market price of our common stock caused by changes in our operating performance or prospects and other factors.

The price at which our common stock will trade after this offering may be volatile due to a number of factors, including:

 

    actual or anticipated fluctuations in our financial condition or annual or quarterly results of operations;

 

    public reaction to our press releases, other public announcements and filings with the Securities and Exchange Commission (the “SEC”);

 

    changes in investor and financial analyst perceptions of the risks and condition of our business;

 

    changes in, or our failure to meet, earnings estimates and other performance expectations of investors or financial analysts;

 

    our ability to implement our growth plans;

 

    changes in market valuations of companies viewed as similar to us;

 

    strategic actions by us or our competitors, such as acquisitions or restructurings;

 

    new laws or regulations, or new interpretations of existing laws or regulations, applicable to our business;

 

    changes in accounting standards, policies, guidance, interpretations or principles;

 

    changes in key personnel;

 

    increased competition;

 

    termination of the lock-up agreement or other restrictions on the ability of our existing shareholders to sell shares after this offering;

 

    sales of common stock by us or members of our management team;

 

    the granting or exercise of employee stock options or other equity awards;

 

    actions by institutional or other large shareholders;

 

    realization of any of the risks described under “Risk Factors” in this prospectus; and

 

    general market and economic conditions.

 

29


In the past, following periods of volatility in the equity markets, securities class action lawsuits have been instituted against public companies. Such litigation, if instituted against us, could result in substantial costs and the diversion of management attention.

Our common stock has no prior public market, and our stock price could be volatile and could decline after this offering.

Prior to this offering, our common stock had no public market. We have negotiated the initial public offering price per share with the representatives of the underwriters and, therefore, that price may not be indicative of the market price of our common stock after the offering. We plan to file an application to list our common stock on the NASDAQ Global Market (“NASDAQ”). However, we cannot ensure that an active public market for our common stock will develop after this offering, or that if it does develop, it will be sustained. In the absence of a public trading market:

 

    you may not be able to liquidate your investment in our common stock;

 

    you may not be able to resell your shares at or above the initial public offering price;

 

    the market price of our common stock may experience more price volatility; and

 

    there may be less efficiency in carrying out your purchase and sale orders.

You will incur immediate and substantial dilution as a result of this offering.

Investors purchasing shares of our common stock in this offering will incur immediate and substantial dilution in net tangible book value per share. Assuming an initial public offering price of $         per share, purchasers of our common stock will effectively incur dilution of $         per share in the net tangible book value of their purchased shares. In addition, purchasers of common stock in this offering will have contributed approximately     % of the aggregate price paid by all purchasers of our stock but will own only approximately     % of our common stock outstanding after this offering. In addition, you may experience further dilution to the extent that shares of our common stock are issued upon the exercise of outstanding stock options and warrants.

We may issue additional common shares or other securities to finance our growth.

We may finance development of our product pipeline or generate additional working capital through equity financing. Therefore, subject to the rules of the NASDAQ, we may issue additional shares of our common stock, and other equity securities of equal or senior rank, without shareholder approval, in a number of circumstances from time to time. The issuance by us of shares of our common stock or other equity securities of equal or senior rank will have the following effects:

 

    the proportionate ownership interest in us held by our existing shareholders will decrease;

 

    the relative voting strength of each previously outstanding share of common stock may be diminished; and

 

    the market price of our common stock may decline.

In addition, if we issue our common shares in a future offering at a price per share lower than the price per share in this offering, it will be dilutive to purchasers of common shares in this offering.

Future sales of shares may cause the market price of our common stock to decline.

Sales of substantial amounts of our common stock in the public market after this offering, or the perception that these sales may occur, could adversely affect the price of our common stock and impair our ability to raise capital through the sale of additional equity securities. Upon completion of this offering, we will have              shares of common stock outstanding. Of these outstanding shares, the shares of common stock sold in this

 

30


offering will be freely tradable, without restriction, in the public market unless purchased by our “affiliates,” as defined under Rule 144 of the Securities Act of 1933, as amended (the “Securities Act”). The remaining shares of common stock will be “restricted securities,” as that term is defined in Rule 144 under the Securities Act, which will be freely tradable subject to the applicable holding period, volume, manner of sale and other limitations under Rule 144 or Rule 701 of the Securities Act.

Upon completion of this offering, most of the restricted securities will be subject to lock-up agreements with the underwriters, restricting the sale of such shares for              days after the date of this offering. This lock-up agreement is subject to a number of exceptions, however, and holders may be released from this agreement with the prior written consent of the underwriters’ representatives.

Additionally, we intend to register all shares of our common stock that we may issue under our employee benefit plans. Once we register these shares, they can be freely sold in the public market upon issuance, unless pursuant to their terms these stock awards have transfer restrictions attached to them.

Reports published by analysts, including projections in those reports that exceed our actual results, could adversely affect our common stock price and trading volume.

We currently expect that securities research analysts, including those affiliated with our underwriters, will establish and publish their own periodic projections for our business. These projections may vary widely and may not accurately predict the results we actually achieve. Our stock price may decline if our actual results do not match the projections of these securities research analysts. Similarly, if one or more of the analysts who write reports on us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price could decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, our stock price or trading volume could decline. While we expect research analyst coverage, if no analysts commence coverage of us, the trading price for our stock and the trading volume could be adversely affected.

Our operating costs as a public company will be significant and our management will be required to devote substantial time to complying with public company regulations.

As a public company, we expect to incur significant legal, accounting and other expenses, including costs associated with our public company reporting requirements under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We must also follow the rules, regulations and requirements subsequently adopted by the SEC and the NASDAQ and any failure by us to comply with such rules and requirements could negatively affect investor confidence in us and cause the market price of our common stock to decline. Our executive officers and other personnel will also need to devote substantial time and financial resources to comply with these rules, regulations and requirements.

If we do not develop and implement all required accounting practices and policies, we may be unable to provide the financial information required of a U.S. publicly traded company in a timely and reliable manner.

Prior to this offering, we did not adopt all of the financial reporting and disclosure procedures and controls required of a U.S. publicly traded company because we were a privately held company. We expect that the implementation of all required accounting practices and policies and the hiring of additional financial staff will increase our operating costs and could require significant time and resources from our management and employees. If we fail to develop and maintain effective internal controls and procedures and disclosure procedures and controls, we may be unable to provide financial information and required SEC reports that a U.S. publicly traded company is required to provide in a timely and reliable fashion. Any such delays or deficiencies could penalize us, including by limiting our ability to obtain financing, either in the public capital markets or from private sources and hurt our reputation and could thereby impede our ability to implement our strategy.

 

31


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

Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not enhance the value of our common stock. The failure by our management to apply these funds effectively could delay the development of our product candidates, have a material adverse effect on our business or cause the price of our common stock to decline. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and may remain an emerging growth company for up to five years. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:

 

    being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure;

 

    not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting;

 

    not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;

 

    reduced disclosure obligations regarding executive compensation; and

 

    exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

We have taken advantage of reduced reporting burdens in this prospectus. We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

We have no present intention to pay dividends and, even if we change that policy, we may be restricted from paying dividends on our common stock.

We do not intend to pay dividends for the foreseeable future. We currently expect to retain all future earnings, if any, for use in the development, operation and expansion of our business. Any determination to pay dividends in the future will depend upon, among other things, our results of operations, plans for expansion, tax considerations, available net profits and reserves, limitations under law, financial condition, capital requirements and other factors that our Board of Directors considers to be relevant.

Provisions in our corporate charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our corporate charter and our bylaws that will become effective upon the closing of this offering may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our

 

32


common stock, thereby depressing the market price of our common stock. In addition, because our Board of Directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board of Directors. Among other things, these provisions:

 

    establish a classified Board of Directors such that not all members of the board are elected at one time;

 

    allow the authorized number of our directors to be changed only by resolution of our Board of Directors;

 

    limit the manner in which stockholders can remove directors from the Board of Directors;

 

    establish advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our Board of Directors;

 

    require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by our stockholders by written consent;

 

    limit who may call stockholder meetings;

 

    authorize our board of directors to issue preferred stock without stockholder approval, which could be used to institute a shareholder rights plan, or so-called “poison pill,” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our Board of Directors; and

 

    require the approval of the holders of at least 75% of the votes that all our stockholders would be entitled to cast to amend or repeal certain provisions of our charter or bylaws.

Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.

 

33


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain of the statements set forth under the captions “Prospectus Summary” and “Use of Proceeds” and elsewhere in this prospectus and the appendices attached hereto constitute forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy, plans and prospects, timing of the commencement or completion of clinical trials, projected revenue or costs and objectives of management for future research, development or operations, are forward-looking statements. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance or achievements, and may contain the words “estimate,” “project,” “intend,” “forecast,” “potential,” “anticipate,” “plan,” “planning,” “expect,” “believe,” “will,” “will likely,” “should,” “could,” “would,” “may” or words or expressions of similar meaning. All such forward-looking statements involve significant risks and uncertainties, including, but not limited to, statements regarding:

 

    the research and development, marketing and sales programs of the Company;

 

    the effect of competition and proprietary rights of third parties;

 

    the availability of additional financing for the Company;

 

    the effects of existing and future federal, state and foreign regulations;

 

    the seeking of joint development, licensing or distribution and collaboration and marketing arrangements with third parties; and

 

    the period of time for which the proceeds of this offering will enable the Company to fund its operations.

As more fully described in this prospectus under the heading “Risk Factors,” many important factors affect our ability to achieve our stated objectives and to develop and commercialize any product candidates, including, among other things, our ability to:

 

    obtain substantial additional funds;

 

    obtain and maintain all necessary patents or licenses;

 

    demonstrate the safety and efficacy of product candidates at each stage of development;

 

    meet applicable regulatory standards and receive required regulatory approvals;

 

    meet obligations and required milestones under agreements;

 

    retain key executives and to attract, retain and motivate qualified personnel;

 

    be capable of manufacturing and distributing products in commercial quantities at reasonable costs; and

 

    compete against other products and to market our products in a profitable manner.

Therefore, prospective investors are cautioned that there can be no assurance that the forward-looking statements included in this prospectus will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation or warranty by the Company or any other person that the objectives and plans of the Company will be achieved in any specified time frame, if at all. Except to the extent required by applicable laws or rules, the Company does not undertake any obligation to update any forward-looking statements or to announce revisions to any of the forward-looking statements.

We caution you that the important factors described in the sections in this prospectus entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” may not be all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences

 

34


or affect us or our operations in the way we expect. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially and adversely from those contained in any forward-looking statements we may make. The forward-looking statements included in this prospectus are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

 

35


USE OF PROCEEDS

We estimate that the net proceeds to us from our issuance and sale of              shares of common stock in this offering will be approximately $         million, assuming an initial public offering price of $         per share, which is the midpoint of the price range listed on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) our net proceeds from this offering by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

We currently estimate that we will use the net proceeds from this offering, together with our existing cash and cash equivalents, as follows:

 

    to fund the costs of early stage clinical development of CF-301;

 

    to fund research and development, to build our product platform and advance our other research programs; and

 

    for working capital and general corporate purposes.

This expected use of net proceeds from this offering represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including the progress of our development, the status of and results from clinical trials, as well as any collaborations that we may enter into with third parties for our product candidates, and any unforeseen cash needs. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering.

Based on our planned use of the net proceeds from this offering and our existing cash and cash equivalents described above, we estimate that such funds will be sufficient to enable us to complete early stage clinical trials of CF-301.

Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments and U.S. government securities.

 

36


DIVIDEND POLICY

We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings for use in the operation of our business and do not intend to declare or pay any cash dividends in the foreseeable future. Any further determination to pay dividends on our capital stock will be at the discretion of our Board of Directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our Board of Directors considers relevant.

 

37


CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2013:

 

    on an actual basis;

 

    on a pro forma basis to give effect to:

 

  (1) the automatic conversion of all outstanding shares of our Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock into an aggregate of 31,884,144 shares of our common stock upon the closing of this offering; and

 

  (2) the automatic conversion of all outstanding Convertible Notes due 2015, together with any accrued and unpaid interest thereon, into an aggregate of              shares of our common stock upon the closing of this offering.

 

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

Our capitalization following the closing of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with “Selected Financial Data,” our financial statements and the related notes included elsewhere in this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this prospectus.

 

    As of June 30, 2013  
    Actual     Pro Forma     Pro Forma
As
Adjusted (1)
 

Cash and cash equivalents

  $ 9,591,898      $                       $                   
 

 

 

   

 

 

   

 

 

 

Total debt (2)

    8,960,160       

Series A Preferred Stock, par value $0.0002 per share; 2,200,000 shares authorized, issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

    1,964,283       

Series B Preferred Stock, par value $0.0002 per share; 5,600,000 shares authorized, 4,651,163 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

    10,175,750       

Series C Preferred Stock, par value $0.0002 per share; 9,090,909 shares authorized, issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

    27,752,294       

Stockholders’ equity:

     

Common stock, par value $0.0001 per share; 200,000,000 shares authorized, 7,084,240 shares issued and outstanding, actual;              shares authorized, pro forma and pro forma as adjusted;              shares issued and outstanding, pro forma;              shares issued and outstanding, pro forma as adjusted

    708       

Additional paid-in capital

    3,435,054       

Loan to officer (3)

    (600,000    

Accumulated deficit during the development stage

    (42,551,395    
 

 

 

   

 

 

   

 

 

 

Total stockholders’ (deficit) equity

    (39,715,633    
 

 

 

   

 

 

   

 

 

 

Total capitalization

  $ 9,136,854      $        $     
 

 

 

   

 

 

   

 

 

 

 

38


 

(1) A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, which is the midpoint of the price range listed on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization on a pro forma as adjusted basis by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
(2) Total debt as of June 30, 2013 includes our Convertible Notes due 2015 and the outstanding balances of our commercial bank lease and note payable. On September 6, 2013, we repaid all amounts outstanding under our Master Lease Agreement with Sterling National Bank. On October 4, 2013, we repaid all amounts outstanding under our Loan and Security Agreement with Silicon Valley Bank.
(3) Consists of amounts loaned by us to Dr. Nowinski and settled by Dr. Nowinski on                 .

The table above does not include:

 

    15,340,920 shares of our common stock issuable upon exercise of stock options outstanding as of June 30, 2013 at a weighted average exercise price of $0.76 per share;

 

    5,028,398 additional shares of our common stock issuable upon exercise of warrants outstanding as of June 30, 2013 at a weighted average exercise price of $0.92 per share;

 

    434,219 additional shares of our common stock available for issuance as of June 30, 2013 under our existing equity incentive plan;

 

    the              shares of our common stock issuable upon the exercise of warrants issued in relation to the sale of the Convertible Notes due 2015 and outstanding as of June 30, 2013 at a weighted average exercise price of $         per share; and

 

                 additional shares of our common stock available for future issuance under our 2013 equity incentive plan, which will become effective immediately prior to the closing of this offering.

 

39


DILUTION

If you invest in our common stock in this offering, your ownership interest will be diluted immediately to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering.

Our historical net tangible book value as of June 30, 2013 was $(41.4) million, or $(5.84) per share of our common stock. Historical net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of our common stock outstanding.

Our pro forma net tangible book value as of June 30, 2013 was $        , or $         per share of our common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the pro forma number of shares of our common stock outstanding, the automatic conversion of all outstanding shares of our preferred stock into an aggregate of 31,884,144 shares of our common stock upon the closing of this offering, and the automatic conversion of all outstanding Convertible Notes due 2015, together with any accrued and unpaid interest thereon, into an aggregate of              shares of our common stock upon the closing of this offering.

After giving effect to our issuance and sale of              shares of our common stock in this offering at an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and offering expenses payable by us, our pro forma net tangible book value as of June 30, 2013 would have been $         million, or $         per share. This represents an immediate increase in pro forma net tangible book value per share of $         to existing stockholders and immediate dilution of $         in pro forma net tangible book value per share to new investors purchasing common stock in this offering. Dilution per share to new investors is determined by subtracting pro forma net tangible book value per share after this offering from the initial public offering price per share paid by new investors. The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share

   $                

Historical net tangible book value per share as of June 30, 2013

   $ (5.84)   

Increase attributable to the pro forma transactions described in preceding paragraphs

   $    

Pro forma net tangible book value per share as of June 30, 2013

   $    

Increase in net tangible book value per share attributable to new investors

   $    

Pro forma net tangible book value per share after this offering

   $    
  

 

 

 

Dilution per share to new investors

   $    
  

 

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $         per share would increase or decrease our pro forma net tangible book value by approximately $        , our pro forma net tangible book value per share by approximately $        and dilution per share to new investors by approximately $        , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

If the underwriters exercise their over-allotment option or if any additional shares are issued in connection with the exercise of options, you will experience further dilution.

 

40


The following table summarizes, on a pro forma basis as of June 30, 2013, the total number of shares purchased from us, the total consideration paid, or to be paid, and the average price per share paid, or to be paid, by existing stockholders and by new investors in this offering at an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and offering expenses payable by us. As the table shows, new investors purchasing shares in this offering will pay an average price per share substantially higher than our existing stockholders paid.

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
     Number    Percentage     Amount      Percentage    

Existing stockholders

               $                  $                

New investors

                          
  

 

  

 

 

   

 

 

    

 

 

   

Total

               $                            
  

 

  

 

 

   

 

 

    

 

 

   

A $1.00 increase or decrease in the assumed initial public offering price of $         per share would increase or decrease the total consideration paid by new investors by $         million and increase or decrease the percentage of total consideration paid by new investors by approximately     %, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

The table above is based on shares outstanding as of June 30, 2013 and includes              additional shares of our common stock issuable upon the automatic conversion of all outstanding shares of our preferred stock into shares of common stock upon the closing of this offering as well as the automatic conversion of all outstanding Convertible Notes due 2015, together with any accrued and unpaid interest thereon, into an aggregate of              shares of our common stock upon the closing of this offering.

The table above excludes:

 

    15,340,920 shares of our common stock issuable upon the exercise of stock options outstanding as of June 30, 2013 at a weighted average exercise price of $0.76 per share;

 

    5,028,398 additional shares of our common stock issuable upon exercise of warrants outstanding as of June 30, 2013 at a weighted average exercise price of $0.92 per share;

 

    434,219 additional shares of our common stock available for future issuance under our equity compensation plans as of June 30, 2013;

 

    the              shares of our common stock issuable upon the exercise of warrants issued in relation to the sale of the Convertible Notes due 2015 and outstanding as of June 30, 2013 at a weighted average exercise price of $         per share; and

 

    an additional              shares of our common stock that will be made available for future issuance under our equity compensation plans upon the closing of this offering.

To the extent that outstanding stock options are subsequently exercised, there will be further dilution to new investors. If all outstanding options as of June 30, 2013 had been exercised, the pro forma as adjusted net tangible book value per share after this offering would be $        , and total dilution per share to new investors would be $        .

If the underwriters exercise their over-allotment option in full, the following will occur:

 

    the percentage of shares of our common stock held by existing stockholders will decrease to approximately     % of the total number of shares of our common stock outstanding after this offering; and

 

    the number of shares of our common stock held by new investors will increase to approximately     % of the total number of shares of our common stock outstanding after this offering.

 

41


SELECTED HISTORICAL FINANCIAL AND OTHER DATA

The following tables summarize our financial data as of the dates and for the periods indicated. We have derived the statements of operations data and balance sheet data as of and for the years ended December 31, 2011 and 2012 from our audited financial statements included elsewhere in this prospectus. We have derived the statements of operations data for the six months ended June 30, 2012 and 2013 and the balance sheet data as of June 30, 2013 from our unaudited financial statements included elsewhere in this prospectus. The unaudited financial data include, in the opinion of our management, all adjustments, including normal recurring adjustments, which are necessary for a fair statement of our financial position and results of operations for these periods. Our historical results are not necessarily indicative of the results that may be expected in the future and results of interim periods are not necessarily indicative of the results for the entire year. The selected historical data presented below should be read in conjunction with the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and the related notes thereto and other financial data included elsewhere in this prospectus.

Statement of Operations Data

 

    Year Ended December 31,     Six Months Ended June 30,     Period From
March 17, 2008
(Inception) to

June 30, 2013
 
    2011     2012     2012     2013    
                (unaudited)     (unaudited)     (unaudited)  

Operating expenses:

         

Research and development

  $ 6,618,172      $ 13,211,111      $ 4,616,140      $ 4,492,708      $ 25,479,597   

General and administrative

    3,887,307        5,943,062        2,859,901        3,783,777        16,649,009   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    10,505,479        19,154,173        7,476,041        8,276,485        42,128,606   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (10,505,479     (19,154,173     (7,476,041     (8,276,485     (42,128,606

Interest expense, net

    (111,450     (129,281     (75,883     (54,701     (422,789
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (10,616,929   $ (19,283,454   $ (7,551,924   $ (8,331,186   $ (42,551,395
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share, basic and diluted

  $ (1.63   $ (2.74   $ (1.07   $ (1.18  
 

 

 

   

 

 

   

 

 

   

 

 

   

Shares used to compute basic and diluted net loss per share

    6,505,204        7,045,177        7,045,177        7,080,985     
 

 

 

   

 

 

   

 

 

   

 

 

   

Balance Sheet Data

 

     As of December 31,     As of June 30,  
     2011     2012     2013  
                 (unaudited)  

Cash and cash equivalents

   $ 15,896,303      $ 7,886,264      $ 9,591,898   

Working capital

     13,803,919        3,439,918        4,490,132   

Total assets

     21,398,315        13,205,664        16,117,394   

Senior convertible notes

     —          —          7,585,725   

Total debt (1)

     2,646,037        1,900,510        8,960,160   

Convertible preferred stock

     30,471,894        39,892,327        39,892,327   

Accumulated deficit

     (14,936,755     (34,220,209     (42,551,395

Total stockholders’ deficit

     (13,177,944     (32,231,516     (39,715,633

 

(1) Total debt includes our Convertible Notes due 2015 and the outstanding balances of our commercial bank lease and note payable on an actual basis and the outstanding balances of our commercial bank lease and note payable. On September 6, 2013, we repaid all amounts outstanding under our Master Lease Agreement with Sterling National Bank. On October 4, 2013, we repaid all amounts outstanding under our Loan and Security Agreement with Silicon Valley Bank.

 

42


MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis in conjunction with the information set forth under “Selected Historical Financial and Other Data” and our financial statements and the notes to those statements included elsewhere in this prospectus. The statements in this discussion regarding our expectations of future performance, liquidity and capital resources and other non-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under “Risk Factors” and “Special Note Regarding Forward-Looking Statements.” Our actual results may differ materially from those contained in or implied by any forward-looking statements.

Overview

We are an IND-stage biotechnology company focused on protein and antibody therapeutic products for life-threatening infectious diseases, particularly those treated in hospital-based settings. We intend to address antibiotic-resistant infections using our novel bacteriophage lysins alone and in combination with standard of care antibiotics. Lysins are bacteriophage enzymes that digest the bacterial cell wall. Lysins are fundamentally different than standard of care antibiotics discovered to date, in that they have the ability to kill bacteria immediately upon contact. We believe our most advanced product candidate, CF-301, for which we hold global rights, will be the first systemic lysin to enter human clinical trials. We believe CF-301’s unique properties will lead us into additional indications such as pneumonia, skin and skin structure infections, osteomyelitis, and biofilm-related indications for infected prosthetic joints, indwelling devices and catheters. In addition to lysins, we are exploring therapy with Mabs that block and disarm virulence factors of bacteria and viruses, rendering them vulnerable to the natural immune balance of the body. We are currently focused on Mabs for influenza.

We are a development stage company. Since our inception in 2008, we have devoted substantially all of our resources to developing our product candidates and our platform technology, building our intellectual property portfolio, business planning, raising capital, and providing general and administrative support for these operations. We have not generated any revenues and, to date, have funded our operations primarily through sales of common stock and convertible preferred stock and issuances of convertible debt to our investors. From inception through June 30, 2013, we have received proceeds of $0.2 million from the sale of common stock, $44.2 million from the sale of convertible preferred stock and $10.0 million from the issuance of our Convertible Notes due 2015. On August 20, 2013, we received proceeds of an additional $1.9 million from the issuance of Convertible Notes due 2015.

We have never been profitable and, from inception through June 30, 2013, our net losses from operations have been $42.6 million. Our net loss from operations was $8.3 million for the six months ended June 30, 2013, $19.3 million for the year ended December 31, 2012 and $10.6 million for the year ended December 31, 2011. We expect to incur significant expenses and increasing operating losses for the foreseeable future. We expect our expenses to increase in connection with our ongoing activities, particularly as we advance our product candidates through preclinical activities and clinical trials to seek regulatory approval and, if approved, commercialize such product candidates. Furthermore, upon the closing of this offering, we will record non-cash expense associated with the effect of the beneficial conversion charge of approximately $         million that will be recorded upon the conversion of our Convertible Notes due 2015. Additionally, we expect to incur additional costs associated with operating as a public company. Accordingly, we will need additional financing to support our continuing operations. We will seek to fund our operations through public or private equity or debt financings or other sources. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We will need to generate significant revenues to achieve profitability, and we may never do so.

 

43


Financial Operations Overview

Revenue

We have not generated any revenue to date. In the future, we may generate revenue from product sales. In addition, to the extent we enter into licensing or collaboration arrangements, we may have additional sources of revenue. We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the amount and timing of payments that we may recognize upon the sale of our products, to the extent that any products are successfully commercialized, and the amount and timing of fees, reimbursements, milestone and other payments received under any future licensing or collaboration arrangements. If we fail to complete the development of our product candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenue, and our results of operations and financial position, would be materially adversely affected.

Research and Development Expenses

Research and development expenses consist of costs associated with our research activities and the development of CF-301. Our research and development expenses consist of:

 

    employee-related expenses, including salaries, benefits, travel and share-based compensation expense;

 

    external research and development expenses incurred under arrangements with third parties such as contract research organizations, or CROs, contract manufacturers, consultants and academic institutions; and

 

    facilities and laboratory and other supplies.

We expense research and development costs to operations as incurred. We account for non-refundable advance payments for goods and services that will be used in future research and development activities as expenses when the service has been performed or when the goods have been received, rather than when the payment is made.

To date, a large portion of our research and development work has related to CF-301 and completing preclinical testing to support our IND application to advance into clinical trials. In the future, we intend to use our employee and infrastructure resources across multiple development as well as research projects. In the years ended December 31, 2011 and 2012 and for the six months ended June 30, 2012 and 2013, we recorded approximately $6.6 million, $13.2 million, $4.6 million and $4.5 million, respectively, of research and development expenses. We do not currently utilize a formal time allocation system to allocate employee-related expenses or depreciation to any particular project because we are organized and record expense by functional department. We anticipate that our research and development expenses will increase substantially in connection with the commencement of clinical trials of CF-301.

The following table summarizes our research and development expenses by functional area for the years ended December 31, 2011 and 2012:

 

     Year Ended
December 31,
 
     2011      2012  

Personnel related

   $ 1,568,581       $ 2,978,817   

Product development

     2,366,139         4,913,864   

Laboratory costs

     902,345         2,586,655   

External research and licensing costs

     1,474,661         2,209,690   

Professional fees

     288,084         475,511   

Share-based compensation

     18,362         46,574   
  

 

 

    

 

 

 
   $ 6,618,172       $ 13,211,111   
  

 

 

    

 

 

 

 

44


The following table summarizes our research and development expenses by functional area for the six months ended June 30, 2012 and 2013:

 

     Six Months Ended
June 30,
 
     2012      2013  
     (unaudited)  

Personnel related

   $ 1,402,442       $ 1,661,655   

Product development

     846,485         671,410   

Laboratory costs

     976,244         1,043,247   

External research and licensing costs

     1,254,008         616,569   

Professional fees

     115,882         353,053   

Share-based compensation

     21,079         146,774   
  

 

 

    

 

 

 
   $ 4,616,140       $ 4,492,708   
  

 

 

    

 

 

 

The successful development of CF-301 and future product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:

 

    the scope, rate of progress and expense of our research and development activities;

 

    clinical trial results;

 

    the terms and timing of regulatory approvals;

 

    our ability to market, commercialize and achieve market acceptance for CF-301 or any other product candidate that we may develop in the future; and

 

    the expense, filing, prosecuting, defending and enforcing of patent claims and other intellectual property rights.

A change in the outcome of any of these variables with respect to the development of CF-301 or any other product candidate that we may develop could mean a significant change in the costs and timing associated with the development of CF-301 or such product candidate. For example, if the FDA or other regulatory authority were to require us to conduct clinical trials beyond those which we currently anticipate will be required for the completion of clinical development of CF-301 or if we experience significant delays in enrollment in any clinical trials of CF-301, we could be required to expend significant additional financial resources and time on the completion of the clinical development of CF-301.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related costs for personnel, including share-based compensation expense, in our executive, finance and business development functions. Other general and administrative expenses include facility costs, insurance expenses and professional fees for legal, consulting and accounting services.

We anticipate that our general and administrative expenses will increase in future periods to support increases in our research and development activities and as a result of increased headcount, expanded infrastructure, increased legal, compliance, accounting and investor and public relations expenses associated with being a public company and increased insurance premiums, among other factors.

Interest Income

Interest income consists of interest earned on our cash and cash equivalents.

 

45


Interest Expense

Interest expense consists primarily of cash and non-cash interest costs, including the estimated value of equity linked securities issued in conjunction with the issuance of debt, related to our outstanding debt. In addition, we capitalize costs incurred in connection with the issuance of debt. We amortize these costs over the life of our debt agreements as interest expense in our statement of operations.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and share-based compensation described in greater detail below. We base our estimates on our limited historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are described in more detail in the notes to our financial statements included elsewhere in this prospectus. However, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our financial condition and results of operations:

 

    accrual of research and development expenses; and

 

    share-based compensation.

Accrued Research and Development Expenses

As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process involves reviewing quotations and contracts, identifying services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. The significant estimates in our accrued research and development expenses are related to fees paid to CROs in connection with research and development activities for which we have not yet been invoiced.

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

 

46


Share-Based Compensation

As we continue to expand our headcount, we expect to make additional stock option grants, which will result in additional share-based compensation expense. Accordingly, we describe below the methodology we have employed to date in measuring such expenses. Following the closing of this offering, stock option values will be determined based on the market price of our common stock.

We apply the fair value recognition provisions of Financial Accounting Standards Board Accounting Standards Codification Topic 718, Stock Compensation (“ASC 718”). Determining the amount of share-based compensation to be recorded requires us to develop estimates of the fair value of stock options as of their grant date. Share-based compensation expense is recognized ratably over the requisite service period, which in most cases is the vesting period of the award. Calculating the fair value of share-based awards requires that we make highly subjective assumptions. We use the Black-Scholes option pricing model to value our stock option awards. Use of this valuation methodology requires that we make assumptions as to the volatility of our common stock, the expected term of our stock options, the risk free interest rate for a period that approximates the expected term of our stock options and our expected dividend yield. Because we are a privately-held company with a limited operating history, we utilize data from a representative group of companies to estimate expected stock price volatility. We selected companies from the biopharmaceutical industry with similar characteristics to us, including those in the early stage of product development and with a therapeutic focus. We use the simplified method as prescribed by SEC Staff Accounting Bulletin No. 107, Share-Based Payment, to calculate the expected term of stock option grants to employees as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term of stock options granted to employees. We utilize a dividend yield of zero based on the fact that we have never paid cash dividends and have no current intention to pay cash dividends. The risk-free interest rate used for each grant is based on the U.S. Treasury yield curve in effect at the time of grant for instruments with a similar expected life. We estimated the fair value of options as of their grant date using a Black-Scholes option pricing model with the following weighted average assumptions:

 

     Year Ended December 31,     Six Months Ended June 30,  
         2011             2012             2012             2013      
                 (unaudited)  

Risk-free interest rate

     2.30     1.03     1.06     1.19

Expected volatility

     75.8     76.0     76.0     73.2

Expected term

     6.22 years        6.19 years        6.04 years        6.29 years   

Given the stage of our development up to and including May 6, 2013, we determined that an option pricing method was the most appropriate valuation methodology to provide our Board of Directors with an estimate of the fair value of our common stock. Key variables in the option pricing method were as follows:

 

    Underlying equity value—to estimate the value of our total equity, including both common and preferred equity, we utilized the marketable equity value based on the most recent round of preferred stock financing, our series B and C preferred stock financings, with a price of $2.58 per share and $3.30 per share, respectively, which we believed to be the most indicative of our value. This valuation technique used to estimate the enterprise value of our company is referred to as the reverse backsolve method.

 

    Volatility—volatility was estimated based on comparable publicly-traded companies over the period that matches the estimated time to liquidity.

 

    Time to liquidity—we estimated time to a liquidity event based on the projected time to significant clinical development events for CF-301 that we believed could lead to an initial public offering or a company sale. Our estimates were based on our expectations of when we would have completed our initial efficacy clinical trial of CF-301. At that time, we believed that an initial public offering or other liquidity event could occur.

 

    Risk-free interest rate—we determined the risk-free interest rate based on the yield of a U.S. Treasury bill with a maturity date closest to the estimated time to a liquidity event for our stockholders.

 

47


    Discounts for lack of marketability—because we are a privately-held company, shares of our common stock are highly illiquid and, as such, warrant a discount in value from their estimated “marketable” price. We estimated the discount factor to be 35% in connection with the preparation of the audited financial statements included elsewhere in this prospectus for illiquidity using legal guidelines from U.S. Tax Court cases regarding privately-held business valuations, fundamental business factors and empirical studies on the discount for lack of marketability. We corroborated the discount factor based on the value of a put option compared to the value of common stock using a Black-Scholes option pricing model. We also considered that our preferred stock has rights that our common stock does not have, including anti-dilution protection, redemption rights and protective provisions in our certificate of incorporation. Our preferred stockholders have control and influence over the enterprise, which provides them with the optionality over future liquidity, financing and other decisions that the common stock option holders do not control.

As there was no public market for our common stock, our Board of Directors determined the estimated fair value of our common stock for purposes of determining the exercise price for option grants, taking into consideration various objective and subjective factors, including:

 

    prices at which we sold shares of preferred stock to third-party investors;

 

    comparative rights and preferences of the security being granted compared to the rights and preferences of our other outstanding equity;

 

    comparative values of public companies discounted for the risk and limited liquidity provided for in the shares we are issuing;

 

    our historical operating and financial performance;

 

    the status of our research and development efforts;

 

    the likelihood of achieving a liquidity event, such as an initial public offering, or initial public offering, or sale of our company;

 

    estimates and analysis provided by management and contemporaneous independent valuations; and

 

    external market conditions affecting the biopharmaceutical industry.

The following tables set forth information regarding equity based awards during the years ended December 31, 2011 and 2012 and through June 30, 2013:

 

     Number of
Shares
Underlying
Options
Granted
     Exercise Price
Per Share
     Estimated
Fair Value
Per Common
Share at
Grant Date
 

January 1, 2011—August 31, 2011

     3,285,231       $ 1.29       $ 0.25   

September 1, 2011—September 30, 2012

     3,683,592         1.65         0.28   

September 30, 2012—February 15, 2013

     450,000         0.50         0.32   

February 16, 2013—May 6, 2013

     4,665,875         0.50         0.50   

During the period between January 1, 2011 and August 31, 2011, we hired our Chief Medical Officer and Vice President of product development, completed two additional licensing agreements with The Rockefeller University, including the license to CF-301, our lead clinical candidate, and established our license agreement with MorphoSys AG, enabling our antibody discovery platform. We used an estimated fair value of a share of our common stock of $0.25 for purposes of determining our share-based compensation for all awards granted from January 1, 2011 through August 31, 2011.

 

48


During the period between September 1, 2011 and September 30, 2012, we hired our Chief Financial Officer, completed $30 million of preferred stock financing, opened our new headquarters and research laboratory in Yonkers, New York, and selected our first clinical candidate, CF-301, for advancement into IND enabling studies and manufacturing. We used an estimated fair value of a share of our common stock of $0.28 for purposes of determining our share-based compensation for all awards granted from September 1, 2011 through September 30, 2012.

During the period between October 1, 2012 and February 15, 2013, we completed our planned IND enabling studies of CF-301, manufactured clinical trial materials of CF-301 for use in early stage clinical trials and prepared our initial IND submission for CF-301. We used an estimated fair value of a share of our common stock of $0.32 for purposes of determining our share-based compensation for all awards granted from October 1, 2012 through February 15, 2013.

On February 27, 2013, we awarded options to purchase 4,530,875 shares of our common stock to our employees and directors under the amended and restated 2008 equity incentive plan (the “Amended 2008 Plan”). Our Board of Directors also approved an option exchange offer (the “Exchange Offer”) for eligible option holders with outstanding options with an exercise price in excess of $0.50 per share. The offering period for the Exchange Offer commenced on March 11, 2013 and expired on April 9, 2013. Participation in the Exchange Offer was voluntary. Options to purchase 4,532,823 shares of our common stock were exchanged under the tender offer. Both the new options grants and the exchange option grants were granted at an exercise price of $0.50 per share.

We have recognized share-based compensation expense of $0.3 million related to the incremental value of the vested portion of the option grants exchanged pursuant to the exchange offer discussed above, which is included in the amounts presented for the six months ended June 30, 2013. There was $0.2 million of unrecognized share-based compensation expense related to the incremental value of the unvested portion of the option grants exchanged pursuant to the exchange offer discussed above, which we expect to recognize over a weighted-average remaining service period of approximately 1.8 years.

Total share based compensation expense was $0.3 million for the year ended December 31, 2011, $0.2 million for the year ended December 31, 2012 and $0.8 million for the six months ended June 30, 2013. As of June 30, 2013, we had $1.7 million of total unrecognized share based compensation expense, which we expect to recognize over a weighted average remaining service period of approximately 2.5 years. We expect the expense to grow in future periods due to the potential increases in the value of our common stock and headcount.

There are significant judgments and estimates inherent in the determination of these valuations. These judgments and estimates include assumptions regarding our future performance, including the successful completion of our clinical trials and the time to completing an initial public offering or sale, as well as the determination of the appropriate valuation methods at each valuation date. If we had made different assumptions, our share-based compensation expense could have been different. The foregoing valuation methodologies are not the only methodologies available and they will not be used to value our common stock once this offering is complete. Accordingly, investors are cautioned not to place undue reliance on the foregoing valuation methodologies as an indicator of our future stock price.

Results of Operations

The following table summarizes key components of our results of operations for the periods indicated.

 

     Year Ended December 31,     Six Months Ended June 30,  
     2011     2012     2012     2013  
                 (unaudited)  

Operating expenses:

        

Research and development expenses

   $ 6,618,172      $ 13,211,111      $ 4,616,140      $ 4,492,708   

General and administrative expenses

   $ 3,887,307      $ 5,943,062      $ 2,859,901      $ 3,783,777   

Interest expense, net

   $ (111,450   $ (129,281   $ (75,883   $ (54,701

 

49


Year ended December 31, 2012 compared to year ended December 31, 2011

Research and Development Expenses

Research and development expense was $13.2 million for the year ended December 31, 2012, compared with $6.6 million for the year ended December 31, 2011, an increase of $6.6 million, or 100%. This increase was primarily attributable to a $2.5 million increase associated with the advancement of our lead product, CF-301, into IND enabling studies, a $2.3 million increase in costs related to the support of our research efforts, including a $0.9 million increase in laboratory costs, a $0.8 million increase in costs related to our antibody library and a $0.4 million increase in rent, utilities and maintenance costs, and a $1.4 million increase in salaries, benefits and related costs resulting from the expansion of our staffing.

General and Administrative Expenses

General and administrative expense was $5.9 million for the year ended December 31, 2012 compared with $3.9 million for the year ended December 31, 2011, an increase of $2.0 million, or 53%. This increase was primarily attributable to a $1.2 million increase in salaries, benefits and related costs resulting from additions to our staff and a $0.4 million increase in legal and professional fees.

Interest Expense, net

Net interest expense was $129,281 for the year ended December 31, 2012 compared with $111,450 for the year ended December 31, 2011, an increase of $17,831, or 16%. This increase was due primarily to the increase in the effective interest rate on our total debt.

Six months ended June 30, 2013 compared to six months ended June 30, 2012

Research and Development Expenses

Research and development expense was $4.5 million for the six months ended June 30, 2013 compared with $4.6 million for the six months ended June 30, 2012, a decrease of $0.1 million, or 3%. This decrease was primarily attributable to a $0.5 million decrease in costs related to the support of our research and development efforts, including a $0.3 million decrease in costs related to our antibody library and a $0.2 million decrease in pre-clinical and manufacturing costs with our lead product, CF-301. These decreases were partially offset by a $0.3 million increase in salaries, benefits and related costs resulting from a higher average number of employees compared to the prior period.

General and Administrative Expenses

General and administrative expense was $3.8 million for the six months ended June 30, 2013 compared with $2.9 million for the six months ended June 30, 2012, an increase of $0.9 million, or 32%. This increase was primarily attributable to a $0.9 million increase in salaries, benefits and related costs resulting from additions to our staff.

Interest Expense, net

Net interest expense was $54,701 for the six months ended June 30, 2013 compared with $75,880 for the six months ended June 30, 2012, a decrease of $21,182 or 28%. This decrease was due primarily to the reduction in our debt balances as principal was repaid.

Liquidity and Capital Resources

Sources of Liquidity

We have financed our operations to date primarily through proceeds from sales of common stock and convertible preferred stock and issuances of convertible debt. To date, we have not generated any revenue from the sale of products. We have incurred losses and generated negative cash flows from operations since inception.

 

50


From inception through June 30, 2013, we have received gross proceeds of $0.2 million from the sale of common stock, $44.2 million from the sale of convertible preferred stock and $10.0 million from the issuance of our Convertible Notes due 2015. On August 20, 2013, we received gross proceeds of an additional $1.9 million from the issuance of Convertible Notes due 2015.

As of June 30, 2013, our cash and cash equivalents totaled $9.6 million. We primarily invest our cash and cash equivalents in commercial savings accounts. We believe that our existing cash and cash equivalents, together with the net proceeds from this offering, will be sufficient to fund our operations and our capital expenditures for at least the next 12 months. The following table summarizes our cash flow activity for each of the periods set forth below:

 

     Year Ended December 31,     Six Months Ended June 30,  
     2011     2012     2012     2013  
                 (unaudited)  

Net cash used in operating activities

   $ (9,106,239   $ (16,310,865   $ (7,227,040   $ (6,770,835

Net cash (used in) provided by investing activities

   $ (3,811,017   $ (158,917   $ (13,819   $ 140,209   

Net cash (used in) provided by financing activities

   $ 17,634,597      $ 8,459,743      $ (144,805   $ 8,336,260   

Operating Activities

Net cash used in operative activities resulted primarily from our net losses adjusted for non-cash charges and favorable changes in the components of working capital. Net cash used in operating activities increased in 2012, as compared to 2011, due to the expansion of our staffing and research efforts and from costs associated with the development of our lead product candidate, CF-301. The decrease in cash used for the six months ended June 30, 2013 as compared to the same period in 2012 was due to an increase in non-cash charges including depreciation, share-based compensation and deferred rent and increase in our accounts payable due to the timing of payments to our suppliers.

Investing Activities

Net cash used in investing activities in the years ended December 31, 2011 and 2012 resulted from the acquisition of equipment to support the expansion of our research efforts and the establishment of a restricted cash account necessary to secure a capital lease that funded a portion of this equipment. Net cash provided by investing activities for the six months ended June 30, 2013 is primarily related to the reduction of our restricted cash requirements.

Financing Activities

Net cash provided by financing activities in the years ended December 31, 2011 and 2012 primarily resulted from of the issuance of an aggregate of $30 million of Series C Convertible Preferred Stock, less the related financing costs, and partially offset by the repayment of debt. Net cash used in financing activities in the six months ended June 30, 2012 principally resulted from the repayment of debt. Net cash provided by financing activities in the six months ended June 30, 2013 resulted from the issuance of $10.0 million of Convertible Notes due 2015, less $1.1 million of issuance costs and $0.5 million for the repayment of debt.

Convertible Notes due 2015

From June 18, 2013 through August 20, 2013, we issued approximately $11.9 million aggregate principal amount of our 8.00% Convertible Notes due May 31, 2015 (the “Convertible Notes due 2015”). The principal amount of the Convertible Notes due 2015 and all accrued and unpaid interest thereon will automatically convert into shares of our common stock upon the closing of this offering. The conversion price of the Convertible Notes due 2015 will be a 25% discount to the initial public offering price for the shares of common stock offered hereby, or $1.65, whichever is lower, subject in each case to adjustment.

 

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Purchasers of the Convertible Notes due 2015 also received warrants to purchase 50% of the total number of common shares into which the note purchased by the holder is convertible. The exercise price of the warrants will be a 25% discount to the initial public offering price for the shares of common stock offered hereby, or $1.50 in the event there is no initial public offering by April 18, 2014, whichever is lower, subject in each case to adjustment.

The placement agent for the sale of the Convertible Notes due 2015 also received warrants to purchase 10% of the total number of common shares into which all notes purchased by the holders are convertible. The exercise price of the warrants will be equal to 110% of a 25% discount to the initial public offering price for the shares of common stock offered hereby, or $1.65, whichever is lower, subject in each case to adjustment.

Funding Requirements

All of our product candidates are still in clinical or preclinical development. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. We anticipate that our expenses will increase substantially if and as we:

 

    continue the ongoing preclinical trials, and initiate the planned clinical trials, of our lead product candidate, CF-301;

 

    continue the research and development of our other product candidates and our platform technology;

 

    seek to identify additional product candidates;

 

    acquire or in-license other products and technologies;

 

    seek marketing approvals for our product candidates that successfully complete clinical trials;

 

    establish, either on our own or with strategic partners, a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval;

 

    maintain, leverage and expand our intellectual property portfolio; and

 

    add operational, financial and management information systems and personnel, including personnel to support our product development and future commercialization efforts.

We expect that the net proceeds from this offering, together with our existing cash and cash equivalents, will enable us to fund our operating expenses and capital expenditure requirements for at least 12 months. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, and the extent to which we may enter into collaborations with third parties for development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the development of our current product candidates. Our future capital requirements will depend on many factors, including:

 

    the progress and results of the clinical trials of our lead product candidates;

 

    the scope, progress, results and costs of compound discovery, preclinical development, laboratory testing and clinical trials for our other product candidates;

 

    the extent to which we acquire or in-license other products and technologies;

 

    the costs, timing and outcome of regulatory review of our product candidates;

 

    the costs of future commercialization activities, including product sales, marketing, manufacturing and distribution, for any of our product candidates for which we receive marketing approval;

 

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    revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval;

 

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

 

    our ability to establish any future collaboration arrangements on favorable terms, if at all.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

We will also incur costs as a public company that we have not previously incurred, including, but not limited to, costs and expenses for increased personnel costs, increased directors fees, increased directors and officers insurance premiums, audit and legal fees, investor relations and external communications fees, expenses for compliance with the Sarbanes-Oxley Act and rules implemented by the SEC and NASDAQ and various other costs.

Contractual Obligations

The following table summarizes our contractual obligations as of June 30, 2013:

 

     Payments by period  
   Total      Less than
1 year
     1-3 years      3-5 years      More than
5 years
 

Long-term debt obligations (1)

   $ 11,372,070       $ 1,051,742       $ 10,320,328       $ —         $ —     

License agreements (2)

     2,838,745         864,030         1,152,520         642,195         180,000   

Operating lease obligations (3)

     13,409,654         739,365         1,670,546         1,738,036         9,261,707   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 27,620,469       $ 2,655,137       $ 13,143,394       $ 2,380,231       $ 9,441,707   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes $10.0 million aggregate principal amount of our Convertible Notes due 2015, payable on May 31, 2015. All of such notes will convert into shares of our common stock upon the closing of this offering.
(2) Includes certain amounts payable under our licenses and sponsored research agreements with The Rockefeller University, Mount Sinai School of Medicine and MorphoSys AG. Amounts payable under our license agreement with MorphoSys AG are payable in Euros and have been converted to U.S. dollars using the exchange rate in effect on June 28, 2013.
(3) We lease office and laboratory space under non-cancelable operating lease agreements expiring on December 31, 2027. As of June 30, 2013, the future minimum lease payments for the year ending December 31, 2013 amount to $659,915.

In addition to the commitments discussed above, we have commitments to make potential future milestone payments to third parties under our licenses and sponsored research agreements totaling approximately $26.4 million, which assumes one product achieving all development and regulatory milestones under each agreement.

 

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These milestones primarily include the commencement and results of clinical trials, obtaining regulatory approval in various jurisdictions and the future commercial success of development programs, the outcome and timing of which are difficult to predict and subject to significant uncertainty. In addition to the milestones discussed above, we are obligated to pay royalties on future sales, which are contingent on generating levels of sales of future products that have not been achieved and may never be achieved. Since we are unable to reliably estimate the timing and amounts of such milestone and royalty payments, or whether they will occur at all, these contingent payments have been excluded from the table above.

In the course of normal business operations, we also have agreements with contract service providers to assist in the performance of our research and development and manufacturing activities. We can elect to discontinue the work under these agreements at any time. We could also enter into additional sponsored research, contract research, manufacturing, and supplier agreements in the future, which may require upfront payments and even long-term commitments of cash.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we are currently not party to, any off-balance sheet arrangements.

Multiemployer Plans

We did not have during the periods presented, and we are currently not party to, any multiemployer plans.

Quantitative and Qualitative Disclosure about Market Risk

We are exposed to market risk related to changes in interest rates. We had cash and cash equivalents of $7.9 million as of December 31, 2012 and $9.6 million as of June 30, 2013, consisting of cash and money market funds. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments are in short-term securities. Due to the short-term duration and low risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our portfolio.

We contract with CROs and contract manufacturers globally. We may be subject to fluctuations in foreign currency rates in connection with these agreements. Transactions denominated in currencies other than our functional currency are recorded based on exchange rates at the time such transactions arise. As of December 31, 2012 and June 30, 2013, all of our liabilities were denominated in our functional currency.

JOBS Act

The JOBS Act provides that an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of delayed adoption of new or revised accounting standards and, therefore, we will be subject to the same requirements to adopt new or revised accounting standards as other public companies that are not emerging growth companies.

Additionally, as an “emerging growth company,” we are not required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404 or (ii) comply with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis).

 

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Change in Accountants

In preparation for this offering, we released EisnerAmper LLP and engaged Ernst & Young LLP as our independent registered public accounting firm effective as of April 16, 2013. The decision to appoint Ernst & Young LLP and release EisnerAmper LLP was recommended by our audit committee and subsequently approved by our board of directors.

The report of EisnerAmper LLP on our financial statements for the year ended December 31, 2011 did not contain an adverse opinion or a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles.

In connection with the audit of our financial statements for the year ended December 31, 2011 and through our change of auditors, there were no disagreements with EisnerAmper LLP on any matters of accounting principles or practices, financial statement disclosures or auditing scope or procedures, which if not resolved to EisnerAmper LLP’s satisfaction would have caused EisnerAmper LLP to make reference to the matter in their report.

In connection with our audited financial statements for the year ended December 31, 2011 through our change of auditors, there have been no reportable events with us as set forth in Item 304(a)(1)(v) of Regulation S-K.

We requested that EisnerAmper LLP furnish us with a letter addressed to the SEC stating whether it agrees with the above statements. A copy of the letter, dated                     , 2013, is filed as an exhibit to the registration statement of which this prospectus forms a part.

 

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BUSINESS

Our Company

We are an IND-stage biotechnology company focused on protein and antibody therapeutic products for life-threatening infectious diseases, particularly those treated in hospital-based settings. We intend to address antibiotic-resistant infections using our novel bacteriophage lysins alone and in combination with standard of care antibiotics. Lysins are bacteriophage enzymes that digest the bacterial cell wall. Lysins are fundamentally different than standard of care antibiotics discovered to date, in that they have the ability to kill bacteria immediately upon contact. We believe our most advanced product candidate, CF-301, for which we hold global rights, will be the first systemic lysin to enter human clinical trials. We believe CF-301’s unique properties will lead us into additional indications such as pneumonia, skin and skin structure infections, osteomyelitis, and biofilm-related indications for infected prosthetic joints, indwelling devices and catheters. Patent protection for CF-301 will be applicable through 2032.

In addition to lysins, we are exploring therapy with Mabs that block and disarm virulence factors of bacteria and viruses, rendering them vulnerable to the natural immune balance of the body. We are currently focused on Mabs for influenza.

Due to drug-resistant and newly-emerging pathogens, infections in the hospital are already the fourth leading cause of death in the United States, following heart disease, cancer and stroke. Recently, these pathogens have become a significant threat outside the hospital, moving rapidly into the general community at large. While bacteria and viruses are treated with antibiotics and antiviral drugs, many of these microbes have developed escape mechanisms that arise from mutation and cause current treatments to be ineffective. As a result, individual antibiotics will eventually become less active or inactive as drug-resistant bacteria develop. For example, 63% of Staph infections are caused by MRSA resistant to the primary antibiotic initially used in their therapy. Viruses also have become resistant through mutation and the survival of strains that avoid immune attack.

Our Focus—Therapeutic Approach

Current therapeutic industry practice focuses on monotherapy—notably the use of one drug at a time. Should the drug not be effective, then a second drug is used. We believe that monotherapy with antibiotics exerts an evolutionary pressure on mutant strains promoting the formation of drug-resistant pathogens. By using one drug at a time, resistance is more likely due to the high growth rates of organisms as well as their high rates of mutation and genetic reassortment. To bypass this, we believe that treatment of drug-resistant pathogens requires a new approach—one focusing on combination therapy. Based on our data, lysins, antibodies and antibiotics are not expected to interact with one another to cause serious side effects and, therefore, we believe they are uniquely suited to accomplish this therapeutic goal by working in combination. By simultaneously attacking multiple targets on pathogens, no single mutation or genetic reassortment can result in complete escape from therapy.

Our Competitive Strengths

We believe the following strengths position us for sustainable growth:

 

    CF-301 demonstrates rapid bactericidal activity. CF-301 has been shown to kill millions of Staph aureus bacteria in seconds upon contact, which has the potential to reduce treatment time and therefore, shorten hospital stays. The average length of time for hospitalization due to Staph aureus bacteremia is 21 days and the average total cost of hospitalization is $114,000.

 

    Lead program suggests minimal resistance to date. Based on our current research and experiments, Staph aureus bacteria have shown minimal resistance to our drug, CF-301, due to the conserved binding sites.

 

    Lysins are highly specific. A key feature of our lysins that distinguishes them from many standard-of-care antibiotics is their ability to target antibiotic-resistant bacteria, as well as those that are antibiotic-sensitive.

 

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    Minimal competition. There are only two FDA approved drugs for MRSA bacteremia. MRSA bacteria have shown resistance to both drugs. Additionally, we expect to seek approval for the use of CF-301 in combination with these standard-of-care antibiotics for Staph aureus bacteria. We believe the use of CF-301 in combination with, rather than as a replacement for, standard-of-care antibiotics may help to speed adoption of our product by physicians.

 

    Diverse research pipeline behind our lead product. Our lysin discovery platform provides a steady pipeline of novel lysins for research consideration and has recently generated gram negative lysins of research interest. Our Mab platform and strategy have resulted in an innovative research program for a therapeutic combination of Mabs to combat influenza.

 

    Deep patent portfolio. We have a deep patent portfolio consisting of 14 families of patents and patent applications in the United States and certain foreign jurisdictions, which include patents filed by us and those licensed from The Rockefeller University and the Mount Sinai School of Medicine. The portfolio includes six issued U.S. patents. Upon issuance, the CF-301 patent will have patent protection through 2032.

 

    Adequate supply of CF-301 for Phase 1 and Phase 2 trials. CF-301’s properties allow us to manufacture high yields of our drug in a two-step process with 99% purity at a low cost. We have a sufficient supply of manufactured drug product available for our currently planned Phase 1 and Phase 2 clinical trials.

 

    Substantial market opportunity. Our market opportunity has accelerated and expanded as antibiotic resistance has become a major threat to global public health. Due to drug-resistant and newly-emerging pathogens, infections in the hospital are already the fourth leading cause of death in the United States, following heart disease, cancer and stroke. Recently, these pathogens have become a significant threat outside the hospital, moving rapidly into the general community at large.

 

    Proven leadership team. We have assembled a management team and Board of Directors that have founded nine companies, which have gone on to produce multibillion dollar drugs such as Cialis, Tobi, Revlimid and Thalomid.

Our Strategy

Our strategy is to achieve a leadership position in first-in-class drugs against resistant, life-threatening infectious diseases. We plan to pursue commercialization of therapeutic products through discovery, acquisition and development of protein and antibody products using three new paradigms:

 

  1) Advance products from our lysin technology by entering our lead product, CF-301, into clinical trials;

 

  2) Demonstrate superiority over any one of the standard-of-care drugs alone by combining CF-301 with standard-of-care antibiotics to enhance their speed and potency; and

 

  3) Acquire or discover Mabs that block and disarm virulence factors of bacteria and viruses, rendering them vulnerable to the natural immune balance of the body. The strategies of our Mab program include: (a) targeting conserved regions of the virus or bacteria which are not prone to mutation; and (b) targeting multiple proteins expressed from different genes within a bacteria or virus, allowing for multiplier effects.

Our Products

Background

Bacteria can be divided into two groups based on structural differences of their outer most walls: (a) “gram-positive” bacteria, which have an outermost cell wall of peptidoglycan and, when exposed to a dye known as the “Gram-stain,” absorb the dye and appear dark blue or violet when viewed under a microscope; and

 

57


(b) “gram-negative” bacteria, which have an additional outer membrane which contains a lipopolysaccharide layer (also known as LPS) that prevents the Gram-stain from penetrating the peptidoglycan and, therefore, do not appear dark blue or violet when viewed microscopically.

Lysins are bacteriophage enzymes that have been shown to digest the peptidoglycan of the bacteria cell wall in in vitro experiments. Once the cell wall is breached, the bacteria lyses in a virtually explosive manner due to the high internal osmotic pressure of its cytoplasm. We believe lysins are unlike standard-of-care antibiotics discovered to date, especially regarding their mechanism and speed of action. Traditional antibiotics, and most cytotoxic agents, require bacterial cell division and metabolism to exert their effect (i.e., cell death or cessation of growth). Based on in vitro tests, lysins, however, are fundamentally different in that they have the ability to kill bacteria immediately upon contact. In fact, at certain concentrations they are sufficiently potent to kill hundreds of millions of bacteria within seconds to minutes.

In cooperation with The Rockefeller University, we have generated recombinant forms of lysins. Our lysin program focuses on gram-positive bacteria, such as Staph aureus. We have acquired worldwide exclusive rights to patents of nine lysins from The Rockefeller University. Each lysin targets a specific gram-positive bacteria, including drug-sensitive and drug-resistant forms of Staph aureus, Pneumococcus, group B streptococcus, enterococcus and anthrax. Significantly, our lysins digest only specific types of bacteria, which we believe will avoid damaging side effects that often occur when conventional antibiotic treatments kill the body’s healthy, desirable bacteria.

From these patents we plan to develop additional products for indications that range from pneumonia, skin and skin structure infections and osteomyelitis, to biofilm-related indications for infected prosthetic joints, indwelling devices and catheters. The following table sets forth the lysins for which we have acquired patents from The Rockefeller University, the bacteria that each lysin targets and the diseases associated with such bacteria.

Lysins Licensed by ContraFect from The Rockefeller University

 

Lysin

  

Bacteria

  

Disease

CF-301

   Staphylococcus aureus    Bacteremia*

CF-302

   Staphylococcus aureus    Abscesses*
      Pneumonia
      Endocarditi
          Meningitis

CF-303

   Pneumococcus    Pneumonia*

CF-309

   Pneumococcus    Bacteremia*
      Endocarditis*
      Meningitis*
          Otitis Media*

CF-304

   Enterococcus    Serious Intestinal Infections

CF-305

   Group B Strep    Neonatal Meningitis*

CF-306

   Anthrax    Serious Bacteremia*

CF-307

   Anthrax   

CF-308

   Anthrax   

 

* Indicates published data.

Our lead compound CF-301’s lead indication is Staph aureus bacteremia, a gram-positive blood borne infection, which caused 119,000 hospitalizations in 2011 and 30,000 deaths per year in the United States. We filed our IND application with the FDA on March 7, 2013. The FDA can place a clinical trial on hold for a

 

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variety of reasons. Our IND was placed on clinical hold because the FDA believes that the results of the pre-clinical studies we submitted do not provide sufficient information to assess the risks to subjects in our proposed clinical trial. We are currently in discussions with the FDA regarding additional information and data needed to enter Phase 1 clinical trials in 2014. Our pre-clinical studies to date have shown that CF-301 has the following attributes:

 

    Rapid bactericidal activity. CF-301 kills millions of bacteria in seconds upon contact. Traditional antibiotics, and most cytotoxic agents, require bacterial cell division and metabolism to exert their effect and can take hours or days to be effective. Lysins, however, are fundamentally different in that they have the ability to kill bacteria immediately upon contact. We believe our lysins, combined with standard of care antibiotics, have the potential to shorten treatment times and reduce the length of hospital stays.

 

    Highly specific to all forms of Staph aureus bacteria. CF-301 exhibits activity specific to all forms of Staph aureus, including MRSA and VISA/VRSA. Significantly, our lysins digest only the specific type of target bacteria, which we believe will avoid damaging side effects that often occur when conventional antibiotic treatments kill the body’s healthy, desirable bacteria.

 

    Minimal resistance. To date, bacteria show minimal resistance to CF-301’s killing activity.

 

    Synergy with current standard-of-care antibiotics. We have discovered a strong synergistic interaction between lysins and several standard-of-care antibiotics, including daptomycin, vancomycin and oxacillin. Synergy is defined as the interaction of two or more agents so that their combined effect is greater than the sum of their individual effects. When used in combination, lysins and antibiotics offer a dual attack on pathogenic bacteria that is far greater than the sum of their individual contributions. We believe that the use of CF-301 in combination with, rather than as a replacement for, standard-of-care antibiotics, may help speed adoption of our product by physicians.

 

    Eradicates biofilms. CF-301 eradicates biofilms that protect bacterial infections on indwelling devices from antibiotics. Biofilms render infections up to 1,000-fold more resistant to penetration by antibiotics. Infected human tissues, such as the heart valve in endocarditis or bone in osteomyelitis, or indwelling medical devices, such as central venous catheters, prosthetic joints and pacemakers, are common sites for biofilm formation, providing a hurdle for effective treatment with antibiotics alone.

A key feature of lysins that distinguishes them from standard-of-care antibiotics is their ability to target antibiotic-resistant bacteria, as well as those that are antibiotic-sensitive. Antibiotic resistance is a major threat to global public health. The table below sets forth the ability of CF-301 to kill all Staph aureus strains tested, regardless of their antibiotic-resistance profile. In this experiment, 250 different strains of Staph aureus, classified as methicillin-sensitive (“MSSA”), MRSA, vancomycin-resistant (“VRSA”), linezolid-resistant (“LRSA”) or daptomycin-resistant (“DRSA”), were tested to determine their sensitivity to CF-301 as measured by the Minimum Inhibitory Concentration (“MIC”) value. The MIC value is the minimum dose of drug that is required to kill a standard amount of bacteria over a 24-hour period. Based on demonstrated MIC values, CF-301 was shown to be active against all the strains tested (‘+’), while subsets of the Staph aureus strains were resistant to daptomycin, vancomycin or linezolid (‘–’).

 

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In Vitro Sensitivity of Antibiotic-Sensitive and Antibiotic-Resistant Staph aureus to CF-301

 

LOGO

Lysins have been shown to kill bacteria upon contact and to kill hundreds of millions of bacteria within seconds to minutes. The figure below compares the rate at which lysins kill bacteria to the rates at which conventional antibiotics kill bacteria. CF-301 reduced the number of Staph aureus bacteria in tests on 62 strains by 1,000-fold within 30 minutes. In contrast, daptomycin required six hours to achieve the same level of cell kill, while vancomycin failed to achieve even a 100-fold cell kill during the same six-hour test period. Because of this high speed of killing, we believe lysins represent a unique and highly desirable therapeutic option for the treatment of rapidly advancing infections.

CF 301’s Rapid Bactericidal Activity

 

LOGO

 

* The star symbols indicate the limit of detection in the plating assay.

 

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Synergy of Lysins with Standard-of-Care Antibiotics in Cell Culture

We have discovered a strong synergistic interaction between lysins and several standard-of-care antibiotics, including oxacillin, vancomycin and daptomycin in in vitro tests. Synergy is defined as the interaction of two or more agents so that their combined effect is greater than the sum of their individual effects. When used in combination, lysins and antibiotics offer a dual attack on pathogenic bacteria that is far greater than the sum of their individual contributions. The result is significantly improved killing of bacteria.

We have developed animal models where the drugs could be tested as single agents (monotherapy) or together (combination therapy). For this purpose we used an animal model where the bacterial load was so high that standard-of-care antibiotics or CF-301 alone did not result in significant cure rates. We treated groups of these animals with drugs alone or in combinations to determine if there was synergy and an improvement in efficacy.

The figure below presents the results of the combination of CF-301 and daptomycin and the combination of CF-301 and vancomycin when applied to the animal model. Control mice treated with buffer (blue diamonds) succumbed to bacterial infection within 12 hours. Administration of a clinical dose of daptomycin as a single agent (green triangles) resulted in clinical failure, as only 34% of mice survived. When CF-301 (orange squares) was dosed as a single agent, only 20% of mice survived. In contrast, when mice received the combination of CF-301 and daptomycin (red circles), 97% survived the bacterial challenge, demonstrating superiority of the combination therapy over the single-drug regimens.

 

LOGO

 

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Combination Therapy of CF 301 with Vancomycin

 

LOGO

We have tested the combination of CF-301 with daptomycin, vancomycin and oxacillin in 30 different experiments with over 1,700 mice. In each experiment the combination therapy was proven superior to therapy with single drugs alone. As a result, we are now pursuing clinical development of the combination of CF-301 and standard-of-care antibiotics for the treatment of Staph aureus bacteremia as CF-301’s first indication.

Impact of Lysin on Antibiotic-Resistant Biofilms

Biofilm formation is a common escape mechanism for bacteria and a key feature associated with bacterial pathogenesis. Biofilms are characterized by densely packed bacterial cells that grow in communities and are enclosed within a complex matrix of dead bacteria and excess cell wall components. This densely packed biofilm matrix renders biofilm-based infections up to 1,000-fold more resistant to penetration by antibiotics. Infected human tissues, such as the heart valve in endocarditis or bone in osteomyelitis, or indwelling medical devices, such as central venous catheters, prosthetic joints and pacemakers, are common sites for biofilm formation, providing a hurdle for effective treatment with antibiotics alone. Biofilm coating of bacterial infections in human medicine is estimated to occur in more than 60% of bacterial infections, costing the healthcare system billions of dollars. For this reason, novel treatment strategies and antimicrobial agents with activity toward biofilms remain a serious unmet medical need.

Since CF-301 disrupts the outer wall of Staph aureus by enzymatic lysis, studies were performed to determine if CF-301 would also disrupt biofilms. For this purpose, Staph aureus was cultured within wells of polystyrene dishes typically used for the culture of cells. Within 24 hours, a dense biofilm formed on the dish surface, which was visualized following treatment with crystal violet stain. In dishes incubated for four hours with high-dose (1,000x MIC) daptomycin, vancomycin or linezolid, the dark blue staining of the biomass was retained. These findings are consistent with the inability of these antibiotics to penetrate and clear biofilm material. In contrast, when the biofilm was incubated in the presence of a lower-dose (1xMIC) CF-301, the biofilm was completely removed. This demonstrated that CF-301 was at least 1,000-fold more potent than standard-of-care antibiotics at destroying bacterial biofilms.

 

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Sensitivity of Staph aureus Bacteremia Biofilms to CF-301 Versus Standard-of-Care Antibiotics.

 

LOGO

In order to assess CF-301’s ability to work on the surface of medically-relevant devices, Staph aureus biofilms were grown in medical catheters. To experimentally accomplish this, a culture of MRSA was grown within a catheter and incubated at body temperature. Biofilms growing in the interior of the catheters were treated with CF-301 or daptomycin at different concentrations. To determine the effect of the treatments, the catheters were flushed with buffer and then stained for residual biofilm. CF-301 was found to lyse and remove the biofilm when diluted to a level 0.001x MIC, while daptomycin failed to remove the biofilm at 5,000x MIC demonstrating that CF-301 had million-fold greater activity against the Staph aureus biofilm than the antibiotic.

Sensitivity of Staph aureus Bacteremia Biofilms of CF-301 Versus Daptomycin

 

LOGO

To visualize CF-301’s disruption of biofilms, Staph aureus was inoculated into a catheter where it attached to the wall of the plastic and formed a dense 3-dimensional structure. The interior of the catheter was then treated with CF-301 at 1x MIC. At various time intervals after treatment the interior of the catheter was sectioned and examined by scanning electron microscopy (“SEM”) as shown below. In the untreated catheter the majority of Staph aureus cells (a single cell is indicated by the horizontal red arrow) were found within a biofilm (circled). However, within 30 seconds of exposure to CF-301, the dense biofilm was largely removed and only single cells

 

63


were observed. Fifteen minutes following exposure to CF-301, the biofilm was completely stripped and residual Staph aureus cells which had been beneath the biofilm were killed, in effect, sterilizing the catheter. These images emphasize the rapid and potent activity of CF-301 against bacterial biofilms. Taken together with the lack of efficacy that antibiotics display against biofilms, we believe CF-301 represents a new therapeutic option against what were previously untreatable biofilms.

Sensitivity of Staph aureus Bacteremia Biofilms Grown on Catheters to CF-301

 

LOGO

Product Development

Product development will be accomplished in four sometimes overlapping steps: (1) pre-clinical activities to demonstrate consistent manufacturing, safety and efficacy in animals; (2) Phase 1 clinical trials in healthy volunteers to determine pharmacokinetics, safety, dosing, effects in special populations, and other issues; (3) Phase 2 clinical trials where the drug is tested in patients for dose, safety and efficacy; and (4) Phase 3 clinical trials, the definitive trials in patients to test for efficacy and safety at the proposed clinical dose.

Non-Clinical Activities

Chemistry, Manufacturing and Controls. Manufacturing of CF-301 utilizes a proprietary engineered E. coli strain that expresses the product in a recombinant manner during the fermentation process. This technology allows production of up to nine grams of CF-301 per liter of fermentation broth. After fermentation, the broth containing CF-301 is separated and purified through a process containing two chromatographic columns. The resulting product has greater than 99% purity. The CF-301 produced by this process was used in subsequent animal studies required for the IND and will be used for our planned Phase 1 and Phase 2 clinical trials.

Safety Pharmacology and Toxicology. The pre-clinical safety pharmacology and toxicology studies that were completed in connection with our IND application for CF-301 demonstrated that CF-301 was well tolerated in both rats and dogs for IV doses of up to 2.5mg/kg per day for a two-hour infusion once daily for seven

 

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consecutive days. Dose dependent histopathological changes were seen in both species. The dose limiting toxicity observed was the development of vascular lesions on the outer wall of blood vessels and a delayed onset response after multiple non-consecutive doses of CF-301. We intend to study CF-301 in the clinical trials at doses much lower than those that caused these events in animal subjects.

Clinical Activities

We plan to work with CROs in running the clinical trials. We have selected the Buffalo Clinical Research Center in Buffalo, New York, as the CRO for Phase 1, and Clinipace Worldwide in Morrisville, North Carolina as the CRO for Phase 2.

Phase 1. Our proposed Phase 1 clinical trial is a randomized, double-blind, placebo-controlled, dose-escalating study designed to evaluate the safety, tolerability, and pharmacokinetics of both increasing single (Part A) and multiple IV doses (Part B) in 80 healthy adult male and female subjects (40 subjects in each part). The starting dose for Phase 1 will be 16-fold below the dose determined in the animal studies to be the highest exposure without adverse effects, the No Observable Adverse Effect Level (“NOAEL”). The dose will be escalated in a sequential fashion until we achieve the desired blood level of drug, observe unacceptable toxicity or reach the maximum planned dose.

For Part A, eligible subjects will be randomized to receive a single dose of study drug (6 CF-301:2 placebo) by IV infusion. There will be five dose levels of the study drug with eight subjects per level. For Part B, eligible subjects will be randomized to receive multiple doses of the study drug (6 CF-301:2 placebo) by infusion. Subjects randomized into Part B will receive an IV dose of CF-301 or placebo once daily for seven consecutive days.

Following data analysis, we expect to proceed into Phase 2 while simultaneously conducting additional required Phase 1 studies. Two CF-301 doses will be selected for Phase 2 based on the safety tolerability and pharmacokinetics data from the Phase 1 study.

Phase 2. We intend for the initial Phase 2 clinical trial to be a multicenter, double-blind, randomized (2:2:1), dose-ranging study that evaluates the efficacy, safety, and pharmacokinetics of low-dose CF-301 plus antistaphylococcal antibiotics, high-dose CF-301 plus antistaphylococcal antibiotics, and placebo plus antistaphylococcal antibiotics in patients with Staph aureus bacteremia.

Each treatment group will be stratified 2:3 for uncomplicated and complicated Staph aureus bacteremia. Uncomplicated bacteremia will be treated with antistaphylococcal antibiotics for a minimum of two weeks and complicated bacteremia for a minimum of four weeks. We intend to evaluate clinical and microbiologic outcomes in support of a Phase 3 clinical trial. The selected CF-301 dose for Phase 3 will be based on the efficacy, safety, and pharmacokinetics of the doses from the Phase 2 study.

Following data analysis, we intend to meet with the FDA to discuss a Phase 3 trial design including the choice of endpoints, eligibility criteria and statistical methods that the FDA would deem sufficient for approval. Based on this discussion, we intend to finalize a Phase 3 study design.

Phase 3. Based on our expectations regarding the safety and efficacy profile of CF-301, publicly available guidance and precedents from the FDA, and our predictions regarding approval of competing products, we intend to conduct a single Phase 3 clinical trial with a superiority study design. We expect that trial to be a global, multicenter, double-blind, randomized (1:1), study that evaluates the efficacy and safety of CF-301 plus antistaphylococcal antibiotics and placebo plus antistaphylococcal antibiotics in patients with Staph aureus bacteremia.

Each treatment group will be stratified 2:3 for uncomplicated and complicated bacteremia. Uncomplicated bacteremia will be treated with antistaphylococcal antibiotics for a minimum of two weeks and complicated bacteremia for a minimum of four weeks.

 

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Once the Phase 3 trial is completed, we intend to prepare and submit a BLA to the FDA, seeking approval to commercialize CF-301 as an adjunctive therapy to standard-of-care antistaphylococcal antibiotics for the treatment of Staph aureus bacteremia.

Commercial Manufacturing

We intend to further optimize the manufacturing process for increased purity and yield. Once completed, we will begin a program to manufacture Phase 3 material. The process will then be scaled 35-fold from the current 100 liter fermentation to 5,000 liters. This process will then be validated in a series of manufacturing batches to demonstrate consistency. In parallel to the validation, we intend to conduct a comparability program that demonstrates comparability between the final product used in Phase 3 and commercial manufacturing. We will combine the results with Phase 3 clinical data to form the BLA that will be submitted to the FDA. Following submission, the FDA will conduct pre-approval inspections of all manufacturing facilities.

Market Opportunities

The issue of antibiotic-resistant bacterial infections has been widely recognized as an increasingly urgent public health threat, including by the World Health Organization, the Centers for Disease Control and Prevention and the Infectious Disease Society of America. Antibiotic resistance has limited the effectiveness of many existing drugs, and the discovery of new antibiotics to address resistance has not kept pace with the increasing incidence of difficult-to-treat microorganisms. According to the Infectious Diseases Society of America, the estimated cost in 2010 to the U.S. healthcare system of antibiotic-resistant infections was approximately $21 billion to $34 billion annually, a substantial portion of which is due to increased length of stay.

Staph aureus bacteremia is a serious bacterial infection worldwide associated with high morbidity and mortality. The incidence of Staph aureus bacteremia in the United States has increased from approximately 112,000 in 2006 to 119,000 in 2011. By 2020, the number of infections is expected to grow to approximately 132,000. Major factors contributing to the growth of Staph aureus bacteremia incidence include increasing numbers of patients with prosthetic devices, especially cardiac devices which contribute substantially to the growing prevalence of Staph aureus bacteremia, and secondary infections such as infective endocarditis.

Staph aureus bacteremia patients are typically treated in the hospital with vancomycin or daptomycin if they have MRSA-based infections, or with a beta-lactam antibiotic such as oxacillin if they have MSSA-based infections. Our approach will be to use CF-301 in combination with vancomycin, daptomycin or oxacillin depending upon the strain of Staph aureus bacteremia.

Our Lysin Discovery Platform

We employ a series of metagenomic-based techniques to clone bacteriophage lysins from bacterial, viral, and environmental sources. The field of metagenomics is based on the bulk extraction of DNA/RNA from environmental samples (e.g., soil, water, feces, etc.) without prior isolation of individual microbial sources. This is useful when one considers that less than 1% of microbes are culturable under standard laboratory conditions. Once extracted, the metagenomic DNA can then be examined using sequence-based methods or by proprietary functional screens. These functional screens for bacteriophage lysin activity form the basis for our lysin discovery work.

For the functional metagenomic work that we perform, environmental genes are expressed in a recombinant format in a standard host organism (i.e., Escherichia coli) and cells are monitored for the acquisition of a desired phenotype. We can vary both the source of environmental DNA and the way we monitor for desired phenotypes to focus only on environmental populations enriched for bacteriophage lysins that can actively kill a pathogen of interest. We sample various DNA sources including viral, prophage, and pathogen-amplified viral metagenomics. Multiple methods for both DNA library construction and for functional screening are used in parallel in order to maximize lysin identification.

 

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We have also established additional discovery methodologies, including bioinformatics analysis of the rapidly expanding databases of bacterial genomic sequences. The highly conserved modular structure of lysin, combined with sequence homologies amongst different lysin classes, enable the rapid analysis of putative lysins from DNA databases. Such sequences can be readily synthesized and screened for lytic activity against any pathogen of interest.

The application of these methods enable the large scale identification of lysins, enabling the production of lysine banks specific for any particular pathogen. We believe the ability to rapidly identify lysins specific for any pathogen of interest, either by in vitro or in silico methods, will provide a steady pipeline of novel lysins for consideration as potential antimicrobial therapeutic candidates.

Our Pipeline

Additional Lysin Programs for Human Therapeutics

The goal of the CF-301 program is to treat Staph aureus bacteremia and then to expand CF-301 treatment to additional indications, including pneumonia, skin and skin structure infections and osteomyelitis. Our objective is to gain market leadership in all Staph aureus-related indications.

We intend to pursue pre-clinical and clinical development of additional lysins. In addition to the lysins we have licensed from The Rockefeller University, we also have an in-house lysin discovery program and an active sponsored research agreement for the discovery of new lysins with Dr. Vincent Fischetti’s Laboratory of Bacterial Pathogenesis and Immunology at The Rockefeller University, where we have the first right to negotiate a license to all discoveries concerning lysins through October 2016. The primary focus of our in-house and sponsored research is the discovery of lysins to target gram-negative bacteria.

Monoclonal Antibodies

In addition to lysins, we are exploring combination therapy with Mabs that block and disarm virulence factors of bacteria and viruses, rendering them vulnerable to the natural immune balance of the body. The strategies of our Mab program include: (1) targeting conserved regions of the virus or bacteria which are not prone to mutation; and (2) targeting multiple proteins expressed from different genes within a bacteria or virus, allowing for multiplier effects.

Antibodies used in combination assert a multiplier effect that avoids resistance and has considerably greater efficacy than the current use of single antibodies (monotherapy). For example, if the rate of therapeutic escape due to a single mutant gene was one per million, the rate of escape requiring two independent genes would be their multiple, or one per trillion, while using three antibodies to independent genes would raise a requirement for therapeutic escape to one per million-trillion.

Our antibodies are generated by genetic engineering using phage display libraries or other available technologies, enabling the screening of billions of human Mabs with different binding sites. With such a large array of Mabs, scores of antibodies will be selected against each target, leading to a high likelihood of identifying lead compounds. As these Mabs are generated by genetic engineering, we have the ability to develop antibodies with a common backbone structure, providing for a similar pharmacokinetic profile (half-life, absorption, biodistribution, metabolism and excretion). The common properties provide for a unique ability to create a therapeutic utilizing a combination of Mabs.

Our Mab products are expected to exhibit the following attributes:

 

    Exert unique efficacy and resistance multiplier effects when used in combination.

 

    Amplify their effectiveness by recruiting immune cells and circulating immune components.

 

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    Remain active in the body for weeks as compared to hours for conventional drugs.

 

    Provide immediate benefit upon intravenous inoculation into patients.

 

    React with all strains of a particular pathogen, regardless of their drug-resistant profile.

 

    Are 100-10,000-fold more specific than conventional drugs, which is a well-known property of Mabs.

Influenza Research

We are currently focused on Mabs for influenza. We have more than 60 Mabs in our research pipeline that cross-react with the three principal strains of influenza (H1, H3 and B). These Mabs react with the principle protein (hemagglutinin) on the surface of influenza at a region (referred to as the hemagglutinin stalk) which is genetically stable and does not vary from one season to another. Consequently, these Mabs have several advantages over conventional Mabs, vaccines, and antivirals, including: (1) bypassing the effects of seasonal change, which allows a single Mab to neutralize decades of different influenza strains; (2) providing for the production of a therapeutic cocktail of only three Mabs (covering influenza Types A H1 and H3, and Type B) that can be used without reformulation; and (3) having an immediate effect (through injection) that cannot be obtained by vaccination (which requires weeks).

We have produced dozens of Mabs that are reactive with the stalk region of hemagglutinin proteins from 10 different subtypes of H3 influenza strains. These 10 strains were derived from seasonal outbreaks that occurred from 1968 through 2009. Single Mabs within this group reacted with all 10 strains of virus tested, representing over 40 years of H3 influenza variants, providing protection that would have required 15-20 vaccine reformulations. In addition to the Mabs against H3, we also have produced a panel of Mabs that target the stalk of the hemagglutinin for H1 viruses. These Mabs react with all strains of H1 from the time of the Spanish Flu (1918) to the present, representing nearly 100 years of seasonal strains.

Our Mabs have also been tested in mouse models to demonstrate protection against lethal infection with influenza in “proof-of-concept” experiments. These data demonstrated that that our anti-H3 and anti-H1 Mabs were able to protect animals from lethal challenge. As shown in the figure below, animals treated with a placebo antibody all had over 30% body weight loss from influenza within 10-days, whereas 100% of animals treated with our cross-reactive Mabs did not have significant percent body weight loss.

Effectiveness of Mabs Against Influenza Infections—Annual Testing Results

 

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Competition

The pharmaceutical and biotechnology industries are intensely competitive. We compete directly and indirectly with other pharmaceutical companies, biotechnology companies and academic and research organizations in developing therapies to treat diseases. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. We compete with companies that have products on the market or in development for the same indications as our product candidates. We may also compete with organizations that are developing similar technology platforms.

Intellectual Property

Our goal is to obtain, maintain and enforce patent protection for our products, formulations, processes, methods and other proprietary technologies, preserve our trade secrets, and operate without infringing on the proprietary rights of other parties, both in the United States and in other countries. Our policy is to actively seek to obtain, where appropriate, the broadest intellectual property protection possible for our product candidates, proprietary information and proprietary technology through a combination of contractual arrangements and patents, both in the United States and abroad. However, patent protection may not afford us with complete protection against competitors who seek to circumvent our patents.

We also depend upon the skills, knowledge, experience and know-how of our management and research and development personnel, as well as that of our advisors, consultants and other contractors. To help protect our proprietary know-how, which is not patentable, and for inventions for which patents may be difficult to enforce, we currently rely and will in the future rely on trade secret protection and confidentiality agreements to protect our interests. To this end, we will require all of our employees, consultants, and other contractors (including any contractors we may retain for purposes of any of our ad hoc Clinical Advisory Boards) to enter into confidentiality agreements that prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries and inventions important to our business.

License Agreement—Mount Sinai School of Medicine

On January 22, 2010, we entered into a license agreement with the Mount Sinai School of Medicine of New York University that gives us exclusive rights to a patent for the method of discovery of monoclonal antibodies that bind to “conserved regions” on “highly variable organisms,” such as influenza. The license also includes up to four specific influenza antibodies of our choosing. To date, we have exercised our right to two such antibodies and continue to evaluate new candidates as they are produced.

In consideration for the license, we paid Mount Sinai School of Medicine expenses relating to its patent rights of approximately $25,000 and issued 75,000 shares of Series A Preferred Stock and 39,063 shares of common stock. Under the license agreement, we will also be required to make certain maintenance, milestone and royalty payments. We are allowed to grant sublicenses to third parties without prior approval, and will be required to pay Mount Sinai School of Medicine a certain percentage of all payments we receive from sublicensees.

The license agreement terminates upon the later of (i) the expiration of the last licensed patent right, or (ii) 20 years from the latest filing date of any patent application included in the patent rights. Either party may terminate the agreement in the event of a material breach by the other, subject to prior notice and opportunity to cure, or in the event the other party enters into bankruptcy or is dissolved. Upon termination of the license agreement, all rights in and to the patent rights revert to Mount Sinai School of Medicine.

License Agreements—The Rockefeller University

We have entered into the following license agreements with The Rockefeller University:

 

    On July 12, 2011, we entered into a license agreement for the worldwide, exclusive right to a patent covering the composition of matter for the lysin PlySS2 for the treatment and prevention of diseases caused by gram-positive bacteria (the “CF-301 License”). We rebranded PlySS2 as CF-301.

 

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    On June 1, 2011, we entered into a license agreement for the exclusive rights to The Rockefeller University’s interest in a patent covering the method of delivering antibodies through the cell wall of a gram positive bacteria to the periplasmic space. This intellectual property was developed as a result of the sponsored research agreement between us and The Rockefeller University, and was jointly discovered and filed by the two parties.

 

    On September 23, 2010, we entered into a license agreement for the worldwide, exclusive right to develop, manufacture, use and sell, and offer for sale a suite of patents and patent applications covering the composition of matter for eight individual lysin molecules for the treatment and prevention of diseases caused by gram-positive bacteria. The lysins in this suite have activity against Staphylococcus, Group A Streptococcus, Group B Streptococcus, Pneumococcus, Enterococcus and Anthrax.

In consideration for the licenses, we paid The Rockefeller University license initiation fees and, in the case of the CF-301 License, we issued The Rockefeller University 30,303 shares of our Series C Preferred Stock. Under the license agreements, we will also be required to make certain maintenance, milestone and royalty payments to The Rockefeller University.

We are allowed to grant sublicenses to third parties without prior approval, subject to certain conditions and the payment of a certain percentage of all payments we receive from sublicensees.

Each license agreement terminates upon the later of (i) the expiration or abandonment of the last licensed patent under the license agreement to expire or become abandoned, or (ii) 10 years after the first commercial sale of the first licensed product. The Rockefeller University may terminate any license agreement in the event of a breach of such agreement by us or if we challenge the validity or enforceability of the underlying patent rights. We may terminate any license agreement at any time on 60 days’ notice.

License Agreement—MorphoSys AG

On April 1, 2011, we entered into a five-year non-exclusive license agreement with MorphoSys AG (“MorphoSys”) pursuant to which we obtained from MorphoSys full rights to practice under MorphoSys’ patent rights, and licenses for its HuCAL Platinum (45 billion antibody) human phage display library (the “HuCAL Library”) and AutoCAL (automation software and know-how) technology for use onsite at our facility.

In consideration for the license we paid MorphoSys a one-time installation fee and will be required to pay annual license maintenance fees. We will also be required to pay for commercial therapeutic licenses for each product that we choose to bring into clinical development that originated from the HuCAL Library and in the event a licensed product is successfully brought to market, we will be required to make milestone payments as products from the HuCAL Library progress through clinical development. We will be required to pay MorphoSys a royalty of 5% of net sales from products that originated from the HuCAL Library. Under the terms of the license agreement, we are allowed to grant sublicenses to third parties without prior approval.

Under the terms of the license agreement, we have the rights to use an unlimited number of antibodies from the HuCAL library for research purposes during the five-year term. We have obtained the right to request up to 40 commercial therapeutic licenses during the five-year term, allowing us to develop as many as 40 human antibody products for therapeutic purposes.

The license agreement terminates upon the earlier of (i) the expiration of the five-year term, if no commercial therapeutic license is in place; (ii) the time at which the last commercial therapeutic license terminates; and (iii) the date all obligations to pay all royalties have ceased.

Sponsored Research Agreements—The Rockefeller University

Effective October 1, 2009, we entered into a sponsored research agreement with The Rockefeller University to produce and test monoclonal antibodies against proteins of Staph aureus. In accordance with the agreement,

 

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The Rockefeller University and we each provide certain equipment and tools, with funding provided by us of up to approximately $350,000, to maintain a research program used to create joint intellectual property.

The agreement expired on September 30, 2012. Following the expiration of the agreement, each party has a non-exclusive license to use for internal research purposes all research results, including joint intellectual property. If joint intellectual property develops from these programs, we will have the right to acquire a royalty-bearing license to utilize the intellectual property for commercial purposes.

Effective October 24, 2011, we entered into a second sponsored research agreement with The Rockefeller University, to identify lysins, enzymes or small molecules that will kill gram-negative bacteria, and identify and characterize lysins from Clostridia difficile to be engineered into gut commensal bacteria. In accordance with the agreement, The Rockefeller University and we each provide certain equipment and tools, with funding provided by us of up to approximately $300,000 each year for five years.

The initial term of the agreement runs through October 31, 2016. Either party may terminate the agreement upon breach of the agreement, following 30 days written notice and failure to cure such breach. Following the expiration or termination of the agreement, each party will have a non-exclusive license to use for internal research purposes all research results, including joint intellectual property. If joint intellectual property develops from these programs, we will have the right to acquire a royalty-bearing license to utilize the intellectual property for commercial purposes.

Government Regulation

The production, distribution, and marketing of products employing our research and intellectual property are subject to extensive governmental regulation in the United States and in other countries. In the United States, our products will be regulated as biologics and subject to the Federal Food, Drug, and Cosmetic Act, as amended (the “FDC Act”), the Public Health Service Act, as amended (the “PHSA”) and the regulations of the FDA, as well as to other federal, state, and local statutes and regulations. These laws, and similar laws outside the United States, govern the research, development, clinical and preclinical testing, manufacture, safety, effectiveness, approval, labeling, distribution, sale, import, export, storage, record-keeping, reporting, advertising, and promotion and marketing of our products. Product development and approval within this regulatory framework, if successful, will require the expenditure of substantial resources and take years to achieve. Violations of regulatory requirements at any stage may result in various adverse consequences, including the FDA’s and other health authorities’ delay in approving or refusal to approve a product and may result in enforcement actions, and administrative or judicial sanctions.

The following provides further information on certain legal and regulatory requirements that have the potential to affect our operations and the future marketing of our products.

FDA Approval Process

In the United States, pharmaceutical products are subject to extensive regulation by the FDA. The FDC Act and other federal and state statutes and regulations, govern, among other things, the research, development, testing, manufacture, storage, recordkeeping, approval, labeling, promotion and marketing, distribution, post-approval monitoring and reporting, sampling, and import and export of pharmaceutical products. Biological products used for the prevention, treatment, or cure of a disease or condition of a human being are subject to regulation under the FDC Act, except the section of the FDC Act which governs the approval of NDAs. Biological products are approved for marketing under provisions of PHSA, via a BLA. However, the application process and requirements for approval of BLAs are very similar to those for NDAs, and biologics are associated with similar approval risks and costs as drugs. Failure to comply with applicable U.S. requirements may subject a

 

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company to a variety of administrative or judicial sanctions, such as FDA refusal to approve pending NDAs or BLAs, warning or untitled letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties, and criminal prosecution.

Pharmaceutical product development for a new product or certain changes to an approved product in the United States typically involves preclinical laboratory and animal tests, the submission to the FDA of an IND, which must become effective before clinical testing may commence, and adequate and well-controlled clinical trials to establish the safety and effectiveness of the drug for each indication for which FDA approval is sought. Satisfaction of FDA pre-market approval requirements typically takes many years and the actual time required may vary substantially based upon the type, complexity, and novelty of the product or disease.

Preclinical tests include laboratory evaluation of product chemistry, formulation, and toxicity, as well as animal trials to assess the characteristics and potential safety and efficacy of the product. The conduct of the preclinical tests must comply with federal regulations and requirements, including good laboratory practices. The results of preclinical testing are submitted to the FDA as part of an IND along with other information, including information about product chemistry, manufacturing and controls, and a proposed clinical trial protocol. Long term preclinical tests, such as animal tests of reproductive toxicity and carcinogenicity, may continue after the IND is submitted.

A 30-day waiting period after the submission of each IND is required prior to the commencement of clinical testing in humans. If the FDA has neither commented on nor questioned the IND within this 30-day period, the clinical trial proposed in the IND may begin.

Clinical trials involve the administration of the investigational new drug or biologic to healthy volunteers or patients under the supervision of a qualified investigator. Clinical trials must be conducted: (i) in compliance with federal regulations; (ii) in compliance with good clinical practice (“GCP”), an international standard meant to protect the rights and health of patients and to define the roles of clinical trial sponsors, administrators, and monitors; as well as (iii) under protocols detailing the objectives of the trial, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated. Each protocol involving testing on healthy U.S. volunteers or patients and subsequent protocol amendments must be submitted to the FDA as part of the IND.

The FDA may order the temporary, or permanent, discontinuation of a clinical trial at any time, or impose other sanctions, if it believes that the clinical trial either is not being conducted in accordance with FDA requirements or presents an unacceptable risk to the clinical trial patients. The study protocol and informed consent information for patients in clinical trials must also be submitted to an IRB for approval. An IRB may also require the clinical trial at the site to be halted, either temporarily or permanently, for failure to comply with the IRB’s requirements, or may impose other conditions.

Clinical trials to support NDAs or BLAs for marketing approval are typically conducted in three sequential phases, but the phases may overlap. In Phase 1, the initial introduction of the drug or biologic into healthy human subjects or patients, the product is tested to assess metabolism, pharmacokinetics, pharmacological actions, side effects associated with increasing doses, and, if possible, early evidence on effectiveness. Phase 2 usually involves trials in a limited patient population to determine the effectiveness of the drug or biologic for a particular indication, dosage tolerance, and optimum dosage, and to identify common adverse effects and safety risks. If a compound demonstrates evidence of effectiveness and an acceptable safety profile in Phase 2 evaluations, Phase 3 trials are undertaken to obtain the additional information about clinical efficacy and safety in a larger number of patients, typically at geographically dispersed clinical trial sites, to permit the FDA to evaluate the overall benefit-risk relationship of the drug or biologic and to provide adequate information for the labeling of the product. In most cases, the FDA requires two adequate and well-controlled Phase 3 clinical trials to demonstrate the efficacy of the drug or biologic. A single Phase 3 trial with other confirmatory evidence may be sufficient in rare instances where the study is a large multicenter trial demonstrating internal consistency and a statistically very persuasive finding of a clinically meaningful effect on mortality, irreversible morbidity or prevention of a disease with a potentially serious outcome and confirmation of the result in a second trial would be practically or ethically impossible.

 

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After completion of the required clinical testing, an NDA or BLA is prepared and submitted to the FDA. FDA approval of the NDA or BLA is required before marketing of the product may begin in the United States. The NDA or BLA must include the results of all preclinical, clinical, and other testing and a compilation of data relating to the product’s pharmacology, chemistry, manufacture, and controls. The cost of preparing and submitting an NDA or BLA is substantial. The submission of most NDAs and BLAs is additionally subject to a substantial application user fee, currently exceeding $2,169,000, and the manufacturer and/or sponsor under an approved new drug application are also subject to annual product and establishment user fees, currently exceeding $104,000 per product and $554,000 per establishment. These fees are typically increased annually.

The FDA has 60 days from its receipt of an NDA or BLA to determine whether the application will be accepted for filing based on the agency’s threshold determination that it is sufficiently complete to permit substantive review. Once the submission is accepted for filing, the FDA begins an in-depth review. The FDA has agreed to certain performance goals in the review of NDAs and BLAs. Most such applications for standard review drug or biologic products are reviewed within ten to twelve months; most applications for priority review drugs or biologics are reviewed in six to eight months. Priority review can be applied to drugs that the FDA determines offer major advances in treatment, or provide a treatment where no adequate therapy exists. For biologics, priority review is further limited only for products intended to treat a serious or life-threatening disease relative to the currently approved products. The review process for both standard and priority review may be extended by the FDA for three additional months to consider certain late-submitted information, or information intended to clarify information already provided in the submission.

The FDA may also refer applications for novel drug or biologic products, or drug or biologic products that present difficult questions of safety or efficacy, to an advisory committee—typically a panel that includes clinicians and other experts—for review, evaluation, and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations. Before approving an NDA or BLA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP. Additionally, the FDA will inspect the facility or the facilities at which the drug is manufactured. FDA will not approve the product unless compliance with cGMPs, is satisfactory and the NDA or BLA contains data that provide substantial evidence that the drug or biologic is safe and effective in the indication studied.

After the FDA evaluates the NDA or BLA and the manufacturing facilities, it issues either an approval letter or a complete response letter. A complete response letter generally outlines the deficiencies in the submission and may require substantial additional testing, or information, in order for the FDA to reconsider the application. If, or when, those deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the NDA or BLA, the FDA will issue an approval letter. The FDA has committed to reviewing such resubmissions in two or six months depending on the type of information included.

An approval letter authorizes commercial marketing of the drug or biologic with specific prescribing information for specific indications. As a condition of NDA or BLA approval, the FDA may require a risk evaluation and mitigation strategy (“REMS”), to help ensure that the benefits of the drug or biologic outweigh the potential risks. REMS can include medication guides, communication plans for healthcare professionals, and elements to assure safe use (“ETASU”). ETASU can include, but are not limited to, special training or certification for prescribing or dispensing, dispensing only under certain circumstances, special monitoring, and the use of patient registries. The requirement for a REMS can materially affect the potential market and profitability of the product. Moreover, product approval may require substantial post-approval testing and surveillance to monitor the product’s safety or efficacy. Once granted, product approvals may be withdrawn if compliance with regulatory standards is not maintained or problems are identified following initial marketing.

Changes to some of the conditions established in an approved application, including changes in indications, labeling, or manufacturing processes or facilities, require submission and FDA approval of a new NDA or BLA or NDA or BLA supplement before the change can be implemented. An NDA or BLA supplement for a new

 

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indication typically requires clinical data similar to that in the original application, and the FDA uses the same procedures and actions in reviewing NDA or BLA supplements as it does in reviewing NDAs or BLAs.

Post-Approval Requirements

Once an NDA or BLA is approved, a product will be subject to certain post-approval requirements. For instance, the FDA closely regulates the post-approval marketing and promotion of drugs and biologics, including standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving the internet. Drugs and biologics may be marketed only for the approved indications and in accordance with the provisions of the approved labeling.

Adverse event reporting and submission of periodic reports is required following FDA approval of an NDA or BLA. The FDA also may require post-marketing testing, known as Phase 4 testing, REMS, and surveillance to monitor the effects of an approved product, or the FDA may place conditions on an approval that could restrict the distribution or use of the product. In addition, quality control, drug manufacture, packaging, and labeling procedures must continue to conform to cGMPs after approval. Drug and biologic manufacturers and certain of their subcontractors are required to register their establishments with the FDA and certain state agencies. Registration with the FDA subjects entities to periodic unannounced inspections by the FDA, during which the agency inspects manufacturing facilities to assess compliance with cGMPs. Accordingly, manufacturers must continue to expend time, money, and effort in the areas of production and quality-control to maintain compliance with cGMPs. Regulatory authorities may withdraw product approvals or request product recalls if a company fails to comply with regulatory standards, if it encounters problems following initial marketing, or if previously unrecognized problems are subsequently discovered.

Fast Track Designation and Accelerated Approval

The FDA is required to facilitate the development, and expedite the review, of drugs or biologics that are intended for the treatment of a serious or life-threatening disease or condition for which there is no effective treatment and which demonstrate the potential to address unmet medical needs for the condition. Under the fast track program, the sponsor of a new drug or biologic candidate may request that the FDA designate the candidate for a specific indication as a fast track drug or biologic concurrent with, or after, the filing of the IND for the candidate. The FDA must determine if the drug or biologic candidate qualifies for fast track designation within 60 days of receipt of the sponsor’s request.

Under the fast track program and FDA’s accelerated approval regulations, the FDA may approve a drug or biologic for a serious or life-threatening illness that provides meaningful therapeutic benefit to patients over existing treatments based upon a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity, or prevalence of the condition and the availability or lack of alternative treatments.

In clinical trials, a surrogate endpoint is a measurement of laboratory or clinical signs of a disease or condition that substitutes for a direct measurement of how a patient feels, functions, or survives. Surrogate endpoints can often be measured more easily or more rapidly than clinical endpoints. A drug or biologic candidate approved on this basis is subject to rigorous post-marketing compliance requirements, including the completion of Phase 4 or post-approval clinical trials to confirm the effect on the clinical endpoint. Failure to conduct required post-approval studies, or confirm a clinical benefit during post-marketing studies, will allow the FDA to withdraw the drug or biologic from the market on an expedited basis. All promotional materials for drug candidates approved under accelerated regulations are subject to prior review by the FDA.

In addition to other benefits such as the ability to use surrogate endpoints and engage in more frequent interactions with the FDA, the FDA may initiate review of sections of a fast track product’s NDA or BLA before the application is complete. This rolling review is available if the applicant provides, and the FDA approves, a

 

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schedule for the submission of the remaining information and the applicant pays applicable user fees. However, the FDA’s time period goal for reviewing an application does not begin until the last section of the NDA or BLA is submitted. Additionally, the fast track designation may be withdrawn by the FDA if the FDA believes that the designation is no longer supported by data emerging in the clinical trial process.

The Breakthrough Therapy Designation

The FDA is required to expedite the development and review of the application for approval of drugs that are intended to treat a serious or life-threatening disease or condition where preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. Under the breakthrough therapy program, the sponsor of a new drug candidate may request that the FDA designate the drug candidate for a specific indication as a breakthrough therapy concurrent with, or after, the filing of the IND for the drug candidate. The FDA must determine if the drug candidate qualifies for breakthrough therapy designation within 60 days of receipt of the sponsor’s request. We intend to apply for breakthrough therapy designation of CF-301 during Phase 1 clinical trials.

Pediatric Information

Under the Pediatric Research Equity Act (“PREA”), NDAs or BLAs or supplements to NDAs or BLAs must contain data to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the drug is safe and effective. The FDA may grant full or partial waivers, or deferrals, for submission of data. Unless otherwise required by regulation, PREA does not apply to any drug for an indication for which orphan designation has been granted.

Additional Controls for Biologics

To help reduce the increased risk of the introduction of adventitious agents, the PHSA emphasizes the importance of manufacturing controls for products whose attributes cannot be precisely defined. The PHSA also provides authority to the FDA to immediately suspend licenses in situations where there exists a danger to public health, to prepare or procure products in the event of shortages and critical public health needs, and to authorize the creation and enforcement of regulations to prevent the introduction or spread of communicable diseases in the United States and between states.

After a BLA is approved, the product may also be subject to official lot release as a condition of approval. As part of the manufacturing process, the manufacturer is required to perform certain tests on each lot of the product before it is released for distribution. If the product is subject to official release by the FDA, the manufacturer submits samples of each lot of product to the FDA together with a release protocol showing a summary of the history of manufacture of the lot and the results of all of the manufacturer’s tests performed on the lot. The FDA may also perform certain confirmatory tests on lots of some products, such as viral vaccines, before releasing the lots for distribution by the manufacturer. In addition, the FDA conducts laboratory research related to the regulatory standards on the safety, purity, potency, and effectiveness of biological products. As with drugs, after approval of biologics, manufacturers must address any safety issues that arise, are subject to recalls or a halt in manufacturing, and are subject to periodic inspection after approval.

Biosmilars

The Biologics Price Competition and Innovation Act of 2009 (“BPCIA”), creates an abbreviated approval pathway for biological products shown to be highly similar to or interchangeable with an FDA-licensed reference biological product. Biosimilarity sufficient to reference a prior FDA-approved product requires that there be no differences in conditions of use, route of administration, dosage form, and strength, and no clinically meaningful differences between the biological product and the reference product in terms of safety, purity, and potency.

 

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Biosimilarity must be shown through analytical studies, animal studies, and at least one clinical study, absent a waiver by the Secretary. A biosimilar product may be deemed interchangeable with a prior approved product if it meets the higher hurdle of demonstrating that it can be expected to produce the same clinical results as the reference product and, for products administered multiple times, the biologic and the reference biologic may be switched after one has been previously administered without increasing safety risks or risks of diminished efficacy relative to exclusive use of the reference biologic. No biosimilar or interchangeable products have been approved under the BPCIA to date. Complexities associated with the larger, and often more complex, structures of biological products, as well as the process by which such products are manufactured, pose significant hurdles to implementation which are still being evaluated by the FDA.

A reference biologic is granted twelve years of exclusivity from the time of first licensure of the reference product, and no application for a biosimilar can be submitted for four years from the date of licensure of the reference product. The first biologic product submitted under the abbreviated approval pathway that is determined to be interchangeable with the reference product has exclusivity against a finding of interchangeability for other biologics for the same condition of use for the lesser of (i) one year after first commercial marketing of the first interchangeable biosimilar, (ii) eighteen months after the first interchangeable biosimilar is approved if there is no patent challenge, (iii) eighteen months after resolution of a lawsuit over the patents of the reference biologic in favor of the first interchangeable biosimilar applicant, or (iv) 42 months after the first interchangeable biosimilar’s application has been approved if a patent lawsuit is ongoing within the 42-month period.

Disclosure of Clinical Trial Information

Sponsors of clinical trials of FDA-regulated products, including drugs, are required to register and disclose certain clinical trial information. Information related to the product, patient population, phase of investigation, study sites and investigators, and other aspects of the clinical trial is then made public as part of the registration. Sponsors are also obligated to discuss the results of their clinical trials after completion. Disclosure of the results of these trials can be delayed until the new product or new indication being studied has been approved. Competitors may use this publicly available information to gain knowledge regarding the progress of development programs.

Other Domestic Regulatory Requirements

In the United States, the research, manufacturing, distribution, sale, and promotion of drug and biological products are potentially subject to regulation by various federal, state, and local authorities in addition to the FDA, including the Centers for Medicare and Medicaid Services, other divisions of the United States Department of Health and Human Services (e.g., the Office of the Inspector General), the United States Department of Justice and individual United States Attorneys’ offices within the Department of Justice, and state and local governments. For example, sales, marketing, and scientific/educational grant programs must comply with the anti-fraud and abuse provisions of the Social Security Act, the False Claims Act, the privacy provision of the Health Insurance Portability and Accountability Act, and similar state laws, each as amended. Pricing and rebate programs must comply with the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990 and the Veterans Health Care Act of 1992, each as amended. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. All of these activities are also potentially subject to federal and state consumer protection, unfair competition, and other laws, and violations of these laws may result in imprisonment, criminal fines, civil monetary penalties and exclusion from participation in federal healthcare programs. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exemption of safe harbor.

 

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In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal laws have been applied to restrict certain marketing practices in the pharmaceutical industry in recent years. These laws include anti-kickback statutes and false claims statutes. The federal healthcare program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers on the other. Violations of the anti-kickback statute are punishable by imprisonment, criminal fines, civil monetary penalties and exclusion from participation in federal healthcare programs. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exemption or safe harbor.

Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, or knowingly making, or causing to be made, a false statement to have a false claim paid. Recently, several pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly inflating drug prices they report to pricing services, which in turn were used by the government to set Medicare and Medicaid reimbursement rates, and for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. In addition, certain marketing practices, including off-label promotion, may also violate false claims laws. The majority of states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor.

Moreover, ContraFect is now, and in the future may become, subject to additional federal, state, and local laws, regulations, and policies relating to safe working conditions, laboratory practices, the experimental use of animals, and/or the use, storage, handling, transportation, and disposal of human tissue, waste, and hazardous substances, including radioactive and toxic materials and infectious disease agents used in conjunction with our research work.

Foreign Regulation

In addition to regulations in the United States, we may become subject to widely varying foreign regulations, which may be quite different from those of the FDA, governing clinical trials, manufacture, product registration and approval, and pharmaceutical sales. Whether or not FDA approval has been obtained, we must obtain a separate approval for a product by the comparable regulatory authorities of foreign countries prior to the commencement of product marketing in these countries. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval. In certain countries, regulatory authorities also establish pricing and reimbursement criteria. In addition, under current United States law, there are restrictions on the export of products not approved by the FDA, depending on the country involved and the status of the product in that country.

Pharmaceutical Coverage, Pricing and Reimbursement

Our ability to commercialize our product candidates successfully will depend in part on the extent to which the United States and foreign governmental authorities, private health insurers and other third-party payors establish appropriate coverage and reimbursement levels for our product candidates and related treatments. In many of the markets where we would commercialize a product following regulatory approval, the prices of pharmaceutical products are subject to direct price controls (by law) and to drug reimbursement programs with varying price control mechanisms. Public and private health care payors control costs and influence drug pricing

 

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through a variety of mechanisms, including through negotiating discounts with the manufacturers and through the use of tiered formularies and other mechanisms that provide preferential access to certain drugs over others within a therapeutic class. Payors also set other criteria to govern the uses of a drug that will be deemed medically appropriate and therefore reimbursed or otherwise covered. In particular, many public and private health care payors limit reimbursement and coverage to the uses of a drug that are either approved by the FDA or that are supported by other appropriate evidence (for example, published medical literature) and appear in a recognized drug compendium. Drug compendia are publications that summarize the available medical evidence for particular drug products and identify which uses of a drug are supported or not supported by the available evidence, whether or not such uses have been approved by the FDA.

In the United States, there have been a number of legislative and regulatory changes to the healthcare system in ways that could affect our future revenues and profitability and the future revenues and profitability of our potential customers. For example, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the “MMA”) revised the payment methodologies for many drugs, which resulted in reduced reimbursement to providers. Additionally, the MMA created an outpatient prescription drug benefit which became effective on January 1, 2006. This benefit is administered by private pharmacy benefit managers and other managed care organizations and is putting increased pressure on the pharmaceutical industry to reduce prices.

Manufacturing

We do not own or operate, and currently have no plans to establish, any manufacturing facilities. We currently rely, and expect to continue to rely, on third parties for the manufacture of our product candidates for preclinical and clinical testing, as well as for commercial manufacture of any products that we may commercialize. We employ the services of Fujifilm UK to supply the active pharmaceutical ingredient for CF-301. We do not yet have contracts to produce a commercial supply of the active pharmaceutical ingredient for CF-301; however, we intend to pursue agreements with Fujifilm UK to do so. We employ the services of CanGene to produce CF-301 in its final vialed drug product form. We do not have contracts for the commercial supply of CF-301. We intend to pursue agreements with third party manufacturers regarding commercial supply of vialed drug product at an appropriate future time. We intend to locate second fill finish third party manufacturers to supply other world regions such as the European Union or Asia.

We generally expect to rely on third parties for the manufacture of any companion diagnostics we develop.

Research and Development

We have invested $6.6 million, $13.2 million, $4.6 million and $4.5 million in research and development for the years ended December 31, 2011 and 2012 and for the six months ended June 30, 2012 and 2013, respectively.

Facilities

In the second quarter of 2011, we opened our corporate headquarters and laboratory in Yonkers, New York. This 15,000 sq. ft. laboratory consist of 1,400 sq. ft. of open laboratory and suites for molecular biology, microbiology, tissue culture, microscopy, an animal vivarium, and a robotics suite. This facility is leased through December 31, 2027. We also retain the right to an additional 45,000 sq. ft. of expansion space, which may house up to 200 employees when fully constructed.

Sales, Marketing and Distribution

We do not currently have an organization for the sales, marketing and distribution of pharmaceutical products. We may rely on licensing and co-promotion agreements with strategic partners for the commercialization of our products in the United States and other territories. If we choose to build a commercial

 

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infrastructure to support marketing in the United States, such commercial infrastructure could be expected to include a targeted sales force supported by sales management, internal sales support, an internal marketing group and distribution support. To develop the appropriate commercial infrastructure internally, we would have to invest financial and management resources, some of which would have to be deployed prior to any confirmation that CF-301 or any of our other products will be approved.

Scientific Advisors

We have assembled a world-class scientific advisory board that includes renowned experts in infectious diseases. These advisors work in close collaboration with our scientists to identify new research directions and accelerate our infectious disease programs. Our scientific advisory board is led by Dr. Vincent A. Fischetti, the founder of our lysin technology.

 

Name

  

Primary  Affiliation

Vincent A. Fischetti, Ph.D.

   The Rockefeller University, Laboratory of Bacterial Pathogenesis and Immunology

Charles Bailey, Ph.D.

   George Mason University Biomedical Research Laboratory

Adolfo Garcia-Sastre, Ph.D.

   Mount Sinai School of Medicine, Department of Microbiology; Global Health & Emerging Pathogens Institute

Peter Palese, Ph.D

   Mount Sinai School of Medicine, Department of Microbiology

Christoph Renner, M.D

   University Hospital, Zurich, Department of Internal Medicine and Oncology

Leon G. Smith, M.D., M.A.C.P

   Formerly, Saint Michael’s Medical Center, New Jersey

Employees

As of August 31, 2013, we had 28 full-time employees, including 10 employees with M.D. or Ph.D. degrees. Of these full-time employees, 18 employees are engaged in research and development activities. None of our employees is represented by a labor union or covered by a collective bargaining agreement. We consider our relationship with our employees to be good.

Legal Proceedings

We are not currently a party to any material legal proceedings.

 

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MANAGEMENT

The following table sets forth the name and position of each of our executive officers, directors and key employees.

 

Name

   Age     

Position

Executive Officers

     

Robert C. Nowinski, Ph.D.

     67       Chief Executive Officer and Director

Julia P. Gregory

     61       Executive Vice President & Chief Financial Officer

David Huang, M.D., Ph.D.

     39       Senior Vice President & Chief Medical Officer

Michael Wittekind, Ph.D.

     58       Senior Vice President & Chief Scientific Officer

Directors

     

Sol Barer, Ph.D.

     66       Chairman of the Board of Directors

Isaac Blech

     63       Director

David Scheinberg, M.D., Ph.D.

     57       Director

Sir Richard Sykes, FRS

     71       Director

Cary Sucoff

     61       Director

Shengda Zan

     49       Director

Key Employees

     

Barry Kappel, Ph.D., M.B.A.

     37       Vice President, Business Development

Michael Messinger

     39       Vice President, Finance

Daniel Couto

     42       Vice President, Product Development

Nancy Dong

     48       Vice President, Controller

Robert C. Nowinski, Ph.D. Dr. Nowinski founded ContraFect Corporation in 2008 and has served as our founder, Chief Executive Officer and a member of our Board of Directors from such time. Dr. Nowinski has founded seven biotechnology companies, including four public companies: Genetic Systems Corporation (acquired in 1987 for $310 million by The Bristol-Myers Squibb Company); PathoGenesis Corporation (acquired in 2000 for $660 million by Chiron Corporation); ICOS Corporation (acquired in 2006 for $2.2 billion by Eli Lilly and Company); and VaxGen Inc. He also held the executive positions of Chief Executive Officer and/or the Chairman of the boards of directors at each of these companies during his tenure.

Dr. Nowinski received his Ph.D. in immunology from the Sloan-Kettering Institute in 1971. He was an Assistant Professor of Oncology at the University of Wisconsin and then an Associate Professor of Microbiology and Immunology at the University of Washington. He also was a founding scientist and Head of the Virology Program of the Fred Hutchinson Cancer Research Center in Seattle (“FHCRC”) and a Professor of Microbiology at the University of Washington and a Member of the FHCRC. His academic research concerned cancer-causing retroviruses, leading to the naming and definition of the oncornavirus family. His studies then turned to antibody treatments for cancer and the development of antibodies for the diagnosis of sexually-transmitted diseases.

We believe that Dr. Nowinski’s detailed knowledge of our Company and his extensive background in the biotechnology industry provide a critical contribution to our Board of Directors.

As a result of obligations related to divorce proceedings commenced in 1996, Dr. Nowinski filed for personal bankruptcy in 2002. Thereafter in 2006, charges against him for failure to make child support payments relating to the divorce proceedings resulted in a misdemeanor. Dr. Nowinski has since satisfied all required child support payments.

Julia P. Gregory. Ms. Gregory has been our Executive Vice President and Chief Financial Officer since July 2012. Prior to joining ContraFect, Ms. Gregory was President and Chief Executive Officer of Five Prime Therapeutics, Inc. (“Five Prime”), a clinical-stage, privately held biotechnology company discovering and developing innovative protein and antibody therapeutics in the fields of oncology and immunology. Prior to Five

 

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Prime, Ms. Gregory was Executive Vice President, Corporate Development and Chief Financial Officer of Lexicon Pharmaceuticals, Inc. (“Lexicon”). While at Five Prime and Lexicon, she led transactions for several strategic partnerships including those with GlaxoSmithKline, Human Genome Sciences, Genentech, Inc., The Bristol-Myers Squibb Company and Takeda Pharmaceutical Company Limited. She conducted Lexicon’s $220 million initial public offering and was involved in the creation of Lexicon’s $500 million private equity investment plan with Invus, LLP. Prior to joining Lexicon, Ms. Gregory served as the head of investment banking for Punk, Ziegel & Company, a specialty technology and healthcare investment banking firm, and was an investment banker with Dillon, Read & Co., Inc. She currently serves as a Director on the board of Clinipace on behalf of and as Special Advisor to Morgan Stanley Expansion Capital and on the board of The Global TB Alliance for Drug Development, primarily funded by the Bill & Melinda Gates Foundation. Ms. Gregory received her B.A. from George Washington University’s Elliott School of International Affairs, where she was elected to Phi Beta Kappa, and her M.B.A. from the Wharton School of the University of Pennsylvania.

David Huang, M.D., Ph.D. Dr. Huang has served as our Senior Vice President and Chief Medical Officer since September 2011. Prior to joining ContraFect, Dr. Huang served as the Global Medical Director of Medical Affairs for Pfizer Inc., where he played a key role in the development efforts of Zyvox for MRSA-associated infections. Previously, he was the Associate Director of Clinical Development for Boehringer Ingelheim GmbH, where he played a key role in the development of Aptivus and Viramune for HIV infections. Dr. Huang previously served as an Assistant Professor at Baylor College of Medicine, and currently serves as an Adjunct Clinical Professor at the University of Medicine and Dentistry of New Jersey, and is an attending physician at the Veterans Affairs Medical Center in Manhattan.

Dr. Huang received his M.D. and Ph.D. from the University of Texas at Houston Medical School. He is board certified in internal medicine and infectious diseases. He completed his internal medicine residency at the University of Texas at Southwestern and his infectious diseases fellowship at Baylor College of Medicine. He is a fellow of the American College of Physicians and a fellow of the Infectious Diseases Society of America. Dr. Huang’s research interest has focused on the epidemiology, pathogenesis and treatment of viruses and bacteria, including multi-drug resistant pathogens, and has resulted in over 100 peer-reviewed publications.

Michael Wittekind, Ph.D. Dr. Wittekind has served as our Senior Vice President and Chief Scientific Officer since August 2012. Prior to joining ContraFect, Dr. Wittekind served as the Executive Director of Research for Amgen Inc. (“Amgen”), where he directed the Protein Science Department at the Amgen-Seattle site. While at Amgen, he was involved in the discovery efforts for multiple protein therapeutics currently undergoing clinical trials, including antibodies, antibody-drug conjugates, and protein fusions. Previously, Dr. Wittekind was the Director of Process Development for Phylos Inc., where he played a key role in the development of alternate scaffold therapeutic discovery, design, and production. Dr. Wittekind has also served as the Associate Director of the Gene Expression and Protein Biochemistry Department of the Bristol-Myers Squibb Pharmaceutical Research Institute, directing groups in both the Lawrenceville and Hopewell, New Jersey sites leading structural biology research as well as protein and small molecule therapeutic efforts.

Dr. Wittekind received his Ph.D. from the University of Wisconsin-Madison in Biochemistry and pursued his postdoctoral studies at the University of Washington. Dr. Wittekind’s research interests have encompassed genetics, molecular biology, structural biology, and engineering of novel antibodies and proteins, resulting in over 40 publications and patents.

Directors

Sol Barer, Ph.D. Dr. Barer has served as a member of our Board of Directors since April 2011 and Chairman of our Board of Directors since March 2012. Dr. Barer is the Managing Director of SJ Barer Consulting, LLC. He served as Chairman of Celgene Corporation (“Celgene”) from January 2011 to June 2011 and as Executive Chairman from June 2010 to January 2011. Prior to that time, he served as Chief Executive Officer of Celgene from January 2006 to June 2010, as Chairman from January 2007 to June 2010, as President

 

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in 1993 and Chief Operating Officer and director in 1994. He previously served as Senior Vice President, Science and Technology, and Vice President/General Manager, Chiral Products, from 1991 to 1994, and Vice President, Technology, from 1987 to 1991. Dr. Barer serves on the boards of directors of Aegerion Pharmaceuticals, Inc., InspireMD Inc. (Chair), and Medgenics Inc. (Chair). He has previously served as Commissioner of the New Jersey Commission on Science and Technology and as Chairman of the University of Medicine and Dentistry of New Jersey Governor’s Advisory Committee. Dr. Barer received a Ph.D. in organic chemistry from Rutgers University.

We believe that Dr. Barer’s significant scientific, executive and board leadership experience in the pharmaceutical industry qualifies him to serve as a member of our Board of Directors.

Sir Richard Sykes. Sir Richard has served as a member of our Board of Directors since June 2012. He is Chairman of Imperial College Healthcare NHS Trust, Chairman of the Royal Institution of Great Britain, Chairman of the UK Stem Cell Foundation, Chairman of CRAC, the Careers and Research Advisory Council, Chairman of Circassia, Omnicyte and NetScientific.

Prior to that, he was Senior Independent Director and non-executive Chairman of Eurasian Natural Resources Corporation PLC from 2007 to June 2011, Chairman of NHS London from December 2008 to July 2010, Rector of Imperial College London from 2000 to 2008. He was a non-executive director of Rio Tinto plc from 1997 to 2007, and senior independent director from 2004 to 2007. He has over 30 years’ experience within the biotechnology and pharmaceutical industries field, serving as Chief Executive and Chairman of GlaxoWellcome plc from 1995 to 2000 and then as Chairman of GlaxoSmithkline plc until 2002. Internationally he is Chairman of the International Advisory Board, A*Star Biomedical Research Council, Singapore and a Board member of EDBI Pte Ltd. He was awarded Honorary Citizenship of Singapore in 2004 for his contribution to the development of the country’s biomedical sciences industry.

Sir Richard holds a number of degrees and awards from institutions both in the UK and overseas. He is a Fellow of the Royal Society and Academy of Medical Sciences, and an Honorary Fellow of the Royal Academy of Engineering, Royal Society of Chemistry, Royal Pharmaceutical Society, Royal College of Pathologists and the Royal College of Physicians. He is also President of the R and D Society, a position he has held since 2002. He is president of the Institute for Employment Studies (“IES”) and President of the Medical and Dental Students’ Association. He is a Fellow of Imperial College London and the Imperial College School of Medicine, King’s College London and Honorary Fellow of the Universities of Wales and Central Lancashire. Sir Richard received a Knighthood in the 1994 New Year’s Honours list for services to the pharmaceutical industry.

We believe that Sir Richard’s significant scientific, executive and board leadership experience in the pharmaceutical industry qualifies him to serve as a member of our Board of Directors.

Isaac Blech. Mr. Blech has served as a member of our Board of Directors since 2010. Mr. Blech is a renowned biotechnology entrepreneur and investor, who, over the past 32 years, has founded and served on the boards of a number of companies which have produced major advances in a broad array of diseases, including the diagnosis of chlamydia, herpes, syphilis and HIV, and the treatment of cystic fibrosis, sexual dysfunction, multiple myeloma and brain cancer. The companies he founded include Celgene Corporation, ICOS Corporation, Nova Pharmaceutical Corporation, Pathogenesis Corporation and Genetics Systems Corporation. Mr. Blech is a major shareholder and Vice Chairman of Cerecor, Inc., and major shareholder and Vice Chairman of Edge Therapeutics. He is also a major shareholder and Vice Chairman of The Spendsmart Payments Company as well as a major shareholder and Vice Chairman of Premier Alliance Group. Mr. Blech is a director of Medgenics, Inc. Mr. Blech earned a B.A. degree from Baruch College in 1975.

We believe that Mr. Blech’s broad experience as a founder, director and major investor in numerous biotechnology companies qualifies him to serve as a member of our Board of Directors.

 

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David A. Scheinberg, M.D., Ph.D. Dr. Scheinberg has served as a member of our Board of Directors since 2010. Since 2002, Dr. Scheinberg has served as Vincent Astor Chair and Chairman of the Molecular Pharmacology and Chemistry Program at the Sloan-Kettering Institute. In 2002, he also founded and serves as the Chair of the Experimental Therapeutics Center at the Memorial Sloan-Kettering Cancer Center. Dr. Scheinberg has been a Professor of Medicine (since 2002) and Pharmacology (since 1999) at the Weill-Cornell University Medical College and has served as Co-chair of the Pharmacology graduate program since 2001. He has served as a Professor at the Gerstner-Sloan Kettering Graduate School at the Memorial Sloan-Kettering Cancer Center since 2005. From 1992 until 2003, he was Chief of the Leukemia Service at Memorial Hospital. He has been elected into the American Society of Clinical Investigation, the American Association of Physicians and the Interurban Club. His other awards include the Doris Duke Distinguished Clinical Science Professorship, the Lucille P. Markey Scholarship, Leukemia and Lymphoma Society Translational Investigator Awards, and CapCure Awards. He Co-chairs the Medical Board of the Laurie Strauss Leukemia Foundation.

Dr. Scheinberg has been a Director of Progenics Pharmaceuticals, a public biotechnology company, from 1996 to the present. He was a founder and Chairman of the board of directors of Active Biotherapeutics, Inc., a private company that was acquired by Progenics Pharmaceuticals, and is currently a member of the Scientific Advisory Boards of Oncopep and Encyse Pharma. Dr. Scheinberg received his A.B., cum laude, distinction in all subjects, from the College of Arts & Sciences, Cornell University, in 1977. He earned his M.D. from Johns Hopkins University in 1983, and his Ph.D. from Johns Hopkins University School of Medicine, Department of Pharmacology and Experimental Therapeutics, in 1983.

We believe that Dr. Scheinberg’s significant scientific, executive and board leadership experience in drug and biologic therapy development and in the pharmaceutical industry qualifies him to serve as a member of our Board.

Cary W. Sucoff. Mr. Sucoff has served as a member of our Board of Directors since 2010. Mr. Sucoff has over 30 years of securities industry experience encompassing supervisory, banking and sales responsibilities. Mr. Sucoff currently owns and operates Equity Source Partners, LLC, an advisory and consulting firm. Mr. Sucoff founded Equity Source Partners, LLC and operated the firm as a boutique investment bank until December 2011. During that time, Mr. Sucoff provided investment banking and consulting services to public and private companies and institutional investors. Mr. Sucoff has played a role in financings for biotechnology companies such as Amgen Inc., Janssen Biotech, Inc. (formerly Centocor Biotech, Inc.), Genzyme Corporation, Genentech, Inc., ICOS Corporation (acquired by Eli Lilly and Company), PathoGenesis Corporation, Vaxgen Inc. and BioTime, Inc. Mr. Sucoff currently serves on the boards of directors of Cerecor, Inc., Premier Alliance Group, Inc., The SpendSmart Payments Corp. and American Roadside Burgers, Inc. In addition, Mr. Sucoff serves as a consultant to Medgenics, Inc., a commercial-stage biopharmaceutical company that focuses on providing protein therapies and develops the Biopump Platform, a proprietary technology, which uses the patient’s own tissue to continuously produce and deliver the patient’s own protein therapy. Mr. Sucoff is the President of New England Law/Boston, has been a member of the Board of Trustees for over 25 years and is the current Chairman of the Endowment Committee.

Mr. Sucoff received a B.A. from SUNY Binghamton (1974) and a J.D. from New England School of Law (1977) where he was the Managing Editor of the Law Review and graduated Magna Cum Laude. Mr. Sucoff has been a member of the Bar of the State of New York since 1978.

We believe that Mr. Sucoff’s broad financial and legal experience qualifies him to serve as a member of our Board.

Shengda Zan. Mr. Zan has served as a member of our Board of Directors since January 2013. Mr. Zan founded the Zongyi Group in 1987 and has been the president of the Zongyi Group since that time. The Zongyi Group is a diversified business group in China focusing on clean energy, information technology, strategic investments and asset management. Mr. Zan currently serves as the sole director of Alpha Spring Limited, a shareholder of ContraFect.

 

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We believe that Mr. Zan’s significant international business experience qualifies him to serve as a member of our Board of Directors.

Key Employees

Barry Kappel, Ph.D. Dr. Kappel joined ContraFect in 2009 as the Company’s second employee and the Head of Business Development. Since joining ContraFect, Dr. Kappel has been involved in all aspects of the Company, including licensing of the Company’s key technologies, participation in the financings of the Company, and establishing scientific collaborations with academic and corporate partners.

Dr. Kappel previously was a Senior Consultant at Easton Associates, LLC, a life science consulting firm. In this capacity, he performed a wide range of activities, including the assessment of preclinical and clinical compounds for pharmaceutical and biotechnology companies. Dr. Kappel received his BA in chemistry from Emory University. He subsequently obtained his Ph.D. in immunology and pharmacology from the Weill Graduate School of Medical Sciences and the Memorial Sloan-Kettering Cancer Center. Dr. Kappel holds an M.B.A. from the S.C. Johnson Graduate School of Management at Cornell University.

Michael Messinger, CPA. Mr. Messinger has more than 15 years of experience in finance, accounting and forecasting for clinical development. He served as Controller of Coelacanth Corporation prior to his role as Director of Finance for Lexicon Pharmaceuticals, Inc. In this capacity, he was responsible for the financial management of Lexicon’s partnership with Symphony Capital, LLC, in addition to coordinating fiscal and program management concerning Lexicon’s development programs.

Mr. Messinger received his B.B.A degree in accounting from the University of Michigan. He started his career as an auditor at Ernst & Young LLP.

Daniel Couto. Mr. Couto has over 20 years of experience in Operations Management. Prior to joining ContraFect in 2011, he served as Vice President of Commercial Manufacturing Operations for Merck Sharp & Dohme Biologics UK Ltd. for 3 years. Previously, he was Director of Manufacturing for Nuvelo Inc. for 3 years, where he was responsible for seven world wide contract manufacturing sites. Mr. Couto also served in Director positions at Genzyme Transgenics Corp., Advanced Biosystems Corp., ImmuCell Corp. and Sepracor Corp. Mr. Couto holds patents for several novel separation technologies such as Bulk Protein Crystallization, HPTFF, and SMB.

Mr. Couto received his B.S. Degree in Chemical Engineering from Rensselaer Polytechnic Institute.

Nancy Dong. Ms. Dong has more than 20 years of experience in accounting, strategic planning, budgeting and forecasting, organizational development, financial systems and controls. She served as controller at XL Marketing and Alley Corp prior to her role as Vice President of Finance and Administration at DCM, a tele-services firm supporting the performing arts. Ms. Dong also held the positions of COO/CFO at Semaphore, a project management software development firm.

Ms. Dong received her B.A. degree from Yale University and a MPPM degree from The Wharton School at the University of Pennsylvania. She started her career as a management consultant at Ernst & Young LLP.

 

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Board Composition

Our Board of Directors currently consists of seven directors and is authorized to have up to 11 members. In accordance with the terms of our certificate of incorporation and bylaws that will become effective upon the closing of this offering, our Board of Directors will be divided into three classes, Class I, Class II and Class III, with members of each class serving staggered three-year terms. Upon the closing of this offering, the members of the classes will be divided as follows:

 

    the Class I directors will be             , and their term will expire at the annual meeting of stockholders to be held in             ;

 

    the Class II directors will be             , and their term will expire at the annual meeting of stockholders to be held in             ;

 

    the Class III directors will be             , and their term will expire at the annual meeting of stockholders to be held in             ;

Upon the expiration of the term of a class of directors, directors in that class will be eligible to be elected for a new three-year term at the annual meeting of stockholders in the year in which their term expires. In accordance with the terms of our certificate of incorporation and bylaws that will become effective upon the closing of this offering, our directors may be removed only for cause by the affirmative vote of the holders of 75% or more of our voting stock.

We have no formal policy regarding board diversity. Our priority in selection of board members is identification of members who will further the interests of our stockholders through his or her established record of professional accomplishment, the ability to contribute positively to the collaborative culture among board members, knowledge of our business and understanding of the competitive landscape.

Director Independence

Rule 5605 of the NASDAQ Listing Rules requires a majority of a listed company’s board of directors to be comprised of independent directors within one year of listing. In addition, the NASDAQ Listing Rules require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating and corporate governance committees be independent and that audit committee members also satisfy independence criteria set forth in Rule 10A-3 under the Securities Exchange Act.

Under Rule 5605(a)(2) of the NASDAQ Listing Rules, a director will only qualify as an “independent director” if, in the opinion of our Board of Directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In order to be considered independent for purposes of Rule 10A-3 of the Exchange Act, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee, accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the listed company or any of its subsidiaries or otherwise be an affiliated person of the listed company or any of its subsidiaries.

In September 2013, our Board of Directors undertook a review of the composition of our Board of Directors and its committees and the independence of each director. Based upon information requested from and provided by each director concerning his background, employment and affiliations, including family relationships, our Board of Directors has determined that each of our directors, with the exception of Dr. Nowinski and Mr. Sucoff, is an “independent director” as defined under Rule 5605(a)(2) of the NASDAQ Listing Rules. Our Board of Directors also determined that Sir Richard, Dr. Scheinberg, and Mr. Blech who will comprise our audit committee following this offering, Drs. Scheinberg and Barer, and Mr. Blech, who will comprise our compensation committee following this offering, and Drs. Nowinski and Barer, and Mr. Blech, who will be members of our nominating and corporate governance committee following this offering, satisfy the

 

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independence standards for such committees established by the SEC and the NASDAQ Listing Rules, as applicable. In making such determinations, our Board of Directors considered the relationships that each such non-employee director has with our company and all other facts and circumstances our Board of Directors deemed relevant in determining independence, including the beneficial ownership of our capital stock by each non-employee director.

There are no family relationships among any of our directors or executive officers.

Board Committees

Our board has established three standing committees—audit, compensation, and nominating and corporate governance—each of which will, upon the closing of this offering, operate under a charter that has been approved by our board.

Audit Committee

The members of our audit committee are Sir Richard, Dr. Scheinberg and Mr. Blech. Sir Richard is the chair of the audit committee. Our Board of Directors has determined that              qualifies as an audit committee financial expert within the meaning of SEC regulations and the NASDAQ Listing Rules. In making this determination, our board has considered the formal education and nature and scope of his previous experience. Our audit committee assists our Board of Directors in its oversight of our accounting and financial reporting process and the audits of our financial statements. Following this offering, our audit committee’s responsibilities will include:

 

    appointing, approving the compensation of, and assessing the independence of our registered public accounting firm;

 

    overseeing the work of our registered public accounting firm, including through the receipt and consideration of reports from such firm;

 

    reviewing and discussing with management and the registered public accounting firm our annual and quarterly financial statements and related disclosures;

 

    monitoring our internal control over financial reporting, disclosure controls and procedures and code of business conduct and ethics;

 

    overseeing our internal audit function;

 

    discussing our risk management policies;

 

    establishing policies regarding hiring employees from the registered public accounting firm and procedures for the receipt and retention of accounting related complaints and concerns;

 

    meeting independently with our internal auditing staff, registered public accounting firm and management;

 

    reviewing and approving or ratifying any related person transactions; and

 

    preparing the audit committee report required by SEC rules.

Compensation Committee

The members of our compensation committee are Drs. Scheinberg and Barer and Mr. Blech. Dr. Scheinberg is the chair of the compensation committee. Our compensation committee assists our Board of Directors in the discharge of its responsibilities relating to the compensation of our executive officers. Following this offering, the compensation committee’s responsibilities will include:

 

    reviewing and approving corporate goals and objectives relevant to Chief Executive Officer compensation; reviewing and approving, or making recommendations to our board with respect to, the compensation of our Chief Executive Officer and our other executive officers;

 

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    overseeing an evaluation of our senior executives;

 

    overseeing and administering our cash and equity incentive plans;

 

    reviewing and making recommendations to our board with respect to director compensation;

 

    reviewing and discussing with management our “Compensation Discussion and Analysis”; and

 

    preparing the compensation committee report required by SEC rules.

Nominating and Corporate Governance Committee

The members of our nominating and corporate governance committee are Drs. Nowinski and Barer, and Mr. Blech. Mr. Blech is the chair of the nominating and corporate governance committee. Following this offering, the nominating and corporate governance committee’s responsibilities will include:

 

    identifying individuals qualified to become board members;

 

    recommending to our board the persons to be nominated for election as directors and to each committee of our Board of Directors;

 

    reviewing and making recommendations to the board with respect to management succession planning;

 

    developing and recommending corporate governance principles to the board; and

 

    overseeing periodic evaluations of the board.

We believe that the composition of our nominating and corporate governance committee will meet the requirements for independence under current NASDAQ and SEC rules and regulations. Our Board of Directors has determined that Dr. Barer and Mr. Blech are independent as independence is currently defined in applicable NASDAQ listing standards. Although the Board of Directors determined that Dr. Nowinski does not satisfy the independence standards, under NASDAQ Marketplace Rule 5615(b)(1), we are permitted to phase in our compliance with the independent nominating and corporate governance committee requirements set forth in NASDAQ Marketplace Rule 5605(e) as follows: (1) one independent member at the time of listing, (2) a majority of independent members within 90 days of listing and (3) all independent members within one year of listing. Within one year of our listing on the NASDAQ Global Select Market, we expect that our nominating and corporate governance committee will comply with the independence requirements under the NASDAQ Marketplace Rules.

Compensation Committee Interlocks and Insider Participation

No current or former member of our compensation committee is or has been a current or former officer or employee of ContraFect. None of our executive officers served as a director or a member of a compensation committee (or other committee serving an equivalent function) of any other entity, one of whose executive officers served as a director or member of our compensation committee during the fiscal year ended December 31, 2012.

Code of Ethics and Code of Conduct

We have adopted a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We intend to post on our website, www.contrafect.com, a current copy of the code and all disclosures that are required by law or NASDAQ stock market listing standards concerning any amendments to, or waivers from, any provision of the code.

 

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EXECUTIVE COMPENSATION

We are providing compensation disclosure that satisfies the requirements applicable to emerging growth companies, as defined in the JOBS Act.

Summary Compensation Table

As an emerging growth company, we have opted to comply with the executive compensation disclosure rules applicable to “smaller reporting companies,” as such term is defined under the Securities Act, which require compensation disclosure for our principal executive officer and the two most highly-compensated executive officers other than our principal executive officer. The table below sets forth the annual compensation earned during fiscal 2012 by our principal executive officer and our next three most highly-compensated executive officers (our “Named Executive Officers”).

 

Name and
Principal Position

   Salary ($)      Bonus ($)      Stock
Awards ($)
(1)
     All Other
Compensation ($)

(2)
     Total ($)  

Robert C. Nowinski, Ph.D. (3)

   $ 475,000       $ 261,250       $ —         $ 139,898       $ 876,148   

Chief Executive Officer

              

David Huang, M.D., Ph.D.

   $ 359,458       $ 60,250       $ —         $ 6,447       $ 426,155   

Chief Medical Officer

              

Julia P. Gregory

   $ 261,026       $ 70,000       $ 42,794       $ 15,263       $ 389,083   

Chief Financial Officer

              

Michael Wittekind, Ph.D.

   $ 230,167       $ 10,950       $ 20,024       $ 25,438       $ 286,579   

Chief Scientific Officer

              

 

(1) The amounts reported in the “Stock Awards” column reflect the aggregate grant date fair value of share-based compensation awarded during the year computed in accordance with the provisions of Financial Accounting Standards Board Accounting Standard Codification, or ASC, Topic 718. See Note 2 to our financial statements included elsewhere in this prospectus regarding assumptions underlying the valuation of equity awards.
(2) The amounts reported in the “All Other Compensation” column reflect, for each Named Executive Officer, the sum of the incremental cost to us of all perquisites and other personal benefits and are comprised of the dollar value of medical and life insurance costs paid by us on behalf of each of the Named Executive Officers.
(3) Dr. Nowinski also serves as a member of our Board of Directors but does not receive any additional compensation for his service as a director.

 

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Outstanding Option Awards at June 30, 2013

The following table sets forth information regarding outstanding stock options held by our Named Executive Officers as of June 30, 2013:

 

Name and
Principal Position

   Number of securities
underlying unexercised
options exercisable

(#)
     Number of securities
underlying unexercised
options unexercisable
(#)
    Option
exercise
price

($/share)
     Option
expiration date

Robert C. Nowinski, Ph.D.

     100,000         —          0.50       4/14/2020

Chief Executive Officer

     1,700,000         —          1.29       12/30/2020
     1,000,000         —          1.29       2/7/2021
     600,000         400,000 (1)      1.29       2/7/2021
     661,250         1,983,750 (2)      0.50       2/26/2023

David Huang, M.D., Ph.D.

     58,140         —          0.50       6/29/2021

Chief Medical Officer

     66,667         133,333 (3)      0.50       8/31/2021
     81,712         245,138 (4)      0.50       2/26/2023

Julia P. Gregory

     156,667         313,333 (5)      0.50       8/10/2022

Chief Financial Officer

     102,500         307,500 (6)      0.50       2/26/2023

Michael Wittekind Ph.D.

     48,000         96,000 (7)      0.50       3/31/2012

Chief Scientific Officer

     20,000         40,000 (8)      0.50       8/10/2022
     22,500         67,500 (9)      0.50       2/26/2023

 

(1) This option vests over four years, with 20% of the shares underlying the option vested immediately on February 8, 2011 and 20% of the shares underlying the option vesting annually thereafter.
(2) This option vests over three years, with 25% of the shares underlying the option vested immediately on January 1, 2013 and 25% of the shares underlying the option vesting annually thereafter.
(3) This option vests over three years, with 34% of the shares underlying the option vested on September 1, 2012 and 33% of the shares underlying the option vesting annually thereafter.
(4) This option vests over three years, with 25% of the shares underlying the option vested immediately on January 1, 2013 and 25% of the shares underlying the option vesting annually thereafter.
(5) This option vests over two years, with 34% of the shares underlying the option vested immediately on August 11, 2012 and 33% of the shares underlying the option vesting annually thereafter.
(6) This option vests over three years, with 25% of the shares underlying the option vested immediately on January 1, 2013 and 25% of the shares underlying the option vesting annually thereafter.
(7) This option vests over three years, with 34% of the shares underlying the option vested on April 1, 2013 and 33% of the shares underlying the option vesting annually thereafter.
(8) This option vests over two years, with 34% of the shares underlying the option vested immediately on August 11, 2012 and 33% of the shares underlying the option vesting annually thereafter.
(9) This option vests over three years, with 25% of the shares underlying the option vested immediately on January 1, 2013 and 25% of the shares underlying the option vesting annually thereafter.

Employment Agreements

Robert C. Nowinski, Ph.D.

In June 2010, we entered into an employment agreement with Dr. Nowinski, to serve as our Chief Executive Officer and as a member of the Board of Directors for a period of five (5) years, which will be automatically renewed for successive one-year terms unless the agreement is terminated. Dr. Nowinski’s annual salary was increased to $522,500 effective January 1, 2013. Dr. Nowinski’s base salary will be increased by 25% upon the Company’s closing of an initial public offering of $25,000,000 or more. In addition, ContraFect has loaned Dr. Nowinski $600,000 pursuant to two promissory notes and a related pledge and security agreement, which loans are secured by Dr. Nowinski’s 1.2 million shares of capital stock and options to purchase 3.3 million shares of common stock. Dr. Nowinski’s employment agreement contains other customary and standard terms and provisions. Dr. Nowinski currently holds options to purchase an aggregate of 6,445,000 shares of common stock.

 

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David Huang, M.D., Ph.D.

In June 2011, we entered into a four-year employment agreement with Dr. Huang, to serve, at will, as Chief Medical Officer. Dr. Huang receives an annual base salary of $391,600 and is eligible to receive an annual bonus equivalent to 35% of his annual salary payable one half in cash and one half in equity. Dr. Huang currently holds options to purchase an aggregate of 584,990 shares of Common Stock.

Julia P. Gregory

In July 2012, we entered into a four-year employment agreement with Ms. Gregory, to serve, at will, as an Executive Vice President and Chief Financial Officer. Ms. Gregory receives an annual base salary of $424,000 and is eligible to receive an annual bonus equivalent to 40% of her annual salary payable in cash, as well as additional bonuses upon the achievement of certain milestones. Ms. Gregory currently holds options to purchase an aggregate of 880,000 shares of Common Stock.

Michael Wittekind, Ph.D.

In March 2012, we entered into a three-year employment agreement with Dr. Wittekind, to serve, at will, as Chief Scientific Officer. Dr. Wittekind receives an annual base salary of $313,000 and is eligible to receive an annual bonus equivalent to 30% of his annual salary payable one half in cash and one-half in equity. Dr. Wittekind currently holds options to purchase an aggregate of 294,000 shares of common stock.

Equity and Other Compensation Plans

The three equity incentive plans described in this section are the 2008 Equity Incentive Plan (the “2008 Plan”), the Amended 2008 Plan, and the 2013 Public Company Equity Incentive Plan, or the 2013 Plan. Following the closing of this offering, we expect to grant awards to eligible participants under the 2013 Plan, which will become effective immediately prior to the closing of this offering.

Amended and Restated 2008 Equity Incentive Plan

The Amended 2008 Plan was adopted by our Board of Directors in February 2013. The Amended 2008 Plan provides us with the flexibility to use restricted stock, stock options and other awards based on the Company’s common stock as part of an overall compensation package to provide performance-based compensation to attract and retain qualified personnel. We believe that awards under the Amended 2008 Plan may serve to broaden the equity participation of key employees and others and further link the long-term interests of management and stockholders. Awards under the Amended 2008 Plan will be limited to restricted stock, performance awards payable in cash or shares of common stock, and options, stock appreciation rights, stock bonuses, phantom stock or other stock-based benefits as determined by the Company or combinations of the foregoing.

Unless the issuance of awards and underlying securities have been registered under the Securities Act and qualified or registered under applicable state securities laws, we issue the awards pursuant to applicable exemptions from such registration or qualification requirements. In connection with any such exempt issuance, the Board of Directors may require the recipients to provide a written representation and undertaking to the Company, satisfactory in form and scope to us, that such recipient is acquiring such awards and underlying securities for such recipient’s own account as an investment and not with a view to, or for sale in connection with, the distribution of any securities, and that such person will make no transfer of the same except in compliance with any rules and regulations in force at the time of such transfer under the Securities Act and other applicable law, and that if securities are issued without registration, a legend to this effect may be endorsed upon the securities so issued, and to the effect of any additional representations that are appropriate in light of applicable securities laws and rules. We may also order our transfer agent to stop transfers of such shares. We have agreed that if we file a registration statement under the Securities Act for an offering of our securities, we will register the Amended 2008 Plan and the securities subject thereto.

 

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There are 11,000,000 shares of common stock reserved for issuance under the Amended 2008 Plan, of which 434,219 are available for issuance as of June 30, 2013.

Administration

The Amended 2008 Plan is administered by the Board of Directors, in its sole discretion. The Board of Directors, may from time to time, appoint a committee (the “Committee”) to administer the Amended 2008 Plan and exercise all powers, authority and discretion of the Board of Directors thereunder and make all other determinations that it deems necessary or appropriate in connection with the Amended 2008 Plan or the administration or interpretation thereof. The Committee shall consist of not less than two directors.

Eligibility and Types of Awards

Employees, directors and officers of the Company or of any Affiliated Entity (as such term is defined in the Amended 2008 Plan), and consultants and advisors who render bona fide services to the Company or any Affiliated Entity not in connection with capital-raising are eligible to be granted awards under the Amended 2008 Plan. The types of awards available under the Amended 2008 Plan include stock options, performance awards, restricted stock, stock appreciation rights, stock bonuses, phantom stock and other stock-based benefits.

Available Shares

Subject to adjustment upon certain corporate transactions or events, 11,000,000 shares of our common stock are reserved for issuance pursuant to awards granted under the Amended 2008 Plan. If an Award granted under the Amended 2008 Plan expires, is cancelled, or terminates, the shares subject to any portion of the award that expires, is cancelled, or terminates without having been exercised or paid, as the case may be, will again become available for the issuance of additional awards. Unless previously terminated by our Board of Directors, no new Award may be granted under the Amended 2008 Plan after May 30, 2018, the tenth anniversary of the effective date of the 2008 Plan (hereinafter described).

Awards under the Plan

Stock Options

For the purposes of Section 422(b) of the Code, stock option awards granted under the Amended 2008 Plan are considered to be non-statutory stock options. The Company may issue up to 4,700,000 stock options as “incentive stock options,” provided the stockholders of the Company approve the Amended 2008 Plan within one year of the Effective Date. The exercise price of an option will be determined by the Board of Directors and reflected in the applicable award agreement. The exercise price with respect to incentive stock options may not be lower than 100% (110% in the case of an incentive stock option granted to a Significant Stockholder (as defined in the Amended 2008 Plan)) of the fair market value of our common stock on the date of grant. Each option will be exercisable after the period or periods specified in the award agreement, which will generally not exceed ten years from the date of grant (or five years in the case of an incentive stock option granted to a Significant Stockholder, if permitted under the Amended 2008 Plan). Options will be exercisable at such times and subject to such terms as determined by the Board of Directors or the Committee.

Restricted Stock Awards

A stock award consists of the transfer by the Company to a participant of shares of common stock as additional compensation for services to the Company. Restricted stock will be subject to restrictions as the Board of Directors shall determine, and such restrictions may include a prohibition against transfer until such time as the Board of Directors determines, forfeiture upon a termination of employment or other service during the applicable restriction period and such other conditions or restrictions as the Board of Directors may deem advisable. Subject to any restrictions on transfer imposed upon the restricted stock, the recipient will have all of

 

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the rights of a stockholder with respect to the restricted stock granted or sold to the recipient, including, without limitation the right to vote the shares and receive all dividends and distributions paid or made with respect thereto. To date, no restricted stock awards have been granted.

Performance Awards

A performance award consists of an award paid in shares of our common stock, cash or a combination thereof (as determined by the Board of Directors), subject to performance objectives to be achieved by the participant before the end of a specified period. The Board of Directors will determine pre-established, objective performance goals (which need not be identical and may be established on an individual or group basis) governing performance awards, the terms thereof, and the form and time of payment of performance awards. To date, no performance awards have been granted.

Stock Appreciation Rights, Stock Bonuses, Phantom Stock and Other Stock Based Bonuses

The Company may, at any time and from time to time, approve the grant of stock appreciation rights, related or unrelated to stock options. A stock appreciation right related to a stock option will entitle the holder of the related stock option, upon exercise of the stock appreciation right, to surrender such stock option, or any portion thereof to the extent previously vested but unexercised, with respect to the number of shares as to which such stock appreciation right is exercised, and to receive payment of an amount computed as set forth below. Such stock option will, to the extent surrendered, then cease to be exercisable. We may also grant stock appreciation rights unrelated to stock options which will entitle the holder to payment upon exercise as described in the next sentence. Upon the exercise of a stock appreciation right, the recipient will be entitled to receive payment in an amount determined by multiplying: (A) the difference obtained by subtracting the exercise price of a share of common stock in the related stock option (or, in the case of a grant unrelated to a stock option, the initial base amount specified in the award) from the fair market value of a share of common stock on the date of exercise, by (B) the number of shares as to which the stock appreciation right is exercised. To date, no stock appreciation rights have been granted.

The Company may issue stock bonuses to eligible persons on such terms and conditions as the Board of Directors may determine. The Company may also grant awards of phantom stock to eligible persons. Phantom stock is a cash payment measured by the fair market value of a specified number of shares of common stock on a specified date, or measured by the excess of such fair market value over a specified minimum. In addition, the Company may grant other stock-based benefits. Other stock-based benefits are any arrangements granted under the Amended 2008 Plan not otherwise described above that: (a) by their terms might involve the issuance or sale of common stock or other securities of the Company; or (b) involve a benefit that is measured, as a whole or in part, by the value, appreciation, dividend yield or other features attributable to a specified number of shares of common stock of other securities of the Company. To date, no phantom stock awards have been granted.

In connection with stock bonuses, phantom stock and other stock-based benefits, the Board of Directors or the Committee will determine the terms and conditions of any such issuances.

Repurchase Rights

Each recipient agrees as a condition to receipt of an award that, in connection with the termination of service of the recipient, the Company, within 60 days of the later of the date of termination or the date of exercise, will have the right to purchase all of the shares that the recipient acquired or will acquire through the exercise of applicable options. This right will terminate upon the closing of this offering.

Termination of Service

Awards will be exercisable by a recipient (or the recipient’s successor in interest) following such recipient’s termination of service for any reason other than Cause (as defined in the Amended 2008 Plan) for a period of two years (90 days if the Company’s stock is publicly traded) and only to the extent that installments thereof had become exercisable on or prior to the date of such termination.

 

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Change in Control

Upon a Change in Control (as defined in the Amended 2008 Plan), all outstanding options will vest and become immediately exercisable in full, the restrictions on all shares of restricted stock, phantom stock or other stock-based awards shall lapse immediately and all performance goals or other vesting criteria of performance-based shares shall be deemed to be met and payment made immediately.

Lock-Up Agreements

Each recipient agrees as a condition to receipt of an Award that, in connection with any public offering by us of our equity securities, and upon our request and that of the principal underwriter (if any) in such public offering, any shares of common stock acquired or that may be acquired upon exercise or vesting of an Award may not be sold, offered for sale, encumbered, or otherwise disposed of or subjected to any transaction that will involve any sales of our securities, without our prior written consent or that of such underwriter, as the case may be, for a period of not more than 180 days after the effective date of the registration statement for such public offering. Each recipient will, if requested by us or the principal underwriter, enter into a separate agreement to this effect.

2008 Equity Incentive Plan

There are 818,833 stock options currently outstanding which were granted under the Company’s 2008 Plan. The 2008 Plan and the Amended 2008 Plan are substantially similar except as noted below.

Repurchase Rights

The 2008 Plan does not provide the Company any rights of repurchase.

Termination of Service

The 2008 Plan allows for awards that have become exercisable to be exercisable by the recipient for a period lasting until the tenth anniversary of the grant date.

Lock-Up Agreements

The 2008 Plan provides for a lock-up period of not more than 60 days after the effective date of the registration statement for a public offering.

Pension Benefits

We do not maintain any defined benefit pension plans.

Nonqualified Deferred Compensation

We do not maintain any nonqualified deferred compensation plans

401(k) Retirement Plan

We maintain a 401(k) retirement plan that is intended to be a tax-qualified defined contribution plan under Section 401(k) of the Internal Revenue Code. In general, all of our employees are eligible to participate beginning on the first day of their employment. The 401(k) plan includes a salary deferral arrangement pursuant to which participants may elect to reduce their current compensation by up to the statutorily prescribed limit, equal to $17,500 in 2013, and have the amount of the reduction contributed to the 401(k) plan.

 

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Limitation of Liability and Indemnification

Our certificate of incorporation, which will become effective upon the closing of this offering, limits the personal liability of directors for breach of fiduciary duty to the maximum extent permitted by the Delaware General Corporation Law and provides that no director will have personal liability to us or to our stockholders for monetary damages for breach of fiduciary duty or other duty as a director. However, these provisions do not eliminate or limit the liability of any of our directors:

 

    for any breach of the director’s duty of loyalty to us or our stockholders;

 

    for acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law;

 

    for voting or assenting to unlawful payments of dividends, stock repurchases or other distributions; or

 

    for any transaction which the director derived an improper personal benefit.

Any amendment to or repeal of these provisions will not eliminate or reduce the effect of these provisions in respect of any act, omission or claim that occurred or arose prior to such amendment or repeal. If the Delaware General Corporation Law is amended to provide for further limitations on the personal liability of directors of corporations, then the personal liability of our directors will be further limited to the greatest extent permitted by the Delaware General Corporation Law.

In addition, our certificate of incorporation, which will become effective upon the closing of this offering, provides that we must indemnify our directors and officers and we must advance expenses, including attorneys’ fees, to our directors and officers in connection with legal proceedings, subject to very limited exceptions.

We maintain a general liability insurance policy that covers certain liabilities of our directors and officers arising out of claims based on acts or omissions in their capacities as directors or officers. In addition, we have entered into indemnification agreements with certain of our directors, and we intend to enter into indemnification agreements with all of our directors and executive officers. These indemnification agreements may require us, among other things, to indemnify each such director for some expenses, including attorneys’ fees, judgments, fines and settlement amounts incurred by him in any action or proceeding arising out of his service as one of our directors.

Certain of our non-employee directors may, through their relationships with their employers, be insured and/or indemnified against certain liabilities incurred in their capacity as members of our Board of Directors.

Rule 10b5-1 Sales Plans

Following the closing of this offering, our directors and executive officers may adopt written plans, known as Rule 10b5-1 plans, in which they will contract with a broker to buy or sell shares of our common stock on a periodic basis. Under a Rule 10b5-1 plan, a broker executes trades pursuant to parameters established by the director or officer when entering into the plan, without further direction from the director or officer. The director or officer may amend or terminate the plan in some circumstances. Our directors and executive officers may also buy or sell additional shares outside of a Rule 10b5-1 plan when they are not in possession of material, nonpublic information.

 

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Director Compensation

Dr. Nowinski, our Chief Executive Officer, who also serves as one of our directors, does not receive any additional compensation for his service as a director.

Our non-employee directors are compensated on annual basis for their services on the Board of Directors as follows:

 

    each non-employee director receives an annual retainer of $25,000, plus $5,000 per Board of Directors meeting attended, except for Mr. Zan, who receives only an annual retainer of $30,000;

 

    each non-employee director receives an annual stock option to purchase 100,000 shares of our common stock; and

 

    each non-employee director who serves as Chairman of the Board of Directors, Chairman of a committee of the Board of Directors or a member of a committee of the Board of Directors, receives additional cash compensation as follows:

 

    Chairman of the Board of Directors – an additional annual retainer of $5,000;

 

    Chairman of the audit committee, compensation committee, portfolio strategy committee or the nominating and governance committee – with respect to each such position, an additional annual retainer of $5,000; and

 

    member of the audit committee, compensation committee, portfolio strategy committee or the nominating and governance committee – with respect to each such membership, an additional annual retainer of $1,500.

The stock options granted to our non-employee directors have an exercise price equal to the fair market value of our common stock on the date of grant, expire ten years after the date of grant, subject to the director’s continued service on our Board of Directors, and vest as to 25% of the original number of shares underlying such options at the beginning of each calendar quarter.

Each member of our Board of Directors is also entitled to be reimbursed for reasonable travel and other expenses incurred in connection with attending meetings of the Board of Directors and any committee on which he serves.

In February 2013, our Board of Directors granted stock options to our directors, pursuant to our Amended 2008 Plan, as follows:

 

Name

   Option Award
(#)
     Option
Exercise
Price
($/share)
     Grant Date
Fair Value
 

Sol Barer, Ph.D.

     100,000         0.50       $ 30,882   

Sir Richard Sykes, FRS

     100,000         0.50       $ 30,882   

Isaac Blech

     100,000         0.50       $ 30,882   

David Scheinberg, M.D., Ph.D.

     200,000         0.50       $ 60,627   

Cary Sucoff

     100,000         0.50       $ 30,882   

Shengda Zan

     100,000         0.50       $ 30,882   

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Since January 1, 2010, we have engaged in the following transactions with our directors, executive officers, beneficial owners of more than 5% of our voting securities, and affiliates of our directors, executive officers and holders of more than 5% of our voting securities, other than equity and other compensation, termination, change in control and other arrangements, which are described under “Executive Compensation.”

Registration Rights

Holders of our preferred stock, as well as the holders of option grants issued pursuant to our Amended 2008 Plan and our 2008 Plan, have the right to require us to include the shares of our common stock reserved for conversion of their preferred shares and exercise of their options, respectively, in any registration statement we file with the SEC. In addition, holders of our Convertible Notes due 2015 have the right to require us to include in any registration statement we file with the SEC the shares of our common stock underlying the warrants that they received in connection with their purchase of our Convertible Notes due 2015. Further, Maxim Group LLC, which acted as the placement agent in the offering of our Convertible Notes due 2015, or its designees, have the right to require us to include in any registration statement we file with the SEC the shares of common stock underlying the warrants that it, or its designees, received as compensation for its services.

We are required to pay all expenses, other than underwriting discounts and commissions, relating to all such shares of our common stock that we are required to include in any registration statement we file with the SEC.

The registration rights described above will terminate, as to any given holder of registrable securities, when such holder of registrable securities is able to sell all of such holder’s registrable securities pursuant to Rule 144 under the Securities Act in a single transaction without registration or any other restrictions.

Transactions with Our Directors

Cary W. Sucoff, one of our directors, owns and operates Equity Source Partners, LLC (“ESP”), which acted as a placement agent in connection with prior offerings of our preferred stock, and in connection therewith, Mr. Sucoff and designees of ESP received warrants to purchase an aggregate of 675,000 shares of our common stock. Mr. Sucoff has also received option grants to purchase an aggregate of 600,000 shares of our common stock, 400,000 for his services as a member of our Board of Directors and 200,000 for his services as a consultant.

In 2011, Dr. Scheinberg, one of our directors, purchased 30,000 shares of Series C preferred stock which are convertible into 60,000 shares of our common stock. Dr. Scheinberg received a warrant to purchase 40,000 shares of our common stock in connection with this investment.

Mr. Blech, one of our directors, through four trusts, purchased an aggregate of 2,392,532 shares of Series B and Series C Preferred Stock, which together, are convertible into 4,785,064 shares of our common stock. Such trusts also own an aggregate of 1,200,000 shares of our common stock, which were purchased pursuant to the exercise of warrants issued to them in connection with the purchase of Series B preferred stock. Mr. Blech has also been issued options to purchase 400,000 shares of our common stock for his services as a member of our Board of Directors and options to purchase 500,000 shares of our common stock for his previous services to the Company.

In June 2013, Dr. Barer, one of our directors, purchased $1.0 million principal amount of our Convertible Notes due 2015 and received related warrants.

Consulting Agreements

In January of 2012, we entered into a consulting agreement with Mr. Sucoff providing for total consideration of $250,000 and warrants to purchase 300,000 shares of our common stock. Mr. Sucoff agreed to provide professional consultation services regarding matters relating to financing. The first payment of $100,000

 

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and warrants to purchase 100,000 shares of our common stock was made at the closing of our Series C Convertible Preferred Stock financing. In May 2013, our Board of Directors approved the second payment of $75,000 as well as the issuance of a stock option grant, instead of warrants, to purchase 100,000 shares of our common stock. The final payment will be made subject to the approval of our Board of Directors. The agreement can be terminated by Mr. Sucoff or us upon 30 days’ prior written notice.

Indemnification Agreements

Our certificate of incorporation in effect upon the closing of this offering provides that we will indemnify our directors and officers to the fullest extent permitted by Delaware law. In addition, we have entered into indemnification agreements with our directors. See “Executive Compensation—Limitation of Liability and Indemnification” for additional information regarding these agreements. We maintain insurance policies for director and officer liability providing for maximum coverage in the amount of $10 million.

Policies and Procedures for Related Person Transactions

Our Board of Directors has adopted written policies and procedures for the review of any transaction, arrangement or relationship in which we are a participant, the amount involved exceeds $120,000 and one of our executive officers, directors, director nominees or 5% stockholders, or their immediate family members, each of whom we refer to as a “related person,” has a direct or indirect material interest.

If a related person proposes to enter into such a transaction, arrangement or relationship, which we refer to as a “related person transaction,” the related person must report the proposed related person transaction to our Chief Operating Officer or principal financial officer. The policy calls for the proposed related person transaction to be reviewed and, if deemed appropriate, approved by our audit committee. Whenever practicable, the reporting, review and approval will occur prior to entry into the transaction. If advance review and approval is not practicable, the committee will review, and, in its discretion, may ratify the related person transaction. The policy also permits the chairman of the committee to review and, if deemed appropriate, approve proposed related person transactions that arise between committee meetings, subject to ratification by the committee at its next meeting. Any related person transactions that are ongoing in nature will be reviewed annually.

A related person transaction reviewed under the policy will be considered approved or ratified if it is authorized by the committee after full disclosure of the related person’s interest in the transaction. As appropriate for the circumstances, the committee will review and consider:

 

    the related person’s interest in the related person transaction;

 

    the approximate dollar value of the amount involved in the related person transaction;

 

    the approximate dollar value of the amount of the related person’s interest in the transaction without regard to the amount of any profit or loss;

 

    whether the transaction was undertaken in the ordinary course of our business;

 

    whether the terms of the transaction are no less favorable to us than terms that could have been reached with an unrelated third party;

 

    the purpose of, and the potential benefits to us of, the transaction; and

 

    any other information regarding the related person transaction or the related person in the context of the proposed transaction that would be material to investors in light of the circumstances of the particular transaction.

The committee may approve or ratify the transaction only if the committee determines that, under all of the circumstances, the transaction is in our best interests. The committee may impose any conditions on the related person transaction that it deems appropriate.

 

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Any member of the audit committee who is a related person with respect to a transaction under review will not be able to participate in the deliberations or vote on the approval or ratification of the transaction. However, such a director may be counted in determining the presence of a quorum at a meeting of the committee that considers the transaction.

In addition to the transactions that are excluded by the instructions to the SEC’s related person transaction disclosure rule, our Board of Directors has determined that the following transactions do not create a material direct or indirect interest on behalf of related persons and, therefore, are not related person transactions for purposes of this policy:

 

    interests arising solely from the related person’s position as an executive officer of another entity (whether or not the person is also a director of such entity), that is a participant in the transaction, where (a) the related person and all other related persons own in the aggregate less than a 10% equity interest in such entity, (b) the related person and his or her immediate family members are not involved in the negotiation of the terms of the transaction and do not receive any special benefits as a result of the transaction and (c) the amount involved in the transaction is less than the greater of $200,000 or 5% of the annual gross revenues of the company receiving payment under the transaction; and

 

    a transaction that is specifically contemplated by provisions of our charter or by-laws.

The policy provides that transactions involving compensation of executive officers shall be reviewed and approved by the compensation committee in the manner specified in its charter.

We did not have a written policy regarding the review and approval of related person transactions prior to this offering. Nevertheless, with respect to such transactions, it was our policy for our Board of Directors to consider the nature of and business reason for such transactions, how the terms of such transactions compared to those which might be obtained from unaffiliated third parties and whether such transactions were otherwise fair to and in the best interests of, or not contrary to, our best interests. In addition, all related person transactions required prior approval, or later ratification, by our Board of Directors.

 

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PRINCIPAL STOCKHOLDERS

The following table sets forth information regarding the beneficial ownership of our common stock as of June 30, 2013, and the anticipated beneficial ownership percentages immediately following this offering, by:

 

    each of our directors;

 

    each of our Named Executive Officers;

 

    all of our directors and executive officers as a group; and

 

    each person, or group of affiliated persons, who is known by us to beneficially own more than 5% of our outstanding shares of common stock.

Each stockholder’s percentage ownership before the offering is based on 38,968,384 shares of our common stock outstanding as of June 30, 2013 (assuming conversion only of all of our shares of preferred stock into common stock), as adjusted to give effect to this offering. Each stockholder’s percentage ownership after the offering is based on             shares of our common stock outstanding immediately after the completion of this offering. We have granted the underwriters an option to purchase up to an aggregate of              additional shares of our common stock from us to cover over-allotments, if any, and the table below assumes no exercise of that option.

Beneficial ownership is determined in accordance with the rules and regulations of the SEC and includes voting or investment power with respect to our common stock. Shares of our common stock subject to options or warrants that are currently exercisable or exercisable with 60 days of June 30, 2013 are considered outstanding and beneficially owned by the person holding the options or warrants for the purposes of calculating the percentage ownership of that person but not for the purpose of calculating the percentage ownership of any other person. Except as disclosed in the footnotes to this table and subject to applicable community property laws, we believe that each stockholder identified in the table possesses sole voting and investment power over all shares of common stock shown as beneficially owned by the stockholder. Except as otherwise set forth below, the address of the beneficial owner is c/o ContraFect Corporation, 28 Wells Avenue, 3rd Floor, Yonkers, New York 10701.

 

     Number of
Shares of
Common
Stock
Beneficially
Owned
     Percentage of
Shares Beneficially
Owned
        Before
Offering
(%)
     After
Offering
(%)

5% Stockholders:

        

Alpha Spring Limited (1)

     5,226,528         13.4      

Robert C. Nowinski, Ph.D. (2)

     5,355,150         12.4      

Liberty Charitable Remainder Trust (3)

     3,631,644         9.3      

Directors and Named Executive Officers:

        

Sol Barer, Ph.D. (4)

     1,275,000         3.2      

Sir Richard Sykes, FRS (5)

     235,000         *      

Isaac Blech (6)

     6,793,397         17.1      

David Scheinberg, M.D., Ph.D. (7)

     575,000         1.5      

Cary Sucoff (8)

     1,065,000         2.7      

Shengda Zan (9)

     5,351,528         13.7      

Robert C. Nowinski, Ph.D. (2)

     5,355,150         12.4      

Julia P. Gregory (10)

     415,833         1.1      

David Huang, M.D., Ph.D. (11)

     206,519         *      

Michael Wittekind, Ph.D. (12)

     110,500         *      

All current directors and executive officers as a group (14 persons) (13)

     22,115,533         46.2      

 

* Represents beneficial ownership of less than one percent of our outstanding common stock.

 

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(1) The address for Alpha Spring Limited is Unit 3, Firs Park, Watermill Industrial Estate, Aspenden Road, Buntingford, Hertfordshire SG9 9JS. Consists of 5,226,528 shares of common stock issuable upon conversion of preferred stock. Mr. Zan, a member of our Board of Directors, is the sole director of Alpha Spring Limited.
(2) Consists of (a) 1,193,900 shares of common stock, (b) 100,000 shares of common stock issuable upon conversion of preferred stock, and (c) 4,061,250 shares of common stock underlying options that are exercisable as of June 30, 2013 or will become exercisable within 60 days after such date. All of the shares of common stock owned by Dr. Nowinski have been pledged as security. Pursuant to the pledge agreement, Dr. Nowinski has the power to vote or direct the voting of the shares.
(3) The address for Liberty Charitable Remainder Trust is 75 Rockefeller Plaza, 29th Floor, New York, New York 10019. Consists of (a) 700,000 shares of common stock and (b) 2,931,644 shares of common stock issuable upon conversion of preferred stock. Mr. Blech, a member of our Board of Directors, is a trustee and one of the beneficiaries of Liberty Charitable Remainder Trust.
(4) Consists of (a) 600,000 shares of common stock and (b) 675,000 shares of common stock underlying options and warrants that are exercisable as of June 30, 2013 or will become exercisable within 60 days after such date.
(5) Consists of 235,000 shares of common stock underlying options that are exercisable as of June 30, 2013 or will become exercisable within 60 days after such date.
(6) Consists of (a) (i) 700,000 shares of common stock and (ii) 2,931,644 shares of common stock issuable upon conversion of preferred stock held by Liberty Charitable Remainder Trust, (b) (i) 500,000 shares of common stock and (ii) 1,550,388 shares of common stock issuable upon conversion of preferred stock held by River Charitable Remainder Unitrust, (c) 151,516 shares of common stock issuable upon conversion of preferred stock held by Harbor Charitable River Trust, (d) 151,516 shares of common stock issuable upon conversion of preferred stock held by Summit Charitable Remainder Trust, (e) 100,000 shares of common stock issuable upon conversion of preferred stock held by Miriam Blech and (f) 708,333 shares of common stock underlying options that are exercisable as of June 30, 2013 or will become exercisable within 60 days after such date.
(7) Consists of (a) 20,000 shares of common stock, (b) 60,000 shares of common stock issuable upon conversion of preferred stock, and (c) 495,000 shares of common stock underlying options and warrants that are exercisable as of June 30, 2013 or will become exercisable within 60 days after such date.
(8) Consists of 1,065,000 shares of common stock underlying options and warrants that are exercisable as of June 30, 2013 or will become exercisable within 60 days after such date.
(9) Consists of (a) 5,226,528 shares of common stock issuable upon conversion of preferred stock held by Alpha Spring Limited and (b) 125,000 shares of common stock underlying options that are exercisable as of June 30, 2013 or will become exercisable within 60 days after such date.
(10) Consists of 415,833 shares of common stock underlying options that are exercisable as of June 30, 2013 or will become exercisable within 60 days after such date.
(11) Consists of 206,519 shares of common stock underlying options that are exercisable as of June 30, 2013 or will become exercisable within 60 days after such date.
(12) Consists of 110,500 shares of common stock underlying options that are exercisable as of June 30, 2013 or will become exercisable within 60 days after such date.
(13) Consists of (a) 3,013,900 shares of common stock, (b) 10,310,352 shares of common stock issuable upon conversion of preferred stock, and (b) 8,791,281 shares of common stock underlying options and warrants that are exercisable as of June 30, 2013 or will become exercisable within 60 days after such date.

 

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DESCRIPTION OF CAPITAL STOCK

The following description of our capital stock and provisions of our amended and restated certificate of incorporation and amended and restated by-laws are summaries and are qualified by reference to the certificate of incorporation and the by-laws that will be in effect upon the closing of this offering. We have filed copies of these documents with the SEC as exhibits to our registration statement of which this prospectus forms a part. The description of the capital stock reflects changes to our capital structure that will occur upon the closing of this offering.

Upon the closing of this offering, our authorized capital stock will consist of              shares of our common stock, par value $0.0001 per share, and 5,000,000 shares of our preferred stock, par value $0.0001 per share, all of which preferred stock will be undesignated.

As of September 1, 2013, we had issued and outstanding:

 

    7,084,240 shares of our common stock;

 

    2,200,000 shares of our series A convertible preferred stock that are convertible into 4,400,000 shares of our common stock;

 

    4,651,163 shares of our series B convertible preferred stock that are convertible into 9,302,326 shares of our common stock; and

 

    9,090,909 shares of our series C convertible preferred stock that are convertible into 18,181,818 shares of our common stock.

Upon the closing of this offering, all of the outstanding shares of our preferred stock will automatically convert into an aggregate of 31,884,144 shares of our common stock.

Common Stock

Holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. An election of directors by our stockholders shall be determined by a plurality of the votes cast by the stockholders entitled to vote on the election. Holders of common stock are entitled to receive proportionately any dividends as may be declared by our Board of Directors, subject to any preferential dividend rights of outstanding preferred stock.

In the event of our liquidation or dissolution, the holders of common stock are entitled to receive proportionately all assets available for distribution to stockholders after the payment of all debts and other liabilities and subject to the prior rights of any outstanding preferred stock. Holders of common stock have no preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders of common stock are subject to and may be adversely affected by the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future.

Preferred Stock

Under the terms of our amended and restated certificate of incorporation that will become effective upon the closing of this offering, our Board of Directors is authorized to issue shares of preferred stock in one or more series without stockholder approval. Our Board of Directors has the discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock.

The purpose of authorizing our Board of Directors to issue preferred stock and determine its rights and preferences is to eliminate delays associated with a stockholder vote on specific issuances. The issuance of

 

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preferred stock, while providing flexibility in connection with possible acquisitions, future financings and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or could discourage a third party from seeking to acquire, a majority of our outstanding voting stock. Upon the closing of this offering, there will be no shares of preferred stock outstanding, and we have no present plans to issue any shares of preferred stock.

Options

As of September 1, 2013, options to purchase an aggregate of 15,340,920 shares of our common stock at a weighted average exercise price of $0.76 per share were outstanding.

Anti-Takeover Effects of Delaware Law and Our Charter and Bylaws

Delaware law contains, and upon the completion of this offering our certificate of incorporation and our bylaws will contain, provisions that could have the effect of delaying, deferring or discouraging another party from acquiring control of us. These provisions, which are summarized below, are expected to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our Board of Directors.

Removal of Directors

A director may be removed only for cause and only by the affirmative vote of the holders of at least 75% of the votes that all of our stockholders would be entitled to cast in an annual election of directors. Any vacancy on our Board of Directors, including a vacancy resulting from an enlargement of our Board of Directors, may be filled only by vote of a majority of our directors then in office.

Stockholder Action by Written Consent; Special Meetings

Upon the completion of this offering, our certificate of incorporation will provide that any action required or permitted to be taken by our stockholders must be effected at a duly called annual or special meeting of such holders and may not be effected by any consent in writing by such holders. Upon the completion of this offering, our certificate of incorporation and bylaws will also provide that, except as otherwise required by law, special meetings of our stockholders can only be called by our Chairman of the Board of Directors or our Chief Executive Officer.

Advance Notice Requirements for Stockholder Proposals

Upon the completion of this offering, our bylaws will establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of stockholders, including proposed nominations of persons for election to our Board of Directors. Stockholders at an annual meeting will only be able to consider proposals or nominations specified in the notice of meeting or brought before the meeting by or at the direction of our Board of Directors or by a stockholder of record on the record date for the meeting who is entitled to vote at the meeting and who has delivered timely written notice in proper form to our secretary of the stockholder’s intention to bring such business before the meeting. These provisions could have the effect of delaying until the next stockholder meeting stockholder actions that are favored by the holders of a majority of our outstanding voting securities.

Delaware Business Combination Statute

Upon the completion of this offering, we will be subject to Section 203 of the Delaware General Corporation Law. Subject to specified exceptions, Section 203 prevents a publicly-held Delaware corporation from engaging in a “business combination” with any “interested stockholder” for three years following the date that the person became an interested stockholder, unless the interested stockholder attained that status with the

 

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approval of our Board of Directors or unless the business combination is approved in a prescribed manner. A “business combination” includes, among other things, a merger or consolidation involving us and the “interested stockholder” and the sale of more than 10% of our assets. In general, an “interested stockholder” is any entity or person beneficially owning 15% or more of our outstanding voting stock and any entity or person affiliated with or controlling or controlled by such entity or person.

Amendment of Certificate of Incorporation and Bylaws

The Delaware General Corporation Law provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation’s certificate of incorporation or bylaws, unless a corporation’s certificate of incorporation or bylaws, as the case may be, requires a greater percentage. Effective upon the completion of this offering, our bylaws may be amended or repealed by a majority vote of our Board of Directors or by the affirmative vote of the holders of at least 75% of the votes that all of our stockholders would be entitled to cast in any annual election of directors. In addition, the affirmative vote of the holders of at least 75% of the votes that all of our stockholders would be entitled to cast in any annual election of directors is required to amend or repeal or to adopt any provisions inconsistent with any of the provisions of our certificate of incorporation described above under “—Removal of Directors” and “—Stockholder Action by Written Consent; Special Meetings.”

Transfer Agent and Registrar

The transfer agent and registrar for our common stock will be                 .

NASDAQ Global Market

We have applied to have our common stock listed on The NASDAQ Global Market under the symbol “             .”

 

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SHARES ELIGIBLE FOR FUTURE SALE

Prior to completion of this offering, there was no public market for our common stock. Future sales of our common stock in the public market, or the perception that sales could occur, could adversely affect the market price of our common stock and could impair our future ability to raise capital through the sale of our equity securities.

Based on the number of shares of our common stock outstanding as of                    , 2013, we will have            shares of our common stock outstanding after completion of this offering. Of those shares, the            shares of common stock sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except that any shares purchased by our “affiliates,” as that term is defined in Rule 144 under the Securities Act, may be sold only in compliance with the limitations described below. The remaining            outstanding shares of our common stock will be deemed “restricted securities” as that term is defined in Rule 144. Restricted securities may not be resold except pursuant to an effective registration statement or an applicable exemption from registration, including an exemption under Rule 144 under the Securities Act as summarized below.

Rule 144

In general, under Rule 144, beginning 90 days after the date of this prospectus, a person who is not our affiliate and has not been our affiliate at any time during the preceding three months will be entitled to sell any of our shares of common stock that such person has beneficially owned for at least six months, including the holding period of any prior owner other than one of our affiliates, without regard to volume limitations, if we are current in our SEC filings as set forth in Rule 144.

In addition, under Rule 144, a person may sell shares of our common stock acquired from us immediately upon the closing of this offering, without regard to volume limitations or the availability of public information about us, if:

 

    the person is not our affiliate and has not been our affiliate at any time during the preceding three months; and

 

    the person has beneficially owned the shares to be sold for at least one year, including the holding period of any prior owner other than one of our affiliates.

Beginning 90 days after the date of this prospectus, a person who is our affiliate or who was our affiliate at any time during the preceding three months and who has beneficially owned shares of our common stock for at least six months, including the holding period of any prior owner other than one of our affiliates, would be entitled to sell within any three-month period a number of shares that does not exceed the greater of:

 

    1.0% of the number of our shares of common stock then outstanding, which will equal approximately            shares immediately after this offering; and

 

    the average weekly trading volume in our common stock on the NASDAQ during the four calendar weeks preceding the date of filing of a Notice of Proposed Sale of Securities Pursuant to Rule 144 with respect to 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.

Upon expiration of the            -day lock-up period described below, approximately            shares of our common stock will be eligible for sale under Rule 144, including shares eligible for resale immediately upon the closing of this offering as described above. We cannot estimate the number of shares of our common stock that our existing shareholders will elect to sell under Rule 144.

 

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Rule 701

In general, under Rule 701 of the Securities Act as currently in effect, any of our employees, consultants or advisors who purchase shares of our common stock from us in connection with a compensatory stock or option plan or other written agreement is eligible to resell those shares 90 days after the effective date of the offering in reliance on Rule 144, but without compliance with some of the restrictions, including the holding period, contained in Rule 144.

Lock-Up Agreements

In connection with this offering, we, certain of our shareholders and each of our executive officers have agreed with the underwriters, subject to certain exceptions, not to sell, dispose of or hedge any shares of our common stock, for a period of at least            days after the date of this prospectus, except with the prior written consent of the representatives of the underwriters. See “Underwriting.”

 

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MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES FOR NON-U.S. HOLDERS

The following is a discussion of the material U.S. federal income and estate tax consequences of the ownership and disposition of our common stock applicable to “Non-U.S. Holders” that purchase shares of our common stock in this offering. As used herein, a Non-U.S. Holder means a beneficial owner of our common stock that is neither a U.S. person nor a partnership for U.S. federal income tax purposes, and that will hold shares of our common stock as capital assets (i.e., generally, for investment purposes). For U.S. federal income tax purposes, a U.S. person includes:

 

    an individual who is a citizen or resident of the United States;

 

    a corporation (or other business entity taxable as a corporation) created or organized under the laws of the United States, any state thereof or the District of Columbia;

 

    an estate the income of which is subject to U.S. federal income taxation regardless of source; or

 

    a trust that (A) is subject to the primary supervision of a court within the United States and all substantial decisions of which are within the control of one or more U.S. persons, or (B) otherwise has validly elected to be treated as a U.S. person for U.S. federal income tax purposes.

If a partnership (or other entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds shares of our common stock, the U.S. federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. Such partner or partnership should consult its independent tax advisor as to its tax consequences.

This discussion does not consider specific facts and circumstances that may be relevant to a particular Non-U.S. Holder’s tax position and does not consider U.S. state and local or non-U.S. tax consequences. It also does not consider Non-U.S. Holders subject to special tax treatment under the U.S. federal income tax laws (including banks and insurance companies, dealers in securities, holders of our common stock held as part of a “straddle,” “hedge,” “conversion transaction” or other risk-reduction transaction, persons who have engaged in swaps or other derivative transactions with respect to our common stock, controlled foreign corporations, passive foreign investment companies, companies that accumulate earnings to avoid U.S. federal income tax, foreign tax-exempt organizations, investors in pass-through entities, persons subject to the alternative minimum tax, former U.S. citizens or residents and persons who hold or receive common stock as compensation). This discussion is based on provisions of the Internal Revenue Code, Treasury regulations promulgated thereunder, administrative pronouncements of the U.S. Internal Revenue Service (the “IRS”), and judicial decisions, all as in effect on the date hereof, and all of which are subject to change, possibly on a retroactive basis, and different interpretations. We have not sought and do not plan to seek any ruling from the IRS with respect to statements made and the conclusions reached in the following summary, and there can be no assurance that the IRS or a court will agree with our statements and conclusions.

Each prospective investor is urged to consult its tax advisor with respect to the U.S. federal, state, local and non-U.S. income, estate and gift, and other tax consequences of holding and disposing of our common stock, as well as the applicability of any income tax treaty.

U.S. Trade or Business Income

For purposes of this discussion, dividend income, and gain on the sale or other taxable disposition of our common stock, will be considered to be “U.S. trade or business income” if such dividend income or gain is (i) effectively connected with the conduct by a Non-U.S. Holder of a trade or business within the United States and (ii) in the case of a Non-U.S. Holder that is eligible for the benefits of an income tax treaty with the United States, attributable to a permanent establishment (or, for an individual, a fixed base) maintained by the Non-U.S. Holder in the United States. Generally, U.S. trade or business income is not subject to U.S. federal withholding tax (provided the Non-U.S. Holder complies with applicable certification and disclosure requirements, including

 

106


delivery of a properly executed IRS Form W-8ECI); instead, U.S. trade or business income is subject to U.S. federal income tax on a net income basis at regular U.S. federal income tax rates in the same manner as would apply to a U.S. person. Any U.S. trade or business income received by a Non-U.S. Holder that is a corporation also may be subject to a “branch profits tax” at a 30% rate, or at a lower rate prescribed by an applicable income tax treaty, under specific circumstances.

Dividends

Distributions of cash or property that we pay on our common stock (if any) will be treated as taxable dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). If the amount of a distribution exceeds our current and accumulated earnings and profits, such excess will be allocated ratably among each share of common stock with respect to which the distribution is paid and will be treated first as a tax-free return of capital to the extent of the Non-U.S. Holder’s adjusted tax basis in our common stock, and thereafter will be treated as capital gain from a sale or other disposition of our common stock as described below in “—Dispositions of Our Common Stock.” Your adjusted tax basis is generally the purchase price of the shares, reduced by any such tax-free returns of capital. A Non-U.S. Holder generally will be subject to U.S. federal withholding tax at a 30% rate, or at a reduced rate prescribed by an applicable income tax treaty, on any dividends received in respect of our common stock. In order to obtain a reduced rate of U.S. federal withholding tax under an applicable income tax treaty, a Non-U.S. Holder will be required to provide a properly executed IRS Form W-8BEN (or appropriate substitute or successor form) certifying that it is not a U.S. person and its entitlement to benefits under the treaty. Special certifications and requirements may apply to Non-U.S. Holders that are intermediaries (including partnerships) or that own stock though certain intermediaries. A Non-U.S. Holder of our common stock that is eligible for a reduced rate of U.S. federal withholding tax under an income tax treaty may obtain a refund or credit of any excess amounts withheld by filing a timely claim for a refund with the IRS. A Non-U.S. Holder should consult its own independent tax advisor regarding its possible entitlement to benefits under an income tax treaty.

U.S. federal withholding tax does not apply to dividends that are U.S. trade or business income, as described above, of a Non-U.S. Holder who provides a properly executed IRS Form W-8ECI (or appropriate substitute or successor form), certifying that the dividends are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States.

Dispositions of Our Common Stock

A Non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax in respect of any gain realized on a sale, exchange or other taxable disposition of our common stock unless:

 

  (1) the gain is effectively connected with the conduct of a U.S. trade or business, as described above in “—U.S. Trade or Business Income”;

 

  (2) the Non-U.S. Holder is an individual who is present in the United States for 183 or more days in the taxable year of the disposition and meets certain other conditions; or

 

  (3) we are or have been a U.S. real property holding corporation (“USRPHC”), under section 897 of the Code at any time during the shorter of the five-year period ending on the date of such disposition and the Non-U.S. Holder’s holding period for our common stock.

If clause (1) or (3) above applies, subject to the discussion below regarding USRPHCs, you will generally be subject to U.S. federal income tax with respect to such gain on a net income basis at the same graduated individual or corporate rates that apply to U.S. persons, subject to reduction by an applicable income tax treaty (and, if you are a corporation, you also may be subject to a 30% branch profits tax, subject to reduction by an applicable income tax treaty). If clause (2) above applies, you will be subject to U.S. federal income tax with respect to such gain at a rate of 30% (or lower applicable treaty rate), which gain may be offset by certain losses.

 

107


In general, a corporation is a USRPHC if the fair market value of its “U.S. real property interests” equals or exceeds 50% of the sum of the fair market values of its worldwide (domestic and foreign) real property interests and its other assets used or held for use in a trade or business (all as determined for U.S. federal income tax purposes). For this purpose, real property interests include land, improvements, and associated personal property. We do not believe that we are currently a USRPHC or that we will become one in the future. Even if we were treated as a USRPHC, gain realized by you on a disposition of our common stock will not be subject to U.S. federal income tax so long as (1) you owned, directly, indirectly and constructively, no more than 5% of our common stock at all times within the shorter of (i) the five year period preceding the disposition or (ii) your holding period and (2) our common stock is regularly traded on an established securities market within the meaning of the applicable Treasury regulations. There can be no assurance that our common stock will qualify as regularly traded on an established securities market.

U.S. Federal Estate Taxes

Shares of our common stock owned or treated as owned by an individual who is not a citizen or resident of the United States (as defined for U.S. estate tax purposes) at the time of his or her death will be included in the individual’s gross estate for U.S. federal estate tax purposes, and may be subject to U.S. federal estate tax, unless an applicable estate tax treaty provides otherwise.

Information Reporting and Backup Withholding Requirements

We must annually report to the IRS and to each Non-U.S. Holder any dividend income that is subject to U.S. federal withholding tax or that is exempt from such withholding tax pursuant to an income tax treaty. Copies of these information returns also may be made available under the provisions of a specific treaty or agreement to the tax authorities of the country in which the Non-U.S. Holder resides. Under certain circumstances, the Code imposes a backup withholding obligation (currently at a rate of 28%) on certain reportable payments. Dividends paid to a Non-U.S. Holder of our common stock generally will be exempt from backup withholding if the Non-U.S. Holder provides a properly executed IRS Form W-8BEN (or appropriate substitute or successor form) or otherwise establishes an exemption.

The payment of the proceeds from the disposition of common stock to or through the U.S. office of any broker, U.S. or foreign, will be subject to information reporting and possible backup withholding unless the owner certifies as to its non-U.S. status under penalties of perjury or otherwise establishes an exemption, provided that the broker does not have actual knowledge or reason to know that the holder is a U.S. person or that the conditions of any other exemption are not, in fact, satisfied. The payment of the proceeds from the disposition of common stock to or through a non-U.S. office of a non-U.S. broker will not be subject to information reporting or backup withholding unless the non-U.S. broker has certain types of relationships with the United States, or a U.S.-related person. In the case of the payment of the proceeds from the disposition of our common stock to or through a non-U.S. office of a broker that is either a U.S. person or a U.S.-related person, the Treasury regulations require information reporting (but not backup withholding) on the payment unless the broker has documentary evidence in its files that the owner is not a U.S. person and the broker has no knowledge to the contrary. Non-U.S. Holders should consult their own tax advisors on the application of information reporting and backup withholding to them in their particular circumstances (including upon their disposition of our common stock).

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a Non-U.S. Holder will be refunded or credited against the Non-U.S. Holder’s U.S. federal income tax liability, if any, if the Non-U.S. Holder provides the required information to the IRS on a timely basis.

Foreign Account Tax Compliance Act

The Foreign Account Tax Compliance Act provisions of the Hiring Incentives to Restore Employment Act (generally referred to as “FATCA”) generally impose a withholding tax of 30% on dividend income paid on our

 

108


common stock and on the gross proceeds of a disposition of our common stock paid to (i) a foreign financial institution, unless such institution (a) enters into an agreement with the U.S. government to collect and provide to the U.S. tax authorities substantial information regarding U.S. account holders of such institution (which would include certain equity and debt holders of such institution, as well as certain account holders that are foreign entities with U.S. owners) and to withhold 30% on certain payments to account holders or (b) is resident in a country that has entered into an intergovernmental agreement with the United States in relation to such information reporting and withholding and the financial entity complies with related information reporting requirements of such country; and (ii) a foreign entity that is not a financial institution, unless such entity provides the withholding agent with a certification identifying the substantial U.S. owners of the entity (or certifying that it has no substantial U.S. owners), which generally includes any U.S. person that directly or indirectly owns more than 10% of the entity. Recently released Treasury regulations and IRS guidance provide for a phased implementation of these withholding tax provisions. A foreign financial institution generally is a foreign entity that (i) accepts deposits in the ordinary course of a banking or similar business, (ii) as a substantial portion of its business, holds financial assets for the benefit of one or more other persons, or (iii) is an investment entity that, in general, primarily conducts as a business on behalf of customers trading in certain financial instruments, individual or collective portfolio management or otherwise investing, administering, or managing funds, money or certain financial assets on behalf of other persons. Specifically, withholding with respect to U.S.-source dividends will begin on July 1, 2014, and withholding with respect to U.S.-source proceeds payments will begin on January 1, 2017. Non-U.S. Holders are encouraged to consult with their own tax advisors regarding the implications of FATCA on their investment in our common stock, including, without limitation, the process and deadlines for meeting the applicable requirements to prevent the imposition of the 30% withholding tax under FATCA.

THE PRECEDING DISCUSSION OF U.S. FEDERAL INCOME TAX CONSIDERATIONS IS FOR GENERAL INFORMATION ONLY. IT IS NOT TAX ADVICE. EACH PROSPECTIVE HOLDER SHOULD CONSULT ITS OWN TAX ADVISOR REGARDING THE PARTICULAR U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF HOLDING AND DISPOSING OF OUR COMMON STOCK, INCLUDING THE APPLICABILITY OF ANY INCOME TAX TREATY AND THE CONSEQUENCES OF ANY PROPOSED CHANGE IN APPLICABLE LAWS.

 

109


UNDERWRITING

 

110


LEGAL MATTERS

The validity of the shares of common stock offered by this prospectus will be passed upon for us by Shearman & Sterling LLP, New York, New York. The underwriters have been represented by              ..

EXPERTS

The financial statements of ContraFect Corporation at December 31, 2012, and for the year then ended, appearing in this prospectus and registration statement have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon (which contains an explanatory paragraph describing conditions that raise substantial doubt about the Company’s ability to continue as a going concern as described in Note 1 to the financial statements) appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing. The financial statements of ContraFect Corporation at December 31, 2011, and for the year then ended, appearing in this prospectus and registration statement have been audited by EisnerAmper LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing. The financial statements for the period from March 17, 2008 (inception) to December 31, 2011, which have been audited by EisnerAmper LLP, are not presented separately herein.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1 under the Securities Act that registers the shares of our common stock to be sold in this offering. The registration statement, including the attached exhibits, contains additional relevant information about us and our common stock. The rules and regulations of the SEC allow us to omit from this document certain information included in the registration statement.

You may read and copy the reports and other information we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may also obtain copies of this information by mail from the public reference section of the SEC, 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates. You may obtain information regarding the operation of the public reference room by calling 1-800-SEC-0330. The SEC also maintains a website that contains reports, proxy statements and other information about issuers, like us, who file electronically with the SEC. The address of that website is http://www.sec.gov. This reference to the SEC’s website is an inactive textual reference only and is not a hyperlink.

Upon completion of this offering, we will become subject to the reporting, proxy and information requirements of the Exchange Act, and as a result will be required to file periodic reports, proxy statements and other information with the SEC. These periodic reports, proxy statements and other information will be available for inspection and copying at the SEC’s public reference room and the website of the SEC referred to above, as well as on our website, without charge, at http://www.contrafect.com. This reference to our website is an inactive textual reference only and is not a hyperlink. The contents of our website are not part of this prospectus, and you should not consider the contents of our website in making an investment decision with respect to our common stock.

We intend to furnish our stockholders with annual reports containing audited financial statements and make available to our stockholders quarterly reports for the first three quarters of each fiscal year containing unaudited interim financial information.

 

111


CONTRAFECT CORPORATION

INDEX TO FINANCIAL STATEMENTS

 

     Page  

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2012

     F-2   

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2011

     F-3   

BALANCE SHEETS AS OF DECEMBER  31, 2011 AND 2012

     F-4   

STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2012 AND THE PERIOD FROM INCEPTION (MARCH 17, 2008) TO DECEMBER 31, 2012

     F-5   

STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ (DEFICIT) EQUITY FOR THE PERIOD FROM INCEPTION (MARCH 17, 2008) TO DECEMBER 31, 2012

     F-6   

STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2012 AND THE PERIOD FROM INCEPTION (MARCH 17, 2008) TO DECEMBER 31, 2012

     F-9   

NOTES TO FINANCIAL STATEMENTS

     F-10   

UNAUDITED BALANCE SHEETS AS OF DECEMBER  31, 2012 AND JUNE 30, 2013

     F-30   

UNAUDITED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2013 AND THE PERIOD FROM INCEPTION (MARCH 17, 2008) TO JUNE 30, 2013

     F-31   

UNAUDITED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2013 AND THE PERIOD FROM INCEPTION (MARCH 17, 2008) TO JUNE 30, 2013

     F-32   

NOTES TO UNAUDITED FINANCIAL STATEMENTS

     F-33   

 

F-1


Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

ContraFect Corporation

We have audited the accompanying balance sheet of ContraFect Corporation (a development stage enterprise) as of December 31, 2012, and the related statements of operations, convertible preferred stock and stockholders’ (deficit) equity and cash flows for the year then ended, and for the period from March 17, 2008 (inception) through December 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements as of December 31, 2011, and for the period March 17, 2008 (inception) through December 31, 2011, were audited by other auditors whose report dated October 11, 2013 expressed an unqualified opinion on those statements. The financial statements for the period March 17, 2008 (inception) through December 31, 2011 include total operating expenses and net loss of $14,697,947 and $14,936,755, respectively. Our opinion on the statements of operations, convertible preferred stock and stockholders’ equity and cash flows for the period March 17, 2008 (inception) through December 31, 2012, insofar as it relates to amounts for prior periods through December 31, 2011, is based solely on the report of other auditors.

We conducted our audit 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 Company’s internal control over financial reporting. Our audit 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 Company’s 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 audit and the report of other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audit and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of ContraFect Corporation at December 31, 2012, and the results of its operations and its cash flows for the year then ended and the period from March 17, 2008 (inception) through December 31, 2012, in conformity with U.S. generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has recurring losses from operations that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Ernst & Young LLP

Metro Park, New Jersey

October 11, 2013

 

F-2


Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

ContraFect Corporation

We have audited the accompanying balance sheet of ContraFect Corporation (a development stage company) (the “Company”) as of December 31, 2011, and the related statements of operations, changes in preferred stock and stockholders’ equity (deficit) and cash flows for the year ended December 31, 2011 and the period from the period from March 17, 2008 (inception) to December 31, 2011. The financial statements for the period from March 17, 2008 (inception) to December 31, 2011 are not presented separately herein. The financial statements are the responsibility of the Company’s 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its 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 Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as 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 ContraFect Corporation as of December 31, 2011, and the results of its operations and its cash flows for the year ended December 31, 2011 and the period from March 17, 2008 (inception) to December 31, 2011 (not presented separately herein), in conformity with accounting principles generally accepted in the United States of America.

/s/ EisnerAmper LLP

Iselin, New Jersey

October 11, 2013

 

F-3


ContraFect Corporation

(A Development Stage Company)

Balance Sheets

 

     December 31,  
     2011     2012  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 15,896,303      $ 7,886,264   

Prepaid expenses and other current assets

     306,546        267,797   
  

 

 

   

 

 

 

Total current assets

     16,202,849        8,154,061   

Property and equipment, net

     3,562,345        3,307,982   

Restricted cash

     1,500,000        1,600,000   

Other assets

     133,121        143,621   
  

 

 

   

 

 

 

Total assets

   $ 21,398,315      $ 13,205,664   
  

 

 

   

 

 

 

Liabilities and stockholders’ equity

    

Current liabilities:

    

Accounts payable

   $ 612,401      $ 2,246,114   

Accrued liabilities

     555,230        725,993   

Deferred rent

     290,697        672,236   

Capital lease, current portion

     452,321        558,777   

Note payable, current portion

     488,281        511,023   
  

 

 

   

 

 

 

Total current liabilities

     2,398,930        4,714,143   

Capital lease, long-term portion

     705,256        341,526   

Note payable, long-term portion

     1,000,179        489,184   
  

 

 

   

 

 

 

Total liabilities

     4,104,365        5,544,853   

Commitments and contingencies

     —          —     

Series A convertible preferred stock, $0.0002 par value, 2,200,000 shares authorized and outstanding at December 31, 2011 and 2012, liquidation preference of $4,784,146 at December 31, 2012

     1,964,283        1,964,283   

Series B convertible preferred stock, $0.0002 par value, 5,600,000 shares authorized; 4,651,163 shares outstanding at December 31, 2011 and 2012, liquidation preference of $25,809,503 at December 31, 2012

     10,175,750        10,175,750   

Series C convertible preferred stock, $0.0002 par value, 9,090,909 shares authorized; 6,176,677 and 9,090,909 shares outstanding at December 31, 2011 and 2012, respectively, liquidation preference of $61,756,003 at December 31, 2012

     18,331,861        27,752,294   

Stockholders’ (deficit) equity:

    

Common stock, $0.0001 par value, 60,000,000 and 200,000,000 shares authorized at December 31, 2011 and 2012, respectively; 7,045,177 shares outstanding at December 31, 2011 and 2012

     705        705   

Additional paid-in capital

     2,358,106        2,587,998   

Loan to officer

     (600,000     (600,000

Deficit accumulated during the development stage

     (14,936,755     (34,220,209
  

 

 

   

 

 

 

Total stockholders’ deficit

     (13,177,944     (32,231,516
  

 

 

   

 

 

 

Total liabilities, convertible preferred stock, and stockholders’ equity

   $ 21,398,315      $ 13,205,664   
  

 

 

   

 

 

 

See accompanying notes.

 

F-4


ContraFect Corporation

(A Development Stage Company)

Statements of Operations

 

     Year Ended December 31,     Period From
March 17, 2008
(Inception) to

December 31,
2012
 
     2011     2012    

Operating expenses:

      

Research and development, including share-based compensation expense of $18,362, $46,574, and $64,935, respectively

   $ 6,618,172      $ 13,211,111      $ 20,986,889   

General and administrative, including share-based compensation expense of $318,557, $183,308, and $789,337, respectively

     3,887,307        5,943,062        12,865,232   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     10,505,479        19,154,173        33,852,121   
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (10,505,479     (19,154,173     (33,852,121

Interest expense, net

     (111,450     (129,281     (368,088
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (10,616,929   $ (19,283,454   $ (34,220,209
  

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (10,616,929   $ (19,283,454   $ (34,220,209

Net loss attributable to preferred stockholders

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (10,616,929   $ (19,283,454   $ (34,220,209
  

 

 

   

 

 

   

 

 

 

Per share information:

      

Net loss per share of common stock, basic and diluted

   $ (1.63   $ (2.74  
  

 

 

   

 

 

   

Basic and diluted weighted average shares outstanding

     6,505,204        7,045,177     
  

 

 

   

 

 

   

Unaudited pro forma net loss per share of common stock, basic and diluted

     $ (0.56  
    

 

 

   

Unaudited basic and diluted pro forma weighted average shares outstanding

       34,634,124     
    

 

 

   

See accompanying notes.

 

F-5


ContraFect Corporation

(A Development Stage Company)

Statements of Convertible Preferred Stock and Stockholders’ (Deficit) Equity

 

    Series A
Convertible
Preferred Stock
    Series B
Convertible
Preferred
Stock
    Series C
Convertible
Preferred Stock
    Common Stock     Additional
Paid-In

Capital
    Stock
Subscriptions

Receivable
    Loan
Receivable-
Officer
    Accumulated
Deficit
    Stockholders’
Equity
(Deficit)
 
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount            

Issuance of common stock for cash

    —        $ —          —        $ —          —        $ —          1,662,500      $ 166      $ 168,996      $ —        $ —        $ —        $ 169,162   

Common stock subscription

    —          —          —          —          —          —          50,000        5        45        (50     —          —          —     

Share-based compensation

    —          —          —          —          —          —          —          —          15        —          —          —          15   

Net loss for the period March 17, 2008 (Inception) through December 31, 2008

    —          —          —          —          —          —          —          —          —          —          —          (313,023     (313,023
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2008

    —          —          —          —          —          —          1,712,500        171        169,056        (50     —          (313,023     (143,846

Payment of common stock subscription

    —                          50        —          —          50   

Issuance of preferred stock for cash

    875,000        875,000        —          —          —          —          —          —          —          —          —          —          —     

Issuance of common stock for cash

    —          —          —          —          —          —          1,096,000        110        2,082        —          —          —          2,192   

Issuance of preferred stock for services

    50,000        50,000        —          —          —          —          —          —          —          —          —          —          —     

Issuance of common stock for services

    —          —          —          —          —          —          453,000        45        861        —          —          —          906   

Conversion of notes payable to preferred stock

    25,000        25,000        —          —          —          —          —          —          —          —          —          —          —     

Conversion of notes payable and accrued interest to common stock

    —          —          —          —          —          —          781,667        78        237,422        —          —          —          237,500   

Beneficial conversion cost associated with notes payable

    —          —          —          —          —          —          —          —          127,027        —          —          —          127,027   

Issuance of preferred stock for interest owed

    1,307        1,307        —          —          —          —          —          —          —          —          —          —          —     

Financing cost of sale of preferred stock

    —          (109,000     —          —          —          —            —          —            —          —          —     

Issuance of warrants related to sale of preferred stock

    —          (9,770     —          —          —          —          —          —          9,770        —          —          —          9,770   

Share-based compensation

    —          —          —          —          —          —          —          —          24,854        —          —          —          24,854   

Net loss for the year ended December 31, 2009

    —          —          —          —          —          —          —          —          —          —          —          (1,018,096     (1,018,096
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-6


    Series A
Convertible
Preferred Stock
    Series B
Convertible
Preferred Stock
    Series C
Convertible
Preferred Stock
    Common Stock     Additional
Paid-In

Capital
    Stock
Subscriptions

Receivable
    Loan
Receivable-
Officer
    Accumulated
Deficit
    Stockholders’
Equity
(Deficit)
 
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount            

Balance, December 31, 2009

    951,307        832,537        —          —          —          —          4,043,167        404        571,072        —          —          (1,331,119     (759,643

Issuance of preferred stock for cash

    1,173,693        1,173,693        4,651,163        12,000,000        —          —          —          —          —          —          —          —          —     

Issuance of common stock upon exercise of stock option

    —          —          —          —          —          —          10,000        1        4,999        —          —          —          5,000   

Issuance of common stock for services

    —          —          —          —          —          —          120,000        12        11,988        —          —          —          12,000   

Issuance of preferred stock for license

    75,000        75,000        —          —          —          —          —          —          —          —          —          —          —     

Share-based compensation

    —          —          —          —          —          —          —          —          186,515        —          —          —          186,515   

Issuance of warrants for services

    —          —          —          —          —          —          —          —          13,182        —          —          —          13,182   

Financing cost of sale of preferred stock

    —          (82,000     —          (1,252,424     —          —          —          —          —          —          —          —          —     

Issuance of warrants related to sale of preferred stock

    —          (34,947     —          (571,826     —          —          —          —          606,773        —          —          —          606,773   

Issuance of common stock for dividend on Series A preferred stock

    —          —          —          —          —          —          57,000        6        (6     —          —          —          —     

Net loss for the year ended December 31, 2010

    —          —          —          —          —          —          —          —          —          —          —          (2,988,707     (2,988,707
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2010

    2,200,000        1,964,283        4,651,163        10,175,750        —          —          4,230,167        423        1,394,523        —          —          (4,319,826     (2,924,880

Issuance of common stock upon exercise of
warrants

    —          —          —          —          —          —          2,200,000        220        219,780        —          —          —          220,000   

Issuance of common stock upon exercise of stock option

    —          —          —          —          —          —          10,000        1        4,999        —          —          —          5,000   

Issuance of common stock for services

    —          —          —          —          —          —          605,010        61        151,400        —          —          —          151,461   

Issuance of preferred stock for cash

    —          —          —          —          6,146,374        20,283,034        —          —          —          —          —          —          —     

Issuance of preferred stock for license, September

    —          —          —          —          30,303        100,000        —          —          —          —          —      &nbs