PRER14A
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No. 1)

 

 

Filed by the Registrant  ☒

Filed by a Party other than the Registrant  ☐

Check the appropriate box:

 

Preliminary Proxy Statement

 

Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

Definitive Proxy Statement

 

Definitive Additional Materials

 

Soliciting Material under §240.14a-12

GRAYBUG VISION, INC.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

 

No fee required.

 

Fee paid previously with preliminary materials.

 

Fee computed on table in exhibit required by Item 25(b) per Exchange Act Rules 14a6(i)(1) and 0-11.

 

 

 


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PRELIMINARY PROXY STATEMENT DATED JANUARY 20, 2023—SUBJECT TO COMPLETION

 

LOGO

Dear Graybug Stockholders:

You are cordially invited to attend the special meeting of the stockholders of Graybug Vision, Inc., a Delaware corporation (“Graybug”), which will be held at [●], Pacific Time, on [●], 2023 (the “special meeting”). The special meeting will be a virtual stockholder meeting, conducted solely through remote audio access via a webcast at www.proxydocs.com/GRAY. In order to attend the virtual special meeting and vote online, you will need the 12-digit control number included on your proxy card or on the instructions that accompanied your proxy materials. This is an important special meeting that affects your investment in Graybug.

On November 21, 2022, Graybug, Camaro Merger Sub, Inc., a wholly owned subsidiary of Graybug, and CalciMedica, Inc., a Delaware corporation (“CalciMedica”), entered into an Agreement and Plan of Merger and Reorganization (the “merger agreement”), pursuant to which Camaro Merger Sub, Inc. will merge with and into CalciMedica with CalciMedica surviving as a wholly owned subsidiary of Graybug (the “merger”).

Under the terms of the merger agreement, at the effective time of the merger, each share of CalciMedica’s capital stock (after giving effect to the automatic conversion of all shares of CalciMedica preferred stock into shares of CalciMedica common stock, the automatic exercise of certain CalciMedica warrants to purchase shares of CalciMedica capital stock in accordance with their terms and the conversion of CalciMedica convertible promissory notes, as may be amended, into CalciMedica common stock pursuant to their terms, and excluding any shares held as treasury stock by CalciMedica or held or owned by Graybug or any subsidiary of Graybug or CalciMedica and any dissenting shares), will be converted into the right to receive a number of shares of Graybug’s common stock, par value $0.0001 per share (“Graybug common stock”), equal to the exchange ratio, which will be calculated based on the total number of shares outstanding of Graybug common stock and CalciMedica common stock immediately prior to the effective time of the merger, in each case, on a fully-diluted basis using the treasury stock method and excluding out-of-the-money options and warrants, and based on the net cash of Graybug as of the closing of the merger. Immediately following the effective time of the merger, CalciMedica’s equityholders are expected to own or hold rights to acquire 71.4% of the combined company and Graybug’s equityholders are expected to own or hold rights to acquire 28.6% of the combined company, in each case, on a fully-diluted basis using the treasury stock method and excluding out-of-the-money options and warrants, and subject to certain assumptions, including, but not limited to, (a) Graybug’s net cash as of the closing of the merger being $25 million, (b) a closing date of February 15, 2023, and (c) CalciMedica issuing approximately 20.5 million shares of common stock in a private placement financing to be conducted by CalciMedica immediately prior to the closing of the merger (the “private placement”). Based on the foregoing assumptions, the exchange ratio is expected to be 0.4073, subject to certain adjustments including based on Graybug’s net cash at closing, the closing date, the number of shares of CalciMedica’s common stock issued in the private placement and to account for the effect of a reverse stock split of Graybug’s common stock at a ratio to be mutually agreed to by Graybug and CalciMedica in the range of one new share for every [●] to [●] shares outstanding (or any whole number in between) to be implemented immediately prior to and contingent upon the consummation of the merger as discussed in this proxy statement. Following the merger, Graybug will change its name to “CalciMedica, Inc.” (the “combined company”).

Each share of Graybug common stock, option to purchase Graybug common stock, warrant to purchase Graybug common stock and Graybug restricted stock unit that is issued and outstanding at the effective time of the merger will remain issued and outstanding and will be unaffected by the merger to the extent they are not, for restricted stock units, accelerated (and settled) in connection with the merger. In connection with the merger, each outstanding and unexercised option and unexercised warrant to purchase shares of CalciMedica common stock at the effective time of the merger will be assumed by Graybug and converted into an option and warrant, respectively, to purchase Graybug common stock, with the number of shares and exercise price being appropriately adjusted to reflect the exchange ratio between CalciMedica common stock and Graybug common stock determined in accordance with the merger agreement.


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For a complete description of how the ownership percentages and exchange ratio will be determined at the effective time of the merger, please see the section entitled “The Merger Agreement—Merger Consideration and Exchange Ratio” beginning on page [●] of this proxy statement.

In addition, on November 21, 2022, in connection with the private placement, CalciMedica entered into a securities purchase agreement with the purchasers named therein (the “private placement investors”), pursuant to which the private placement investors agreed to purchase and CalciMedica agreed to sell shares of CalciMedica common stock for an aggregate purchase price of $10.3 million. The closing of the private placement is expected to occur immediately prior to the closing of the merger.

At the special meeting:

 

   

Graybug will ask its stockholders to approve the issuance of Graybug common stock pursuant to the merger agreement, which approval is necessary to complete the transactions contemplated by the merger agreement. The issuance of these shares requires the approval of Graybug’s stockholders under Graybug’s currently effective certificate of incorporation. Pursuant to the rules of The Nasdaq Stock Market LLC (the “Nasdaq rules”), the issuance of Graybug common stock in the merger also requires the approval of Graybug’s stockholders because it exceeds 20% of the number of shares of Graybug’s common stock outstanding prior to the issuance. Furthermore, the issuance of the shares requires the approval of Graybug’s stockholders under the Nasdaq rules because it will result in a “change of control” of Graybug (the “share issuance proposal” or “Proposal 1”);

 

   

Graybug will ask its stockholders to approve an amended and restated certificate of incorporation, including to effect a reverse stock split of Graybug common stock (the “reverse stock split”), which approval is also necessary to complete the transactions contemplated by the merger agreement. Upon the effectiveness of the amended and restated certificate of incorporation effecting the reverse stock split, the outstanding shares of Graybug common stock will be combined into a lesser number of shares at a ratio to be determined by Graybug’s board of directors (the “Graybug Board”) and agreed to by CalciMedica in the range of one new share for every [●] to [●] shares outstanding (or any whole number in between) prior to the effective time of such amended and restated certificate of incorporation and public announcement by Graybug (the “charter proposal” or “Proposal 2”);

 

   

Graybug will ask its stockholders to approve its 2023 equity incentive plan (the “equity incentive plan proposal” or “Proposal 3”);

 

   

Graybug will ask its stockholders to approve its 2023 employee stock purchase plan (the “ESPP proposal” or “Proposal 4”); and

 

   

Graybug will ask its stockholders, if necessary, if a quorum is present, to approve an adjournment or postponement of the special meeting for the purpose of soliciting additional proxies to approve the share issuance proposal and/or the charter proposal (the “adjournment proposal” or “Proposal 5”).

As described in the accompanying proxy statement, certain of Graybug’s stockholders who in the aggregate own approximately 45% of the shares of Graybug common stock outstanding as of immediately prior to the date of the merger agreement are parties to support agreements with CalciMedica, whereby such stockholders have agreed to vote their shares in favor of the adoption or approval, among other things, of each of Proposals 1 through 5, subject to the terms of the support agreements.

After careful consideration, the Graybug Board has unanimously approved the merger agreement and the proposals referred to above, and has determined that they are advisable, fair and in the best interests of Graybug’s stockholders. Accordingly, the Graybug Board unanimously recommends that stockholders vote “FOR” the share issuance proposal, “FOR” the charter proposal, “FOR” the equity incentive plan proposal, “FOR” the ESPP proposal, and “FOR” the adjournment proposal.

Shares of Graybug common stock are currently listed on The Nasdaq Global Market under the symbol “GRAY.” After completion of the merger, it is expected that Graybug common stock will trade on The Nasdaq Global Market under the symbol “CALC.”


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More information about Graybug, CalciMedica and the proposed transactions are contained in the accompanying proxy statement. Graybug urges you to read the proxy statement carefully and in its entirety. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER “RISK FACTORS” BEGINNING ON PAGE [●].

Your vote is important. Whether or not you expect to attend the virtual special meeting, please complete, date, sign and promptly return the accompanying proxy card in the enclosed postage paid envelope to ensure that your shares will be represented and voted at the special meeting. You can also vote your shares via the internet or by telephone as provided in the instructions set forth in the enclosed proxy card. If you hold your shares in “street name” through a broker, you should follow the procedures provided by your broker.

Graybug is excited about the opportunities the merger brings to its stockholders, and we thank you for your consideration and continued support.

 

Yours sincerely,

 

Frederic Guerard, Pharm.D.

President and Chief Executive Officer

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved the merger described in this proxy statement or the Graybug common stock to be issued in connection with the merger or determined if this proxy statement is accurate or adequate. Any representation to the contrary is a criminal offense.

This proxy statement is dated                 , 2023 and is first being mailed to stockholders on or about                 , 2023.


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PRELIMINARY PROXY STATEMENT DATED JANUARY 20, 2023—SUBJECT TO COMPLETION

203 REDWOOD SHORES PARKWAY, SUITE 620

REDWOOD CITY, CALIFORNIA 94065

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON [], 2023.

To the Stockholders of Graybug Vision, Inc.:

Notice is hereby given that a special meeting of stockholders of Graybug Vision, Inc. (“Graybug”) will be held virtually, conducted via live audio webcast at [●], Pacific Time, on [●], 2023, at www.proxydocs.com/GRAY, to consider and act upon the following matters:

 

   

To approve the issuance of Graybug’s common stock, par value $0.0001 per share (“Graybug common stock”), pursuant to the Agreement and Plan of Merger and Reorganization, dated as of November 21, 2022 (the “merger agreement”), by and among Graybug, Camaro Merger Sub, Inc. (the “merger subsidiary”), a wholly-owned subsidiary of Graybug, and CalciMedica, Inc. (“CalciMedica”), and the resulting change of control of Graybug pursuant to the rules of The Nasdaq Stock Market LLC (the “Nasdaq rules”) (such proposal referred to as the “share issuance proposal” or “Proposal 1”);

 

   

To approve an amended and restated certificate of incorporation of Graybug (the “charter proposal” or “Proposal 2”);

 

   

To approve Graybug’s 2023 equity incentive plan (the “equity incentive plan proposal” or “Proposal 3”);

 

   

To approve Graybug’s 2023 employee stock purchase plan (the “ESPP proposal” or “Proposal 4”); and

 

   

To approve an adjournment or postponement of the special meeting for the purpose of soliciting additional proxies to approve Proposals 1 and/or 2 (the “adjournment proposal” or “Proposal 5”).

If Graybug is to complete the merger with CalciMedica, stockholders must approve Proposals 1 and 2. The approval of Proposal 3, 4 and/or 5 is not a condition to the completion of the merger with CalciMedica.

Graybug common stock is the only type of security entitled to vote at the special meeting. Graybug’s board of directors (the “Graybug Board”) has fixed [●] as the record date for the determination of stockholders entitled to notice of, and to vote at, the special meeting and any adjournment or postponement thereof. Only holders of record of shares of Graybug common stock at the close of business on the record date are entitled to notice of, and to vote at, the special meeting. At the close of business on the record date, Graybug had [●] shares of common stock outstanding and entitled to vote at the special meeting. Each holder of record of shares of common stock on the record date will be entitled to one vote for each share held on all matters to be voted upon at the special meeting.

Your vote is important. The affirmative vote of a majority of the votes cast virtually or by proxy at the virtual special meeting is required for approval of Proposals 1, 3, 4 and 5. The affirmative vote of the holders of a majority of the outstanding shares of Graybug common stock entitled to vote at the special meeting is required for approval of Proposal 2. Whether or not you plan to attend the virtual special meeting virtually, please submit your proxy promptly by telephone or via the internet in accordance with the instructions on the enclosed proxy card or complete, date, sign and promptly return the accompanying proxy card in the enclosed postage paid envelope to ensure that your shares will be represented and voted at the special meeting. If you date, sign and return your proxy card without indicating how you wish to vote, your proxy will be voted in favor of Proposals 1 through 5.


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By Order of the Board of Directors of

Graybug Vision, Inc.

 

Frederic Guerard, Pharm.D.

President and Chief Executive Officer

[●], 2023

Redwood City, California

THE GRAYBUG BOARD HAS DETERMINED AND BELIEVES THAT EACH OF THE PROPOSALS OUTLINED ABOVE IS ADVISABLE, FAIR AND IN THE BEST INTERESTS OF GRAYBUG AND ITS STOCKHOLDERS AND HAS UNANIMOUSLY APPROVED EACH SUCH PROPOSAL. THE GRAYBUG BOARD RECOMMENDS THAT GRAYBUG’S STOCKHOLDERS VOTE “FOR” PROPOSALS 1, 2, 3, 4 AND 5.


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REFERENCES TO ADDITIONAL INFORMATION

This proxy statement under Section 14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules thereunder, contains a notice of meeting with respect to the special meeting of stockholders at which Graybug’s stockholders will consider and vote on the proposals to approve the issuance of Graybug common stock issuable to the holders of CalciMedica’s common stock pursuant to the merger agreement described in this proxy statement and the resulting “change of control” of Graybug under the Nasdaq rules, the amendment and restatement of Graybug’s certificate of incorporation, including to effect a reverse stock split of Graybug common stock to maintain the listing of Graybug common stock on Nasdaq and consummate the merger, the adoption of Graybug’s 2023 equity incentive plan, the adoption of Graybug’s 2023 employee stock purchase plan, and an adjournment or postponement of the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposals 1 and/or 2.

Additional business and financial information about Graybug can be found in documents previously filed by Graybug with the U.S. Securities and Exchange Commission (the “SEC”). This information is available to you without charge on the SEC’s website (www.sec.gov). Graybug stockholders will also be able to obtain the proxy statement, free of charge, from Graybug by requesting copies in writing using the following contact information:

Graybug Vision, Inc.

c/o Corporate Secretary

203 Redwood Shores Parkway, Suite 620

Redwood City, CA 94065

To ensure timely delivery of these documents, any request should be made no later than                 , 2023 to receive them before the special meeting. See “Where You Can Find Additional Information” beginning on page [●].


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TABLE OF CONTENTS

 

QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER

     1  

SUMMARY

     10  

The Companies

     10  

The Combined Company

     11  

Summary of the Merger

     11  

Graybug’s Reasons for the Merger; Recommendations of the Graybug Board

     11  

Opinion of Graybug’s Financial Advisor

     13  

Overview of the Merger Agreement

     13  

Treatment of CalciMedica Stock Options

     14  

Treatment of CalciMedica Warrants

     15  

Treatment of Graybug Stock Options and Restricted Stock Units

     15  

Conditions to the Completion of the Merger

     15  

Non-Solicitation

     16  

Termination and Termination Fees

     16  

Expense Reimbursement

     16  

Support Agreements

     16  

Lock-Up Agreements

     17  

Private Placement

     17  

Management Following the Merger

     17  

The Board of Directors Following the Merger

     18  

Interests of Graybug’s Directors and Executive Officers in the Merger

     18  

Federal Securities Law Consequences; Resale Restrictions

     18  

Material U.S. Federal Income Tax Consequences of the Merger and the Reverse Stock Split

     19  

Regulatory Approvals

     19  

Anticipated Accounting Treatment

     19  

Appraisal Rights

     19  

Summary of Risk Factors

     19  

MARKET PRICE AND DIVIDEND INFORMATION

     22  

RISK FACTORS

     23  

Risks Related to the Merger

     23  

Risks Related to the Reverse Stock Split and Amended and Restated Certificate of Incorporation

     29  

Risks Related to Graybug

     30  

Risks Related to CalciMedica

     30  

Risks Related to the Combined Company

     85  

CAUTIONARY INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

     94  

THE MERGER

     96  

Graybug’s Reasons for the Merger; Recommendations of the Graybug Board

     104  

Opinion of Graybug’s Financial Advisor

     108  

Certain Unaudited Financial Projections and Liquidation Analysis

     119  

Interests of Graybug’s Directors and Executive Officers in the Merger

     122  

Federal Securities Law Consequences; Resale Restrictions

     127  

Material U.S. Federal Income Tax Consequences of the Merger and the Reverse Stock Split

     127  

THE SPECIAL MEETING

     130  

Date, Time and Place

     130  

Purpose of the Special Meeting

     130  

Record Date; Shares Outstanding and Entitled to Vote

     130  

Quorum

     130  

How to Vote Your Shares

     131  

How to Change Your Vote

     131  

Proxies; Counting Your Vote

     131  

Appraisal Rights

     132  

Voting by Graybug’s Directors, Executive Officers and Certain Stockholders

     132  

Solicitation of Proxies

     132  

 

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THE MERGER AGREEMENT

     133  

Structure

     133  

Completion and Effectiveness of the Merger

     133  

Merger Consideration and Exchange Ratio

     134  

Treatment of CalciMedica Stock Options

     137  

Treatment of CalciMedica Warrants

     137  

Treatment of Graybug Stock Options and Restricted Stock Units

     138  

Directors and Executive Officers of the Combined Company Following the Merger

     138  

Conditions to the Completion of the Merger

     138  

Calculation of Graybug Net Cash

     142  

Potential Asset Disposition

     143  

Representations and Warranties

     144  

Non-Solicitation

     145  

Graybug Stockholder Meeting

     147  

CalciMedica Stockholder Action by Written Consent

     148  

Appraisal Rights and Dissenters’ Rights

     149  

Covenants; Operation of Business Pending the Merger

     149  

Termination and Termination Fees

     153  

Other Agreements

     155  

Amendment of Merger Agreement

     156  

AGREEMENTS RELATED TO THE MERGER

     157  

Support Agreements

     157  

Lock-Up Agreements

     157  

MATTERS BEING SUBMITTED TO A VOTE OF GRAYBUG’S STOCKHOLDERS

     159  

Proposal 1: Approval of the Issuance of Graybug common stock in the Merger and the Resulting Change of Control under the Nasdaq Rules

     159  

Proposal 2: Approval of the Amended and Restated Certificate of Incorporation

     161  

Reasons for the Amendments

     162  

Reverse Stock Split

     163  

Proposal 3: Approval of 2023 Equity Incentive Plan

     170  

Proposal 4: Approval of 2023 Employee Stock Purchase Plan

     179  

Proposal 5: Approval of Possible Adjournment of the Special Meeting

     183  

GRAYBUG’S BUSINESS

     184  

GRAYBUG’S PROPERTY

     184  

CALCIMEDICA’S BUSINESS

     185  

Overview

     185  

Our Strategy

     190  

Our Team

     191  

Our Science

     191  

Advantages to Our Approach

     193  

Auxora, a Selective CRAC Channel Inhibitor

     194  

Sales and Marketing

     224  

Manufacturing

     224  

Competition

     225  

Intellectual Property

     226  

Government Regulation and Product Approval

     227  

U.S. Drug Development Process

     227  

Legal Proceedings

     243  

Facilities

     244  

Employees and Human Capital Resources

     244  

GRAYBUG’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     245  

 

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT GRAYBUG’S MARKET RISK

     246  

CALCIMEDICA’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     247  

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

     264  

EXECUTIVE OFFICERS AND DIRECTORS FOLLOWING THE MERGER

     279  

DESCRIPTION OF GRAYBUG’S CAPITAL STOCK

     287  

Authorized Capital Stock

     287  

Common Stock

     287  

Listing

     288  

Transfer Agent and Registrar

     288  

PRINCIPAL STOCKHOLDERS OF GRAYBUG

     291  

PRINCIPAL STOCKHOLDERS OF CALCIMEDICA

     294  

PRINCIPAL STOCKHOLDERS OF THE COMBINED COMPANY

     297  

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     298  

HOUSEHOLDING

     298  

FUTURE STOCKHOLDER PROPOSALS

     299  

INFORMATION INCORPORATED BY REFERENCE

     300  

INDEX TO CALCIMEDICA’S FINANCIAL STATEMENTS

     F-1  

ANNEX A—MERGER AGREEMENT

     A-1  

ANNEX B—PROPOSED AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF GRAYBUG

     B-1  

ANNEX C—OPINION OF GRAYBUG’S FINANCIAL ADVISOR

     C-1  

ANNEX D—2023 EQUITY INCENTIVE PLAN

     D-1  

ANNEX E—2023 EMPLOYEE STOCK PURCHASE PLAN

     E-1  

 

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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER

Except as specifically indicated, the following information and all other information contained in this proxy statement does not give effect to the reverse stock split described in Proposal 2.

The following section provides answers to frequently asked questions about the special meeting of stockholders and the merger. This section, however, only provides summary information. These questions and answers may not address all issues that may be important to you as a stockholder. For a more complete response to these questions and for additional information, please refer to the cross-referenced pages below. You should carefully read this entire proxy statement, including each of the annexes.

 

Q:

What is the merger?

 

A:

Graybug Vision, Inc. a Delaware corporation (“Graybug”), CalciMedica, Inc., a Delaware corporation (“CalciMedica”), and Camaro Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of Graybug formed by Graybug in connection with the merger (the “merger subsidiary”), have entered into an Agreement and Plan of Merger and Reorganization, dated as of November 21, 2022, as may be amended from time to time (the “merger agreement”), that contains the terms and conditions of the proposed business combination of Graybug and CalciMedica. Under the merger agreement, at the effective time of the merger, the merger subsidiary will merge with and into CalciMedica, with CalciMedica surviving as a wholly owned subsidiary of Graybug (the “merger”). Following the merger, Graybug will change its name to “CalciMedica, Inc.” (the “combined company”). The combined company is expected to trade on The Nasdaq Global Market under the ticker symbol “CALC.”

Under the terms of the merger agreement, at the effective time of the merger, each share of CalciMedica’s capital stock (after giving effect to the automatic conversion of all shares of CalciMedica preferred stock into shares of CalciMedica common stock (“preferred stock conversion”), the automatic exercise of certain CalciMedica warrants to purchase shares of CalciMedica capital stock in accordance with their terms (the “CalciMedica warrant exercises”) and the conversion of CalciMedica convertible promissory notes, as may be amended, into CalciMedica common stock pursuant to their terms (“convertible promissory note conversion”), and excluding any shares held as treasury stock by CalciMedica or held or owned by Graybug or any subsidiary of Graybug or CalciMedica and any dissenting shares), will be converted into the right to receive a number of shares of Graybug’s common stock, par value $0.0001 per share (“Graybug common stock”), equal to the exchange ratio, which will be calculated based on the total number of shares outstanding of Graybug common stock and CalciMedica common stock immediately prior to the effective time of the merger, in each case, on a fully-diluted basis (unless stated otherwise, references to “fully diluted” shares in this proxy statement are calculated pursuant to the treasury stock method), and based on the net cash of Graybug as of the closing of the merger (the “closing”). Immediately following the effective time of the merger, CalciMedica’s equityholders are expected to own or hold rights to acquire 71.4% of the combined company and Graybug’s equityholders are expected to own or hold rights to acquire 28.6% of the combined company, in each case, on a fully diluted basis, and subject to certain assumptions, including, but not limited to, (a) Graybug’s net cash as of the closing of the merger being $25 million, (b) a closing date of February 15, 2023, and (c) and CalciMedica issuing approximately 20.5 million shares of common stock in the private placement. The post-closing equity split is subject to certain adjustments including based on Graybug’s net cash at closing, the closing date, the number of shares of CalciMedica’s common stock issued in the private placement (as defined below) and to account for the effect of a reverse stock split.

Each share of Graybug common stock, option to purchase Graybug common stock, warrant to purchase Graybug common stock and Graybug restricted stock unit that is issued and outstanding at the effective time of the merger will remain issued and outstanding and will be unaffected by the merger, other than adjustments for the reverse stock split and those shares subject to acceleration upon termination of

 

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employment. In connection with the merger, each outstanding and unexercised option and warrant to purchase shares of CalciMedica common stock will be assumed by Graybug and converted into an option and warrant, respectively, to purchase Graybug common stock, with necessary adjustments to reflect the exchange ratio.

 

Q:

What will happen to Graybug if, for any reason, the merger with CalciMedica does not close?

 

A:

Graybug has invested significant time and incurred, and expects to continue to incur, significant expenses related to the proposed merger with CalciMedica. Although Graybug’s board of directors (the “Graybug Board”) may elect, among other things, to attempt to complete another strategic transaction if the merger with CalciMedica does not close, the Graybug Board may instead divest all or a portion of Graybug’s business or take steps necessary to liquidate or dissolve Graybug’s business and assets if a viable alternative strategic transaction is not available. If Graybug decides to dissolve and liquidate its assets, Graybug would be required to pay all of its contractual obligations, and to set aside certain reserves for potential future claims, and there can be no assurance as to the amount or the timing of such a liquidation and distribution of available cash left to distribute to stockholders after paying the obligations of Graybug and setting aside funds for reserves.

 

Q:

Why is Graybug proposing to merge with CalciMedica?

 

A:

The Graybug Board considered a number of factors that supported its decision to approve the merger agreement. In the course of its deliberations, the Graybug Board also considered a variety of risks and other countervailing factors related to entering into the merger agreement.

For a more complete discussion of Graybug’s reasons for the merger, please see the section entitled “The Merger—Graybug’s Reasons for the Merger; Recommendations of the Graybug Board” beginning on page [●] of this proxy statement.

 

Q:

What is required to consummate the merger?

 

A:

The consummation of the proposed merger with CalciMedica is subject to a number of closing conditions, including the conditions that Graybug’s stockholders approve the issuance of shares of Graybug common stock in the merger and the resulting “change of control” of Graybug under the rules of The Nasdaq Stock Market LLC (the “Nasdaq rules”), which require the affirmative vote of a majority of the votes cast virtually or by proxy at the virtual special meeting, and the amended and restated certificate of incorporation of Graybug, which requires the affirmative vote of a majority of the outstanding shares of Graybug common stock entitled to vote on such matter.

For a more complete description of the closing conditions under the merger agreement, please see the section entitled “The Merger Agreement—Conditions to the Completion of the Merger” beginning on page [●] of this proxy statement.

 

Q:

Are there any federal or state regulatory requirements that must be complied with or federal or state regulatory approvals or clearances that must be obtained in connection with the merger?

 

A:

Neither Graybug nor CalciMedica is required to make any filings or to obtain any approvals or clearances from any antitrust regulatory authorities in the United States or other countries to consummate the merger. In the United States, Graybug must comply with applicable federal and state securities laws and the Nasdaq rules in connection with the issuance of shares of Graybug common stock in the merger, including the filing with the SEC of this proxy statement and the required stockholder approval for the resulting “change of control” of Graybug under the Nasdaq rules. Prior to consummation of the merger, Graybug intends to file an initial listing application with Nasdaq pursuant to Nasdaq’s “reverse merger” rules and to effect the initial listing of Graybug common stock issuable in connection with the merger.

 

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Q:

When will the exchange ratio be final?

 

A:

At least 15 calendar days prior to the date of the special meeting, Graybug and CalciMedica will mutually agree upon the anticipated date for closing (the “Anticipated Closing Date”). At least ten (10) calendar days prior to the date of the special meeting, Graybug shall deliver to CalciMedica a schedule setting forth, in reasonable detail, the estimated calculation of the Graybug net cash as of the Anticipated Closing Date. Following the final determination of the Graybug net cash as of the Anticipated Closing Date, Graybug and CalciMedica will issue a press release setting forth the anticipated exchange ratio, which the parties have agreed to publicly disclose as early as practicable prior to the special meeting.

 

Q:

What will CalciMedica’s stockholders receive in the merger?

 

A:

At the effective time of the merger, each share of CalciMedica common stock outstanding immediately prior to the effective time of the merger will be converted into the right to receive approximately 0.4073 shares of Graybug common stock, subject to certain adjustments including based on Graybug’s net cash at closing, the number of shares of CalciMedica’s common stock issued in the private placement and to account for the effect of a reverse stock split of Graybug’s common stock at a ratio to be mutually agreed to by Graybug and CalciMedica to be implemented immediately prior to and contingent upon the consummation of the merger. In connection with the merger, each outstanding and unexercised option and warrant to purchase shares of CalciMedica common stock at the effective time will be assumed by Graybug and converted into an option and warrant, respectively, to purchase Graybug common stock, with necessary adjustments to reflect the exchange ratio.

For a more complete discussion of the exchange ratio at the effective time of the merger, please see the section entitled “The Merger Agreement—Merger Consideration and Exchange Ratio” beginning on page [●] of this proxy statement.

 

Q:

What will Graybug’s stockholders receive in the merger?

 

A:

Graybug’s stockholders will continue to own and hold their existing shares of Graybug common stock, subject to adjustment for the reverse stock split. Each option to purchase Graybug common stock, each warrant to purchase Graybug common stock and each Graybug restricted stock unit that is issued and outstanding at the effective time of the merger will remain issued and outstanding and will be unaffected by the merger, other than adjustments for the reverse stock split.

 

Q:

What is the private placement?

 

A:

On November 21, 2022, CalciMedica entered into a securities purchase agreement (the “securities purchase agreement”) with the purchasers named therein (the “private placement investors”), pursuant to which the private placement investors agreed to purchase and CalciMedica agreed to sell shares of CalciMedica common stock for an aggregate purchase price of $10.3 million. In connection with the private placement, CalciMedica entered into a registration rights agreement with the private placement investors, pursuant to which CalciMedica granted certain registration rights with respect to the shares sold to the private placement investors in the private placement. The closing of the private placement is expected to occur immediately prior to the closing of the merger. The closing of the private placement is not a condition to closing the merger.

 

Q:

What are the material U.S. federal income tax consequences of the merger and the reverse stock split to Graybug stockholders?

 

A:

Graybug and CalciMedica intend that the merger to qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”). Graybug stockholders will

 

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  not sell, exchange or dispose of any shares of Graybug common stock as a result of the merger. Thus, there will be no material U.S. federal income tax consequences to Graybug stockholders as a result of the merger. Graybug stockholders should not recognize gain or loss upon the reverse stock split, except to the extent a Graybug stockholder receives cash in lieu of a fractional share of Graybug common stock.

For a more complete description of the material U.S. federal income tax consequences of the reverse stock split and merger, please see the section entitled “The Merger—Material U.S. Federal Income Tax Consequences of the Merger and the Reverse Stock Split” beginning on page [●] of this proxy statement.

 

Q:

Why is Graybug seeking stockholder approval to issue shares of Graybug common stock to existing stockholders of CalciMedica in the merger?

 

A:

Because Graybug common stock is listed on Nasdaq, we are subject to the Nasdaq rules. Rule 5635(a) of the Nasdaq rules requires stockholder approval with respect to issuances of Graybug common stock, among other instances, when the shares to be issued are being issued in connection with the acquisition of the stock or assets of another company and are equal to 20% or more of the outstanding shares of Graybug common stock before the issuance. Rule 5635(b) of the Nasdaq rules also requires stockholder approval when any issuance or potential issuance will result in a “change of control” of the issuer. Although Nasdaq has not adopted any rule on what constitutes a “change of control” for purposes of Rule 5635(b), Nasdaq has previously indicated that the acquisition of, or right to acquire, by a single investor or affiliated investor group, as little as 20% of the common stock (or securities convertible into or exercisable for common stock) or voting power of an issuer could constitute a change of control. Rule 5635(d) of the Nasdaq rules also requires stockholder approval for a transaction other than a public offering involving the sale, issuance or potential issuance by an issuer of common equity securities (or securities convertible into or exercisable for common equity securities) at a price that is less than market value of the stock if the number of equity securities to be issued is or may be equal to 20% or more of the common equity securities, or 20% or more of the voting power, outstanding before the issuance.

In the case of the merger, the number of shares of Graybug common stock to be issued will be based on, among other factors, the reverse stock split ratio, the total number of outstanding shares of Graybug common stock and shares of CalciMedica common stock, each on a fully-diluted basis using the treasury stock method and excluding out-of-the-money options and warrants, the amount of Graybug net cash, the closing date and the number of shares to be issued in the private placement. Based on the assumptions set forth in this proxy statement, Graybug is expected to issue approximately 63.2 million shares of Graybug common stock on a fully diluted basis, and Graybug common stock to be issued pursuant to the merger agreement will represent greater than 20% of its voting stock. Accordingly, Graybug is seeking stockholder of approval of the issuance pursuant to the merger agreement under the Nasdaq rules.

 

Q:

What is the reverse stock split and why is it necessary?

 

A:

Prior to the effective time of the merger, by virtue of the filing of an amended and restated certificate of incorporation in the form attached hereto as Annex B and incorporated herein by reference, the outstanding shares of Graybug common stock will be combined into a lesser number of shares at a ratio in the range of one new share for every [●] to [●] shares outstanding (or any whole number in between) to be determined by the Graybug Board and agreed to by CalciMedica prior to the effective time and publicly announced by Graybug and identified in the amended and restated certificate of incorporation so filed. The Graybug Board believes that a reverse stock split may be desirable for a number of reasons. Graybug common stock is currently, and will be following the completion of the merger, listed on Nasdaq. According to the applicable Nasdaq rules, in order for Graybug common stock to continue to be listed on Nasdaq, Graybug must satisfy certain requirements established by Nasdaq. The Graybug Board expects that a reverse stock split of

 

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  Graybug common stock will increase the market price of Graybug common stock so that Graybug will be able to maintain compliance with the relevant Nasdaq listing requirements for the foreseeable future, although Graybug cannot assure holders of Graybug common stock that it will be able to do so.

 

Q:

Why am I receiving this proxy statement?

 

A:

You are receiving this proxy statement because you have been identified as a stockholder of Graybug as of the record date, and thus you are entitled to vote at Graybug’s special meeting. This document contains important information about the merger and the special meeting of Graybug and serves as a proxy statement of Graybug used to solicit proxies for the special meeting, and you should read it carefully.

 

Q:

How does the Graybug Board recommend that Graybug’s stockholders vote?

 

A:

After careful consideration, the Graybug Board unanimously recommends that Graybug’s stockholders vote:

 

   

FOR Proposal 1 to approve the issuance of Graybug common stock pursuant to the merger agreement and the resulting change of control of Graybug pursuant to the Nasdaq rules;

 

   

FOR Proposal 2 to approve an amended and restated certificate of incorporation of Graybug;

 

   

FOR Proposal 3 to approve Graybug’s 2023 equity incentive plan;

 

   

FOR Proposal 4 to approve Graybug’s 2023 employee stock purchase plan; and

 

   

FOR Proposal 5 to approve an adjournment or postponement of the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposals 1 and 2.

 

Q:

What risks should Graybug’s stockholders consider in deciding whether to vote in favor of the share issuance and the reverse stock split?

 

A:

Graybug’s stockholders should carefully read the section of this proxy statement entitled “Risk Factors” beginning on page [●], which sets forth certain risks and uncertainties related to the merger and reverse stock split, risks and uncertainties to which the combined company’s business will be subject, risks and uncertainties to which Graybug, as an independent company, is subject and risks and uncertainties to which CalciMedica, as an independent company, is subject.

 

Q:

When do you expect the merger to be consummated?

 

A:

The consummation of the merger will occur as promptly as practicable after the special meeting and following satisfaction or waiver of all closing conditions. Graybug and CalciMedica anticipate that the consummation of the merger will occur in the first quarter of 2023. However, the exact timing of the consummation of the merger is not yet known. For a more complete description of the closing conditions under the merger agreement, please see the section entitled “The Merger Agreement—Conditions to the Completion of the Merger” beginning on page [●] of this proxy statement.

 

Q:

What constitutes a quorum for purposes of the special meeting?

 

A:

The presence at the special meeting by means of remote communication in a manner authorized by the Graybug Board in its sole discretion, or represented by proxy, of the holders of a majority in voting power of the shares of common stock issued and outstanding and entitled to vote at the meeting will constitute a quorum for the transaction of business at the special meeting. The inspector of election appointed for the special meeting will determine whether a quorum is present. The inspector of election will treat abstentions as present for purposes of determining the presence of a quorum.

 

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If a quorum is not present, the only business that can be transacted at the special meeting is the adjournment or postponement of the meeting to another date or time.

 

Q:

What vote of our stockholders is required to approve each of the proposals?

 

A:

The affirmative vote of a majority of the votes cast virtually or by proxy at the virtual special meeting is required for approval of Proposals 1, 3, 4 and 5. The affirmative vote of the holders of a majority of the outstanding shares of Graybug common stock entitled to vote at the special meeting is required for approval of Proposal 2.

Votes will be counted by the inspector of election appointed for the meeting, who will separately count “FOR” and “AGAINST” votes, abstentions and any broker non-votes. Abstentions and broker non-votes will be treated as shares present for the purpose of determining the presence of a quorum for the transaction of business at the special meeting. Abstentions and broker non-votes will have no effect on Proposals 1, 3, 4 and 5, and will have the same effect as “AGAINST” votes for Proposal 2.

As of November 21, 2022, the directors and executive officers of Graybug owned or controlled approximately 9.9% of the outstanding shares of Graybug common stock entitled to vote at the special meeting. As of November 21, 2022, the Graybug stockholders that are party to support agreements, including the directors and executive officers of Graybug and certain other stockholders, owned an aggregate of 9,635,711 shares of Graybug common stock representing approximately 45% of the outstanding shares of Graybug common stock. Pursuant to the support agreements, these stockholders, including the directors and executive officers of Graybug and certain other stockholders, have agreed to vote all shares of Graybug common stock owned by them as of the record date in favor of Proposals 1 through 5, and against any competing Acquisition Proposal (as defined in the section of this proxy statement entitled “The Merger Agreement—Non-Solicitation”).

 

Q:

How will the reverse stock split and the merger affect restricted stock units and stock options and warrants to acquire Graybug common stock and Graybug’s stock option and incentive plans?

 

A:

All stock options and warrants to acquire shares of Graybug common stock and restricted stock units that are outstanding immediately prior to the effective time of the merger will remain outstanding following the effective time of the merger. As of the effective time of the reverse stock split, Graybug will adjust and proportionately decrease the number of shares of Graybug common stock that may be the subject of future grants under Graybug’s 2020 equity incentive plan and 2020 employee stock purchase plan. Additionally, as of the effective time of the reverse stock split, Graybug will adjust and proportionately decrease the number of shares of Graybug common stock subject to its outstanding stock options, warrants, and restricted stock units, and adjust and proportionately increase the exercise price of the outstanding stock options and warrants to acquire Graybug common stock. Pursuant to the terms of the merger agreement and Graybug’s 2020 equity incentive plan, the vesting of all of the restricted stock units and options granted to the directors and employees of Graybug will accelerate to render them vested in full prior to the closing of the merger.

 

Q:

What do I need to do now?

 

A:

You are urged to read this proxy statement carefully, including each of the annexes, and to consider how the merger affects you. If you are a holder of Graybug common stock as of the record date, please vote your shares as soon as possible so that your shares will be represented at the Graybug virtual special meeting. Please follow the instructions set forth on the enclosed proxy card or on the voting instruction form provided by the record holder of your shares if your shares are held in the name of your bank, broker or other nominee.

 

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Q:

What happens if I do not return a proxy card or otherwise fail to provide proxy instructions?

 

A:

The failure to return your proxy card or otherwise failure to provide proxy instructions will have the same effect as voting against Proposal 2, and your shares will not be counted for purposes of determining whether a quorum is present at the special meeting.

 

Q:

What is a “broker non-vote”?

 

A:

If a beneficial owner of shares of common stock held in “street name” by a bank, broker or other nominee does not provide the organization that holds its shares with specific voting instructions, then, under applicable rules, the organization that holds its shares may generally vote on “discretionary” matters but cannot vote on “non-discretionary” matters. If the organization that holds the beneficial owner’s shares does not receive instructions from such stockholder on how to vote its shares on any proposal to be voted on at the special meeting, that bank, broker or other nominee will inform the inspector of election at the special meeting that it does not have authority to vote on any proposal at the special meeting with respect to such shares, and, furthermore, such shares will not be deemed to be in attendance at the meeting. This is generally referred to as a “broker non-vote.” However, if the bank, broker or other nominee receives instructions from such stockholder on how to vote its shares as to at least one proposal but not all of the proposals, the shares will be voted as instructed on the proposal as to which voting instructions have been given but will not be voted on the other, uninstructed proposal(s).

 

Q:

How do I vote and what must I do to attend the Graybug virtual special meeting?

 

A:

You will be able to vote your shares and submit questions during the Graybug virtual special meeting webcast by logging in to the website www.proxydocs.com/GRAY. There will be no physical location for stockholders to attend.

In order to attend the virtual special meeting and vote online, you will need the 12-digit control number included on your proxy card or on the instructions that accompanied your proxy materials. The control number is designed to verify your identity and allow you to vote your shares of common stock at the special meeting or to vote by proxy prior to the special meeting. If you attend the special meeting and vote via the internet, your vote will revoke any proxy that you have previously submitted.

We will have technicians ready to assist you with any technical difficulties you may have accessing the Graybug virtual special meeting. If you encounter any difficulties accessing the Graybug virtual special meeting platform, including any difficulties voting or submitting questions, you may call the technical support number that will be posted in your instructional email.

If you wish to submit a question during the Graybug virtual special meeting, log into the Graybug virtual special meeting registration platform at www.proxydocs.com/GRAY, type your question into the “Questions for Management” field, and click “Submit.” Graybug will respond to as many properly submitted questions during the relevant portion of the Graybug virtual special meeting agenda as time allows. The procedures for voting are as follows:

Shares Registered in Your Name

If you are a stockholder of record, you may vote online at the Graybug virtual special meeting, vote by proxy over the telephone, vote by proxy through the internet, or vote by proxy by mail using the enclosed proxy card. Whether or not you plan to attend the Graybug virtual special meeting, we urge you to vote by

 

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proxy to ensure your vote is counted. You may still attend the Graybug virtual special meeting and vote even if you have already voted by proxy.

 

   

To vote online during the Graybug virtual special meeting, follow the instructions posted at www.proxydocs.com/GRAY. You must register in advance at www.proxydocs.com/GRAY to be able to vote during the Graybug virtual special meeting.

 

   

To vote over the telephone, dial toll-free (866) 859-2440 using a touch-tone phone and follow the recorded instructions. You will be asked to provide the company number and control number from the enclosed proxy card.

 

   

To vote through the internet, go to www.proxydocs.com/GRAY to complete an electronic proxy card. You will be asked to provide the company number and control number from the enclosed proxy card.

 

   

To vote by mail, simply complete, sign and date the enclosed proxy card and return it promptly in the envelope provided. If you return your signed proxy card to us before the Graybug virtual special meeting, we will vote your shares as you direct.

If your shares are registered in your name with Graybug’s stock registrar and transfer agent, American Stock Transfer & Trust Company, LLC, no proof of ownership is necessary because Graybug can verify your ownership.

Shares Registered in the Name of a Broker, Bank or Other Nominee

If you are a beneficial owner of shares registered in the name of your broker, bank, or other nominee, you should have received voting instructions from that organization rather than from Graybug. Simply follow the voting instructions provided by your broker, bank or other nominee to ensure that your vote is counted. Alternatively, you may vote by telephone or over the internet as instructed by your broker, bank, or other nominee. To vote online at the Graybug virtual special meeting, you must obtain a valid proxy from your broker, bank, or other nominee. Follow the instructions from your broker, bank, or other nominee included with these proxy materials, or contact that organization to request a proxy form.

If you own shares in street name through an account with a bank, broker or other nominee, please send proof of your Graybug share ownership as of the Graybug record date (for example, a brokerage firm account statement or a “legal proxy” from your intermediary) along with your registration request. If you are not sure what proof to send, check with your intermediary.

Please note that even if you plan to attend the special meeting, we recommend that you vote in advance, to ensure that your shares will be represented.

 

Q:

May I change my vote after I have submitted a proxy by telephone or via the internet or mailed my signed proxy card?

 

A:

Any Graybug stockholder of record voting by proxy, other than those Graybug stockholders who have executed a support agreement, has the right to revoke the proxy at any time before the polls close at the special meeting by delivery of a written notice stating that he, she or it would like to revoke his, her or its proxy to Graybug’s Corporate Secretary, by providing a duly executed proxy card bearing a later date than the proxy being revoked, by submitting a proxy on a later date by telephone or via the internet (only your last telephone or internet proxy will be counted), before [●] Pacific Time on [●], 2023 or by attending the special meeting via the internet and voting during the special meeting. Attendance alone at the special meeting will not revoke a proxy. If a stockholder of Graybug has instructed a broker to vote its shares of Graybug common stock that are held in “street name,” the stockholder must follow directions received from its broker to change those instructions.

 

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Q:

Should Graybug’s stockholders send in their stock certificates now?

 

A:

No. After the merger is consummated, and if the reverse stock split is approved and effected, Graybug’s stockholders will receive written instructions, as applicable, from Graybug’s transfer agent for exchanging their certificates representing shares of Graybug common stock for new certificates giving effect to the reverse stock split.

 

Q:

Am I entitled to appraisal rights?

 

A:

Graybug’s stockholders are not entitled to appraisal rights in connection with the merger or any of the proposals to be voted on at the special meeting.

 

Q:

Have CalciMedica’s stockholders agreed to adopt the merger agreement?

 

A:

Yes. On November 21, 2022, CalciMedica’s stockholders adopted the merger agreement and approved the merger and related transactions by written consent.

 

Q:

Who is paying for this proxy solicitation?

 

A:

Graybug and CalciMedica will equally share the cost of the printing and filing of this proxy statement and the fees paid to a financial printer or the SEC. Graybug will pay any other fees and expenses incurred by it. You will need to obtain your own internet access if you choose to access the proxy materials and/or vote over the internet. Graybug and CalciMedica may use the services of its directors, officers and other employees to solicit proxies from Graybug’s stockholders without additional compensation. Arrangements will also be made with banks, brokers, nominees, custodians and fiduciaries who are record holders of Graybug common stock for the forwarding of solicitation materials to the beneficial owners of Graybug common stock. Upon request of the record holders, Graybug will reimburse these banks, brokers, nominees, custodians and fiduciaries for the reasonable out-of-pocket expenses they incur in connection with the forwarding of solicitation materials.

 

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SUMMARY

This summary highlights selected information from this proxy statement and may not contain all of the information that is important to you. To better understand the merger and the other proposals being considered at the special meeting, you should read this entire proxy statement carefully, including the materials attached as annexes, as well as other documents referred to or incorporated by reference herein. You may obtain the information incorporated by reference into this proxy statement without charge by following the instructions under the section of this proxy statement entitled “Where You Can Find Additional Information”.

The Companies

Graybug Vision, Inc.

203 Redwood Shores Parkway, Suite 620

Redwood City, CA 94065

(650) 487-2800

Graybug Vision, Inc. (“Graybug”) has historically been a clinical-stage biopharmaceutical company focused on developing transformative medicines for the treatment of ocular diseases. Graybug’s novel proprietary technologies are designed to release drugs in ocular tissue at a controlled rate for up to 12 months in order to improve patient compliance, reduce healthcare burdens and, ultimately, deliver better clinical outcomes. Graybug’s lead product candidate, GB-102, is an intravitreal injection of a microparticle depot formulation of sunitinib, a potent inhibitor of neovascular growth and permeability, which are leading causes of retinal disease. GB-102 is designed to provide pan-vascular endothelial growth factor inhibition for six months or longer while minimizing fluctuations in retinal thickness in between treatments, which is emerging as predictive of visual outcomes. Furthermore, Graybug has been using its proprietary technologies to develop GB-401, an intravitreally injected implant formulation of a beta-adrenergic blocking agent prodrug with a target dosing regimen of once every six months or longer for the treatment of primary open-angle glaucoma, or POAG.

Camaro Merger Sub, Inc.

203 Redwood Shores Parkway, Suite 620

Redwood City, CA 94065

(650) 487-2800

The merger subsidiary is a wholly-owned subsidiary of Graybug that was recently incorporated in Delaware for the purpose of the merger. It does not conduct any business and has no material assets.

CalciMedica, Inc.

505 Coast Boulevard South, Suite 307

La Jolla, CA 92037

(858) 952-5500

CalciMedica is a clinical-stage biopharmaceutical company focused on developing therapies for life-threatening inflammatory diseases with high unmet need. CalciMedica’s proprietary technology targets the inhibition of calcium-release activated calcium (“CRAC”) channels designed to modulate the immune response and protect against tissue cell injury, with the potential to provide therapeutic benefits in life-threatening inflammatory diseases for which there are currently no approved therapies. CalciMedica’s lead product candidate Auxora, a proprietary, intravenous-formulated CRAC channel inhibitor, has demonstrated positive and consistent clinical results and has been well-tolerated in four completed efficacy clinical trials. Auxora is in development for acute pancreatitis and asparaginase-associated pancreatitis. CalciMedica was founded by scientists from TorreyPines Therapeutics and the Harvard CBR Institute for Biomedical Research, and is headquartered in La Jolla, CA.

 

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The Combined Company

Immediately following the effective time of the merger, CalciMedica’s equityholders are expected to own or hold rights to acquire 71.4% of the combined company and Graybug’s equityholders are expected to own or hold rights to acquire 28.6% of the combined company, in each case, on a fully-diluted basis, and subject to certain assumptions, including, but not limited to, (a) Graybug’s net cash as of the closing of the merger being $25 million, (b) a closing date of February 15, 2023, and (c) CalciMedica issuing approximately 20.5 million shares of common stock in the private placement. The post-closing equity split is subject to certain adjustments including based on Graybug’s net cash at closing, the closing date, the number of shares of CalciMedica’s common stock issued in the private placement and to account for the effect of the reverse stock split.

The principal executive office of the combined company will be located in La Jolla, California.

Summary of the Merger

Upon the terms and subject to the conditions of the merger agreement, the merger subsidiary, a wholly owned subsidiary of Graybug formed by Graybug in connection with the merger, will merge with and into CalciMedica. The merger agreement provides that upon the consummation of the merger the separate existence of merger subsidiary shall cease. CalciMedica will continue as the surviving corporation and will be a wholly owned subsidiary of Graybug.

Graybug’s Reasons for the Merger; Recommendations of the Graybug Board

The Graybug Board considered various reasons for the merger, including, among others, the following factors:

At a meeting held on November 21, 2022, among other things, the Graybug Board unanimously (i) determined that the merger and the other transactions contemplated by the merger agreement are fair to, advisable and in the best interests of Graybug and its stockholders, (ii) approved and declared advisable the merger agreement and the transactions contemplated by the merger agreement, including the issuance of shares of Graybug common stock to the stockholders of CalciMedica and the change of control of Graybug, and (iii) determined to recommend, upon the terms and subject to the conditions set forth in the merger agreement, that the stockholders of Graybug vote to approve Proposals 1 through 5.

The Graybug Board considered the following reasons in reaching its conclusion to approve the merger and the other transactions contemplated by the merger agreement, all of which the Graybug Board viewed as supporting its decision to approve the merger with CalciMedica:

 

   

the Graybug Board, with the assistance of its advisors, undertook a comprehensive and thorough process of reviewing and analyzing potential strategic options, involving outreach to 92 parties, and including potential strategic alternatives such as strategic mergers and acquisitions, licensing transactions, and a liquidation to distribute available cash, to identify the opportunity that would, in the Graybug Board’s opinion, create the most value for Graybug’s stockholders;

 

   

the Graybug Board’s belief, after a thorough review of strategic alternatives and discussions with Graybug senior management, financial advisors and legal counsel, that the merger is more favorable to Graybug’s stockholders than the potential value that might have resulted from other strategic options available to Graybug;

 

   

the alternative of a liquidation, which would result in a liquidation value estimated by Graybug’s management that assumed that there would be approximately $32.0 million in cash available at the commencement of the liquidation process, or approximately $1.50 per currently outstanding share, an orderly liquidation, with approximately 50% of this amount distributed to stockholders upon initial

 

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filing and any remaining amount payable in 18 to 36 months, depending on the length of the liquidation process, representing an aggregate present value range of $0.75 to $1.45 per currently outstanding share using a discount rate ranging from 5.0% to 15.0% and ranges of the portion of the remaining amount after the initial distribution that would be available for further distribution from 0% to 100%;

 

   

the fact that Graybug’s estimated cash of $26.5 million at the planned closing of the merger would be approximately $1.06 per share, assuming approximately 25 million fully-diluted shares then outstanding (which differs from estimated maximum liquidation value of the $1.50 per share liquidation value because the merger transaction fees would not be payable in a liquidation, the operating costs and severance obligations would also be reduced due to, among other things, the termination of most or all of the employees and remaining operations upon filing for liquidation in lieu of the merger, and the shares issuable as a result of accelerated vesting of equity awards would not be included in the fully diluted shares outstanding when calculating the potential per share value of a liquidation);

 

   

the Graybug Board’s comparison of the present value range of potential per share payments in a liquidation process of $0.75 to $1.45 per share, to a range of implied per share values of Graybug common stock in the merger set forth in the analyses of Piper Sandler & Co. (“Piper Sandler”) of $1.12 (reflecting the 25th percentile of the selected public companies analysis portion of such analyses) to $4.78 (reflecting the 75th percentile of the discounted cash flow analysis portion of such analyses), in each case assuming $26.5 million in cash held by Graybug at the planned closing of the merger, as described under “The Merger—Opinion of Graybug’s Financial Advisor” beginning on page [●];

 

   

the Graybug Board’s belief, based in part on scientific, regulatory and commercial diligence and an analysis process conducted over several weeks by Graybug’s management and reviewed with the Graybug Board, that CalciMedica’s lead product candidate Auxora is potentially a medium-term commercial asset with a sizable potential market and efficient commercialization plan and may create value for the stockholders of the combined company and an opportunity for Graybug’s stockholders to participate in the potential growth of the combined company;

 

   

based on the current plans of CalciMedica for developing and potentially commercializing Auxora, the likelihood that the combined company would possess sufficient financial resources to allow the management team to focus on such plans and the potential achievement of important clinical milestones in 2023;

 

   

the possibility that the combined company would be able to raise capital in the future from a broader array of sources as a result of the combination of Graybug’s public company structure with CalciMedica’s business;

 

   

the strength of the balance sheet of the combined company, which includes the cash that CalciMedica expects to raise in the private placement concurrently with the closing of the merger, in addition to the cash that Graybug is expected to have at the closing of the merger, which would give the combined company an estimated cash runway into the second half of 2024, funding the advancement of Auxora through clinical milestones in 2023;

 

   

the fact that the combined company will be led by an experienced industry chief executive officer and a team many of whom have extensive drug development, research and development, business, and regulatory expertise, and a board of directors with representation from the current Graybug Board and CalciMedica’s board of directors (the “CalciMedica Board”);

 

   

the Graybug Board’s belief that, as a result of arm’s length negotiations with CalciMedica, Graybug and its representatives negotiated the most favorable exchange ratio for Graybug stockholders that CalciMedica was willing to agree to, and that the terms of the merger agreement include the most favorable terms to Graybug in the aggregate to which CalciMedica was willing to agree; and

 

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the opinion of Piper Sandler, rendered orally to the Graybug Board on November 21, 2022 (which was subsequently confirmed in writing by delivery of its written opinion, dated November 21, 2022), to the effect that, as of such date and based upon and subject to the various assumptions made, procedures followed, matters considered and limitations on the scope of the review undertaken by Piper Sandler, as described in its written opinion, the exchange ratio pursuant to the terms of the merger agreement was fair, from a financial point of view, to Graybug, as more fully described in the section entitled “The Merger—Opinion of Graybug’s Financial Advisor” beginning on page [●].

For more information on the Graybug Board’s reasons for the transaction, see the section entitled “The Merger—Graybug’s Reasons for the Merger; Recommendations of the Graybug Board.”

Opinion of Graybug’s Financial Advisor

On November 21, 2022, Piper Sandler rendered its oral opinion to the Graybug Board (which was subsequently confirmed in writing by delivery of Piper Sandler’s written opinion dated November 21, 2022) to the effect that, as of November 21, 2022, and based upon and subject to the various assumptions and limitations set forth therein, the exchange ratio was fair, from a financial point of view, to Graybug.

Piper Sandler’s opinion was directed to the Graybug Board, and addressed solely the fairness, from a financial point of view, to Graybug of the exchange ratio and did not address any other terms or agreement relating to the merger or any other terms of the merger agreement. The summary of Piper Sandler’s opinion in this proxy statement is qualified in its entirety by reference to the full text of its written opinion, which is included as Annex C to this proxy statement and sets forth the assumptions made, procedures followed, matters considered and limitations on the scope of the review undertaken by Piper Sandler in preparing its opinion. However, neither Piper Sandler’s written opinion nor the summary of its opinion and the related analyses set forth in this proxy statement is intended to be, and they do not constitute, a recommendation to any Graybug stockholder as to how such stockholder should act or vote with respect to the merger or any other matter.

See Annex C and the section of this proxy statement entitled “The Merger—Opinion of Graybug’s Financial Advisor” beginning on page [●].

Overview of the Merger Agreement

Merger Consideration and Exchange Ratio

At the effective time of the merger, each share of CalciMedica capital stock outstanding immediately prior to the effective time of the merger (excluding shares held as treasury stock by CalciMedica or held or owned by Graybug, the merger subsidiary or any subsidiary of Graybug or CalciMedica and dissenting shares), after giving effect to (i) the preferred stock conversion (as defined below), (ii) the automatic exercise of CalciMedica warrants to purchase shares of CalciMedica common stock with an exercise price of $0.01 immediately prior to the closing of the merger in accordance with their terms and the automatic exercise of CalciMedica warrants to purchase shares of CalciMedica Series C-2 preferred stock immediately prior to the closing of the merger in accordance with their terms (the “CalciMedica warrant exercises”) and (iii) the conversion of CalciMedica convertible promissory notes, as may be amended, into CalciMedica common stock pursuant to their terms (the “convertible promissory note conversion”), will be automatically converted solely into the right to receive a number of validly issued, fully paid and nonassessable shares of Graybug common stock equal to the exchange ratio (as described below).

No fractional shares of Graybug common stock will be issued in connection with the merger, no certificates or scrip for any such fractional shares will be issued and no cash will be paid for any such fractional shares. Any

 

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fractional shares of Graybug common stock that a holder of CalciMedica capital stock would otherwise be entitled to receive will be aggregated with all fractional shares of Graybug common stock issuable to such holder and any remaining fractional shares will be rounded up to the nearest whole share.

Immediately following the effective time of the merger, CalciMedica’s equityholders are expected to own or hold rights to acquire 71.4% of the combined company and Graybug’s equityholders are expected to own or hold rights to acquire 28.6% of the combined company, in each case, on a fully-diluted basis, and subject to certain assumptions, including, but not limited to, (a) Graybug’s net cash as of the closing of the merger being $25 million, (b) a closing date of February 15, 2023, and (c) CalciMedica issuing approximately 20.5 million shares of common stock in the private placement. As currently anticipated, the exchange ratio is expected to be approximately 0.4073, subject to certain adjustments including based on Graybug’s net cash at closing, the closing date, the number of shares of CalciMedica’s common stock issued in the private placement and to account for the effect of the reverse stock split.

The following table illustrates how the exchange ratio and post-merger equity ownership of CalciMedica’s pre-merger equity holders and Graybug’s pre-merger equity holders may change if Graybug net cash is between $18 million and $32 million at the closing of the merger, in each case estimated as of November 21, 2022.

 

Graybug Net Cash
($ in millions)
    Exchange Ratio     Post-Merger Ownership  
  CalciMedica
Equityholders
    Graybug
Equityholders
 
$ 18       0.4911       75.2     24.8
$ 19       0.4769       74.6     25.4
$ 20       0.4637       74.1     25.9
$ 21       0.4512       73.5     26.5
$ 22       0.4394       73.0     27.0
$ 23       0.4282       72.5     27.5
$ 24       0.4175       71.9     28.1
$ 25       0.4073       71.4     28.6
$ 26       0.3977       70.9     29.1
$ 27       0.3885       70.4     29.6
$ 28       0.3797       69.9     30.1
$ 29       0.3713       69.4     30.6
$ 30       0.3633       69.0     31.0
$ 31       0.3556       68.5     31.5
$ 32       0.3482       68.0     32.0

Treatment of CalciMedica Stock Options

Under the terms of the merger agreement, each option to purchase shares of CalciMedica capital stock that is outstanding and unexercised immediately prior to the effective time of the merger under the CalciMedica plan, whether or not vested, will be converted into and become an option to purchase shares of Graybug common stock. Graybug will assume the CalciMedica plan and all such CalciMedica stock options in accordance with the terms of the CalciMedica plan and the terms of the stock option agreement by which such option is evidenced.

Accordingly, from and after the effective time of the merger: (i) each outstanding CalciMedica stock option assumed by Graybug may be exercised solely for shares of Graybug common stock; (ii) the number of shares of Graybug common stock subject to each outstanding CalciMedica stock option assumed by Graybug will be determined by multiplying (A) the number of shares of CalciMedica capital stock that were subject to such CalciMedica stock option, as in effect immediately prior to the effective time of the merger, by (B) the exchange

 

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ratio, and rounding the resulting number down to the nearest whole number of shares of Graybug common stock; (iii) the per share exercise price for the Graybug common stock issuable upon exercise of each CalciMedica stock option assumed by Graybug will be determined by dividing (A) the per share exercise price of CalciMedica capital stock subject to such CalciMedica stock option, as in effect immediately prior to the effective time of the merger, by (B) the exchange ratio and rounding the resulting exercise price up to the nearest whole cent; and (iv) any restriction on the exercise of any CalciMedica stock option assumed by Graybug will continue in full force and effect and the term, exercisability, vesting schedule, accelerated vesting provisions, and any other provisions of such CalciMedica stock option will otherwise remain unchanged; provided, however, that the Graybug Board or a committee thereof will succeed to the authority and responsibility of the CalciMedica Board or any committee thereof with respect to each CalciMedica stock option assumed by Graybug.

Treatment of CalciMedica Warrants

Under the terms of the merger agreement, each warrant to purchase shares of CalciMedica capital stock that is outstanding and unexercised as of immediately prior to the effective time of the merger (after giving effect to the preferred stock conversion, the CalciMedica warrant exercises and the convertible promissory note conversion) will be converted into and become a warrant to purchase shares of Graybug common stock and Graybug will assume each such CalciMedica warrant in accordance with its terms.

Accordingly, from and after the effective time of the merger: (i) each outstanding CalciMedica warrant assumed by Graybug may be exercised solely for shares of Graybug common stock; (ii) the number of shares of Graybug common stock subject to each outstanding CalciMedica warrant assumed by Graybug will be determined by multiplying (A) the number of shares of CalciMedica common stock, or the number of shares of CalciMedica preferred stock issuance upon exercise of the CalciMedica warrant, as applicable, that were subject to such CalciMedica warrant immediately prior to the effective time of the merger by (B) the exchange ratio, and rounding the resulting number up to the nearest whole number of shares of Graybug common stock; (iii) the per share exercise price for the Graybug common stock issuable upon exercise of each CalciMedica warrant assumed by Graybug will be determined by dividing (A) the per share exercise price of CalciMedica capital stock subject to such CalciMedica warrant, as in effect immediately prior to the effective time of the merger, by (B) the exchange ratio and rounding the resulting exercise price up to the nearest whole cent; and (iv) any restriction on any CalciMedica warrant assumed by Graybug will continue in full force and effect and the term and other provisions of such CalciMedica warrant will otherwise remain unchanged.

Treatment of Graybug Stock Options and Restricted Stock Units

All outstanding and unexercised options to purchase shares of Graybug common stock and all outstanding and unvested restricted stock units will remain effective and outstanding to the extent they are not, for restricted stock units, accelerated (and settled) in connection with the Merger. As of November 21, 2022, there were outstanding options to purchase up to an aggregate of 4,411,230 shares of Graybug common stock and unvested restricted stock units covering 3,520,994 shares of Graybug common stock. As of November 21, 2022, Graybug’s current executive officers and directors collectively owned outstanding options to purchase an aggregate of 3,293,214 shares of Graybug common stock and unvested restricted stock units covering 2,830,556 shares of Graybug common stock. Such options and restricted stock units will be adjusted for the reverse stock split.

Conditions to the Completion of the Merger

To consummate the merger, Graybug’s stockholders must approve the issuance of Graybug common stock in the merger and an amended and restated certificate of incorporation of Graybug effecting the reverse stock split. The merger agreement does not include a price-based termination right. Additionally, each of the other closing conditions set forth in the merger agreement and described in the section entitled “The Merger Agreement—Conditions to the Completion of the Merger” must be satisfied or waived.

 

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Non-Solicitation

Both Graybug and CalciMedica are prohibited by the terms of the merger agreement, other than, in the case of Graybug, with respect to any asset disposition, and other than, in the case of CalciMedica, with respect to the private placement, from:

 

   

soliciting, initiating or knowingly encouraging, inducing or facilitating the communication, making, submission or announcement of any acquisition proposal (as defined in the Section entitled “The Merger Agreement—No Solicitation” below) or acquisition inquiry (as defined in the Section entitled “The Merger Agreement—No Solicitation” below) or taking any action that could reasonably be expected to lead to an acquisition proposal or acquisition inquiry;

 

   

furnishing any non-public information regarding such party to any person in connection with or in response to an acquisition proposal or acquisition inquiry;

 

   

engaging in discussions or negotiations with any person with respect to any acquisition proposal or acquisition inquiry;

 

   

approving, endorsing or recommending any acquisition proposal (with respect to Graybug, subject to certain carve-outs as described below);

 

   

executing or entering into any letter of intent or any contract contemplating or otherwise relating to any acquisition transaction (as defined below) (other than, in the case of Graybug, a confidentiality agreement permitted as described below); or

 

   

publicly proposing to do any of the foregoing.

Termination and Termination Fees

Either Graybug or CalciMedica can terminate the merger agreement under specified circumstances, which would prevent the merger from being consummated. The merger agreement provides for the payment of a termination fee of $1 million by Graybug to CalciMedica upon termination of the merger agreement under specified circumstances, or a termination fee of $1.5 million in the case where Graybug accepts a superior offer from a third party.

Expense Reimbursement

The merger agreement provides for the payment of an expense reimbursement of up to $1 million by Graybug to CalciMedica upon termination of the merger agreement under specified circumstances, or an expense reimbursement of up to $250,000 in the case where Graybug accepts a superior offer from a third party.

Nasdaq Listing

Pursuant to the merger agreement, Graybug has agreed to use its commercially reasonable efforts (i) to maintain its existing listing on Nasdaq until the effective time of the merger and to obtain approval of the listing of the combined company on Nasdaq, (ii) to the extent required by the rules and regulations of Nasdaq, to prepare and submit to Nasdaq a notification form for the listing of the shares of Graybug common stock to be issued in connection with the merger, and to cause such shares to be approved for listing (subject to official notice of issuance), (iii) effect the reverse stock split and (iv) to the extent required by Nasdaq Rule 5110, to file an initial listing application for Graybug common stock on Nasdaq and to cause such Nasdaq listing application to be conditionally approved prior to the effective time.

Support Agreements

Concurrently with the execution of the merger agreement, the executive officers, directors and certain stockholders of Graybug entered into support agreements in favor of CalciMedica relating to the merger

 

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representing approximately 45% of Graybug’s outstanding shares of common stock as of immediately prior to the date of the merger agreement. The Graybug support agreements provide, among other things, that such officers, directors and stockholders will vote all of their shares of Graybug common stock in favor of adopting the merger agreement and approving the merger, and the stockholder matters and other transactions and actions contemplated by the merger agreement. Concurrently with the execution of the merger agreement, the executive officers, directors and certain stockholders of CalciMedica entered into support agreements in favor of Graybug relating to the merger representing approximately 86% of the outstanding shares of CalciMedica capital stock as of immediately prior to the date of the merger agreement. The CalciMedica support agreements provide, among other things, that such officers, directors and stockholders will vote all of their shares of CalciMedica capital stock in favor of adopting the merger agreement and approving the merger, and the stockholder matters and other transactions and actions contemplated by the merger agreement.

Lock-Up Agreements

Concurrently with the execution of the merger agreement, the executive officers, directors and certain stockholders of CalciMedica representing approximately 86% of the outstanding shares of CalciMedica capital stock as of immediately prior to the date of the merger agreement entered into lock-up agreements, pursuant to which they accepted certain restrictions on transfers of the shares of Graybug common stock held by such executive officer, director or stockholder for a 180-day period following the effective time of the merger. Pursuant to the terms of the merger agreement, each executive officer and director of Graybug expected to continue as an executive officer or director of the combined company will also be required to enter into lock-up agreements.

Private Placement

On November 21, 2022, CalciMedica entered into a securities purchase agreement and registration rights agreement with the private placement investors in connection with the private placement, pursuant to which the private placement investors will purchase an aggregate of approximately $10.3 million shares of CalciMedica common stock (the “private placement shares”) and CalciMedica has agreed to grant the private placement investors certain registration rights with respect to such shares. The private placement is expected to close immediately prior to the closing of the merger. The closing of the private placement is not a condition to closing the merger. CalciMedica has agreed to use commercially reasonably efforts to prepare and file a registration statement with the SEC as soon as practicable following the closing of the merger but in no event later than the 90th day following the closing of the merger to register the resale of the private placement shares. The private placement, including those investors who are expected to beneficially own or be affiliates of holders of more than 5% of the combined company’s common stock is discussed in more detail in the section entitled “Agreements Related to the Merger—Private Placement” beginning on page [●].

Management Following the Merger

At the effective time of the merger, the executive management team of the combined company is expected to include the following individuals:

 

Name

 

Position with the Combined Company

 

Current Position with CalciMedica

A. Rachel Leheny, Ph.D.   Chief Executive Officer   Chief Executive Officer
Michael J. Dunn, MBA   President and Chief Operating Officer   President and Chief Operating Officer
Daniel Geffken, MBA   Chief Financial Officer   Interim Chief Financial Officer
Sudarshan Hebbar, M.D.   Chief Medical Officer   Chief Medical Officer
Eric W. Roberts   Chief Business Officer   Chief Business Officer
Kenneth A. Stauderman, Ph.D.   Chief Scientific Officer   Chief Scientific Officer

 

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The Board of Directors Following the Merger

Immediately after the effective time of the merger, the board of directors of the combined company (the “Combined Board”) will be comprised of seven members, with two designated by Graybug, including Eric Bjerkholt and Frederic Guerard, Pharm.D., and five designated by CalciMedica, including A. Rachel Leheny, Ph.D., Eric W. Roberts, Robert N. Wilson, Fred Middleton and Allan Shaw. It is expected that [●] will serve as chairman of the Combined Board.

Interests of Graybug’s Directors and Executive Officers in the Merger

Graybug’s directors and executive officers have economic interests in the merger that are different from, or in addition to, those of Graybug stockholders generally. These interests include:

 

   

Graybug’s directors and executive officers hold Graybug options and restricted stock units which, pursuant to the merger agreement, will be treated as set forth in the section entitled “The Merger Agreement—Treatment of Graybug Stock Options and Restricted Stock Units” on page [●] of this proxy statement.

 

   

Pursuant to the merger agreement, Graybug and CalciMedica have agreed that each Graybug employee, including all Graybug executive officers, that remain employed by Graybug as of immediately prior to the closing of the merger will be terminated on the closing date, and that such termination will be treated as a qualifying termination for purposes Graybug Change in Control Severance Policy (the “CIC Policy”). As a result of such qualifying termination, upon the closing of the merger, the vesting of all unvested equity awards held by Graybug’s employees, including its executive officers, who are terminated upon the closing, will accelerate in full.

 

   

The CIC Policy provides for certain severance payments, equity acceleration and other benefits in the event a Graybug executive officer’s employment is terminated due to termination by Graybug (or a successor) without “cause” or the Graybug executive officer’s resignation for “good reason” (as such terms are defined in the CIC Policy) that occurs on or within 12 months after a “change in control” of Graybug.

 

   

Pursuant to the Graybug 2022 Bonus Program adopted by Graybug’s compensation committee on January 14, 2022, as amended on October 17, 2022, the Graybug executive officers are eligible to receive cash bonus payments based on weighted performance metrics, with 50% of such bonus being payable in the event of a closing of a merger. Such payable portion will be paid in full if the merger closes in 2022, 50% of such portion will be paid if the merger closes in the first quarter of 2023, and 25% of such portion will be paid if the merger closes in the second quarter of 2023.

These interests are discussed in more detail in the section entitled “The Merger—Interests of Graybug’s Directors and Executive Officers in the Merger” beginning on page [●]. The Graybug Board was aware of and considered these interests, among other matters, in reaching its decision to approve and declare advisable the merger agreement, the merger and the other transactions contemplated by the merger agreement.

Federal Securities Law Consequences; Resale Restrictions

The issuance of Graybug common stock in the merger to CalciMedica’s stockholders will be effected by means of a private placement, which is exempt from registration under the Securities Act, in reliance on Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D or Regulation S promulgated thereunder and such shares will be “restricted securities.” The shares issued in connection with the merger will not be registered under the Securities Act upon issuance and will not be freely transferable. Holders of such shares may not sell their respective shares unless the shares are registered under the Securities Act or an exemption is available under the

 

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Securities Act. Additionally, the shares of Graybug common stock issued in the merger to certain of CalciMedica’s stockholders will be subject to the resale restrictions under the lock-up agreements, as further described in the section entitled “Agreements Related To The Merger” beginning on page [●] of this proxy statement.

Material U.S. Federal Income Tax Consequences of the Merger and the Reverse Stock Split

Graybug and CalciMedica intend that the merger qualify as a reorganization within the meaning of Section 368(a) of the Code. Graybug stockholders will not sell, exchange or dispose of any shares of Graybug common stock as a result of the merger. Thus, there will be no material U.S. federal income tax consequences to Graybug or its stockholders as a result of the merger. Graybug stockholders should not recognize gain or loss upon the reverse stock split, except to the extent a Graybug stockholder receives cash in lieu of a fractional share of Graybug common stock.

For a more complete description of the material U.S. federal income tax consequences of the reverse stock split and merger, please see the section entitled “The Merger—Material U.S. Federal Income Tax Consequences of the Merger and the Reverse Stock Split” beginning on page [●] of this proxy statement.

Regulatory Approvals

Neither Graybug nor CalciMedica is required to make any filings or to obtain approvals or clearances from any antitrust regulatory authorities in the United States or other countries to consummate the merger. In the United States, Graybug must comply with applicable federal and state securities laws and the Nasdaq rules in connection with the issuance of shares of Graybug common stock in the merger, including the filing with the SEC of this proxy statement.

Anticipated Accounting Treatment

The merger will be treated by Graybug as a reverse recapitalization under U.S. generally accepted accounting principles (“GAAP”). For accounting purposes, CalciMedica is considered to be the accounting acquirer in this transaction.

Appraisal Rights

Graybug’s stockholders are not entitled to appraisal rights in connection with the merger.

Summary of Risk Factors

Both Graybug and CalciMedica are subject to various risks associated with their businesses and their industries. In addition, the merger, including the possibility that the merger may not be completed, poses a number of risks to each company and its respective securityholders, including the following risks:

 

   

If the proposed merger with CalciMedica is not consummated, Graybug’s business could suffer materially and Graybug’s stock price could decline;

 

   

If Graybug does not successfully consummate the merger or another strategic transaction, the Graybug Board may decide to pursue a dissolution and liquidation of Graybug. In such an event, the amount of cash available for distribution to Graybug’s stockholders will depend heavily on the timing of such liquidation as well as the amount of cash that will need to be reserved for commitments and contingent liabilities;

 

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Graybug’s net cash may be less than $18 million at the closing of the merger, which would cause a condition to CalciMedica’s obligation to consummate the merger to fail to be satisfied and may result in the termination of the merger agreement;

 

   

Some of Graybug’s officers and directors have conflicts of interest that may influence them to support or approve the merger;

 

   

The merger may be completed even though material adverse changes may result from the announcement of the merger, industry-wide changes and other causes;

 

   

The market price of the combined company’s common stock may decline as a result of the merger; and

 

   

Graybug’s stockholders may not realize a benefit from the merger commensurate with the ownership dilution they will experience in connection with the merger.

 

   

Certain provisions of the merger agreement may discourage third parties from submitting competing proposals, including proposals that may be superior to the arrangements contemplated by the merger agreement.

 

   

Because the lack of a public market for the CalciMedica capital stock makes it difficult to evaluate the fairness of the merger, the stockholders of Graybug may receive consideration in the merger that is less than the fair market value of the CalciMedica capital stock and/or Graybug may pay more than the fair market value of the CalciMedica capital stock.

 

   

Graybug and CalciMedica have become and may become involved in securities litigation or stockholder derivative litigation in connection with the merger in the future, and this could divert the attention of Graybug and CalciMedica management and harm the combined company’s business, and insurance coverage may not be sufficient to cover all related costs and damages.

 

   

CalciMedica is a clinical-stage biopharmaceutical company and has incurred significant losses since its inception. CalciMedica anticipates that it will continue to incur significant losses for the foreseeable future.

 

   

CalciMedica has never generated revenue from product sales and may never be profitable.

 

   

There is substantial doubt about CalciMedica’s ability to continue as a going concern. CalciMedica will need additional financing to execute its business plan, to fund its operations and to continue as a going concern.

 

   

CalciMedica’s proprietary CRAC channel inhibition science is based on novel technologies that are unproven and may not result in approvable or marketable products, which exposes it to unforeseen risks and makes it difficult for CalciMedica to predict the time and cost of product development and potential for regulatory approval and it may not be successful in its efforts to use and expand its science to build a pipeline of product candidates

 

   

CalciMedica’s business is highly dependent on the success of its product candidates, in particular Auxora, and it may fail to develop Auxora successfully or be unable to obtain regulatory approval.

 

   

CalciMedica relies on third parties to conduct and perform most of its research, preclinical studies and clinical trials. If these third parties do not satisfactorily carry out their contractual duties, fail to comply with applicable regulatory requirements, or fail to meet expected deadlines, CalciMedica’s development programs may be delayed or subject to increased costs, each of which may have an adverse effect on its business and prospects.

 

   

CalciMedica contracts with third parties for the manufacturing and supply of certain goods and services for our product candidates for use in preclinical studies and clinical trials, which supply may become limited or interrupted or may not be of satisfactory quality and quantity.

 

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Any approved product candidates may fail to achieve the degree of market acceptance by physicians, patients, hospitals, healthcare payors and others in the medical community necessary for commercial success.

 

   

CalciMedica’s business and the business or operations of third parties with whom it conducts business could be adversely affected by the effects of health pandemics or epidemics, including the COVID-19 pandemic, in regions where CalciMedica or third parties on which it relies have business operations.

Additional discussion of the risks summarized in this risk factor summary, and other risks that Graybug and CalciMedica face, can be found below under the heading “Risk Factors” and should be carefully considered, together with other information in this proxy statement.

 

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MARKET PRICE AND DIVIDEND INFORMATION

Graybug common stock began trading the Nasdaq Global Market on September 25, 2020 under the symbol “GRAY.”

On November 18, 2022, the last trading day prior to the public announcement of the proposed merger on November 21, 2022, the closing price per share of Graybug common stock as reported on Nasdaq was $0.95 per share. On [●], 2023, the last practicable date before the printing of this proxy statement, the closing price per share of Graybug common stock as reported on Nasdaq was $[●] per share.

Following the consummation of the merger, and subject to successful application for initial listing with Nasdaq, Graybug common stock will continue to be listed on Nasdaq, but will trade under the symbol “CALC” and under the combined company name of “CalciMedica, Inc.”

As of the record date, Graybug had approximately [●] stockholders of record.

Graybug has never declared or paid cash dividends on Graybug common stock. Graybug currently anticipates that all of its earnings in the foreseeable future will be used for the operation and growth of its business, and does not expect to pay any cash dividends to Graybug stockholders. Payment of future dividends, if any, will be at the discretion of the Graybug Board.

 

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RISK FACTORS

You should consider the following factors in evaluating whether to approve the issuance of shares of Graybug common stock in the merger and the resulting “change of control” of Graybug under the Nasdaq rules and the amended and restated certificate of incorporation, including to effect a reverse stock split of Graybug common stock. These factors should be considered in conjunction with the other information included or incorporated by reference by Graybug in this proxy statement.

Risks Related to the Merger

If the proposed merger with CalciMedica is not consummated, Graybug’s business could suffer materially and Graybug’s stock price could decline.

The consummation of the proposed merger with CalciMedica is subject to a number of closing conditions, including the approval by Graybug’s stockholders, approval by Nasdaq of Graybug’s application for initial listing of Graybug common stock in connection with the merger, and other customary closing conditions. Graybug is targeting a closing of the transaction in the first quarter of 2023.

If the proposed merger is not consummated, Graybug may be subject to a number of material risks, and its business and stock price could be adversely affected, as follows:

 

   

Graybug has incurred and expects to continue to incur significant expenses related to the proposed merger with CalciMedica even if the merger is not consummated.

 

   

The merger agreement contains covenants relating to Graybug’s solicitation of competing acquisition proposals and the conduct of Graybug’s business between the date of signing the merger agreement and the closing of the merger. As a result, significant business decisions and transactions before the closing of the merger are restricted or prohibited. Accordingly, Graybug may be unable to pursue business opportunities that would otherwise be in its best interest as a standalone company. If the merger agreement is terminated after Graybug has invested significant time and resources in the transaction process, Graybug will have a limited ability to continue its current operations without obtaining additional financing to fund its operations.

 

   

Graybug could be obligated to pay CalciMedica a $1 million or $1.5 million termination fee in connection with the termination of the merger agreement, depending on the reason for the termination.

 

   

Graybug could be obligated to pay CalciMedica a $250,000 or $1 million expense reimbursement in connection with the termination of the merger agreement, depending on the reason for the termination.

 

   

Graybug’s collaborators and other business partners and investors in general may view the failure to consummate the merger as a poor reflection on its business or prospects.

 

   

Some of Graybug’s suppliers, collaborators and other business partners may seek to change or terminate their relationships with Graybug as a result of the proposed merger.

 

   

As a result of the proposed merger, current and prospective employees could experience uncertainty about their future roles within the combined company. This uncertainty may adversely affect Graybug’s ability to retain its key employees, who may seek other employment opportunities. Additionally, pursuant to the merger agreement, all Graybug employees will be terminated effective as of the closing.

 

   

Graybug’s management team may be distracted from day-to-day operations as a result of the proposed merger.

 

   

The market price of Graybug common stock may decline to the extent that the current market price reflects a market assumption that the proposed merger will be completed.

 

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In addition, if the merger agreement is terminated and the Graybug Board determines to seek another business combination, it may not be able to find a third party willing to provide equivalent or more attractive consideration than the consideration to be provided by each party in the merger. In such circumstances, the Graybug Board may elect to, among other things, divest all or a portion of Graybug’s business, or take the steps necessary to liquidate all of Graybug’s business and assets, and in either such case, the consideration that Graybug receives may be less attractive than the consideration to be received by Graybug pursuant to the merger agreement.

If Graybug does not successfully consummate the merger or another strategic transaction, the Graybug Board may decide to pursue a dissolution and liquidation of Graybug. In such an event, the amount of cash available for distribution to Graybug’s stockholders will depend heavily on the timing of such liquidation as well as the amount of cash that will need to be reserved for commitments and contingent liabilities.

There can be no assurance that the merger will be completed. If the merger is not completed, the Graybug Board may decide to pursue a dissolution and liquidation of Graybug. In such an event, the amount of cash available for distribution to Graybug’s stockholders will depend heavily on the timing of such decision and, as with the passage of time the amount of cash available for distribution will be reduced as Graybug continues to fund its operations. The amount of cash available for distribution would also be reduced if Graybug is required to pay a termination fee to CalciMedica pursuant to the merger agreement. In addition, if the Graybug Board were to approve and recommend, and Graybug’s stockholders were to approve, a dissolution and liquidation of Graybug, Graybug would be required under Delaware corporate law to pay its outstanding obligations, as well as to make reasonable provision for contingent and unknown obligations, prior to making any distributions in liquidation to Graybug’s stockholders. As a result of this requirement, a portion of Graybug’s assets may need to be reserved pending the resolution of such obligations, and the timing of any such resolution is uncertain. In addition, Graybug may be subject to litigation or other claims related to a dissolution and liquidation of Graybug. If a dissolution and liquidation were pursued, the Graybug Board, in consultation with its advisors, would need to evaluate these matters and make a determination about a reasonable amount to reserve. Accordingly, holders of Graybug common stock could lose all or a significant portion of their investment in the event of a liquidation, dissolution or winding up of Graybug.

Graybug’s net cash may be less than $18 million at the closing of the merger, which would cause a condition to CalciMedica’s obligation to consummate the merger to fail to be satisfied and may result in the termination of the merger agreement.

Graybug is required to have a net cash balance of at least $18 million at the closing of the merger as a condition to CalciMedica’s obligation to consummate the merger. For purposes of the merger agreement, net cash is subject to certain reductions, including, without limitation, short- and long-term liabilities accrued and any unpaid change of control payments or severance, termination, accrued paid time off, retention or similar payments at closing. In the event that Graybug’s net cash falls below this threshold, a condition to the CalciMedica’s obligation to consummate the merger will fail to be satisfied and CalciMedica will have the right to terminate the merger agreement at an outside date of May 21, 2023 (subject to extension as provided in the merger agreement) if Graybug’s net cash continues to be lower than the $18 million threshold.

Some of Graybug’s officers and directors have conflicts of interest that may influence them to support or approve the merger.

Officers and directors of Graybug participate in arrangements that provide them with interests in the merger that are different from yours, including, among others, their continued service as a director of the combined company, retention and severance benefits, the acceleration of option and restricted stock unit vesting, and continued indemnification. These interests, among others, may influence the officers and directors of Graybug to support or approve the merger. For a more detailed discussion see “The Merger—Interests of Graybug’s Directors and Executive Officers in the Merger” beginning on page [●] of this proxy statement.

 

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The merger may be completed even though material adverse changes may result from the announcement of the merger, industry-wide changes and other causes.

In general, either party can refuse to complete the merger if there is a material adverse change affecting the other party between November 21, 2022, the date of the merger agreement, and the closing. However, some types of changes do not permit either party to refuse to complete the merger, even if such changes would have a material adverse effect on Graybug or CalciMedica, to the extent they resulted from the following:

 

   

general business or economic conditions generally affecting the industry in which either company and its subsidiaries operate;

 

   

acts of war, the outbreak or escalation of armed hostilities, acts of terrorism, earthquakes, wildfires, hurricanes or other natural disasters, health emergencies, including pandemics (including COVID-19 and any evolutions or mutations thereof) and related or associated epidemics, disease outbreaks or quarantine restrictions;

 

   

changes in financial, banking or securities markets;

 

   

any change in, or any compliance with or action taken for the purpose of complying with, any law or GAAP (or interpretations of any law or GAAP);

 

   

the announcement of the merger agreement or the pendency of the contemplated transactions;

 

   

the taking of any action required to be taken by the merger agreement, except in each case with respect to the first three items listed above, to the extent disproportionately affecting either company and its subsidiaries, taken as a whole, relative to other similarly situated companies in the industries in which either company and its subsidiaries operate, as applicable;

 

   

with respect to Graybug, the asset dispositions (as defined in the section titled “The Merger Agreement—Potential Asset Disposition” below);

 

   

with respect to Graybug, any reduction in the amount of Graybug’s or its subsidiaries’ cash and cash equivalents as a result of expenditures made by Graybug or its subsidiaries related to wind-down activities of Graybug or its subsidiaries associated with the termination of its research and development activities (including the termination of ongoing contractual obligations relating to Graybug’s or its subsidiaries’ current products or product candidates);

 

   

with respect to Graybug, the failure of Graybug and its subsidiaries, taken as a whole, to meet internal or analysts’ expectations or projections or the results of operations of Graybug and its subsidiaries, taken as a whole; or

 

   

with respect to Graybug, any change in the stock price or trading volume of Graybug common stock (it being understood, however, that any Effect (as defined in the section titled “The Merger Agreement— Conditions to the Completion of the Merger” below) causing or contributing to any change in stock price or trading volume of Graybug common stock may be taken into account in determining whether a Graybug material adverse effect has occurred, unless such Effects are otherwise excepted from this definition).

If adverse changes occur but Graybug and CalciMedica must still complete the merger, the combined company’s stock price may suffer.

The market price of the combined company’s common stock may decline as a result of the merger.

The market price of the combined company’s common stock may decline as a result of the merger for a number of reasons including if:

 

   

the combined company does not achieve the perceived benefits of the merger as rapidly or to the extent anticipated by financial or industry analysts;

 

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the effect of the merger on the combined company’s business and prospects is not consistent with the expectations of financial or industry analysts; or

 

   

investors react negatively to the effect on the combined company’s business and prospects from the merger.

Graybug’s stockholders may not realize a benefit from the merger commensurate with the ownership dilution they will experience in connection with the merger.

If the combined company is unable to realize the strategic and financial benefits currently anticipated from the merger, Graybug’s stockholders will have experienced substantial dilution of their ownership interest without receiving any commensurate benefit. Significant management attention and resources will be required to integrate the two companies. Delays in this process could adversely affect the combined company’s business, financial results, financial condition and stock price following the merger.

During the pendency of the merger, Graybug may not be able to enter into a business combination with another party and will be subject to contractual limitations on certain actions because of restrictions in the merger agreement.

Covenants in the merger agreement impede the ability of Graybug or CalciMedica to make acquisitions or complete other transactions that are not in the ordinary course of business pending completion of the merger. As a result, if the merger is not completed, the parties may be at a disadvantage to their competitors. In addition, while the merger agreement is in effect and subject to limited exceptions, each party is prohibited from soliciting, initiating, encouraging, inducing or facilitating the communication, making, submission or announcement of certain acquisition inquiries or acquisition proposals or taking any action that could reasonably be expected to lead to certain acquisition inquiries or acquisition proposal, such as certain acquisitions of Graybug common stock, a tender offers for Graybug common stock, and mergers or other business combinations. Any such transactions could be favorable to such Graybug’s stockholders.

Because the lack of a public market for CalciMedica common stock makes it difficult to evaluate the fairness of the merger, CalciMedica’s stockholders may receive consideration in the merger that is greater than or less than the fair market value of CalciMedica common stock.

The outstanding share capital of CalciMedica is privately held and is not traded in any public market. The lack of a public market makes it extremely difficult to determine the fair market value of CalciMedica. Since the percentage of Graybug’s equity to be issued to CalciMedica’s stockholders was determined based on negotiations between the parties, it is possible that the value of the Graybug common stock to be issued in connection with the merger will be greater than the fair market value of CalciMedica. Alternatively, it is possible that the value of the shares of Graybug common stock to be issued in connection with the merger will be less than the fair market value of CalciMedica.

The combined company will incur significant transaction costs as a result of the merger, including investment banking, legal and accounting fees. In addition, the combined company will incur significant consolidation and integration expenses which cannot be accurately estimated at this time. These costs could include the possible relocation of certain operations from Redwood, California to other offices of the combined company as well as costs associated with terminating existing office leases and the loss of benefits of certain favorable office leases. Actual transaction costs may substantially exceed CalciMedica’s estimates and may have an adverse effect on the combined company’s financial condition and operating results.

Failure of the merger to qualify as a reorganization within the meaning of Section 368(a) of the Code could harm the combined company.

The parties intend for the merger to qualify as a reorganization within the meaning of Section 368(a) of the Code, as amended. For a full description of the tax consequences of the merger, see “The Merger—Material U.S.

 

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Federal Income Tax Consequences of the Merger and the Reverse Stock Split” beginning on page [●] of this proxy statement. Certain requirements must be met for the merger to qualify as a Section 368(a) reorganization; if such requirements are not satisfied, CalciMedica’s stockholders could be subject to tax liability.

The merger is expected to result in a limitation on Graybug’s ability to utilize its net operating loss carryforwards.

Under Section 382 of the Code, use of Graybug’s net operating loss carryforwards (“NOLs”) will be limited if Graybug experiences an “ownership change.” For these purposes, an ownership change generally occurs where the aggregate stock ownership of one or more stockholders or groups of stockholders who own at least 5% of a corporation’s stock increases by more than 50 percentage points over its lowest ownership percentage within a specified testing period. Graybug is expected to experience an ownership change as a result of the merger, and therefore its ability to utilize its NOLs and certain credit carryforwards remaining at the effective time will be limited. The limitation will be determined by the fair market value of Graybug common stock outstanding prior to the ownership change, multiplied by the applicable federal rate. Limitations imposed on Graybug’s ability to utilize NOLs could cause U.S. federal and state income taxes to be paid earlier than they would be paid if such limitations were not in effect and could cause such NOLs to expire unused, in each case reducing or eliminating the benefit of such NOLs.

Certain stockholders could attempt to influence changes within Graybug which could adversely affect Graybug’s operations, financial condition and the value of Graybug common stock.

Graybug’s stockholders may from time to time seek to acquire a controlling stake in Graybug, engage in proxy solicitations, advance stockholder proposals or otherwise attempt to effect changes. Campaigns by stockholders to effect changes at publicly-traded companies are sometimes led by investors seeking to increase short-term stockholder value through actions such as financial restructuring, increased debt, special dividends, stock repurchases or sales of assets or the entire company. Responding to proxy contests and other actions by activist stockholders can be costly and time-consuming, and could disrupt Graybug’s operations and divert the attention of the Graybug Board and senior management from the pursuit of the proposed merger transaction. These actions could adversely affect Graybug’s operations, financial condition, Graybug’s ability to consummate the merger and the value of Graybug common stock.

Graybug and CalciMedica have become and may become involved in securities litigation or stockholder derivative litigation in connection with the merger in the future, and this could divert the attention of Graybug and CalciMedica management and harm the combined company’s business, and insurance coverage may not be sufficient to cover all related costs and damages.

Securities litigation or stockholder derivative litigation frequently follows the announcement of certain significant business transactions, such as the sale of a business division or announcement of a business combination transaction. Since the filing of our proxy statement on form PREM 14A on December 14, 2022, two lawsuits have been filed in federal courts against Graybug and the Graybug Board: Bushansky v. Graybug Vision, Inc., et al., 3:22-cv-09131 (N.D. Cal.), and Connelly v. Graybug Vision, Inc., et al., 3:23-cv-00028 (N.D. Cal.) (collectively, the “Stockholder Litigation”). In addition, six purported stockholders of Graybug sent demand letters regarding the proxy statement (the “Demand Letters”). Further details regarding the Stockholder Litigation and the Demand Letters are set forth below in the section entitled “Graybug’s Business—Legal Proceedings”.

Graybug, CalciMedica and the combined company may become involved in this type of litigation in connection with the merger again in the future. Litigation often is expensive and diverts management’s attention and resources, which could adversely affect the business of Graybug, CalciMedica and the combined company.

 

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Failure to complete the merger may result in Graybug paying a termination fee or expenses to the other party and could harm the price of Graybug common stock and the future business and operations of each company.

If the merger is not completed and the merger agreement is terminated under certain circumstances, Graybug may be required to pay CalciMedica a termination fee of $1 million or $1.5 million and/or an expense reimbursement of up to $1 million. Even if a termination fee or expense reimbursement is not payable in connection with a termination of the merger agreement, Graybug will have incurred significant fees and expenses, which must be paid whether or not the merger is completed. Further, if the merger is not completed, it could significantly harm the market price of Graybug common stock.

Once the merger has closed, there can be no further recourse by either party or its stockholders for a breach of representation or warranty.

The representations and warranties of CalciMedica, Graybug and the merger subsidiary contained in the merger agreement or any certificate or instrument delivered pursuant to the merger agreement will terminate at the effective time of the merger, and there would be no recourse for any breach of such representations and warranties following the closing of the merger.

The exchange ratio is not adjustable based on the market price of Graybug common stock so the merger consideration at the closing may have greater or lesser value than the market price at the time the merger agreement was signed.

Under the terms of the merger agreement, at the effective time of the merger, each share of CalciMedica capital stock (excluding shares held as treasury stock by CalciMedica or held or owned by Graybug, the merger subsidiary or any subsidiary of Graybug or CalciMedica and dissenting shares), after giving effect to (i) preferred stock conversion, (ii) CalciMedica warrant exercises and (iii) the convertible promissory note conversion, will be converted solely into the right to receive a number of validly issued, fully paid and nonassessable shares of Graybug’s common stock equal to the exchange ratio, which will be calculated based on the total number of shares outstanding of Graybug common stock and CalciMedica common stock immediately prior to the effective time of the merger, in each case, on a fully-diluted basis using the treasury stock method and excluding out-of-the-money options and warrants, and based on the net cash of Graybug as of the closing of the merger. Immediately following the effective time of the merger, CalciMedica’s equityholders are expected to own or hold rights to acquire 71.4% of the combined company and Graybug’s equityholders are expected to own or hold rights to acquire 28.6% of the combined company, in each case, on a fully-diluted basis using the treasury stock method and excluding out-of-the-money options and warrants, and subject to certain assumptions, including, but not limited to, (a) Graybug’s net cash as of the closing of the merger being $25 million, (b) a closing date of February 15, 2023, and (c) CalciMedica issuing approximately 20.5 million shares of common stock in the private placement. The post-closing equity split is subject to certain adjustments including based on Graybug’s net cash at closing, the closing date, the number of shares of CalciMedica’s common stock issued in the private placement and to account for the effect of a reverse stock split. As a result, these ownership percentages may be adjusted upward or downward due to such adjustments and as a result, Graybug’s stockholders could own less of the combined company than expected.

Any changes in the market price of Graybug common stock before the completion of the merger will not affect the number of shares of Graybug common stock issuable to CalciMedica’s stockholders pursuant to the merger agreement. Therefore, if before the completion of the merger the market price of Graybug common stock declines from the market price on the date of the merger agreement, then CalciMedica’s stockholders could receive merger consideration with substantially lower value than the value of such merger consideration on the date of the merger agreement. Similarly, if before the completion of the merger the market price of Graybug common stock increases from the market price of Graybug common stock on the date of the merger agreement, then CalciMedica’s stockholders could receive merger consideration with substantially greater value than the value of such merger consideration on the date of the merger agreement. The merger agreement does not include a price-based termination right. Because the exchange ratio does not adjust as a result of changes in the market

 

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price of Graybug common stock, for each one percentage point change in the market price of Graybug common stock, there is a corresponding one percentage point rise or decline, respectively, in the value of the total merger consideration payable to CalciMedica’s stockholders pursuant to the merger agreement.

Certain provisions of the merger agreement may discourage third parties from submitting alternative takeover proposals, including proposals that may be superior to the arrangements contemplated by the merger agreement.

The terms of the merger agreement prohibit each of Graybug and CalciMedica from soliciting alternative takeover proposals or cooperating with persons making unsolicited takeover proposals, except in limited circumstances when, among other things, the Graybug Board determines in good faith after consultation with outside financial advisors and outside legal counsel that an unsolicited alternative takeover proposal is or is reasonably likely to result in a superior takeover proposal, and that failure to cooperate with the proponent of the proposal could be reasonably likely to be inconsistent with the Graybug Board’s fiduciary duties.

If the conditions to the merger are not met, the merger may not occur.

Even if the share issuances and amended and restated certificate of incorporation to effect the reverse stock split are approved by Graybug’s stockholders, specified conditions must be satisfied or waived to complete the merger. These conditions are set forth in the merger agreement and described in the section entitled “The Merger Agreement—Conditions to the Completion of the Merger”. Graybug cannot assure you that all of the conditions will be satisfied or waived. If the conditions are not satisfied or waived, the merger will not occur or will be delayed, and Graybug and CalciMedica each may lose some or all of the intended benefits of the merger.

Risks Related to the Reverse Stock Split and Amended and Restated Certificate of Incorporation

The reverse stock split may not increase Graybug’s stock price over the long-term.

The principal purpose of the reverse stock split is to increase the per-share market price of Graybug common stock above the minimum bid price requirement under the Nasdaq rules so that the listing on Nasdaq of the combined company and the shares of Graybug common stock being issued in the merger will be approved. It cannot be assured, however, that the reverse stock split will accomplish this objective for any meaningful period of time. While it is expected that the reduction in the number of outstanding shares of common stock will proportionally increase the market price of Graybug common stock, it cannot be assured that the reverse stock split will increase the market price of its common stock by a multiple of the reverse stock split ratio chosen by the Graybug Board, or result in any permanent or sustained increase in the market price of Graybug common stock, which is dependent upon many factors, including Graybug’s business and financial performance, general market conditions, and prospects for future success. Thus, while the stock price of the combined company might meet the continued listing requirements for Nasdaq initially, it cannot be assured that it will continue to do so.

The reverse stock split may decrease the liquidity of Graybug common stock.

Although the Graybug Board believes that the anticipated increase in the market price of Graybug common stock could encourage interest in its common stock and possibly promote greater liquidity for its stockholders, such liquidity could also be adversely affected by the reduced number of shares outstanding after the reverse stock split. The reduction in the number of outstanding shares may lead to reduced trading and a smaller number of market makers for Graybug common stock.

The reverse stock split may lead to a decrease in Graybug’s overall market capitalization.

Should the market price of Graybug common stock decline after the reverse stock split, the percentage decline may be greater, due to the smaller number of shares outstanding, than it would have been prior to the reverse stock split. A reverse stock split is often viewed negatively by the market and, consequently, can lead to a

 

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decrease in Graybug’s overall market capitalization. If the per share market price does not increase in proportion to the reverse stock split ratio, then the value of the combined company, as measured by its stock capitalization, will be reduced. In some cases, the per-share stock price of companies that have effected reverse stock splits subsequently declined back to pre-reverse split levels, and accordingly, it cannot be assured that the total market value of Graybug common stock will remain the same after the reverse stock split is effected, or that the reverse stock split will not have an adverse effect on Graybug’s stock price due to the reduced number of shares outstanding after the reverse stock split.

The elimination of personal liability against the combined company’s directors and officers under Delaware law and the existence of indemnification rights held by the combined company’s directors, officers and employees may result in substantial expenses.

If approved, the amended and restated certificate of incorporation of Graybug, as described in Proposal 2, eliminates the personal liability of the combined company’s directors and officers to the combined company and its stockholders for damages for breach of fiduciary duty as a director or officer to the extent permissible under Delaware law. Further, the current restated bylaws of Graybug (which will be the restated bylaws of the combined company) provide that the combined company is obligated to indemnify each of its directors or officers to the fullest extent authorized by the Delaware law and, subject to certain conditions, advance the expenses incurred by any director or officer in defending any action, suit or proceeding prior to its final disposition. Those indemnification obligations could expose the combined company to substantial expenditures to cover the cost of settlement or damage awards against the combined company’s directors or officers, which the combined company may be unable to afford. Further, those provisions and resulting costs may discourage the combined company or its stockholders from bringing a lawsuit against any of the combined company’s current or former directors or officers for breaches of their fiduciary duties, even if such actions might otherwise benefit the combined company’s stockholders.

Risks Related to Graybug

For risks related to the business of Graybug, please refer to the section entitled “Item 1A. Risk Factors” set forth in Graybug’s Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the SEC on March 11, 2022, as updated by Graybug’s subsequent Quarterly Reports on Form 10-Q.

Risks Related to CalciMedica

Unless otherwise indicated or the context otherwise requires, references in this “—Risks Related to CalciMedica” section to “CalciMedica,” the “Company” “we,” “us,” “our” and other similar terms refer to CalciMedica, Inc.

Risks Related to Our Limited Operating History, Financial Position and Capital Requirements

We are a clinical-stage biopharmaceutical company with a limited operating history. We have incurred net losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future. We have never generated any revenue from product sales and may never be profitable.

We are a clinical-stage biopharmaceutical company with a limited operating history that may make it difficult to evaluate the success of our business to date and assess our future viability. We commenced operations in October 2006, have no products approved for commercial sale and have never generated any revenue. To date, we have devoted substantially all of our resources to organizing and staffing our company, business planning, establishing and maintaining our intellectual property portfolio, raising capital, developing our product candidates, undertaking research and development activities, and providing general and administrative support for these operations. We are conducting several clinical trials and preclinical studies for our lead product candidate, Auxora, which is currently in an ongoing Phase 2b clinical trial in acute pancreatitis (“AP”) and

 

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accompanying systemic inflammatory response syndrome (“SIRS”), an ongoing Phase 1/2 clinical trial for which we have completed with our investigator the first cohort in pediatric patients with asparaginase-associated pancreatitis (“AAP”) as a side effect of pediatric acute lymphoblastic leukemia treatment with asparaginase, and a Phase 2 trial for which we have completed with our investigator the enrollment and patient treatment in COVID-19 pneumonia patients with acute respiratory distress syndrome (“ARDS”) which may inform the design of a Phase 2 clinical trial for the treatment of acute hypoxemic respiratory failure (“AHRF”) and/or ARDS caused by a broad range of infectious agents, as well as preclinical studies in acute kidney injury (“AKI”). Our other pipeline programs, which include new product candidates, are in preclinical development. We have incurred net losses each year since our inception. For the years ended December 31, 2020 and 2021, our net losses were $15.2 million and $23.5 million, respectively. As of September 30, 2022, we had an accumulated deficit of $113.2 million. We expect that it will be several years, if ever, before we have a product candidate ready for commercialization. We expect to incur increasing levels of operating losses over the next several years and for the foreseeable future as we advance our product candidates through clinical development. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ equity and working capital.

To become and remain profitable, we must develop and eventually commercialize product candidates with significant market potential. This will require us to be successful in a range of challenging activities, including completing preclinical studies and clinical trials of our product candidates, obtaining marketing approval for these product candidates, finding external manufacturing capacity sufficient to meet commercial demand, marketing and selling those product candidates for which we may obtain marketing approval and satisfying any post-marketing requirements. We may never succeed in these activities and, even if we succeed in commercializing one or more of our product candidates, we may never generate revenue that is significant or large enough to achieve profitability. In addition, as a young business, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown challenges. If we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis and we will continue to incur substantial research and development and other expenditures to develop and market additional product candidates. Our failure to become and remain profitable would decrease the value of the company and could impair our ability to raise capital, maintain our research and development efforts, 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 will need to obtain substantial additional funding to complete the development and any commercialization of our product candidates. If we are unable to raise this capital when needed, on acceptable terms, or at all, we may be forced to delay, reduce or eliminate our proprietary product candidate development process or other operations.

Since we commenced operations in October 2006, we have principally financed our operations through private placements of our preferred stock, convertible promissory notes and common stock. We have used substantial amounts of cash to fund our operations and we expect our expenses to increase substantially during the next several years and for the foreseeable future. The development of drug product candidates is highly capital intensive. As our product candidates enter and advance through preclinical studies and clinical trials, we will need substantial additional funds to expand our clinical, regulatory and quality capabilities. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to marketing, sales, manufacturing and distribution. Furthermore, following the closing of the merger, we expect to incur additional costs associated with operating as a public company. 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.

As of September 30, 2022, we had $96,000 in cash and cash equivalents. We believe, based on our current operating plan, that the net proceeds from the merger and private placement, together with our cash and cash

 

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equivalents as of September 30, 2022 and the receipt of the net cash proceeds from the sale of CalciMedica’s convertible promissory notes, will be sufficient to fund our operations until the second half of 2024. In particular, we expect that the net proceeds from the merger and private placement will allow us to fund the advancement of Auxora in AP and AAP through clinical milestones in 2023. However, the expected net proceeds from the merger and private placement will not be sufficient to fund any of our product candidates through regulatory approval, nor will it be sufficient to pursue additional indications for Auxora like AKI and AHRF, nor will it be sufficient to fund work on other product candidates in our portfolio aside from Auxora, and we will need to raise substantial additional capital to complete the development and commercialization of our product candidates.

We have based these estimates on assumptions that may prove to be incorrect or require adjustment as a result of business decisions, and we could utilize our available capital resources sooner than we currently expect. Our future funding requirements will depend on many factors, including, but not limited to:

 

   

the progress, costs and results of our ongoing clinical trials of Auxora and our planned trials for our other product candidates;

 

   

the scope, progress, results and costs of discovery research, preclinical development, laboratory testing and clinical trials for our product candidates, including our ongoing clinical trials of Auxora;

 

   

the number of, and development requirements for, other product candidates that we pursue;

 

   

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

 

   

our ability to enter into contract manufacturing arrangements for supply of active pharmaceutical ingredient (“API”) and manufacture of drug product for our product candidates and the terms of such arrangements;

 

   

our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of such arrangements;

 

   

the payment or receipt of milestones and receipt of other collaboration-based revenues, if any;

 

   

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

 

   

the amount and timing of revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval;

 

   

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

 

   

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

 

   

the ability to receive additional non-dilutive funding, including grants from organizations and foundations;

 

   

the impacts of the COVID-19 pandemic and the ongoing conflict between Ukraine and Russia; and

 

   

the costs of operating as a public company.

Because we do not expect to generate revenue from product candidate sales for many years, if at all, we will need to obtain substantial additional funding in connection with our continuing operations and expected increases in expenses. Until such time as we can generate significant revenue from sales of our product candidates, if ever, we expect to finance our cash needs through equity offerings, debt financings or other capital sources, including potentially grants, collaborations, licenses or other similar arrangements. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all. In addition, we may seek additional capital due to favorable market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future

 

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operating plans. The impacts of the COVID-19 pandemic and the ongoing conflict between Ukraine and Russia on capital markets may affect the availability, amount and type of financing available to us in the future. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts.

Our general business strategy may be adversely affected by any such economic downturn, volatile business environment or continued unpredictable and unstable market conditions. If the current equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult, more costly and more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could adversely affect our growth strategy, financial performance and stock price and could require us to delay or abandon clinical development plans. In addition, there is a risk that one or more of our current service providers, manufacturers and other partners may not survive an economic downturn, which could directly affect our ability to attain our operating goals on schedule and on budget.

We may not consummate the private placement or may fail to receive the minimum private placement proceeds of $10.0 million, which could put financial strain on our ability to fund our operations as planned.

The closing of the private placement is expected to occur immediately prior to the closing of the merger and is subject to certain closing conditions, including the requirement that the private placement investors purchase at least $10.0 million shares of CalciMedica common stock, as specified in the securities purchase agreement. While the private placement investors have agreed to purchase an aggregate of $10.3 million shares of CalciMedica common stock, there can be no assurances that such purchases will occur. Although the consummation of the private placement is not a condition to closing the merger, we believe, based on our current operating plan, that the net proceeds from the merger and private placement, together with our cash and cash equivalents as of September 30, 2022 and the receipt of the net cash proceeds from the sale of CalciMedica’s convertible promissory notes, will be sufficient to fund our operations until the second half of 2024. In particular, we expect that the net proceeds from the merger and private placement will allow us to fund the advancement of Auxora in AP and AAP through clinical milestones in 2023. In the event that the private placement is not consummated, or we raise less than we expect, we may have to look for alternative sources of funding earlier than expected to meet our expected cash runway or revise our current operating plan. See “Risk Factors—Risks Related to CalciMedica—Risks Related to Our Limited Operating History, Financial Position and Capital Requirements— We will need to obtain substantial additional funding to complete the development and any commercialization of our product candidates. If we are unable to raise this capital when needed, on acceptable terms, or at all, we may be forced to delay, reduce or eliminate our proprietary product candidate development process or other operations.”

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

Until such time, if ever, as we can generate substantial product revenue, we expect to finance our operations through equity offerings, debt financings or other capital sources, including potentially grants, collaborations, licenses or other similar arrangements. 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 common stockholder. Debt financing, if available, may involve agreements that include covenants further limiting or restricting our ability to take specific actions, such as limitations on our ability to incur debt, make capital expenditures or declare dividends.

If we raise funds through collaborations 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 when needed, we may be required to delay, limit, reduce or terminate our proprietary product candidate development process or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

 

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Attempting to secure additional financing may also divert our management from our day-to-day activities, which may impair or delay our ability to develop our proprietary platform. In addition, demands on our cash resources may change as a result of many factors currently unknown to us including, but not limited to, any unforeseen costs we may incur as a result of preclinical study or clinical trial delays, or disruptions in the manufacturing of our product candidates, due to the COVID-19 pandemic, the ongoing conflict between Ukraine and Russia or other causes, and we may need to seek additional funds sooner than planned. If we are unable to obtain funding on a timely basis or at all, we may be required to significantly curtail or stop one or more of our research or development programs.

Our business and the business or operations of third parties with whom we conduct business could be adversely affected by the effects of health pandemics or epidemics, including the COVID-19 pandemic, in regions where we or third parties on which we rely have business operations.

Our business could be adversely affected by health pandemics or epidemics, including the COVID-19 pandemic. The COVID-19 pandemic has resulted in governments implementing numerous containment measures, such as travel bans and restrictions, particularly quarantines, stay at home orders and business limitations and shutdowns. We have implemented policies that enable some of our employees to work in the research laboratories and for other employees to work remotely, and such policies may continue for an indefinite period. We have also implemented various safety protocols for all on-site personnel, including the requirement to wear masks and maintain social distance. We will have reopened our offices to allow employees to return when appropriate, although may face several challenges or disruptions upon a return back to the workplace, including re-integration challenges by our employees and distractions to management related to such transition. These and similar challenges and disruptions in our operations due to the COVID-19 pandemic could negatively impact our business, financial condition, results of operations and prospects.

The COVID-19 pandemic, which has caused a broad impact globally, may materially affect us economically. While the potential economic impact brought by, and the duration of, the COVID-19 pandemic may be difficult to assess or predict, the pandemic has caused disruption in the global financial markets. This disruption, if sustained or recurrent, could make it more difficult for us to access capital in the future. In addition, a recession or market correction resulting from the COVID-19 pandemic could materially affect our business and the value of our common stock.

As a result of the COVID-19 pandemic or any other pandemic, epidemic or outbreak of an infectious disease, we may experience disruptions that could severely impact our business, preclinical studies and clinical trials, including:

 

   

delays or difficulties in enrolling patients in our clinical trials;

 

   

delays or difficulties in clinical site initiation, including difficulties in recruiting clinical site investigators and clinical site staff;

 

   

interruptions or delays in patient accrual for clinical trials due to staffing shortages, including shortages in nurses and clinical trial coordinators at hospital sites;

 

   

diversion of healthcare resources away from the conduct of clinical trials, including the diversion of hospitals serving as our clinical trial sites and hospital staff supporting the conduct of our clinical trials;

 

   

interruption of key clinical trial activities, such as clinical trial site data monitoring, due to limitations on travel imposed or recommended by U.S. federal, state or foreign governments, employers and others or interruption of clinical trial subject visits and study procedures, which may impact the integrity of subject data and clinical study endpoints;

 

   

interruption or delays in the operations of the U.S. Food and Drug Administration (“FDA”) or other regulatory authorities, which may impact review and approval timelines;

 

   

interruption or delays in manufacturing operations due to staffing shortages, production slowdowns or stoppages and disruptions in delivery systems;

 

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the need for additional contract manufacturing resources and personnel;

 

   

delays in clinical sites receiving the supplies and materials needed to conduct our clinical trials, including interruption in global shipping that may affect the transport of clinical trial materials;

 

   

delays of our preclinical studies due to shortages of animals for laboratory testing and preclinical studies, due in part to global supply chain shortages and the COVID-19 pandemic;

 

   

some patients may not be able or willing to comply with clinical trial protocols if quarantines impede patient movement or interrupt healthcare services.

 

   

interruptions in our preclinical studies and clinical trials due to restricted or limited operations at our laboratory facilities;

 

   

limitations on employee resources that would otherwise be focused on the conduct of our preclinical studies and clinical trials, including because of sickness of employees or their families or the desire of employees to avoid contact with large groups of people; and

 

   

interruption or delays to our discovery and clinical activities.

If any of our clinical trials are delayed or suspended as a result of COVID-19 or for other reasons, they may not reinitiate or commence enrollment and their enrollment may not be reinitiated at all. For our ongoing clinical trials, COVID-19 may require us to delay or pause dosing or data collection in our clinical trials as a result of negative impacts to site initiation, participant recruitment and enrollment, participant dosing, distribution of clinical trial materials, trial monitoring or data analysis. Even if we are able to collect clinical data while the pandemic is ongoing, COVID-19 may negatively affect the quality, completeness or interpretability of that clinical data as a result of deviations from clinical study protocols, disruptions in patient screening or dosing (for instance, as a result of delays in manufacturing) or disruptions in patient evaluations (for instance, as a result of inabilities to conduct study visits while following local public health requirements or inabilities to conduct remote assessments). Any of these effects could adversely affect our ability to obtain regulatory approval for and to commercialize our product candidates, increase our operating expenses and have an adverse effect on our business and financial results.

The ultimate impact of the COVID-19 pandemic or a similar health pandemic or epidemic is highly uncertain and will depend on future developments. We do not yet know the full extent of potential delays or impacts on our business, our clinical trials, healthcare systems or the global economy as a whole, but these delays could have a material impact on our operations.

Any acquisitions or strategic collaborations may increase our capital requirements, dilute our stockholders, cause us to incur debt or assume contingent liabilities or subject us to other risks.

From time to time, we may evaluate various acquisitions and strategic collaborations, including licensing or acquiring complementary products and technologies, intellectual property rights, technologies or businesses. Any acquisition or strategic partnership may entail numerous risks, including, but not limited to:

 

   

increased operating expenses and cash requirements;

 

   

the assumption of indebtedness or contingent or unknown liabilities;

 

   

assimilation of operations, intellectual property and products or product candidates of an acquired company, including difficulties associated with integrating new personnel;

 

   

the diversion of our management’s attention from our existing product candidates and initiatives in pursuing such an acquisition or a strategic partnership;

 

   

retention of key employees, the loss of key personnel and uncertainties about our ability to maintain key business relationships;

 

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risks and uncertainties associated with the other party to such a transaction, including the prospects of that party and their existing products or product candidates and regulatory approvals, and the possibility of disagreements or disputes with such other party; and

 

   

our inability to generate revenue from acquired products, product candidates, intellectual property rights, technologies, and/or businesses sufficient to meet our objectives in undertaking the acquisition or even to offset the associated acquisition and maintenance costs.

In addition, if we engage in acquisitions or strategic partnerships, we may issue dilutive securities, assume or incur debt obligations, incur large one-time expenses or acquire intangible assets that could result in significant future amortization expense. Moreover, we may not be able to locate suitable acquisition opportunities, and this inability could impair our growth or limit access to technology or drugs that may be important to the development of our business.

There is substantial doubt about our ability to continue as a going concern. We will need additional financing to execute our business plan, to fund our operations and to continue as a going concern.

We have prepared cash flow forecasts which indicate that, based on our expected operating losses and negative cash flows, there is substantial doubt about our ability to continue as a going concern for the twelve months after independent registered public accounting firm on our financial statements as of and for the years ended December 31, 2021 and 2020 includes an explanatory paragraph indicating that there is substantial doubt about our ability to continue as a going concern. Our financial statements as of December 31, 2021 and 2020 were prepared under the assumption that we will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty. Our ability to continue as a going concern will be determined by our ability to generate sufficient cash flow to sustain our operations and/or to raise additional capital. If we are unable to raise sufficient capital when needed, our business, financial condition and results of operations will be materially and adversely affected, and we will need to significantly modify our operational plans to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements. The inclusion of a going concern explanatory paragraph by our auditors, our lack of cash resources and our potential inability to continue as a going concern may materially adversely affect our share price and our ability to raise new capital or to enter into critical contractual relations with third parties.

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

Our proprietary CRAC channel inhibition science is based on novel technologies that are unproven and may not result in approvable or marketable products, which exposes us to unforeseen risks and makes it difficult for us to predict the time and cost of product development and potential for regulatory approval and we may not be successful in our efforts to use and expand our science to build a pipeline of product candidates.

We are seeking to identify and develop a broad pipeline of product candidates using our proprietary CRAC channel inhibitor science to address acute critical illness and chronic inflammatory diseases where there are no effective therapies. Our lead product candidate, Auxora, is currently in Phase 2 clinical development and we have only completed one randomized, blinded placebo-controlled trial with Auxora to date. We are not aware of any FDA approved therapeutics utilizing similar technology. Further, the scientific evidence to support the feasibility of developing therapeutic treatments based on our proprietary CRAC channel inhibition science is both preliminary and limited. Additionally, there are no drugs currently approved for the treatment of AP and as a result the FDA has not established the endpoints that will be required for approval in this indication. As a result, we are exposed to a number of unforeseen risks and it is difficult to predict the types of challenges and risks that we may encounter during development of our product candidates.

Given the novelty of our CRAC channel inhibition science, we intend to work closely with the FDA and comparable foreign regulatory authorities to perform the requisite scientific analyses and evaluation of our

 

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methods to obtain regulatory approval for our product candidates; however, due to a lack of relevant experience with the indications that we are pursuing, the regulatory pathway with the FDA and comparable regulatory authorities may be more complex and time-consuming. There can be no assurance as to the length of clinical development, the number of patients that the FDA may require to be enrolled in clinical trials to establish the safety and efficacy of our product candidates, or that the data generated in these clinical trials will be acceptable to the FDA to support marketing approvals. We cannot be certain that our approach will lead to the development of approvable or marketable products, alone or in combination with other therapies. If we are unable to develop, or obtain regulatory approval for, or, if approved, successfully commercialize our product candidates, we may not be able to generate sufficient revenue to continue our business.

Our business is highly dependent on the success of our product candidates, in particular Auxora, and we may fail to develop Auxora successfully or be unable to obtain regulatory approval.

Our future success is dependent on our ability to timely and successfully complete clinical trials, obtain marketing approval for and successfully commercialize Auxora, our lead product candidate. We are investing the majority of our efforts and financial resources in the research and development of Auxora for multiple indications. Auxora is currently in several studies: an ongoing Phase 2b clinical trial in AP and accompanying SIRS; an ongoing Phase 1/2 clinical trial, for which we have completed with our investigator the first cohort, in pediatric patients with AAP as a side effect of pediatric acute lymphoblastic leukemia treatment with asparaginase; a Phase 2 trial, for which we have completed with our investigator the enrollment and patient treatment in COVID-19 pneumonia patients with ARDS which may inform the design of a Phase 2 clinical trial for the treatment of AHRS and/or ARDS caused by a broad range of infectious agents; and preclinical studies in AKI. We also have additional preclinical product candidates that will need to progress through investigational new drug (“IND”) application enabling studies prior to clinical development. None of our product candidates have advanced into a late-stage or pivotal trials for the indications for which we are pursuing development. Our ability to generate product revenues, which we do not expect will occur for many years, if ever, will depend heavily on the successful development and eventual commercialization of our product candidates.

Although certain of our employees have prior experience with clinical trials, regulatory approvals and manufacturing of pharmaceutical products, we have not previously completed any late-stage or pivotal clinical trials or submitted an NDA to the FDA or regulatory approval filings to comparable foreign authorities for any product candidate, and Auxora may not be successful in clinical trials and may not receive any regulatory approval. The FDA and other comparable global regulatory authorities can delay, limit or deny approval of a product candidate for many reasons. Any delay in obtaining, or inability to obtain, applicable regulatory approval will delay or harm our ability to successfully commercialize Auxora and harm our business, financial condition, results of operations and prospects.

Furthermore, because Auxora is our most advanced product candidate, if our clinical trials of Auxora encounter safety, efficacy or manufacturing problems, development delays, regulatory issues or other problems, our development plans for Auxora and our other product candidates in our pipeline could be significantly impaired, which could harm our business, financial condition, results of operations and prospects.

The success of our business, including our ability to finance our company and generate any revenue in the future, will primarily depend on the successful development, regulatory approval and commercialization of our product candidates, which may never occur. We have not yet succeeded and may not succeed in demonstrating efficacy and safety for any product candidate in late-stage clinical trials for regulatory approval or in obtaining marketing approval thereafter. Given our early stage of development, it may be several years, if at all, before we have demonstrated the safety and efficacy of a treatment sufficient to warrant approval for commercialization. If we are unable to develop, or obtain regulatory approval for, or, if approved, successfully commercialize our product candidates, we may not be able to generate sufficient revenue to continue our business.

 

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Clinical development is a lengthy, expensive and uncertain process. The results of preclinical studies and early clinical trials are not always predictive of future results. Any product candidate that we advance into clinical trials may not achieve favorable results in later clinical trials, if any, or receive marketing approval.

The research and development of drugs is extremely risky. Only a small percentage of programs that enter the clinical development process ever receive marketing approval. Before obtaining marketing approval from regulatory authorities for the sale of our product candidates, we must conduct extensive clinical trials to demonstrate the safety and efficacy of the product candidate in humans. Clinical testing is expensive, can take many years to complete and its outcome is uncertain. 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 product candidates.

The results of preclinical studies and early clinical candidates, even those with the same or similar mechanisms of action, may not be predictive of the results of later-stage clinical trials. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy characteristics despite having progressed through preclinical studies and initial clinical trials. While we have previously received results, some preliminary, from one randomized, blinded placebo-controlled trial, one small blinded randomized SOC-controlled trial, one small randomized open-label placebo-controlled trial, and one small open-label single site trial, we do not know how Auxora will perform in the ongoing Phase 2 clinical trials or in future clinical trials with larger sample sizes. Results of clinical trials with smaller sample sizes, such as our completed SOC-controlled Phase 2a clinical trial of Auxora in 21 patients with AP and accompanying SIRS, can be disproportionately influenced by various biases associated with the conduct of small clinical trials, such as the potential failure of the smaller sample size to accurately depict the features of the broader patient population, which limits the ability to generalize the results across a broader community, thus making the clinical trial results less reliable than clinical trials with a larger number of patients. In general, clinical trial failure may result from a multitude of factors including flaws in trial design, dose selection, patient enrollment criteria and failure to demonstrate favorable safety or efficacy traits. As such, failure in clinical trials can occur at any stage of testing. A number of companies in the biopharmaceutical industry have suffered setbacks in the advancement of clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials.

To date, we have not completed any late-stage or pivotal clinical trials for any of our product candidates. We cannot guarantee that any clinical trials will be initiated or conducted as planned or completed on schedule, if at all. We also cannot be sure that submission of an IND or similar application will result in the FDA or other regulatory authority, as applicable, allowing clinical trials to begin in a timely manner, if at all.

Moreover, even if these trials begin, issues may arise that could cause regulatory authorities to suspend or terminate such clinical trials. A failure of one or more clinical trials can occur at any stage of testing, and our future clinical trials may not be successful. Any of these events could cause delays and interruptions in our clinical trials, which could adversely affect our business.

We may experience delays in site initiation and patient enrollment, failures to comply with study protocols, delays in the manufacture of our product candidates for clinical testing and other difficulties in starting or competing our clinical trials. Other events that may prevent successful or timely completion of clinical development include:

 

   

inability to generate sufficient preclinical, toxicology, or other in vivo or in vitro data to support the initiation or continuation of clinical trials;

 

   

delays in reaching a consensus with regulatory agencies, the FDA or foreign regulatory authorities, on trial design or implementation;

 

   

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

 

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delays in identifying, recruiting and training suitable clinical investigators;

 

   

delays in obtaining required institutional review board (“IRB”) or independent ethics committee (“IEC”) approval at each clinical trial site;

 

   

delays in recruiting suitable patients to participate in our clinical trials;

 

   

imposition of a clinical hold by regulatory agencies for a number of reasons, including after review of an IND or amendment or equivalent foreign application or amendment, as a result of a new safety finding that presents unreasonable risk to clinical trial participants, or after a negative finding from an inspection of our clinical trial operations or study sites;

 

   

failure by our CROs, other third parties or us to adhere to the trial protocol or good clinical practices (“GCPs”);

 

   

third-party contractors or clinical investigators becoming debarred or suspended or otherwise penalized by the FDA or other comparable foreign regulatory authorities for violations of applicable regulatory requirements;

 

   

delays in the testing, validation, manufacturing and delivery of our product candidates to the treatment sites, including due to supply or manufacturing related delays, being ordered by the FDA or comparable foreign regulatory authorities to temporarily or permanently shut down due to violations of current good manufacturing practices (“cGMP”), regulations or other applicable requirements, or infections or cross- contaminations of our product candidates in the manufacturing process;

 

   

delays in having subjects complete participation in a study or return for post-treatment follow-up;

 

   

changes to the clinical trial protocols;

 

   

clinical trial sites or subjects deviating from the trial protocol or dropping out of a study;

 

   

changes in the standard of care (“SOC”) on which a clinical development plan was based, which may require new or additional trials;

 

   

selection of clinical endpoints that require prolonged periods of observation or analyses of resulting data;

 

   

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

 

   

clinical trials of our product candidates producing negative or inconclusive results, which may result in our deciding, or regulators requiring us, to conduct additional clinical trials or abandon development of such product candidates;

 

   

transfer of manufacturing processes to larger-scale facilities operated by a contract manufacturing organization, and delays or failure by our such manufacturers or us to make any necessary changes to such manufacturing process;

 

   

occurrence of adverse events (“AEs”) associated with the product candidate that are viewed to outweigh its potential benefits, or occurrence of AE in trial of the same class of agents conducted by other companies;

 

   

we plan to conduct a significant portion of our ongoing CARPO trial in India and to the extent that we conduct clinical trials in foreign countries, the failure of enrolled subjects in foreign countries to adhere to clinical protocol as a result of differences in SOC, provision of healthcare services or cultural customs;

 

   

patients in different geographies, including foreign countries, may show differences in clinical outcomes than expected due to differences in underlying disease etiologies or genetic factors;

 

   

conducting clinical trials in a foreign country may also present additional administrative burdens or delays associated with foreign regulatory schemes including different requirements for clinical trial protocols;

 

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conducting clinicals in a foreign country may introduce political and economic risks relevant to such foreign countries;

 

   

receiving untimely or unfavorable feedback from applicable regulatory authorities regarding the trial or requests from regulatory authorities to modify the design of a trial;

 

   

suspensions or terminations by us, the IRBs (or the IECs) of the institutions at which such trials are being conducted, by the data safety monitoring board (“DSMB”), for such trial or by regulatory authorities due to a number of factors, including those described above;

 

   

lack of adequate funding; or

 

   

changes in regulatory requirements and guidance that require amending or submitting new clinical protocols.

In addition, disruptions caused by the COVID-19 pandemic or the ongoing conflict between Ukraine and Russia may increase the likelihood that we encounter such difficulties or delays in initiating, enrolling, conducting or completing our planned and ongoing clinical trials. Any inability to successfully complete preclinical and clinical development could result in additional costs to us or impair our ability to raise capital, generate revenues from product candidate sales and enter into or maintain collaboration arrangements. For example, if enrollment in a clinical trial is slowed, certain of our expenses related to the trial would not decrease and therefore the overall costs to complete the trial would increase. Ongoing staffing shortages and budgetary constraints or any great increases in hospitalizations caused by the COVID-19 pandemic may negatively impact our ability to recruit patients or to treat patients in a manner consistent with historical medical practices. In addition, if we make manufacturing changes to our product candidates, we may need to conduct additional studies to bridge our modified product candidates to earlier versions. Clinical trial delays could also shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring product candidates to market before we do, which could impair our ability to successfully commercialize our product candidates and may harm our business and results of operations.

One of our product candidates is, and potential future product candidates may be, developed for the treatment of a pediatric population, for which safety concerns may be particularly scrutinized by regulatory agencies. Trials involving pediatric populations can be difficult to conduct, can be quite costly and, like other clinical trials, may not yield the anticipated results. In addition, pediatric trials are more dependent on a smaller number of specialized clinical trial sites, which in turn can limit site availability and make the trials more expensive to conduct. In addition, as interest in pediatric indications grows as a result of the RACE Act and other market forces, trial recruitment may become even more difficult due to competition for eligible patients. Moreover, it may be challenging to ensure that pediatric or adolescent patients adhere to clinical trial protocols.

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

 

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We plan to conduct a significant portion of our ongoing CARPO trial in India and regulatory authorities may not accept data from such trial or any future clinical trials we conduct outside the United States or the applicable foreign jurisdiction.

We plan to conduct a significant portion of our ongoing CARPO trial in India and may conduct further clinical trials in India or other countries outside the United States. The acceptance of trial data from clinical trials conducted outside the United States or another jurisdiction by the FDA or comparable non-U.S. regulatory authorities may be subject to certain conditions or may not be accepted at all. In cases where data from non-U.S. clinical trials are intended to serve as the basis for marketing approval in the United States, the FDA will generally not approve the application on the basis of non-U.S. data alone unless (i) the data are applicable to the U.S. population and U.S. medical practice; and (ii) the trials were performed by clinical investigators of recognized competence and pursuant to GCP regulations. Additionally, the FDA’s clinical trial requirements, including sufficient size of patient populations and statistical powering, must be met. Many non-U.S. regulatory authorities have similar approval requirements. In addition, such non-U.S. trials would be subject to the applicable local laws of the non-U.S. jurisdictions where the trials are conducted. There can be no assurance that the FDA or any comparable non-U.S. regulatory authority will accept data from trials conducted outside of the United States or the applicable jurisdiction. If the FDA or any comparable non-U.S. regulatory authority does not accept such data or believes that additional data is necessary to supplement such data, it would result in the need for additional trials, which would be costly and time-consuming and delay aspects of our business plan, and which may result in product candidates that we may develop not receiving approval for commercialization in the applicable jurisdiction

Conducting clinical trials outside the United States also exposes us to additional risks, including risks associated with:

 

   

additional foreign regulatory requirements;

 

   

foreign exchange fluctuations;

 

   

compliance with foreign manufacturing, customs, shipment and storage requirements;

 

   

the failure of enrolled subjects in foreign countries to adhere to clinical protocol as a result of differences in SOC;

 

   

cultural differences in medical practice and clinical research; and

 

   

diminished protection of intellectual property in some countries.

We depend on enrollment of patients in our clinical trials for our product candidates. If we experience delays or difficulties enrolling patients in our clinical trials, our research and development efforts and business, financial condition, results of operations and prospects could be adversely affected.

Successful and timely completion of clinical trials will require that we enroll a sufficient number of patients to participate in each study. These trials may be subject to delays for a variety of reasons, including as a result of patient enrollment taking longer than anticipated, subject withdrawal from the trial or AEs. These types of developments could cause us to delay the trial or halt further development. Our clinical trials will compete with other clinical trials that are in the same therapeutic areas as our product candidates, and this competition reduces the number and types of patients available to us, as some patients who might have opted to enroll in our trials may instead opt to enroll in a trial being conducted by one of our competitors. Because the number of qualified clinical investigators and clinical trial sites is limited, we expect to conduct some of our clinical trials at the same clinical trial sites that some of our competitors use, which will reduce the number of patients who are available for our clinical trials at such clinical trial sites. In addition, there may be limited patient pools from which to draw for clinical studies. In addition to the rarity of some diseases, the eligibility criteria of our clinical studies will further limit the pool of available study participants as we will require that patients have specific characteristics that we can measure or to assure their disease is either severe enough or not too advanced to include them in a clinical trial.

 

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Participant enrollment in clinical trials depends on many factors, including:

 

   

the size and nature of the patient population;

 

   

the severity of the disease under investigation;

 

   

eligibility criteria for the trial;

 

   

the proximity of patients to clinical sites;

 

   

the design of the clinical protocol;

 

   

the ability to obtain and maintain research subject consents;

 

   

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

 

   

the availability of competing clinical trials;

 

   

the state of the COVID-19 pandemic;

 

   

patients’ perceptions of risk in traveling to clinical sites (for patients in non-hospitalized clinical trial settings);

 

   

the availability of new drugs approved for the indication the clinical trial is investigating; and

 

   

clinicians’ and patients’ perceptions as to the potential advantages of the product candidate being studied in relation to other available therapies.

These factors may make it difficult for us to enroll enough patients to complete our clinical trials in a timely and cost-effective manner. Delays in the completion of any clinical trial of our product candidates will increase our costs, slow down our product candidate development and approval process and delay or potentially jeopardize our ability to commence product sales and generate revenue. In addition, some of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.

Interim, topline and preliminary data from our clinical trials may change as more participant data become available, and are subject to audit and verification procedures that could result in material changes in the final data.

From time to time, we may publicly disclose preliminary, interim or topline data from our preclinical studies and clinical trials, which is based on a preliminary analysis of then-available data, and the results and related findings and conclusions are subject to change as participant enrollment and treatment continues and more data become available. Our data to date is based on a small number of subjects, and as a result, data from additional subjects can have a significant impact on the overall data viewed as a whole. Adverse differences between previous preliminary or interim data and future interim or final data could significantly harm our business prospects. We may also announce topline data following the completion of a preclinical study or clinical trial, which may be subject to change following a more comprehensive review of the data related to the particular study or trial. We also make assumptions, estimations, calculations and conclusions as part of our analyses of data, and we may not have received or had the opportunity to fully and carefully evaluate all data. As a result, the interim, topline or preliminary results that we report may differ from future results of the same studies, or different conclusions or considerations may qualify such results, once additional data have been received and fully evaluated. Topline data also remain subject to audit and verification procedures that may result in the final data being materially different from the preliminary data we previously published. As a result, interim, topline and preliminary data should be viewed with caution until the final data are available.

Further, others, including regulatory agencies, may not accept or agree with our assumptions, estimates, calculations, conclusions or analyses or may interpret or weigh the importance of data differently, which could impact the value of the particular program, the approvability or commercialization of the particular product

 

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candidate or product and our company in general. In addition, the information we choose to publicly disclose regarding a particular study or clinical trial is based on what is typically extensive information, and you or others may not agree with what we determine to be material or otherwise appropriate information to include in our disclosure. If the interim, top-line, or preliminary data that we report differ from actual results, or if others, including regulatory authorities, disagree with the conclusions reached, our ability to obtain approval for, and commercialize, our product candidates may be harmed, which could harm our business, financial condition, results of operations and prospects.

SAEs, undesirable side effects or other unexpected properties of our product candidates could lead to the discontinuation of our clinical development programs, refusal by regulatory authorities to approve our product candidates or, if discovered following marketing approval, revocation of marketing authorizations or limitations on the use of our product candidates thereby limiting the commercial potential of such product candidate.

As we continue developing Auxora and initiate clinical trials of our additional product candidates, Serious Adverse Events (“SAEs”), undesirable side effects, relapse of disease or unexpected characteristics may emerge causing us to abandon these product candidates or limit their development to more narrow uses or subpopulations in which the SAEs or undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk- benefit perspective or in which efficacy is more pronounced or durable.

Further, clinical trials by their nature utilize a sample of the potential patient population. With a limited number of subjects and limited duration of exposure, rare and severe side effects of our product candidates may only be uncovered with a significantly larger number of patients exposed to our therapies. Because of our planned dose escalation design for our clinical trials, undesirable side effects could also result in an expansion in the size of our clinical trials, increasing the expected costs and timeline of our clinical trials. Additionally, results of our clinical trials could reveal a high and unacceptable severity and prevalence of side effects or unexpected characteristics, which may stem from our product candidates specifically or may be due to an illness from which the clinical trial subject is suffering.

If unacceptable side effects arise in the development of our product candidates such that there is no longer a positive benefit risk, we, the FDA, the IRBs at the institutions in which our trials are conducted or the DSMB could suspend or terminate our clinical trials or the FDA or comparable foreign regulatory authorities could order us to cease clinical trials or deny approval of our product candidates for any or all targeted indications. Treatment-related side effects could also affect patient recruitment or the ability of enrolled subjects to complete the trial or result in potential product liability claims. In addition, these side effects may not be appropriately recognized or managed by the treating medical staff, and inadequate training in recognizing or managing the potential side effects of our product candidates could result in patient injury or death.

Even if we believe our product candidates initially show promise in early clinical trials, side effects of product candidates may only be detectable after they are tested in larger, longer and more extensive clinical trials or, in some cases, after they are made available to patients on a commercial scale after approval. Sometimes, it can be difficult to determine if the serious adverse or unexpected side effects were caused by the product candidate or another factor. If serious adverse or unexpected side effects are identified during development or after approval (including pursuant to any toxicity studies, including reproductive toxicity studies) and are determined to be attributed to our product candidates, we may be required to develop a Risk Evaluation and Mitigation Strategy (“REMS”) to ensure that the benefits of treatment with such product candidate outweigh the risks for each potential patient, which may include, among other things, a communication plan to health care practitioners, patient education, extensive patient monitoring or distribution systems and processes that are highly controlled, restrictive and more costly than what is typical for the industry. Product-related side effects could also result in potential product liability claims. Any of these occurrences may harm our business, financial condition, results of operations and prospects.

 

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In addition, if one or more of our product candidates receives marketing approval, and we or others later identify undesirable side effects caused by such product candidates, a number of potentially significant negative consequences could result, including:

 

   

regulatory authorities may suspend, withdraw or limit approvals of such product candidate, or seek an injunction against its manufacture or distribution;

 

   

regulatory authorities may require additional warnings on the label, including “boxed” warnings, or issue safety alerts, Dear Healthcare Provider letters, press releases or other communications containing warnings or other safety information about the product candidate;

 

   

we may be required to create a medication guide outlining the risks of such side effects for distribution to patients;

 

   

we may be required to change the way a product candidate is administered or conduct additional clinical trials;

 

   

the product candidate may become less competitive;

 

   

we may decide to remove the product candidate from the marketplace; and

 

   

we may be subject to fines, injunctions or the imposition of civil or criminal penalties.

Any of these events could prevent us from achieving or maintaining market acceptance of the particular product candidate, if approved, and could seriously harm our business.

We may seek special designations by the regulatory authorities to expedite regulatory approvals, but may not be successful in receiving such designations, and even if received, they may not benefit the development and regulatory approval process.

We may seek various designations by the regulatory authorities for any product candidates that we develop, such as Fast Track designation or Breakthrough Therapy designation.

If a product candidate is intended for the treatment of a serious condition and nonclinical or clinical data demonstrate the potential to address unmet medical need for this condition, a product sponsor may apply for Fast Track designation from the FDA. The sponsor of a product candidate with Fast Track designation has opportunities for more frequent interactions with the applicable FDA review team during product development and, once an NDA is submitted, the candidate may be eligible for priority review if the relevant criteria are met. A product candidate with Fast Track designation may also be eligible for rolling review, where the FDA may consider for review sections of the NDA on a rolling basis before the complete application is submitted, if the sponsor provides a schedule for the submission of the sections of the NDA, the FDA agrees to accept sections of the NDA and determines that the schedule is acceptable, and the sponsor pays any required user fees upon submission of the first section of the NDA. We have received Fast Track designation for Auxora for the treatment of AP, and we may receive Fast Track designation for other product candidates in the future; however, we may not experience a faster development process, review or approval compared to conventional FDA approval timelines, and the FDA may still decline to approve Auxora or our other designated product candidates. The FDA may rescind the Fast Track designation if it believes that the designation is no longer supported by data from our clinical development program or for any other reason.

A Breakthrough Therapy is defined by the FDA as a drug or biologic that is intended, alone or in combination with one or more other drugs or biologics, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the drug, may demonstrate substantial improvement over currently approved therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. For product candidates that have been designated as Breakthrough Therapies, interaction and communication between the FDA and the sponsor of the trial can help to identify the most efficient path for clinical development while minimizing the number of patients placed in ineffective control

 

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regimens. The designation also includes all of the Fast Track designation benefits, including eligibility for rolling review of an NDA submission.

Seeking and obtaining these designations is dependent upon results of our clinical program, and whether and when we may have the data from our clinical programs to support an application to obtain any such designation is uncertain. Even if we do receive the designations we may apply for, we may not experience a faster development process, review or approval compared to conventional FDA or similar foreign regulatory authorities’ procedures, as applicable. The FDA or similar foreign regulatory authorities, as applicable, may rescind any granted designations if it believes that the designation is no longer supported by data from our clinical development program.

We may seek Orphan Drug Designation for our product candidates, and we may be unsuccessful or may be unable to maintain the benefits associated with Orphan Drug Designation, including the potential for market exclusivity.

Regulatory authorities in some jurisdictions, including the United States and Europe, may designate drugs for relatively small patient populations as orphan drugs. Under the Orphan Drug Act, the FDA may designate a drug as an orphan drug if it is a drug intended to treat a rare disease or condition, which is generally defined as a patient population of fewer than 200,000 individuals annually in the United States, or a patient population greater than 200,000 in the United States where there is no reasonable expectation that the cost of developing the drug will be recovered from sales in the United States. In the United States, Orphan Drug Designation entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages and user-fee waivers.

Similarly, in the European Union, the European Commission grants Orphan Drug Designation after receiving the opinion of the EMA Committee for Orphan Medicinal Products on an Orphan Drug Designation application. Orphan Drug Designation is intended to promote the development of drugs that are (1) intended for the diagnosis, prevention or treatment of life-threatening or chronically debilitating conditions; (2) either (a) affecting not more than 5 in 10,000 persons in Europe, or (b) when, without incentives, it is unlikely that sales of the drug in Europe would be sufficient to justify the necessary investment in developing the drug; and (3) for which no satisfactory method of diagnosis, prevention, or treatment has been authorized (or if such a method exists, the product will be of significant benefit to those affected by the condition). In Europe, Orphan Drug Designation entitles a party to a number of incentives, such as protocol assistance and scientific advice specifically for designated orphan medicines, and potential fee reductions depending on the status of the sponsor. We have received Orphan Drug Designation for Auxora for the treatment of AP in the European Union, and we may receive Orphan Drug Designation for other product candidates in the future; however, we may not experience a faster development process, review or approval compared to conventional approval timelines, and the European Commission and EMA may still decline to approve Auxora or our other designated product candidates. The European Commission and EMA may rescind the Orphan Drug Designation if it believes that the designation is no longer supported by data from our clinical development program or for any other reason.

Generally, if a drug with an Orphan Drug Designation subsequently receives the first marketing approval for the indication for which it has such designation, the drug is entitled to a period of marketing exclusivity, which precludes the EMA or the FDA from approving another marketing application for the same or similar drug and indication for that time period, except in limited circumstances. The applicable period is seven years in the United States and ten years in Europe. The European exclusivity period can be reduced to six years if, at the end of the fifth year, it is established that the drug no longer meets the criteria for Orphan Drug Designation or if the drug is sufficiently profitable such that market exclusivity is no longer justified.

Even if we obtain orphan drug exclusivity for any of our product candidates that obtain approval, that exclusivity may not effectively protect those product candidates from competition because different therapies can be approved for the same condition. Even after an orphan drug is approved, the FDA or comparable foreign

 

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authorities can subsequently approve another drug for the same condition if the relevant authority concludes that the later drug is clinically superior in that it is shown to be safer, more effective or makes a major contribution to patient care. In addition, a designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. Moreover, orphan drug exclusive marketing rights in the United States may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition. Orphan Drug Designation neither shortens the development time or regulatory review time of a drug nor gives the drug any advantage in the regulatory review or approval process. While we may seek Orphan Drug Designation for applicable indications for our product candidates, we may never receive such designations. Even if we do receive such designations, we may not enjoy the benefits of those designations.

We may attempt to secure approval from the FDA or comparable foreign regulatory authorities through the use of accelerated approval pathways. If we are unable to obtain such approval, we may be required to conduct additional clinical trials beyond those that we contemplate, which could increase the expense of obtaining, and delay the receipt of, necessary marketing approvals. Even if we receive accelerated approval from the FDA, if our confirmatory trials do not verify clinical benefit, or if we do not comply with rigorous post-marketing requirements, the FDA may seek to withdraw accelerated approval.

We may in the future seek an accelerated approval for our one or more of our product candidates. Under the accelerated approval program, the FDA may grant accelerated approval to a product candidate designed to treat a serious or life-threatening condition that provides meaningful therapeutic benefit over available therapies upon a determination that such product candidate has an effect on a surrogate endpoint or intermediate clinical endpoint that is reasonably likely to predict clinical benefit. The FDA considers a clinical benefit to be a positive therapeutic effect that is clinically meaningful in the context of a given disease, such as irreversible morbidity or mortality. For the purposes of accelerated approval, a surrogate endpoint is a marker, such as a laboratory measurement, radiographic image, physical sign, or other measure that is thought to predict clinical benefit, but is not itself a measure of clinical benefit. An intermediate clinical endpoint is a clinical endpoint that can be measured earlier than an effect on irreversible morbidity or mortality that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit. The accelerated approval pathway may be used in cases in which the advantage of a new drug over available therapy may not be a direct therapeutic advantage, but is a clinically important improvement from a patient and public health perspective. If granted, accelerated approval is usually contingent on the sponsor’s agreement to conduct, in a diligent manner, additional post- approval confirmatory studies to verity and describe the drug’s clinical benefit. If such post- approval studies fail to confirm the drug’s clinical benefit, the FDA may withdraw its approval of the drug.

Prior to seeking accelerated approval for any of our product candidates, we intend to seek feedback from the FDA and will otherwise evaluate our ability to seek and receive accelerated approval. There can be no assurance that after our evaluation of the feedback and other factors we will decide to pursue or submit an NDA for accelerated approval or any other form of expedited development, review or approval. Similarly, there can be no assurance that after subsequent FDA feedback we will continue to pursue or apply for accelerated approval or any other form of expedited development, review or approval, even if we initially decide to do so. Furthermore, if we decide to submit an application for accelerated approval or receive an expedited regulatory designation (e.g., breakthrough therapy designation) for our product candidates, there can be no assurance that such submission or application will be accepted or that any expedited development, review or approval will be granted on a timely basis, or at all. The FDA or other comparable foreign regulatory authorities could also require us to conduct further studies prior to considering our application or granting approval of any type. A failure to obtain accelerated approval or any other form of expedited development, review or approval for our product candidates would result in a longer time period to commercialization of such product candidates, if any, could increase the cost of development of such candidates and could harm our competitive position in the marketplace.

 

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Our product candidates must meet extensive regulatory requirements before they can be commercialized and any regulatory approval may contain limitations or conditions that require substantial additional development expenses or limit our ability to successfully commercialize our product candidates.

The clinical development, manufacturing, labeling, storage, record-keeping, advertising, promotion, import, export, marketing and distribution of our product candidates are subject to extensive regulation by the FDA in the United States and by comparable foreign regulatory authorities in foreign markets. In the United States, we are not permitted to market our product candidates until we receive regulatory approval from the FDA. The process of obtaining regulatory approval is expensive, often takes many years following the commencement of clinical trials and can vary substantially based upon the type, complexity and novelty of the product candidates involved, as well as the target indications and patient population. Despite the time and expense invested in clinical development of product candidates, regulatory approval is never guaranteed.

To date, we have not submitted an NDA or other marketing authorization application to the FDA or similar drug approval submissions to comparable foreign regulatory authorities for any product candidates.

Prior to obtaining approval to commercialize a product candidate in the United States or abroad, we or our potential future collaborators must demonstrate with substantial evidence from adequate and well-controlled clinical trials, and to the satisfaction of the FDA or comparable foreign regulatory authorities, that such product candidates are safe and effective for their intended uses. Even if we believe the preclinical or clinical data for our product candidates are promising, such data may not be sufficient to support approval by the FDA and comparable foreign regulatory authorities. In particular, because we are seeking to identify and develop product candidates using new technologies, there is heightened risk that the FDA or other regulatory authorities may impose additional requirements prior to granting marketing approval, including enhanced safety studies or monitoring. Furthermore, as more product candidates within a particular class of products proceed through clinical development to regulatory review and approval, the amount and type of clinical data that may be required by regulatory authorities may increase or change.

The FDA or comparable foreign regulatory authorities can delay, limit or deny approval of a product candidate for many reasons, including:

 

   

such authorities may disagree with the design or implementation of our clinical trials;

 

   

negative or ambiguous results from our clinical trials or results may not meet the level of statistical significance required by the FDA or comparable foreign regulatory agencies for approval;

 

   

serious and unexpected product candidate-related side effects may be experienced by participants in our clinical trials;

 

   

serious and unexpected results from preclinical toxicity studies that will be completed in conjunction with late stage clinical trials;

 

   

the population studied in the clinical trial may not be sufficiently broad or representative to assure safety in the full population for which we seek approval;

 

   

such authorities may not accept clinical data from trials which are conducted at clinical facilities or in countries where the SOC is potentially different from that of the United States;

 

   

we may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;

 

   

such authorities may disagree with our interpretation of data from preclinical studies or clinical trials;

 

   

such authorities may not agree that the data collected from clinical trials of our product candidates are acceptable or sufficient to support the submission of an application for regulatory approval or other submissions or to obtain regulatory approval in the United States or elsewhere, including due to clinical trial issues encountered as a result of the COVID-19 pandemic, and such authorities may impose requirements for additional preclinical studies or clinical trials;

 

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such authorities may disagree regarding the formulation, labeling and/or the specifications of our product candidates;

 

   

approval may be granted only for indications that are significantly more limited than what we apply for and/or with other significant restrictions on distribution and use;

 

   

such authorities may fail to approve any required companion diagnostics to be used with our product candidates;

 

   

such authorities may find deficiencies in the manufacturing processes or facilities of our or our third-party suppliers or manufacturers with which we or any of our potential future collaborators contract for clinical and commercial supplies; or

 

   

the approval policies or regulations of such authorities may significantly change in a manner rendering our or any of our potential future collaborators’ clinical data insufficient for approval.

With respect to foreign markets, approval procedures vary among countries and, in addition to the foregoing risks, may involve additional product candidate testing, administrative review periods and agreements with pricing authorities. In addition, events raising questions about the safety of certain marketed pharmaceuticals may result in increased cautiousness by the FDA and comparable foreign regulatory authorities in reviewing new products based on safety, efficacy or other regulatory considerations and may result in significant delays in obtaining regulatory approvals.

Even if we eventually complete clinical trials and receive approval to commercialize our product candidates, the FDA or comparable foreign regulatory authority may grant approval contingent on the performance of costly additional clinical trials, including Phase 4 clinical trials, and/or the implementation of a REMS. The FDA or the comparable foreign regulatory authority also may approve a product candidate for a more limited indication or patient population than we originally requested or may not approve the labeling that we believe is necessary or desirable for the successful commercialization of a product candidate. Manufacturers of our product candidates and manufacturers’ facilities are also required to comply with cGMP regulations and other similar regulatory requirements, which include requirements related to quality control and quality assurance, as well as the corresponding maintenance of records and documentation. Further, regulatory authorities must approve these manufacturing facilities before they can be used to manufacture our product candidates, if approved, and these facilities are subject to continual review and periodic inspections by the FDA and other comparable foreign regulatory authorities for compliance with cGMP regulations and other similar regulatory requirements.

Any delay in obtaining, or inability to obtain, applicable regulatory approval would delay or prevent commercialization of that product candidate and could adversely impact our business, financial condition, results of operations and prospects.

We will need to obtain FDA approval of any proposed product names, including Auxora, and any failure or delay associated with such approval may adversely affect our business.

Any name we intend to use for our current or future product candidates will require approval from the FDA regardless of whether we have secured a formal trademark registration from the United States Patent and Trademark Office (“USPTO”). The FDA typically conducts a review of proposed product names, including an evaluation of the potential for confusion with other product names. The FDA may also object to a product name if it believes the name inappropriately implies medical claims or contributes to an overstatement of efficacy. If the FDA objects to any of our proposed product names, we may be required to adopt alternative names for our product candidates. If we adopt alternative names, we would lose any goodwill or brand recognition developed for previously used names and marks as well as the benefit of our existing trademark applications for such product candidate and may be required to expend significant additional resources in an effort to identify a suitable product name that would qualify under applicable trademark laws, not infringe the existing rights of third parties and be acceptable to the FDA. We may be unable to build a successful brand identity for a new trademark in a timely manner or at all, which would limit our ability to commercialize our product candidates.

 

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Even if we receive regulatory approval for any of our product candidates, we will be subject to ongoing obligations and continued regulatory review, which may result in significant additional expense. Additionally, our product candidates, if approved, could be subject to labeling and other restrictions and market withdrawal and we may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our product candidates.

If the FDA, EMA or any other comparable foreign regulatory authority approves any of our product candidates, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion and recordkeeping for the drug 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 GCP, for any clinical trials that we conduct post-approval.

In addition, any regulatory approvals that we receive for our present or future product candidates may be subject to limitations on the approved indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase 4 clinical trials and surveillance to monitor the safety and efficacy of the product candidate. The FDA may also require REMS as a condition of approval of our product candidates, which could entail requirements for long- term patient follow-up, a medication guide, physician communication plans or additional elements to ensure safe use, such as restricted distribution methods, patient registries and other risk minimization tools.

Later discovery of previously unknown problems with a product candidate, including AEs of unanticipated severity or frequency, or with our third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:

 

   

restrictions on our ability to conduct clinical trials, including full or partial clinical holds on ongoing or planned trials;

 

   

restrictions on the marketing or manufacturing of the product candidate, withdrawal of the product candidate from the market, or voluntary or mandatory product candidate recalls;

 

   

fines, untitled or warning letters or holds on clinical trials;

 

   

refusal by the FDA, the EMA or any other comparable foreign regulatory authority to approve pending applications or supplements to approved applications filed by us, or suspension or revocation of product candidate approvals;

 

   

product candidate seizure or detention, or refusal to permit the import or export of product candidates; and

 

   

injunctions or the imposition of civil or criminal penalties.

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 or our collaborators’ ability to commercialize our product candidates, and harm our business, financial condition, results of operations and prospects.

Manufacturers and manufacturers’ facilities are required to comply with extensive FDA and other regulatory authority requirements, including ensuring that quality control and manufacturing procedures conform to cGMP regulations. As such, we and our contract manufacturers will be subject to continual review and inspections to assess compliance with cGMP and adherence to commitments made in any NDA, other marketing application and previous responses to inspectional observations made by regulatory authorities. Accordingly, we and others with whom we work must continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production and quality control.

We also cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative or executive action, either in the United States or abroad. If we are slow or unable to

 

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adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may be subject to enforcement action and we may not achieve or sustain profitability.

The FDA and other regulatory agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses.

If any of our product candidates are approved and we are found to have improperly promoted off-label uses of those products, we may become subject to significant liability. The FDA and other regulatory agencies strictly regulate the promotional claims that may be made about prescription products, such as our product candidates, if approved. In particular, a product may not be promoted for uses that are not approved by the FDA or such other regulatory agencies as reflected in the product’s approved labeling. If we receive marketing approval for a product candidate, physicians may nevertheless prescribe it to their patients in a manner that is inconsistent with the approved label. If we are found to have promoted such off-label uses, we may become subject to significant liability. The U.S. federal government has levied large civil and criminal fines against companies for alleged improper promotion of off-label use and has enjoined several companies from engaging in off-label promotion. The government has also required that companies enter into consent decrees or imposed permanent injunctions under which specified promotional conduct is changed or curtailed. If we cannot successfully manage the promotion of our product candidates, if approved, we could become subject to significant liability, which could adversely affect our business, financial condition, results of operations and prospects.

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

The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels, statutory, regulatory, and policy changes, the FDA’s ability to hire and retain key personnel and accept the payment of user fees, and other events that may otherwise affect the FDA’s ability to perform routine functions. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of other government agencies such as the EMA, following its relocation to Amsterdam and corresponding staff changes, that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable. Disruptions at the FDA and other agencies may also slow the time necessary for product candidates to be reviewed and/or approved by necessary government agencies, which would adversely affect our business. For example, over the last several years, including for 35 days beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees and stop critical activities.

Separately, in response to the global COVID-19 pandemic, the FDA and regulatory authorities outside the United States have and may adopt restrictions or other policy measures in response to the COVID-19 pandemic that divert resources and delay their attention to any submissions we may make. If a prolonged government shutdown or slowdown occurs, or if global health concerns continue to prevent the FDA or other regulatory authorities from conducting their regular inspections, reviews, or other regulatory activities, it could significantly impact the ability of the FDA or other regulatory authorities to timely review and process our regulatory submissions, which could have a material adverse effect on our business.

We may not identify or discover other product candidates and may fail to capitalize on our proprietary platform or product candidates that may present a greater commercial opportunity or for which there is a greater likelihood of success.

Our business depends upon our ability to identify, develop and commercialize product candidates. A key element of our strategy is to discover and develop additional product candidates based upon our CRAC channel inhibitor

 

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science. We are seeking to do so through our internal research programs, and may also explore strategic collaborations for the discovery of new product candidates. Research programs to identify product candidates require substantial technical, financial and human resources, whether or not any product candidates are ultimately identified. In addition, targets for different indications may require changes to our manufacturing processes, which may slow down development or make it impossible to manufacture our product candidates. Our research programs may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development for many reasons, including the following:

 

   

the research methodology or technology platform used may not be successful in identifying potential product candidates;

 

   

competitors may develop alternatives that render our product candidates obsolete or less attractive;

 

   

we may choose to cease development if we determine that clinical results do not show promise;

 

   

product candidates we develop may nevertheless be covered by third parties’ patents or other exclusive rights;

 

   

a product candidate may be shown to have harmful side effects or other characteristics that indicate it is unlikely to be effective or otherwise does not meet applicable regulatory criteria; and

 

   

a product candidate may not be accepted as safe and effective by patients, the medical community or third- party payors.

Because we have limited resources, we must choose to pursue and fund the development of specific types of treatment, or treatment for a specific indication, and we may forego or delay pursuit of opportunities with certain programs or product candidates or for indications that later prove to have greater commercial potential. Our estimates regarding the potential market for our product candidates could be inaccurate, and if we do not accurately evaluate the commercial potential for a particular product candidate, we may relinquish valuable rights to that product candidate through strategic collaboration, licensing or other arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product candidate. Alternatively, we may allocate internal resources to a product candidate in a therapeutic area in which it would have been more advantageous to enter into a partnering arrangement.

If any of these events occur, we may be forced to abandon or delay our development efforts with respect to a particular product candidate or fail to develop a potentially successful product candidate.

Product liability lawsuits against us could cause us to incur substantial liabilities and could limit commercialization of any product candidate that we may develop.

We face an inherent risk of product liability exposure related to the testing of our product candidate programs in clinical trials and may face an even greater risk if we commercialize any product candidate that we may develop. If we cannot successfully defend ourselves against claims that any such product candidate programs caused injuries, we could incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

   

decreased demand for any product candidate that we may develop;

 

   

loss of revenue;

 

   

substantial monetary awards to trial participants or patients;

 

   

significant time and costs to defend the related litigation;

 

   

withdrawal of clinical trial participants;

 

   

increased insurance costs;

 

   

the inability to commercialize any product candidate that we may develop; and

 

   

injury to our reputation and significant negative media attention.

 

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Any such outcomes could adversely affect our business, financial condition, results of operations and prospects.

Risks Related to Manufacturing, Commercialization and Reliance on Third Parties

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

We do not have the ability to conduct most aspects of our preclinical studies or clinical trials in-house. As a result, we are and expect to remain dependent on third parties to conduct or otherwise support our ongoing clinical trials and any future clinical trials of our product candidates. Specifically, CROs, clinical investigators, and consultants play a significant role in the conduct of these trials and the subsequent collection and analysis of data. However, we will not be able to control all aspects of their activities. Nevertheless, we are responsible for ensuring that each of our trials is conducted in accordance with the applicable protocol and legal, regulatory and scientific standards, and our reliance on the CROs and other third parties does not relieve us of our regulatory responsibilities. We and our CROs are required to comply with GCP requirements, which are regulations and guidelines enforced by the FDA, the Competent Authorities of the member states of the EEA, and comparable foreign regulatory authorities for all of our product candidates in clinical development. Regulatory authorities enforce these GCP requirements through periodic inspections of trial sponsors, clinical trial investigators and clinical trial sites. If we or any of our CROs or clinical trial sites fail to comply with applicable GCP requirements, the data generated in our clinical trials may be deemed unreliable, and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. In addition, our clinical trials must be conducted with investigational product produced under cGMP regulations (and similar foreign requirements). Our failure to comply with these regulations may require us to stop and/or repeat clinical trials, which would delay the marketing approval process.

CROs, clinical trial investigators or other third parties on which we rely may not devote adequate time and resources to our development activities or perform as contractually required. These risks are heightened as a result of the efforts of government agencies and the CROs themselves to limit the spread of COVID-19, including quarantines and shelter-in-place orders. If any of these third parties fail to meet expected deadlines, adhere to our clinical protocols or meet regulatory requirements, otherwise performs in a substandard manner, or terminates its engagement with us, the timelines for our development programs may be extended or delayed or our development activities may be suspended or terminated. If any of our clinical trial sites terminates for any reason, we may experience the loss of follow-up information on subjects enrolled in such clinical trials unless we are able to transfer those subjects to another qualified clinical trial site, which may be difficult or impossible. In addition, clinical trial investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and may receive cash or equity compensation in connection with such services. If these relationships and any related compensation result in perceived or actual conflicts of interest, or the FDA or any comparable foreign regulatory authority concludes that the financial relationship may have affected the interpretation of the trial, the integrity of the data generated at the applicable clinical trial site may be questioned and the utility of the clinical trial itself may be jeopardized, which could result in the delay or rejection of any marketing application we submit by the FDA or any comparable foreign regulatory authority. Any such delay or rejection could prevent us from commercializing our product candidates.

If any of our relationships with these third parties terminate, we may not be able to enter into arrangements with alternative third parties on commercially reasonable terms, or at all. Further, under certain circumstances, these third parties may terminate their agreements with us upon as little as 30 days prior written notice. Entering into arrangements with alternative CROs, clinical trial investigators or other third parties involves additional cost and requires management focus and time, in addition to requiring a transition period when a new CRO, clinical trial investigator or other third party begins work. If third parties do not successfully carry out their contractual duties

 

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or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain are compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, any clinical trials such third parties are associated with may be extended, delayed or terminated, and we may not be able to obtain marketing approval for or successfully commercialize our product candidates. As a result, we believe that our financial results and the commercial prospects for our product candidates in the subject indication would be harmed, our costs could increase and our ability to generate revenue could be delayed.

In addition, with respect to investigator-sponsored trials that are being conducting and may be conducted in the future, we do not and would not control the design or conduct of these trials, and it is possible that the FDA will not view these investigator-sponsored trials as providing adequate support for future clinical trials or market approval, whether controlled by us or third parties, for any one or more reasons, including elements of the design or execution of the trials or safety concerns or other trial results. We expect that such arrangements will provide us certain information rights with respect to the investigator-sponsored trials, including access to and the ability to use and reference the data, including for our own regulatory submissions, resulting from the investigator-sponsored trials. However, we would not have control over the timing and reporting of the data from investigator-sponsored trials, nor would we own the data from the investigator-sponsored trials. If we are unable to confirm or replicate the results from the investigator-sponsored trials or if negative results are obtained, we would likely be further delayed or prevented from advancing further clinical development. Further, if investigators or institutions breach their obligations with respect to the clinical development of our product candidates, or if the data proves to be inadequate compared to the firsthand knowledge we might have gained had the investigator-sponsored trials been sponsored and conducted by us, then our ability to design and conduct any future clinical trials ourselves may be adversely affected. The investigators may design clinical trials with clinical endpoints that are more difficult to achieve, or in other ways that increase the risk of negative clinical trial results compared to clinical trials that we may design on our own. Negative results in investigator- sponsored clinical trials could have a material adverse effect on our efforts to obtain regulatory approval for our product candidates and the public perception of our product candidates. Additionally, the FDA may disagree with the sufficiency of our right of reference to the preclinical, manufacturing or clinical data generated by these investigator-sponsored trials, or our interpretation of preclinical, manufacturing or clinical data from these investigator-sponsored trials. If so, the FDA may require us to obtain and submit additional preclinical, manufacturing, or clinical data.

Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our clinical trials in accordance with regulatory requirements or our stated protocols, we will not be able to obtain, or may be delayed in obtaining, marketing approvals for our product candidates and will not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates.

We contract with third parties for the manufacturing and supply of certain goods and services for our product candidates for use in preclinical studies and clinical trials, which supply may become limited or interrupted or may not be of satisfactory quality and quantity.

We do not have any manufacturing facilities. We produce in our laboratory relatively small quantities of product for evaluation in our research programs. We rely on third parties for the manufacture of most of our product candidates for preclinical testing and all of our product candidates for clinical testing and we will continue to rely on such third parties for commercial manufacture if any of our product candidates are approved. We currently have limited manufacturing arrangements and expect that each of our product candidates, including Auxora, will only be covered by single source suppliers for the foreseeable future. This reliance increases the risk that we will not have sufficient quantities of our product candidates or products, if approved, or such quantities at an acceptable cost or quality, which could delay, prevent or impair our development or commercialization efforts.

Furthermore, all entities involved in the preparation of product candidates for clinical trials or commercial sale, including our existing contract manufacturers for our product candidates, are subject to extensive regulation.

 

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Components of a finished therapeutic product approved for commercial sale or used in clinical trials must be manufactured in accordance with cGMP requirements. These regulations govern manufacturing processes and procedures, including record keeping, and the implementation and operation of quality systems to control and assure the quality of investigational products and products approved for sale. Poor control of production processes can lead to the introduction of contaminants, or to inadvertent changes in the properties or stability of our product candidates that may not be detectable in final product testing. We or our contract manufacturers must supply all necessary documentation in support of an NDA on a timely basis and must adhere to the FDA’s Good Laboratory Practice (“GLP”) regulations and cGMP regulations enforced by the FDA through its facilities inspection program. Comparable foreign regulatory authorities may require compliance with similar requirements. Our facilities and quality systems, and those of our third-party contract manufacturers, must pass a pre-approval inspection for compliance with the applicable regulations as a condition of marketing approval of our product candidates. We do not control the manufacturing activities of, and are completely dependent on, our contract manufacturers for compliance with cGMP regulations, although the FDA will hold us responsible for any such non-compliance with respect to our product candidates and any future approved products.

In the event that any of our contracted third parties fails to comply with such requirements or to perform their obligations to us in relation to quality, timing or otherwise, or if our supply of components or other materials becomes limited or interrupted for other reasons, including due to the impact of the COVID-19 pandemic or the ongoing conflict between Ukraine and Russia, we may be forced to manufacture the materials ourselves, for which we currently do not have the capabilities or resources, or enter into an agreement with another third- party, which we may not be able to do on commercially reasonable terms, if at all. In particular, any replacement of a third-party contractor could require significant effort and expertise because there may be a limited number of qualified replacements. In some cases, the technical skills or technology required to manufacture a certain aspect of our product candidates may be unique or proprietary to the third party performing such process and we may have difficulty transferring such skills or technology to another third- party and a feasible alternative may not exist. In addition, certain of our product candidates and our own proprietary methods have never been produced or implemented outside of our company, and we may therefore experience delays to our development programs if we attempt to establish new third-party arrangements for these product candidates or methods. If we are required to or voluntarily change a third-party contractor for any reason, we will be required to verify that the new third party maintains facilities, processes and procedures that comply with quality standards and with all applicable regulations and guidelines. The delays associated with the verification of a new manufacturer could negatively affect our ability to develop product candidates in a timely manner or within budget.

Our or a third-party’s failure to execute on our manufacturing and supply requirements, do so on commercially reasonable terms and comply with cGMP could adversely affect our business in a number of ways, including:

 

   

in the event of approval, to initiate or continue clinical trials of our product candidates;

 

   

delays in submitting regulatory applications, or receiving marketing approvals, for our product candidates;

 

   

loss of the cooperation of future collaborators;

 

   

subjecting our or any third-party manufacturing facilities to additional inspections by regulatory authorities; or

 

   

requirements to cease development to market and commercialize our product candidates, an inability to meet commercial demands for our current or any other future product candidates, if approved.

Any approved product candidates may fail to achieve the degree of market acceptance by physicians, patients, hospitals, healthcare payors and others in the medical community necessary for commercial success.

If any of our product candidates receives marketing approval, they may nonetheless fail to gain sufficient market acceptance by physicians, patients, healthcare payors and others in the medical community. Our CRAC channel inhibitors are a relatively novel technology, and no CRAC channel inhibitor-based therapy has been approved to

 

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date. Public perception may be influenced by third-party claims, such as claims that CRAC channel inhibitors are unsafe, ineffective and, consequently, our approach may not gain the acceptance of the public or the medical community. The degree of market acceptance of our product candidates, if approved for commercial sale, will depend on a number of factors, including:

 

   

efficacy and potential advantages compared to alternative treatments;

 

   

our ability to offer our product candidates for sale at competitive prices;

 

   

convenience and ease of administration compared to alternative treatments;

 

   

the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;

 

   

the availability of coverage and adequate reimbursement by third-party payors, including government payors, for our products, if approved by applicable regulatory authorities;

 

   

the strength of marketing and distribution support; and

 

   

the prevalence and severity of any side effects.

For example, Auxora is an injectable emulsion drug product that must be administered intravenously over four hours, and this dosing regimen may be inconvenient for physicians or patients.

If our product candidates do not achieve an adequate level of acceptance, we may not generate significant product revenue and we may not become profitable.

We may not be able to successfully commercialize our product candidates due to unfavorable pricing regulations or third-party coverage and reimbursement policies, which could make it difficult for us to sell our product candidates profitably.

Patients who are prescribed medications for the treatment of their conditions, and their prescribing physicians, generally rely on third-party payors to reimburse all or part of the costs associated with those medications. Patients are unlikely to use our product candidates unless coverage is provided and reimbursement is adequate to cover all or a significant portion of the cost of our product candidates. Therefore, coverage and adequate reimbursement are critical to a new product’s acceptance. Coverage decisions may depend upon clinical and economic standards that disfavor new products when more established or lower cost therapeutic alternatives are already available or subsequently become available.

There is significant uncertainty related to the insurance coverage and reimbursement of newly approved products. In the United States, there is no uniform policy among third-party payors for coverage and reimbursement. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting reimbursement policies, but also have their own methods and approval process apart from Medicare coverage and reimbursement determinations. Therefore, one third-party payor’s determination to provide coverage for a product does not assure that other payors will also provide coverage for the product.

Coverage and reimbursement by a third-party payor may depend upon a number of factors, including the third- party payor’s determination that use of a product is:

 

   

a covered benefit under its health plan;

 

   

safe, effective and medically necessary;

 

   

appropriate for the specific patient;

 

   

cost-effective; and

 

   

neither experimental nor investigational.

 

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Obtaining coverage and reimbursement approval for a product from a government or other third-party payor is a time-consuming and costly process, with uncertain results, that could require us to provide supporting scientific, clinical and cost effectiveness data for the use of our product candidates to the payor. There may be significant delays in obtaining such coverage and reimbursement for newly approved product candidates, and coverage may not be available, or may be more limited than the purposes for which the product is approved by the FDA or comparable foreign regulatory authorities. Moreover, eligibility for coverage and reimbursement does not imply that a product will be paid for in all cases or at a rate that covers our costs, including research, development, intellectual property, manufacture, sale and distribution expenses. Interim reimbursement levels for new products, if applicable, may also not be sufficient to cover our costs and may not be made permanent. Reimbursement rates may vary according to the use of the product and the clinical setting in which it is used, may be based on reimbursement levels already set for lower cost products and may be incorporated into existing payments for other services. Net prices for products may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors, by any future laws limiting drug prices and by any future relaxation of laws that presently restrict imports of product from countries where they may be sold at lower prices than in the United States.

Reimbursement may not be available for any product that we commercialize and, if coverage and reimbursement are available, the level of reimbursement may not be adequate. Obtaining reimbursement for our product candidates may be particularly difficult because of the higher prices often associated with branded therapeutics and therapeutics administered under the supervision of a physician. Additionally, we expect our future products to potentially be more expensive than other therapeutics due to the personalized and proprietary product selection process of our product candidates, as well as our individualized approach to patient treatment, which requires patient hospitalization, in some cases intensive care unit admission and the potential administration of combination therapies, all of which increases costs and may result in reimbursement payment rates which may not be adequate or may require co-payments that patients find unacceptably high. Our inability to promptly obtain coverage and adequate reimbursement rates from both government-funded and private payors for any approved product candidates that we develop could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize product candidates and our overall financial condition. Further, coverage policies and third party reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained, less favorable coverage policies and reimbursement rates may be implemented in the future.

Additionally, separate reimbursement for the product itself may or may not be available. Instead, the hospital or administering physician may be reimbursed only for providing the treatment or procedure in which our product is used. Further, from time to time, the Centers for Medicare & Medicaid Services (“CMS”) revises the reimbursement systems used to reimburse health care providers, including the Medicare Physician Fee Schedule and Hospital Outpatient Prospective Payment System, which may result in reduced Medicare payments.

We expect to experience pricing pressures in connection with the sale of any of our product candidates due to the trend toward managed healthcare, the increasing influence of health maintenance organizations, and additional legislative changes. The downward pressure on healthcare costs in general, particularly prescription medicines, medical devices and surgical procedures and other treatments, has become very intense. As a result, increasingly high barriers are being erected to the successful commercialization of new products. Further, the adoption and implementation of any future governmental cost containment or other health reform initiative may result in additional downward pressure on the price that we may receive for any approved product.

Outside of the United States, many countries require approval of the sale price of a product before it can be marketed, and the pricing review period only begins after marketing or product licensing approval is granted. In the European Union, governments influence the price of pharmaceutical products through their pricing and reimbursement rules and control of national health care systems that fund a large part of the cost of those products to consumers. Member states are free to restrict the range of pharmaceutical products for which their national health insurance systems provide reimbursement, and to control the prices and reimbursement levels of

 

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pharmaceutical products for human use. Some jurisdictions operate positive and negative list systems under which products may only be marketed once a reimbursement price has been agreed. To obtain reimbursement or pricing approval, some of these countries may require the completion of clinical trials that compare the cost- effectiveness of a particular product candidate to currently available therapies. To obtain reimbursement or pricing approval in some of these countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. Other member states allow companies to fix their own prices for medicines but monitor and control company profits. The downward pressure on health care costs in general, particularly prescription drugs, has become very intense. As a result, new products are facing increasingly high barriers to entry. In addition, in some countries, cross-border imports from low-priced markets exert a commercial pressure on pricing within a country. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we might obtain marketing approval for a product candidate in a particular country, but then be subject to price regulations that delay our commercial launch of the product, possibly for lengthy time periods, and negatively impact the revenue, if any, we are able to generate from the sale of the product in that country. Adverse pricing limitations may hinder our ability to recoup our investment in one or more product candidates, even if such product candidates obtain marketing approval.

If any of our product candidates are approved for marketing and commercialization and we are unable to establish sales and marketing capabilities or enter into agreements with third parties to sell and market our product candidates, we will be unable to successfully commercialize our product candidates if and when they are approved.

We have no sales, marketing or distribution capabilities or experience. To achieve commercial success for any approved product for which we retain sales and marketing responsibilities, we must either develop a sales and marketing organization, which would be expensive and time consuming, or outsource these functions to other third parties. In the future, we may choose to build a focused sales and marketing infrastructure to sell, or participate in sales activities with our collaborators for, some of our product candidates if and when they are approved.

There are risks involved with both establishing our own sales and marketing capabilities and entering into arrangements with third parties to perform these services. For example, recruiting and training a sales force is expensive and time consuming and could delay any product launch. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.

If we enter into arrangements with third parties to perform sales, marketing and distribution services, our product revenue or the profitability of these product revenue to us are likely to be lower than if we were to market and sell any products that we develop ourselves. In addition, we may not be successful in entering into arrangements with third parties to sell and market our product candidates or may be unable to do so on terms that are favorable to us. If we do not establish sales and marketing capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing our product candidates.

Even if we obtain FDA approval of any of our product candidates, we may never obtain approval or commercialize such product candidates outside of the United States, which would limit our ability to realize their full market potential.

In order to market any product candidates outside of the United States, we must establish and 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

 

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administrative review periods. Seeking foreign regulatory approvals could result in significant delays, difficulties and costs for us and may require additional preclinical studies or clinical trials which would be costly and time consuming. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of our product candidates in those countries. 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 any 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 any jurisdiction, including international markets, and we do not have experience in obtaining regulatory approval in international markets. If we fail to comply with regulatory requirements in international markets or to obtain and maintain required approvals, our ability to realize the full market potential of our product candidates will be harmed.

Risks Related to Our Industry and Business Operations

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

Our ability to compete in the highly competitive biotechnology and pharmaceutical industries depends upon our ability to attract and retain highly qualified managerial, scientific and medical personnel. We are highly dependent on our management, scientific and medical personnel. The loss of the services of any of our executive officers, other key employees, and other scientific and medical advisors, and our inability to find suitable replacements could result in delays in product development and harm our business.

We conduct substantially all of our operations at our facilities in La Jolla, California. This region is headquarters to many other biopharmaceutical companies and many academic and research institutions. Competition for skilled personnel in our market is intense and may limit our ability to hire and retain highly qualified personnel on acceptable terms or at all.

To induce valuable employees to remain at our company, in addition to salary and cash incentives, we have provided stock options that vest over time. The value to employees of stock options that vest over time may be significantly affected by movements in our stock price that are beyond our control and may at any time be insufficient to counteract more lucrative offers from other companies. Despite our efforts to retain valuable employees, members of our management, scientific and development teams may terminate their employment with us on short notice. Although we have employment agreements with certain of our key employees, these employment agreements provide for at-will employment, which means that any of our employees could leave our employment at any time, with or without notice. We do not maintain “key person” insurance policies on the lives of these individuals or the lives of any of our other employees. Our success also depends on our ability to continue to attract, retain and motivate highly skilled junior, mid-level and senior managers as well as junior, mid-level and senior scientific and medical personnel.

Dr. Rachel Leheny, our Chief Executive Officer and a member of our board of directors, and Eric W. Roberts, our Chief Business Officer and a member of our board of directors, also provide services for Valence, an investment fund that is one of our significant stockholders.

Our Chief Executive Officer and member of our board of directors, Dr. Leheny, and our Chief Business Officer and member of our board of directors, Mr. Roberts, are the co-founders of Valence Life Sciences (Valence), are employed as managing directors of Valence and beneficially own the shares of the company held by Valence. Entities affiliated with Valence beneficially owned approximately 16.9% of our common stock as of November 21, 2022. Although we expect that each of Dr. Leheny and Mr. Roberts will devote on average at least 40 hours per week to our company and remain highly active in our management, they will also continue to devote time to Valence. Because Dr. Leheny and Mr. Roberts are not required to work exclusively for us, their attention to other activities could slow our operations, which could adversely affect our business. In addition, although we do not believe Valence currently has any investments that conflict with our interests, in the future

 

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Valence may invest in companies that may compete with us for business opportunities or develop products that are competitive with ours. As a result, Dr. Leheny’s and Mr. Roberts’ interests may not be aligned with the interests of our other stockholders, and they may from time to time be incentivized to take certain actions that benefit their other interests and that our other stockholders do not view as being in their interest as investors in our company.

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

As of September 30, 2022, we employed 12 full-time employees, five of whom were primarily engaged in research and development activities. We also engage various consultants that are primarily engaged in research and development activities. As we advance our research and development programs, we may be required to further increase the number of our employees, particularly in the areas of clinical development, quality, regulatory affairs and, if any of our product candidates receives marketing approval, sales, marketing and distribution. To manage any future growth, we must:

 

   

identify, recruit integrate, maintain and motivate additional qualified personnel;

 

   

manage our development efforts effectively, including the initiation and conduct of clinical trials for our product candidates, both as a monotherapy and combination therapy; and

 

   

improve our operational, financial and management controls, reporting systems and procedures.

Our need to effectively execute our growth strategy requires that we:

 

   

discover new product candidates, develop the process and analytical methods for IND-enabling studies and regulatory submissions, complete the required IND-enabling studies for each, and receive approval from the FDA and other regulatory authorities to initiate clinical trials for such product candidates;

 

   

manage our clinical trials effectively;

 

   

identify, recruit, retain, incentivize and integrate additional employees;

 

   

maintain sufficient quantities of drug product for clinical supply and establish manufacturing capabilities or arrangements with third-party manufacturers for commercial supply, if and when approved; and

 

   

continue to improve our operational, financial and management controls, reports systems and procedures.

Our future financial performance and our ability to develop, manufacture and commercialize our product candidates will depend, in part, on our ability to effectively manage any future growth, and our management may also have to divert financial and other resources, and a disproportionate amount of its attention away from day-to-day activities in order to devote a substantial amount of time, to managing these growth activities.

If we are not able to effectively expand our organization by hiring new employees and expanding our groups of consultants and contractors, we may not be able to successfully implement the tasks necessary to further develop and commercialize our product candidates and, accordingly, may not achieve our research, development and commercialization goals. Furthermore, the United States is currently experiencing an increasingly competitive labor market and we are uncertain as to the employment environment in the future, or how that environment will impact our workforce, including our ability to hire or retain qualified employees, consultants, contractors or other key personnel to facilitate our growth.

We face substantial competition, which may result in others discovering, developing or commercializing product candidates more quickly or marketing them more successfully than us.

The development and commercialization of new product candidates is highly competitive. We compete in the segments of the pharmaceutical, biotechnology and other related markets that develop therapies for the treatment

 

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of acute critical illnesses. Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize product candidates that are safer, more effective, have fewer or less severe side effects, are more convenient, or are less expensive than any product candidates that we may develop or that would render any product candidates that we may develop obsolete or non-competitive. Our competitors also may obtain marketing approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market. Moreover, with the proliferation of new drugs and therapies into critical illnesses, we expect to face increasingly intense competition as new technologies become available. If we fail to stay at the forefront of technological change, we may be unable to compete effectively. Any product candidates that we successfully develop and commercialize will compete with existing therapies and new therapies that may become available in the future. The highly competitive nature of and rapid technological changes in the biotechnology and pharmaceutical industries could render our product candidates or our technology obsolete, less competitive or uneconomical.

The amount and type of clinical data that may be required by regulatory authorities may increase or change. Consequently, the results of our clinical trials for product candidates will likely need to show a risk benefit profile that is competitive with or more favorable than products approved prior to ours in order to obtain marketing approval or, if approved, a product label that is favorable for commercialization. If the risk benefit profile is not competitive with those product candidates or product candidate candidates, we may have developed a product that is not commercially viable, that we are not able to sell profitably or that is unable to achieve favorable pricing or reimbursement. In such circumstances, our future product business, financial condition, results of operations and prospects could be adversely affected.

There is significant investment across the biotechnology and pharmaceutical industries in developing novel and proprietary therapies for acute critical illnesses. We face substantial and increasing competition on multiple fronts, including from larger companies with access to more resources and capital, as well as more experience in research and development, clinical trials and commercialization. Smaller or earlier-stage companies as well as academic institutions, government agencies and public and private research institutions may also prove to be significant competitors. Additionally, we may face competition in hiring scientific and management personnel, establishing clinical trial sites, recruiting patients to participate in clinical trials and acquiring technologies complementary to, or necessary for our programs.

Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize product candidates that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any product candidates that we may develop. Our competitors also may obtain FDA or other regulatory approval for their product candidates more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market. The key competitive factors affecting the success of all of our programs are likely to be their efficacy, safety, convenience, price and degree of reimbursement.

Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller and other early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These third parties compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and subject enrollment for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.

The key competitive factors affecting the success of all of our programs are likely to be the possibility of other companies developing drugs that address the same illnesses that we are aiming to address. Some of these markets are limited and significant competition could reduce the number of patients we are able to reach. If we are not successful in developing, commercializing and achieving higher levels of reimbursement than our competitors, we will not be able to compete against them and our business would be adversely affected.

 

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We may wish to form collaborations in the future with respect to our product candidates, but may not be able to do so or realize the potential benefits of such transactions, which may cause us to alter or delay our development and commercialization plans.

The development and potential commercialization of our product candidates will require substantial additional capital to fund expenses. We may, in the future, decide to collaborate with other biopharmaceutical companies for the development and potential commercialization of those product candidates, including in territories outside the United States or for certain indications. We will face significant competition in seeking appropriate collaborators. We may not be successful in our efforts to establish a strategic partnership or other alternative arrangements for our product candidates because they may be deemed to be at too early of a stage of development for collaborative effort and third parties may not view our product candidates as having the requisite potential to demonstrate safety and efficacy. If and when we collaborate with a third-party for development and commercialization of a product candidate, we can expect to relinquish some or all of the control over the future success of that product candidate to the third-party. Our ability to reach a definitive agreement for a collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of our technologies, product candidates and market opportunities. The collaborator may also consider alternative product candidates or technologies for similar indications that may be available to collaborate on and whether such a collaboration could be more attractive than the one with us for our product candidates. We may also be restricted under any license agreements from entering into agreements on certain terms or at all with potential collaborators.

Collaborations are complex and time-consuming to negotiate and document. In addition, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators and changes to the strategies of the combined company. As a result, we may not be able to negotiate collaborations on a timely basis, on acceptable terms, or at all. If we are unable to do so, we may have to curtail the development of such product candidate, reduce or delay one or more of our other development programs, delay the potential commercialization or reduce the scope of any planned sales or marketing activities for such product candidate, or increase our expenditures and undertake development, manufacturing or commercialization activities at our own expense. If we elect to increase our expenditures to fund development, manufacturing or commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we may not be able to further develop our product candidates or bring them to market and generate product revenue.

Our product candidates may also require specific components to work effectively and efficiently, and rights to those components may be held by others. We may be unable to in-license any compositions, methods of use, processes or other third-party intellectual property rights from third parties that we identify. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, which would harm our business. Even if we are able to obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. In that event, we may be required to expend significant time and resources to develop or license replacement technology.

Failure to comply with health and data protection laws and regulations could lead to government enforcement actions (which could include civil or criminal penalties), private litigation, and/or adverse publicity and could negatively affect our operating results and business.

We and any potential collaborators may be subject to federal, state, and foreign data protection laws and regulations (i.e., laws and regulations that address privacy and data security). In the United States, numerous federal and state laws and regulations, including federal health information privacy laws, state data breach notification laws, state health information privacy laws, and federal and state consumer protection laws (e.g., Section 5 of the Federal Trade Commission Act), that govern the collection, use, disclosure, and protection of health-related and other personal information could apply to our operations or the operations of our collaborators. In addition, we may obtain health information from third parties (including research institutions from which we

 

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obtain clinical trial data) that are subject to privacy and security requirements under federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (“HITECH”). Depending on the facts and circumstances, we could be subject to significant penalties if we obtain, use, or disclose individually identifiable health information, provided by a HIPAA- covered entity or business associate in a manner that is not authorized or permitted by HIPAA.

Additionally, new privacy rules are being enacted in the United States and globally, and existing ones are being updated and strengthened. For example, the California Consumer Privacy Act (“CCPA”), which increases privacy rights for California residents and imposes obligations on companies that process their personal information, came into effect on January 1, 2020. Among other things, the CCPA requires covered companies to provide new disclosures to California consumers and provide such consumers new data protection and privacy rights, including the ability to opt-out of certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for certain data breaches that result in the loss of personal information. This private right of action may increase the likelihood of, and risks associated with, data breach litigation. The CCPA has been amended several times, and it is possible that further amendments will be enacted, but even in its current form it remains unclear how various provisions of the CCPA will be interpreted and enforced. State laws are changing rapidly, with both Virginia and Colorado recently following California’s lead and enacting their own statutory privacy regimes, and there is discussion in Congress of a new federal data protection and privacy law to which we would become subject if it is enacted. All of these evolving compliance and operational requirements impose significant costs that are likely to increase over time, may require us to modify our data processing practices and policies, divert resources from other initiatives and projects, and could restrict the way products and services involving data are offered, all of which may harm our business, financial condition, results of operations and prospects. Internationally, virtually every jurisdiction in which we operate has established its own data security and privacy legal framework that may also apply to health-related and other personal information obtained outside of the United States, including but not limited to the European Union (“EU”). For example, the EU has adopted the General Data Protection Regulation (“GDPR”), which went into effect on May 25, 2018 and imposes strict requirements for processing the personal data of individuals within the European Economic Area (“EEA”). Companies that must comply with the GDPR face increased compliance obligations and risk, including more robust regulatory enforcement of data protection requirements and potential fines for noncompliance of up to 20 million euros or up to 4% of the annual global revenue of the noncompliant company, whichever is greater. Among other requirements, the GDPR regulates transfers of personal data subject to the GDPR to third countries that have not been found to provide adequate protection to such personal data, including the United States, and the efficacy and longevity of current transfer mechanisms between the EU and the United States remains uncertain.

For example, in 2016, the EU and United States agreed to a transfer framework for data transferred from the EU to the United States, called the Privacy Shield, but the Privacy Shield was invalidated in July 2020 by the Court of Justice of the European Union. Further, from January 1, 2021, companies have to comply with the GDPR and also the United Kingdom GDPR, or the UK GDPR, which, together with the amended UK Data Protection Act 2018, retains the GDPR in UK national law. The UK GDPR mirrors the fines under the GDPR, i.e., fines up to the greater of €20 million (£17.5 million) or 4% of global turnover. The relationship between the United Kingdom and the European Union in relation to certain aspects of data protection law remains unclear, and it is unclear how United Kingdom data protection laws and regulations will develop in the medium to longer term, and how data transfers to and from the United Kingdom will be regulated in the long term. These changes will lead to additional costs and increase our overall risk exposure. Currently there is a four to six-month grace period agreed in the EU and United Kingdom Trade and Cooperation Agreement, ending June 30, 2021 at the latest, whilst the parties discuss an adequacy decision. The European Commission published a draft adequacy decision on February 19, 2021. If adopted, the decision will enable data transfers from EU member states to the United Kingdom for a four- year period, subject to subsequent extensions.

 

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Failure to comply with U.S. and international data protection laws and regulations could result in government enforcement actions (which could include civil or criminal penalties), private litigation, breach reporting requirements and/or adverse publicity and could negatively affect our operating results and business. Moreover, clinical trial subjects about whom we or our potential collaborators obtain information, as well as the providers who share this information with us, may contractually limit our ability to use and disclose the information. Claims that we have violated individuals’ privacy rights, failed to comply with data protection laws, or breached our contractual obligations, even if we are not found liable, could be expensive and time-consuming to defend and could result in adverse publicity that could harm our business.

Our internal information technology systems, or those of our CROs or other contractors or consultants, may fail or suffer security breaches, loss or leakage of data, and other disruptions, which could result in a material disruption of our product candidates’ development programs, compromise sensitive information related to our business or prevent us from accessing critical information, potentially exposing us to liability or otherwise adversely affecting our business.

We are increasingly dependent upon information technology systems, infrastructure and data to operate our business. In the ordinary course of business, we collect, store and transmit confidential information (including but not limited to intellectual property, proprietary business information and personal information). It is critical that we do so in a secure manner to maintain the confidentiality and integrity of such confidential information. We also have outsourced elements of our operations to third parties, and as a result we manage a number of third-party contractors who have access to our confidential information.

Despite the implementation of security measures, given their size and complexity and the increasing amounts of confidential information that they maintain, our internal information technology systems and those of our third- party CROs and other contractors and consultants are potentially vulnerable to breakdown or other damage or interruption from service interruptions, system malfunction, natural disasters, terrorism, war and telecommunication and electrical failures, as well as security breaches from inadvertent or intentional actions by our employees, contractors, consultants, business partners, and/or other third parties, or from cyber-attacks by malicious third parties (including the deployment of harmful malware, ransomware, denial-of-service attacks, social engineering and other means to affect service reliability and threaten the confidentiality, integrity and availability of information), which may compromise our system infrastructure or lead to data leakage. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and reputational damage and the further development and commercialization of our product candidates could be delayed.

While we invest in our information security systems, we cannot assure you that our data protection efforts and our investment in information technology will prevent significant breakdowns, data leakages, breaches in our systems or other cyber incidents that could have an adverse effect upon our reputation, business, financial condition, results or operations and prospects. For example, we have experienced phishing attacks in the past and we may be a target of phishing attacks or other cyber-attacks in the future. As use of digital technologies has increased, cyber incidents, including deliberate attacks and attempts to gain unauthorized access to computer systems and networks, which could result in material adverse impacts to our business, including the theft of our intellectual property, have increased in frequency and sophistication. In addition to traditional computer “hackers,” threat actors, software bugs, malicious code (such as viruses and worms), employee theft or misuse, denial-of-service attacks (such as credential stuffing), phishing and ransomware attacks, sophisticated nation-state and nation-state supported actors now engage in attacks (including advanced persistent threat intrusions). These threats pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data. We may not be successful in preventing or detecting cyber-attacks or mitigating their effects, or we may be perceived as having failed to do so. For example, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our programs and the development of our product candidates could be delayed. In addition, the loss of clinical trial data for our product candidates could result in delays in our marketing approval efforts and significantly increase our costs to recover or

 

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reproduce the data. Additionally, theft of our intellectual property or proprietary business information could require substantial expenditures to remedy. Furthermore, significant disruptions of our internal information technology systems or security breaches could result in the loss, misappropriation, and/or unauthorized access, use, or disclosure of, or the prevention of access to, confidential information (including trade secrets or other intellectual property, proprietary business information, and personal information), which could result in financial, legal, business, and reputational harm to us. For example, any such event that leads to unauthorized access, use, or disclosure of personal information, including personal information regarding our clinical trial subjects or employees, could harm our reputation directly, compel us to comply with federal and/or state breach notification laws and foreign law equivalents, subject us to mandatory corrective action, and otherwise subject us to liability under laws and regulations that protect the privacy and security of personal information, which could result in significant legal and financial exposure and reputational damages that could potentially have an adverse effect on our business.

We or the third parties upon whom we depend may be adversely affected by earthquakes, fires or other natural disasters, terrorism or similar unforeseen events and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.

Our headquarters and main research facility are located in California near major earthquake faults and fire zones. If earthquakes, fires, other natural disasters, terrorism or similar unforeseen events beyond our control prevent us from using all or a significant portion of our headquarters or research facility, it may be difficult or, in certain cases, impossible for us to continue our business for a substantial period of time. We do not have a disaster recovery or business continuity plan in place and may incur substantial expenses as a result of the absence or limited nature of our internal or third-party service provider disaster recovery and business continuity plans, which, particularly when taken together with our lack of earthquake insurance, could have a material adverse effect on our business. Furthermore, integral parties in our supply chain are operating from single sites, increasing their vulnerability to natural disasters or other sudden, unforeseen and severe AEs. If such an event were to affect our supply chain, it could have a material adverse effect on our ability to conduct our clinical trials, our development plans and business.

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

We have incurred substantial losses during our history and do not expect to become profitable in the near future, and we may never achieve profitability. To the extent that we continue to generate losses for tax purposes, such unused losses may carry forward to offset future taxable income, if any, until such unused losses expire (if at all). As of December 31, 2021, we had federal net operating loss (“NOL”) carryforwards of approximately $64.5 million. As of December 31, 2021, we had state NOL carryforwards of approximately $63.8 million. With respect to the federal NOL carryforwards, $40.5 million will begin to expire in 2026, unless previously utilized, and all have expiration dates. We also have federal and state research and development credit carryforwards totaling $4.4 million and $2.0 million, respectively. The federal research and development credit carryforwards will begin to expire in 2027, unless previously utilized. The state research and development credits do not expire.

Under current law, our federal NOLs generated in tax years beginning after December 31, 2017, may be carried forward indefinitely, but the deductibility of such federal NOLs in tax years beginning after December 31, 2020, is limited to 80% of taxable income. It is uncertain if and to what extent various states will conform to federal tax law.

In addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Code”), and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50 percentage point change (by value) in its equity ownership over a rolling three-year period, the corporation’s ability to use its pre-change NOL carryforwards and certain other tax attributes to offset its post-change income or taxes may be limited. This could limit the amount of NOLs or other applicable tax attributes that we can utilize annually to offset future taxable income or tax liabilities. We have not undertaken a

 

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Section 382 study, and it is possible that we have previously undergone one or more ownership changes so that our use of net operating losses is subject to limitation. We may experience ownership changes in the future as a result of subsequent shifts in our stock ownership. As a result, if we earn net taxable income, our ability to use our pre-change NOLs to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us. In addition, at the state level, there may be periods during which the use of NOLs is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed. As a result, we may be unable to use all or a material portion of our NOL carryforwards and other tax attributes, which could adversely affect our future cash flows.

Changes in tax laws or regulations that are applied adversely to us or our customers may have a material adverse effect on our business, cash flow, financial condition or results of operations.

New income, sales, use, or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, which could adversely affect our business operations and financial performance. Further, existing tax laws, statutes, rules, regulations, or ordinances could be interpreted, changed, modified, or applied adversely to us. For example, the Biden administration and Congress have proposed various U.S. federal tax law changes, which if enacted could have a material impact on our business, cash flow, financial condition or results of operations. In addition, it is uncertain if and to what extent various states will conform to federal tax laws. Future tax reform legislation could have a material impact on the value of our deferred tax assets, could result in significant one-time charges, and could increase our future U.S. tax expense.

Changes in healthcare law and implementing regulations, as well as changes in healthcare policy, may impact our business in ways that we cannot currently predict, and may have a significant adverse effect on our business and results of operations.

In the United States and some foreign jurisdictions, there have been, and continue to be, several legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval of product candidates, restrict or regulate post-approval activities, and affect our ability to profitably sell any product candidates for which we obtain marketing approval. Among policy makers and payors in the United States and elsewhere, including in the EU, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding access. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives.

For example, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the “Affordable Care Act”), substantially changed the way healthcare is financed by both the government and private insurers, and continues to significantly impact the U.S. pharmaceutical industry. As another example, the 2021 Consolidated Appropriations Act signed into law on December 27, 2020 incorporated extensive healthcare provisions and amendments to existing laws, including a requirement that all manufacturers of drugs and biological products covered under Medicare Part B report the product’s average sales price, or ASP, to Department of Health and Human Services (“HHS”) beginning on January 1, 2022, subject to enforcement via civil money penalties.

Since its enactment, there have been judicial, executive and Congressional challenges to certain aspects of the Affordable Care Act. By way of example, legislation enacted in 2017, informally titled the Tax Cuts and Jobs Act (the “Tax Act”) repealed penalties for not complying with the Affordable Care Act’s individual mandate to carry health insurance, commonly referred to as the “individual mandate.” Following several years of litigation in the federal courts, in June 2021 the U.S. Supreme Court upheld the Affordable Care Act when it dismissed a legal challenge to the Affordable Care Act’s constitutionality on procedural grounds following that legislative repeal of the individual mandate. It is possible that the Affordable Care Act will be subject to additional challenges in the future. Prior to the Supreme Court’s decision, President Biden issued an executive order that initiated a special enrollment period for purposes of obtaining health insurance coverage through the Affordable

 

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Care Act marketplace. The executive order also instructed certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare, including among others, reexamining Medicaid demonstration projects and waiver programs that include work requirements, and policies that create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or the Affordable Care Act. Further, on August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (“IRA”) into law, which among other things, extends enhanced subsidies for individuals purchasing health insurance coverage in Affordable Care Act marketplaces through plan year 2025. The IRA also eliminates the “donut hole” under the Medicare Part D program beginning in 2025 by significantly lowering the beneficiary maximum out-of-pocket cost through a newly established manufacturer discount program. It is unclear how any such challenges and the healthcare reform measures of the Biden administration will impact the Affordable Care Act, our business, or financial condition.

Other legislative changes have been proposed and adopted since the Affordable Care Act was enacted that affect healthcare expenditures. These changes include aggregate reductions to Medicare payments to providers of 2% per fiscal year pursuant to the Budget Control Act of 2011, which began in 2013 and, due to legislative amendments to the statute, will remain in effect until 2031, with the exception of a temporary suspension as part of COVID-19 pandemic relief legislation from May 1, 2020 through March 31, 2022, unless additional Congressional action is taken. Under current legislation, the actual reduction in Medicare payments will vary from 1% in 2022 to up to 4% in the final fiscal year of this sequester. In January 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, reduced Medicare payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. In addition, new laws may result in additional reductions in Medicare and other healthcare funding, which may adversely affect customer demand and affordability for our product candidates and, accordingly, the results of our financial operations.

Also, there has been heightened governmental scrutiny recently over the manner in which drug manufacturers set prices for their marketed products, which have resulted in several Congressional inquiries, presidential executive orders, and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drug products. At the federal level, the Trump administration used several means to propose or implement drug pricing reform, including through federal budget proposals, executive orders and policy initiatives. Moreover, in July 2021, President Biden issued a sweeping executive order on promoting competition in the American economy that includes several mandates pertaining to the pharmaceutical and healthcare insurance industries. Among other things, the executive order includes several directives regarding the Federal Trade Commission’s oversight of potentially anticompetitive practices within the pharmaceutical industry. The executive order also directs the FDA to work towards implementing a system for importing drugs from Canada (following on a Trump administration notice-and-comment rulemaking on Canadian drug importation that was finalized in October 2020). In response to President Biden’s executive order, on September 9, 2021, HHS released a Comprehensive Plan for Addressing High Drug Prices that outlines principles for drug pricing reform and sets out a variety of potential legislative policies that Congress could pursue to advance these principles. In addition, the IRA, among other things, (1) directs HHS to negotiate the price of certain single-source drugs and biologics covered under Medicare and (2) imposes rebates under Medicare Part B and Medicare Part D to penalize price increases that outpace inflation. These provisions will take effect progressively starting in fiscal year 2023, although they may be subject to legal challenges. It is currently unclear how the IRA will be implemented but is likely to have a significant impact on the pharmaceutical industry. Further, the Biden Administration released an additional executive order on October 14, 2022, directing HHS to submit a report within 90 days on how the Center for Medicare and Medicaid Innovation can be further leveraged to test new models for lowering drug costs for Medicare and Medicaid beneficiaries.

 

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At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures. For example, California requires pharmaceutical manufacturers to notify certain purchasers, including health insurers and government health plans at least 60 days before any scheduled increase in the wholesale acquisition cost (“WAC”), of their product if the increase exceeds 16%, and further requires pharmaceutical manufacturers to explain whether a change or improvement in the product necessitates such an increase. Similarly, Vermont requires pharmaceutical manufacturers to disclose price information on certain prescription drugs, and to provide notification to the state if introducing a new drug with a WAC in excess of the Medicare Part D specialty drug threshold. In December 2020, the U.S. Supreme Court also held unanimously that federal law does not preempt the states’ ability to regulate pharmaceutical benefit managers, or PBMs, and other members of the healthcare and pharmaceutical supply chain, an important decision that may lead to further and more aggressive efforts by states in this area.

We expect that these and other healthcare reform measures that may be adopted in the future may result in more rigorous coverage criteria and lower reimbursement and in additional downward pressure on the price that we receive for any approved product. Any reduction in reimbursement from Medicare or other government-funded programs may result in a similar reduction in payments from private payors. The implementation of cost- containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability or commercialize our drugs, once marketing approval is obtained.

In the EU, coverage and reimbursement status of any product candidates for which we obtain regulatory approval are provided for by the national laws of member states. The requirements may differ across the EU member states. Also, at national level, actions have been taken to enact transparency and anti-gift laws (similar to the US Physician Payments Sunshine Act) regarding payments between pharmaceutical companies and health care professionals.

We are subject to applicable fraud and abuse, transparency, government price reporting, and other healthcare laws and regulations. If we are unable to comply, or have not fully complied, with such laws, we could face substantial penalties.

Healthcare providers and third-party payors will play a primary role in the recommendation and prescription of any future product candidates we may develop and any product candidates for which we obtain marketing approval. Our current and future arrangements with clinical investigators, third-party payors, healthcare provider and customers expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may affect the business or financial arrangements and relationships through which we research, market, sell and distribute our product candidates. The laws that may affect our ability to operate include, but are not limited to:

 

   

the federal Anti-Kickback Statute, which prohibits any person or entity from, among other things, knowingly and willfully soliciting, receiving, offering or paying any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of an item or service reimbursable, in whole or in part, under a federal healthcare program, such as the Medicare and Medicaid programs. The term “remuneration” has been broadly interpreted to include anything of value. The federal Anti-Kickback Statute has also been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, and purchasers, on the other the other hand. There are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution, but these exceptions and safe harbors are narrowly drawn. Practices that are alleged to be intended to induce prescribing, purchases or recommendations, or include any payments of more than fair market value, may be subject to scrutiny if they do not qualify for an exception or safe harbor. In addition, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;

 

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federal civil and criminal false claims laws, such as the civil False Claims Act (“FCA”), which can be enforced by private citizens through civil qui tam actions, and civil monetary penalty laws prohibit individuals or entities from, among other things, knowingly presenting, or causing to be presented, false, fictitious or fraudulent claims for payment of federal funds, and knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent claim to avoid, decrease or conceal an obligation to pay money to the federal government. For example, pharmaceutical companies have been prosecuted under the FCA in connection with, among other things their alleged off-label promotion of drugs, engaging in improper consulting arrangements with physicians, concealing price concessions in the pricing information submitted to the government for government price reporting purposes, and providing free product to customers with the expectation that the customers would bill federal health care programs for the product. As a result of a modification made by the Fraud Enforcement and Recovery Act of 2009, a claim includes “any request or demand” for money or property presented to the U.S. government. In addition, manufacturers can be held liable under the FCA even when they do not submit claims directly to government payors if they are deemed to “cause” the submission of false or fraudulent claims. Moreover, a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the FCA;

 

   

HIPAA which, among other things, imposes criminal liability for executing or attempting to execute a scheme to defraud any healthcare benefit program, including private third-party payors, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and creates federal criminal laws that prohibit knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement or representation, or making or using any false writing or document knowing the same to contain any materially false, fictitious or fraudulent statement or entry in connection with the delivery of or payment for healthcare benefits, items or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;

 

   

HIPAA, as amended by HITECH and their implementing regulations, which imposes privacy, security and breach reporting obligations with respect to individually identifiable health information upon covered entities, including certain healthcare providers, health plans, and healthcare clearinghouses, and their respective business associates and covered subcontractors. HITECH also created new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in U.S. federal courts to enforce the federal HIPAA laws and seek attorneys’ fees and costs associated with pursuing federal civil actions;

 

   

the federal transparency requirements under the Physician Payments Sunshine Act, created under the Affordable Care Act, which requires, among other things, certain manufacturers of drugs, devices, biologics and medical supplies reimbursed under Medicare, Medicaid, or the Children’s Health Insurance Program to report to CMS information related to payments and other transfers of value provided to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors), other healthcare professionals (such as physician assistants and nurse practitioners) and teaching hospitals and physician ownership and investment interests, including such ownership and investment interests held by a physician’s immediate family members;

 

   

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

 

   

state and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws, that may impose similar or more prohibitive restrictions, and may apply to items or services reimbursed by any non-governmental third-party payors, including private insurers; and

 

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state and foreign laws that require pharmaceutical companies to implement compliance programs, comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, or to track and report gifts, compensation and other remuneration provided to physicians and other health care providers; state and local laws that require the registration of pharmaceutical sales representatives; and state health information privacy laws, many of which differ from each other in significant ways and often are not pre-empted by HIPAA, thus requiring additional compliance efforts.

We have entered into consulting and scientific advisory board arrangements with physicians and other healthcare providers, including some who could influence the use of our product candidates, if approved, and have received equity awards as compensation for services provided to us. Because of the complex and far-reaching nature of these laws, regulatory agencies may view these transactions as prohibited arrangements that must be restructured, or discontinued, or for which we could be subject to other significant penalties. We could be adversely affected if regulatory agencies interpret our financial relationships with providers who may influence the ordering of and use our product candidates, if approved, to be in violation of applicable laws.

Federal and state enforcement bodies have continued their scrutiny of interactions between healthcare companies and healthcare providers, which has led to significant investigations, prosecutions, convictions and settlements in the healthcare industry. Responding to investigations can be time-and resource-consuming and can divert management’s attention from the business. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business.

Ensuring that our business arrangements with third parties comply with applicable healthcare laws and regulations will likely be costly. If our operations are found to be in violation of any of these laws or any other current or future governmental laws and regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, disgorgement, imprisonment, exclusion from government funded healthcare programs, such as Medicare and Medicaid, contractual damages, reputational harm, diminished profits and future earnings, additional reporting obligations and oversight if we become subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with these laws, and the curtailment or restructuring of our operations, any of which could substantially disrupt our operations. If any of the physicians or other healthcare providers or entities with whom we expect to do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.

Our current or future employees, principal investigators, consultants and commercial partners may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements and insider trading.

We are exposed to the risk of fraud or other misconduct by our employees, principal investigators, consultants and commercial partners. Misconduct by these parties could include intentional failures to comply with the regulations of the FDA and non-U.S. regulators, provide accurate information to the FDA and non-U.S. regulators, comply with healthcare fraud and abuse laws and regulations in the United States and abroad, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Such misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and cause serious harm to our reputation. It is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us those actions could have a

 

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significant impact on our business, including the imposition of significant civil, criminal and administrative penalties, damages, fines, disgorgement, imprisonment, exclusion from government funded healthcare programs, such as Medicare and Medicaid, contractual damages, reputational harm, diminished profits and future earnings, additional reporting obligations and oversight if subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with these laws, and the curtailment or restructuring of our operations.

Risks Related to Our Intellectual Property

If we are unable to obtain and maintain sufficient intellectual property protection for Auxora, any future product candidates, and other proprietary technologies we develop, or if the scope of the intellectual property protection obtained is not sufficiently broad, our competitors could develop and commercialize products similar or identical to ours, and our ability to successfully commercialize Auxora, any future product candidates, and other proprietary technologies if approved, may be adversely affected.

Our commercial success will depend in part on our ability to obtain and maintain a combination of patents, trade secret protection and confidentiality agreements to protect the intellectual property related to Auxora, any future product candidates, and other proprietary technologies we develop. If we are unable to obtain or maintain patent protection with respect to Auxora, any future product candidates, and other proprietary technologies we may develop, our business, financial condition, results of operations, and prospects could be materially harmed.

The patent position of biotechnology and pharmaceutical companies is highly uncertain and involves complex legal, scientific, and factual questions and has been the subject of frequent litigation in recent years. As a result, the issuance, scope, validity, enforceability, and commercial value of our patent rights are highly uncertain. Our patent applications may not result in patents being issued which protect Auxora, any future product candidates, and other proprietary technologies we may develop or which effectively prevent others from commercializing competitive technologies and products. Further, no consistent policy regarding the breadth of claims allowed in pharmaceutical patents has emerged to date in the United States or in many jurisdictions outside of the United States. Changes in either the patent laws or interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be enforced in the patents that may be issued from the applications we currently or may in the future own or license from third parties. Further, if any patents we obtain or license are deemed invalid and unenforceable, our ability to commercialize or license our technology could be adversely affected.

The patent application process is subject to numerous risks and uncertainties, and there can be no assurance that we or any of our actual or potential future collaborators will be successful in protecting Auxora, any future product candidates, and other proprietary technologies and their uses by obtaining, defending and enforcing patents. These risks and uncertainties include the following:

 

   

the USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent process, the noncompliance with which can result in abandonment or lapse of a patent or patent application, and partial or complete loss of patent rights in the relevant jurisdiction;

 

   

patent applications may not result in any patents being issued;

 

   

patents that may be issued may be challenged, invalidated, modified, revoked, circumvented, found to be unenforceable, or may otherwise not provide any competitive advantage;

 

   

our competitors, many of whom have substantially greater resources than we do and many of whom have made significant investments in competing technologies, may seek or may have already obtained patents that will limit, interfere with, or eliminate our ability to make, use and sell our potential product candidates;

 

   

other parties may have designed around our claims or developed technologies that may be related or competitive to our platform, may have filed or may file patent applications and may have received or

 

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may receive patents that overlap or conflict with our patent applications, either by claiming the same composition of matter, methods or formulations or by claiming subject matter that could dominate our patent position;

 

   

any successful opposition to any patents owned by or licensed to us could deprive us of rights necessary for the practice of our technologies or the successful commercialization of any products or product candidates that we may develop;

 

   

because patent applications in the United States and most other countries are confidential for a period of time after filing, we cannot be certain that we were the first to file any patent application related to Auxora, any future product candidates, and other proprietary technologies and their uses;

 

   

an interference proceeding can be provoked by a third party or instituted by the USPTO to determine who was the first to invent any of the subject matter covered by the patent claims of our applications for any application with an effective filing date before March 16, 2013;

 

   

there may be significant pressure on the U.S. government and international governmental bodies to limit the scope of patent protection both inside and outside the United States for disease treatments that prove successful, as a matter of public policy regarding worldwide health concerns; and

 

   

countries other than the United States may have patent laws less favorable to patentees than those upheld by U.S. courts, allowing foreign competitors a better opportunity to create, develop, and market competing product candidates in those countries.

The patent prosecution process is expensive, time-consuming, and complex, and we may not be able to file, prosecute, or maintain 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. Although we enter into non-disclosure and confidentiality agreements with parties who have access to patentable aspects of our research and development output, such as our employees, corporate collaborators, outside scientific collaborators, CROs, contract manufacturers, consultants, advisors and other third parties, any of these parties may breach such agreements and disclose such output before a patent application is filed, thereby jeopardizing our ability to seek patent protection for such output. In addition, our ability to obtain and maintain valid and enforceable patents depends on whether the differences between our inventions and the prior art allow our inventions to be patentable over the prior art. Furthermore, 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 any of our owned patents or pending patent applications, or that we were the first to file for patent protection of such inventions.

The degree of future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. If we do not adequately protect our intellectual property and proprietary technology, competitors may be able to use Auxora, any future product candidates, and other proprietary technologies and erode or negate any competitive advantage we may have, which could have a material adverse effect on our financial condition and results of operations. For example:

 

   

others may be able to make compounds that are similar to Auxora and any future product candidates but that are not covered by the claims of our patents;

 

   

we might not have been the first to make the inventions covered by our pending patent applications;

 

   

we might not have been the first to file patent applications for these inventions;

 

   

others may independently develop similar or alternative technologies or duplicate any of our technologies;

 

   

any patents that we obtain may not provide us with any competitive advantages;

 

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we may not develop additional proprietary technologies that are patentable;

 

   

our competitors might conduct research and development activities in countries where we do not have patent rights or where patent protection is weak and then use the information learned from such activities to develop competitive products for sale in our major commercial markets;

 

   

we cannot ensure that any of our patents, or any of our pending patent applications, if issued, will include claims having a scope sufficient to protect our products;

 

   

we cannot ensure that we will be able to successfully commercialize our products on a substantial scale, if approved, before the relevant patents that we own expire; or

 

   

the patents of others may have an adverse effect on our business.

Others have filed, and in the future are likely to file, patent applications covering products and technologies that are similar, identical or competitive to ours or important to our business. We cannot be certain that any patent application owned by a third party will not have priority over patent applications filed by us, or that we will not be involved in interference, opposition or invalidity proceedings before U.S. or non-U.S. patent offices.

We cannot be certain that the claims in our issued patents and pending patent applications covering Auxora or any future product candidates will be considered patentable by the USPTO, courts in the United States, or by patent offices and courts in foreign countries. Furthermore, the laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the United States. As a result, we may encounter significant problems in protecting and defending our intellectual property internationally.

The strength of patents in the biotechnology and pharmaceutical fields involves complex legal and scientific questions and can be uncertain. The patent applications that we own may fail to result in issued patents with claims that cover Auxora and any future product candidates in the United States or in foreign countries. Even if such patents do successfully issue, third parties may challenge the ownership, validity, enforceability, or scope thereof, which may result in such patents being narrowed, invalidated, or held unenforceable. Any successful opposition to our patents could deprive us of exclusive rights necessary for the successful commercialization of Auxora and any future product candidates. Furthermore, even if they are unchallenged, our patents may not adequately protect our intellectual property, provide exclusivity for Auxora or any future product candidates or prevent others from designing around our claims. If the breadth or strength of protection provided by the patents we hold with respect to Auxora or any future product candidates is threatened, it could dissuade companies from collaborating with us to develop, or threaten our ability to commercialize, Auxora or any future product candidates.

For U.S. patent applications in which claims are entitled to a priority date before March 16, 2013, an interference proceeding can be provoked by a third party or instituted by the USPTO to determine who was the first to invent any of the subject matter covered by the patent claims of our patents or patent applications. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms. Our participation in an interference proceeding may fail and, even if successful, may result in substantial costs and distract our management and other employees.

For U.S. patent applications containing a claim not entitled to priority before March 16, 2013, there is greater level of uncertainty in the patent law. In September 2011, the Leahy-Smith America Invents Act, or America Invents Act, was signed into law. The America Invents Act includes a number of significant changes to U.S. patent law, including provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. The USPTO is developing regulations and procedures to govern the administration of the America Invents Act, and many of the substantive changes to patent law associated with the America Invents Act, and in particular, the “first to file” provisions, were enacted on March 16, 2013. This will require us to be cognizant going forward of the time from invention to filing of a patent application and be diligent in filing

 

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patent applications, but circumstances could prevent us from promptly filing patent applications on our inventions. It remains unclear what impact the America Invents Act will have on the operation of our business. As such, the America Invents Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.

Patent terms may be inadequate to protect our competitive position on our product candidates for an adequate amount of time.

The term of any individual patent depends on applicable law in the country where the patent is granted. In the United States, provided all maintenance fees are timely paid, a patent generally has a term of 20 years from its application filing date or earliest claimed non-provisional filing date. Extensions may be available under certain circumstances, but the life of a patent and, correspondingly, the protection it affords is limited. Even if we obtain patents covering our product candidates, when the terms of all patents covering a product expire, our business may become subject to competition from competitive products, including generic products. Given the amount of time required for the development, testing, and regulatory review and approval of new product candidates, patents protecting such candidates may expire before or shortly after such candidates are commercialized. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.

If we do not obtain patent term extension for Auxora, our business may be materially harmed.

Depending upon the timing, duration, and specifics of any FDA marketing approval of Auxora, or any future product candidate we may develop, one or more of patents issuing from our U.S. patent applications may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Action of 1984, or Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent extension term, or PTE, of up to five years as compensation for patent term lost during the FDA regulatory review process. A patent term extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval, only one patent may be extended and only those claims covering the approved drug, a method for using it or a method for manufacturing it may be extended. Similar patent term restoration provisions to compensate for commercialization delay caused by regulatory review are also available in certain foreign jurisdictions, such as in Europe under Supplemental Protection Certificate, or SPC. If we encounter delays in our development efforts, including our clinical trials, the period of time during which we could market Auxora and any future product candidates under patent protection would be reduced. Additionally, we may not receive an extension if we fail to apply within applicable deadlines, fail to apply prior to expiration of relevant patents, or otherwise fail to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than we request. If we are unable to obtain patent term extension or restoration, or the term of any such extension is less than we request, the period during which we will have the right to exclusively market our product will be shortened and our competitors may obtain approval of competing products following our patent expiration, and our revenue could be reduced.

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

The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment, and other similar provisions during the patent process. Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on any issued patents and/or applications are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of the patents and/or applications. We have systems in place to remind us to pay these fees, and we employ an outside firm and rely on our outside counsel to pay these fees due to foreign patent agencies. While an inadvertent lapse may sometimes be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations

 

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in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors might be able to enter the market with similar or identical products or technology earlier than should otherwise have been the case, which would have a material adverse effect on our business, financial condition, results of operations, and prospects.

Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect Auxora.

As is the case with other biotechnology and pharmaceutical companies, our success is heavily dependent on intellectual property, particularly on obtaining and enforcing patents. Our patent rights may be affected by developments or uncertainty in U.S. or foreign patent statutes, patent case law, USPTO rules and regulations or the rules and regulations of foreign patent offices. Obtaining and enforcing patents in the biotechnology and pharmaceutical industry involve both technological and legal complexity, and is therefore costly, time- consuming and inherently uncertain. In addition, the United States may, at any time, enact changes to U.S. patent law and regulations, including by legislation, by regulatory rule-making, or by judicial precedent, that adversely affect the scope of patent protection available and weaken the rights of patent owners to obtain patents, enforce patent infringement and obtain injunctions and/or damages. For example, the scope of patentable subject matter under 35 U.S.C. 101 has evolved significantly over the past several years as the Court of Appeals for the Federal Circuit and the Supreme Court issued various opinions, and the USPTO modified its guidance for practitioners on multiple occasions. Other countries may likewise enact changes to their patent laws in ways that adversely diminish the scope of patent protection and weaken the rights of patent owners to obtain patents, enforce patent infringement, and obtain injunctions and/or damages.

Further, the United States and other governments may, at any time, enact changes to law and regulation that create new avenues for challenging the validity of issued patents. For example, the America Invents Act created new administrative post-grant proceedings, including post-grant review, inter partes review, and derivation proceedings that allow third parties to challenge the validity of issued patents. This applies to all of our U.S. patents, even those issued before March 16, 2013. Because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary standard in U.S. federal courts necessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that could weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future.

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

Patents are of national or regional effect. Filing, prosecuting, and defending patents on Auxora, any future product candidates, and other proprietary technologies we develop in all countries throughout the world would be prohibitively expensive. In addition, the laws of some foreign countries do not protect intellectual property rights in the same manner and to the same extent as laws in the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but enforcement of such patent protection is not as strong as that in the United States. These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

The requirements for patentability may differ in certain countries. For example, unlike other countries, China has a heightened requirement for patentability, and specifically requires a detailed description of medical uses of a

 

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claimed drug. In India, unlike the United States, there is no link between regulatory approval for a drug and its patent status. In addition to India, certain countries in Europe and developing countries, including China, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, some countries limit the enforceability of patents against government agencies or government contractors.

In those countries, we may have limited remedies if patents are infringed or if we are compelled to grant a license to a third party, which could materially diminish the value of those patents. This could limit our potential revenue opportunities. Accordingly, our efforts to enforce intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we own or license.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets, and other intellectual property protection, particularly those relating to biotechnology or pharmaceutical products, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. In Europe, no earlier than October 1, 2022, European applications will soon have the option, upon grant of a patent, of becoming a Unitary Patent which will be subject to the jurisdiction of the Unitary Patent Court (“UPC”). This will be a significant change in European patent practice. As the UPC is a new court system, there is no precedent for the court, increasing the uncertainty. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

Geopolitical actions in the United States and in foreign countries could increase the uncertainties and costs surrounding the prosecution or maintenance of our patent applications or those of any current or future licensors and the maintenance, enforcement or defense of our issued patents or those of any current or future licensors. For example, the United States and foreign government actions related to Russia’s invasion of Ukraine may limit or prevent filing, prosecution and maintenance of patent applications in Russia. Government actions may also prevent maintenance of issued patents in Russia. These actions could result in abandonment or lapse of our patents or patent applications, resulting in partial or complete loss of patent rights in Russia. We currently maintain one granted patent in Russia.

We may become subject to claims challenging the inventorship or ownership of our patents and other intellectual property.

We may be subject to claims that former employees, collaborators or other third parties have an interest in our patents rights, trade secrets, or other intellectual property as an inventor or co-inventor. The failure to name the proper inventors on a patent application can result in the patents issuing thereon being unenforceable. For example, we may have inventorship disputes arise from conflicting views regarding the contributions of different individuals named as inventors, the effects of foreign laws where foreign nationals are involved in the development of the subject matter of the patent, conflicting obligations of third parties involved in developing Auxora or as a result of questions regarding co-ownership of potential joint inventions. Litigation may be necessary to resolve these and other claims challenging inventorship and/or ownership. Alternatively, or additionally, we may enter into agreements to clarify the scope of our rights in such intellectual property. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business, financial condition, results of operations and prospects. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

 

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We may not be successful in obtaining or maintaining necessary rights to product components and processes for our development pipeline through acquisitions and in-licenses.

Our program may require the use of intellectual property rights held by third parties. The growth of our business may depend in part on our ability to acquire, in-license or use these proprietary rights. In addition, Auxora may require specific formulations to work effectively and efficiently and these rights may be held by others. We may be unable to acquire or in-license, on reasonable terms, proprietary rights related to any compositions, formulations, methods of use, processes or other intellectual property rights from third parties that we identify as being necessary for Auxora. Even if we are able to obtain a license to such proprietary rights, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. In that event, we may be required to expend significant time and resources to develop or license replacement technology.

Where we obtain licenses from or collaborate with third parties, we may not have the right to control the preparation, filing, and prosecution of patent applications, or to maintain the patents, covering technology that we license from third parties, or such activities, if controlled by us, may require the input of such third parties. Therefore, these patents and applications may not be prosecuted and enforced in a manner consistent with the best interests of our business, or in compliance with applicable laws and regulations, which may affect the validity and enforceability of such patents or any patents that may issue from such application. Moreover, if we do obtain necessary licenses, we will likely have obligations under those licenses, including making royalty and milestone payments, and any failure to satisfy those obligations could give our licensor the right to terminate the license. Termination of a necessary license, or expiration of licensed patents or patent applications, could have a material adverse impact on our business. Our business would suffer if any such licenses terminate, if the licensors fail to abide by the terms of the license, if the licensors fail to enforce licensed patents against infringing third parties, if the licensed patents or other rights are found to be invalid or unenforceable, or if we are unable to enter into necessary licenses on acceptable terms. Furthermore, if any licenses terminate, or if the underlying patents fail to provide the intended exclusivity, competitors or other third parties may gain the freedom to seek regulatory approval of, and to market, products identical or similar to ours. Moreover, our licensors may own or control intellectual property that has not been licensed to us and, as a result, we may be subject to claims, regardless of their merit, that we are infringing or otherwise violating the licensor’s rights. In addition, while we cannot currently determine the amount of the royalty obligations we would be required to pay on sales of future products, if any, the amounts may be significant. The amount of our future royalty obligations will depend on the technology and intellectual property we use in products that we successfully develop and commercialize, if any. Therefore, even if we successfully develop and commercialize products, we may be unable to achieve or maintain profitability.

The licensing and acquisition of third-party proprietary rights is a competitive area, and companies, which may be more established, or have greater resources than we do, may also be pursuing strategies to license or acquire third-party proprietary rights that we may consider necessary or attractive in order to commercialize Auxora. More established companies may have a competitive advantage over us due to their size, cash resources and greater clinical development and commercialization capabilities.

For example, we may collaborate with U.S. and foreign academic institutions to accelerate our research development under written agreements with these institutions. Typically, these institutions provide us with an option to negotiate an exclusive license to any of the institution’s proprietary rights in technology resulting from the collaboration. Regardless of such option to negotiate a license, we may be unable to negotiate a license within the specified time frame or under terms that are acceptable to us. If we are unable to do so, the institution may offer, on an exclusive basis, their proprietary rights to other parties, potentially blocking our ability to pursue our program.

In addition, companies that perceive us to be a competitor may be unwilling to assign or license rights to us, either on reasonable terms, or at all. We also may be unable to license or acquire third-party intellectual property rights on terms that would allow us to make an appropriate return on our investment, or at all. If we are unable to successfully obtain rights to required third-party intellectual property rights on commercially reasonable terms, our ability to commercialize our products, and our business, financial condition, and prospects for growth, could suffer.

 

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Third-party claims alleging intellectual property infringement may prevent or delay our drug discovery and development efforts.

Our success depends in part on our avoiding infringement of the patents and proprietary rights of third parties. There is a substantial amount of litigation, both within and outside the United States, involving patents and other intellectual property rights in the biotechnology and pharmaceutical industries, as well as administrative proceedings for challenging patents, including inter partes review, interference and reexamination proceedings before the USPTO, or oppositions and other comparable proceedings in foreign jurisdictions. The America Invents Act introduced new procedures including inter partes review and post grant review. The implementation of these procedures brings uncertainty to the possibility of challenges to our patents in the future and the outcome of such challenges. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are developing Auxora. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our activities related to Auxora may give rise to claims of infringement of the patent rights of others.

The pharmaceutical and biotechnology industries have produced a proliferation of patents, and it is not always clear to industry participants, including us, which patents cover various types of products or methods of use. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. We cannot assure you that any of our current or future product candidates will not infringe existing or future patents. We may not be aware of patents that have already issued that a third party might assert are infringed by one of our current or future product candidates. Nevertheless, we are not aware of any issued patents that will prevent us from marketing Auxora.

Third parties may assert that we are employing their proprietary technology without authorization. There may be third-party patents of which we are currently unaware with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of Auxora. Because patent applications can take many years to issue and may be confidential for 18 months or more after filing, there may be currently pending third-party patent applications which may later result in issued patents that Auxora, any future product candidates, and other proprietary technologies may infringe, or which such third parties claim are infringed by the use of our technologies. Parties making claims against us for infringement or misappropriation of their intellectual property rights may seek and obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize Auxora or future product candidates. Defense of these claims, regardless of their merit, could involve substantial expenses and could be a substantial diversion of management and other employee resources from our business.

If we collaborate with third parties in the development of technology in the future, our collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to invite litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to litigation or potential liability. Further, collaborators may infringe the intellectual property rights of third parties, which may expose us to litigation and potential liability. In the future, we may agree to indemnify our commercial collaborators against certain intellectual property infringement claims brought by third parties.

Any claims of patent infringement asserted by third parties would be time-consuming and could:

 

   

result in costly litigation;

 

   

divert the time and attention of our technical personnel and management;

 

   

cause development delays;

 

   

prevent us from commercializing Auxora or any future product candidates until the asserted patent expires or is finally held invalid, unenforceable, or not infringed in a court of law;

 

   

require us to develop non-infringing technology, which may not be possible on a cost-effective basis;

 

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require us to pay damages to the party whose intellectual property rights we may be found to be infringing, which may include treble damages if we are found to have been willfully infringing such intellectual property;

 

   

require us to pay the attorney’s fees and costs of litigation to the party whose intellectual property rights we may be found to be willfully infringing; and/or

 

   

require us to enter into royalty or license agreements, which may not be available on commercially reasonable terms, or at all.

If we are sued for patent infringement, we would need to demonstrate that our products or methods either do not infringe the patent claims of the relevant patent or that the patent claims are invalid or unenforceable, and we may not be able to do either. Proving invalidity or unenforceability is difficult. For example, in the United States, proving invalidity before federal courts requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents. Even if we are successful in these proceedings, we may incur substantial costs and divert management’s time and attention in pursuing these proceedings, which could have a material adverse effect on us. If we are unable to avoid infringing the patent rights of others, we may be required to seek a license, which may not be available, defend an infringement action or challenge the validity or enforceability of the patents in court. Patent litigation is costly and time-consuming. We may not have sufficient resources to bring these actions to a successful conclusion. In addition, if we do not obtain a license, develop or obtain non-infringing technology, fail to defend an infringement action successfully or have infringed patents declared invalid or unenforceable, we may incur substantial monetary damages, encounter significant delays in bringing Auxora or any future product candidates to market and be precluded from developing, manufacturing or selling Auxora or any future product candidates.

We do not always conduct independent reviews of pending patent applications of and patents issued to third parties. We cannot be certain that any of our patent searches or analyses, including but not limited to the identification of relevant patents, analysis of the scope of relevant patent claims or determination of the expiration of relevant patents, are complete or thorough, nor can we be certain that we have identified each and every third-party patent and pending application in the United States, Europe and elsewhere that is relevant to or necessary for the commercialization of our product candidates in any jurisdiction, because:

 

   

some patent applications in the United States may be maintained in secrecy until the patents are issued;

 

   

patent applications in the United States and elsewhere can be pending for many years before issuance, or unintentionally abandoned patents or applications can be revived;

 

   

pending patent applications that have been published can, subject to certain limitations, be later amended in a manner that could cover our technologies, Auxora, and any future product candidates or the use of Auxora and any future product candidates;

 

   

identification of third-party patent rights that may be relevant to our technology is difficult because patent searching is imperfect due to differences in terminology among patents, incomplete databases, and the difficulty in assessing the meaning of patent claims;

 

   

patent applications in the United States are typically not published until 18 months after the priority date; and

 

   

publications in the scientific literature often lag behind actual discoveries.

Furthermore, the scope of a patent claim is determined by an interpretation of the law, the written disclosure in a patent and the patent’s prosecution history and can involve other factors such as expert opinion. Our interpretation of the relevance or the scope of claims in a patent or a pending application may be incorrect, which may negatively impact our ability to market our products. Further, we may incorrectly determine that our technologies, products, or product candidates are not covered by a third party patent or may incorrectly predict whether a third party’s pending patent application will issue with claims of relevant scope. Our determination of the expiration date of any patent in the United States or internationally that we consider relevant may be incorrect, which may negatively impact our ability to develop and market our products or product candidates.

 

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Our competitors may have filed, and may in the future file, patent applications covering technology similar to ours, and others may have or obtain patents or proprietary rights that could limit our ability to make, use, sell, offer for sale or import Auxora and future approved products or impair our competitive position. Numerous third-party U.S. and foreign issued patents and pending patent applications exist in the fields in which we are developing product candidates. There may be third-party patents or patent applications with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of Auxora. Any such patent application may have priority over our patent applications, which could further require us to obtain rights to issued patents covering such technologies. If another party has filed a U.S. patent application on inventions similar to ours, we may have to participate in an interference proceeding declared by the USPTO to determine priority of invention in the United States. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful if, unbeknownst to us, the other party had independently arrived at the same or similar invention prior to our own invention, resulting in a loss of our U.S. patent position with respect to such inventions. Other countries have similar laws that permit secrecy of patent applications and may be entitled to priority over our applications in such jurisdictions.

Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations.

If a third party prevails in a patent infringement lawsuit against us, we may have to stop making and selling the infringing product, pay substantial damages, including treble damages and attorneys’ fees if we are found to be willfully infringing a third party’s patents, obtain one or more licenses from third parties, pay royalties or redesign our infringing products, which may be impossible or require substantial time and monetary expenditure.

We cannot predict whether any such license would be available at all or whether it would be available on commercially reasonable terms. Furthermore, even in the absence of litigation, we may need to obtain licenses from third parties to advance our research or allow commercialization of Auxora. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, we would be unable to further develop and commercialize Auxora, which could harm our business significantly. Even if we were able to obtain a license, the rights may be nonexclusive, which may give our competitors access to the same intellectual property.

We may be subject to claims that we have wrongfully hired an employee from a competitor or that we or our employees have wrongfully used or disclosed alleged confidential information or trade secrets of their former employers.

As is common in the biotechnology and pharmaceutical industries, in addition to our employees, we engage the services of consultants to assist us in the development of Auxora, any future product candidates, and other proprietary technologies. Many of these consultants, and many of our employees, were previously employed at, or may have previously provided or may be currently providing consulting services to, other pharmaceutical companies including our competitors or potential competitors. We may become subject to claims that we, our employees or a consultant inadvertently or otherwise used or disclosed trade secrets or other information proprietary to their former employers or their former or current clients. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel, which could adversely affect our business. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to our management team and other employees.

 

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We may be involved in lawsuits to protect or enforce our patents which could be expensive, time-consuming, and unsuccessful. Further, our issued patents could be found invalid or unenforceable if challenged in court, and we may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights.

Third parties including competitors may infringe, misappropriate or otherwise violate our patents or patents that may issue to us in the future. To counter infringement or unauthorized use, we may need to or choose to file infringement claims, which can be expensive and time-consuming. We may not be able to prevent, infringement, misappropriation, or other violation of our intellectual property, particularly in countries where the laws may not protect those rights as fully as in the United States.

If we choose to go to court to stop another party from using the inventions claimed in our patents, that individual or company has the right to ask the court to rule that such patents are invalid, unenforceable, or should not be enforced against that third party for any number of reasons. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge include an alleged failure to meet any of several statutory requirements for patentability, including lack of novelty, obviousness, lack of written description, indefiniteness, or non-enablement. Grounds for an unenforceability assertion could include an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO or made a misleading statement during prosecution, i.e., committed inequitable conduct. Third parties may also raise similar claims before the USPTO, even outside the context of litigation. Similar mechanisms for challenging the validity and enforceability of a patent exist in foreign patent offices and courts and may result in the revocation, cancellation, or amendment of any foreign patents we hold now or in the future. The outcome following legal assertions of invalidity and unenforceability is unpredictable, and prior art could render our patents invalid. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on such product candidate. Such a loss of patent protection would have a material adverse impact on our business.

Interference or derivation proceedings provoked by third parties or brought by us or declared by the USPTO may be necessary to determine the priority of inventions with respect to our patents or patent applications. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms or at all if a non-exclusive license is offered and our competitors gain access to the same technology. Our defense of litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. In addition, the uncertainties associated with litigation could have a material adverse effect on our ability to raise the funds necessary to continue our clinical trials, continue our research programs, license necessary technology from third parties, or enter into development or manufacturing partnerships that would help us bring Auxora and any future product candidates to market.

Even if resolved in our favor, litigation or other legal proceedings relating to our intellectual property rights 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 activities or any future sales, marketing, or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. 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 compromise our ability to compete in the marketplace. 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.

 

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Our ability to enforce our patent rights depends on our ability to detect infringement. It may be difficult to detect infringers who do not advertise the components or methods that are used in connection with their products and services. Moreover, it may be difficult or impossible to obtain evidence of infringement in a competitor’s or potential competitor’s product or service. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded if we were to prevail may not be commercially meaningful.

Because of the expense and uncertainty of litigation, we may not be in a position to enforce our intellectual property rights against third parties.

Because of the expense and uncertainty of litigation, we may conclude that even if a third party is infringing our issued patent, any patents that may be issued as a result of our pending or future patent applications or other intellectual property rights, the risk-adjusted cost of bringing and enforcing such a claim or action may be too high or not in the best interest of our company or our stockholders. In such cases, we may decide that the more prudent course of action is to simply monitor the situation or initiate or seek some other non-litigious action or solution.

If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed. Our reliance on third parties requires us to share our trade secrets, which increases the possibility that a competitor will discover them or that our trade secrets will be misappropriated or disclosed.

We may rely on trade secrets to protect our proprietary technologies, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. We rely in part on confidentiality agreements with our employees, consultants, outside scientific collaborators, sponsored researchers, and other advisors, and inventions agreements with employees, consultants, and advisors, to protect our trade secrets and other proprietary information. In addition to contractual measures, we try to protect the confidential nature of our proprietary information using commonly accepted physical and technological security measures. Despite these efforts, we cannot provide any assurances that all such agreements have been duly executed, and these agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets and proprietary information. For example, the FDA, as part of its Transparency Initiative, is currently considering whether to make additional information publicly available on a routine basis, including information that we may consider to be trade secrets or other proprietary information, and it is not clear at the present time how the FDA’s disclosure policies may change in the future, if at all. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

In addition, such security measures may not provide adequate protection for our proprietary information, for example, in the case of misappropriation of a trade secret by an employee, consultant, customer, or third party with authorized access. Our security measures may not prevent an employee, consultant or customer from misappropriating our trade secrets and providing them to a competitor, and recourse we take against such misconduct may not provide an adequate remedy to protect our interests fully. Monitoring unauthorized uses and disclosures is difficult, and we do not know whether the steps we have taken to protect our proprietary technologies will be effective. Unauthorized parties may also attempt to copy or reverse engineer certain aspects of our products that we consider proprietary. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret can be difficult, expensive and time-consuming, and the outcome is unpredictable. Even though we use commonly accepted security measures, the criteria for protection of trade secrets can vary among different jurisdictions.

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, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. Moreover, third parties may still obtain this information or

 

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may come upon this or similar information independently, and we would have no right to prevent them from using that technology or information to compete with us. Trade secrets will over time be disseminated within the industry through independent development, the publication of journal articles, and the movement of personnel skilled in the art from company to company or academic to industry scientific positions. Though our agreements with third parties typically restrict the ability of our advisors, employees, collaborators, licensors, suppliers, third-party contractors, and consultants to publish data potentially relating to our trade secrets, our agreements may contain certain limited publication rights. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent such competitor from using that technology or information to compete with us, which could harm our competitive position. Because from time to time we expect to rely on third parties in the development, manufacture, and distribution of our products and provision of our services, we must, at times, share trade secrets with them. Despite employing the contractual and other security precautions described above, the need to share trade secrets increases the risk that such trade secrets become known by our competitors, are inadvertently incorporated into the technology of others, or are disclosed or used in violation of these agreements. If any of these events occurs or if we otherwise lose protection for our trade secrets, the value of this information may be greatly reduced and our competitive position would be harmed. If we do not apply for patent protection prior to such publication or if we cannot otherwise maintain the confidentiality of our proprietary technology and other confidential information, then our ability to obtain patent protection or to protect our trade secret information may be jeopardized.

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

Our future trademarks or trade names may be unable to be obtained, challenged, infringed, circumvented or declared generic or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which we need to build name recognition among potential partners or customers in our markets of interest. At times, competitors may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other trademarks or trademarks that incorporate variations of our registered or unregistered trademarks or trade names. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected. We may license our trademarks and trade names to third parties, such as distributors. Though these license agreements may provide guidelines for how our trademarks and trade names may be used, a breach of these agreements or misuse of our trademarks and tradenames by our licensees may jeopardize our rights in or diminish the goodwill associated with our trademarks and trade names. Our efforts to enforce or protect our proprietary rights related to trademarks, trade names, trade secrets, domain names, copyrights, or other intellectual property may be ineffective and could result in substantial costs and diversion of resources and could adversely affect our financial condition or results of operations.

Moreover, any name we have proposed to use with Auxora 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 (or an equivalent administrative body in a foreign jurisdiction) objects to any of our proposed proprietary product names, it may be required to expend significant additional resources in an effort to identify a suitable substitute name that would qualify under applicable trademark laws, not infringe the existing rights of third parties, and be acceptable to the FDA. Similar requirements exist in Europe. Furthermore, in many countries, owning and maintaining a trademark registration may not provide an adequate defense against a subsequent infringement claim asserted by the owner of a senior trademark. At times, competitors or other third parties may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of our registered or unregistered trademarks or trade names. If we assert trademark infringement claims, a court

 

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may determine that the marks we have asserted are invalid or unenforceable, or that the party against whom we have asserted trademark infringement has superior rights to the marks in question. In this case, we could ultimately be forced to cease use of such trademarks.

Any collaboration arrangements that we may enter into in the future may not be successful, which could adversely affect our ability to develop and commercialize our products.

Any future collaborations that we enter into may not be successful. The success of our collaboration arrangements will depend heavily on the efforts and activities of our collaborators. Collaborations are subject to numerous risks, which may include that:

 

   

collaborators have significant discretion in determining the efforts and resources that they will apply to collaborations;

 

   

collaborators may not pursue development and commercialization of our products or may elect not to continue or renew development or commercialization programs based on trial or test results, changes in their strategic focus due to the acquisition of competitive products, availability of funding, or other external factors, such as a business combination that diverts resources or creates competing priorities;

 

   

collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with Auxora and any future product candidates;

 

   

a collaborator with marketing, manufacturing, and distribution rights to one or more products may not commit sufficient resources to or otherwise not perform satisfactorily in carrying out these activities;

 

   

we could grant exclusive rights to our collaborators that would prevent us from collaborating with others;

 

   

collaborators may not properly maintain or defend our intellectual property rights or may use our intellectual property or proprietary information in a way that gives rise to actual or threatened litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential liability;

 

   

disputes may arise between us and a collaborator that causes the delay or termination of the research, development, or commercialization of our current or future products or that results in costly litigation or arbitration that diverts management attention and resources;

 

   

collaborations may be terminated, and, if terminated, may result in a need for additional capital to pursue further development or commercialization of the applicable current or future products;

 

   

collaborators may own or co-own intellectual property covering our products that results from our collaborating with them, and in such cases, we would not have the exclusive right to develop or commercialize such intellectual property; and

 

   

a collaborator’s sales and marketing activities or other operations may not be in compliance with applicable laws resulting in civil or criminal proceedings.

General Risk Factors

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

We, and the third parties with whom we share our facilities, 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. Each of our operations involve the use of hazardous and flammable materials, including chemicals and biological and radioactive materials. Each of our operations also produce hazardous waste products. We generally contract with third parties for the disposal of these

 

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materials and wastes. We cannot eliminate the risk of contamination or injury from these materials. We could be held liable for any resulting damages in the event of contamination or injury resulting from the use of hazardous materials by us or the third parties with whom we share our facilities, and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties.

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

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

Our business involves the use of hazardous materials and we and our third-party manufacturers and suppliers must comply with environmental laws and regulations, which can be expensive and restrict how we do business.

Our research and development activities and our or any third-party manufacturers’ and suppliers’ activities involve the controlled storage, use and disposal of hazardous materials owned by us. We and our manufacturers and suppliers are subject to laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials. In some cases, these hazardous materials and various wastes resulting from their use are stored at our manufacturers’ facilities pending their use and disposal.

We cannot eliminate the risk of contamination, which could cause an interruption of our research and development efforts and business operations, environmental damage resulting in costly clean-up and liabilities under applicable laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. Although we believe that the safety procedures utilized by our third-party manufacturers and suppliers for handling and disposing of these materials generally comply with the standards prescribed by these laws and regulations, this may not be the case or and we may not eliminate the risk of accidental contamination or injury from these materials. In such an event, we may be held liable for any resulting damages and such liability could exceed our resources and state or federal or other applicable authorities may curtail our use of certain materials and/or interrupt our business operations. Furthermore, environmental laws and regulations are complex, change frequently and have tended to become more stringent over time. We cannot predict the impact of such changes and cannot be certain of our future compliance. We do not currently carry biological or hazardous waste insurance coverage. Any contamination by such hazardous materials could therefore adversely affect our business, financial condition, results of operations and prospects.

Future changes in financial accounting standards or practices may cause adverse and unexpected revenue fluctuations and adversely affect our reported results of operations.

Future changes in financial accounting standards may cause adverse, unexpected revenue fluctuations and affect our reported financial position or results of operations. Financial accounting standards in the United States are constantly under review and new pronouncements and varying interpretations of pronouncements have occurred with frequency in the past and are expected to occur again in the future. As a result, we may be required to make changes in our accounting policies. Those changes could affect our financial condition and results of operations or the way in which such financial condition and results of operations are reported. We intend to invest resources to comply with evolving standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from business activities to compliance activities.

 

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We are subject to certain U.S. and foreign anti-corruption, anti-money laundering, export control, sanctions, and other trade laws and regulations. We can face serious consequences for violations.

U.S. and foreign anti-corruption, anti-money laundering, export control, sanctions, and other trade laws and regulations, including the U.S. Foreign Corrupt Practices Act (collectively, “Trade Laws”), prohibit, among other things, companies and their employees, agents, CROs, legal counsel, accountants, consultants, contractors, and other partners from authorizing, promising, offering, providing, soliciting, or receiving directly or indirectly, corrupt or improper payments or anything else of value to or from recipients in the public or private sector. Violations of Trade Laws can result in substantial criminal fines and civil penalties, imprisonment, the loss of trade privileges, debarment, tax reassessments, breach of contract and fraud litigation, reputational harm, and other consequences. We have direct or indirect interactions with officials and employees of government agencies or government-affiliated hospitals, universities, and other organizations. We also expect our non-U.S. activities to increase over time. We expect to rely on third parties for research, preclinical studies, and clinical trials and/or to obtain necessary permits, licenses, patent registrations, and other marketing approvals. We can be held liable for the corrupt or other illegal activities of our personnel, agents, or partners, even if we do not explicitly authorize or have prior knowledge of such activities.

Risks Related to the Combined Company

In determining whether you should vote to approve the proposals contained in this proxy statement, you should carefully read the following risk factors in addition to the risks described above.

The combined company may incur losses for the foreseeable future and might never achieve profitability.

The combined company may never become profitable, even if the combined company is able to complete clinical development for one or more product candidates and eventually commercialize such product candidates. The combined company will need to successfully complete significant research, development, testing and regulatory compliance activities that, together with projected general and administrative expenses, is expected to result in substantial increased operating losses for at least the next several years. Even if the combined company does achieve profitability, it may not be able to sustain or increase profitability on a quarterly or annual basis.

The combined company will need to raise additional financing in the future to fund its operations, which may not be available to it on favorable terms or at all.

The combined company will require substantial additional funds to conduct the costly and time-consuming clinical efficacy trials necessary to pursue regulatory approval of each potential product candidate and to continue the development of future product candidates. The combined company’s future capital requirements will depend upon a number of factors, including: the number and timing of future product candidates in the pipeline; progress with and results from preclinical testing and clinical trials; the ability to manufacture sufficient drug supplies to complete preclinical and clinical trials; the costs involved in preparing, filing, acquiring, prosecuting, maintaining and enforcing patent and other intellectual property claims; and the time and costs involved in obtaining regulatory approvals and favorable reimbursement or formulary acceptance. Raising additional capital may be costly or difficult to obtain and could significantly dilute stockholders’ ownership interests or inhibit the combined company’s ability to achieve its business objectives. If the combined company raises additional funds through public or private equity offerings, the terms of these securities may include liquidation or other preferences that adversely affect the rights of its common stockholders. Further, to the extent that the combined company raises additional capital through the sale of common stock or securities convertible or exchangeable into common stock, its stockholder’s ownership interest in the combined company will be diluted. In addition, any debt financing may subject the combined company to fixed payment obligations and covenants limiting or restricting its ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If the combined company raises additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, the combined company may have to relinquish certain valuable intellectual property or other rights to its

 

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product candidates, technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to it. Even if the combined company were to obtain sufficient funding, there can be no assurance that it will be available on terms acceptable to the combined company or its stockholders.

The combined company’s stock price is expected to be volatile, and the market price of its common stock may drop following the merger.

The market price of the combined company’s common stock following the merger could be subject to significant fluctuations. Market prices for securities of early-stage pharmaceutical, biotechnology, and other life sciences companies have historically been particularly volatile. Some of the factors that may cause the market price of the combined company’s common stock to fluctuate following the merger include:

 

   

the ability of the combined company to obtain regulatory approvals for product candidates, and delays or failures to obtain such approvals;

 

   

the failure of any of the combined company’s product candidates, if approved for marketing and commercialization, to achieve commercial success;

 

   

any inability to obtain adequate supply of the combined company’s product candidates or the inability to do so at acceptable prices;

 

   

the entry into, or termination of, key agreements, including key licensing, supply or collaboration agreements;

 

   

the initiation of material developments in, or conclusion of, disputes or litigation to enforce or defend any of the combined company’s intellectual property rights or defend against the intellectual property rights of others;

 

   

changes in laws or regulations applicable to the combined company’s product candidates;

 

   

the results of current, and any future, nonclinical or clinical trials of the combined company’s product candidates;

 

   

announcements by commercial partners or competitors of new commercial products, clinical progress (or the lack thereof), significant contracts, commercial relationships, or capital commitments;

 

   

failure to meet or exceed financial and development projections the combined company may provide to the public;

 

   

failure to meet or exceed the financial and development projections of the investment community;

 

   

the perception of the pharmaceutical industry by the public, legislatures, regulators and the investment community;

 

   

adverse publicity relating to the combined company’s markets, including with respect to other products and potential products in such markets;

 

   

the introduction of technological innovations or new therapies competing with potential products of the combined company;

 

   

announcements of significant acquisitions, strategic collaborations, joint ventures or capital commitments by the combined company or its competitors;

 

   

disputes or other developments relating to proprietary rights, including patents, litigation matters, and the combined company’s ability to obtain patent protection for its technologies;

 

   

the loss of key employees;

 

   

significant lawsuits, including patent or stockholder litigation;

 

   

if securities or industry analysts do not publish research or reports about the combined company’s business, or if they issue an adverse or misleading opinion regarding its business and stock;

 

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changes in the market valuations of similar companies;

 

   

general and industry-specific economic conditions potentially affecting the combined company’s research and development expenditures;

 

   

sales of its common stock by the combined company or its stockholders in the future;

 

   

trading volume of the combined company’s common stock;

 

   

changes in the structure of health care payment systems;

 

   

adverse regulatory decisions;

 

   

trading volume of the combined company’s common stock; and

 

   

period-to-period fluctuations in the combined company’s financial results.

Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies or the biotechnology and pharmaceutical sectors. These broad market fluctuations may also adversely affect the trading price of the combined company’s common stock.

In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies. Regardless of the merits or the ultimate results of such litigation, if instituted, such litigation could result in substantial costs and diversion of management’s attention and resources, which could significantly harm the combined company’s profitability and reputation.

Additionally, a decrease in the stock price of the combined company may cause the combined company’s common stock to no longer satisfy the continued listing standards of Nasdaq. If the combined company is not able to maintain the requirements for listing on Nasdaq, it could be delisted, which could have a materially adverse effect on its ability to raise additional funds as well as the price and liquidity of its common stock.

Financial reporting obligations of being a public company in the United States are expensive and time-consuming, and the combined company’s management will be required to devote substantial time to compliance matters.

As a publicly-traded company, the combined company will incur significant additional legal, accounting and other expenses that CalciMedica did not incur as a privately-held company, including costs associated with public company reporting requirements. The obligations of being a public company in the United States require significant expenditures and will place significant demands on the combined company’s management and other personnel, including costs resulting from public company reporting obligations under the Exchange Act and the rules and regulations regarding corporate governance practices, including those under the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the listing requirements of the stock exchange on which the combined company’s securities are listed. These rules require the establishment and maintenance of effective disclosure and financial controls and procedures, internal control over financial reporting and changes in corporate governance practices, among many other complex rules that are often difficult to implement, monitor and maintain compliance with. In addition, the combined company expects these rules and regulations to make it more difficult and more expensive for the combined company to obtain director and officer liability insurance and the combined company may be required to incur substantial costs to maintain the same or similar coverage that CalciMedica had as a privately-held company. The combined company’s management and other personnel will need to devote a substantial amount of time to ensure that the combined company complies with all of these requirements and to keep pace with new regulations, otherwise the combined company may fall out of compliance and risk becoming subject to litigation or being delisted, among other potential problems.

 

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The sale or availability for sale of a substantial number of shares of common stock of the combined company after the merger and the private placement and after expiration of applicable lock-up periods could adversely affect the market price of such shares after the merger.

Sales of a substantial number of shares of common stock of the combined company in the public market after the merger, the private placement or if existing stockholders of Graybug and CalciMedica sell, or indicate an intention to sell, substantial amounts of the combined company’s common stock in the public market after expiration of applicable lock-up periods and other legal restrictions on resale, or the perception that these sales could occur, could adversely affect the market price of such shares and could materially impair the combined company’s ability to raise capital through equity offerings in the future. In addition, in connection with the private placement, the private placement investors were granted certain registration rights with respect to the shares of CalciMedica common stock purchased in the private placement, which will be exchanged for shares of Graybug common stock at the effective time. Such registration rights will require the combined company to use commercially reasonably efforts to prepare and file a registration statement with the SEC as soon as practicable following the closing of the merger but in no event later than the 90th day following such closing to register the resale of the shares purchase in the private placement. Graybug and CalciMedica are unable to predict what effect, if any, market sales of securities held by significant stockholders, directors or officers of the combined company or the availability of these securities for future sale will have on the market price of the combined company’s common stock after the merger.

The combined company will have broad discretion in the use of proceeds from the private placement and may invest or spend the proceeds in ways with which its stockholders do not agree and in ways that may not increase the value of their investments.

The combined company will have broad discretion over the use of proceeds from the private placement. Its stockholders may not agree with the combined company’s decisions, and its use of the proceeds may not yield any return on its stockholders’ investments. The combined company’s failure to apply the net proceeds of the private placement effectively could compromise its ability to pursue its growth strategy and the combined company might not be able to yield a significant return, if any, on its investment of these net proceeds. The combined company’s stockholders will not have the opportunity to influence its decisions on how to use the net proceeds from the private placement.

Ownership of the combined company’s common stock may be highly concentrated, and it may prevent other stockholders from influencing significant corporate decisions.

Upon completion of the merger and the private placement, CalciMedica’s stockholders are estimated to beneficially own or control approximately 71.4% of the combined company on a fully-diluted basis using the treasury stock method and excluding out-of-the-money options and warrants, and subject to certain assumptions, including, but not limited to, (a) Graybug’s net cash as of the closing of the merger being $25 million, (b) a closing date of February 15, 2023, and (c) CalciMedica issuing approximately 20.5 million shares of common stock in the private placement. Accordingly, CalciMedica’s stockholders will have substantial influence over the outcome of any corporate action of the combined company requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of the combined company’s assets or any other significant corporate transaction. These stockholders also may exert influence in delaying or preventing a change of control of the combined company, even if such change of control would benefit the other stockholders of the combined company.

The combined company will continue to be a smaller reporting company. The combined company cannot be certain whether the reduced disclosure requirements applicable to smaller reporting companies will make the combined company’s common stock less attractive to investors or otherwise limit the combined company’s ability to raise additional funds.

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that, as of the last business day of its most recently completed second fiscal quarter, has an aggregate market value of the company’s voting stock held by non-affiliates, or public float, of less than $250 million, or has annual revenues less than $100 million and either no public float or public float less than $750 million. SEC rules provide that companies with a non-affiliate public float of less than $75 million may only sell shares under a Form S-3 shelf registration statement, during any 12-month period, in an amount less than or equal to one-third of the public float. If the combined company does not meet this public float requirement, any offering by the combined company under a Form S-3 will be limited to raising an aggregate of one-third of the combined company’s public float in any 12-month period. In addition, a smaller reporting company is able to provide simplified executive compensation disclosures in its filings, is exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that an independent registered public accounting firm provide an attestation report on the effectiveness of internal control over financial reporting if its public float is less than $75 million, and has certain other reduced disclosure obligations in their SEC filings, including, among other things, only being required to provide two years of audited financial statements in annual reports. Reduced disclosure in the combined company’s SEC filings due to its status as a smaller reporting company may make it harder for investors to analyze its results of operations and financial prospects.

Graybug and CalciMedica do not anticipate that the combined company will pay any cash dividends in the foreseeable future.

The current expectation is the combined company will retain its future earnings, if any, to fund the development and growth of the combined company’s business. As a result, capital appreciation, if any, of the combined company’s common stock will be stockholders’ sole source of gain, if any, for the foreseeable future.

An active trading market for the combined company’s common stock may not develop and its stockholders may not be able to resell their shares of common stock for a profit, if at all.

Prior to the merger, there had been no public market for CalciMedica’s common stock. An active trading market for the combined company’s shares of common stock may never develop or be sustained. If an active market for its common stock does not develop or is not sustained, it may be difficult for its stockholders to sell their shares at an attractive price or at all.

If equity research analysts do not publish research or reports, or publish unfavorable research or reports, about the combined company, its business or its market, its stock price and trading volume could decline.

The trading market for the combined company’s common stock will be influenced by the research and reports that industry or equity research analysts publish about it and its business. Equity research analysts may elect not to provide research coverage of the combined company’s common stock after the completion of the merger, and such lack of research coverage may adversely affect the market price of its common stock. In the event it does have equity research analyst coverage, the combined company will not have any control over the analysts, or the content and opinions included in their reports. The price of the combined company’s common stock could decline if one or more equity research analysts downgrade its stock or issue other unfavorable commentary or research. If one or more equity research analysts ceases coverage of the combined company or fails to publish reports on it regularly, demand for its common stock could decrease, which in turn could cause its stock price or trading volume to decline.

The combined company must maintain effective internal controls over financial reporting, and if the combined company is unable to do so, the accuracy and timeliness of the combined company’s financial reporting may be adversely affected, which could have a material adverse effect on the combined company’s business and stock price.

Graybug is currently, and the combined company is expected to continue to be upon completion of the merger, an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, and therefore will be

 

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able to take advantage of certain exemptions from various reporting requirements that are applicable to other companies that are not “emerging growth companies” including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act.

The combined company must maintain effective internal control over financial reporting in order to accurately and timely report its results of operations and financial condition. In addition, as a public company, the Sarbanes-Oxley Act requires, among other things, that the combined company assess the effectiveness of its disclosure controls and procedures quarterly and the effectiveness of the combined company’s internal control over financial reporting at the end of each fiscal year.

The rules governing the standards that must be met for the combined company management to assess the combined company’s internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act are complex and require significant documentation, testing and possible remediation. These stringent standards require that the combined company’s audit committee be advised and regularly updated on management’s review of internal control over financial reporting. The combined company’s management may not be able to effectively and timely implement controls and procedures that adequately respond to the increased regulatory compliance and reporting requirements that are applicable to the combined company as a public company. If the combined company fails to staff the combined company’s accounting, finance and information technology functions adequately or maintain internal control over financial reporting adequate to meet the demands that will be placed upon the combined company as a public company, including the requirements of the Sarbanes-Oxley Act, the combined company’s business and reputation may be harmed and its stock price may decline. Furthermore, investor perceptions of the combined company may be adversely affected, which could cause a decline in the market price of its common stock.

If the combined company fails to attract and retain management and other key personnel, it may be unable to continue to successfully develop or commercialize its product candidates or otherwise implement its business plan.

The combined company’s ability to compete in the highly competitive biopharmaceutical industry depends on its ability to attract and retain highly qualified managerial, scientific, medical, legal, sales and marketing and other personnel. The combined company will be highly dependent on its management and scientific personnel. The loss of the services of any of these individuals could impede, delay or prevent the successful development of the combined company’s product pipeline, completion of its planned clinical trials, commercialization of its product candidates or in-licensing or acquisition of new assets and could negatively impact its ability to successfully implement its business plan. If the combined company loses the services of any of these individuals, it might not be able to find suitable replacements on a timely basis or at all, and its business could be harmed as a result. The combined company might not be able to attract or retain qualified management and other key personnel in the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses.

Anti-takeover provisions in the combined company’s charter documents and under Delaware law could make an acquisition of the combined company more difficult and may prevent attempts by the combined company’s stockholders to replace or remove the combined company’s management.

Provisions in the combined company’s amended and restated certificate of incorporation and bylaws may delay or prevent an acquisition or a change in management. These provisions include a classified board of directors, a prohibition on actions by written consent of the combined company’s stockholders, and the ability of the board of directors to issue preferred stock without stockholder approval. In addition, because the combined company will be incorporated in Delaware, it is governed by the provisions of Section 203 of the Delaware General Corporation Law (the “DGCL”), which prohibits stockholders owning in excess of 15% of the outstanding combined company’s voting stock from merging or combining with the combined company in certain circumstances. Although Graybug and CalciMedica believe these provisions collectively will provide for an

 

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opportunity to receive higher bids by requiring potential acquirers to negotiate with the combined company’s board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by the combined company’s stockholders to replace or remove then current management by making it more difficult for stockholders to replace members of the board of directors, which is responsible for appointing the members of management.

The combined company’s employees may engage in misconduct or other improper activities, including violating applicable regulatory standards and requirements or engaging in insider trading, which could significantly harm the combined company’s business.

The combined company is exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with the regulations of the FDA and applicable non-U.S. regulators, provide accurate information to the FDA and applicable non-U.S. regulators, comply with healthcare fraud and abuse laws and regulations in the United States and abroad, report financial information or data accurately or disclose unauthorized activities to the combined company. Employees may also unintentionally or willfully disclose the combined company’s proprietary and/or confidential information to competitors. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of, including trading on, information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to the combined company’s reputation. The combined company is expected to adopt a code of conduct, but it is not always possible to identify and deter employee misconduct, and the precautions the combined company takes to detect and prevent this activity may be ineffective in controlling unknown or unmanaged risks or losses or in protecting the combined company from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against the combined company, and the combined company is not successful in defending itself or asserting its rights, those actions could have a significant impact on the combined company’s business, including the imposition of significant fines or other sanctions.

The bylaws of the combined company will provide that the Court of Chancery of the State of Delaware is the exclusive forum for substantially all disputes between the combined company and its stockholders, which could limit its stockholders’ ability to obtain a favorable judicial forum for disputes with the combined company or its directors, officers or other employees.

The amended and restated bylaws of the combined company will provide that the Court of Chancery of the State of Delaware (or, if the Court of Chancery of the State of Delaware does not have jurisdiction, the federal district court for the District of Delaware) is the sole and exclusive forum for any state law claims for (a) any derivative action or proceeding brought on behalf of the combined company; (b) any action asserting a claim of breach of a fiduciary duty owed by, or other wrongdoing by, any director, officer, stockholder, employee or agent of the combined company to the combined company or its stockholders; (c) any action asserting a claim against the combined company or any of its directors, officers, stockholders, employees or agents arising pursuant to any provision of the DGCL, the certificate of incorporation or the bylaws or as to which the DGCL confers jurisdiction on the Court of Chancery of the State of Delaware; (d) any action to interpret, apply, enforce or determine the validity of the certificate of incorporation or the bylaws; or (e) any action asserting a claim against the combined company or any of its directors, officers, stockholders, employees or agents governed by the internal affairs doctrine; provided, that these choice of forum provisions do not apply to suits brought to enforce a duty or liability created by the Securities Act, the Exchange Act, or any other claim for which the federal courts have exclusive jurisdiction. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. The amended and restated bylaws will provide that the federal district courts will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. The choice of forum provision may make it more expensive for stockholders to

 

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bring a claim than if the stockholders were permitted to select another jurisdiction and limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with the combined company or its directors, officers or other employees, which may discourage such lawsuits against the combined company and its directors, officers and other employees. If a court were to find the choice of forum provision contained in the bylaws to be inapplicable or unenforceable in an action, the combined company may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect the combined company’s business and financial condition. Any person or entity purchasing or otherwise acquiring any interest in shares of the combined company’s capital stock shall be deemed to have notice of and to have consented to the provisions of the combined company’s bylaws described above.

Unfavorable global economic conditions could adversely affect the combined company’s business, financial condition or results of operations.

The combined company’s results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. A severe or prolonged economic downturn could result in a variety of risks to the combined company’s business, including, weakened demand for the combined company’s product candidates and the combined company’s ability to raise additional capital when needed on acceptable terms, if at all. A weak or declining economy could also strain the combined company’s suppliers, possibly resulting in supply disruption, or cause the combined company’s customers to delay making payments for its services. Any of the foregoing could harm the combined company’s business and the combined company cannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely impact its business.

The administrator of the 2023 equity incentive plan, if approved, will be authorized to exercise its discretion to effect the repricing of stock options and stock appreciation rights and there may be adverse consequences to the combined company’s business if the administrator of the 2023 equity incentive plan exercises such discretion.

The terms of the 2023 equity incentive plan, if approved, will authorize the combined company to grant equity awards, including stock options and stock appreciation rights, to the combined company’s employees, directors and consultants. The administrator of the 2023 equity incentive plan (which we expect will be, as is customary, the compensation committee of the combined company) will be authorized to exercise its discretion to reduce the exercise price of stock options or stock appreciation rights or effect the repricing of such awards. Although we do not anticipate needing to exercise this discretion in the near term, or at all, if the administrator of the 2023 equity incentive plan were to exercise such discretion without seeking prior stockholder approval, certain proxy advisory firms or institutional investors may be unsupportive of such actions and publicly criticize the combined company’s compensation practices, and proxy advisory firms may recommend an “against” or “withhold” vote for members of the combined company’s compensation committee. In addition, if the combined company is required to hold an advisory vote on named executive officer compensation (known as the “say-on-pay” vote) at the time of, or subsequent to, any such repricing, it is likely that proxy advisory firms would issue an “against” recommendation on the combined company’s say on pay vote and institutional investors may not be supportive of its say-on-pay vote. If proxy advisory firms or institutional investors are successful in aligning their views with the combined company’s broader stockholder base and the combined company is required to make changes to the composition of its board and its committees, or if the combined company needs to make material changes to its compensation and corporate governance practices, the combined company’s business might be disrupted and the stock price of the combined company’s common stock might be negatively impacted. Even if the combined company is able to successfully rationalize the exercise of such discretionary power, defending against any “against” or “withhold” recommendation for members of the combined company’s compensation committee, any “against” recommendation on the combined company’s say on pay vote or public criticism could be distracting to management, and responding to such positions from such firms or investors, even if remedied, can be costly and time-consuming.

 

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In addition, if the administrator of the 2023 equity incentive plan, if approved, does determine to reprice stock options or stock appreciation rights, even absent negative reactions from proxy advisory firms and institutional investors, management attention may be diverted and the combined company could incur significant costs, including accounting and administrative costs and attorneys’ fees. The combined company may also be required to recognize incremental compensation expense as such result of a repricing. These actions could cause the stock price of the combined company’s common stock to decrease and experience periods of increased volatility, which could result in material adverse consequences to the combined company’s business.

 

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CAUTIONARY INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This proxy statement, and the documents incorporated by reference into this proxy statement, contains “forward-looking” statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, known as the PSLRA. These statements, as they relate to Graybug or CalciMedica, the management of either such company or the proposed transaction between Graybug or CalciMedica, involve risks and uncertainties that may cause results to differ materially from those set forth in the statements. These statements are based on current plans, estimates and projections, and therefore, you are cautioned not to place undue reliance on them. These statements may discuss goals, intentions and expectations as to future plans, trends, events, results of operations or financial condition, or otherwise, based on current beliefs of the management of Graybug, as well as assumptions made by, and information currently available to management. No forward-looking statement can be guaranteed, and actual results may differ materially from those projected. Graybug and CalciMedica undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise, except to the extent required by law. Forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions, and projections about the business and future financial results of the pharmaceutical industry, and other legal, regulatory and economic developments. We use words such as “anticipates,” “believes,” “plans,” “expects,” “projects,” “future,” “intends,” “may,” “will,” “should,” “could,” “estimates,” “predicts,” “potential,” “continue,” “guidance,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including, but not limited to, those described in the documents Graybug has filed with the SEC as well as the possibility that (i) risks associated with Graybug’s ability to obtain the stockholder approval required to consummate the proposed transaction, including approval of the issuance of shares of Graybug’s common stock in the merger and the resulting “change of control” of Graybug under Nasdaq rules or the contemplated reverse stock split, and the timing of the closing of the proposed transaction, including the risks that a condition to closing would not be satisfied within the expected timeframe or at all or that the closing of the proposed transaction, will not occur (ii) the response of Graybug stockholders to the proposed transaction; (iii) risks related to Graybug’s ability to manage its operating expenses and its expenses associated with the proposed transaction pending closing; (iv) risks related to the failure or delay in obtaining required approvals from any governmental or quasi-governmental entity necessary to consummate the proposed transaction, including continued listing on Nasdaq; (v) the risk that as a result of adjustments to the exchange ratio, Graybug stockholders and CalciMedica stockholders could own more or less of the combined company than is currently anticipated; (vi) risks related to the market price of Graybug common stock relative to the exchange ratio; (vii) unexpected costs, charges, expenditures or expenses resulting from the proposed transaction; (viii) potential adverse reactions or changes to business relationships resulting from the announcement or completion of the proposed transaction; (ix) Graybug’s ability to retain personnel as a result of the announcement or completion of the proposed transaction; (x) risks associated with the possible failure to realize certain anticipated benefits of the proposed transaction, including with respect to future financial and operating results; and (xi) the response of Graybug’s stockholders to the proposed merger. Additionally, forward-looking statements related to CalciMedica’s future expectations are subject to numerous risks and uncertainties. Neither Graybug nor CalciMedica gives any assurance that either Graybug or CalciMedica will achieve its expectations.

The foregoing list of factors is not exhaustive. You should carefully consider the foregoing factors and the other risks and uncertainties that affect the businesses of Graybug described in the “Risk Factors” section of this proxy statement, Graybug’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other documents filed by Graybug from time to time with the SEC. See “Where You Can Find Additional Information” beginning on page [●] of this proxy statement.

All forward-looking statements included in this proxy statement are based upon information available to Graybug and CalciMedica on the date hereof. If any of these risks or uncertainties materialize or any of these assumptions prove incorrect, the results of operations of Graybug, CalciMedica or the combined

 

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company could differ materially from the forward-looking statements. All forward-looking statements in this proxy statement are current only as of the date on which the statements were made. Graybug and CalciMedica do not undertake any obligation to publicly update any forward-looking statements to reflect events or circumstances after the date on which any statement is made, the occurrence of unanticipated events or any new information that becomes available in the future, except as required by law.

 

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THE MERGER

This section and the section entitled “The Merger Agreement” beginning on page [] of this proxy statement describe the material aspects of the merger, including the merger agreement. While Graybug believes that this description covers the material terms of the merger and the merger agreement, it may not contain all of the information that is important to you. You should carefully read this entire proxy statement, including the merger agreement, which is attached as Annex A to this proxy statement, and the other documents to which Graybug has referred to or incorporated by reference herein. For a more detailed description of where you can find those other documents, please see the section entitled “Where You Can Find Additional Information” beginning on page [] of this proxy statement.

Background of the Merger

Prior to June 2022, Graybug was a clinical-stage biopharmaceutical company focused on developing transformative medicines for ocular diseases. From time to time, in furtherance of this strategy, the Graybug Board, together with Graybug’s management, has considered various strategic business initiatives intended to strengthen Graybug’s business and enhance stockholder value. These have included licensing or acquiring rights to product candidates, divesting certain product candidates or businesses, or acquiring or merging with other companies with products, product candidates or technologies. In May 2021, Graybug announced full-data from its Phase 2b trial for GB-102 and indicated that it would seek to partner the program while advancing GB-401 for treatment of glaucoma. The Graybug Board met by videoconference on July 2, 2021, and discussed potential business strategies, including the terms of potential merger transactions. At this meeting the Graybug Board approved engaging Piper Sandler to act as exclusive financial advisor in licensing, private placements, acquisitions or mergers for a period of 12 months (unless earlier terminated), with a customary obligation for payment of a fee to Piper Sandler for any transactions occurring both within that term, and within 12 months of the termination of the engagement letter. Graybug engaged Piper Sandler because, among other reasons, Piper Sandler is nationally recognized as having investment banking professionals with significant experience in investment banking and mergers and acquisitions transactions involving life sciences companies, with specific expertise and success in the field of ophthalmology, because Piper Sandler is familiar with Graybug’s business, having served as an underwriter in Graybug’s initial public offering in 2020, and the experience that members of the Graybug Board had previously had with Piper Sandler. Following the engagement of Piper Sandler, Graybug and Piper Sander initiated discussions with a number of different entities in connection with partnering, in-licensing and other potential collaborative transactions. As a result of this strategy, Graybug acquired patents and certain license rights to a portfolio of novel cyclic guanosine monophosphate analogues in December 2021 for an upfront payment of $500,000, and acquired RainBio and its sole asset, a novel adeno-associated virus (“AAV”) gene therapy program to treat corneal clouding caused by mucopolysaccharidosis type 1 (“MPS1”), a lysosomal storage disorder in March 2022 for a total upfront cost of approximately $2.2 million, including transaction costs and a contingent holdback. In addition, Graybug received a term sheet for a merger transaction from two other companies during 2021, but the terms of those proposed transactions were not acceptable to the Graybug Board.

Between October 2021 and August 2022, Graybug and representatives of Piper Sandler contacted 38 parties to solicit interest in licensing or partnering GB-102, and 11 parties to solicit interest in licensing GB-401, but received only one proposal, and it was on terms that were not acceptable to Graybug. In the spring of 2022, representatives of Piper Sandler also coordinated discussions with investors who expressed preliminary interest in participating in a private placement of Graybug’s securities, but all such investors ultimately declined to invest in Graybug.

On June 21, 2022, Graybug announced that it received written notice from Nasdaq that, based on the closing bid price of Graybug’s common stock for the last 30 consecutive trading days, Graybug no longer complied with the minimum bid price requirement for continued listing on The Nasdaq Global Market. On July 20, 2022, Graybug resumed compliance with the minimum bid price, after its stock closed at $1.00 or more for 10 consecutive trading days.

 

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On June 23, 2022, the Graybug Board met by videoconference, with members of Graybug’s senior management and representatives of Fenwick & West LLP (“Fenwick”), its outside counsel, present and reviewed Graybug’s cash position, the cash required to fund the operations of Graybug to an event that could enable the raising of additional capital, and the challenges obtaining financing pending such an event. Following this discussion, the Graybug Board authorized Graybug to issue a press release announcing that it was conducting a strategic review, and to initiate a process to reach out to parties potentially interested in a stock-for-stock transaction.

On June 28, 2022, Graybug announced that the Graybug Board would conduct a comprehensive review of strategic alternatives focused on maximizing stockholder value and was exploring the potential for an acquisition, company sale, merger, divestiture of assets, private placement of equity securities or other strategic transaction (the “2022 Strategic Process”), and that it had engaged Piper Sandler to assist in the strategic review process.

Following the June 28, 2022 press release, at the direction of the Graybug Board, Graybug’s management and representatives of Piper Sandler proactively reached out to, and responded to inbound interest from, potential merger counterparties. From June 2022 through September 2022, Graybug and its advisors contacted and/or received inbound interest from 92 parties regarding various types of transactions, with 15 of such parties submitting preliminary proposals, including CalciMedica, Company A (a privately held biotechnology company), and Company B (a publicly listed biotechnology company). The companies that Graybug and representatives of Piper Sandler initially reached out to and companies that had contacted Graybug or Piper Sandler following Graybug’s public announcement regarding its consideration of strategic alternatives included private companies (including companies that representatives of Piper Sandler believed might be interested in a stock for stock, or “reverse”, merger transaction, companies that might be interested in purchasing certain of the assets of Graybug, and public companies in the U.S. that were believed to have a strategic fit with Graybug or would value access to Graybug’s cash). Representatives of Piper Sandler sent 56 of these companies a process letter indicating a deadline of July 28, 2022 for the submission of non-binding written proposals. The process letters outlined criteria for Graybug’s evaluation of merger opportunities as well as other topics to be addressed in any proposals submitted.

On July 1, 2022, representatives of Piper Sandler and an investment fund, which we refer to as “Fund A” met by videoconference to discuss possible interest in Graybug’s programs. These parties met again by videoconference, along with Graybug’s management and an affiliate of Fund A, on each of July 11, 2022, July 25, 2022 and July 26, 2022 to discuss potential acquisition interest in assets related to GB-501.

On each of July 1, 2022, July 8, 2022, July 15, 2022 and July 22, 2022, members of the Graybug Board met by videoconference, with members of Graybug’s management, representatives of Piper Sandler and Fenwick present, and representatives of Piper Sandler presented updates on the 2022 Strategic Process.

On July 22, 2022, the Graybug Board, by written consent, determined to form a committee of the Graybug Board to oversee the process of exploring a potential acquisition, company sale, merger, divestiture of assets, private placement of equity securities or other strategic transaction, consisting of chief executive officer and director of Graybug, Frederic Guerard, Pharm.D., and directors Eric Bjerkholt, Julie Eastland and Christy Shaffer, Ph.D. (the “Finance Committee”).

On July 19, 2022, Graybug entered into a customary confidentiality agreement with Company A, and on July 27, 2022, Graybug entered into a customary confidentiality agreement with CalciMedica. On July 11, 2022, Graybug entered into a customary confidentiality agreement with Company B. The confidentiality agreement with Company A included a customary 12-month standstill provision that did not include a so-called “don’t ask, don’t waive” provision and was subject to a customary “fall-away” provision under which it would terminate if we were to enter into an agreement with a third party providing for a change of control transaction of our company. The confidentiality agreement with CalciMedica and Company B did not include a standstill provision.

 

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During July 2022, Graybug received initial non-binding proposals for merger transactions from 12 companies, including CalciMedica, Company A and Company B, each of which generally described why the particular company believed it would be a good merger partner for Graybug, a summary of its business, its preliminary proposed allocation of equity between its stockholders and Graybug’s stockholders in a potential merger with Graybug, its cash needs and certain other matters relevant to any potential transaction, including any required regulatory approvals. On July 14, 2022, Company A submitted a proposal for a merger transaction in which Graybug equityholders would receive 11.1% ownership of the combined company, and Company A equityholders would receive 88.9% ownership (with Graybug valued at $40 million). On July 28, 2022, CalciMedica submitted a proposal for a merger transaction in which Graybug stockholders would receive 29% ownership of the combined company, and CalciMedica stockholders would receive 71% ownership (with CalciMedica valued at $90 million and Graybug at $40 million), with a proposed investment by existing CalciMedica stockholders of $10 million included in the 71% ownership of CalciMedica equityholders. On July 29, 2022, Company B submitted a proposal for an all-stock acquisition valuing Graybug at $30 million. All of these proposals assumed that Graybug would have at least $25 million in net cash at closing.

On July 25, 2022, representatives of Piper Sandler met with representatives of CalciMedica and Oppenheimer & Co. Inc. (“Oppenheimer”), and discussed CalciMedica’s interest in submitting a proposal and the expected timing of the process going forward.

On August 2, 2022, the Graybug Board met by videoconference, with members of our senior management and representatives of Piper Sandler and Fenwick present, and representatives of Piper Sandler presented a summary of the parties that had proposed a potential merger transaction as well as an acquisition of certain pipeline assets, the economic terms of the proposals, and the status of discussions with those parties. The Graybug Board authorized and directed Graybug to further negotiate with seven merger parties, including CalciMedica, Company A and Company B. Graybug’s management and the Graybug Board concluded that the other companies that submitted initial proposals were less likely to lead to a definitive agreement or had less favorable offer terms.

As directed by the Graybug Board, between August 4, 2022 and August 17, 2022, members of our senior management and representatives of Piper Sandler met by videoconference with seven of the prospective merger parties that had submitted proposals, in which those parties presented regarding their respective businesses, and identified five of those parties to continue discussions for due diligence, in each case including CalciMedica, Company A and Company B. The two companies that were not identified for further due diligence were not considered to have favorable business prospects as compared to the other companies.

On August 4, 2022, representatives of Graybug’s management and CalciMedica’s management met by videoconference and each presented the other information about their respective company. Also, on August 4, 2022, representatives of Graybug’s management and Company B’s management met by videoconference and each presented the other information about their respective company.

On August 5, 2022, the Finance Committee met by videoconference, with representatives of Piper Sandler and Fenwick present, and discussed the results of the meetings with potential parties to a merger transaction, including those with CalciMedica and Company A.

In addition, throughout the month of August, representatives of Piper Sandler had numerous discussions with representatives of CalciMedica and Company A to further negotiate terms and initial business diligence.

On August 16, 2022, Graybug’s management and CalciMedica’s management met by videoconference to review financial models for a potential transaction.

On August 18, 2022, the Graybug Board met by videoconference, with members of our senior management and a representatives of Piper Sandler and Fenwick present, and a representative of Piper Sandler reviewed the five parties that had proposed a potential merger transaction and with whom Graybug was continuing discussions,

 

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including their respective businesses, product pipelines, management teams, cash position, terms and valuations proposed for a potential merger transaction, and the status of discussions with those parties. Following this discussion, the Graybug Board supported continuing discussions with CalciMedica, Company A and Company B, and reconstituted the membership of the Finance Committee to consist of Eric Bjerkholt, Christy Shaffer and Julie Eastland, and changed the name of the committee to the “Transaction Committee”. In addition, the Graybug Board determined to terminate Graybug’s activities related to its GB-102 and GB-401 programs, and to terminate all but eight of its full-time employees by no later than October 31, 2022.

On August 20, 2022, the Transaction Committee met by videoconference, with members of our senior management and representatives of Fenwick present, and discussed the process for continued negotiations with Company A, which had indicated that its ability to proceed would be conditioned on negotiation of an agreement with Dr. Guerard, to serve as chief executive officer of the combined company. The Transaction Committee authorized Dr. Guerard to engage in negotiations with Company A with respect to such an agreement, and required that he not participate in discussions of merger terms with Company A or with other parties to a merger transaction with Graybug.

On August 21, 2022, representatives of Piper Sandler contacted Oppenheimer and requested that its client, CalciMedica, submit a “best and final” proposal by August 29, 2022.

On August 29, 2022, Company A informed Piper Sandler that its investors were prepared to commit up to $40 million in capital towards a potential PIPE financing in parallel with a potential merger transaction. Also on August 29, 2022, CalciMedica submitted a proposal for a potential merger transaction in which Graybug stockholders would receive 30% ownership of the combined company, and CalciMedica stockholders would receive 70% ownership (with CalciMedica valued at $85 million and Graybug at $40 million), with a proposed investment by existing CalciMedica stockholders of $10 million included in the ownership of CalciMedica and assuming Graybug has $25 million of cash at closing.

On August 30, 2022, the Transaction Committee met by videoconference, with members of our senior management and representatives of Piper Sandler and Fenwick present, and discussed the results of meetings with the three potential parties to a merger transaction, CalciMedica, Company A and Company B, including the strengths and challenges of a potential transaction with each.

On September 1, 2022, the Science and Innovation Committee of the Board met to discuss the technologies and business prospects of each of the potential merger candidates.

On September 9, 2022, the Graybug Board met by videoconference, with members of our senior management and representatives of Piper Sandler and Fenwick present, and further discussed the potential terms offered by CalciMedica and Company A, among others. After a review and discussion, the Graybug Board authorized and directed Graybug’s management to proceed with negotiations and due diligence with Company A based primarily on the perceived clinical potential of its product pipeline and its market opportunity and determined that Graybug’s management should de-prioritize further engagement with Company B based on its business prospects.

On September 10, 2022, Graybug sent a draft term sheet to Company A proposing that Graybug stockholders would receive 16.0% ownership of the combined company, and Company A stockholders would receive 84.0% ownership (with Graybug valued at $40 million).

On September 16, 2022, Graybug received a revised draft term sheet from Company A, proposing that Graybug stockholders would receive 14.0% ownership of the combined company, and Company A stockholders would receive 86.0% ownership in the combined company, on a fully diluted basis with a reduction in the ownership stake retained by Graybug stockholders if Graybug’s net cash was less than $30 million at closing, with Dr. Guerard to remain the chief executive officer of the combined company at closing (and with his retention being a condition to the consummation of the merger).

 

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On September 17, 2022 Graybug sent Company A a revised draft term sheet which restated the proposal that Graybug stockholders would receive 16.0% ownership of the combined company, and Company A stockholders would receive 84.0% ownership in the combined company, on a fully diluted basis with an increase in the ownership stake retained by Graybug stockholders if Graybug’s net cash was greater than $25 million at closing (and removing the closing condition regarding retention of Dr. Guerard and instead providing for him to enter into an employment agreement with Company A concurrently with execution of the definitive merger agreement).

On September 22, 2022, representatives of Piper Sandler informed Oppenheimer that Graybug may be willing to re-initiate discussions with CalciMedica due to a lack of progress with the other party they had been having discussions with. Representatives of Oppenheimer informed Piper Sandler that CalciMedica was in advanced discussions with another public company regarding a merger and that any transaction with Graybug would need to be agreed to expeditiously and that CalciMedica would have limited flexibility on terms.

On September 23, 2022, the Graybug Board met by videoconference, with representatives of Piper Sandler and Fenwick present, and further discussed negotiations and current status with Company A and the terms proposed by CalciMedica. Following discussion, the Graybug Board authorized Graybug’s management to proceed with negotiations and due diligence with CalciMedica in the event that a final term sheet could not be reached with Company A by Sunday, September 25, 2022, as it was unclear if Company A was committed to moving forward. Later that same day, Graybug management requested that the management team of Company A provide a final version of their term sheet be submitted by the morning of Sunday, September 25, 2022, prior to a meeting of the Graybug Board later that day. Later on September 23, 2022, Graybug sent a revised draft terms sheet to CalciMedica proposing that the equity holders of CalciMedica would own 68.0% of the combined company on a fully diluted basis and the equity holders of Graybug would own 32.0% of the equity of the combined company on a fully diluted basis, with an equity financing to dilute the equityholders of both companies.

On September 25, 2022, the Graybug Board met by videoconference, with members of CalciMedica’s management, representatives of Piper Sandler and Fenwick present. Members of CalciMedica’s management joined the meeting and presented an overview of CalciMedica’s business to the Graybug Board, including recent progress from CalciMedica’s clinical programs. The members of CalciMedica’s management then left the meeting and the Graybug Board further discussed the terms proposed by CalciMedica as compared to those proposed by Company A, and the absence of a final term sheet from Company A. Dr. Guerard recused himself at this time and the Graybug Board discussed the possibility that Dr. Guerard would remain the chief executive officer of the combined company. Following this discussion, the Graybug Board authorized and directed Graybug to proceed with CalciMedica on the terms that had been discussed, and to execute the proposed term sheet, including a mutual agreement to negotiate on an exclusive basis until either party delivered notice that it was terminating such exclusivity (but for at least 30 days). Following the Graybug Board meeting, Company A submitted a term sheet affirming that Graybug stockholders would receive 16.0% ownership of the combined company, and Company A stockholders would receive 84.0% ownership but it did not address certain issues previously raised by the Graybug Board and management team, including a lack of exclusivity and board composition.

On the morning of September 26, 2022, and prior to being informed of Graybug’s agreement to negotiate on an exclusive basis with CalciMedica, a representative of Company A notified Graybug that Company A was terminating further discussions with Graybug without offering a reason.

Later on September 26, 2022 Graybug and CalciMedica signed a Summary of Proposed Terms with a 30 day exclusivity period. The terms proposed a merger transaction in which Graybug stockholders would receive 32% ownership of the combined company, and CalciMedica stockholders would receive 68% ownership, with a proposed investment by existing CalciMedica stockholders of $10 million (diluting both companies’ stockholders) and assuming that Graybug would have at least $25 million in net cash at closing.

 

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On September 28, 2022, Fenwick and Cooley LLP (“Cooley”), outside legal counsel to CalciMedica, exchanged requests for legal due diligence, and each party provided the other (and its representatives) with access to a virtual data room to share information and legal documentation with the other party and its representatives. From September 28, 2022 through November 18, 2022, each party, and its advisors, conducted a due diligence review with respect to the other party, including the completion of interviews of seven physicians and clinicians with firsthand knowledge of CalciMedica’s drug development efforts that had commenced on August 12, 2022, as well as meetings between members of the senior management of Graybug and CalciMedica and their respective financial and legal advisors at which the parties reviewed the financial projections of CalciMedica (as discussed in the section entitled “The Merger—Certain Unaudited Financial Projections and Liquidation Analysis”), its intellectual property and product candidates.

On September 29, 2022, members of Graybug’s and CalciMedica’s senior management met by videoconference, with representatives of Fenwick, Piper Sandler, Cooley, Oppenheimer and each party’s respective independent auditors also attending. The participants discussed legal and structuring topics, including the proposed timeline of the transaction, the status of Graybug’s potential asset divestitures, CalciMedica’s financing plans and the calculation of the exchange ratio.

On October 3, 2022, Fenwick delivered an initial draft of the merger agreement to Cooley, which reflected, in accordance with the non-binding term sheet, a 68% to 32% post-closing ownership split for CalciMedica and Graybug equityholders, respectively, on a fully diluted basis, assuming Graybug’s net cash at closing was $25 million, and included customary conditions (including a condition to CalciMedica’s obligation to complete the merger that Graybug’s net cash was at least $22.0 million), covenants (including restrictions on the ability of each party to solicit alternative proposals), and termination rights, including obligations of each party to pay a termination fee and/or reimburse the other party for certain expenses in certain customary situations, including a termination fee payable by either party if such party entered into an alternative transaction and reimbursement by Graybug of CalciMedica’s transaction expenses in the event Graybug’s stockholders did not approve the merger. The initial draft of the merger agreement did not include dollar amounts for such termination fees and reimbursement.

On October 3, 2022, Dr. Guerard, met in person for the first time with the chief business officer of CalciMedica, Eric W. Roberts, and Chairman of CalciMedica’s board of directors (the “CalciMedica Board”), Robert N. Wilson. A broad range of topics were discussed, including organizational structures and the possible retention of certain Graybug personnel.

On October 5, 2022, Graybug received an initial draft of a non-binding term sheet from Fund A providing for the acquisition of RainBio, a wholly owned subsidiary of Graybug, by an affiliate of Fund A for a purchase price of $3.5 million. During the period from October 5, 2022 through November 28, 2022, representatives of Graybug and representatives of Fund A, including Lowenstein Sandler LLP, RainBio transaction counsel to Graybug, and Goodwin Procter LLP (“Goodwin”), outside counsel to Fund A, negotiated the terms of the non-binding term sheet, including the representations and warranties, operating covenants and indemnification obligations of each party, and the timing of the RainBio sale with respect to the timing of the merger.

On October 7, 2022, the Transaction Committee met by videoconference, with members of Graybug’s senior management and representatives of Fenwick and Piper Sandler present, and reviewed the status of discussions with CalciMedica and Fund A, and Graybug’s expected cash balances and CalciMedica’s cash requirements.

On October 12, 2022, Dr. Guerard and the chief executive officer of CalciMedica, Dr. Rachel Leheny met in person and held a videoconference with members of Graybug’s and CalciMedica’s senior management, representatives of Fenwick, Piper Sandler, Cooley, Oppenheimer, and each party’s respective independent auditors also attending. The participants discussed the proposed timeline of the transaction, including the timing of the delivery of the parties’ financial statements, the status of the RainBio divestiture, and the status of the concurrent financing.

 

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On October 13, 2022, Cooley sent Fenwick a revised merger agreement, as well as a draft subscription agreement for a concurrent financing, which contemplated that investors would purchase Graybug common stock in a private placement immediately after the closing of the merger (so that the pre-transaction stockholders of each company would share the dilution from the concurrent financing). The revised draft of the merger agreement made certain changes to the adjustment mechanism of the exchange ratio based on net cash (including the “collar” around target net cash around which there would be no adjustment to the exchange ratio); provided for a termination fee of $2.5 million payable by Graybug to CalciMedica in the event Graybug terminated the merger agreement in order to enter into an alternative transaction and reimbursement of up to $1.5 million by Graybug of CalciMedica’s transaction expenses in the event Graybug’s stockholders did not approve the merger; and made certain changes to the provisions relating to each party’s operational flexibility to take actions prior to the closing of the merger without the other party’s consent.

On October 15, 2022, at the request of Dr. Leheny and Mr. Roberts, Dr. Guerard provided CalciMedica with the most recent compensation survey, obtained by Graybug from its independent compensation consulting firm, covering all eight remaining employees at Graybug.

Early in the week of October 17, 2022, Dr. Leheny and Dr. Guerard spoke about various topics and agreed that a that detailed negotiation regarding Dr. Guerard’s potential employment with CalciMedica following the merger should be deferred until after the material terms of the merger agreement had been finalized.

On October 18, 2022, Fenwick sent Cooley a revised draft of the merger agreement. Among other things, the revised draft of the merger agreement provided for a termination fee of $1.0 million payable by Graybug to CalciMedica in the event Graybug terminated the merger agreement in order to enter into an alternative transaction and reimbursement of up to $1.0 million by Graybug of CalciMedica’s transaction expenses in the event Graybug’s stockholders did not approve the merger; and made changes to the conditions to CalciMedica’s obligation to complete the merger, including a lowering of the net cash Graybug was required to have at closing from $22.0 million to $18.8 million, reflecting the bottom of the range of the net cash collar that Cooley had proposed. From October 18, 2022 through November 20, 2022, representatives of Fenwick and representatives of Cooley exchanged drafts of a proposed merger agreement and discussed aspects of the draft merger agreement, including the net cash collar, the calculation of net cash (including the liabilities that would be deducted), the termination fee and expense reimbursement provisions, and the interim operating covenants. During this period, the parties continued to conduct their respective due diligence reviews, exchanged drafts of each party’s disclosure schedules and engaged in related discussions to finalize the transaction documents.

On October 21, 2022, the Transaction Committee met by videoconference, with members of Graybug’s senior management and representatives of Fenwick and Piper Sandler present, and reviewed the status of discussions with CalciMedica and Fund A, and of a potential equity financing in connection with the proposed merger.

On October 21, 2022, members of Graybug’s and CalciMedica’s senior management met by videoconference, with representatives of Fenwick, Piper Sandler, Cooley, and Oppenheimer present. The participants discussed the status of the concurrent financing, including general market conditions for such a financing, investor outreach strategy, and the terms of the form of lock-up agreement, and whether officers, directors, and stockholders of Graybug and CalciMedica would be expected to execute lock-up agreements.

On November 1, 2022, Fenwick delivered to Cooley initial drafts of the form of Graybug support agreement and CalciMedica support agreement, which provided, among other things, for certain stockholders of each party to vote in favor of adopting the merger agreement and approving the merger and imposed restrictions on the transfer of such stockholders’ shares in the parties.

On November 4, 2022, the Transaction Committee met by videoconference, with members of Graybug’s senior management and representatives of Fenwick and Piper Sandler present, and reviewed the status of discussions with CalciMedica and Fund A, and the potential sale or termination of additional assets and operations of the Company, and the potential for an equity financing in connection with the merger.

 

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On November 8, 2022, Cooley sent revised drafts of the form of Graybug support agreement and CalciMedica support agreement to Fenwick, and the agreements were subsequently negotiated and finalized. On that same day, a teleconference was held among Dr. Guerard, Mr. Roberts and Mr. Dunn, during which Mr. Roberts communicated CalciMedica’s compensation expectations if Dr. Guerard were to be retained by the combined company. In response, Dr. Guerard observed that the expectations differed from the CEO compensation benchmarks contained in the most recent compensation survey prepared by Graybug’s independent compensation consulting firm, which was received in October 2022 and forwarded to Calcimedica on October 15, 2022. The parties agreed to defer negotiation of employment terms, and of Mr. Guerard’s possible retention.

On November 9, 2022, Cooley delivered to Fenwick an initial draft of the form of lock-up agreement, which was subsequently negotiated and finalized.

On November 11, 2022, Piper Sandler furnished Graybug with a customary letter regarding its relationships with the parties, which letter did not disclose any relationships with CalciMedica.

On November 15, 2022, members of Graybug’s and CalciMedica’s senior management met by videoconference, with representatives of Fenwick, Piper Sandler, Cooley, Oppenheimer, and each party’s respective independent auditors present. The participants discussed the status of the concurrent financing, including that it would take the form of a commitment by current CalciMedica stockholders to invest in CalciMedica immediately prior to the closing of the merger, which would result in the pre-transaction stockholders of CalciMedica bearing the dilution from the concurrent financing, and the appropriateness of adjusting the post-closing ownership split to reflect the revised structure of the concurrent financing as if it had occurred post-closing as originally proposed. In addition, the participants discussed the remaining open points in the merger agreement, including the adjustment to the exchange ratio based on net cash, the calculation of net cash and the desirability of including explicit valuations in the merger agreement that the parties had been contemplating (specifically, a valuation of $100,000,000 for CalciMedica and a valuation of $40,000,000 for Graybug). On the same day, Cooley provided a draft of the securities purchase agreement reflecting the revised structure of the concurrent financing.

On November 16, 2022, the Transaction Committee met by videoconference, with members of Graybug’s senior management and representatives of Fenwick and Piper Sandler present, to discuss the status of negotiations with CalciMedica, and the remaining open issues in the merger agreement. At the meeting, the Transaction Committee authorized Graybug’s management to continue discussions with CalciMedica based on a CalciMedica valuation of $100,000,000 and a Graybug valuation of $40,000,000, resulting in a 71.4% and 28.6% post-closing ownership split for CalciMedica and Graybug equityholders, respectively, on a fully diluted basis, assuming Graybug’s net cash at closing was $25 million, reflecting, in part, that the pre-transaction stockholders of CalciMedica would be bearing the entirety of the dilution from the concurrent financing. The Transaction Committee then discussed the estimated costs, and estimated the current cash value that could be returned to stockholders through a voluntary liquidation of Graybug.

On November 18, 2022, Lowenstein shared an initial draft of the RainBio stock purchase agreement with Goodwin, reflecting the non-binding term sheet that Graybug and Fund A had negotiated.

On November 19, 2022, the Graybug Board met by videoconference, with members of Graybug’s senior management and representatives of Fenwick and Piper Sandler present. A representative of Fenwick reviewed the key terms of the merger agreement, and discussed the fiduciary duties of the Graybug Board in connection with considering the approval of the merger, and reviewed the key terms of the merger agreement, the lock-up agreement, Graybug support agreement, and CalciMedica support agreement. Representatives of Piper Sandler reviewed Piper Sandler’s preliminary financial analysis of certain financial terms of the merger and informed the Graybug Board that Piper Sandler was prepared to render its opinion as to the fairness of the exchange ratio to Graybug. Members of Graybug’s senior management also presented an analysis of a hypothetical liquidation of Graybug, the risks and uncertainties of a liquidation, and possible distributions of available cash to stockholders, as described in the sections entitled “The Merger—Reasons for the Merger” and “The Merger—Certain Unaudited Financial Projections and Liquidation Analysis”. The Graybug Board compared the range of present

 

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values to stockholders of such a liquidation to the range of implied Graybug per share values in the merger as set forth in the preliminary financial analysis of Piper Sandler, as described in the section entitled “The Merger—Certain Unaudited Financial Projections and Liquidation Analysis”, the majority of which were higher than such liquidation values. The Graybug Board then discussed the potential timing for the filing with the Securities and Exchange Commission of a proxy statement for the merger and directed members of Graybug’s senior management to seek assurances from CalciMedica that CalciMedica would be able to provide its requisite financial statements on a timely basis so as to enable the parties to close the merger as quickly as possible. The following day, CalciMedica’s independent auditor confirmed, in writing, that CalciMedica would be able to provide its requisite financial statements on a timely basis.

On November 21, 2022, the Graybug Board met by videoconference, with members of Graybug’s senior management and representatives of Fenwick and Piper Sandler present. The Graybug Board again discussed CalciMedica, its business, the terms of the merger agreement and the other strategic options available to Graybug. Following this discussion, representatives of Piper Sandler reviewed Piper Sandler’s financial analysis of certain financial terms of the merger and then rendered Piper Sandler’s oral opinion (which was subsequently confirmed in writing by delivery of its written opinion, dated November 21, 2022), to the effect that, as of such date, and based upon and subject to the various assumptions and limitations set forth in its written opinion, the exchange ratio pursuant to the terms of the merger agreement was fair, from a financial point of view, to Graybug. The Graybug Board then unanimously (i) determined that the merger is fair to, advisable and in the best interests of Graybug and its stockholders, (ii) approved and declared advisable the merger agreement and the transactions contemplated thereby, including the issuance of shares of Graybug common stock to the equityholders of CalciMedica and the change of control of Graybug, and (iii) determined to recommend, upon the terms and subject to the conditions set forth in the merger agreement, that the stockholders of Graybug vote to approve Proposals 1 through 5.

On November 21, 2022, representatives of Graybug, Merger Sub, and CalciMedica executed the merger agreement. Concurrently with the execution of the merger agreement, certain executive officers, directors, and stockholders of Graybug and CalciMedica executed the Graybug support agreements and CalciMedica support agreements, respectively, and certain executive officers, directors, and stockholders of CalciMedica executed lock-up agreements. Immediately following the execution of the merger agreement, CalciMedica delivered the CalciMedica stockholder written consent approving the CalciMedica stockholder matters. Later that afternoon, the execution of the merger agreement was publicly announced and, on the morning of November 22, 2022, representatives of Graybug and CalciMedica held a joint webcast for investors.

Graybug’s Reasons for the Merger; Recommendations of the Graybug Board

At a meeting held on November 21, 2022, among other things, the Graybug Board unanimously (i) determined that the merger and the other transactions contemplated by the merger agreement are fair to, advisable and in the best interests of Graybug and its stockholders, (ii) approved and declared advisable the merger agreement and the transactions contemplated by the merger agreement, including the issuance of shares of Graybug common stock to the stockholders of CalciMedica and the change of control of Graybug, and (iii) determined to recommend, upon the terms and subject to the conditions set forth in the merger agreement, that the stockholders of Graybug vote to approve Proposals 1 through 5.

The Graybug Board considered the following reasons in reaching its conclusion to approve the merger and the other transactions contemplated by the merger agreement, all of which the Graybug Board viewed as supporting its decision to approve the merger with CalciMedica:

 

   

the Graybug Board, with the assistance of its advisors, undertook a comprehensive and thorough process of reviewing and analyzing potential strategic options, involving outreach to 92 parties, and including potential strategic alternatives such as strategic mergers and acquisitions, licensing transactions, and a liquidation to distribute available cash, to identify the opportunity that would, in the Graybug Board’s opinion, create the most value for Graybug’s stockholders;

 

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the Graybug Board’s belief, after a thorough review of strategic alternatives and discussions with Graybug senior management, financial advisors and legal counsel, that the merger is more favorable to Graybug’s stockholders than the potential value that might have resulted from other strategic options available to Graybug;

 

   

the alternative of a liquidation, which would result in a liquidation value estimated by Graybug’s management that assumed that there would be approximately $32.0 million in cash available at the commencement of the liquidation process, or approximately $1.50 per currently outstanding share, an orderly liquidation, with approximately 50% of this amount distributed to stockholders upon initial filing and any remaining amount payable in 18 to 36 months, depending on the length of the liquidation process, representing an aggregate payment of $0.75 to $1.45 per currently outstanding share using a discount rate ranging from 5.0% to 15.0% and ranges of the portion of the remaining amount after the initial distribution that would be available for further distribution from 0% to 100%;

 

   

the fact that Graybug’s estimated cash of $26.5 million at the planned closing of the merger would be approximately $1.06 per share, assuming approximately 25 million fully-diluted shares then outstanding (which differs from estimated maximum liquidation value of $1.50 per share because the merger transaction fees would not be payable in a liquidation, the operating costs and severance obligations would also be reduced due to, among other things, the termination of most or all of the employees and remaining operations upon filing for liquidation in lieu of the merger, and the shares issuable as a result of accelerated vesting of equity awards would not be included in the fully diluted shares outstanding when calculating the potential per share value of a liquidation);

 

   

the Graybug Board’s comparison of the present value range of potential per share payments in a liquidation process of $0.75 to $1.45 per share, to a range of implied per share values of Graybug common stock in the merger set forth in the analyses of Piper Sandler of $1.12 (reflecting the 25th percentile of the selected public companies analysis portion of such analyses) to $4.78 (reflecting the 75th percentile of the discounted cash flow analysis portion of such analyses), in each case assuming $26.5 million in cash held by Graybug at the planned closing of the merger, as described under The Merger—Opinion of Graybug’s Financial Advisor” beginning on page [●];

 

   

the Graybug Board’s belief, based in part on scientific, regulatory and commercial diligence and an analysis process conducted over several weeks by Graybug’s management and reviewed with the Graybug Board, that CalciMedica’s lead product candidate Auxora is potentially a medium-term commercial asset with a sizable potential market and efficient commercialization plan and may create value for the stockholders of the combined company and an opportunity for Graybug’s stockholders to participate in the potential growth of the combined company;

 

   

based on the current plans of CalciMedica for developing and potentially commercializing Auxora, the likelihood that the combined company would possess sufficient financial resources to allow the management team to focus on such plans and the potential achievement of important clinical milestones in 2023;

 

   

the possibility that the combined company would be able to raise capital in the future from a broader array of sources as a result of the combination of Graybug’s public company structure with CalciMedica’s business;

 

   

the strength of the balance sheet of the combined company, which includes the cash that CalciMedica expects to raise in the private placement concurrently with the closing of the merger, in addition to the cash that Graybug is expected to have at the closing of the merger, which would give the combined company an estimated cash runway into the second half of 2024, funding the advancement of Auxora through clinical milestones in 2023;

 

   

the fact that the combined company will be led by an experienced industry chief executive officer and a team many of whom have extensive drug development, research and development, business, and regulatory expertise, and a board of directors with representation from the current Graybug Board and the CalciMedica Board.

 

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the Graybug Board’s belief that, as a result of arm’s length negotiations with CalciMedica, Graybug and its representatives negotiated the most favorable exchange ratio for Graybug stockholders that CalciMedica was willing to agree to, and that the terms of the merger agreement include the most favorable terms to Graybug in the aggregate to which CalciMedica was willing to agree; and

 

   

the opinion of Piper Sandler, rendered orally to the Graybug Board on November 21, 2022 (which was subsequently confirmed in writing by delivery of its written opinion, dated November 21, 2022), to the effect that, as of such date and based upon and subject to the various assumptions made, procedures followed, matters considered and limitations on the scope of the review undertaken by Piper Sandler, as described in its written opinion, the exchange ratio pursuant to the terms of the merger agreement was fair, from a financial point of view, to Graybug, as more fully described in the section entitled “The Merger—Opinion of Graybug’s Financial Advisor.”

The Graybug Board also reviewed various reasons impacting the financial condition, results of operations and prospects of Graybug, including:

 

   

the risks associated with Graybug remaining a standalone company pursuing a limited pipeline focusing primarily on GB-501, including liquidity needs and cash-burn related to, among other things, funding Graybug’s development pipeline;

 

   

the risks and significant capital requirements associated with building Graybug’s pipeline with more near-term clinical assets through asset in-licensing; and

 

   

the risks and delays associated with, and uncertain value and costs to Graybug’s stockholders of, liquidating Graybug, including, without limitation, the uncertainties of continuing cash burn while potential new and contingent liabilities are discovered and resolved and uncertainty of timing regarding the release of cash until all liabilities are resolved.

The Graybug Board also reviewed the terms and conditions of the merger agreement and the transactions contemplated by the merger agreement, as well as the safeguards and protective provisions included therein intended to mitigate risks, including:

 

   

the initial estimated exchange ratio used to establish the number of shares of Graybug common stock to be issued to CalciMedica’s stockholders in the merger was determined based on the relative valuations of Graybug and CalciMedica, and thus the relative percentage ownership of Graybug’s stockholders and CalciMedica’s stockholders immediately following the completion of the merger is subject to change based on the amount of Graybug net cash at the closing of the merger to the extent it is greater than or less than $25 million, subject to a floor of $18 million and a ceiling of $32 million;

 

   

a dollar-for-dollar adjustment to Graybug net cash for amounts received by Graybug for the timely receipt of sale proceeds from its legacy assets, if any;

 

   

the limited number and nature of the conditions to CalciMedica’s obligation to consummate the merger and the limited risk of non-satisfaction of such conditions as well as the likelihood that the merger will be consummated on a timely basis;

 

   

the respective right of, and limitation on, Graybug under the merger agreement to consider certain unsolicited acquisition proposals under certain circumstances should Graybug receive a superior offer;

 

   

the reasonableness of the potential termination fee of $1.0 million or $1.5 million (depending on the circumstances as described in “The Merger—Termination and Termination Fees”), and related reimbursement of certain transaction expenses capped at $1.0 million, which could become payable by Graybug to CalciMedica if the merger agreement is terminated in certain circumstances;

 

   

the support agreements, pursuant to which certain directors, officers and stockholders of Graybug and CalciMedica have agreed, solely in their capacity as stockholders of Graybug and CalciMedica,

 

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respectively, to vote all of their shares of Graybug common stock or CalciMedica capital stock in favor of the approval or adoption, respectively, of the merger agreement and the transactions contemplated by the merger agreement;

 

   

the agreement of CalciMedica to provide the written consent of CalciMedica’s stockholders necessary to adopt the merger agreement thereby approving the merger and the other transactions contemplated by the merger agreement within one business day of the date of the merger agreement and the actual receipt of such written consent; and

 

   

the belief that the terms of the merger agreement, including the parties’ representations, warranties and covenants, and the conditions to their respective obligations, are reasonable under the circumstances.

In the course of its deliberations, the Graybug Board also considered a variety of risks and other countervailing factors related to entering into the merger, including:

 

   

the $1.0 million or $1.5 million termination fee payable by Graybug to CalciMedica upon the termination of the merger agreement in certain circumstances, the $1.0 million termination fee payable by CalciMedica to Graybug upon the termination of the merger agreement in certain circumstances, up to $1.0 million in expense reimbursement payable by Graybug to CalciMedica in the event of a termination of the merger agreement due to the failure of Graybug’s stockholders to approve the merger, and the potential effect of the fees in deterring other potential acquirers from proposing an alternative transaction that may be more advantageous to Graybug’s stockholders;

 

   

the substantial expenses to be incurred in connection with the merger, including the costs associated with any related litigation;

 

   

the possibility of disruptive stockholder litigation following announcement of the merger;

 

   

the possible volatility, at least in the short term, of the trading price of Graybug common stock resulting from the announcement of the merger;

 

   

the risk that the merger might not be consummated in a timely manner or at all and the potential adverse effect of the public announcement of the merger or delay or failure to complete the merger on the reputation of Graybug;

 

   

the likely detrimental effect on Graybug’s cash position, stock price and ability to initiate another process and to successfully complete an alternative transaction should the merger not be completed;

 

   

the risk to Graybug’s business, operations and financial results in the event that the merger is not consummated, including the diminution of Graybug’s cash and the significant challenges associated with the need to raise additional capital through the public or private sale of equity securities;

 

   

the strategic direction of the combined company following the completion of the merger, which will be determined by a board of directors initially comprised of a majority of the directors designated by CalciMedica; and

 

   

various other risks associated with the combined company and the merger, including those described in the section entitled “Risk Factors.”

In view of the wide variety of reasons considered in connection with its evaluation of the merger and the complexity of these matters, the Graybug Board did not find it useful to attempt, and did not attempt, to quantify, rank or otherwise assign relative weights to these reasons. In considering the reasons described above, individual members of the Graybug Board may have given different weight to different reasons. The Graybug Board conducted an overall analysis of the factors described above, including thorough discussions with, and questioning of, Graybug’s management team and the legal and financial advisors of Graybug, and considered the reasons overall to be favorable to, and to support, its determination.

 

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Opinion of Graybug’s Financial Advisor

On November 21, 2022, Piper Sandler rendered its oral opinion to the Graybug Board (which was subsequently confirmed in writing by delivery of Piper Sandler’s written opinion dated November 21, 2022) to the effect that, as of November 21, 2022, and based upon and subject to the various assumptions and limitations set forth therein, the exchange ratio was fair, from a financial point of view, to Graybug.

The full text of the Piper Sandler written opinion dated November 21, 2022, which sets forth, among other things, the assumptions made, procedures followed, matters considered and limitations on the scope of the review undertaken by Piper Sandler in rendering its opinion, is attached as Annex C to this proxy statement. Piper Sandler’s opinion addressed solely the fairness, from a financial point of view to Graybug, of the exchange ratio and does not address any other terms or agreement relating to the merger or any other terms of the merger agreement. Piper Sandler’s opinion was directed to the Graybug Board in connection with its consideration of the merger and was not intended to be, and does not constitute, a recommendation to any Graybug stockholder as to how such stockholder should act or vote with respect to the merger or any other matter. Piper Sandler’s opinion was approved for issuance by the Piper Sandler opinion committee.

In connection with rendering the opinion described above and performing its related financial analyses, Piper Sandler, among other things:

 

   

reviewed and analyzed the financial terms of a draft dated November 20, 2022 of the merger agreement;

 

   

reviewed certain financial and other data with respect to Graybug that was publicly available;

 

   

reviewed and analyzed certain information, including financial forecasts relating to the estimated cash usage of Graybug, as well as financial forecasts relating to the business, earnings, cash flows, assets, liabilities and prospects of CalciMedica on a standalone basis, as described in the section entitled “The Merger—Certain Unaudited Financial Projections and Liquidation Analysis”, that were furnished to Piper Sandler by Graybug and CalciMedica, respectively;

 

   

conducted discussions with members of senior management and representatives of each of Graybug and CalciMedica concerning the matters described in the second and third items above, as well as Graybug’s business and prospects before and after giving effect to the merger;

 

   

reviewed the current and historical reported prices and trading activity of Graybug common stock;

 

   

compared the business profile of CalciMedica with that of certain publicly-traded companies that Piper Sandler deemed relevant; and

 

   

reviewed the valuations of certain companies implied by the pricing of such companies’ initial public offerings that Piper Sandler deemed relevant.

In addition, Piper Sandler conducted such other analyses, examinations and inquiries and considered such other financial, economic and market criteria as Piper Sandler deemed necessary in arriving at its opinion.

The following is a summary of the material financial analyses performed by Piper Sandler in connection with the preparation of its fairness opinion and reviewed with the Graybug Board at a meeting held on November 22, 2022.

This summary includes information presented in tabular format, which tables must be read together with the text of each analysis summary and considered as a whole in order to fully understand the financial analyses presented by Piper Sandler. The tables alone do not constitute a complete summary of the financial analyses. The order in which these analyses are presented below, and the results of those analyses, should not be taken as any indication of the relative importance or weight given to these analyses by Piper Sandler or the Graybug Board. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before November 18, 2022, and is not necessarily indicative of current market conditions.

 

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Review of Solicitation Process

In connection with Piper Sandler’s review of the merger, and in arriving at its opinion, Piper Sandler reviewed its solicitation of expressions of interest from other parties with respect to a business combination with Graybug or other alternative transactions. In connection therewith, Piper Sandler reviewed with the Graybug Board such solicitation process undertaken by Piper Sandler to assist Graybug in exploring third party interest in a transaction involving Graybug, including the potential divestiture of certain pipeline assets of Graybug. Piper Sandler highlighted that:

A total of 92 parties (including CalciMedica) were evaluated for a potential asset sale, licensing or merger transaction:

 

   

11 parties (including CalciMedica) executed confidentiality agreements and received invitations to submit indications of interest;

 

   

15 parties (including CalciMedica) submitted preliminary proposals;

 

   

5 parties (including CalciMedica) were invited to conduct due diligence for a potential merger transaction;

 

   

2 parties (including CalciMedica) were selected to move forward as potential counterparties for a potential merger transaction; and

 

   

Discussions with additional potential strategic partners were held with respect to a potential divestiture of certain pipeline assets of Graybug.

Financial Review of Graybug

Graybug Current Valuation and Capitalization; Projected Cash Balances

Piper Sandler reviewed, among other things, the current implied equity and enterprise valuations, capitalization and cash balances, and projected closing capitalization and cash balances of Graybug. The analysis indicated, among other things, that Graybug had diluted shares outstanding as of September 30, 2022 of approximately 25.1 million using the treasury stock method (“TSM”), cash, cash equivalents and short-term investments on hand (referred to herein as net cash) as of September 30, 2022 of approximately $43.6 million, a current implied enterprise value of approximately $(19.8) million, and estimated net cash at the consummation of the merger of approximately $26.5 million (the “Graybug Closing Cash”). References below to an assumed Graybug intrinsic value are references to an assumed intrinsic value of $1.06 per share, based on the quotient of the Graybug Closing Cash and such number of diluted shares.

Financial Analyses of CalciMedica

Selected Public Companies Analysis

Piper Sandler reviewed certain market data for US-listed biotech companies that Piper Sandler deemed relevant based on its professional judgment focusing on small molecule drug development that targeted specialty indications (excluding oncology), with lead product candidates in Phase 2 stage clinical trials. Small molecule drug development that targeted specialty indications excluded those targeting large therapeutic markets including viral infections such as COVID-19 and neuropsychiatry indications including depression, Alzheimer’s Disease and anxiety.

Set forth below are the nine selected biotech public companies, as well as their respective targeted lead treatment indications and stages of development:

 

Company

  

Indication

  

Phase

89bio, Inc.

   Nonalcoholic Steatohepatitis    Phase 2

Anebulo Pharmaceuticals, Inc.

   Cannibinoid Intoxication    Phase 2

Axcella Health Inc.

   Nonalcoholic Steatohepatitis    Phase 2b

 

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Company

  

Indication

  

Phase

Edgewise Therapeutics, Inc.

   Becker Muscular Dystrophy    Phase 2

Kezar Life Sciences, Inc.

   Lupus Nephritis    Phase 2

Morphic Holding, Inc.

   Inflammatory Bowel Disease    Phase 2

RAPT THERAPEUTICS, INC.

   Atopic Dermatitis / Asthma    Phase 2

Viking Therapeutics, Inc.

   Nonalcoholic Steatohepatitis    Phase 2b

vTv Therapeutics Inc.

   Type 1 Diabetes    Phase 2

For each selected biotech public company, Piper Sandler reviewed its current (i) implied equity value, calculated as the aggregate value of each company’s diluted outstanding equity securities, based on such company’s closing common stock price as of November 18, 2022, using TSM, and (ii) implied enterprise value. Enterprise values were calculated as implied equity values, as described in the immediately preceding sentence, plus debt outstanding, less net cash, in each case, as of their most recent respective reported quarter-ends. The analysis indicated the following maximum, 75th percentile, mean, median, 25th percentile and minimum equity values and enterprise values for the selected public companies:

 

($ in millions)              
     Equity Value      Enterprise Value  

Maximum

   $ 1,124      $ 752  

75th Percentile

   $ 685      $ 369  

Mean

   $ 452      $ 262  

Median

   $ 489      $ 254  

25th Percentile

   $ 85      $ 57  

Minimum

   $ 62      $ 35  

For the selected biotech public companies analysis, Piper Sandler derived a range of implied enterprise values for CalciMedica based on the implied enterprise value range for the selected public companies referred to above and then adjusted for net cash, to calculate an implied range of CalciMedica equity values. Piper Sandler then derived an implied number of shares of Graybug common stock to be issued in the merger, based on a Graybug intrinsic value of $1.06 per share. Piper Sandler also calculated an implied pro forma equity value for the combined company by adjusting the implied enterprise value for CalciMedica for pro forma net cash at the consummation of the merger of approximately $11.5 million for CalciMedica and the Graybug Closing Cash for Graybug. This analysis did not account for any assumed additional cash needs of CalciMedica to fund its business plan.

Based on the minimum, 25th percentile, median, mean, 75th percentile, and maximum implied equity values for CalciMedica derived above, Piper Sandler then calculated the corresponding (a) implied ownership percentages range for Graybug stockholders in the combined company and (b) implied exchange ratios range for the merger, calculated by dividing the shares contemplated to be issued to CalciMedica stockholders in the merger by CalciMedica’s diluted shares outstanding prior to the merger based on TSM:

 

     Minimum     25th Percentile     Median     Mean     75th Percentile     Maximum  

Implied Graybug Stockholder Ownership

     36.4     27.8     9.1     8.8     6.5     3.4

Implied Exchange Ratio

     0.2979x       0.4300x       1.4915x       1.5330x       2.0981x       4.1325x  

Based on the 25th percentile, median, mean, and 75th percentile implied equity values for CalciMedica derived above, Piper Sandler also calculated the corresponding implied per share values range of Graybug common stock, using an implied Graybug stockholder ownership percentage in the combined company of 29.3%, based on the Graybug Closing Cash (the “Graybug Pro Forma Ownership Percentage”):

 

     25th Percentile      Median      Mean      75th Percentile  

Implied Graybug Per Share Value

   $ 1.12      $ 3.42      $ 3.51      $ 4.75  

 

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Selected IPOs Analysis

Piper Sandler also reviewed certain market data for US-listed biotech companies that completed an initial public offering (referred to as an “IPO”) of common stock since January 1, 2020. Specifically, Piper Sandler selected IPO companies that it deemed relevant based on its professional judgment focusing on small molecule drug development that targeted specialty indications (excluding oncology) with lead product candidates in Phase 2 stage clinical trials, but excluding companies that experienced recent clinical setbacks and/or FDA clinical hold. Small molecule drug development that targeted specialty indications excluded those targeting large therapeutic markets including viral infections such as COVID-19 and neuropsychiatry indications including depression and Alzheimer’s Disease.

Set forth below are the eight selected biotech company IPOs, as well as their respective targeted lead treatment indications, stages of development and IPO pricing dates:

 

Company

  

Indication

  

Phase

   Pricing Date

CinCor Pharma, Inc.

   Hypertension    Phase 2    January 6, 2022

Eliem Therapeutics, Inc.

   Diabetic Peripheral Neuropathic Pain    Phase 2a    August 9, 2021

Reneo Pharmaceuticals, Inc.

   Primary Mitochondrial Myopathies    Phase 2b    April 8, 2021

Terns Pharmaceuticals, Inc.

   Nonalcoholic Steatohepatitis    Phase 2    February 4, 2021

Landos Biopharma, Inc.

   Ulcerative Colitis    Phase 2    February 3, 2021

Galecto, Inc.

   Idiopathic Pulmonary Fibrosis    Phase 2a    October 28, 2020

Spruce Biosciences, Inc.

   Classic Congenital Adrenal Hyperplasia    Phase 2b    October 8, 2020

Pliant Therapeutics, Inc.

   Idiopathic Pulmonary Fibrosis    Phase 2a    June 2, 2020

For each selected biotech IPO company, Piper Sandler reviewed its (i) implied pre-money equity value, based on the offering price of such company’s shares in its respective IPO and the number of such company’s diluted shares outstanding prior to such company’s IPO, excluding any shares being issued in such company’s IPO, using TSM, referred to as the “pre-money equity value”, together with (ii) the implied adjusted pre-money enterprise value, calculated as the pre-money equity value, as adjusted to reflect the performance of the XBI market index from the date of such company’s IPO to November 18, 2022, plus net debt (calculated as debt, less cash and cash equivalents at the time of such company’s IPO), referred to as the “adjusted pre-money enterprise value.” The analysis indicated the following maximum, 75th percentile, mean, median, 25th percentile and minimum pre-money equity values and adjusted pre-money enterprise values for the selected IPO companies:

 

($ in millions)              
     Pre-Money
Equity Value
     Adj. Pre-Money
Enterprise Value
 

Maximum

   $ 550      $ 241  

75th Percentile

   $ 442      $ 183  

Mean

   $ 357      $ 164  

Median

   $ 307      $ 155  

25th Percentile

   $ 296      $ 134  

Minimum

   $ 264      $ 120  

For the selected biotech IPO companies analysis, Piper Sandler derived a range of implied enterprise values for CalciMedica based on the implied adjusted pre-money enterprise value range for the selected IPO companies referred to above and then adjusted for net cash, to calculate an implied range of CalciMedica equity values. Piper Sandler then derived an implied number of shares of Graybug common stock to be issued in the merger,

 

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based on a Graybug intrinsic value of $1.06 per share. Piper Sandler also calculated an implied pro forma equity value for the combined company by adjusting the implied enterprise value for CalciMedica for pro forma net cash at the consummation of the merger of approximately $11.5 million for CalciMedica and the Graybug Closing Cash for Graybug. This analysis did not account for assumed additional cash needs of CalciMedica to fund its business plan.

Based on the minimum, 25th percentile, median, mean, 75th percentile, and maximum implied equity values for CalciMedica derived above, Piper Sandler then calculated the corresponding (a) implied ownership percentages range for Graybug stockholders in the combined company and (b) implied exchange ratios range for the merger, calculated as described above:

 

     Minimum     25th Percentile     Median     Mean     75th Percentile     Maximum  

Implied Graybug Stockholder Ownership

     16.8     15.4     13.7     13.2     12.0     9.5

Implied Exchange Ratio

     0.7786x       0.8533x       0.9660x       1.0115x       1.1150x       1.4231x  

Based on the 25th percentile, median, mean, and 75th percentile implied equity values for CalciMedica derived above, Piper Sandler also calculated the corresponding implied per share values range of Graybug common stock, based on the Graybug Pro Forma Ownership Percentage:

 

     25th Percentile      Median      Mean      75th Percentile  

Implied Graybug Per Share Value

   $ 2.01      $ 2.26      $ 2.36      $ 2.59  

Discounted Cash Flows Analysis

Using a discounted cash flows analysis, Piper Sandler calculated an estimated range of theoretical enterprise values for CalciMedica based on the net present value of projected unlevered after tax free cash flows from January 1, 2023 to December 31, 2038, discounted back to January 1, 2023. No cash flows were projected beyond 2038 in light of assumed patent expirations and, accordingly, no terminal value was computed. Market practice in the financial analysis of clinical stage biotech companies often relies on financial projections spanning the length of product development to commercialization through patent expiration, which can be significantly in excess of five years from the date of the financial analysis. The after-tax free cash flows for each year were calculated based on estimates provided to Piper Sandler by CalciMedica’s management (and authorized for use by Graybug’s management), to which Piper Sandler then applied probability of success adjustments based on industry standards published by Biotechnology Innovation Organization, Pharma Intelligence Informa and QLS Advisors LLC in the February 2021 publication Clinical Development Success Rates and Contributing Factors 2011-2020 (the “BIO Publication”), based on statistical probability in achieving specified development milestones by biotechnology companies, as described in the section entitled “The MergerCertain Unaudited Financial Projections and Liquidation Analysis”. Piper Sandler calculated the range of net present values for unlevered after-tax free cash flows for such periods using a range of discount rates ranging from 15.0% to 19.0% based on its estimation of CalciMedica’s weighted average cost of capital using the capital asset pricing model, together with a size premium, and based on the selected public companies, described above, in order to derive a range of implied enterprise values for CalciMedica. Piper Sandler then adjusted such implied enterprise values for net cash, to calculate an implied range of CalciMedica equity values, from which Piper Sandler then derived an implied number of shares of Graybug common stock to be issued in the merger, assuming a Graybug intrinsic value of $1.06 per share. Piper Sandler also calculated an implied pro forma equity value for the combined company by adjusting the implied enterprise value for CalciMedica for pro forma net cash at the consummation of the merger of approximately $11.5 million for CalciMedica and the Graybug Closing Cash for Graybug. Piper Sandler also adjusted for the projected immediate cash need of $25 million required by CalciMedica to fund through its next key milestone, Acute Pancreatitis Phase 2b data readout, but did not assume any future stockholder dilution from potential financings required to fund its business plan beyond the Phase 2b readout.

 

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Based on the minimum, 25th percentile, median, mean, 75th percentile, and maximum implied equity values for CalciMedica derived above, Piper Sandler then calculated the corresponding (a) implied ownership percentages range for Graybug stockholders in the combined company and (b) implied exchange ratios range for the merger, calculated as described above:

 

     Minimum     25th Percentile     Median     Mean     75th Percentile     Maximum  

Implied Graybug Stockholder Ownership

     16.3     10.5     8.0     7.9     6.5     4.7

Implied Exchange Ratio

     0.8036x       1.2832x       1.6954x       1.7195x       2.1119x       2.9148x  

Based on the 25th percentile, median, mean, and 75th percentile implied enterprise values for CalciMedica derived above, Piper Sandler also calculated the corresponding implied per share values range of Graybug common stock, based on the Graybug Pro Forma Ownership Percentage:

 

     25th Percentile      Median      Mean      75th Percentile  

Implied Graybug Per Share Value

   $ 2.96      $ 3.87      $ 3.92      $ 4.78  

Pro Forma Exchange Ratio/Cash Sensitivity Analysis

The ranges of implied exchange ratios and implied Graybug per share values resulting from the analyses described above were based on the Graybug Closing Cash. Pursuant to the terms of the merger agreement, however, the exchange ratio is based in part on the actual amount of net cash of Graybug at the consummation of the merger. The actual exchange ratio can fluctuate between 0.3463x and 0.4873x, depending upon the amount of net cash of Graybug at the consummation of the merger, subject to collars at $18 million and $32 million of net cash, respectively.

As a result, Piper Sandler also reviewed the implied exchange ratio ranges for the merger and the implied per share value ranges of Graybug common stock, resulting from the analyses described above, but under certain sensitivity cases tied to ranges of estimated (i) net cash of Graybug at the consummation of the merger, and (ii) the resulting implied ownership percentages for Graybug stockholders in the combined company. The estimated net cash was sensitized at a range of amounts from $18 million to $32 million and the estimated implied ownership percentages for Graybug stockholders was sensitized at a range of percentages from 24.8% to 31.9%, which corresponded to the resulting exchange ratio based on the net cash of Graybug at the consummation of the merger. Piper Sandler then applied these sensitivity ranges to the ranges of CalciMedica equity values implied by each of the analyses above, which resulted in the following implied exchange ratios range for the merger and the implied per share values range of Graybug common stock:

Selected Public Companies

 

Graybug
%
Ownership

    Est. Graybug
Cash at Close
    25th Percentile     Median     Mean     75th Percentile  
      Implied Exchange Ratio  
  24.8   $ 18.0M       0.6335x       2.1975x       2.2587x       3.0912x  
  29.3   $ 26.5M       0.4300x       1.4915x       1.5330x       2.0981x  
  31.9   $ 32.0M       0.3569x       1.2380x       1.2725x       1.7415x  
      Graybug Implied per Share Value  
  24.8   $ 18.0M     $ 0.86     $ 2.81     $ 2.88     $ 3.94  
  29.3   $ 26.5M     $ 1.12     $ 3.42     $ 3.51     $ 4.75  
  31.9   $ 32.0M     $ 1.28     $ 3.79     $ 3.89     $ 5.24  

 

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  Selected IPOs  

Graybug %
Ownership

    Est.
Graybug
Cash at
Close
    25th
Percentile
    Median     Mean     75th
Percentile
 
      Implied Exchange Ratio  
  24.8   $ 18.0M       1.2571x       1.4233x       1.4903x       1.6427x  
  29.3   $ 26.5M       0.8533x       0.9660x       1.0115x       1.1150x  
  31.9   $ 32.0M       0.7082x       0.8019x       0.8396x       0.9255x  
      Graybug Implied per Share Value  
  24.8   $ 18.0M     $ 1.62     $ 1.83     $ 1.91     $ 2.10  
  29.3   $ 26.5M     $ 2.01     $ 2.26     $ 2.36     $ 2.59  
  31.9   $ 32.0M     $ 2.26     $ 2.53     $ 2.64     $ 2.88  
  Discounted Cash Flow  

Graybug %
Ownership

    Est.
Graybug
Cash at
Close
    25th
Percentile
    Median     Mean     75th
Percentile
 
      Implied Exchange Ratio  
  24.8   $ 18.0M       1.8906x       2.4979x       2.5334x       3.1115x  
  29.3   $ 26.5M       1.2832x       1.6954x       1.7195x       2.1119x  
  31.9   $ 32.0M       1.0651x       1.4073x       1.4273x       1.7529x  
      Graybug Implied per Share Value  
  24.8   $ 18.0M     $ 2.42     $ 3.19     $ 3.23     $ 3.96  
  29.3   $ 26.5M     $ 2.96     $ 3.87     $ 3.92     $ 4.78  
  31.9   $ 32.0M     $ 3.29     $ 4.28     $ 4.34     $ 5.28  

Piper Sandler noted these ranges of implied exchange ratios and implied Graybug per share values as compared to the exchange ratio range of 0.3463x – 0.4873x, the current Graybug per share closing price on November 18, 2022 of $0.95 per share, and the Graybug implied per share intrinsic value range of $0.72 – $1.28 per share (calculated based on 25.1 million diluted shares, and a range of net cash at the consummation of the merger of $18 million to $32 million).

Subsequent Developments

Subsequent to the November 21, 2022 Graybug Board meeting, Piper Sandler was informed that the diluted share information for CalciMedica provided to it by CalciMedica’s management, which was used in conducting the foregoing financial analyses, included an incorrect assumption and Piper Sandler was provided with the corrected diluted share information. This discovery did not result in any change to Piper Sandler’s fairness opinion or its conclusion. Piper Sandler did, however, provide the Graybug Board with the revised exchange ratio analyses reflecting the corrected diluted share information, which indicated the implied exchange ratios set forth below. These revisions did not impact the implied ownership percentages for Graybug stockholders in the combined company or the implied per share values of Graybug common stock.

 

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     Minimum      25th Percentile      Median      Mean      75th Percentile      Maximum  

Selected Public Companies Analysis—Implied Exchange Ratio (Corrected)

     0.3002x        0.4333x        1.5023x        1.5441x        2.1132x        4.1622x  

Selected IPOs Analysis—Implied Exchange Ratio (Corrected)

     0.7843x        0.8595x        0.9731x        1.0188x        1.1230x        1.4334x  

Discounted Cash Flow Analysis—Implied Exchange Ratio (Corrected)

     0.8094x        1.2925x        1.7077x        1.7319x        2.1271x        2.9358x  

In addition, Piper Sandler provided the Graybug Board a revised Pro Forma Exchange Ratio/Cash Sensitivity Analysis, which resulted in the following implied exchange ratios range for the merger and the implied per share values range of Graybug common stock:

 

  Selected Public Companies  

Graybug %
Ownership

    Est. Graybug
Cash at Close
    25th Percentile     Median     Mean     75th Percentile  
      Implied Exchange Ratio (Corrected)  
  24.8   $ 18.0M       0.6387x       2.2142x       2.2759x       3.1147x  
  29.3   $ 26.5M       0.4333x       1.5023x       1.5441x       2.1132x  
  32.0   $ 32.0M       0.3593x       1.2455x       1.2802x       1.7520x  
      Graybug Implied per Share Value (Corrected)  
  24.8   $ 18.0M     $ 0.86     $ 2.81     $ 2.88     $ 3.94  
  29.3   $ 26.5M     $ 1.12     $ 3.42     $ 3.51     $ 4.75  
  32.0   $ 32.0M     $ 1.29     $ 3.79     $ 3.89     $ 5.25