As filed with the U.S. Securities and Exchange Commission on November 27, 2019

 

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Chanticleer Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware   5812   20-2932652

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

7621 Little Avenue, Suite 414

Charlotte, NC 28226

(704) 366-5122

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

 

 

Michael D. Pruitt

Chief Executive Officer

Chanticleer Holdings, Inc.

7621 Little Avenue, Suite 414

Charlotte, NC 28226

(704) 366-5122

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

 

 

Copies to:

 

Ruba Qashu, Esq.

Libertas Law Group, Inc.

225 Santa Monica Boulevard,
5th Floor

Santa Monica, CA 90401

 

Pankaj Mohan, Ph.D.

CEO and Chairman

Sonnet BioTherapeutics, Inc.

100 Overlook Center, Second Floor

Princeton, New Jersey 08540

(609) 375-2227

 

Steven M. Skolnick, Esq.

Lowenstein Sandler LLP

1251 Avenue of the Americas

New York, New York 10020

Tel: 973-597-2500

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement and the satisfaction or waiver of all other conditions under the Merger Agreement described herein.

 

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box: [  ]

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b–2 of the Exchange Act.

 

Large accelerated filer [  ]   Accelerated filer   [  ]
       
Non-accelerated filer [X]   Smaller reporting company   [X]
       
      Emerging growth company   [  ]

 

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

 

If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

 

Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer) [  ]

 

Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer) [  ]

 

CALCULATION OF REGISTRATION FEE

 

Title of each class of
securities to be registered
  Amount to be
registered(1)(2)
   Proposed maximum
offering price
per share
   Proposed maximum
aggregate offering
price(3)
   Amount of
registration fee
 
Common stock, par value $0.0001 per share   211,453,835    N/A   $0.00   $0.00 

 

(1) Represents an estimate of the maximum number of shares of common stock of Chanticleer Holdings, Inc. (“Chanticleer”) issuable upon completion of the transactions contemplated by the Agreement and Plan of Merger dated as of October 10, 2019, among Chanticleer, Sonnet BioTherapeutics, Inc. (“Sonnet”) and Biosub Inc. (the “Merger Agreement”), as described in this registration statement.
   
(2) Pursuant to Rule 416 under the Securities Act of 1933, as amended, or Securities Act, there are also being registered such additional shares of Chanticleer common stock that may be issued because of events such as recapitalizations, stock dividends, stock splits and reverse stock splits, and similar transactions.
   
(3) Calculated in accordance with Rule 457(f) of the Securities Act. Sonnet is a private company and no market exists for its equity securities. Sonnet has accumulated a capital deficit; therefore, pursuant to Rule 457(f)(2) under the Securities Act, the proposed maximum offering price would be one-third of the aggregate par value of Sonnet’s capital stock being acquired in the proposed merger. However, because Sonnet’s common stock has no par value, this value is $0.00.

 

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

 

 

 

 
 

 

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

 

SUBJECT TO COMPLETION, DATED NOVEMBER 27, 2019

 

 

 

PROPOSED MERGER

 

YOUR VOTE IS VERY IMPORTANT

 

To the Stockholders of Chanticleer Holdings, Inc. and Sonnet BioTherapeutics, Inc.:

 

Chanticleer Holdings, Inc., a Delaware corporation, or Chanticleer, Biosub Inc., a Delaware corporation and a wholly-owned subsidiary of Chanticleer (“Merger Sub”), and Sonnet BioTherapeutics, Inc., a New Jersey corporation (“Sonnet”), have entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Merger Sub will merge with and into Sonnet, with Sonnet surviving the merger as a wholly-owned subsidiary of the combined company. These transactions are referred to herein collectively as the “merger.” Following the merger, Chanticleer will be renamed “Sonnet BioTherapeutics Holdings, Inc.” and is sometimes referred to herein as the “combined company.” The shareholders of Sonnet will become the majority owners of Chanticleer’s outstanding common stock upon the closing of the merger. Additionally, as part of this transaction, Chanticleer will spin-off (the “Disposition”) its current restaurant operations, including all assets and liabilities, into a newly created entity (the “Spin-Off Entity”), the equity of which will be distributed out to the stockholders of Chanticleer as of the record date for the Disposition.

 

Pursuant to the Merger Agreement, each share of common stock of Sonnet, no par value per share (the “Sonnet Common Stock”) (other than Cancelled Shares (as defined in the Merger Agreement) and Dissenting Shares (as defined in the Merger Agreement)), issued and outstanding immediately prior to the effective time of the merger (the “Effective Time”) shall be automatically converted into the right to receive an amount of shares of common stock, par value $0.0001 per share, of Chanticleer (“Chanticleer Common Stock”) equal to the Common Stock Exchange Ratio (as defined in the Merger Agreement) (the “Merger Consideration”). As a result, immediately following the Effective Time, the former Sonnet shareholders will hold approximately 94% of the outstanding shares of Chanticleer Common Stock, the stockholders of Chanticleer will retain ownership of approximately 6% of the outstanding shares of Chanticleer Common Stock and the Spin-Off Entity will hold the Spin-Off Entity Warrant (as defined below), exercisable for 2% of the outstanding shares of Chanticleer Common Stock. All outstanding Sonnet stock options and warrants, if any, whether vested or unvested, that have not been exercised prior to the Effective Time will be converted into a stock option or warrant, as applicable, to purchase shares of Chanticleer Common Stock, proportionately adjusted based on the Common Stock Exchange Ratio. The exact number of shares of Chanticleer Common Stock that will be issued to Sonnet shareholders will be fixed immediately prior to the Effective Time to reflect the capitalization of Chanticleer as of immediately prior to such time as well as changes in the relative valuations of Chanticleer and Sonnet to reflect any capital raises completed by either party and the cash on the respective balance sheets of Chanticleer and Sonnet immediately prior to the Effective Time, including as a result of any Pre-Closing Private Placement Transactions (as defined in this proxy statement/prospectus/information statement). For a more complete description of the Common Stock Exchange Ratio, see the section titled “The Merger Agreement—Common Stock Exchange Ratio” in this proxy statement/prospectus/information statement.

 

In addition, at the closing of the Merger, Chanticleer will issue to the Spin-Off Entity a warrant (the “Spin-Off Entity Warrant”) to purchase that number of shares of Chanticleer Common Stock equal to two percent (2%) of the number of shares of issued and outstanding Chanticleer Common Stock immediately after the Effective Time. The warrant will be a five year warrant, will have an exercise price of $0.01 per share and will not be exercisable for 180 days following the Effective Time.

 

For illustrative purposes, if the closing of the merger occurred on October 31, 2019, Chanticleer would have issued an aggregate of approximately 210,744,237 shares of Chanticleer Common Stock to the holders of Sonnet Common Stock at the time of such closing pursuant to the Merger Agreement, such number reflecting the relative valuations of Chanticleer and Sonnet in accordance with the Merger Agreement and the capitalization of Chanticleer as of October 31, 2019, assuming, solely for purposes of this calculation, no cash on the balance sheets of either Chanticleer or Sonnet immediately prior to the Effective Time.

 

Subject to approval of the Nasdaq Stock Market LLC (“Nasdaq”), the merger, together with the Disposition, will result in a publicly-traded company operating under the Sonnet name and the proposed Nasdaq ticker symbol “SONN” that will focus on advancing Sonnet’s pipeline of oncology candidates and the strategic expansion of Sonnet’s technology platform into other human diseases. Upon completion of the merger, the board of directors of the public company will be comprised of the current members of the board of directors of Sonnet, and Dr. Pankaj Mohan will serve as its Chairman, as well as the President and Chief Executive Officer of the public company.

 

Shares of Chanticleer Common Stock are currently listed on the Nasdaq Capital Market under the symbol “BURG.” The closing of the merger will be subject to a number of closing conditions, including approval of the continued trading of shares of Chanticleer Common Stock on the Nasdaq Capital Market following the consummation of the merger. On          , 20          , the last trading day before the date of this proxy statement/prospectus/information statement, the closing sale price of Chanticleer Common Stock was $      per share.

 

Chanticleer is holding a special meeting of stockholders in order to obtain the stockholder approvals necessary to complete the merger and other matters. At the Chanticleer special meeting, which will be held on          , 20           at           , local time, at          , unless postponed or adjourned to a later date, Chanticleer will ask its stockholders (i) to approve the issuance of shares of Chanticleer Common Stock as consideration in the merger (the “Stock Issuance Proposal”), (ii) to approve an amendment to Chanticleer’s certificate of incorporation effecting a reverse stock split of Chanticleer Common Stock at a ratio in the range from 2-for-1 to [  ]-for-1, with such specific ratio to be mutually agreed upon by the respective Chanticleer and Sonnet boards of directors (the “Reverse Stock Split Proposal”), (iii) to approve an amendment to the certificate of incorporation of Chanticleer to increase the total number of authorized shares of common stock to [  ] (the “Stock Increase Proposal”), (iv) to approve the Sonnet BioTherapeutics Holdings, Inc. 20 Omnibus Equity Incentive Plan and to Authorize for Issuance [  ] Shares of Chanticleer Common Stock Thereunder (the “Plan Proposal”) and (v) an adjournment of the Chanticleer special meeting, if necessary, to solicit additional proxies if there are not sufficient votes at the time of the Chanticleer special meeting to approve the proposals submitted at the Chanticleer special meeting (the “Adjournment Proposal”), each as described in this proxy statement/prospectus/information statement.

 

Sonnet will also hold a meeting of its shareholders to adopt the Merger Agreement and approve the merger and related transactions. Sonnet will distribute a separate packet of information, including this proxy statement/prospectus/information statement, to its shareholders in connection with such meeting.

 

After careful consideration, the respective Chanticleer and Sonnet boards of directors have unanimously approved the Merger Agreement and the transactions contemplated thereby, including the proposals referred to above and discussed elsewhere in this proxy statement/prospectus/information statement. The Chanticleer board of directors unanimously recommends that its stockholders vote “FOR” each of the Stock Issuance Proposal, the Reverse Stock Split Proposal, the Stock Increase Proposal, the Plan Proposal and the Adjournment Proposal described in this proxy statement/prospectus/information statement, and the Sonnet board of directors unanimously recommends that its shareholders vote to adopt the Merger Agreement and approve the merger and related transactions.

 

More information about Chanticleer, Sonnet and the proposed transactions are contained in this proxy statement/prospectus/information statement. Chanticleer and Sonnet urge you to read this proxy statement/prospectus/information statement carefully and in its entirety. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER “RISK FACTORS” BEGINNING ON PAGE 28.

 

Chanticleer and Sonnet are excited about the opportunities the merger brings to both Chanticleer and Sonnet stockholders, and thank you for your consideration and continued support.

 

 

Michael D. Pruitt   Pankaj Mohan, Ph.D.
Chairman and Chief Executive Officer   Chairman and Chief Executive Officer
Chanticleer Holdings, Inc.   Sonnet BioTherapeutics, Inc.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this proxy statement/prospectus/information statement. Any representation to the contrary is a criminal offense.

 

This proxy statement/prospectus/information statement is dated            , 20  , and is first being mailed to Chanticleer and Sonnet stockholders on or about            , 20  .

 

 
 

 

CHANTICLEER HOLDINGS, INC.

7621 Little Avenue, Suite 414

Charlotte, NC 28226

(704) 366-5122

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

 

To Be Held On                 , 20  

 

Dear Stockholders of Chanticleer:

 

On behalf of the board of directors of Chanticleer Holdings, Inc., a Delaware corporation (“Chanticleer”), Chanticleer is pleased to deliver this proxy statement/prospectus/information statement for the proposed merger between Chanticleer and Sonnet BioTherapeutics, Inc., a New Jersey corporation (“Sonnet”), pursuant to which Biosub Inc., a wholly-owned subsidiary of Chanticleer, or Merger Sub, will merge with and into Sonnet, with Sonnet surviving the merger as a wholly-owned subsidiary of the combined company. The special meeting of Chanticleer stockholders will be held on                , 20   at ,                local time, at                  , for the following purposes:

 

1. To consider and vote upon a proposal to approve the issuance of shares of Chanticleer Common Stock pursuant to the Agreement and Plan of Merger, dated as of October 10, 2019, by and among Chanticleer, Merger Sub, and Sonnet, a copy of which is attached as Annex A to this proxy statement/prospectus/information statement (the “Stock Issuance Proposal”);
   
2. To consider and vote upon an amendment to the certificate of incorporation of Chanticleer to effect a reverse stock split of Chanticleer Common Stock, at a ratio in the range from 2-for-1 to [  ]-for-1, with such specific ratio to be mutually agreed upon by Chanticleer and Sonnet (the “Reverse Split”), the form of which is attached as Annex B to this proxy statement/prospectus/information statement (the “Reverse Stock Split Proposal”);
   
3. To consider and vote upon an amendment to the certificate of incorporation of Chanticleer to increase the total number of authorized shares of common stock to [  ] (the “Stock Increase”), the form of which is attached as Annex C to this proxy statement/prospectus/information statement (the “Stock Increase Proposal”);
   
4. To consider and vote upon a proposal to approve the Sonnet BioTherapeutics Holdings, Inc. 20 Omnibus Equity Incentive Plan, the form of which is attached as Annex D to this proxy statement/prospectus/information statement, and to authorize for issuance [ ] shares of Chanticleer Common Stock thereunder (the “Plan Proposal”); and
   
5. To consider and vote upon an adjournment of the Chanticleer special meeting, if necessary, to solicit additional proxies if there are not sufficient votes at the time of the Chanticleer special meeting to approve the proposals submitted at the Chanticleer special meeting (the “Adjournment Proposal”).

 

The foregoing items of business are more fully described in the proxy statement/prospectus/information statement that accompanies this notice. The Chanticleer board of directors has fixed the close of business on  , 20   as the record date for the determination of stockholders entitled to notice of and to vote at this Chanticleer special meeting and at any adjournment or postponement thereof. At the close of business on the record date, Chanticleer had     shares of common stock outstanding and entitled to vote.

 

All Chanticleer stockholders are cordially invited to attend the Chanticleer special meeting in person. Whether or not you expect to attend the Chanticleer special meeting, please complete, date, sign and return the enclosed proxy as promptly as possible in order to ensure your representation at the meeting. A return envelope (which is postage prepaid if mailed in the United States) is enclosed for that purpose. Even if you have given your proxy, you may still vote in person if you attend the Chanticleer special meeting. Please note, however, that if your shares are held of record by a broker, bank or other nominee and you wish to vote at the Chanticleer special meeting, you must obtain from the record holder a proxy issued in your name. You may revoke your proxy in the manner described in the proxy statement at any time before it has been voted at the meeting.

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SPECIAL MEETING OF STOCKHOLDERS OF CHANTICLEER HOLDINGS, INC. TO BE HELD           , 20  . THIS PROXY STATEMENT AND THE ACCOMPANYING FORM OF PROXY CARD ARE AVAILABLE AT HTTP://ONLINEPROXYVOTE.COM/BURG/. Under Securities and Exchange Commission rules, we are providing access to our proxy materials both by sending you this full set of proxy materials, and by notifying you of the availability of our proxy materials on the Internet.

 

  By Order of the Board of Directors of Chanticleer Holdings, Inc.
   
 
  Michael D. Pruitt
  Chairman and Chief Executive Officer
  Charlotte, North Carolina
                , 20  

 

 
 

 

ADDITIONAL INFORMATION

 

This proxy statement/prospectus/information statement incorporates important business and financial information about Chanticleer that is not included in or delivered with the document. This information is available without charge to security holders upon written or oral request.

 

The registration statement to which this proxy statement/prospectus/information statement relates and the exhibits thereto, the information incorporated by reference herein and the other information filed by Chanticleer with the SEC are available on or through Chanticleer’s website at www.chanticleerholdings.com, free of charge. The SEC maintains a website that contains the documents that Chanticleer files electronically with the SEC. The address of the SEC’s website is http://www.sec.gov. In addition, Chanticleer will provide to each person to whom a proxy statement/prospectus/information statement is delivered, without charge upon written or oral request, a copy of any or all of the documents that Chanticleer files with the SEC. Requests should be directed to:

 

Chanticleer Holdings, Inc.

7621 Little Avenue, Suite 414

Charlotte, NC 28226

(704) 366-5122

Attention: Michael D. Pruitt, Chairman and Chief Executive Officer

 

Chanticleer Stockholders Meeting:  To obtain timely delivery of such information, you must request the information no later than five business days before the Chanticleer special meeting of stockholders. Accordingly, if you would like to request any information, please do so no later than          , 20  .

 

 
 

 

ABOUT THIS PROXY STATEMENT/PROSPECTUS/INFORMATION STATEMENT

 

This proxy statement/prospectus/information statement, which forms part of a registration statement on Form S-4 filed with the SEC by Chanticleer (File No. 333-      ), constitutes a prospectus of Chanticleer under Section 5 of the Securities Act of 1933, as amended, or the Securities Act, with respect to the shares of Chanticleer Common Stock, par value $0.0001, of Chanticleer Holdings, Inc. to be issued pursuant to the Merger Agreement. This document also constitutes a notice of meeting and a proxy statement under Section 14(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, with respect to the Chanticleer special meeting, at which Chanticleer stockholders will be asked to consider and vote on, among other matters, a proposal to approve the issuance of shares of Chanticleer Common Stock pursuant to the Merger Agreement.

 

No one has been authorized to provide you with information that is different from that contained in, or incorporated by reference into, this proxy statement/prospectus/information statement. This proxy statement/prospectus/information statement is dated       , 20  . The information contained in this proxy statement/prospectus/information statement is accurate only as of that date or, in the case of information in a document incorporated by reference, as of the date of such document, unless the information specifically indicates that another date applies.

 

This proxy statement/prospectus/information statement does not constitute an offer to sell, or a solicitation of an offer to buy, any securities, or the solicitation of a proxy, in any jurisdiction in which or from any person to whom it is unlawful to make any such offer or solicitation in such jurisdiction.

 

The information concerning Chanticleer contained in this proxy statement/prospectus/information statement or incorporated by reference has been provided by Chanticleer, and the information concerning Sonnet contained in this proxy statement/prospectus/information statement has been provided by Sonnet.

 

 
 

 

TABLE OF CONTENTS

 

QUESTIONS AND ANSWERS ABOUT THE MERGER 1
PROSPECTUS SUMMARY 11
The Parties 11
The Merger 12
Reasons for the Merger 13
Overview of the Merger Agreement and Agreements Related to the Merger Agreement 13
The Chanticleer Special Meeting 17
Interests of Directors and Executive Officers of Chanticleer and Sonnet 19
Risk Factors 20
Regulatory Approvals 21
Nasdaq Stock Market Listing 21
Anticipated Accounting Treatment 21
Appraisal Rights and Dissenters’ Rights 21
Comparison of Stockholder Rights 21
SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION AND DATA 22
Selected Historical Consolidated Financial Data of Chanticleer 22
Selected Historical Financial Data of Sonnet 23
Selected Unaudited Pro Forma Condensed Combined Financial Data of Chanticleer and Sonnet 24
Comparative Historical and Unaudited Pro Forma Per Share Data 26
MARKET PRICE AND DIVIDEND INFORMATION 27
Chanticleer Common Stock 27
Dividend Policy 27
RISK FACTORS 28
Risks Related to the Merger and the Combined Company 28
Risks Related to Chanticleer 74

 

i
 

 

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS 88
THE SPECIAL MEETING OF CHANTICLEER STOCKHOLDERS 90
Date, Time and Place 90
Purposes of the Chanticleer Special Meeting 90
Recommendation of the Chanticleer Board of Directors 90
Record Date and Voting Power 91
Voting and Revocation of Proxies 91
Required Vote 93
Solicitation of Proxies 93
Other Matters 93
THE MERGER 94
Background of the Merger 94
Chanticleer Reasons for the Merger 95
Sonnet Reasons for the Merger 97
Interests of the Chanticleer Directors and Executive Officers in the Merger 98
Interests of the Sonnet Directors and Executive Officers in the Merger 99
Limitations of Liability and Indemnification 100
Form of the Merger 101
Merger Consideration 101
Effective Time of the Merger 102
Regulatory Approvals 103
Nasdaq Stock Market Listing 106
Anticipated Accounting Treatment 106
Appraisal Rights and Dissenters’ Rights 106
THE MERGER AGREEMENT 109
General 109
Merger Consideration 110
Exchange Ratio 110
Treatment of Sonnet Stock Options and Warrants 112
Directors and Executive Officers of the Combined Company Following the Merger 113
Conditions to the Closing of the Merger 113
Representations and Warranties 117
Non-Solicitation 118
Stockholder Approvals 120
Covenants; Conduct of Business Pending the Merger 120

 

ii
 

 

Other Agreements 125
Termination of the Merger Agreement 128
Termination Fees 130
Amendment 131
AGREEMENTS RELATED TO THE MERGER 132
MATTERS BEING SUBMITTED TO A VOTE OF CHANTICLEER STOCKHOLDERS 133
Chanticleer Proposal No. 1 (the Stock Issuance Proposal): Approval of the Issuance of Common Stock in the Merger 133
Chanticleer Proposal No. 2 (the Reverse Stock Split Proposal): Approval of the Amendment to the Certificate of Incorporation of Chanticleer Effecting the Reverse Stock Split at a Ratio in the Range from [2-for-1 to 15-for-1] 134
Chanticleer Proposal No. 3 (Stock Increase Proposal): Approval Of An Amendment To The Certificate Of Incorporation Of Chanticleer To Increase The Total Number of Authorized Shares Of Common Stock to [●] 139
Chanticleer Proposal No. 4 (Plan Proposal): To Approve the Sonnet BioTherapeutics Holdings, Inc. 20 Omnibus Equity Incentive Plan and to Authorize for Issuance [  ] Shares of Chanticleer Common Stock Thereunder 142
Chanticleer Proposal No. 5 (Adjournment Proposal): Approval of Possible Adjournment of the Chanticleer Special Meeting 147
BUSINESS OF CHANTICLEER 148

 

iii
 

 

SONNET BUSINESS 166
Overview 166
SONNET MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 183
MANAGEMENT FOLLOWING THE MERGER 196
Executive Officers and Directors of the Combined Company Following the Merger 196
Family Relationships 199
Board Committees 199
Code of Business Conduct and Ethics 200
Compensation Committee Interlocks and Insider Participation 201
CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS 204
Chanticleer 204
Sonnet 205
DESCRIPTION OF SECURITIES 206
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS 207
Unaudited Pro Forma Condensed Combined Balance Sheet As of September 30, 2019 (In thousands) 209
Unaudited Pro Forma Condensed Combined Statement of Operations For the Nine Months Ended September 30, 2019 (in thousands, except share and per share data) 210
Unaudited Pro Forma Condensed Combined Statement of Operations For the Year Ended December 31, 2018* (In thousands, except share and per share data) 211
COMPARISON OF RIGHTS OF HOLDERS OF CHANTICLEER STOCK AND SONNET STOCK 217
Sonnet Stockholder Rights Versus Chanticleer Stockholder Rights 217
PRINCIPAL STOCKHOLDERS OF CHANTICLEER 226
PRINCIPAL STOCKHOLDERS OF SONNET 228
PRINCIPAL STOCKHOLDERS OF THE COMBINED COMPANY 229
LEGAL MATTERS 231
EXPERTS 231
WHERE YOU CAN FIND MORE INFORMATION 231
OTHER MATTERS 232
Householding of Proxy Statement/Prospectus/Information Statement 232
INDEX TO FINANCIAL STATEMENTS 234
Annex A Agreement and Plan of Merger A-1
Annex B Certificate of Amendment to Certificate of Incorporation B-1
Annex C Certificate of Amendment of Certificate of Incorporation of Chanticleer Holdings, Inc. C-1
Annex D Sonnet BioTherapeutics Holdings, Inc. 20 Omnibus Equity Incentive Plan D-1
Annex E New Jersey Business Corporation Act Title 14A Corporations, General Chapter 11. Rights of Dissenting Shareholders E-1
PART II INFORMATION NOT REQUIRED IN PROXY STATEMENT/PROSPECTUS/ INFORMATION STATEMENT II-1

 

iv
 

 

QUESTIONS AND ANSWERS ABOUT THE MERGER and other proposals

 

The following are brief answers to some questions that you may have regarding the merger and the Chanticleer special meeting. The questions and answers in this section may not address all questions that might be important to you as a stockholder. For more detailed information, and for a description of the legal terms governing the merger, Chanticleer urges you to read carefully and in its entirety this proxy statement/prospectus/information statement, including the Annexes hereto, as well as the registration statement to which this proxy statement/prospectus/information statement relates, including the exhibits to the registration statement. For more information, please see the section titled “Where You Can Find More Information.”

 

Except where specifically noted, the following information and all other information contained in this proxy statement/prospectus/information statement does not give effect to the proposed reverse stock split of Chanticleer Common Stock described in the Reverse Stock Split Proposal in this proxy statement/prospectus/information statement.

 

The following section provides answers to frequently asked questions about the merger. This section, however, provides only summary information. For a more complete response to these questions and for additional information, please refer to the cross-referenced sections.

 

Q: What is the merger?

 

A: Chanticleer Holdings, Inc., a Delaware corporation, or Chanticleer, Biosub Inc., a Delaware corporation and a wholly-owned subsidiary of Chanticleer (“Merger Sub”), and Sonnet BioTherapeutics, Inc., a New Jersey corporation (“Sonnet”), have entered into an Agreement and Plan of Merger (the “Merger Agreement”), dated October 10, 2019, pursuant to which Merger Sub will merge with and into Sonnet, with Sonnet surviving the merger as a wholly-owned subsidiary of the combined company. These transactions are referred to herein collectively as the “merger.” Following the merger, Chanticleer will be renamed “Sonnet BioTherapeutics Holdings, Inc.” and is sometimes referred to herein as the “combined company.” The shareholders of Sonnet will become the majority owners of Chanticleer’s outstanding common stock upon the closing of the merger. Additionally, as part of this transaction, Chanticleer will spin-off (the “Disposition”) its current restaurant operations, including all assets and liabilities, into a newly created entity (the “Spin-Off Entity”), the equity of which will be distributed out to the stockholders of Chanticleer as of the record date for the Disposition.

 

Pursuant to the Merger Agreement, each share of common stock of Sonnet, no par value per share (the “Sonnet Common Stock”) (other than Cancelled Shares (as defined in the Merger Agreement) and Dissenting Shares (as defined in the Merger Agreement)), issued and outstanding immediately prior to the effective time of the merger (the “Effective Time”) shall be automatically converted into the right to receive an amount of shares of common stock, par value $0.0001 per share, of Chanticleer (“Chanticleer Common Stock”) equal to the Common Stock Exchange Ratio (as defined in the Merger Agreement) (the “Merger Consideration”). As a result, immediately following the Effective Time, the former Sonnet shareholders will hold approximately 94% of the outstanding shares of Chanticleer Common Stock, the stockholders of Chanticleer will retain ownership of approximately 6% of the outstanding shares of Chanticleer Common Stock and the Spin-Off Entity will hold the Spin-Off Entity Warrant (as defined below), exercisable for 2% of the outstanding shares of Chanticleer Common Stock. All outstanding Sonnet stock options and warrants, if any, whether vested or unvested, that have not been exercised prior to the Effective Time will be converted into a stock option or warrant, as applicable, to purchase shares of Chanticleer Common Stock, proportionately adjusted based on the Common Stock Exchange Ratio. The exact number of shares of Chanticleer Common Stock that will be issued to Sonnet shareholders will be fixed immediately prior to the Effective Time to reflect the capitalization of Chanticleer as of immediately prior to such time as well as changes in the relative valuations of Chanticleer and Sonnet to reflect any capital raises completed by either party and the cash on the respective balance sheets of Chanticleer and Sonnet immediately prior to the Effective Time, including as a result of any Pre-Closing Private Placement Transactions (as defined in this proxy statement/prospectus/information statement). For a more complete description of the Common Stock Exchange Ratio, see the section titled “The Merger Agreement—Common Stock Exchange Ratio” in this proxy statement/prospectus/information statement.

 

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In addition, at the closing of the Merger, Chanticleer will issue to the Spin-Off Entity a warrant (the “Spin-Off Entity Warrant”) to purchase that number of shares of Chanticleer Common Stock equal to two percent (2%) of the number of shares of issued and outstanding Chanticleer Common Stock immediately after the Effective Time. The warrant will be a five year warrant, will have an exercise price of $0.01 per share and will not be exercisable for 180 days following the Effective Time.

 

On October 31, 2019, Chanticleer had outstanding 10,073,514 shares of Chanticleer Common Stock, 62,876 shares of 9% Redeemable Series 1 Preferred Stock (the “Preferred Stock”), warrants to purchase 3,576,270 shares of Chanticleer Common Stock with a weighted average exercise price of $7.76 per share, options to purchase 32,800 shares of Chanticleer Common Stock with a weighted average exercise price of $4.00 per share and 45,000 restricted stock units. On October 31, 2019, Sonnet had outstanding 52,295,250 shares of Sonnet Common Stock, 7,111,947 shares of Sonnet Common Stock reserved for issuance to Relief Therapeutics Holding SA (“Relief Holding”) for the acquisition of Relief Therapeutics SA (“Relief”) pursuant to the Share Exchange Agreement dated August 9, 2019 between Sonnet and Relief Holding (the “Share Exchange Agreement”) (which shares will be issued to Relief Holding upon the closing of the Relief acquisition, which transaction will occur immediately prior to the closing of the merger, and which shares are assumed outstanding as of October 31, 2019 for purposes of the estimated Merger Consideration and Exchange Ratio in this proxy statement/prospectus/information statement) and warrants to purchase 200,000 shares of Sonnet Common Stock with an exercise price of $3.125 per share. Accordingly, by way of example only, if the closing of the merger occurred on October 31, 2019, assuming, solely for purposes of this calculation, no cash on the balance sheets of either Chanticleer or Sonnet immediately prior to the Effective Time, Chanticleer would have issued an aggregate of approximately 210,744,237 shares of Chanticleer Common Stock to the holders of Sonnet Common Stock at the time of such closing pursuant to the Merger Agreement (or 3.5475 shares of Chanticleer Common Stock per share of Sonnet Common Stock), such number reflecting the relative valuations of Chanticleer and Sonnet in accordance with the Merger Agreement and the capitalization of Chanticleer as of October 31, 2019. This equates to a Common Stock Exchange Ratio of 3.5475 shares of Chanticleer Common Stock per one share of Sonnet Common Stock. As a result, following the closing of the merger, Chanticleer would have had outstanding a total of 220,817,858 shares of Chanticleer Common Stock, 62,876 shares of Preferred Stock, warrants to purchase 8,702,117 shares of Chanticleer Common Stock (including the Spin-Off Entity Warrant), options to purchase 32,800 shares of Chanticleer Common Stock and 45,000 restricted stock units.

 

Q: What will happen to Chanticleer if, for any reason, the merger does not close?

 

A: If, for any reason, the merger does not close, the Chanticleer board of directors may elect to, among other things, attempt to complete another strategic transaction like the merger, attempt to sell or otherwise dispose of the various assets of Chanticleer or continue to operate the business of Chanticleer. Chanticleer may be unable to identify and complete an alternative strategic transaction or continue to operate the business due to limited cash availability, and it may be required to dissolve and liquidate its assets. In such case, Chanticleer would be required to pay all of its debts and contractual obligations, and to set aside certain reserves for potential future claims, and there can be no assurances as to the amount or timing of available cash, if any, left to distribute to stockholders after paying the debts and other obligations of Chanticleer and setting aside funds for reserves.

 

As of September 30, 2019, Chanticleer’s cash balance was $638,000, its working capital was negative $15.5 million and it has significant near-term commitments and contractual obligations. Chanticleer has typically funded its operating costs, acquisition activities, working capital requirements and capital expenditures with proceeds from the issuances of its common stock and other financing arrangements, including convertible debt, lines of credit, notes payable, capital leases, and other forms of external financing. As of September 30, 2019, Chanticleer and its subsidiaries have approximately $2.9 million of accrued employee and employer taxes, including penalties and interest, which are due to certain taxing authorities. Chanticleer is currently in discussions with various taxing authorities on settling these liabilities through payment plans that began in the third quarter. Chanticleer also has $3 million of principal due on the 8% non-convertible secured debentures by the end of December 2019 and the remaining $3 million of principal due by the end of March 2020, plus interest. In addition, if Chanticleer fails to meet various debt covenants going forward and is notified of the default by the noteholders of the 8% non-convertible secured debentures, Chanticleer may be assessed additional default interest and penalties which would increase its obligations. In addition, Chanticleer has approximately $680,000 of other debt obligations coming due over the next twelve months. Chanticleer cannot provide assurance that it will be able to refinance its long-term debt or sell assets or raise additional capital.

 

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In the event that capital is not available, or Chanticleer is unable to refinance its debt obligations or obtain waivers, it may then have to scale back or freeze its organic growth plans, sell assets on less than favorable terms, reduce expenses, curtail future acquisition plans to manage its liquidity and capital resources and/or pursue bankruptcy protection. Chanticleer may also incur financial penalties or other negative actions from its lenders if it is not able to refinance or otherwise extend or repay its current obligations or obtain waivers.

 

Q: Why are the companies proposing to merge?

 

A: Chanticleer and Sonnet believe that the merger, together with the Disposition, will result in a publicly-traded company operating under the Sonnet name that will focus on advancing Sonnet’s pipeline of oncology candidates and the strategic expansion of Sonnet’s technology platform into other human diseases, while allowing the Chanticleer stockholders both maintain their ongoing investment in the restaurant business and also have potential upside from the potential growth and expansion of Sonnet. Sonnet is a clinical stage, oncology-focused biotechnology company with a proprietary platform for innovating biologic medicines of single- or bi-specific action. Known as FHAB™ (Fully Human Albumin Binding), the technology utilizes a fully human single chain antibody fragment (scFv) that binds to and “hitch-hikes” on human serum albumin (HSA) for transport to target tissues. Sonnet’s pipeline of therapeutic compounds for oncology indications of high unmet medical need includes lead candidate, SON-080, a fully human version of low dose Interleukin-6 (IL-6) that has successfully completed Phase I clinical trials and will advance to a pilot efficacy study in patients with chemotherapy-induced peripheral neuropathy (CIPN) during 2020. For a more complete discussion of Chanticleer and Sonnet reasons for the merger, please see the section titled “The Merger—Chanticleer Reasons for the Merger” and “The Merger—Sonnet Reasons for the Merger.”

 

Q: Why am I receiving this proxy statement/prospectus/information statement?

 

A: You are receiving this proxy statement/prospectus/information statement because you have been identified as a stockholder of Chanticleer or Sonnet as of the applicable record date, and you are entitled, as applicable, to vote at the Chanticleer stockholder meeting to approve among other things the issuance of shares of Chanticleer Common Stock pursuant to the Merger Agreement and reverse stock split, or vote at the Sonnet shareholder meeting to adopt the Merger Agreement and approve the merger and related transactions. This document serves as:

 

  a proxy statement of Chanticleer used to solicit proxies for its special meeting of stockholders;
     
  a prospectus of Chanticleer used to issue shares of Chanticleer Common Stock in exchange for shares of Sonnet Common Stock in the merger; and
     
  an information statement of Sonnet used to solicit the proxies of its stockholders for the adoption of the Merger Agreement and the approval of the merger and related transactions.

 

Q: What is required to consummate the merger?

 

A: To consummate the merger, among other things, Chanticleer stockholders must approve the Stock Issuance Proposal, the Reverse Stock Split Proposal and the Stock Increase Proposal, and Sonnet shareholders must adopt the Merger Agreement and approve the merger and the transactions contemplated thereby. Chanticleer must also effect the Stock Increase and the Reverse Split prior to and as a condition to the consummation of the merger.

 

The approval of the Stock Issuance Proposal by the Chanticleer stockholders requires the affirmative vote of the holders of a majority of the shares of Chanticleer Common Stock present and entitled to vote (in person or represented by proxy) at the Chanticleer special meeting, presuming a quorum is present at the meeting, and the approval of the Reverse Stock Split Proposal and the Stock Increase Proposal requires the affirmative vote of the holders of a majority of the shares of Chanticleer Common Stock outstanding on the record date of the Chanticleer special meeting. The adoption of the Merger Agreement and the approval of the merger and related transactions by the shareholders of Sonnet requires the affirmative vote of a majority of the votes cast by the holders of shares of Sonnet Common Stock; provided, that a majority of the outstanding shares of Sonnet Common Stock entitled to vote at the Sonnet special meeting is present, in person or by proxy.

 

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In addition to the requirement of obtaining such stockholder approvals and appropriate regulatory approvals, completion of the Merger is subject to the satisfaction of a number of other conditions, including authorization for listing of the shares of Chanticleer Common Stock issued in the merger on The Nasdaq Stock Market LLC, or Nasdaq, and the continued listing of the Chanticleer Common Stock on the Nasdaq Capital Market post-merger, the payment by Sonnet to Chanticleer of $6,000,000, a portion of which is expected to be used by Chanticleer to satisfy certain outstanding indebtedness and other liabilities of Chanticleer prior to or at the Effective Time (which is subject to Sonnet’s success in raising capital prior to the Effective Time), Chanticleer having no indebtedness or other liabilities at the Effective Time (which is subject to Chanticleer’s success in raising capital and settling its debt prior to the Effective Time) and the consummation by Chanticleer and the Spin-Off Entity of the Disposition (which requires the consent of the holders of Chanticleer’s 8% non-convertible secured debentures).

 

For a more complete description of the closing conditions under the Merger Agreement, please see the section titled “The Merger Agreement—Conditions to the Closing of the Merger.”

 

Q: What will Sonnet securityholders receive in the merger?

 

A: Pursuant to the Merger Agreement, each share of Sonnet Common Stock (other than Cancelled Shares (as defined in the Merger Agreement) and Dissenting Shares (as defined in the Merger Agreement)), issued and outstanding immediately prior to the Effective Time shall be automatically converted into the right to receive an amount of shares of Chanticleer Common Stock equal to the Common Stock Exchange Ratio (as defined in the Merger Agreement). As a result, immediately following the Effective Time, the former Sonnet shareholders will hold approximately 94% of the outstanding shares of Chanticleer Common Stock, the stockholders of Chanticleer will retain ownership of approximately 6% of the outstanding shares of Chanticleer Common Stock and the Spin-Off Entity will hold the Spin-Off Entity Warrant, exercisable for 2% of the outstanding shares of Chanticleer Common Stock. All outstanding Sonnet stock options and warrants, if any, whether vested or unvested, that have not been exercised prior to the Effective Time will be converted into a stock option or warrant, as applicable, to purchase shares of Chanticleer Common Stock, proportionately adjusted based on the Common Stock Exchange Ratio. The exact number of shares of Chanticleer Common Stock that will be issued to Sonnet shareholders will be fixed immediately prior to the Effective Time to reflect the capitalization of Chanticleer as of immediately prior to such time as well as changes in the relative valuations of Chanticleer and Sonnet to reflect any capital raises completed by either party and the cash on the respective balance sheets of Chanticleer and Sonnet immediately prior to the Effective Time, including as a result of any Pre-Closing Private Placement Transactions (as defined in this proxy statement/prospectus/information statement).

 

Accordingly, by way of example only, if the closing of the merger occurred on October 31, 2019, Chanticleer would have issued an aggregate of approximately 210,744,237 shares of Chanticleer Common Stock to the holders of Sonnet Common Stock at the time of such closing pursuant to the Merger Agreement (or 3.5475 shares of Chanticleer Common Stock per share of Sonnet Common Stock), such number reflecting the relative valuations of Chanticleer and Sonnet in accordance with the Merger Agreement and the capitalization of Chanticleer as of October 31, 2019, assuming, solely for purposes of this calculation, no cash on the balance sheets of either Chanticleer or Sonnet immediately prior to the Effective Time. This equates to a Common Stock Exchange Ratio of 3.5475 shares of Chanticleer Common Stock per one share of Sonnet Common Stock.

 

For a more complete description of what Sonnet securityholders will receive in the merger, please see the sections titled “Market Price and Dividend Information” and “The Merger Agreement—Merger Consideration.”

 

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Q: What will Chanticleer securityholders receive in the merger?

 

A: Chanticleer securityholders will not receive any new securities in the merger and will instead retain ownership of their shares of Chanticleer Common Stock and other securities exercisable or convertible to Chanticleer Common Stock, but their percentage ownership will decrease due to the number of shares being issued in the merger.

 

Q: Who will be the directors of the combined company following the merger?

 

A: Upon the closing of the merger, the combined company’s board of directors is expected to be composed of six directors, all of which will be current directors of Sonnet or designees of Sonnet.

 

The table below provides the names and principal affiliation of the individuals currently identified to serve as directors of the combined company following the consummation of the merger.

 

Name

  Current Principal Affiliation
Pankaj Mohan, Ph.D. (Chairman)   President and Chief Executive Officer, Sonnet
Nailesh Bhatt   Managing Director of ADVENT Engineering Services, Inc.
Albert Dyrness   Chief Executive Officer, VGYAAN Pharmaceuticals LLC
Donald J. Griffith   Partner, Stolz & Griffith, LLC
Raghu Rao   Investor and Strategic Advisor, Cellix BioSciences Inc.

 

Q: Who will be the executive officers of combined company immediately following the merger?

 

A: Upon the closing of the merger, the executive management team of the combined company is expected to be composed of the following persons:

 

Name

  Combined Company Position(s)   Current Position(s)
Pankaj Mohan, Ph.D.   President, Chief Executive Officer and Chairman   Founder, CEO and Chairman of Sonnet
Jay Cross   Chief Financial Officer   Chief Financial Officer of Sonnet
John K. Cini, Ph.D.   Chief Scientific Officer   Co-Founder and Chief Scientific Officer of Sonnet
Terence Rugg, M.D.   Chief Medical Officer   Chief Medical Officer of Sonnet
Susan Dexter   Chief Technical Officer   Chief Technical Officer of Sonnet

 

Q: What are the material U.S. federal income tax consequences of the merger to holders of Sonnet Common Stock?

 

A: The merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986 (the “Code”). In connection with the filing of the registration statement of which this proxy statement/prospectus/information statement is a part, K&L Gates LLP (“K&L Gates”), Chanticleer’s counsel, has delivered to Chanticleer, and Lowenstein Sandler LLP (“Lowenstein Sandler”), Sonnet’s counsel, has delivered to Sonnet, their respective opinions that, for United States federal income tax purposes, subject to the limitations, assumptions and qualifications described in the opinions and in the section entitled “Material United States Federal Income Tax Consequences of the Disposition, the Reverse Stock Split and the Merger,” the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code. The opinions of K&L Gates and Lowenstein Sandler will be based on certain representations, assumptions and covenants regarding the merger, including representations and covenants contained in officer’s certificates furnished to K&L Gates and Lowenstein Sandler by Chanticleer, Sonnet and Merger Sub, which are customary for transactions of this type. If any of the representations, assumptions or covenants upon which the opinions rely is incorrect, incomplete or inaccurate or is violated, the accuracy of the opinions may be affected and the tax consequences of the merger could differ from those described in this proxy statement/prospectus/information statement.

 

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Accordingly, if you are a U.S. holder (as defined in the section entitled “Material United States Federal Income Tax Consequences of the Disposition, the Reverse Stock Split and the Merger”) of Sonnet Common Stock, you will not recognize any gain or loss for U.S. federal income tax purposes upon your exchange of shares of Sonnet Common Stock for shares of Chanticleer Common Stock in the merger, except with respect to cash received in lieu of fractional shares of Chanticleer Common Stock. Notwithstanding the foregoing, your tax treatment will depend on your specific situation and many variables not within Chanticleer’s or Sonnet’s control.

 

For further information, see the section entitled “Material U.S. Federal Income Tax Consequences of the Disposition, the Reverse Stock Split and the Merger.”

 

Q: What are the material U.S. federal income tax consequences of the Disposition and the Reverse Stock Split to holders of Chanticleer Common Stock?

 

A: The Disposition is expected to be treated as a taxable dividend to holders of Chanticleer Common Stock in an amount equal to the fair market value of the Spin-Off Entity common stock received, to the extent of such holder’s ratable share of Chanticleer’s current or accumulated earnings and profits. To the extent the Disposition exceeds such earnings and profits, the Disposition would constitute a return of capital and would first reduce the holder’s basis in its Chanticleer Common Stock, but not below zero, and then will be treated as a gain from the sale of the Chanticleer stock. Generally a U.S. Holder’s tax basis in the shares of the Spin-Off Entity common stock received in the Disposition would equal their fair market value as of the date of the Disposition, and such holder’s holding period with respect to such shares would begin on the day after the Disposition.

 

The Reverse Stock Split is expected to constitute a “recapitalization” for U.S. federal income tax purposes. As a result, a Chanticleer U.S. holder generally should not recognize gain or loss upon the Reverse Stock Split. A Chanticleer U.S. holder’s aggregate tax basis in the shares of Chanticleer Common Stock received pursuant to the Reverse Stock Split should equal the aggregate tax basis of the shares of Chanticleer Common Stock surrendered, and such Chanticleer U.S. holder’s holding period in the shares of Chanticleer Common Stock received should include the holding period in the shares of Chanticleer Common Stock surrendered.

 

For further information, see the section entitled “Material U.S. Federal Income Tax Consequences of the Disposition, the Reverse Stock Split and the Merger.”

 

Q: Do persons involved in the merger have interests that may conflict with mine as a Chanticleer stockholder?

 

A: Yes. In considering the recommendation of the Chanticleer board of directors with respect to issuing shares of Chanticleer Common Stock pursuant to the Merger Agreement and the other matters to be acted upon by Chanticleer stockholders at the Chanticleer special meeting, Chanticleer stockholders should be aware that certain members of the Chanticleer board of directors and executive officers of Chanticleer have interests in the merger that may be different from, or in addition to, interests they have as Chanticleer stockholders.

 

As of October 31, 2019, Chanticleer’s directors and executive officers beneficially owned approximately 2.4% of the outstanding shares of Chanticleer Common Stock.

 

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All of Chanticleer’s current executive officers, with the exception of Richard Adams, will continue as executive officers of the Spin-Off Entity post-merger.

 

Michael D. Pruitt, Chief Executive Officer of Chanticleer, holds 340 shares of Chanticleer’s 9% Redeemable Series 1 Preferred Stock (“Series 1 Preferred”), which are expected to be redeemed at or prior to the closing of the merger. Holders of the Series 1 Preferred are entitled to receive cumulative dividends out of legally available funds at the rate of 9% of the purchase price per year. The redemption price for any shares of Series 1 Preferred will be an amount equal to the $13.50 purchase price per share plus any accrued but unpaid dividends to the date fixed for redemption.

 

For more information, please see the sections titled “The Merger—Interests of the Chanticleer Directors and Executive Officers in the Merger” and “Agreements Related to the Merger-Disposition Agreement.

 

Q: Do persons involved in the merger have interests that may conflict with mine as a Sonnet stockholder?

 

A: Yes. In considering the recommendation of the Sonnet board of directors with respect to voting to approve the merger and related transactions at the Sonnet shareholder meeting, Sonnet shareholders should be aware that certain members of the Sonnet board of directors and executive officers of Sonnet have interests in the merger that may be different from, or in addition to, interests they have as Sonnet shareholders.

 

All of Sonnet’s current executive officers and directors hold shares of Sonnet Common Stock, which will, at the Effective Time, be automatically converted into the right to receive an amount of registered shares of Chanticleer Common Stock equal to the Common Stock Exchange Ratio. As of October 31, 2019, Sonnet’s directors and executive officers beneficially owned approximately 55.3% of the outstanding shares of Sonnet Common Stock. In addition, all of Sonnet’s current executive officers and directors are expected to become executive officers and directors of Chanticleer upon the closing of the merger and are entitled to certain indemnification and liability insurance coverage pursuant to the terms of the Indemnification Agreement and Tail Policy (each as described below).

 

For more information, please see the sections titled “The Merger—Interests of the Sonnet Directors and Executive Officers in the Merger.”

 

Q: As a Chanticleer stockholder, how does the Chanticleer board of directors recommend that I vote?

 

A: After careful consideration, the Chanticleer board of directors unanimously recommends that Chanticleer stockholders vote:

 

FOR” the Stock Issuance Proposal;

 

FOR” the Reverse Stock Split Proposal;

 

FOR” the Stock Increase Proposal;

 

FOR” the Plan Proposal; and

 

FOR” the Adjournment Proposal.

 

If on the date of the Chanticleer special meeting, or a date preceding the date on which the Chanticleer special meeting is scheduled, Chanticleer reasonably believes that (i) it will not receive proxies sufficient to obtain the required vote to approve the Chanticleer Proposals, whether or not a quorum would be present or (ii) it will not have sufficient shares of Chanticleer Common Stock represented (whether in person or by proxy) to constitute a quorum necessary to conduct the business of the Chanticleer special meeting, Chanticleer may postpone or adjourn, or make one or more successive postponements or adjournments of, the Chanticleer special meeting as long as the date of the Chanticleer special meeting is not postponed or adjourned more than an aggregate of 30 calendar days in connection with any postponements or adjournments.

 

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Because Chanticleer currently does not have sufficient authorized capital stock to issue the Merger Consideration to the Sonnet stockholders, the merger will not be consummated unless both the Stock Issuance Proposal and the Stock Increase Proposal are approved by the Chanticleer stockholders at the Chanticleer special Meeting. In addition, the merger requires the approval by the Chanticleer stockholders of the Reverse Stock Split Proposal because Chanticleer is currently not in compliance with the $1.00 per share minimum bid price requirement for continued listing on Nasdaq under Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”), and it is a condition to closing of the merger that Nasdaq authorize for listing the shares of Chanticleer Common Stock issued in the merger and the continued listing of the Chanticleer Common Stock on the Nasdaq Capital Market post-merger. However, assuming all other closing conditions have been either satisfied or waived, the merger may be consummated even if the Plan Proposal is not approved by Chanticleer’s stockholders.

 

Q: As a Sonnet stockholder, how does the Sonnet board of directors recommend that I vote?

 

A: After careful consideration, the Sonnet board of directors recommends that Sonnet stockholders execute vote to adopt the Merger Agreement and approve the merger and the transactions contemplated thereby at the Sonnet shareholder meeting.

 

Q: What risks should I consider in deciding whether to vote in favor of the Chanticleer Proposals or to vote to approve the Merger Agreement and the transactions contemplated thereby at the Sonnet shareholder meeting, as applicable?

 

A: You should carefully review this proxy statement/prospectus/information statement, including the section titled “Risk Factors,” which sets forth certain risks and uncertainties related to the merger, risks and uncertainties to which the combined company’s business will be subject, and risks and uncertainties to which each of Chanticleer and Sonnet, as an independent company, is subject.

 

Q: When do you expect the merger to be consummated?

 

A: The merger is anticipated to close as soon as possible after the Chanticleer special meeting is held on                     , 20  , but Chanticleer cannot predict the exact timing. For more information, please see the section titled “The Merger Agreement—Conditions to the Closing of the Merger.”

 

Q: What do I need to do now?

 

A: Chanticleer and Sonnet urge you to read this proxy statement/prospectus/information statement carefully, including its annexes, and to consider how the merger affects you.

 

If you are a Chanticleer stockholder, you may provide your proxy instructions in one of two different ways. First, you can mail your signed proxy card in the enclosed return envelope. Second, you may also provide your proxy instructions via the Internet by following the instructions on your proxy card or voting instruction form. Please provide your proxy instructions only once, unless you are revoking a previously delivered proxy instruction, and as soon as possible so that your shares can be voted at the special meeting of Chanticleer stockholders.

 

If you are a Sonnet shareholder, you will be asked to a vote at a special meeting of shareholders of Sonnet, the information for which will be send to you under separate cover.

 

Q: What happens if I do not return a proxy card or otherwise provide proxy instructions, as applicable?

 

A: If you are a stockholder of record and you return a signed proxy card without marking any selections, your shares will be voted “FOR” each of the Stock Issuance Proposal, the Reverse Stock Split Proposal, the Stock Increase Proposal, the Plan Proposal and the Adjournment Proposal.

 

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If you are a beneficial owner of shares of Chanticleer Common Stock and do not instruct your broker, bank, or other agent how to vote your shares, the question of whether your broker or nominee will still be able to vote your shares depends on whether the New York Stock Exchange, or the NYSE, deems the particular proposal to be a “routine” matter and how your broker or nominee exercises any discretion they may have in the voting of the shares that you beneficially own. Brokers and nominees can use their discretion to vote “uninstructed” shares with respect to matters that are considered to be “routine,” but not with respect to “non-routine” matters. Under the rules and interpretations of the NYSE, “non-routine” matters are matters that may substantially affect the rights or privileges of stockholder, such as mergers, stockholder proposals, elections of directors (even if not contested), executive compensation (including any advisory stockholder votes on executive compensation and on the frequency of stockholder votes on executive compensation), and certain corporate governance proposals, even if management-supported.

 

For any Chanticleer Proposal that is considered a “routine” matter, your broker or nominee may vote your shares in its discretion either for or against the proposal even in the absence of your instruction. For any Chanticleer Proposal that is considered a “non-routine” matter for which you do not give your broker instructions, the Chanticleer shares will be treated as broker non-votes. Broker non-votes occur when a beneficial owner of shares held in street name does not give instructions to the broker or nominee holding the shares as to how to vote on matters deemed “non-routine.” Broker non-votes will not be considered to be shares “entitled to vote” at the meeting and will not be counted as having been voted on the applicable proposal.

 

Chanticleer believes that only the Reverse Stock Split Proposal and Stock Increase Proposal will be considered “routine” matters by the NYSE and all of the other Chanticleer Proposals will be considered “non-routine” matters. This belief is based on preliminary guidance from the NYSE and may be incorrect or change before the special meeting. Therefore, if you are a beneficial owner and want to ensure that shares you beneficially own are voted in favor or against any or all of the Chanticleer Proposals, the only way you can do so is to give your broker or nominee specific instructions as to how the shares are to be voted.

 

Q: May I vote in person at the special meeting of stockholders of Chanticleer?

 

A: If your shares of Chanticleer Common Stock are registered directly in your name with the Chanticleer transfer agent, you are considered to be the stockholder of record with respect to those shares, and the proxy materials and proxy card are being sent directly to you by Chanticleer. If you are a Chanticleer stockholder of record, you may attend the special meeting of Chanticleer stockholders and vote your shares in person. Even if you plan to attend the Chanticleer special meeting in person, Chanticleer requests that you sign and return the enclosed proxy to ensure that your shares will be represented at the Chanticleer special meeting if you are unable to attend. If your shares of Chanticleer Common Stock are held in a brokerage account or by another nominee, you are considered the beneficial owner of shares held in “street name,” and the proxy materials are being forwarded to you by your broker or other nominee together with a voting instruction card. As the beneficial owner, you are also invited to attend the special meeting of Chanticleer stockholders. Because a beneficial owner is not the stockholder of record, you may not vote these shares in person at the Chanticleer special meeting unless you obtain a proxy from the broker, trustee or nominee that holds your shares, giving you the right to vote the shares at the meeting.

 

Q: When and where is the special meeting of Chanticleer stockholders being held?

 

A: The special meeting of Chanticleer stockholders will be held at             , at                  local time, on                     , 20  . Subject to space availability, all Chanticleer stockholders as of the record date, or their duly appointed proxies, may attend the meeting. Since seating is limited, admission to the meeting will be on a first-come, first-served basis.

 

Q: If my Chanticleer shares are held in “street name” by my broker, will my broker vote my shares for me?

 

A: Unless your broker has discretionary authority to vote on certain “routine” matters, your broker will not be able to vote your shares of Chanticleer Common Stock on matters requiring discretionary authority without instructions from you.

 

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Chanticleer believes that brokers will not have discretionary authority to vote for the Stock Issuance Proposal, the Plan Proposal or the Adjournment Proposal, as Chanticleer believes such matters to be “non-routine” under the applicable rules of Nasdaq. To make sure that your vote is counted, you should instruct your broker to vote your shares, following the procedures provided by your broker.

 

Chanticleer believes that brokers will have discretionary authority to vote for the Reverse Stock Split Proposal and Stock Increase Proposal as Chanticleer believes such matters to be “routine” under the applicable rules of the NYSE.

 

Q: May I change my vote after I have submitted a proxy or provided proxy instructions?

 

A: Chanticleer stockholders of record may change their vote at any time before their proxy is voted at the Chanticleer special meeting in one of three ways. First, a Chanticleer stockholder of record can send a written notice to the chief financial officer of Chanticleer stating that it would like to revoke its proxy. Second, a Chanticleer stockholder of record can submit new proxy instructions either on a new proxy card or via the Internet. Third, a Chanticleer stockholder of record can attend the Chanticleer special meeting and vote in person. Attendance alone will not revoke a proxy. If a Chanticleer stockholder of record or a stockholder who owns Chanticleer shares in “street name” has instructed a broker to vote its shares of Chanticleer Common Stock, the stockholder must follow directions received from its broker to change those instructions.

 

Q: Who is paying for this proxy solicitation?

 

A: Chanticleer and Sonnet will share equally the costs of printing and filing this proxy statement/prospectus/information statement and proxy card. Arrangements will also be made with brokerage firms and other custodians, nominees and fiduciaries who are record holders of Chanticleer Common Stock for the forwarding of solicitation materials to the beneficial owners of Chanticleer Common Stock. Chanticleer will reimburse these brokers, custodians, nominees and fiduciaries for the reasonable out-of-pocket expenses they incur in connection with the forwarding of solicitation materials.

 

Q: Who can help answer my questions?

 

A: If you are a Chanticleer stockholder and would like additional copies, without charge, of this proxy statement/prospectus/information statement or if you have questions about the merger, including the procedures for voting your shares, you should contact:

 

Chanticleer Holdings, Inc.

7621 Little Avenue, Suite 414

Charlotte, North Carolina 28226

Attention: Patrick Harkleroad, Chief Financial Officer

 

If you are a Sonnet shareholder and would like additional copies, without charge, of this proxy statement/prospectus/information statement or if you have questions about the merger, including the procedures for voting your shares, you should contact:

 

Sonnet BioTherapeutics, Inc.

100 Overlook Center, Second Floor

Princeton, New Jersey 08540

Attention: Jay Cross, Chief Financial Officer

 

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PROSPECTUS SUMMARY

 

This summary highlights selected information from this proxy statement/prospectus/information statement and may not contain all of the information that is important to you. To better understand the merger, the proposals being considered at the Chanticleer special meeting and the Sonnet special meeting, you should read this entire proxy statement/prospectus/information statement carefully, including the Merger Agreement and the other annexes to which you are referred to herein. For more information, please see the section titled “Where You Can Find More Information.”

 

The Parties

 

Chanticleer Holdings, Inc.

 

7621 Little Avenue, Suite 414

Charlotte, North Carolina 28226

(704) 366-5122

 

Chanticleer Holdings, Inc., or Chanticleer, is in the business of owning, operating and franchising fast casual and full-service dining concepts in the United States and internationally. Chanticleer currently owns, operates and franchises a system-wide total of 45 fast casual restaurants specializing the “Better Burger” category of which 34 are company-owned, and 11 are operated by franchisees under franchise agreements. American Burger Company (“ABC”) is a fast-casual dining chain consisting of 6 locations in New York and the Carolinas, known for its diverse menu featuring, customized burgers, milk shakes, sandwiches, fresh salads and beer and wine. The Burger Joint (“BGR”), consists of 9 company-owned locations in the United States and 11 franchisee-operated locations in the United States and the Middle East. Little Big Burger (“LBB”) consists of 19 company-owned locations in Oregon, Washington and North Carolina. Further, Chanticleer owns and operates 2 Hooters full-service restaurants in the United States and the United Kingdom. Hooters restaurants are casual beach-themed establishments featuring music, sports on large flat screens, and a menu that includes seafood, sandwiches, burgers, salads, and of course, Hooters original chicken wings and the “nearly world famous” Hooters Girls. We also will be managing our recently sold Just Fresh chain of 5 stores in Charlotte, North Carolina through the end of 2019.

 

Chanticleer is a Delaware corporation headquartered in Charlotte, North Carolina. The Chanticleer Common Stock is traded on the Nasdaq Capital Market under the symbol “BURG.”

 

Sonnet BioTherapeutics, Inc.

 

100 Overlook Center, Second Floor

Princeton, New Jersey 08540-7814

(609) 375-2227

 

Sonnet BioTherapeutics, Inc., or Sonnet, is a clinical stage, oncology-focused biotechnology company with a proprietary platform for innovating biologic medicines of single- or bi-specific action. Known as FHAB™ (Fully Human Albumin Binding), the technology utilizes a fully human single chain antibody fragment (scFv) that binds to and “hitch-hikes” on human serum albumin (HSA) for transport to target tissues. Sonnet’s pipeline of therapeutic compounds for oncology indications of high unmet medical need includes lead candidate, SON-080, a fully human version of low dose Interleukin-6 (IL-6) that has successfully completed Phase I clinical trials and will advance to a pilot efficacy study in patients with chemotherapy-induced peripheral neuropathy (CIPN) during 2020.

 

Biosub Inc.

 

7621 Little Avenue, Suite 414

Charlotte, North Carolina 28226

(704) 366-5122

 

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Biosub Inc., or Merger Sub, is a wholly-owned subsidiary of Chanticleer and was formed solely for the purposes of carrying out the merger.

 

The Merger

 

If the merger is consummated, Merger Sub will merge with and into Sonnet, with Sonnet surviving the merger as a wholly-owned subsidiary of the combined company.

 

Pursuant to the Merger Agreement, each share of Sonnet Common Stock (other than Cancelled Shares (as defined in the Merger Agreement) and Dissenting Shares (as defined in the Merger Agreement)), issued and outstanding immediately prior to the Effective Time shall be automatically converted into the right to receive an amount of shares of Chanticleer Common Stock equal to the Common Stock Exchange Ratio (as defined in the Merger Agreement). As a result, immediately following the Effective Time, the former Sonnet shareholders will hold approximately 94% of the outstanding shares of Chanticleer Common Stock, the stockholders of Chanticleer will retain ownership of approximately 6% of the outstanding shares of Chanticleer Common Stock and the Spin-Off Entity will hold the Spin-Off Entity Warrant (as defined below), exercisable for 2% of the outstanding shares of Chanticleer Common Stock. All outstanding Sonnet stock options and warrants, if any, whether vested or unvested, that have not been exercised prior to the Effective Time will be converted into a stock option or warrant, as applicable, to purchase shares of Chanticleer Common Stock, proportionately adjusted based on the Common Stock Exchange Ratio. The exact number of shares of Chanticleer Common Stock that will be issued to Sonnet shareholders will be fixed immediately prior to the Effective Time to reflect the capitalization of Chanticleer as of immediately prior to such time as well as changes in the relative valuations of Chanticleer and Sonnet to reflect any capital raises completed by either party and the cash on the respective balance sheets of Chanticleer and Sonnet immediately prior to the Effective Time, including as a result of any Pre-Closing Private Placement Transactions (as defined in this proxy statement/prospectus/information statement). For a more complete description of the Common Stock Exchange Ratio, see the section titled “The Merger Agreement—Common Stock Exchange Ratio” in this proxy statement/prospectus/information statement.

 

In addition, at the closing of the Merger, Chanticleer will issue to the Spin-Off Entity a warrant (the “Spin-Off Entity Warrant”) to purchase that number of shares of Chanticleer Common Stock equal to two percent (2%) of the number of shares of issued and outstanding Chanticleer Common Stock immediately after the Effective Time. The warrant will be a five year warrant, will have an exercise price of $0.01 per share and will not be exercisable for 180 days following the Effective Time.

 

On October 31, 2019, Chanticleer had outstanding 10,073,514 shares of Chanticleer Common Stock, 62,876 shares of 9% Redeemable Series 1 Preferred Stock (the “Preferred Stock”), warrants to purchase 3,576,270 shares of Chanticleer Common Stock with a weighted average exercise price of $7.76 per share, options to purchase 32,800 shares of Chanticleer Common Stock with a weighted average exercise price of $4.00 per share and 45,000 restricted stock units. On October 31, 2019, Sonnet had outstanding 52,295,250 shares of Sonnet Common Stock, 7,111,947 shares of Sonnet Common Stock reserved for issuance to Relief Therapeutics Holding SA (“Relief Holding”) for the acquisition of Relief Therapeutics SA (“Relief”) pursuant to the Share Exchange Agreement dated August 9, 2019 between Sonnet and Relief Holding (the “Share Exchange Agreement”) (which shares will be issued to Relief Holding upon the closing of the Relief acquisition, which transaction will occur immediately prior to the closing of the merger, and which shares are assumed outstanding as of October 31, 2019 for purposes of the estimated Merger Consideration and Exchange Ratio in this proxy statement/prospectus/information statement) and warrants to purchase 200,000 shares of Sonnet Common Stock with an exercise price of $3.125 per share. Accordingly, by way of example only, if the closing of the merger occurred on October 31, 2019, assuming, solely for purposes of this calculation, no cash on the balance sheets of either Chanticleer or Sonnet immediately prior to the Effective Time, Chanticleer would have issued an aggregate of approximately 210,744,237 shares of Chanticleer Common Stock to the holders of Sonnet Common Stock at the time of such closing pursuant to the Merger Agreement (or 3.5475 shares of Chanticleer Common Stock per share of Sonnet Common Stock), such number reflecting the relative valuations of Chanticleer and Sonnet in accordance with the Merger Agreement and the capitalization of Chanticleer as of October 31, 2019. This equates to a Common Stock Exchange Ratio of 3.5475 shares of Chanticleer Common Stock per one share of Sonnet Common Stock. As a result, following the closing of the merger, Chanticleer would have had outstanding a total of 220,817,858 shares of Chanticleer Common Stock, 62,876 shares of Preferred Stock, warrants to purchase 8,702,117 shares of Chanticleer Common Stock (including the Spin-Off Entity Warrant), options to purchase 32,800 shares of Chanticleer Common Stock and 45,000 restricted stock units.

 

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The closing of the merger will occur no later than the second business day after the last of the conditions to the merger has been satisfied or waived, or at another time as Chanticleer and Sonnet agree. Chanticleer and Sonnet anticipate that the closing of the merger will occur promptly after the Chanticleer special meeting. However, because the merger is subject to a number of conditions, neither Chanticleer nor Sonnet can predict exactly when the closing will occur or if it will occur at all. Following the merger, Chanticleer will be renamed “Sonnet BioTherapeutics Holdings, Inc.”

 

Reasons for the Merger

 

In the course of its evaluation of the Merger Agreement and merger with Sonnet, the Chanticleer Board held numerous meetings, consulted with Chanticleer’s executive management, Chanticleer’s outside legal counsel and Chanticleer’s financial advisors, and reviewed and assessed a significant amount of information, and considered a number of factors, including the following:

 

  the Chanticleer Board’s belief that Chanticleer’s business, operational and financial prospects, including its cash position and inability to satisfy $3 million in debt obligations coming due December 31, 2019, and the substantially diminished price of its common stock make it highly unlikely Chanticleer will find financing alternatives;
  the Chanticleer Board’s conclusion that the merger provides existing Chanticleer stockholders an opportunity to participate in the potential growth of post-merger Sonnet following the merger while still participating in the continuing business of Chanticleer through the Spin-Off, which is also expected to be a publicly traded company;
  the Chanticleer Board’s conclusion that the closing condition of the $6 million payment from Sonnet to Chanticleer will facilitate Chanticleer’s ability to negotiate the settlement of its 8% debentures in the principal amount of $6 million;
  the $15,913,043 valuation of Chanticleer in the context of the merger vis a vis the perceived value of Chanticleer reflected in the diminished price of its common stock;
  the Chanticleer’s Board’s belief that the Spin-Off entity will be in a greatly enhanced financial position to continue the restaurant business of Chanticleer; and
  the Chanticleer Board’s consideration that post-merger Sonnet will be led by an experienced senior management team from Sonnet.

 

For more information on the Sonnet board of directors’ reasons for the transaction, see the section titled “The Merger—Sonnet Reasons for the Merger.”

 

Overview of the Merger Agreement and Agreements Related to the Merger Agreement

 

Merger Consideration

 

At the closing of the merger:

 

  each outstanding share of common stock of Sonnet will be converted into the right to receive approximately 3.5475 shares of Chanticleer Common Stock, subject to adjustment for any reverse stock split and subject to the adjustments described elsewhere in this proxy statement/prospectus/information statement; and
     
  all outstanding Sonnet stock options and warrants, if any, whether vested or unvested, that have not been exercised prior to the Effective Time will be converted into a stock option or warrant, as applicable, to purchase shares of Chanticleer Common Stock, proportionately adjusted based on the Common Stock Exchange Ratio.

 

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Immediately after the merger, based on the Common Stock Exchange Ratio, Sonnet securityholders will own approximately 94% of the post-closing outstanding shares of Chanticleer Common Stock (the “Post-Closing Shares”), Chanticleer securityholders will own approximately 6% of the Post-Closing Shares and the Spin-Off Entity will hold the Spin-Off Entity Warrant, exercisable for 2% of the Post-Closing Shares.

 

The Common Stock Exchange Ratio is an estimate only and the final Common Stock Exchange Ratio will be determined pursuant to a formula described in more detail in the Merger Agreement and in this proxy statement/prospectus/information statement. Adjustments to the Common Stock Exchange Ratio are described in more detail in the Merger Agreement and in this proxy statement/prospectus/information statement.

 

The Merger Agreement does not include a price-based termination right, and there will be no adjustment to the total number of shares of Chanticleer Common Stock that Sonnet securityholders will be entitled to receive for changes in the market price of Chanticleer Common Stock. The Common Stock Exchange Ratio may be adjusted to reflect relative cash balances for Chanticleer and Sonnet and the capitalization of Chanticleer at closing, as provided for in the Merger Agreement.

 

Accordingly, the market value of the shares of Chanticleer Common Stock issued pursuant to the Merger Agreement will depend on the market value of the shares of Chanticleer Common Stock at the time the Merger closes and could vary significantly from the market value on the date of this proxy statement/prospectus/information statement. On                     , 20  , the last trading day before the date of this proxy statement/prospectus/information statement, the closing sale price of Chanticleer common stock was $        per share.

 

Treatment of Chanticleer Stock Options and Warrants

 

All options and warrants to purchase shares of Chanticleer Common Stock will remain outstanding immediately after the Effective Time in accordance with their terms. The number of shares of Chanticleer Common Stock underlying such options and warrants and the exercise prices for such options and warrants will be appropriately adjusted to reflect Chanticleer’s proposed reverse stock split, if consummated. The terms governing options and warrants to purchase shares of Chanticleer Common Stock will remain in full force and effect following the closing of the merger.

 

Conditions to the Closing of the Merger

 

To consummate the merger, among other things, Chanticleer stockholders must approve the Stock Issuance Proposal, the Reverse Stock Split Proposal and the Stock Increase Proposal, and Sonnet shareholders must adopt the Merger Agreement and approve the merger and the transactions contemplated thereby. Chanticleer must also effect the Stock Increase and the Reverse Split prior to and as a condition to the consummation of the merger.

 

The approval of the Stock Issuance Proposal by the Chanticleer stockholders requires the affirmative vote of the holders of a majority of the shares of Chanticleer Common Stock present and entitled to vote (in person or represented by proxy) at the Chanticleer special meeting, presuming a quorum is present at the meeting, and the approval of the Reverse Stock Split Proposal and the Stock Increase Proposal requires the affirmative vote of the holders of a majority of the shares of Chanticleer Common Stock outstanding on the record date of the Chanticleer special meeting. The adoption of the Merger Agreement and the approval of the merger and related transactions by the shareholders of Sonnet requires the affirmative vote of a majority of the votes cast by the holders of shares of Sonnet Common Stock; provided, that a majority of the outstanding shares of Sonnet Common Stock entitled to vote at the Sonnet special meeting is present, in person or by proxy.

 

In addition to the requirement of obtaining such stockholder approvals and appropriate regulatory approvals, completion of the Merger is subject to the satisfaction of a number of other conditions, including authorization for listing of the shares of Chanticleer Common Stock issued in the merger on the Nasdaq stock market and the continued listing of the Chanticleer Common Stock on the Nasdaq Capital Market post-merger, the payment by Sonnet to Chanticleer of $6,000,000, a portion of which is expected to be used by Chanticleer to satisfy certain outstanding indebtedness and other liabilities of Chanticleer prior to or at the Effective Time (which is subject to Sonnet’s success in raising capital prior to the Effective Time), Chanticleer having no indebtedness or other liabilities at the Effective Time (which is subject to Chanticleer’s success in raising capital and settling its debt prior to the Effective Time) and the consummation by Chanticleer and the Spin-Off Entity of the Disposition (which requires the consent of the holders of Chanticleer’s 8% non-convertible secured debentures).

 

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In addition to obtaining such stockholder approvals, each of the other closing conditions set forth in the Merger Agreement must be satisfied or waived.

 

Non-Solicitation

 

Each of Chanticleer and Sonnet agreed that, subject to certain exceptions, neither Chanticleer nor Sonnet, nor any of their respective subsidiaries, will, and none of them will authorize their respective directors, officers, employees, agents, attorneys, accountants, investment bankers, advisors or representatives to, directly or indirectly:

 

  solicit, seek or initiate or knowingly take any action to facilitate or encourage any offers, inquiries or the making of any proposal or offer that constitutes, or could reasonably be expected to lead to, any “acquisition proposal” (as defined below), or engage, participate in, or knowingly facilitate, any discussions or negotiations regarding, or furnish any nonpublic information to any person in connection with any inquiries, proposals or offers that constitute or could reasonably be expected to lead to, an acquisition proposal;
     
  enter into, continue or otherwise participate or engage in any discussions or negotiations regarding any acquisition proposal, or furnish to any person any non-public information or afford any person other than Chanticleer or Sonnet, as applicable, access to such party’s property, books or records, except pursuant to a request by a governmental entity, in connection with any offers, inquiries or the making of any proposal or offer that constitutes, or could reasonably be expected to lead to, any acquisition proposal;
     
  engage in discussions or negotiations with any person with respect to any acquisition proposal;
     
  take any action to make the provisions of any takeover statute inapplicable to any transactions contemplated by an acquisition proposal; or
     
  publicly propose to do any of the foregoing.

 

An “acquisition proposal” means (a) any inquiry, proposal or offer for a merger, consolidation, dissolution, sale of substantial assets, recapitalization, share exchange, tender offer or other business combination involving such party and its subsidiaries, (b) any proposal for the issuance by such party of 15% or more of its equity securities, or (c) any proposal or offer to acquire in any manner, directly or indirectly, 15% or more of the equity securities or consolidated total assets of such party and its subsidiaries, in each case other than the transactions contemplated by the Merger Agreement.

 

However, before obtaining the applicable approvals from their respective stockholders required to consummate the merger, Chanticleer and Sonnet may furnish nonpublic information regarding it and its respective subsidiaries to, and may enter into discussions or negotiations with, any third-party in response to a bona fide written acquisition proposal made or received after the date of the Merger Agreement, which Chanticleer’s or Sonnet’s board of directors (as the case may be) determines in good faith, constitutes or is reasonably likely to result in a “superior offer” (as defined below) in respect of such party, if:

 

  neither Chanticleer, or Sonnet, as applicable, nor any of its representatives has breached the non-solicitation provisions of the Merger Agreement described above;
     
  Chanticleer’s or Sonnet’s board of directors, as applicable, concludes in good faith that the failure to take such action is reasonably likely to be inconsistent with the fiduciary duties of such board of directors under applicable law;
     
  Chanticleer or Sonnet, as applicable, receives from the third-party an executed confidentiality agreement containing provisions at least as favorable to such relevant party as those contained in the confidentiality agreement between Chanticleer and Sonnet; and
     
  substantially contemporaneously with furnishing of any such nonpublic information to a third-party, Chanticleer or Sonnet, as applicable, furnishes the same information to the other party to the Merger Agreement to the extent not previously furnished.

 

 15 
 

 

A “superior offer” means an unsolicited bona fide written acquisition proposal made by a third party to acquire 50% or more of the equity securities or consolidated total assets of such party and its subsidiaries, pursuant to a tender offer or exchange offer, a merger, consolidation, business combination or recapitalization or a sale or exclusive license of its assets: (a) is on terms and conditions that the Chanticleer board of directors or the Sonnet board of directors, as applicable, determines in good faith, to be more favorable to the holders of such party’s capital stock from a financial point of view than the transactions contemplated by the Merger Agreement, taking into account all the terms and conditions of such proposal and the Merger Agreement, (b) is not subject to any financing condition, (c) is reasonably capable of being completed on the terms proposed without unreasonable delay, and (d) includes termination rights no less favorable than the terms set forth in the Merger Agreement, and in all respects from a third party capable of performing such terms.

 

Termination of the Merger Agreement

 

Either Chanticleer or Sonnet can terminate the Merger Agreement under certain circumstances, which would prevent the merger from being consummated.

 

Termination Fees

 

If the Merger Agreement is terminated under certain circumstances and certain other events occur as described in the Merger Agreement, either Chanticleer or Sonnet will be required to pay the other party a termination fee of $500,000. Moreover, if either Chanticleer or Sonnet fails to pay any termination fee when due, then it will be required to pay interest on and reasonable fees and expenses incurred in connection with the collection of such overdue amount in addition to the $500,000 termination fee.

 

Management and Headquarters Following the Merger

 

Effective as of the closing of the merger, the combined company’s executive officers are expected to be composed of the following members of the current Sonnet management teams:

 

Name

  Combined Company Position(s)   Current Position(s)
Pankaj Mohan, Ph.D.   President, Chief Executive Officer and Chairman   Founder, CEO and Chairman of Sonnet
Jay Cross   Chief Financial Officer   Chief Financial Officer of Sonnet
John K. Cini, Ph.D.   Chief Scientific Officer   Co-Founder and Chief Scientific Officer of Sonnet
Terence Rugg, M.D.   Chief Medical Officer   Chief Medical Officer of Sonnet
Susan Dexter   Chief Technical Officer   Chief Technical Officer of Sonnet

 

Following the merger, the combined company’s headquarters will be at 100 Overlook Center, Second Floor, Princeton, NJ 08540.

 

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Related Transactions and Agreements

 

Disposition Agreement

 

Chanticleer intends to enter into a disposition agreement (the “Disposition Agreement”) which will provide for the consolidation of its existing business of owning, operating and franchising fast casual dining concepts (the “Spin-Off Business”) into a single subsidiary of Chanticleer (the “Spin-Off Entity”). Prior to the merger, the Spin-Off Entity will acquire and assume (i) all of Chanticleer’s right, title and interest in and to all of the assets, properties, claims and rights used in, necessary for or held in connection with the Spin-Off Business, including the equity of all of Chanticleer’s subsidiaries; and (ii) all of Chanticleer’s obligations and liabilities (together, the “Contribution”). In exchange  for the Contribution, Chanticleer will receive 100% of the equity in Spin-Off Entity.  Following the Contribution, and immediately prior to the merger, all of the equity of the Spin-Off Entity will be distributed to the stockholders of Chanticleer as of the record date of such distribution.

 

Indemnification Agreement and Tail Policy

 

Pursuant to the Merger Agreement, Chanticleer and Sonnet agreed that at or prior to the Effective Time, each of Chanticleer, Sonnet and the Spin-Off Entity shall have entered into an indemnification agreement (the “Indemnification Agreement”), providing that from and after the Effective Time through the six (6th) anniversary of the date on which the Disposition is consummated, each of Chanticleer and Sonnet, and each of their respective, directors, officers, stockholders and managers who assumes such role upon or following the Effective Time (the “Disposition Indemnitees”) shall be fully indemnified and held harmless by the Spin-Off Entity against all actual or threatened claims, losses, liabilities, damages, judgments, fines and reasonable fees, costs and expenses, including attorneys’ fees and disbursements, incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, administrative, investigative or otherwise, related to the Spin-Off Business prior to the Disposition or in connection with the Disposition.

 

In addition, at or prior to the Effective Time, the Spin-Off Entity will acquire a tail insurance policy in a coverage amount of at least $3.0 million, prepaid in full by the Spin-Off Entity, at no cost to the Disposition Indemnitees, and effective for at least six years following the consummation of the Disposition, covering the Spin-Off Entity’s indemnification obligations to the Disposition Indemnitees (the “Tail Policy”).

 

Pre-Closing Private Placement Transactions

 

Chanticleer and Sonnet intend to enter into one or more private placement transactions of their respective equity securities prior to the closing of the merger, to raise capital (the “Pre-Closing Private Placement Transactions”).

 

Preferred Stock

 

Chanticleer intends to redeem all of the shares of Series 1 Preferred outstanding prior to the merger. Holders of the Series 1 Preferred are entitled to receive cumulative dividends out of legally available funds at the rate of 9% of the purchase price per year. The redemption price for any shares of Series 1 Preferred will be an amount equal to the $13.50 purchase price per share plus any accrued but unpaid dividends to the date fixed for redemption.

 

The Chanticleer Special Meeting

 

The special meeting of stockholders of Chanticleer will be held on                     , 20   at                 , local time, at                 , for the following purposes:

 

  to consider and vote upon a proposal to approve the issuance of shares of Chanticleer Common Stock pursuant to the Agreement and Plan of Merger, dated as of October 10, 2019, by and among Chanticleer, Merger Sub, and Sonnet, a copy of which is attached as Annex A to this proxy statement/prospectus/information statement (the “Stock Issuance Proposal”);
     
  to consider and vote upon an amendment to the certificate of incorporation of Chanticleer to effect a reverse stock split of Chanticleer Common Stock, at a ratio in the range from 2-for-1 to [  ]-for-1, with such specific ratio to be mutually agreed upon by Chanticleer and Sonnet (the “Reverse Split”), the form of which is attached as Annex B to this proxy statement/prospectus/information statement (the “Reverse Stock Split Proposal”);

 

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  to consider and vote upon an amendment to the certificate of incorporation of Chanticleer to increase the total number of authorized shares of common stock to [  ] (the “Stock Increase”), the form of which is attached as Annex C to this proxy statement/prospectus/information statement (the “Stock Increase Proposal”);
     
 

to consider and vote upon a proposal to approve the Sonnet BioTherapeutics Holdings, Inc. 20 Omnibus Equity Incentive Plan, the form of which is attached as Annex D to this proxy statement/prospectus/information statement, and to authorize for issuance [ ] shares of Chanticleer Common Stock thereunder (the “Plan Proposal”);

     
  to consider and vote upon an adjournment of the Chanticleer special meeting, if necessary, to solicit additional proxies if there are not sufficient votes at the time of the Chanticleer special meeting to approve the proposals submitted at the Chanticleer special meeting (the “Adjournment Proposal”); and
     
  to transact such other business as may properly come before the Chanticleer special meeting or any adjournment or postponement thereof.

 

Collectively the proposals above are referred to as the “Chanticleer Proposals.” On each matter to be voted upon, stockholders have one vote for each share of Chanticleer Common Stock owned as of    , 20  . Votes will be counted by the inspector of election. The following table summarizes vote requirements and the effect of abstentions and broker non-votes.

 

Proposal
Number

  Proposal Description   Vote Required for Approval   Effect of
Abstentions
  Effect of
Broker
Non-Votes
1   Stock Issuance Proposal   FOR votes from the holders of a majority of shares present and entitled to vote at a meeting at which a quorum is present   Against   None
2   Reverse Stock Split Proposal   FOR votes from the holders of a majority of outstanding shares   Against   Against
3   Stock Increase Proposal   FOR votes from the holders of a majority of outstanding shares   Against   Against
4  

Plan Proposal

 

FOR votes from the holders of a majority of shares present and entitled to vote at a meeting at which a quorum is present

 

Against

 

None

5   Adjournment   FOR votes from the holders of a majority of shares present and entitled to vote at a meeting at which a quorum is present   Against   Against

 

The information in the preceding table with respect to the effect of broker non-votes may be incorrect or change before the special meeting. Therefore, if you are a beneficial owner and want to ensure that shares you beneficially own are voted in favor or against any or all of the Chanticleer Proposals, the only way you can do so is to give your broker or nominee specific instructions as to how the shares are to be voted.

 

If on the date of the Chanticleer special meeting, or a date preceding the date on which the Chanticleer special meeting is scheduled, Chanticleer reasonably believes that (i) it will not receive proxies sufficient to obtain the required vote to approve the Chanticleer Proposals, whether or not a quorum would be present or (ii) it will not have sufficient shares of Chanticleer Common Stock represented (whether in person or by proxy) to constitute a quorum necessary to conduct the business of the Chanticleer special meeting, Chanticleer may postpone or adjourn, or make one or more successive postponements or adjournments of, the Chanticleer special meeting as long as the date of the Chanticleer special meeting is not postponed or adjourned more than an aggregate of 30 calendar days in connection with any postponements or adjournments.

 

Because Chanticleer currently does not have sufficient authorized capital stock to issue the Merger Consideration to the Sonnet stockholders, the merger will not be consummated unless both the Stock Issuance Proposal and the Stock Increase Proposal are approved by the Chanticleer stockholders at the Chanticleer special Meeting. In addition, the merger requires the approval by the Chanticleer stockholders of the Reverse Stock Split Proposal because Chanticleer is currently not in compliance with the $1.00 per share minimum bid price requirement for continued listing on Nasdaq under Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”), and it is a condition to closing of the merger that Nasdaq authorize for listing the shares of Chanticleer Common Stock issued in the merger and the continued listing of the Chanticleer Common Stock on the Nasdaq Capital Market post-merger. However, assuming all other closing conditions have been either satisfied or waived, the merger may be consummated even if the Plan Proposal is not approved by Chanticleer’s stockholders.

 

 18 
 

 

The Sonnet Special Meeting

 

The adoption of the Merger Agreement and the approval of the merger and related transactions by Sonnet shareholders requires the affirmative votes of a majority of the votes cast by the holders of shares of Sonnet common stock; provided, that a majority of the outstanding shares of Sonnet common stock entitled to vote at the Sonnet special meeting is present, in person or by proxy.

 

Following the registration statement on Form S-4, of which this proxy statement/prospectus/information statement is a part, being declared effective by the SEC and pursuant to the conditions of the Merger Agreement, Sonnet shareholders will have the opportunity to elect to adopt the Merger Agreement, thereby approving the merger and related transactions, at a special meeting of the shareholders of Sonnet to be held be held on                     , 20   at                , local time, at       at                .  Shareholders will have one vote for each share of Sonnet Common Stock owned as of    , 2019. Votes will be counted by the inspector of election. Stockholders of Sonnet will be receiving information regarding this special meeting of stockholders under separate cover.

 

In addition to the requirement of obtaining such shareholder approval and appropriate regulatory approvals, each of the other closing conditions set forth in the Merger Agreement must be satisfied or waived.

 

Interests of Directors and Executive Officers of Chanticleer and Sonnet

 

Interests of the Chanticleer Directors and Executive Officers in the Merger

 

In considering the recommendation of the Chanticleer board of directors with respect to issuing shares of Chanticleer Common Stock pursuant to the Merger Agreement and the other matters to be acted upon by Chanticleer stockholders at the Chanticleer special meeting, Chanticleer stockholders should be aware that certain members of the Chanticleer board of directors and executive officers of Chanticleer have interests in the merger that may be different from, or in addition to, interests they have as Chanticleer stockholders.

 

As of October 31, 2019, Chanticleer’s directors and executive officers beneficially owned approximately 2.4% of the outstanding shares of Chanticleer Common Stock.

 

All of Chanticleer’s current executive officers, with the exception of Richard Adams, will continue as executive officers of the Spin-Off Entity post-merger.

 

Michael D. Pruitt, Chief Executive Officer of Chanticleer, holds 340 shares of Chanticleer’s 9% Redeemable Series 1 Preferred Stock (“Series 1 Preferred”), which are expected to be redeemed at or prior to the closing of the merger. Holders of the Series 1 Preferred are entitled to receive cumulative dividends out of legally available funds at the rate of 9% of the purchase price per year. The redemption price for any shares of Series 1 Preferred will be an amount equal to the $13.50 purchase price per share plus any accrued but unpaid dividends to the date fixed for redemption.

 

The Chanticleer board of directors was aware of these interests and considered them, among other matters, in its decision to approve the Merger Agreement. For more information, please see the sections titled “The Merger—Interests of the Chanticleer Directors and Executive Officers in the Merger” and “Agreements Related to the Merger-Disposition Agreement.

 

Interests of the Sonnet Directors and Executive Officers in the Merger

 

In considering the recommendation of the Sonnet board of directors with respect to voting to approve the merger and related transactions by at the Sonnet shareholder meeting, Sonnet shareholders should be aware that certain members of the Sonnet board of directors and executive officers of Sonnet have interests in the merger that may be different from, or in addition to, interests they have as Sonnet shareholders.

 

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All of Sonnet’s current executive officers and directors hold shares of Sonnet Common Stock, which will, at the Effective Time, be automatically converted into the right to receive an amount of registered shares of Chanticleer Common Stock equal to the Common Stock Exchange Ratio. As of October 31, 2019, Sonnet’s directors and executive officers beneficially owned approximately 55.3% of the outstanding shares of Sonnet Common Stock. In addition, all of Sonnet’s current executive officers and directors are expected to become executive officers and directors of Chanticleer upon the closing of the merger and are entitled to certain indemnification and liability insurance coverage pursuant to the terms of the Indemnification Agreement and Tail Policy.

 

The Sonnet board of directors was aware of these interests and considered them, among other matters, in its decision to approve the Merger Agreement. For more information, please see the sections titled “The Merger—Interests of the Sonnet Directors and Executive Officers in the Merger,” and “Certain Relationships and Related-Party Transactions—Sonnet.”

 

Risk Factors

 

Both Chanticleer and Sonnet 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 stockholders, including the following risks:

 

  the Exchange Ratio is not adjustable based on the market price of Chanticleer Common Stock so the merger consideration at the closing may have a greater or lesser value than at the time the Merger Agreement was signed;
     
  failure to complete the merger may result in Chanticleer or Sonnet paying a termination fee or expenses to the other party and could harm the common stock price of Chanticleer and future business and operations of each company;
     
 

failure to complete the merger may result in Chanticleer’s inability to satisfy its obligations under its 8% non-convertible secured debentures (for which $3 million of principal is due by the end of December 2019 and the remaining $3 million of principal is due by the end of March 2020, plus interest) and would require Chanticleer to renegotiate its obligations under the debentures or could require Chanticleer to file for bankruptcy protection;

     
  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 combined company will need to raise additional capital by issuing securities or debt or through licensing arrangements, which may cause significant dilution to the combined company’s stockholders or restrict the combined company’s operations or proprietary rights;
     
  certain Chanticleer and Sonnet executive officers and directors have interests in the merger that are different from yours and that may influence them to support or approve the merger without regard to your interests;
     
  the market price of the combined company’s common stock may decline as a result of the merger;
     
  Chanticleer and Sonnet stockholders may not realize a benefit from the merger and the Disposition commensurate with the ownership dilution they will experience in connection with the merger;
     
  during the pendency of the merger, Chanticleer and Sonnet may not be able to enter into a business combination with another party at a favorable price because of restrictions in the Merger Agreement, which could adversely affect their respective businesses;
     
  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 lack of a public market for Sonnet shares makes it difficult to determine the fair market value of the Sonnet shares, and the stockholders of Sonnet may receive consideration in the merger that is less than the fair market value of the Sonnet shares and/or Chanticleer may pay more than the fair market value of the Sonnet shares; and
     
  if the conditions of the merger are not met, the merger will not occur.

 

 20 
 

 

These risks and other risks are discussed in greater detail under the section titled “Risk Factors” and in the documents incorporated by reference in this proxy statement/prospectus/information statement. Chanticleer and Sonnet both encourage you to read and consider all of these risks carefully.

 

Regulatory Approvals

 

In the United States, Chanticleer must comply with applicable federal and state securities laws and the rules and regulations of Nasdaq in connection with the issuance of shares of Chanticleer Common Stock pursuant to the Merger Agreement and the filing of this proxy statement/prospectus/information statement with the SEC.

 

Nasdaq Stock Market Listing

 

The approval by Nasdaq of (i) the continued listing of the Chanticleer Common Stock on the Nasdaq Capital Market following the Effective Time and (ii) the listing of the shares of Chanticleer Common Stock being issued in connection with the merger on Nasdaq at or prior to the Effective Time are conditions to the closing of the merger. Sonnet has agreed to cooperate with Chanticleer to furnish to Chanticleer all information concerning Sonnet and its equityholders that may be required or reasonably requested in connection with Nasdaq.  If such approvals are obtained, Chanticleer anticipates that the combined company’s common stock will be listed on Nasdaq under the trading symbol “SONN” following the closing of the merger.

 

Anticipated Accounting Treatment

 

The merger is expected to be treated by Chanticleer as a reverse merger and accounted for as a reverse recapitalization in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). For accounting purposes, Sonnet is considered to be acquiring Chanticleer in the Merger.

 

Appraisal Rights and Dissenters’ Rights

 

Holders of shares of Chanticleer capital stock are not entitled to appraisal rights in connection with the merger. Sonnet shareholders are entitled to appraisal rights in connection with the merger under New Jersey law. For more information about such rights, see the provisions of Section 14A-11 of the New Jersey Business Corporation Act, or the BCA, attached hereto as Annex E, and the section titled “The Merger—Appraisal Rights and Dissenters’ Rights.”

 

Comparison of Stockholder Rights

 

Chanticleer is incorporated under the laws of the State of Delaware, and Sonnet is incorporated under the laws of the State of New Jersey. If the merger is completed, Sonnet shareholders will become stockholders of Chanticleer, and their rights will be governed by the General Corporation Law of the State of Delaware (the “DGCL”), the bylaws of Chanticleer and, the certificate of incorporation of Chanticleer. The rights of Chanticleer stockholders contained in the certificate of incorporation and bylaws of Chanticleer differ from the rights of Sonnet shareholders under the certificate of incorporation and bylaws of Sonnet and the BCA, as more fully described under the section titled “Comparison of Rights of Holders of Chanticleer Stock and Sonnet Stock.”

 

 21 
 

 

SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION AND DATA

 

The following tables present summary historical financial data for Chanticleer and Sonnet, summary unaudited pro forma condensed combined financial data for Chanticleer and Sonnet, and comparative historical and unaudited pro forma per share data for Chanticleer and Sonnet.

 

Selected Historical Financial Data of Chanticleer

 

The selected statement of operations data for the years ended December 31, 2018 and 2017 and the selected balance sheet data as of December 31, 2018 and 2017 are derived from Chanticleer’s audited financial statements prepared using accounting principles generally accepted in the United States (“U.S. GAAP”), which are included in this proxy statement/prospectus/information statement. The selected statement of operations data for the years ended December 31, 2016, 2015 and 2014 and the selected balance sheet data as of December 31, 2016, 2015 and 2014 are derived from Chanticleer’s audited financial statements, which are not included in this proxy statement/prospectus/information statement. The selected financial data for the nine months ended September 30, 2019 and 2018, are derived from Chanticleer’s unaudited condensed financial statements included in this proxy statement/prospectus/information statement. The financial data should be read in conjunction with“Chanticleer Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Chanticleer’s condensed financial statements and related notes appearing elsewhere in this proxy statement/prospectus/information statement. The historical results are not necessarily indicative of results to be expected in any future period.

 

   Years Ended December 31,   Nine Months Ended September 30, 
   2018   2017   2016   2015   2014   2019   2018 
                       (unaudited) 
   (in thousands, except per share data) 
Consolidated Statement of Operations Data:                                   
Total revenue  $40,614   $41,433   $41,702   $42,397   $29,843   $30,562   $30,494 
Net loss from continuing operations attributable to common shareholders  $(6,973)  $(6,903)  $(4,271)  $(12,190)  $(5,482)  $(9,059)  $(4,680)
Net loss from continuing operations per common share attributable to common stockholders - basic and diluted  $(1.98)  $(2.73)  $(1.97)  $(8.56)  $(8.38)  $(1.54)  $(1.35)
Weighted average shares outstanding, basic and diluted   3,520,125    2,525,037    2,169,503    1,424,550    654,467    5,892,639    3,457,145 

 

 22 
 

 

   At December 31,   At September 30, 
   2018   2017   2016   2015   2014   2019 
                       (unaudited) 
   (in thousands) 
Consolidated Balance Sheet Data:                              
Cash  $630   $273   $269   $1,224   $246   $637 
Total assets  $29,793   $30,183   $33,486   $42,205   $35,792   $41,847 
Total current liabilities  $14,312   $14,906   $12,111   $16,181   $11,413   $19,000 
Total long-term liabilities  $7,224   $3,788   $7,670   $4,267   $9,406   $17,714 

 

Selected Historical Financial Data of Sonnet

 

The selected statement of operations data for the fiscal years ended September 30, 2019 and 2018 and the selected balance sheet data as of September 30, 2019 and 2018 are derived from Sonnet’s audited financial statements prepared using accounting principles generally accepted in the United States (“U.S. GAAP”), which are included in this proxy statement/prospectus/information statement. The financial data should be read in conjunction with “Sonnet Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Sonnet’s condensed financial statements and related notes appearing elsewhere in this proxy statement/prospectus/information.

 

   Years Ended September 30, 
   2019   2018  
   (in thousands, except per share data) 
Statement of Operations Data:           
Research and development expenses  $2,199   $155  
General and administrative expenses  $2,509   $364  
Net loss  $(4,871)  $(900 )
Loss per share, basic and diluted  $(0.10)  $(0.02 )
Weighted average shares outstanding, basic and diluted   50,216,305    46,939,089  

 

   At September 30, 
   2019   2018 
   (in thousands) 
Balance Sheet Data:          
Cash  $36   $5 
Total assets  $40   $5 
Total current liabilities  $2,885   $2,397 
Stockholders’ deficit  $(2,845)  $(2,391)

 

 23 
 

 

Selected Unaudited Pro Forma Condensed Combined Financial Data of Chanticleer and Sonnet

 

The following selected unaudited pro forma condensed combined financial data gives effect to: (i) the Merger, (ii) the GEM Draw Down (as defined in the section entitled “Unaudited Pro Forma Condensed Combined Financial Information” in this proxy statement/prospectus/information statement), (iii) proceeds from the Pre-Closing Private Placement Transactions (iv) Sonnet’s acquisition of Relief Therapeutics SA (“Relief”), and (v) the Disposition (collectively, the “Pro Forma Events”).  The Merger is accounted for as a reverse recapitalization under U.S. GAAP because Chanticleer will have nominal assets and operations as a result of the Disposition. Sonnet was determined to be the accounting acquirer based upon the terms of the merger and other factors including: (i) Sonnet stockholders will own approximately 94% of Chanticleer immediately following the effective time of the merger, (ii) Sonnet will hold all of the board seats of the combined company and (iii) Sonnet’s management will hold all key positions in the management of the combined company.

 

The Chanticleer and Sonnet unaudited pro forma condensed combined balance sheet data assume that the Pro Forma Events took place on September 30, 2019, and combines the Chanticleer and Sonnet historical balance sheets at September 30, 2019. The Chanticleer and Sonnet unaudited pro forma condensed combined statements of operations data assume that the Pro Forma Events took place as of January 1, 2018, and combines the historical results of Chanticleer for the year ended December 31, 2018, of Sonnet for the year ended September 30, 2018 and of Chanticleer and Sonnet for the nine months ended September 30, 2019.

 

Chanticleer and Sonnet have different fiscal year ends. As Chanticleer’s fiscal year ended December 31 is within 93 days of Sonnet’s fiscal year ended September 30, Chanticleer’s pro forma condensed combined statement of operations for the year ended December 31, 2018 includes Sonnet’s operating results for its respective fiscal year ended September 30, 2018 as permitted by Rule 11-02 of Regulation S-X. The unaudited condensed combined statement of operations for the nine months ended September 30, 2019 combines the historical results of Chanticleer for the nine months ended September 30, 2019 and the historical results of Sonnet for the nine months ended September 30, 2019, derived from Sonnet’s audited statement of operations for the year ended September 30, 2019 and Sonnet’s unaudited statement of operations for the three months ended December 31, 2018.

 

The selected unaudited pro forma condensed combined financial data are presented for illustrative purposes only and are not necessarily indicative of the combined financial position or results of operations of future periods or the results that actually would have been realized had the entities been a single entity during these periods. The selected unaudited pro forma condensed combined financial data as of and for the nine months ended September 30, 2019 and for the year ended December 31, 2018 are derived from the unaudited pro forma condensed combined financial information and should be read in conjunction with that information. For more information, please see the section entitled “Unaudited Pro Forma Condensed Combined Financial Information” in this proxy statement/prospectus/information statement.

 

The unaudited pro forma condensed combined financial information assumes that, at the Effective Time, each share of Sonnet Common Stock will be converted into the right to receive shares of Chanticleer Common Stock such that, immediately after the Merger, Chanticleer stockholders are expected to own approximately 6% of the fully-diluted common stock of the combined company, Sonnet stockholders are expected to own approximately 92% of the fully-diluted common stock of the combined company and the Spin-Off Entity will hold a warrant to purchase 2% of the common stock of the combined company outstanding after the Effective Time. Such percentages are subject to adjustment to account for the occurrence of certain events discussed elsewhere in this proxy statement/prospectus/information statement.

 

 24 
 

 

Unaudited Pro Forma Condensed Combined Statements of Operations Data

 

   For the Nine
Months Ended
September 30, 2019
  

For the 
Year Ended

December 31, 2018

 
   (In thousands, except per share data) 
Research and development expenses  $2,170   $208 
General and administrative expenses   2,337    444 
Loss from operations   (4,507)   (652)
Net loss attributable to common stockholders   (3,187)   (1,034)
Net loss per share, basic and diluted   (0.01)    

 

Unaudited Pro Forma Condensed Combined Balance Sheet Data

 

    As of
September 30, 2019
 
    (In thousands)  
Cash and cash equivalents   $ 595  
Working capital, net     (3,539 )
Total assets     1,623  
Accumulated deficit     (35,875 )
Total stockholders’ deficit     (3,564 )

 

 25 
 

 

Comparative Historical and Unaudited Pro Forma Per Share Data

 

The information below reflects the historical net loss and book value per share of Chanticleer Common Stock and the historical net loss and book value per share of Sonnet Common Stock in comparison with the unaudited pro forma net loss and book value per share after giving effect to the merger (and the other Pro Forma Events) on a purchase basis.

 

You should read the tables below in conjunction with the audited and unaudited consolidated financial statements of Chanticleer included in this proxy statement/prospectus/information statement and the audited and unaudited financial statements of Sonnet included in this proxy statement/prospectus/information statement and the related notes and the unaudited pro forma condensed combined financial information and notes related to such financial statements included elsewhere in this proxy statement/prospectus/information statement.

 

Chanticleer

 

   Nine Months Ended September 30, 2019   Year Ended December 31, 2018 
Historical Per Common Share Data:          
Basic and diluted net loss per share  $(1.54)  $(1.98)
Book value per share   0.51    2.22 

 

Sonnet

 

   Nine Months Ended September 30, 2019   Year Ended December 31, 2018 
Historical Per Common Share Data:          
Basic and diluted net loss per share  $(0.09)  $(0.02)
Book value per share   (0.05)   (0.05)

 

Combined company

 

   Nine Months Ended September 30, 2019   Year Ended December 31, 2018 
Pro Forma Per Common Share Data:          
Basic and diluted net loss per share  $(0.01)  $ 
Book value per share   (0.02)   N/A 

 

Sonnet unaudited pro forma equivalent per share data

 

   Nine Months Ended
September 30, 2019
   Year Ended December 31, 2018 
Pro Forma Per Common Share Data:          
Basic and diluted net loss per share  $       —   $ 
Book value per share       N/A 

 

 26 
 

 

MARKET PRICE AND DIVIDEND INFORMATION

 

Chanticleer Common Stock is listed on the Nasdaq Capital Market under the symbol “BURG.” The following table presents, for the periods indicated, the range of high and low per share sales prices for Chanticleer Common Stock as reported on the Nasdaq Capital Market for each of the periods set forth below. Sonnet is a private company and its common stock is not publicly traded. These per share sales prices do not give effect to the proposed reverse stock split of Chanticleer Common Stock to be implemented, if approved by Chanticleer stockholders, prior to the closing of the merger.

 

Chanticleer Common Stock

 

    High     Low  
Year Ending December 31, 2019                
First Quarter   $ 2.16     $ 1.27  
Second Quarter   $ 2.95     $ 0.82  
Third Quarter   $ 1.09     $ 0.50  
Fourth Quarter (through November 26, 2019)   $ 1.02     $ 0.63  
                 
Year Ended December 31, 2018                
First quarter   $ 5.14     $ 2.96  
Second quarter   $ 3.99     $ 2.75  
Third quarter   $ 3.28     $ 2.27  
Fourth quarter   $ 2.54     $ 1.23  
                 
Year Ended December 31, 2017                
First quarter   $ 0.47     $ 0.31  
Second quarter*   $ 4.50     $ 0.23  
Third quarter   $ 3.44     $ 1.90  
Fourth quarter   $ 3.20     $ 1.81  

 

* Chanticleer effected a 10:1 stock split on May 19, 2017.  

 

On October 10, 2019, the last full trading day immediately preceding the public announcement of the merger, the closing price per share of Chanticleer Common Stock on the Nasdaq Capital Market was $0.83. On November 26, 2019, the last reported sale price of Chanticleer Common Stock on the Nasdaq Capital Market was $0.67 per share.

 

Because the market price of Chanticleer Common Stock is subject to fluctuation, the market value of the shares of Chanticleer Common Stock that Sonnet shareholders will be entitled to receive in the merger may increase or decrease.

 

Following the closing of the merger, Chanticleer expects the combined company’s common stock will be listed on Nasdaq and will trade under Chanticleer’s new name, “Sonnet BioTherapeutics Holdings, Inc.”, and trading symbol “SONN.”

 

As of November 13, 2019, there were 183 stockholders of record. The number of record holders was determined from the records of Chanticleer’s transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies. The transfer agent of the Chanticleer Common Stock is Securities Transfer Corporation, 2901 N Dallas Parkway, Suite 380, Plano, TX 75093, (469) 633-0101.

 

As of October 31, 2019, there were approximately 131 holders of record of Sonnet Common Stock.

 

Dividend Policy

 

Chanticleer has never declared or paid dividends on its common stock. It currently intends to retain future earnings, if any, for use in its business, and, therefore, it does not anticipate declaring or paying any dividends in the foreseeable future. Payments of future dividends, if any, will be at the discretion of Chanticleer’s board of directors after considering various factors, including its financial condition, operating results, current and anticipated cash needs and plans for expansion.

 

Sonnet has never paid or declared any cash dividends on its common stock. If the merger does not occur, Sonnet does not anticipate paying any cash dividends on its common stock in the foreseeable future, and Sonnet intends to retain all available funds and any future earnings to fund the development and expansion of its business. Any future determination to pay dividends will be at the discretion of the Sonnet board of directors and will depend upon a number of factors, including its results of operations, financial condition, future prospects, contractual restrictions, restrictions imposed by applicable law and other factors the Sonnet board of directors deems relevant.

 

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RISK FACTORS

 

You should carefully consider the risks described below regarding the merger, the Chanticleer business and the Sonnet business, together with all of the other information included in this proxy statement/prospectus/information statement, before making a decision about voting on the proposals submitted for your consideration, including, in particular, proposal 1 with respect to the issuance of Chanticleer Common Stock in respect of the merger.

 

Risks Related to the Merger and the Combined Company

 

The Exchange Ratio is not adjustable based on the market price of Chanticleer Common Stock so the merger consideration at the closing may have a greater or lesser value than at the time the Merger Agreement was signed.

 

The Merger Agreement has set the Exchange Ratio for the Sonnet Common Stock, and the Exchange Ratio is only adjustable upward or downward based on increases or decreases in the number of shares of Sonnet’s issued and outstanding capital stock and the number of shares of Sonnet capital stock issuable upon the exercise or conversion of other Sonnet securities, increases or decreases in the number of shares of Chanticleer’s issued and outstanding capital stock and the number of shares of Chanticleer capital stock issuable upon the exercise or conversion of other Chanticler securities and if the cash balances at closing of either Chanticleer or Sonnet change in relation to each other, as described in the section titled “The Merger—Merger Consideration.” The pre-reverse stock split Exchange Ratio is currently estimated to be 3.5475, and the post-split Exchange Ratio will depend on the exact reverse stock split ratio that is ultimately mutually determined by Chanticleer and Sonnet. Any changes in the market price of Chanticleer Common Stock before the closing of the merger will not affect the number of shares Sonnet securityholders will be entitled to receive pursuant to the Merger Agreement. Therefore, if before the closing of the merger the market price of Chanticleer Common Stock declines from the market price on the date of the Merger Agreement, then Sonnet shareholders could receive merger consideration with substantially lower value. Similarly, if before the closing of the merger the market price of Chanticleer Common Stock increases from the market price on the date of the Merger Agreement, then Sonnet shareholders could receive merger consideration with substantially more value for their shares of Sonnet capital stock than the parties had negotiated for in the establishment of the Exchange Ratio. Because the Exchange Ratio does not adjust as a result of changes in the value of Chanticleer Common Stock, for each one percentage point that the market value of Chanticleer Common Stock rises or declines, there is a corresponding one percentage point rise or decline, respectively, in the value of the total merger consideration issued to Sonnet shareholders.

 

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

 

If the merger is not completed, Chanticleer and Sonnet are subject to the following risks:

 

  if the Merger Agreement is terminated under certain circumstances and certain events occur, Chanticleer or Sonnet will be required to pay the other party a termination fee of $500,000;
     
  the price of Chanticleer stock may decline; and
     
  costs related to the merger, such as legal, accounting and investment banking fees must be paid even if the merger is not completed.

 

In addition, if the Merger Agreement is terminated and the Chanticleer or Sonnet board of directors determines to seek another business combination, there can be no assurance that Chanticleer or Sonnet will be able to find a partner willing to provide equivalent or more attractive consideration than the consideration to be provided by each party in the merger.

 

Chanticleer may be unable to identify and complete an alternative strategic transaction or continue to operate the business due to its limited cash availability, and it may be required to dissolve and liquidate its assets. In such case, Chanticleer would be required to pay all of its debts and contractual obligations, and to set aside certain reserves for potential future claims, and there can be no assurances as to the amount or timing of available cash, if any, left to distribute to stockholders after paying the debts and other obligations of Chanticleer and setting aside funds for reserves.

 

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As of September 30, 2019, Chanticleer’s cash balance was $638,000, its working capital was negative $15.5 million and it has significant near-term commitments and contractual obligations. Chanticleer has typically funded its operating costs, acquisition activities, working capital requirements and capital expenditures with proceeds from the issuances of its common stock and other financing arrangements, including convertible debt, lines of credit, notes payable, capital leases, and other forms of external financing. As of September 30, 2019, Chanticleer and its subsidiaries have approximately $2.9 million of accrued employee and employer taxes, including penalties and interest, which are due to certain taxing authorities. Chanticleer is currently in discussions with various taxing authorities on settling these liabilities through payment plans that began in the third quarter. Chanticleer also has $3 million of principal due on the 8% non-convertible secured debentures by the end of December 2019 and the remaining $3 million of principal due by the end of March 2020, plus interest. In addition, if Chanticleer fails to meet various debt covenants going forward and is notified of the default by the noteholders of the 8% non-convertible secured debentures, Chanticleer may be assessed additional default interest and penalties which would increase its obligations. In addition, Chanticleer has approximately $680,000 of other debt obligations coming due over the next twelve months. Chanticleer cannot provide assurance that it will be able to refinance its long-term debt or sell assets or raise additional capital.

 

In the event that capital is not available, or Chanticleer is unable to refinance its debt obligations or obtain waivers, it may then have to scale back or freeze its organic growth plans, sell assets on less than favorable terms, reduce expenses, curtail future acquisition plans to manage its liquidity and capital resources and/or pursue bankruptcy protection. Chanticleer may also incur financial penalties or other negative actions from its lenders if it is not able to refinance or otherwise extend or repay its current obligations or obtain waivers.

 

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

 

Even if the proposals referred to herein are approved by the stockholders of Chanticleer and Sonnet, specified other conditions must be satisfied or waived to complete the merger. These conditions are set forth in the Merger Agreement and described in the section titled “The Merger Agreement—Conditions to the Closing of the Merger.” Chanticleer and Sonnet cannot assure you that all of the conditions will be satisfied or waived. If the conditions are not satisfied or waived, the merger may not occur or will be delayed, and Chanticleer and Sonnet each may lose some or all of the intended benefits of the merger.

 

The consummation of the transactions contemplated by the Merger Agreement is dependent upon Chanticleer and Sonnet obtaining all relevant and necessary consents and approvals.

 

A condition to consummation of the merger is that Chanticleer and Sonnet obtain certain consents or approvals from third parties, including consents from parties to certain commercial agreements, leases and debt agreements in connection with the merger and the Disposition and approval from NASDAQ to maintain the listing of the Chanticleer Common Stock on the Nasdaq Capital Market following the merger and to list the shares of Chanticleer Common Stock being issued in the merger. In addition, the stockholders of Chanticleer must approve the issuance of Chanticleer Common Stock pursuant to the Merger Agreement. The Sonnet shareholders must adopt the Merger Agreement and approve the merger to be consummated pursuant thereto. There can be no assurance that Chanticleer or Sonnet will be able to obtain all such relevant consents and approvals on a timely basis or at all. Each of Chanticleer and Sonnet has incurred, and expects to continue to incur, significant costs and expenses in connection with the proposed merger. Any failure to obtain, or delay in obtaining, the necessary consents or approvals would prevent Chanticleer and Sonnet from being able to consummate, or delay the consummation of, the transactions contemplated by the Merger Agreement, which could materially adversely affect the business, financial condition and results of operations of Chanticleer and Sonnet, and, correspondingly, the combined company if the merger is consummated. There is no guarantee that such approvals will be obtained or that such conditions will be satisfied.

 

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The No Debt Condition may not be satisfied.

 

One of the conditions to the obligations of Sonnet under the Merger Agreement is that on or prior to the closing of the merger, Chanticleer shall have no indebtedness or other liabilities (the “No Debt Condition”). As of September 30, 2019, Chanticleer and its subsidiaries had an aggregate of $36.7 million in total liabilities, and such liabilities must be either fully paid or assumed by the Spin-Off Entity prior to the consummation of the merger. Pursuant to the terms of the Merger Agreement, Sonnet is required to pay $6.0 million to Chanticleer in connection with the merger (the “$6 Million Payment Condition”), which amount is expected to be used by Chanticleer towards the payoff of Chanticleer liabilities that are not assumed by the Spin-Off Entity in connection with the Disposition, however, no assurance can be given that Chanticleer will be able to settle the remaining debt in order to satisfy the No Debt Condition. It is currently estimated that Chanticleer needs to raise approximately $1.5 million through equity financing, asset sales or other strategic transactions in order to enable it to sustain operations through closing and satisfy all of its conditions to closing, including the No Debt Condition. If Chanticleer cannot raise additional funds on acceptable terms and if Sonnet is not otherwise willing to waive the No Debt Condition, the parties will not be able to consummate the merger.

 

The $6 Million Payment Condition may not be satisfied.

 

One of the conditions to the obligations of Chanticleer under the Merger Agreement is that on or prior to the closing of the merger, Sonnet shall satisfied the $6 Million Payment Condition. As of September 30, 2019, Sonnet had negative working capital of $2.8 million. No assurance can be given that Sonnet will be able to raise the remaining funds necessary to satisfy the $6 Million Payment Condition. If Sonnet cannot raise additional funds on acceptable terms and if Chanticleer is not otherwise willing to waive the $6 Million Payment Condition, the parties will not be able to consummate 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.

 

In general, either Chanticleer or Sonnet can refuse to complete the merger if there is a material adverse change affecting the other party between October 10, 2019, the date of the Merger Agreement, and the closing. However, certain types of changes do not permit either party to refuse to complete the merger, even if such change could be said to have a material adverse effect on Chanticleer or Sonnet, including:

 

  general business or economic conditions affecting the industries in which Sonnet or Chanticleer operate (except to the extent any changes in such conditions have a disproportionate effect on Sonnet or Chanticleer relative to other participants in such industries);
     
  natural disasters, acts of war, armed hostilities or terrorism;
     
  changes in financial, banking or securities markets;
     
  the taking of any action required to be taken by the Merger Agreement; or
     
  with respect to Chanticleer, any change in the stock price or trading volume of Chanticleer common stock.

 

If adverse changes occur and Chanticleer and Sonnet still complete the merger, the combined company stock price may suffer. This in turn may reduce the value of the merger to the stockholders of Chanticleer and Sonnet.

 

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The combined company will need to raise additional capital by issuing securities or debt or through licensing arrangements, which may cause dilution to the combined company’s stockholders or restrict the combined company’s operations or proprietary rights.

 

The combined company will be required to raise additional capital and may be required to raise funds sooner than currently planned. Additional financing may not be available to the combined company when it needs it or may not be available on favorable terms. To the extent that the combined company raises additional capital by issuing equity securities, such an issuance may cause significant dilution to the combined company’s stockholders’ ownership and the terms of any new equity securities may have preferences over the combined company’s common stock. Any debt financing the combined company enters into may involve covenants that restrict its operations. These restrictive covenants may include limitations on additional borrowing and specific restrictions on the use of the combined company’s assets, as well as prohibitions on its ability to create liens, pay dividends, redeem its stock or make investments. In addition, if the combined company raises additional funds through licensing arrangements, it may be necessary to grant licenses on terms that are not favorable to the combined company.

 

Certain Chanticleer and Sonnet executive officers and directors have interests in the merger that are different from yours and that may influence them to support or approve the merger without regard to your interests.

 

Certain officers and directors of Chanticleer and Sonnet participate in arrangements that provide them with interests in the merger that are different from yours, including, among others, the continued service as directors and officers of the combined company, in the case of Sonnet, severance benefits and continued indemnification.

 

For example, all of the current officers and directors of Sonnet will continue as the officers and directors of the combined company upon the closing of the merger. For more information, please see the section titled “The Merger—Interests of the Sonnet Directors and Executive Officers in the Merger” and “The Merger—Interests of the Chanticleer Directors and Executive Officers in the Merger.”

 

The market price of the combined company’s common stock following the merger and the Disposition 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 and the Disposition for a number of reasons including if:

 

  investors react negatively to the prospects of the combined company’s business and prospects from the merger and the Disposition;
     
  the effect of the merger and Disposition on the combined company’s business and prospects is not consistent with the expectations of financial or industry analysts; or
     
  the combined company does not achieve the perceived benefits of the merger and the Disposition as rapidly or to the extent anticipated by financial or industry analysts.

 

Chanticleer and Sonnet 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 full strategic and financial benefits currently anticipated from the merger, Chanticleer and Sonnet securityholders will have experienced substantial dilution of their ownership interests in their respective companies without receiving any commensurate benefit, or only receiving part of the commensurate benefit to the extent the combined company is able to realize only part of the strategic and financial benefits currently anticipated from the merger.

 

During the pendency of the merger, Chanticleer and Sonnet may not be able to enter into a business combination with another party at a favorable price because of restrictions in the Merger Agreement, which could adversely affect their respective businesses.

 

Covenants in the Merger Agreement impede the ability of Chanticleer and Sonnet to make acquisitions, subject to certain exceptions relating to fiduciary duties, or complete other transactions that are not in the ordinary course of business pending the closing of the merger. As a result, if the merger is not completed, the parties may lose valuable business opportunities during that period. In addition, while the Merger Agreement is in effect, each party is generally prohibited from soliciting, initiating, encouraging or entering into certain extraordinary transactions, such as a merger, sale of assets or other business combination outside the ordinary course of business, with any third-party, subject to certain exceptions. Any such transactions could be favorable to such party’s stockholders.

 

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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 Chanticleer and Sonnet from soliciting alternative takeover proposals or cooperating with persons making unsolicited takeover proposals, except in certain circumstances where the Chanticleer or Sonnet board of directors, as applicable, determines in good faith, after consultation with its financial advisor and outside legal counsel, that an unsolicited alternative takeover proposal constitutes or is reasonably likely to result in a superior takeover proposal. In addition, if Chanticleer or Sonnet terminate the Merger Agreement under certain circumstances, including terminating because of a decision of the Chanticleer or Sonnet board of directors, as applicable, to recommend an alternative proposal, Chanticleer or Sonnet, as applicable, would be required to pay a termination fee of $500,000 to the other party. This termination fee described above may discourage third parties from submitting alternative takeover proposals to Chanticleer and its stockholders and Sonnet and its shareholders, and may cause the Chanticleer board of directors or the Sonnet board of directors to be less inclined to recommend an alternative proposal.

 

The lack of a public market for Sonnet shares makes it difficult to determine the fair market value of the Sonnet shares, and Sonnet shareholders may receive consideration in the merger that is less than the fair market value of the Sonnet shares and/or Chanticleer may pay more than the fair market value of the Sonnet shares.

 

Sonnet is privately held and its capital stock is not traded in any public market. The lack of a public market makes it extremely difficult to determine Sonnet’s fair market value. Because the percentage of Chanticleer equity to be issued to Sonnet stockholders was determined based on negotiations between the parties, it is possible that the value of the Chanticleer Common Stock to be received by Sonnet shareholders will be less than the fair market value of Sonnet, or Chanticleer may pay more than the aggregate fair market value for Sonnet.

 

The issuance of shares of Chanticleer Common Stock to Sonnet shareholders in the merger will dilute substantially the voting power of Chanticleer’s current stockholders.

 

If the merger is completed, immediately following the Effective Time, the former Sonnet shareholders will hold approximately 94% of the outstanding shares of Chanticleer Common Stock, the stockholders of Chanticleer will retain ownership of only approximately 6% of the outstanding shares of Chanticleer Common Stock and the Spin-Off Entity will hold the Spin-Off Entity Warrant, exercisable for 2% of the outstanding shares of Chanticleer Common Stock. Accordingly, the issuance of shares of Chanticleer Common Stock to Sonnet shareholders in the merger will reduce substantially the voting power of each share of Chanticleer Common Stock held by Chanticleer’s current security holders. Consequently, Chanticleer security holders as a group will have substantially less influence over the management and policies of the combined company after the merger, than prior thereto.

 

The pendency of the merger could have an adverse effect on the trading price of Chanticleer Common Stock and Chanticleer’s business, financial condition, results of operations or business prospects.

 

While there have been no significant adverse effects to date, the pendency of the merger could disrupt Chanticleer’s businesses in the following ways, including:

 

  the attention of Chanticleer’s management may be directed toward the closing of the merger and related matters and may be diverted from the day-to-day business operations; and
     
  third parties may seek to terminate or renegotiate their relationships with Chanticleer as a result of the merger, whether pursuant to the terms of their existing agreements with Chanticleer or otherwise.

 

Should they occur, any of these matters could adversely affect the trading price of Chanticleer Common Stock or harm Chanticleer’s and/or the Spin-Off Entity’s financial condition, results of operations or business prospects.

 

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

 

The current expectation is that 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 common stock of the combined company will be your sole source of gain, if any, for the foreseeable future.

 

Future sales of shares by existing stockholders could cause the combined company’s stock price to decline.

 

If existing stockholders of Chanticleer and Sonnet sell, or indicate an intention to sell, substantial amounts of the combined company’s common stock in the public market after the merger, the trading price of the common stock of the combined company could decline. Based on shares outstanding as of October 31, 2019 and shares expected to be issued upon the closing of the merger, the combined company is expected to have outstanding a total of approximately 220,817,858 shares of common stock (prior to giving effect to any proposed reverse stock split) immediately following the closing of the merger. All of such shares of common stock will be freely tradable, without restriction, in the public market. Approximately 102,700,125 of such shares of common stock (prior to giving effect to the proposed reverse stock split) will be held by directors, executive officers of the combined company and other affiliates and will be subject to volume limitations under Rule 144 under the Securities Act.

 

The ownership of the combined company common stock is expected to be highly concentrated, which may prevent you and other stockholders from influencing significant corporate decisions and may result in conflicts of interest that could cause the combined company stock price to decline.

 

Executive officers and directors of the combined company and their affiliates are expected to beneficially own or control approximately 46.5% of the outstanding shares of the combined company common stock following the closing of the merger. Accordingly, these executive officers, directors and their affiliates, acting as a group, will have substantial influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of the combined company assets or any other significant corporate transactions. These stockholders may also delay or prevent a change of control of the combined company, even if such a change of control would benefit the other stockholders of the combined company. The significant concentration of stock ownership may adversely affect the trading price of the combined company’s common stock due to investors’ perception that conflicts of interest may exist or arise.

 

Anti-takeover provisions under Delaware law could make an acquisition of the combined company more difficult and may prevent attempts by the combined company stockholders to replace or remove the combined company management.

 

Because the combined company will be incorporated in Delaware, it is governed by the provisions of Section 203 of the Delaware General Corporation Law, or the DGCL, which prohibits stockholders owning in excess of 15% of the outstanding combined company voting stock from merging or combining with the combined company. Although Chanticleer and Sonnet believe these provisions collectively will provide for an 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 rights of holders of Sonnet securities will change as a result of the merger.

 

After the merger, the rights of those shareholders of Sonnet who will become Chanticleer stockholders will be governed by Chanticleer’s certificate of incorporation and Chanticleer’s bylaws, which are governed by the laws of the State of Delaware, which may be different from the laws of the State of New Jersey. For more information, see the section entitled “Comparison of Rights of Chanticleer Stockholders and Sonnet Shareholders.”

 

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The historical audited and unaudited pro forma condensed combined financial information may not be representative of our results after the merger.

 

The historical audited and unaudited pro forma condensed combined financial information included elsewhere in this prospectus has been presented for informational purposes only and is not necessarily indicative of the financial position or results of operations that actually would have occurred had the merger been completed as of the date indicated, nor is it indicative of future operating results or financial position.

 

Risks Relating to Sonnet’s Business and Stock Ownership in Sonnet

 

Investing in Sonnet involves a high degree of risk. Before deciding whether to invest, you should carefully consider the following risks and uncertainties, together with all other information in this proxy statement/prospectus/information statement, including Sonnet’s consolidated financial statements and related notes and “Management’s Discussion and Analysis of Results of Operations and Financial Condition”. All references in this section to “Sonnet,” the “Company,” “we,” “us,” or “our” mean Sonnet BioTherapeutics, Inc. unless we state otherwise or the context otherwise indicates. The occurrence of any of the events or developments described below could harm our business, financial condition, results of operations and/or growth prospects. Additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our business. Certain statements below are forward- looking statements. See “Cautionary Statement Concerning Forward-Looking Statements” in this proxy statement/prospectus/information statement.

 

Risks Related to Our Financial Position and Need for Additional Capital

 

We have a history of significant operating losses and expect to incur significant and increasing losses for the foreseeable future, and we may never achieve or maintain profitability.

 

We do not expect to generate revenue or profitability that is necessary to finance our operations in the short term. We incurred net losses of $4.9 million and $0.9 million for the years ended September 30, 2019 and 2018, respectively. In addition, our accumulated deficit as of September 30, 2019 was 12.4 million. To date, we have not commercialized any products or generated any revenues from the sale of products, and absent the realization of sufficient revenues from product sales, we may never attain profitability in the future. We have devoted substantially all of our financial resources and efforts to research and development, including preclinical studies and our clinical trials. Our net losses may fluctuate significantly from quarter to quarter and year to year. Net losses and negative cash flows have had, and will continue to have, an adverse effect on our shareholders’ (deficit) equity and working capital.

 

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

 

  continue to develop and conduct clinical trials with respect to our lead product candidate, SON-080, and our other product candidates program;
     
  initiate and continue research, preclinical and clinical development efforts for any future product candidates;
     
  seek to discover and develop additional product candidates and further expand our clinical product pipeline;
     
  seek marketing and regulatory approvals for any product candidates that successfully complete clinical trials;
     
  require the manufacture of larger quantities of product candidates for clinical development and, potentially, commercialization;
     
  maintain, expand and protect our intellectual property portfolio;
     
  expand our research and development infrastructure, including hiring and retaining additional personnel, such as clinical, quality control and scientific personnel;

 

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  establish sales, marketing, distribution and other commercial infrastructure in the future to commercialize products for which we obtain marketing approval, if any;
     
  add operational, financial and management information systems and personnel, including personnel to support our product development and commercialization and help us comply with our obligations as a public company; and
     
  add equipment and physical infrastructure to support our research and development.

 

Our ability to become and remain profitable depends on our ability to license our products and generate revenue. Generating product revenue will depend on our ability to obtain marketing approval for, and successfully commercialize, one or more of our product candidates.

 

Successful commercialization will require achievement of key milestones, including completing clinical trials of our product candidates, obtaining marketing approval for these product candidates, manufacturing, marketing and selling those products for which we, or any collaborators, may obtain marketing approval, satisfying any post-marketing requirements and obtaining reimbursement for our products from private insurance or government payors. Because of the uncertainties and risks associated with these activities, we are unable to accurately predict the timing and amount of revenues, and if or when we might achieve profitability. We and any collaborators may never succeed in these activities and, even if we do, or any collaborators do, we may never generate revenues that are large enough for us to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.

 

Our failure to become and remain profitable would depress the market price of our common stock and could impair our ability to raise capital, expand our business, diversify our product offerings or continue our operations. If we continue to suffer losses, investors may not receive any return on their investment and may lose their entire investment.

 

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

 

Our business commenced operations in 2015. Our operations to date have been limited to financing and staffing our company, developing our technology, conducting preclinical research and early-stage clinical trials for our product candidates and pursuing strategic collaborations to advance our product candidates. We have not yet demonstrated an ability to successfully conduct late-stage clinical trials, obtain marketing approvals, manufacture a commercial-scale product, or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. Accordingly, you should consider our prospects in light of the costs, uncertainties, delays and difficulties frequently encountered by companies in the early stages of development, especially clinical-stage biopharmaceutical companies such as ours. Any predictions you make about our future success or viability may not be as accurate as they would be if we had a longer operating history or a history of successfully developing and commercializing pharmaceutical products.

 

We may encounter unforeseen expenses, difficulties, complications, delays and other known or unknown factors in achieving our business objectives. We will eventually need to transition from a company with a development focus to a company capable of supporting commercial activities. We may not be successful in such a transition.

 

We expect our financial condition and operating results to continue to fluctuate significantly from quarter to quarter and year to year due to a variety of factors, many of which are beyond our control. Accordingly, you should not rely upon the results of any quarterly or annual periods as indications of future operating performance.

 

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Our recurring losses from operations have raised substantial doubt regarding our ability to continue as a going concern.

 

We have incurred recurring losses since inception. We anticipate operating losses to continue for the foreseeable future due to, among other things, costs related to research funding, development of our product candidates and preclinical and clinical programs, strategic alliances and the development of our administrative organization. The consolidated financial statements included elsewhere in this proxy statement/prospectus/information statement do not include any adjustments that might be necessary should we be unable to continue as a going concern.

 

Our ability to continue as a going concern is dependent on our ability to raise additional equity or debt capital or spin-off non-core assets to raise additional cash. Should we be unable to raise sufficient additional capital, we may be required to undertake cost-cutting measures including delaying or discontinuing certain clinical activities.

 

The source, timing and availability of any future financing will depend principally upon market conditions, and, more specifically, on the progress of our clinical development programs. Funding may not be available when needed, at all, or on terms acceptable to us. Lack of necessary funds may require us, among other things, to delay, scale back or eliminate some or all of our planned clinical trials. These factors among others create a substantial doubt about our ability to continue as a going concern.

 

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

 

Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is a very time-consuming, expensive and uncertain process that takes years to complete. For example, in the years ended September 30, 2019 and 2018, we used $2.2 million and $0.7 million, respectively, in net cash for our operating activities, substantially all of which related to research and development activities. We expect our expenses to increase in connection with our ongoing activities, particularly as we initiate new clinical trials of, initiate new research and preclinical development efforts for and seek marketing approval for, our current product candidates or any future product candidates. In addition, if we obtain marketing approval for any of our product candidates, we may incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution to the extent that such sales, marketing, manufacturing and distribution are not the responsibility of a collaborator. Furthermore, following the completion of the merger, we expect to incur significant 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 may be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts.

 

Assuming the merger and the transactions related thereto are consummated, we expect that our existing cash will be sufficient to fund our operating expenses and capital expenditure requirements through [ ]. We will be required to expend significant funds in order to advance the development of the product candidates in our pipeline, as well as other product candidates we may seek to develop. In addition, while we may seek one or more collaborators for future development of our product candidates, we may not be able to enter into a collaboration for any of our product candidates for such indications on suitable terms, on a timely basis or at all. In any event, our existing cash will not be sufficient to fund all of the efforts that we plan to undertake or to fund the completion of development of any of our product candidates. Accordingly, we will be required to obtain further funding through public or private equity offerings, debt financings, collaborations and licensing arrangements or other sources. We do not have any committed external source of funds. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.

 

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Our estimate may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Further, changing circumstances, some of which may be beyond our control, could cause us to consume capital significantly faster than we currently anticipate, and we may need to seek additional funds sooner than planned. Our future funding requirements, both short-term and long-term, will depend on many factors, including:

 

  the scope, progress, timing, costs and results of clinical trials of, and research and preclinical development efforts for, our current and future product candidates;
     
  our ability to enter into, and the terms and timing of, any collaborations, licensing or other arrangements;
     
  our ability to identify one or more future product candidates for our pipeline;
     
  the number of future product candidates that we pursue and their development requirements;
     
  the outcome, timing and costs of seeking regulatory approvals;
     
  the costs of commercialization activities for any of our product candidates that receive marketing approval to the extent such costs are not the responsibility of any collaborators, including the costs and timing of establishing product sales, marketing, distribution and manufacturing capabilities;
     
  the receipt of marketing approval, revenue, if any, received from commercial sales of our current and future product candidates;
     
  our headcount growth and associated costs as we expand our research and development and establish a commercial infrastructure;
     
  the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights including enforcing and defending intellectual property related claims; and
     
  the costs of operating as a public company.

 

Raising additional capital may cause dilution to our existing shareholders, restrict our operations or cause us to relinquish valuable rights.

 

We may seek additional capital through a combination of public and private equity offerings, debt financings, strategic partnerships and alliances, licensing arrangements or monetization transactions. To the extent that we raise additional capital through the sale of equity, convertible debt securities or other equity-based derivative securities, your ownership interest will be diluted and the terms may include liquidation or other preferences that adversely affect your rights as a shareholder. Any indebtedness we incur would result in increased fixed payment obligations and could involve restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. Furthermore, the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our common stock to decline and existing shareholders may not agree with our financing plans or the terms of such financings. If we raise additional funds through strategic partnerships and alliances, licensing arrangements or monetization transactions with third parties, we may have to relinquish valuable rights to our technologies, or our product candidates, or grant licenses on terms unfavorable to us. Adequate additional financing may not be available to us on acceptable terms, or at all. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

 

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

 

We are substantially dependent on the success of our internal development programs and our product pipeline candidates may not successfully complete clinical trials, receive regulatory approval or be successfully commercialized.

 

Our future success will depend heavily on the success of our internal development programs and of product candidates from our pipeline program.

 

Our ability to successfully commercialize our pipeline and our other product candidates will depend on, among other things, our ability to:

 

  successfully complete preclinical studies and clinical trials;
     
  receive regulatory approvals from the FDA, the EMA and other similar regulatory authorities;
     
  establish and maintain collaborations with third parties for the development and/or commercialization of our product candidates, or otherwise build and maintain strong development, sales, distribution and marketing capabilities that are sufficient to develop products and launch commercial sales of any approved products;
     
  obtain coverage and adequate reimbursement from payors such as government health care systems and insurance companies and achieve commercially attractive levels of pricing;
     
  secure acceptance of our product candidates from physicians, health care payors, patients and the medical community;
     
  produce, through a validated process, in manufacturing facilities inspected and approved by regulatory authorities, including the FDA, sufficiently large quantities of our product candidates to permit successful commercialization;
     
  manage our spending as expenses increase due to clinical trials and commercialization; and
     
  obtain and enforce sufficient intellectual property rights for any approved products and product candidates.

 

Of the large number of drugs in development in the pharmaceutical industry, only a small percentage result in the submission of a new drug application, or NDA, or biologics licensing application, or BLA, to the FDA and even fewer are approved for commercialization. Furthermore, even if we do receive regulatory approval to market our product candidates, any such approval may be subject to limitations on the indicated uses or patient populations for which we may market the product. Accordingly, even if we are able to obtain the requisite financing to continue to fund our development programs, we cannot assure you that our product candidates will be successfully developed or commercialized. If we are unable to develop, or obtain regulatory approval for, or, if approved, to successfully commercialize our product candidates, we may not be able to generate sufficient revenue to continue our business.

 

We are at a very early stage in our development efforts, our product candidates represent a new category of medicines and may be subject to heightened regulatory scrutiny until they are established as a therapeutic modality.

 

Our pipeline product candidates represent a new therapeutic modality of including engaging a Fully Human Albumin Binding Domain to deliver therapeutic products. Our product candidates may not demonstrate in patients any or all of the pharmacological benefits we believe they may possess. We have not yet succeeded and may never succeed in demonstrating efficacy and safety for these or any other product candidates in clinical trials or in obtaining marketing approval thereafter.

 

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Regulatory authorities do not have experience with our product candidate and may require evidence of safety and efficacy that goes beyond what we have included in our development plans. In such a case, development of our product candidates may be more costly or time-consuming than expected, and our candidate products may not prove to be viable.

 

If we are unsuccessful in our development efforts, we may not be able to advance the development of our product candidates, commercialize products, raise capital, expand our business or continue our operations.

 

Our product candidates and those of any collaborators will need to undergo preclinical and clinical trials that are time-consuming and expensive, the outcomes of which are unpredictable, and for which there is a high risk of failure. If preclinical or clinical trials of our or their product candidates fail to satisfactorily demonstrate safety and efficacy to the FDA, the EMA and any other comparable regulatory authority, additional costs may be incurred or delays experienced in completing, the development of these product candidates, or their development may be abandoned.

 

The FDA in the United States, the EMA in the European Union and the European Economic Area, and other comparable regulatory authorities in other jurisdictions must approve new product candidates before they can be marketed, promoted or sold in those territories. We have not previously submitted an IND or BLA to the FDA or similar drug approval filings to comparable foreign regulatory authorities for any of our product candidates. We must provide these regulatory authorities with data from preclinical studies and clinical trials that demonstrate that our product candidates are safe and effective for a specific indication before they can be approved for commercial distribution. We cannot be certain that our clinical trials for our product candidates will be successful or that any of our product candidates will receive approval from the FDA, the EMA or any other comparable regulatory authority.

 

Preclinical studies and clinical trials are long, expensive and unpredictable processes that can be subject to extensive delays. We cannot guarantee that any clinical trials will be conducted as planned or completed on schedule, if at all. It may take several years and require significant expenditures to complete the preclinical studies and clinical trials necessary to commercialize a product candidate, and delays or failure are inherently unpredictable and can occur at any stage. We may also be required to conduct additional clinical trials or other testing of our product candidates beyond the trials and testing that we contemplate, which may lead to us incurring additional unplanned costs or result in delays in clinical development. In addition, we may be required to redesign or otherwise modify our plans with respect to an ongoing or planned clinical trial, and changing the design of a clinical trial can be expensive and time consuming. An unfavorable outcome in one or more trials would be a major setback for our product candidates and for us. An unfavorable outcome in one or more trials may require us to delay, reduce the scope of or eliminate one or more product development programs, which could have a material adverse effect on our business, financial position, results of operations and future growth prospects.

 

Many 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 marketing approval for our product candidates. The FDA, EMA or any other comparable regulatory authority may disagree with our clinical trial design and our interpretation of data from clinical trials, or may change the requirements for approval even after it has reviewed and commented on the design for our clinical trials.

 

In connection with clinical trials of our product candidates, we face a number of risks, including risks that:

 

  a product candidate is ineffective or inferior to existing approved products for the same indications;
     
  a product candidate causes or is associated with unacceptable toxicity or has unacceptable side effects;
     
  patients may die or suffer adverse effects for reasons that may or may not be related to the product candidate being tested;
     
  the results may not confirm the positive results of earlier trials;
     
  the results may not meet the level of statistical significance required by the FDA, the EMA or other relevant regulatory agencies to establish the safety and efficacy of our product candidates for continued trial or marketing approval; and
     
  our collaborators may be unable or unwilling to perform under their contracts.

 

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Furthermore, we sometimes estimate for planning purposes the timing of the accomplishment of various scientific, clinical, regulatory and other product development objectives. These milestones may include our expectations regarding the commencement or completion of scientific studies, clinical trials, the submission of regulatory filings or commercialization objectives. From time to time, we may publicly announce the expected timing of some of these milestones, such as the completion of an ongoing clinical trial, the initiation of other clinical programs, the receipt of marketing approval or a commercial launch of a product. The achievement of many of these milestones may be outside of our control. All of these milestones are based on a variety of assumptions, which may cause the timing of achievement of the milestones to vary considerably from our estimates. If we fail to achieve milestones in the timeframes we expect, the commercialization of our product candidates may be delayed, we may not be entitled to receive certain contractual payments, which could have a material adverse effect on our business, financial position, results of operations and future growth prospects.

 

We may find it difficult to enroll patients in our clinical trials, which could delay or prevent us from proceeding with clinical trials of our product candidates.

 

Identifying and qualifying patients to participate in clinical trials of our product candidates is critical to our success. The timing of our clinical trials depends on our ability to recruit patients to participate as well as the completion of required follow-up periods. Patients may be unwilling to participate in our clinical trials because of negative publicity from adverse events related to novel therapeutic approaches, competitive clinical trials for similar patient populations, the existence of current treatments or for other reasons. Enrollment risks are heightened with respect to certain indications that we may target for one or more of our product candidates that may be rare diseases, which may limit the pool of patients that may be enrolled in our planned clinical trials. The timeline for recruiting patients, conducting trials and obtaining regulatory approval of our product candidates may be delayed, which could result in increased costs, delays in advancing our product candidates, delays in testing the effectiveness of our product candidates or termination of the clinical trials altogether.

 

We may not be able to identify, recruit and enroll a sufficient number of patients, or those with the required or desired characteristics, to complete our clinical trials in a timely manner. For example, due to the nature of the indications that we are initially targeting, patients with advanced disease progression may not be suitable candidates for treatment with our product candidates and may be ineligible for enrollment in our clinical trials. Therefore, early diagnosis in patients with our target diseases is critical to our success. Patient enrollment and trial completion is affected by factors including the:

 

  size of the patient population and process for identifying subjects;
     
  design of the trial protocol;
     
  eligibility and exclusion criteria;
     
  safety profile, to date, of the product candidate under study;
     
  perceived risks and benefits of the product candidate under study;
     
  perceived risks and benefits of our approach to treatment of diseases;
     
  availability of competing therapies and clinical trials;
     
  severity of the disease under investigation;

 

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  degree of progression of the subject’s disease at the time of enrollment;
     
  proximity and availability of clinical trial sites for prospective subjects;
     
  ability to obtain and maintain subject consent;
     
  risk that enrolled subjects will drop out before completion of the trial;
     
  patient referral practices of physicians; and
     
  ability to monitor subjects adequately during and after treatment.

 

In addition, clinical development for pilot scale feasibility study of SON-080 is currently planned to take place outside of the U.S. Our ability to successfully initiate, enroll and complete a clinical trial in any foreign country is subject to numerous risks unique to conducting business in foreign countries, including:

 

  difficulty in establishing or managing relationships with academic partners or contract research organizations, or CROs, and physicians;
     
  different standards for the conduct of clinical trials;
     
  the absence in some countries of established groups with sufficient regulatory expertise for review of protocols related to our novel approach;
     
  our inability to locate qualified local consultants, physicians and partners; and
     
  the potential burden of complying with a variety of foreign laws, medical standards and regulatory requirements, including the regulation of pharmaceutical and biotechnology products and treatment.

 

If we have difficulty enrolling a sufficient number of patients to conduct our clinical trials as planned, we may need to delay, limit or terminate ongoing or planned clinical trials, any of which would have an adverse effect on our business, financial condition, results of operations and prospects.

 

Results of preclinical studies and early clinical trials may not be predictive of results of future clinical trials.

 

The outcome of preclinical studies and early clinical trials may not be predictive of the success of later clinical trials, and interim results of clinical trials do not necessarily predict success in the results of completed clinical trials. Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials after achieving positive results in earlier development, and we could face similar setbacks. For example, the Phase IIa trial of SON-080 will be conducted outside of the U.S., and the findings may not be replicated in future trials at global clinical trial sites in a later stage clinical trial conducted by us or our collaborators. The design of a clinical trial can determine whether its results will support approval of a product and flaws in the design of a clinical trial may not become apparent until the clinical trial is well advanced. We may be unable to design and execute a clinical trial to support marketing approval.

 

Preclinical and clinical data are often susceptible to varying interpretations and analyses. Many companies that believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval for the product candidates. Even if we, or any collaborators, believe that the results of clinical trials for our product candidates warrant marketing approval, the FDA or comparable foreign regulatory authorities may disagree and may not grant marketing approval of our product candidates.

 

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In some instances, there can be significant variability in safety or efficacy results between different clinical trials of the same product candidate due to numerous factors, including changes in trial procedures set forth in protocols, differences in the size and type of the patient populations, changes in and adherence to the dosing regimen and other clinical trial protocols and the rate of dropout among clinical trial participants. If we fail to receive positive results in clinical trials of our product candidates, the development timeline and regulatory approval and commercialization prospects for our most advanced product candidates, and, correspondingly, our business and financial prospects would be negatively impacted.

 

Our current or future product candidates may cause undesirable side effects or have other properties when used alone or in combination with other approved products or investigational new drugs that could halt their clinical development, prevent their marketing approval, limit their commercial potential or result in significant negative consequences.

 

Undesirable or clinically unmanageable side effects could occur and cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of marketing approval by the FDA or comparable foreign regulatory authorities. Results of our trials could reveal a high and unacceptable severity and prevalence of side effects or unexpected characteristics.

 

If unacceptable side effects arise in the development of our product candidates, we, the FDA or comparable foreign regulatory authorities, the Institutional Review Boards, or IRBs, or independent ethics committees at the institutions in which our studies are conducted, or the Data Safety Monitoring Board, or 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. We may be required to train medical personnel using our product candidates to understand the side effect profiles for our clinical trials and upon any commercialization of any of our product candidates. Inadequate training in recognizing or managing the potential side effects of our product candidates could result in patient injury or death. Any of these occurrences may prevent us from achieving or maintaining market acceptance of the affected product candidate and may harm our business, financial condition and prospects significantly.

 

Moreover, clinical trials of our product candidates are conducted in carefully defined sets of patients who have agreed to enter into clinical trials. Consequently, it is possible that our clinical trials may indicate an apparent positive effect of a product candidate that is greater than the actual positive effect, if any, or alternatively fail to identify undesirable side effects. If, following approval of a product candidate, we, or others, discover that the product is less effective than previously believed or causes undesirable side effects that were not previously identified, any of the following consequences could occur:

 

  regulatory authorities may withdraw their approval of the product or seize the product;
     
  we, or any collaborators, may need to recall the product, or be required to change the way the product is administered or conduct additional clinical trials;
     
  additional restrictions may be imposed on the marketing of, or the manufacturing processes for, the particular product;
     
  we may be subject to fines, injunctions or the imposition of civil or criminal penalties;
     
  regulatory authorities may require the addition of labeling statements, such as a boxed warning or a contraindication;
     
  we, or any collaborators, may be required to create a medication guide outlining the risks of the previously unidentified side effects for distribution to patients;
     
  we, or any collaborators, could be sued and held liable for harm caused to patients;
     
  the product may become less competitive; and
     
  our reputation may suffer.

 

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If any of our current or future product candidates fail to demonstrate safety and efficacy in clinical trials or do not gain marketing approval, we will not be able to generate revenue and our business will be harmed. Any of these events could harm our business and operations, and could negatively impact the price of our common stock.

 

We may not be successful in our efforts to identify or discover additional product candidates.

 

Although we intend to explore other therapeutic opportunities in addition to the product candidates that we are currently developing, we may fail to identify other product candidates for clinical development for a number of reasons. For example, our research methodology may not be successful in identifying potential product candidates or those we identify may be shown to have harmful side effects or other characteristics that make them unmarketable or unlikely to receive regulatory approval. Additional product candidates will require additional, time-consuming development efforts prior to commercial sale, including preclinical studies, clinical trials and approval by the FDA and/or applicable foreign regulatory authorities. All product candidates are prone to the risks of failure that are inherent in pharmaceutical product development. If we fail to identify and develop additional potential product candidates, we may be unable to grow our business and our results of operations could be materially harmed.

 

We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.

 

Because we have limited financial and managerial resources, we intend to focus on developing product candidates for specific indications that we identify as most likely to succeed, in terms of both their potential for marketing approval and commercialization. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications that may prove to have greater commercial potential.

 

Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs and product candidates for specific indications may not yield any commercially viable product candidates. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to the product candidate.

 

We face potential product liability, and, if successful claims are brought against us, we may incur substantial liability and costs. If the use of our product candidates harms patients, or is perceived to harm patients even when such harm is unrelated to our product candidates, our regulatory approvals could be revoked or otherwise negatively impacted and we could be subject to costly and damaging product liability claims.

 

The use of our product candidates in clinical trials and the sale of any products for which we obtain marketing approval expose us to the risk of product liability claims. Product liability claims might be brought against us by patients, healthcare providers, pharmaceutical companies or others selling or otherwise coming into contact with our products. There is a risk that our product candidates may induce adverse events. If we cannot successfully defend against product liability claims, we could incur substantial liability and costs. In addition, regardless of merit or eventual outcome, product liability claims may result in:

 

  the impairment of our business reputation;
     
  the withdrawal of clinical trial participants;

 

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  substantial monetary awards to patients or other claimants;
     
  costs due to related litigation;
     
  the distraction of management’s attention from our primary business;
     
  the inability to commercialize our product candidates; and
     
  decreased demand for our product candidates, if approved for commercial sale.

 

We intend to acquire product liability insurance coverage in light of our current clinical programs; however, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. We intend to expand our insurance coverage each time we commercialize an additional product; however, we may be unable to obtain product liability insurance on commercially reasonable terms or in adequate amounts. On occasion, large judgments have been awarded in class action lawsuits based on drugs or medical treatments that had unanticipated adverse effects. A successful product liability claim or series of claims brought against us could cause our stock price to decline and, if judgments exceed our insurance coverage, could adversely affect our results of operations and business.

 

Patients with the diseases targeted by certain of our product candidates, such as our lead indications in oncology, are often already in severe and advanced stages of disease and have both known and unknown significant pre-existing and potentially life-threatening health risks. During the course of treatment, patients may suffer adverse events, including death, for reasons that may be related to our product candidates. Such events could subject us to costly litigation, require us to pay substantial amounts of money to injured patients, delay, negatively impact or end our opportunity to receive or maintain regulatory approval to market our products, or require us to suspend or abandon our commercialization efforts. Even in a circumstance in which we do not believe that an adverse event is related to our products, the investigation into the circumstance may be time-consuming or inconclusive. These investigations may interrupt our sales efforts, delay our regulatory approval process, or impact and limit the type of regulatory approvals our product candidates receive or maintain. As a result of these factors, a product liability claim, even if successfully defended, could have a material adverse effect on our business, financial condition or results of operations.

 

We may seek designations for our product candidates with the FDA and other comparable regulatory authorities that are intended to confer benefits such as a faster development process or an accelerated regulatory pathway, but there can be no assurance that we will successfully obtain such designations. In addition, even if one or more of our product candidates are granted such designations, we may not be able to realize the intended benefits of such designations.

 

The FDA and other comparable regulatory authorities offer certain designations for product candidates that are intended to encourage the research and development of pharmaceutical products addressing conditions with significant unmet medical need. These designations may confer benefits such as additional interaction with regulatory authorities, a potentially accelerated regulatory pathway and priority review. There can be no assurance that we will successfully obtain such designation for any of our other product candidates. In addition, while such designations could expedite the development or approval process, they generally do not change the standards for approval. Even if we obtain such designations for one or more of our product candidates, there can be no assurance that we will realize their intended benefits.

 

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For example, we may seek a Breakthrough Therapy Designation for one or more of our product candidates. A breakthrough therapy is defined as a therapy that is intended, alone or in combination with one or more other therapies, to treat a serious or life-threatening disease or condition, if preliminary clinical evidence indicates that the therapy may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. For therapies 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 regimens. Therapies designated as breakthrough therapies by the FDA are also eligible for accelerated approval. Designation as a breakthrough therapy is within the discretion of the FDA. Accordingly, even if we believe one of our product candidates meets the criteria for designation as a breakthrough therapy, the FDA may disagree and instead determine not to make such designation. In any event, the receipt of a Breakthrough Therapy Designation for a product candidate may not result in a faster development process, review or approval compared to therapies considered for approval under conventional FDA procedures and does not assure ultimate approval by the FDA. In addition, even if one or more of our product candidates qualify as breakthrough therapies, the FDA may later decide that such product candidates no longer meet the conditions for qualification.

 

We may also seek Fast Track Designation for some of our product candidates. If a therapy is intended for the treatment of a serious or life-threatening condition and the therapy demonstrates the potential to address unmet medical needs for this condition, the therapy sponsor may apply for Fast Track Designation. The FDA has broad discretion whether or not to grant this designation, so even if we believe a particular product candidate is eligible for this designation, there can be no assurance that the FDA would decide to grant it. Even if we do receive Fast Track Designation, we may not experience a faster development process, review or approval compared to conventional FDA procedures, and receiving a Fast Track Designation does not provide assurance of ultimate FDA approval. The FDA may withdraw Fast Track Designation if it believes that the designation is no longer supported by data from our clinical development program.

 

We may seek priority review designation for one or more of our product candidates, but we might not receive such designation, and even if we do, such designation may not lead to a faster regulatory review or approval process.

 

If the FDA determines that a product candidate offers a treatment for a serious condition and, if approved, the product would provide a significant improvement in safety or effectiveness, the FDA may designate the product candidate for priority review. A priority review designation means that the goal for the FDA to review an application is six months, rather than the standard review period of ten months. We may request priority review for our product candidates. The FDA has broad discretion with respect to whether or not to grant priority review status to a product candidate, so even if we believe a particular product candidate is eligible for such designation or status, in particular if such product candidate has received a Breakthrough Therapy Designation, the FDA may decide not to grant it. Moreover, a priority review designation does not result in expedited development and does not necessarily result in expedited regulatory review or approval process or necessarily confer any advantage with respect to approval compared to conventional FDA procedures. Receiving priority review from the FDA does not guarantee approval within the six-month review cycle or at all.

 

Obtaining and maintaining marketing approval of our current and future product candidates in one jurisdiction does not mean that we will be successful in obtaining marketing approval of our current and future product candidates in other jurisdictions.

 

Obtaining and maintaining marketing approval of our current and future product candidates in one jurisdiction does not guarantee that we will be able to obtain or maintain marketing approval in any other jurisdiction, while a failure or delay in obtaining marketing approval in one jurisdiction may have a negative effect on the marketing approval process in others. For example, even if the FDA grants marketing approval of a product candidate, comparable regulatory authorities in foreign jurisdictions must also approve the manufacturing, marketing and promotion of the product candidate in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from, and greater than, those in the United States, including additional preclinical studies or clinical trials as clinical studies conducted in one jurisdiction may not be accepted by regulatory authorities in other jurisdictions. In many jurisdictions outside the United States, a product candidate must be approved for reimbursement before it can be approved for sale in that jurisdiction. In some cases, the price that we intend to charge for our products is also subject to approval. We do not have experience in obtaining reimbursement or pricing approvals in international markets.

 

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Obtaining marketing approvals and compliance with regulatory requirements could result in significant delays, difficulties and costs for us and could delay or prevent the introduction of our products in certain countries outside of the United States. If we fail to comply with the regulatory requirements in international markets and/or receive applicable marketing approvals, our target market will be reduced and our ability to realize the full market potential of our product candidates will be harmed.

 

Risks Related to Commercialization of Our Product Candidates and Other Regulatory Compliance Matters
 
Even if we complete the necessary preclinical studies and clinical trials, the marketing approval process is expensive, time consuming and uncertain and may prevent us or any collaborators from obtaining approvals for the commercialization of some or all of our product candidates. As a result, we cannot predict when or if, and in which territories, we, or any collaborators, will obtain marketing approval to commercialize a product candidate.

 

The process of obtaining marketing approvals, both in the United States and abroad, is lengthy, expensive and uncertain. It may take many years, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidates involved. Securing marketing approval requires the submission of extensive preclinical and clinical data and supporting information to regulatory authorities for each therapeutic indication to establish the product candidate’s safety and efficacy. Securing marketing approval also requires the submission of information about the product manufacturing process to, and inspection of manufacturing facilities by, the regulatory authorities. The FDA or other regulatory authorities may determine that our product candidates are not safe and effective, only moderately effective or have undesirable or unintended side effects, toxicities or other characteristics that preclude our obtaining marketing approval or prevent or limit commercial use. Any marketing approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable.

 

In addition, changes in marketing approval policies during the development period, changes in or the enactment or promulgation of additional statutes, regulations or guidance or changes in regulatory review for each submitted product application, may cause delays in the approval or rejection of an application. Regulatory authorities have substantial discretion in the approval process and may refuse to accept any application or may decide that our data are insufficient for approval and require additional preclinical, clinical or other studies. Varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent marketing approval of a product candidate. We cannot commercialize a product until the appropriate regulatory authorities have reviewed and approved the product candidate. Even if our product candidates demonstrate safety and efficacy in clinical trials, the regulatory agencies may not complete their review processes in a timely manner, or we may not be able to obtain regulatory approval. Additional delays may result if an FDA Advisory Committee or other regulatory authority recommends non-approval or restrictions on approval. In addition, we may experience delays or rejections based upon additional government regulation from future legislation or administrative action, or changes in regulatory agency policy during the period of product development, clinical trials and the review process. Any marketing approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the approved product commercially unviable.

 

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 other regulatory authority. The FDA or other regulatory authority may conclude that a financial relationship between us and a principal investigator has created a conflict of interest or otherwise affected interpretation of the study. The FDA or other 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 other 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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In addition, regulatory agencies may not approve the labeling claims that are necessary or desirable for the successful commercialization of our product candidates. For example, regulatory agencies may approve a product candidate for fewer or more limited indications than requested or may grant approval subject to the performance of post-marketing studies. Regulators may approve a product candidate for a smaller patient population, a different drug formulation or a different manufacturing process, than we are seeking. If we are unable to obtain necessary regulatory approvals, or more limited regulatory approvals than we expect, our business, prospects, financial condition and results of operations may suffer.

 

Any delay in obtaining or failure to obtain required approvals could negatively impact our ability to generate revenue from the particular product candidate, which likely would result in significant harm to our financial position and adversely impact the price of our common stock.

 

We currently have no marketing, sales or distribution infrastructure with respect to our product candidates. If we are unable to develop our sales, marketing and distribution capability on our own or through collaborations with marketing partners, we will not be successful in commercializing our product candidates.

 

We currently have no marketing, sales or distribution capabilities and have limited sales or marketing experience within our organization. If one or more of our product candidates is approved, we intend either to establish a sales and marketing organization with technical expertise and supporting distribution capabilities to commercialize that product candidate, or to outsource this function to a third party. There are risks involved with either establishing our own sales and marketing capabilities and entering into arrangements with third parties to perform these services.

 

Recruiting and training an internal commercial organization is expensive and time consuming and could delay any product launch. Some or all of these costs may be incurred in advance of any approval of any of our product candidates. 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. In addition, we may not be able to hire a sales force in the United States or other target market that is sufficient in size or has adequate expertise in the medical markets that we intend to target.

 

Factors that may inhibit our efforts to commercialize our product candidates on our own include:

 

  the inability to recruit, train and retain adequate numbers of effective sales and marketing personnel;
     
  the inability of sales personnel to obtain access to physicians or persuade adequate numbers of physicians to prescribe any future product that we may develop;
     
  the lack of complementary treatments to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and
     
  unforeseen costs and expenses associated with creating an independent sales and marketing organization.

 

If we enter into arrangements with third parties to perform sales, marketing and distribution services, our product revenue or the profitability to us from these revenue streams is likely to be lower than if we were to market and sell any product candidates 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. We likely will have little control over such third parties and any of them may fail to devote the necessary resources and attention to sell and market our product candidates effectively. If we do not establish sales and marketing capabilities successfully, either on our own or in collaboration with third parties, we may not be successful in commercializing our product candidates.

 

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The market opportunities for any current or future product candidate we develop, if and when approved, may be limited to those patients who are ineligible for established therapies or for whom prior therapies have failed, and therefore may be small.

 

Cancer therapies are sometimes characterized as first-line, second-line, or third-line, and the FDA often approves new therapies initially only for third-line use. When cancer is detected early enough, first-line therapy, usually chemotherapy, hormone therapy, surgery, radiation therapy, immunotherapy or a combination of these, is sometimes adequate to cure the cancer or prolong life without a cure. Second- and third-line therapies are administered to patients when prior therapy is not effective. We may initially seek approval of SON-080 and any other product candidates we develop as a therapy for patients who have received one or more prior treatments. Subsequently, for those products that prove to be sufficiently beneficial, if any, we would expect to seek approval potentially as a first-line therapy, but there is no guarantee that product candidates we develop, even if approved, would be approved for first-line therapy, and, prior to any such approvals, we may have to conduct additional clinical trials.

 

The number of patients who have the cancers we are targeting may turn out to be lower than expected. Additionally, the potentially addressable patient population for our current programs or future product candidates may be limited, if and when approved. Even if we obtain significant market share for any product candidate, if and when approved, if the potential target populations are small, we may never achieve profitability without obtaining marketing approval for additional indications, including use as first- or second-line therapy.

 

Even if we receive marketing approval of a product candidate, we will be subject to ongoing regulatory obligations and continued regulatory review, which may result in significant additional expense and we may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our products, if approved.

 

Any marketing approvals that we receive for any current or future product candidate may be subject to limitations on the approved indicated uses for which the product may be marketed or the conditions of approval, or contain requirements for potentially costly post-market testing and surveillance to monitor the safety and efficacy of the product candidate. The FDA may also require a Risk Evaluation and Mitigation Strategy, or REMS, as a condition of approval of any product candidate, which could include requirements for 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. If the FDA or a comparable foreign regulatory authority approves a product candidate, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion, import and export and record keeping for the product candidate will be subject to extensive and ongoing regulatory requirements. These requirements include, among others, prohibitions on the promotion of an approved product for uses not included in the product’s approved labeling, submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with current Good Manufacturing Practice, or cGMP, and Good Clinical Practice, or GCP, for any clinical trials that we conduct post-approval. Later discovery of previously unknown problems with any approved candidate, including adverse events 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 the labeling, distribution, marketing or manufacturing of the product, withdrawal of the product from the market, or product recalls;
     
  untitled and warning letters, or holds on clinical trials;
     
  refusal by the FDA to approve pending applications or supplements to approved applications we filed or suspension or revocation of license approvals;
     
  requirements to conduct post-marketing studies or clinical trials;

 

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  restrictions on coverage by third-party payors;
     
  fines, restitution or disgorgement of profits or revenues;
     
  suspension or withdrawal of marketing approvals;
     
  product seizure or detention, or refusal to permit the import or export of the product; and
     
  injunctions or the imposition of civil or criminal penalties.

 

The FDA’s and other regulatory authorities’ policies may change and additional government regulations may be enacted that could prevent, limit or delay marketing approval of a product. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability.

 

We face significant competition and if our competitors develop and market products that are more effective, safer or less expensive than the product candidates we develop, our commercial opportunities will be negatively impacted.

 

The life sciences industry is highly competitive. We are currently developing therapeutics that will compete, if approved, with other products and therapies that currently exist, are being developed or will in the future be developed, some of which we may not currently be aware.

 

We have competitors both in the United States and internationally, including major multinational pharmaceutical companies, established biotechnology companies, specialty pharmaceutical companies, universities and other research institutions. Many of our competitors have significantly greater financial, manufacturing, marketing, product development, technical and human resources than we do. Large pharmaceutical companies, in particular, have extensive experience in clinical testing, obtaining marketing approvals, recruiting patients and manufacturing pharmaceutical products. These companies also have significantly greater research and marketing capabilities than we do and may also have products that have been approved or are in late stages of development, and collaborative arrangements in our target markets with leading companies and research institutions. Established pharmaceutical companies may also invest heavily to accelerate discovery and development of novel compounds or to in-license novel compounds that could make the product candidates that we develop obsolete. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. As a result of all of these factors, our competitors may succeed in obtaining patent protection and/or marketing approval or discovering, developing and commercializing products in our field before we do.

 

There is a large number of companies developing or marketing treatments for cancer, including many major pharmaceutical and biotechnology companies. These treatments consist both of small molecule drug products, such as traditional chemotherapy, as well as novel immunotherapies. For example, a number of multinational companies as well as large biotechnology companies, including Astellas Pharma Inc., Seattle Genetics, Inc., AstraZeneca, and GlaxoSmithKline plc, are developing programs for the targets that we are exploring for our pipeline programs.

 

Our commercial opportunities could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe effects, are more convenient, have a broader label, are marketed more effectively, are reimbursed or are less expensive than any products that we may develop. Our competitors also may obtain FDA, EMA or other 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. Even if the product candidate we develop achieve marketing approval, they may be priced at a significant premium over competitive products if any have been approved by then, resulting in reduced competitiveness.

 

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Smaller and other early stage companies may also prove to be significant competitors. These third parties compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs. In addition, the biopharmaceutical industry is characterized by rapid technological change. If we fail to stay at the forefront of technological change, we may be unable to compete effectively. Technological advances or products developed by our competitors may render our product candidates obsolete, less competitive or not economical.

 

The commercial success of any current or future product candidate will depend upon the degree of market acceptance by physicians, patients, payors and others in the medical community.

 

We have never commercialized a product, and even if we obtain any regulatory approval for our product candidates, the commercial success of our product candidates will depend in part on the medical community, patients, and payors accepting our product candidates as effective, safe and cost-effective. Any product that we bring to the market may not gain market acceptance by physicians, patients, payors and others in the medical community. Physicians are often reluctant to switch their patients from existing therapies even when new and potentially more effective or convenient treatments enter the market. Further, patients often acclimate to the therapy that they are currently taking and do not want to switch unless their physicians recommend switching products or they are required to switch therapies due to lack of reimbursement for existing therapies.

 

The degree of market acceptance of these product candidates, if approved for commercial sale, will depend on a number of factors, including:

 

  the potential efficacy and potential advantages over alternative treatments;
     
  the frequency and severity of any side effects, including any limitations or warnings contained in a product’s approved labeling;
     
  the frequency and severity of any side effects resulting from follow-up requirements for the administration of our product candidates;
     
  the relative convenience and ease of administration;
     
  the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;
     
  the strength of marketing and distribution support and timing of market introduction of competitive products;
     
  publicity concerning our products or competing products and treatments; and
     
  sufficient third-party insurance coverage and adequate reimbursement.

 

Even if a product candidate displays a favorable efficacy and safety profile in preclinical studies and clinical trials, market acceptance of the product, if approved for commercial sale, will not be known until after it is launched. Our efforts to educate the medical community and payors on the benefits of our product candidates may require significant resources and may never be successful. Such efforts to educate the marketplace may require more resources than are required by the conventional technologies marketed by our competitors, particularly due to the novelty of our Sonnet approach. If these products do not achieve an adequate level of acceptance, we may not generate significant product revenue and may not become profitable.

 

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If the market opportunities for our product candidates are smaller than we believe they are, our product revenues may be adversely affected and our business may suffer.

 

We currently focus our research and product development on treatments for oncology indications and our product FHAB candidates are designed to target solid tumors. Our understanding of both the number of people who have these diseases, as well as the subset of people with these diseases who have the potential to benefit from treatment with our product candidates, are based on estimates. These estimates may prove to be incorrect and new studies may reduce the estimated incidence or prevalence of these diseases. Patient identification efforts also influence the ability to address a patient population. If efforts in patient identification are unsuccessful or less impactful than anticipated, we may not address the entirety of the opportunity we are seeking.

 

The insurance coverage and reimbursement status of newly-approved products is uncertain. Failure to obtain or maintain adequate coverage and reimbursement for any of our product candidates, if approved, could limit our ability to market those products and decrease our ability to generate revenue.

 

We expect the cost of our product candidates to be substantial, when and if they achieve market approval. The availability and extent of reimbursement by governmental and private payors is essential for most patients to be able to afford expensive treatments. Sales of our product candidates will depend substantially, both domestically and abroad, on the extent to which the costs of our product candidates will be paid by private payors, such as private health coverage insurers, health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or reimbursed by government health care programs, such as Medicare and Medicaid. We may not be able to provide data sufficient to gain acceptance with respect to coverage and reimbursement. If reimbursement is not available, or is available only at limited levels, we may not be able to successfully commercialize our product candidates, even if approved. Even if coverage is provided, the approved reimbursement amount may not be high enough to allow us to establish or maintain pricing sufficient to realize a sufficient return on our investment.

 

There is significant uncertainty related to the insurance coverage and reimbursement of newly approved products. In the United States, the principal decisions about coverage and reimbursement for new medicines are typically made by the Centers for Medicare & Medicaid Services, or CMS, an agency within the U.S. Department of Health and Human Services, as the CMS decides whether and to what extent a new medicine will be covered and reimbursed under Medicare. Private payors tend to follow CMS to a substantial degree. It is difficult to predict what CMS will decide with respect to coverage and reimbursement for novel products such as ours, as there is no body of established practices and precedents for these new products. 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: (1) a covered benefit under its health plan; (2) safe, effective and medically necessary; (3) appropriate for the specific patient; (4) cost-effective; and (5) neither experimental nor investigational. In the United States, no uniform policy of coverage and reimbursement for products exists among third-party payors. As a result, the coverage determination process is often a time-consuming and costly process that will require us to provide scientific and clinical support for the use of our products to each payor separately, with no assurance that coverage and adequate reimbursement will be applied consistently or obtained in the first instance. Even if we obtain coverage for a given product, the resulting reimbursement payment rates might not be adequate for us to achieve or sustain profitability or may require co-payments that patients find unacceptably high. Third-party payors may limit coverage to specific drug products on an approved list, also known as a formulary, which might not include all of the approved drugs for a particular indication.

 

Additionally, third-party payors may not cover, or provide adequate reimbursement for, long-term follow-up evaluations required following the use of product candidates. Patients are unlikely to use our product candidates unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our product candidates. Because our product candidates may have a higher cost of goods than conventional therapies, and may require long-term follow-up evaluations, the risk that coverage and reimbursement rates may be inadequate for us to achieve profitability may be greater. There is significant uncertainty related to insurance coverage and reimbursement of newly approved products. It is difficult to predict at this time what third-party payors will decide with respect to the coverage and reimbursement for our product candidates.

 

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Moreover, increasing efforts by governmental and third-party payors in the United States and abroad to cap or reduce healthcare costs may cause such organizations to limit both coverage and the level of reimbursement for newly approved products and, as a result, they may not cover or provide adequate payment for our product candidates. There has been increasing legislative and enforcement interest in the United States with respect to specialty drug pricing practices. Specifically, there have been several recent U.S. Congressional inquiries and proposed federal and state legislation designed to, among other things, bring more transparency to drug pricing, reduce the cost of prescription drugs under Medicare, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs. 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, cost containment initiatives and additional legislative changes.

 

Outside the United States, certain countries, including a number of member states of the European Union, set prices and reimbursement for pharmaceutical products, or medicinal products, as they are commonly referred to in the European Union. These countries have broad discretion in setting prices and we cannot be sure that such prices and reimbursement will be acceptable to us or our collaborators. If the regulatory authorities in these jurisdictions set prices or reimbursement levels that are not commercially attractive for us or our collaborators, our revenues from sales by us or our collaborators, and the potential profitability of our drug products, in those countries would be negatively affected. An increasing number of countries are taking initiatives to attempt to reduce large budget deficits by focusing cost-cutting efforts on pharmaceuticals for their state-run health care systems. These international price control efforts have impacted all regions of the world, but have been most drastic in the European Union. Additionally, some countries require approval of the sale price of a product before it can be lawfully marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. To obtain reimbursement or pricing approval in some countries, we, or any collaborators, may be required to conduct a clinical trial that compares the cost-effectiveness of our product to other available therapies. As a result, we might obtain marketing approval for a product in a particular country, but then may experience delays in the reimbursement approval of our product or be subject to price regulations that would delay our commercial launch of the product, possibly for lengthy time periods, which could negatively impact the revenues we are able to generate from the sale of the product in that particular country.

 

Moreover, efforts by governments and payors, in the United States and abroad, to cap or reduce healthcare costs may cause such organizations to limit both coverage and level of reimbursement for new products approved and, as a result, they may not cover or provide adequate reimbursement for our product candidates. There has been increasing legislative and enforcement interest in the United States with respect to specialty drug practices. Specifically, there have been several recent U.S. Congressional inquiries and proposed federal and state legislation designed to, among other things, bring more transparency to drug pricing, reduce the cost of prescription drugs under Medicare, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs. 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 drugs and other treatments, has become very intense. As a result, increasingly high barriers are being erected to the entry of new products. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be harmed.

 

If the FDA or comparable foreign regulatory authorities approve generic versions of any of our product candidates that receive marketing approval, or such authorities do not grant such products appropriate periods of data exclusivity before approving generic versions of such products, the sales of such products could be adversely affected.

 

In the United States, manufacturers may seek approval of biosimilar versions of biologics approved by the FDA under a BLA through submission of abbreviated biologic license applications, or ABLAs. In support of an ABLA, a biosimilar manufacturer generally must show that its product is similar to the original biologic product. Biosimilar products may be less costly to bring to market than the original biologic and companies that produce biosimilar products are sometimes able to offer them at lower prices. Thus, following the introduction of a biosimilar product, a significant percentage of the sales of the original biologic may be lost to the biosimilar product, and the price of the original biologic product may be lowered.

 

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The FDA may not accept for review or approve an ABLA for a biosimilar product until any applicable period of non-patent exclusivity for the original biologic has expired. The Public Health Service (PHS) Act provides a period of twelve years of non-patent exclusivity for a biologic approved under a BLA.

 

Competition that our products may face from biosimilar versions of our products could negatively impact our future revenue, profitability and cash flows and substantially limit our ability to obtain a return on our investments in those product candidates.

 

We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws, false claims laws health information privacy and security laws, and other health care laws and regulations. If we are unable to comply, or have not fully complied, with such laws, we could face substantial penalties.

 

If we obtain FDA approval for any of our product candidates and begin commercializing those products in the United States, our operations will be directly, or indirectly through our prescribers, customers and purchasers, subject to various federal and state fraud and abuse laws and regulations, including, without limitation, the federal Health Care Program Anti-Kickback Statute, or Anti-Kickback Statute, the federal civil and criminal False Claims Act and Physician Payments Sunshine Act and regulations. These laws will impact, among other things, our proposed sales, marketing and educational programs. In addition, we may be subject to patient privacy laws by both the federal government and the states in which we conduct our business. The laws that will affect our operations include, but are not limited to:

 

  the Anti-Kickback Statute, which prohibits, among other things, persons or entities from knowingly and willfully soliciting, receiving, offering or paying any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce, or in return for, either the referral of an individual, or the purchase, lease, order, arrangement, or recommendation of any good, facility, item or service for which payment may be made, in whole or in part, under a federal healthcare program, such as the Medicare and Medicaid programs. “Remuneration” has been interpreted broadly to include anything of value. A person or entity does not need to have actual knowledge of the Anti-Kickback Statute or specific intent to violate it to have committed a violation. In addition, the government may assert that a claim including items or services resulting from a violation of the Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act, or FCA, or federal civil money penalties. The Anti-Kickback Statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers, and formulary managers on the other. There are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution;
     
  the federal civil and criminal false claims laws and civil monetary penalty laws, including the FCA, which impose criminal and civil penalties against individuals or entities for, among other things: knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent; knowingly making, using or causing to be made or used, a false statement of record material to a false or fraudulent claim or obligation to pay or transmit money or property to the federal government. 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. The FCA also permits a private individual acting as a “whistleblower” to bring actions on behalf of the federal government alleging violations of the FCA and to share in any monetary recovery;
     
  the beneficiary inducement provisions of the CMP Law, which prohibits, among other things, the offering or giving of remuneration, which includes, without limitation, any transfer of items or services for free or for less than fair market value (with limited exceptions), to a Medicare or Medicaid beneficiary that the person knows or should know is likely to influence the beneficiary’s selection of a particular supplier of items or services reimbursable by a federal or state governmental program;

 

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  the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created new federal criminal statutes that prohibit a person from knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by means of false or fraudulent pretenses, representations or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payor (e.g., public or private) and knowingly and willfully falsifying, concealing or covering up by any trick or device a material fact or making any materially false, fictitious, or fraudulent statements or representations in connection with the delivery of, or payment for, healthcare benefits, items or services relating to healthcare matters; similar to the 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 the Health Information Technology for Economic and Clinical Health Act of 2009, and their respective implementing regulations, which impose requirements on certain healthcare providers, health plans, and healthcare clearinghouses, known as covered entities, as well as their respective business associates, individuals and entities that perform services on their behalf that involve the use or disclosure of individually identifiable health information, relating to the privacy, security and transmission of individually identifiable health information;
     
  the U.S. federal transparency requirements under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively, ACA, including the provision commonly referred to as the Physician Payments Sunshine Act, which requires applicable manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to CMS information related to payments or other transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, as well as ownership and investment interests held by the physicians described above and their immediate family members. Beginning in 2022, applicable manufacturers also will be required to report information regarding payments and transfers of value provided to physician assistants, nurse practitioners, clinical nurse specialists, certified nurse anesthetists, and certified nurse-midwives;
     
  federal government price reporting laws, which require us to calculate and report complex pricing metrics in an accurate and timely manner to government programs; and
     
  federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers.

 

Additionally, we are subject to state and foreign equivalents of each of the healthcare laws and regulations described above, among others, some of which may be broader in scope and may apply regardless of the payer. Many U.S. states have adopted laws similar to the Anti-Kickback Statute and False Claims Act, and may apply to our business practices, including, but not limited to, research, distribution, sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental payors, including private insurers. In addition, some states have passed laws that require pharmaceutical companies to comply with the April 2003 Office of Inspector General Compliance Program Guidance for Pharmaceutical Manufacturers and/or the Pharmaceutical Research and Manufacturers of America’s Code on Interactions with Healthcare Professionals. Several states also impose other marketing restrictions or require pharmaceutical companies to make marketing or price disclosures to the state. There are ambiguities as to what is required to comply with these state requirements and if we fail to comply with an applicable state law requirement we could be subject to penalties. Finally, there are state and foreign laws governing the privacy and security of health information, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

 

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Because of the breadth of these laws and the narrowness of the statutory exceptions and regulatory safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such laws. Law enforcement authorities are increasingly focused on enforcing fraud and abuse laws, and it is possible that some of our practices may be challenged under these laws. Efforts to ensure that our current and future business arrangements with third parties, and our business generally, will comply with applicable healthcare laws and regulations will involve substantial costs. If our operations, including our arrangements with physicians and other healthcare providers, some of whom receive stock options as compensation for services provided, are found to be in violation of any of such laws or any other governmental regulations that apply to us, we may be subject to penalties, including, without limitation, administrative, civil and criminal penalties, damages, fines, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, the curtailment or restructuring of our operations, exclusion from participation in federal and state healthcare programs (such as Medicare and Medicaid), additional reporting requirements and/or oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, and individual imprisonment, any of which could adversely affect our ability to operate our business and our financial results. Any action for violation of these laws, even if successfully defended, could cause a pharmaceutical manufacturer to incur significant legal expenses and divert management’s attention from the operation of the business. Prohibitions or restrictions on sales or withdrawal of future marketed products could materially affect business in an adverse way.

 

Healthcare legislative reform measures and constraints on national budget social security systems may have a material adverse effect on our business and results of operations.

 

Payors, whether domestic or foreign, or governmental or private, are developing increasingly sophisticated methods of controlling healthcare costs and those methods are not always specifically adapted for new technologies such as those we are developing. In both the United States and certain foreign jurisdictions, there have been a number of legislative and regulatory changes to the health care system that could impact our ability to sell our products profitably. In particular, in the United States, the ACA was enacted in 2010 which, among other things, subjects biologic products to potential competition by lower-cost biosimilars; addresses a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected; increases the minimum Medicaid rebates owed by most manufacturers under the Medicaid Drug Rebate Program; extends the Medicaid Drug Rebate program to utilization of prescriptions of individuals enrolled in Medicaid managed care organizations; subjects manufacturers to new annual fees and taxes for certain branded prescription drugs; and provides incentives to programs that increase the federal government’s comparative effectiveness research.

 

Since its enactment, there have been judicial and Congressional challenges to certain aspects of the ACA, as well as recent efforts by the current administration to repeal or replace certain aspects of the ACA. Further, since January 2017, President Trump has signed two Executive Orders and other directives designed to delay the implementation of certain provision of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. In addition, CMS recently issued a final rule that will give states greater flexibility, starting in 2020, in setting benchmarks for insurers in the individual and small group marketplaces, which may have the effect of relaxing the essential health benefits required under the ACA for plans sold through such marketplaces.

 

Concurrently, Congress has considered legislation that would repeal and replace all or part of the ACA. While Congress has not passed comprehensive repeal legislation, two bills affecting the implementation of certain taxes under the ACA have been signed into law. The Tax Cuts and Jobs Act of 2017, or TCJA, includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” Additionally, on January 22, 2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of certain ACA-mandated fees, including the so-called “Cadillac” tax on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based on market share, and the medical device exercise tax on non-exempt medical devices. Further, the Bipartisan Budget Act of 2018, or BBA, among other things, amends the ACA, effective January 1, 2019, to increase from 50 percent to 70 percent the point-of-sale discount that is owed by pharmaceutical manufacturers who participate in Medicare Part D and to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole.” More recently, in July 2018, CMS published a final rule permitting further collections and payments to and from certain ACA qualified health plans and health insurance issuers under the ACA risk adjustment program in response to the outcome of federal district court litigation regarding the method CMS uses to determine this risk adjustment. Congress also could consider additional legislation to repeal or replace other elements of the ACA. Thus, the full impact of the ACA, any law repealing or replacing elements of it, and the political uncertainty surrounding any repeal or replacement legislation on our business remains unclear.

 

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In addition, other legislative changes have been proposed and adopted in the United States since the ACA was enacted. In August 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.5 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions of Medicare payments to providers of 2% per fiscal year, which went into effect in April 2013, and due to subsequent legislative amendments, including the BBA, will remain in effect through 2027 unless additional Congressional action is taken. In January 2013, the American Taxpayer Relief Act of 2012, was signed into law, which, among other things, further reduced Medicare payments to several providers, including hospitals and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.

 

Also, there has been heightened governmental scrutiny recently over the manner in which drug manufacturers set prices for their marketed products, which has resulted in several Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drug products. For example, the current administration released a “Blueprint” to lower drug prices and reduce out of pocket costs of drugs that contains additional proposals to increase manufacturer competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their products and reduce the out of pocket costs of drug products paid by consumers. For example, in November 2018, CMS issued a proposed rule for comment that would, among other things, provide Medicare prescription drug plans under Part D more transparency in pricing and greater flexibility to negotiate discounts for, and in certain circumstances exclude, drugs in the six “protected” formulary classes and allow Medicare Advantage plans to use certain drug management tools such as step therapy for physician-administered drugs. Although a number of these, and other proposed measures will require authorization through additional legislation to become effective, Congress and the Trump administration have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs.

 

There have been, and likely will continue to be, legislative and regulatory proposals at the foreign, federal and state levels directed at broadening the availability of healthcare and containing or lowering the cost of healthcare. We cannot predict the initiatives that may be adopted in the future. The continuing efforts of these governments and other payors to contain or reduce costs of healthcare and/or impose price controls may adversely affect:

 

  the demand for our product candidates, if we obtain regulatory approval;
     
  our ability to set a price that we believe is fair for our products;
     
  our ability to generate revenue and achieve or maintain profitability;
     
  the level of taxes that we are required to pay; and
     
  the availability of capital.

 

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Any denial in coverage or reduction in reimbursement from Medicare or other government programs may result in a similar denial or reduction in payments from private payors, which may adversely affect our future profitability.

 

We are subject to the the U.S. Foreign Corrupt Practices Act of 1977, as amended, or the FCPA, and other anti-corruption laws, as well as export control laws, import and customs laws, trade and economic sanctions laws and other laws governing our operations.

 

Our operations are subject to anti-corruption laws, including the FCPA, the U.S. domestic bribery statute contained in 18 §201, the U.S. Travel Act, and other anti-corruption laws that apply in countries where we do business. The Bribery Act, the FCPA and these other laws generally prohibit us and our employees and intermediaries from authorizing, promising, offering, or providing, directly or indirectly, improper or prohibited payments, or anything else of value, to government officials or other persons to obtain or retain business or gain some other business advantage. Under the Bribery Act, we may also be liable for failing to prevent a person associated with us from committing a bribery offense. We and our commercial partners operate in a number of jurisdictions that pose a high risk of potential Bribery Act or FCPA violations, and we participate in collaborations and relationships with third parties whose corrupt or illegal activities could potentially subject us to liability under the Bribery Act, FCPA or local anti-corruption laws, even if we do not explicitly authorize or have actual knowledge of such activities. In addition, we cannot predict the nature, scope or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing laws might be administered or interpreted.

 

We are also subject to other laws and regulations governing our international operations, including regulations administered by the governments of the United Kingdom and the United States, and authorities in the European Union, including applicable export control regulations, economic sanctions and embargoes on certain countries and persons, anti-money laundering laws, import and customs requirements and currency exchange regulations, collectively referred to as the Trade Control laws.

 

There is no assurance that we will be completely effective in ensuring our compliance with all applicable anti-corruption laws, including the Bribery Act, the FCPA or other legal requirements, including Trade Control laws. If we are not in compliance with the Bribery Act, the FCPA and other anti-corruption laws or Trade Control laws, we may be subject to criminal and civil penalties, disgorgement and other sanctions and remedial measures, and legal expenses, which could have an adverse impact on our business, financial condition, results of operations and liquidity. Likewise, any investigation of any potential violations of the Bribery Act, the FCPA, other anti-corruption laws or Trade Control laws by United Kingdom, United States or other authorities could also have an adverse impact on our reputation, our business, results of operations and financial condition.

 

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

 

We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. Our operations involve the use of hazardous and flammable materials, including chemicals and biological materials. Our operations also produce hazardous waste products. We generally contract with third parties for the disposal of these materials and wastes. We cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or injury resulting from our use of hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties. Furthermore, environmental laws and regulations are complex, change frequently and have tended to become more stringent. We cannot predict the impact of such changes and cannot be certain of our future compliance. In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair our research, development or production efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.

 

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Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials or other work-related injuries, this insurance may not provide adequate coverage against potential liabilities. In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair our research, development or production efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions or liabilities, which could materially adversely affect our business, financial condition, results of operations and prospects.

 

Risks Related to Our International Operations
 
As one of our subsidiaries, Relief, is based outside of the United States, we are subject to economic, political, regulatory and other risks associated with international operations.

 

As Relief is based in the Switzerland, our business is subject to risks associated with conducting business outside of the United States. Many of our suppliers and clinical trial relationships are located outside the United States. Accordingly, our future results could be harmed by a variety of factors, including:

 

  economic weakness, including inflation, or political instability in particular non-U.S. economies and markets;
     
  differing and changing regulatory requirements for product approvals;
     
  differing jurisdictions could present different issues for securing, maintaining or obtaining freedom to operate in such jurisdictions;
     
  potentially reduced protection for intellectual property rights;
     
  difficulties in compliance with different, complex and changing laws, regulations and court systems of multiple jurisdictions and compliance with a wide variety of foreign laws, treaties and regulations;
     
  changes in non-U.S. regulations and customs, tariffs and trade barriers;
     
  changes in non-U.S. currency exchange rates of the pound sterling, U.S. dollar, euro and currency controls;
     
  trade protection measures, import or export licensing requirements or other restrictive actions by governments;
     
  differing reimbursement regimes and price controls in certain non-U.S. markets;
     
  negative consequences from changes in tax laws;
     
  compliance with tax, employment, immigration and labor laws for employees living or traveling abroad, including, for example, the variable tax treatment in different jurisdictions of options granted under our share option schemes or equity incentive plans;
     
  workforce uncertainty in countries where labor unrest is more common than in the United States;
     
  litigation or administrative actions resulting from claims against us by current or former employees or consultants individually or as part of class actions, including claims of wrongful terminations, discrimination, misclassification or other violations of labor law or other alleged conduct;

 

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  difficulties associated with staffing and managing international operations, including differing labor relations;
     
  production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
     
  business interruptions resulting from geo-political actions, including war and terrorism, or natural disasters including earthquakes, typhoons, floods and fires.

 

European data collection is governed by restrictive regulations governing the use, processing, and cross-border transfer of personal information.

 

The collection and use of personal health data in the European Union is was governed by the provisions of the Data Protection Directive, and which, as of May 25, 2018, has been superseded by the GDPR. These directives impose several requirements relating to the consent of the individuals to whom the personal data relates, the information provided to the individuals, notification of data processing obligations to the competent national data protection authorities and the security and confidentiality of the personal data. The Data Protection Directive and GDPR also impose strict rules on the transfer of personal data out of the European Union to the United States. Failure to comply with the requirements of the Data Protection Directive, the GDPR, and the related national data protection laws of the European Union Member States may result in fines and other administrative penalties. While the Data Protection Directive did not apply to organizations based outside the EU, the GDPR has expanded its reach to include any business, regardless of its location, that provides goods or services to residents in the EU. This expansion would incorporate any potential clinical trial activities in EU member states. The GDPR imposes strict requirements on controllers and processors of personal data, including special protections for “sensitive information” which includes health and genetic information of data subjects residing in the EU. GDPR grants individuals the opportunity to object to the processing of their personal information, allows them to request deletion of personal information in certain circumstances, and provides the individual with an express right to seek legal remedies in the event the individual believes his or her rights have been violated. Further, the GDPR imposes strict rules on the transfer of personal data out of the European Union to the United States or other regions that have not been deemed to offer “adequate” privacy protections. Failure to comply with the requirements of the GDPR and the related national data protection laws of the European Union Member States, which may deviate slightly from the GDPR, may result in fines of up to 4% of global revenues, or € 20,000,000, whichever is greater. As a result of the implementation of the GDPR, we may be required to put in place additional mechanisms ensuring compliance with the new data protection rules.

 

Exchange rate fluctuations may materially affect our results of operations and financial condition.

 

Owing to the international scope of our operations, fluctuations in exchange rates, particularly between the pound sterling and the U.S. dollar, may adversely affect us. Although we are based in the United Kingdom, we source research and development, manufacturing, consulting and other services from the United States and the European Union. Further, potential future revenue may be derived from abroad, particularly from the United States. As a result, our business and the price of our common stock may be affected by fluctuations in foreign exchange rates not only between the pound sterling and the U.S. dollar, but also the euro, which may have a significant impact on our results of operations and cash flows from period to period. Currently, we do not have any exchange rate hedging arrangements in place.

 

Risks Related to Our Dependence on Third Parties
 
For certain product candidates, we may depend on development and commercialization collaborators to develop and conduct clinical trials with, obtain regulatory approvals for, and if approved, market and sell product candidates. If such collaborators fail to perform as expected, the potential for us to generate future revenue from such product candidates would be significantly reduced and our business would be harmed.

 

For certain products candidates, we depend, or will depend, on our development and commercial collaborators to develop, conduct clinical trials of, and, if approved, commercialize product candidates.

 

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Our current collaborations and any future collaborations that we enter into are subject to numerous risks, including:

 

  collaborators have significant discretion in determining the efforts and resources that they will apply to the collaborations;
     
  collaborators may not perform their obligations as expected or fail to fulfill their responsibilities in a timely manner, or at all;
     
  collaborators may not pursue development and commercialization of any product candidates that achieve regulatory approval or may elect not to continue or renew development or commercialization programs based on preclinical studies or clinical trial results, changes in the collaborators’ strategic focus or available funding or external factors, such as an acquisition, that divert resources or create competing priorities;
     
  collaborators may delay preclinical studies or clinical trials, provide insufficient funding for clinical trials, stop a preclinical study or clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing;
     
  we may not have access to, or may be restricted from disclosing, certain information regarding product candidates being developed or commercialized under a collaboration and, consequently, may have limited ability to inform our shareholders about the status of such product candidates;
     
  collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our product candidates if the collaborators believe that competitive products are more likely to be successfully developed or can be commercialized under terms that are more economically attractive than ours;
     
  The collaborations may not result in product candidates to develop and/or preclinical studies or clinical trials conducted as part of the collaborations may not be successful;
     
  product candidates developed with collaborators may be viewed by our collaborators as competitive with their own product candidates or products, which may cause collaborators to stop commercialization of our product candidates;
     
  a collaborator with marketing and distribution rights to one or more of our product candidates that achieve regulatory approval may not commit sufficient resources to the marketing and distribution of any such product candidate; and
     
  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 potential litigation.

 

In addition, certain collaboration and commercialization agreements provide our collaborators with rights to terminate such agreements, which rights may or may not be subject to conditions, and which rights, if exercised, would adversely affect our product development efforts and could make it difficult for us to attract new collaborators. In that event, we would likely be required to limit the size and scope of efforts for the development and commercialization of such product candidates or products; we would likely be required to seek additional financing to fund further development or identify alternative strategic collaborations; our potential to generate future revenue from royalties and milestone payments from such product candidates or products would be significantly reduced, delayed or eliminated; and it could have an adverse effect on our business and future growth prospects. Our rights to recover tangible and intangible assets and intellectual property rights needed to advance a product candidate or product after termination of a collaboration may be limited by contract, and we may not be able to advance a program post- termination.

 

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If conflicts arise with our development and commercialization collaborators or licensors, they may act in their own self-interest, which may be adverse to the interests of our company.

 

We may in the future experience disagreements with our development and commercialization collaborators or licensors. Conflicts may arise in our collaboration and license arrangements with third parties due to one or more of the following:

 

  disputes with respect to milestone, royalty and other payments that are believed due under the applicable agreements;
     
  disagreements with respect to the ownership of intellectual property rights or scope of licenses;
     
  disagreements with respect to the scope of any reporting obligations;
     
  unwillingness on the part of a collaborator to keep us informed regarding the progress of its development and commercialization activities, or to permit public disclosure of these activities; and
     
  disputes with respect to a collaborator’s or our development or commercialization efforts with respect to our products and product candidates.

 

Conflicts with our development and commercialization collaborators or licensors could materially adversely affect our business, financial condition or results of operations and future growth prospects.

 

We will rely on third parties, including independent clinical investigators and CROs, to conduct and sponsor some of the clinical trials of our product candidates. Any failure by a third party to meet its obligations with respect to the clinical development of our product candidates may delay or impair our ability to obtain regulatory approval for our product candidates.

 

We will be relying upon and plan to continue to rely upon third parties, including independent clinical investigators, academic partners, regulatory affairs consultants and third-party CROs, to conduct our preclinical studies and clinical trials, including in some instances sponsoring such clinical trials, and to engage with regulatory authorities and monitor and manage data for our ongoing preclinical and clinical programs. Given the breadth of clinical therapeutic areas for which we believe our product candidates may have utility, we intend to continue to rely on external service providers rather than build internal regulatory expertise.

 

Any of these third parties may terminate their engagements with us under certain circumstances. We may not be able to enter into alternative arrangements or do so on commercially reasonable terms. In addition, there is a natural transition period when a new contract research organization begins work. As a result, delays would likely occur, which could negatively impact our ability to meet our expected clinical development timelines and harm our business, financial condition and prospects.

 

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We remain responsible for ensuring that each of our preclinical studies and clinical trials is conducted in accordance with the applicable protocol and legal, regulatory and scientific standards, and our reliance on these third parties does not relieve us of our regulatory responsibilities. We and our third-party contractors and 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 European Economic Area, or EEA, and comparable foreign regulatory authorities for all of our products in clinical development. Regulatory authorities enforce these GCP requirements through periodic inspections of trial sponsors, principal investigators and trial sites. If we fail to exercise adequate oversight over any of our academic partners or CROs or if we or any of our academic partners or CROs do not successfully carry out their contractual duties or obligations, fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements, or for any other reasons, the clinical data generated in our clinical trials may be deemed unreliable and the FDA, the EMA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that upon a regulatory inspection of us, our academic partners or our CROs or other third parties performing services in connection with our clinical trials, such regulatory authority will determine that any of our clinical trials complies with GCP regulations. In addition, our clinical trials must be conducted with product produced under applicable CGMP regulations. Our failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process.

 

Furthermore, the third parties conducting clinical trials on our behalf are not our employees, and except for remedies available to us under our agreements with such contractors, we cannot control whether or not they devote sufficient time, skill and resources to our ongoing development programs. These contractors may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical trials or other drug development activities, which could impede their ability to devote appropriate time to our clinical programs. If these third parties, including clinical investigators, 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 may not be able to obtain, or may be delayed in obtaining, marketing approvals for our product candidates. If that occurs, we will not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates.

 

In addition, with respect to investigator-sponsored trials that may be conducted, we would not control the design or conduct of these trials, and it is possible that the FDA or EMA 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. Additionally, the FDA or EMA 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 or EMA may require us to obtain and submit additional preclinical, manufacturing, or clinical data.

 

We intend to rely on third parties to manufacture product candidates, which increases the risk that we will not have sufficient quantities of such product candidates or products or such quantities at an acceptable cost, which could delay, prevent or impair our development or commercialization efforts.

 

We do not own or operate manufacturing facilities for the production of clinical or commercial supplies of the product candidates that we are developing or evaluating in our development programs. We have limited personnel with experience in drug manufacturing and lack the resources and the capabilities to manufacture any of our product candidates on a clinical or commercial scale. We rely on third parties for supply of our product candidates, and our strategy is to outsource all manufacturing of our product candidates and products to third parties.

 

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In order to conduct clinical trials of product candidates, we will need to have them manufactured in potentially large quantities. Our third- party manufacturers may be unable to successfully increase the manufacturing capacity for any of our product candidates in a timely or cost- effective manner, or at all. In addition, quality issues may arise during scale-up activities and at any other time. For example, ongoing data on the stability of our product candidates may shorten the expiry of our product candidates and lead to clinical trial material supply shortages, and potentially clinical trial delays. If these third-party manufacturers are unable to successfully scale up the manufacture of our product candidates in sufficient quality and quantity, the development, testing and clinical trials of that product candidate may be delayed or infeasible, and regulatory approval or commercial launch of that product candidate may be delayed or not obtained, which could significantly harm our business.

 

Our use of new third-party manufacturers increases the risk of delays in production or insufficient supplies of our product candidates as we transfer our manufacturing technology to these manufacturers and as they gain experience manufacturing our product candidates. Even after a third-party manufacturer has gained significant experience in manufacturing our product candidates or even if we believe we have succeeded in optimizing the manufacturing process, there can be no assurance that such manufacturer will produce sufficient quantities of our product candidates in a timely manner or continuously over time, or at all.

 

We may be delayed if we need to change the manufacturing process used by a third party. Further, if we change an approved manufacturing process, then we may be delayed if the FDA or a comparable foreign authority needs to review the new manufacturing process before it may be used.

 

We operate an outsourced model for the manufacture of our product candidates, and contract with good manufacturing practice, or GMP, licensed pharmaceutical contract development and manufacturing organizations. While we have engaged several third-party vendors to provide clinical and non-clinical supplies and fill-finish services, we do not currently have any agreements with third-party manufacturers for long-term commercial supplies. In the future, we may be unable to enter into agreements with third-party manufacturers for commercial supplies of any product candidate that we develop, or may be unable to do so on acceptable terms. Even if we are able to establish and maintain arrangements with third-party manufacturers, reliance on third- party manufacturers entails risks, including:

 

  reliance on third-parties for manufacturing process development, regulatory compliance and quality assurance;
     
  limitations on supply availability resulting from capacity and scheduling constraints of third-parties;
     
  the possible breach of manufacturing agreements by third-parties because of factors beyond our control; and
     
  the possible termination or non-renewal of the manufacturing agreements by the third-party, at a time that is costly or inconvenient to us.

 

Third-party manufacturers may not be able to comply with cGMP requirements or similar regulatory requirements outside the United States. Our failure, or the failure of our third-party manufacturers, to comply with applicable requirements could result in sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products, operating restrictions and/or criminal prosecutions, any of which could significantly and adversely affect supplies of our product candidates. In addition, some of the product candidates we intend to develop, including SON-080, use toxins or other substances that can be produced only in specialized facilities with specific authorizations and permits, and there can be no guarantee that we or our manufacturers can maintain such authorizations and permits. These specialized requirements may also limit the number of potential manufacturers that we can engage to produce our product candidates, and impair any efforts to transition to replacement manufacturers.

 

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Our future product candidates and any products that we may develop may compete with other product candidates and products for access to manufacturing facilities. There are a limited number of manufacturers that operate under cGMP requirements that might be capable of manufacturing for us.

 

If the third parties that we engage to supply any materials or manufacture product for our preclinical tests and clinical trials should cease to continue to do so for any reason, we likely would experience delays in advancing these tests and trials while we identify and qualify replacement suppliers or manufacturers and we may be unable to obtain replacement supplies on terms that are favorable to us. In addition, if we are not able to obtain adequate supplies of our product candidates or the substances used to manufacture them, it will be more difficult for us to develop our product candidates and compete effectively.

 

Our current and anticipated future dependence upon others for the manufacture of our product candidates may adversely affect our future profit margins and our ability to develop product candidates and commercialize any products that receive marketing approval on a timely and competitive basis.

 

Our reliance on third parties requires us to share our trade secrets, which increases the possibility that a competitor will discover them or that our trade secrets will be misappropriated or disclosed.

 

Because we rely on third parties to manufacture our product candidates, and because we collaborate with various organizations and academic institutions on the development of our product candidates, we must, at times, share trade secrets with them. We seek to protect our proprietary technology in part by entering into confidentiality agreements and, if applicable, material transfer agreements, collaborative research agreements, consulting agreements or other similar agreements with our collaborators, advisors, employees and consultants prior to beginning research or disclosing proprietary information. These agreements typically limit the rights of the third parties to use or disclose our confidential information, such as trade secrets.

 

Despite the contractual provisions employed when working with third parties, the need to share trade secrets and other confidential information increases the risk that such trade secrets become known by our competitors, are inadvertently incorporated into the technology of others, or are disclosed or used in violation of these agreements. Given that our proprietary position is based, in part, on our know-how and trade secrets, a competitor’s discovery of our trade secrets or other unauthorized use or disclosure would impair our competitive position and may have a material adverse effect on our business.

 

In addition, these agreements typically restrict the ability of our collaborators, advisors, employees and consultants to publish data potentially relating to our trade secrets. Our academic collaborators typically have rights to publish data, provided that we are notified in advance and may delay publication for a specified time in order to secure our intellectual property rights arising from the collaboration. In other cases, publication rights are controlled exclusively by us, although in some cases we may share these rights with other parties. Despite our efforts to protect our trade secrets, our competitors may discover our trade secrets, either through breach of these agreements, independent development or publication of information including our trade secrets in cases where we do not have proprietary or otherwise protected rights at the time of publication. A competitor’s discovery of our trade secrets would impair our competitive position and have an adverse impact on our business.

 

Risks Related to Our Intellectual Property
 
If we are unable to obtain and maintain patent and other intellectual property protection for our products and product candidates, or if the scope of the patent and other 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 our products and product candidates may be adversely affected.

 

Our ability to compete effectively will depend, in part, on our ability to maintain the proprietary nature of our technology and manufacturing processes. We rely on research, manufacturing and other know-how, patents, trade secrets, license agreements and contractual provisions to establish our intellectual property rights and protect our products and product candidates. These legal means, however, afford only limited protection and may not adequately protect our rights. As of September 30, 2019, our intellectual property portfolio includes five patent applications.

 

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In certain situations and as considered appropriate, we have sought, and we intend to continue to seek to protect our proprietary position by filing patent applications in the United States and, in at least some cases, one or more countries outside the United States relating to current and future products and product candidates that are important to our business. However, we cannot predict whether the patent applications currently being pursued will issue as patents, or whether the claims of any resulting patents will provide us with a competitive advantage or whether we will be able to successfully pursue patent applications in the future relating to our current or future products and product candidates. Moreover, the patent application and approval process is expensive and time-consuming. We may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Furthermore, we, or any future partners, collaborators, or licensees, may fail to identify patentable aspects of inventions made in the course of development and commercialization activities before it is too late to obtain patent protection on them. Therefore, we may miss potential opportunities to seek additional patent protection. It is possible that defects of form in the preparation or filing of patent applications may exist, or may arise in the future, for example with respect to proper priority claims, inventorship, claim scope, or requests for patent term adjustments. If we fail to establish, maintain or protect such patents and other intellectual property rights, such rights may be reduced or eliminated. If there are material defects in the form, preparation, prosecution or enforcement of our patents or patent applications, such patents may be invalid and/or unenforceable, and such applications may never result in valid, enforceable patents.

 

Even if they are unchallenged, our patents and patent applications, if issued, may not provide us with any meaningful protection or prevent competitors from designing around our patent claims by developing similar or alternative technologies or therapeutics in a non-infringing manner. For example, a third party may develop a competitive therapy that provides benefits similar to one or more of our product candidates but that falls outside the scope of our patent protection. If the patent protection provided by the patents and patent applications we hold or pursue with respect to our product candidates is not sufficiently broad to impede such competition, our ability to successfully commercialize our product candidates could be negatively affected.

 

As discussed in “Business of Sonnet,” Sonnet’s WO/2018/151868 patent application was not timely filed in the PCT receiving office due to a computer issue at the filing office. Despite the restoration of priority by the PCT as “unintentional”, some countries in which this application was foreign filed did not accept this restoration. Canada and China do not allow for such priority restoration. Brazil, Europe, India and Japan allow priority restoration under a more rigorous “due care” standard, and such restoration procedures are pending in these jurisdictions. However, if priority is not restored, these patent applications will face both Sonnet’s own publications as well as any additional prior art published by third parties in the year preceding the PCT filing. This could affect the scope or breadth of the patent claims we are pursuing in these specific jurisdictions, or could result in no ability to receive patents in these countries.

 

Other parties, many of whom have substantially greater resources and have made significant investments in competing technologies, have developed or may develop technologies that may be related or competitive with our approach, and may have filed or may file p