cos: click here to indicate for the eyenovia inc. offering...cos: roth capital partners, union...

IPO NAME Symbol Filing range Lead Due

our

rating million

Sh. Underwriters

ARMO BioSciences, Inc. ARMO 3

$14.00-$16.00 6.67

Underwriters: Jefferies, Leerink, BMO Capital Markets Cos: Baird

1/26

Entera Bio Ltd. ENTX 2

$10.00-$12.00

5.0

Underwriters: Oppenheimer & Co, Ladenburg Thalmann Cos:

1/24

Eyenovia, Inc. EYEN 2

$10.00-$12.00 2.73

Underwriters: Ladenburg Thalmann, Roth Capital Partners Cos:

1/24

Gates Industrial Corporation plc GTES 2

$18.00-$21.00 38.5

Underwriters: Citigroup, Morgan Stanley, UBS Investment Bank, Barclays, Credit Suisse, Goldman Sachs & Co., RBC Capital Markets Cos: Blackstone Capital Markets, Deutsche Bank Securities, Wells Fargo Securities, Current Capital Securities, KeyBanc Capital Markets, Siebert Cisneros Shank & Co., SunTrust Robinson Humphrey, Academy Securities, BTIG, Guggenheim Securities

1/25

Menlo Therapeutics, Inc. MNLO 2

$14.00-$16.00 5.67

Underwriters: Jefferies, Piper Jaffray, Guggenheim Securities Cos: JMP Securities

1/25

PagSeguro Digital Ltd. PAGS 3

$17.50-$20.50 92.1

Underwriters: Goldman Sachs & Co., Morgan Stanley, BofA Merrill Lynch, Bradesco BBI, Credit Suisse, Deutsche Bank Securities, Itau BBA, J.P. Morgan Cos:

1/25

PlayAGS, Inc. AGS 2

$16.00-$18.00 10.25

Underwriters: Credit Suisse, Deutsche Bank Securities Jefferies, Macquarie Capital, BofA Merrill Lynch, Citigroup, Nomura, Stifel, SunTrust Robinson Humphrey

1/26

Click here to indicate for the PagSeguro Digital Offering

Click here to indicate for the Eyenovia Inc. Offering

https://www.motifinvesting.com/ipos/eyenovia-inc?utm_medium=partner&utm_source=ipo-boutique&utm_campaign=ipo


https://www.motifinvesting.com/ipos/pagseguro-digital-ltd?utm_medium=partner&utm_source=ipo-boutique&utm_campaign=ipo




Cos: Roth Capital Partners, Union Gaming, The Williams Capital Group, Apollo Global Securities

Prolung, Inc. LUNG 2

$7.00-$8.00 .93

Underwriters: Maxim Group, Aegis Cos:

1/25

resTORbio, Inc. TORC 2

$14.00-$16.00 5.67

Underwriters: BofA Merrill Lynch, Leerink Partners, Evercore ISI, Wedbush PacGrow Cos:

1/26

Solid Biosciences, LLC SLDB 2

$16.00-$18.00 5.89

Underwriters: J.P. Morgan, Goldman Sachs & Co., Leerink Partners Cos: Nomura, Chardan

1/25

SECONDARY NAME

Symbol

Last

Trade Lead Due

their

rating

million

Sh. Underwriters

There are no secondaries currently scheduled for this week. If this changes, we will alert you with emailed advisories.

This past week three IPOs debuted, eight updated terms and, at the time of this writing, nine IPOs were filed.

The IPO market was stung this past week as the largest deal since Snap Inc. opened with a flop. ADT Inc. (ADT) downsized its offering from 111.1mm to 105.0mm shares and priced at $14.00 or three-dollars below the initial $17-$19 range. The cuts were not enough to appease investors as the heavily retail-allocated deal opened (albeit it varies by who you talk to after the fact) at $12.65 for a loss of 9% at first trade. A late morning ‘rally’ (if you want to call it that) to $12.97 was sold off into the close as ADT finished the opening session near its lows. It is our opinion that the performance of ADT will be a thorn in the side of future PE-backed deals- at least in the short term. Companies of this nature that attempt to go public with massive debt and a quick turnaround from the time of acquisition by the sponsor will likely be scrutinized. There are a couple sponsor-backed deals this week (Gates Industrial & PlayAGS) and these deals could likely suffer because of the result of ADT.

The other two deals this week fared much better. Americold Realty Trust (COLD) upsized its offering from an initial share count of 24.0mm shares to a final result of 45.3mm shares and priced at the high-end of the range, $16.00. COLD opened at $17.50 for a gain of 9.4% at first trade. The offering traded held steady in its opening session and finished Friday near its highs.

Click here to indicate for the Prolung Inc. offering

http://motifinvesting.com/ipos/prolung-inc?utm_medium=partner&utm_source=ipo-boutique&utm_campaign=ipo



The best performing deal of the week was Nine Energy Service (NINE) marking a win for the energy sector for the second straight week. NINE priced a full-size deal at the high-end of the range, $23.00, and opened with a $1.00 premium. NINE traded as high as $29.00 on its opening day for a 26.1% return at top-tick.

Looking ahead to this week there are ten deals on the schedule and two are attracting early positive street chatter. PagSeguro Digital Ltd (PAGS) is a disruptive provider of financial technology solutions focused primarily on Micro-Merchants, Small Companies and Medium-Sized Companies, or SMEs, in Brazil. Their total revenue and income was $R325.8 million, R$674.9 million and R$1.14 billion and their net income was R$27.2 million, R$35.5 million and R$127.8 million in 2014, 2015, and 2016, respectively. ARMO BioSciences Inc. (ARMO) is a late-stage immuno-oncology company that is developing a pipeline of novel, proprietary product candidates that activate the immune system of cancer patients to recognize and eradicate tumors. The company has impressive backers as well as significant insider buying -- it would be 40% of the offering if priced at the midpoint of the range.

Please check your emails early and often. We may upgrade or downgrade an IPO and or secondary –sometimes with not as much notice as we would like to give. If you have interest in IPOs do NOT delay your IOI’s (hopefully they are already in)…you can always cancel them. We will keep you posted if and as when…we have anything pertinent to add. The current number of “active” IPOs in the pipeline as of 1/19/18 is 70. Good luck trading!

IPO's

ARMO BioSciences, Inc. ARMO $14.00-$16.00 6.67 million shares Underwriters: Jefferies, Leerink, BMO Capital Markets Co-Managers: Baird Proposed trade date of 1/26. They are a late-stage immuno-oncology company that is developing a pipeline of novel, proprietary product candidates that activate the immune system of cancer patients to recognize and eradicate tumors.

ARMO BioSciences, Inc. ARMO

6,666,667 shares to be offered between $14.00 and $16.00 per share

Underwriters: Jefferies, Leerink, BMO Capital Markets Co-Managers: Baird

Proposed trade date of 1/26

Rating = 3

Click here to view the prospectus.

https://www.sec.gov/Archives/edgar/data/1693664/000119312518010551/d269230ds1a.htm



Company Overview

They are a late-stage immuno-oncology company that is developing a pipeline of novel, proprietary product candidates that activate the immune system of cancer patients to recognize and eradicate tumors. Their vision is to improve and prolong the lives of cancer patients by advancing and expanding the field of immuno-oncology through novel combinations and treatment sequences of their pipeline products with standard of care chemotherapies and checkpoint inhibitors or with other emerging immunotherapies that elicit complementary and synergistic treatment effects.

Their lead product candidate, AM0010 (pegilodecakin) is a long-acting form of human Interleukin-10 (IL-10). IL-10 is a naturally occurring immune cell growth factor in humans that stimulates the survival, expansion and tumor killing (cytotoxic) capacity of a particular white blood cell of the immune system, called the CD8+ T cell. They have focused on CD8+ T cells because these cells have been shown to recognize and kill cancer cells. An abundance of tumor-infiltrating CD8+ T cells improves the prognosis and lengthens the survival of cancer patients.

AM0010 has been advanced into late-stage clinical development as an immuno-oncology drug based on the results of their Phase 1/1b clinical trial in over 350 cancer patients across more than 14 different types of cancer and many treatment settings. In this ongoing Phase 1/1b clinical trial, they have observed objective tumor responses, including partial and complete responses. AM0010 was well-tolerated in patients as a single agent and in combination with chemotherapeutic drugs or immune checkpoint inhibitors, nivolumab and pembrolizumab, which bind to a protein called PD-1. Based on the results from this Phase 1/1b clinical trial, the initial focus of their late-stage AM0010 development program is pancreatic ductal adenocarcinoma (PDAC), non-small cell lung cancer (NSCLC) and renal cell carcinoma (RCC).

They have initiated SEQUOIA, a Phase 3 randomized pivotal clinical trial in PDAC patients, which compares a combination of AM0010 and FOLFOX to FOLFOX alone, as a second-line therapy after tumor progression during or following a gemcitabine-containing regimen. They initiated this trial in the fourth quarter of 2016, enrolled the first patients in early 2017 and they expect the first interim analysis to be conducted in early 2018. The second interim analysis, which could provide the basis for a Biologics License Application (BLA) submission to the Food and Drug Administration (FDA), is expected to be conducted in 2020. Depending on the outcome of this trial, they may expand the SEQUOIA program and further develop this combination or potentially combinations of AM0010 and other chemotherapies, including gemcitabine-based chemotherapies, as a first-line therapy for pancreatic cancer. The FDA and European Commission (EC) have granted AM0010 Orphan Drug designation for the treatment of pancreatic cancer. Orphan Drug designation is a status granted to a product candidate for the treatment of a rare disease (with a population of less than 200,000) that qualifies the drug for incentives if regulatory approval for the drug is achieved. The FDA also granted Fast Track designation for AM0010 in combination with FOLFOX as a second-line therapy in patients with pancreatic cancer. Fast Track designation is a designation granted to drugs that

demonstrate the ability to treat a serious or life threatening disease and provides the designee with the opportunity for more frequent interactions with the FDA review team and the potential for rolling review of completed portions of a marketing application even prior to submission of the comprehensive application.

They are launching CYPRESS, a Phase 2b clinical development program in NSCLC which will initially include two randomized clinical trials in patients with different levels of tumor PD-L1 expression in different lines of treatment. CYPRESS-1 will compare the safety and efficacy of AM0010 plus pembrolizumab to standard of care pembrolizumab alone as front-line therapy for patients with high tumor PD-L1 expression (>50%). CYPRESS-2 will compare the safety and efficacy of AM0010 plus nivolumab to standard of care nivolumab alone in a second-line setting (one prior therapy that was not a PD-1 or PD-L1 inhibitor) in patients with low tumor PD-L1 expression (<50%). They plan to begin enrolling patients in these trials in the first quarter of 2018 and given the open label design of the trials they expect to have preliminary response data in a meaningful number of patients in both trials by late 2018, which they expect will inform their regulatory strategy and next steps in the development of AM0010 in NSCLC. They also expect to have additional data from both trials in 2019. Based on the results of CYPRESS-1 and CYPRESS-2 and the evolving treatment landscape for NSCLC, they may expand the CYPRESS program and, importantly, seek to develop their own independent, proprietary combination regimen in the immuno-oncology space by including their pipeline anti-PD-1checkpoint inhibitor (AM0001).

They continue to evaluate the results from their ongoing Phase 1/1b clinical trial assessing encouraging signals that justify further development of AM0010 in additional tumor types, such as, but not limited to, RCC, colorectal cancer (CRC), melanoma and breast cancer.

In addition to AM0010, their immuno-oncology pipeline includes a number of product candidates. AM0001 is their anti-PD-1 checkpoint inhibitor currently undergoing Investigational New Drug Application (IND) enabling studies. They expect to initiate a Phase 1 clinical trial with AM0001 in advanced malignancies in 2018 and plan to subsequently combine this immune checkpoint inhibitor with AM0010 to develop their first proprietary immuno-oncology combination regimen. AM0015 is a pre-IND stage recombinant human Interleukin-15 (IL-15) cytokine that has demonstrated preclinical anti-tumor responses that are additive with AM0010. AM0012 is a recombinant human Interleukin-12 (IL-12) cytokine currently in preclinical studies. Cytokines are small proteins that are made by immune cells and non-immune cells and have an effect on the immune system and other physiologic functions. Some cytokines stimulate the immune system and others inhibit it. AM0003 is their anti-LAG-3 checkpoint inhibitor program that is undergoing pre-IND enabling studies. LAG-3 (Lymphocyte-activation gene 3) is a cell surface protein and immune checkpoint receptor.

Product Candidate Pipeline

They have built a pipeline of proprietary product candidates that activate the immune system of patients to recognize and eradicate their tumors.

In addition to the mechanistic data illustrating AM0010’s immunotherapeutic activity, preliminary data from the Phase 1/1b clinical trial demonstrated durable responses, as measured by overall survival. The survival benefit for AM0010 alone or in combination with standard of care in these populations with advanced stage diseases are longer than those observed historically, based on medical literature in comparable or earlier stage populations.

AM0010 Development for the Treatment of Pancreatic Ductal

Adenocarcinoma

In their Phase 1/1b clinical trial, they treated 22 PDAC patients with AM0010 monotherapy and 21 patients with AM0010 in combination with FOLFOX standard of care. Treatment with AM0010 monotherapy showed in PDAC patients with a median number of three prior treatments, a median overall survival (mOS) of 3.8 months, median progression-free survival (mPFS) of 1.7 months and one-year survival of 22.7% as of October 2017. The combination with AM0010 and FOLFOX showed in PDAC patients with a median number of two prior therapies, a mPFS of 2.6 months. The mOS for the combination of AM0010 and FOLFOX is 10.2 months with a median follow-up time of 20.3 months with a range between 15.8 and 25.9 months as of October 2017. At that time, the one year survival rate was 42.9%. These results are of particular interest compared to a mOS of 4.3 months, mPFS of 1.7 months and one-year survival of 18.5% reported in a study of FOLFOX in the second-line setting. In addition, the treatment with a combination of AM0010 and FOLFOX has resulted in partial and complete antitumor responses in PDAC patients who have failed multiple prior lines of treatment.

AM0010 Development with Anti-PD-1 Immune Checkpoint Inhibitors

for the Treatment of Non-Small Cell Lung Cancer

In their Phase 1/1b clinical trial, they treated as of October 2017 nine NSCLC patients with AM0010 monotherapy and 34 patients with AM0010 in combination with anti-PD-1 therapies nivolumab or pembrolizumab. There were no objective responses observed in the seven heavily pre-treated NSCLC evaluable patients exposed to AM0010 monotherapy. However, the mOS was 15.4 months (median follow up of 30.7 months with a range between 9.9 and 37.7 months) and the landmark one year survival rate was 55.6%. This is promising given the mOS for nivolumab, a standard of care in the second-line setting for NSCLC, is 9.2 months for squamous NSCLC and 12.0 months for non-squamous NSCLC and the one year survival is 42% and 52% for these subtypes, respectively. In their Phase 1/1b clinical trial, a cohort of 27 evaluable patients with advanced-stage NSCLC, who had received a median of two prior therapies, were treated with AM0010 in combination with anti-PD-1 immune checkpoint inhibitors and had an objective response rate (ORR) of 41% regardless of tumor PD-L1 expression (41% and 40% ORRs for AM0010 plus nivolumab or pembrolizumab, respectively). This could represent an increase in ORR in NSCLC patients that received a median of two prior therapies compared to a 19% ORR as reported in the Garon Article for nivolumab as a monotherapy in a second-line setting regardless of tumor PD-L1 expression.

In addition, eight NSCLC patients treated with AM0010 in combination with pembrolizumab or nivolumab had liver metastasis. Of those eight patients, five had a partial response. In addition, these eight patients had a combined total number of 18 target secondary lesions in the liver, of which 16 had a reduction in size. More importantly, 14 of these 16 lesions showed more than a 50% reduction in size. These findings indicate that treatment with AM0010 in combination with immune checkpoint inhibitors may have a therapeutic impact on liver metastases and potentially improve clinical outcomes.

AM0010 for the Treatment of Renal Cell Carcinoma

In their Phase 1/1b clinical trial, they treated as of October 2017 eight RCC patients with AM0010 monotherapy and 37 patients with AM0010 in combination with anti-PD-1 therapies nivolumab or pembrolizumab. For later-stage RCC patients receiving AM0010 monotherapy in the Phase 1/1b clinical trial, the ORR was 25%, the DCR was 56.3% and mPFS was 1.9 months. For comparison purposes, nivolumab studies in second-line RCC reported an average ORR of about 20%, a DCR of between 57% and 65% and an mPFS of between 2.7 months and 4.2 months. For later-stage RCC patients receiving AM0010 plus pembrolizumab in the Phase 1/1b clinical trial, the mPFS was 16.7 months and the mOS has not yet been reached after a median follow-up time of 29.4 months. For RCC patients receiving AM0010 plus nivolumab, the mPFS and mOS has not yet been reached after a median follow-up time of 13.8 months. For comparison purposes, nivolumab studies in second-line RCC reported an average mPFS of between 2.7 months and 4.2 months and mOS of between 18.2 and 25.5 months. They are developing a plan to study AM0010 plus an immune checkpoint inhibitor in RCC.

AM0010 for the Treatment of Additional Cancer Indications

As part of their Phase 1/1b clinical trial, AM0010 has been studied in combination with pembrolizumab in melanoma patients whose tumors are resistant or refractory to immune checkpoint blockade and who failed a median number of three prior therapies. The mOS is 16.7 months with median follow-up time of 24.6 months and a range between 1.2 and 27.4 months. They are encouraged by the tail on the overall survival curve which is indicative of long term survivors. As a comparison, a recent study reports a mOS of 8 months in patients who received pembrolizumab in combination with ipilimumab after they progressed on prior treatment with ipilimumab and anti-PD-1 monotherapies.

AM0010 monotherapy was studied in microsatellite stable CRC patients who had a median number of four prior therapies and the mOS was 11 months. These data appear favorable to the reported mOS of 7.1 months for LONSURF, a combination of trifluridine and tipiracil, which was approved by the FDA in 2015 for the treatment of metastatic CRC in third or later line of treatment.

They are evaluating Phase 2 clinical trials to study AM0010, as a monotherapy or in a combination, in these indications in the future.

IPO Detail

This is the initial public offering of ARMO BioSciences, Inc. and no public market currently exists for its common stock. ARMO BioSciences, Inc. is offering 6,666,667 shares of common stock as described in the prospectus. The company expects the initial public offering price of its common stock to be between $14.00 and $16.00 per share. The company has applied to list its common stock on the NASDAQ Global Market under the symbol “ARMO.”

Common stock offered by the company 6,666,667 shares

Common stock to be outstanding

immediately after this offering 28,412,953 shares

Certain of their existing stockholders, including stockholders affiliated with certain of their

directors, have indicated an interest in purchasing up to an aggregate of approximately

$40.0 million of their common stock in this offering, at the initial public offering price.

However, because indications of interest are not binding agreements or commitments to

purchase, the underwriters could determine to sell more, less or no shares to any of these

potential investors and any of these potential investors could determine to purchase more,

less or no shares in this offering.

Use of Proceeds

They estimate that the net proceeds from this offering will be approximately $89.3 million. The principal

purposes of this offering are to increase their financial flexibility and create a public market for their

common stock. They intend to use the net proceeds from this offering as follows:

approximately $35.0 million to fund their development of AM0010 for the treatment of PDAC,

including their Phase 3 clinical trial in PDAC;

approximately $35.0 million to fund their two planned Phase 2b clinical trials in NSCLC; and

the remaining proceeds to fund their development of AM0010 for the treatment of additional

indications, as well as their development of other product candidates in their pipeline and other

general corporate purposes, which may include the hiring of additional personnel, capital

expenditures and the costs of operating as a public company.

Competition

Company

Stock

Symbol Exchange.

Bristol-Myers Squibb Co. BMY NYSE

Merck & Co., Inc. MRK NYSE

. Roche Holding Ltd. ROG VTX

AstraZeneca PLC (ADR) AZN NYSE

Market Opportunity

The Pancreatic Cancer Market size

Approximately 53,670 new cases of pancreatic cancer are expected to be diagnosed in the United States in 2017. Over the last decade the incidence of pancreatic cancer has increased, largely due to the increasing prevalence of obesity and an aging population. In 2017, an estimated 43,090 deaths from pancreatic cancer are expected in the United States. According to the American Cancer Society, pancreatic cancer is estimated to be the third leading cause of cancer-related death in the United States in 2017. Pancreatic ductal adenocarcinoma (PDAC) accounts for over 90% of pancreatic malignancies. They believe AM0010 in combination with chemotherapy represents a promising therapeutic option for patients with this serious life-threatening disease.

Current treatments in PDAC and survival rates According to the American Cancer

Society, pancreatic cancer mortality rates lead all other cancers, with five-year survival rates of about 7%, which declines to 3% if the disease is diagnosed at distant stage. Patients who present with locally-advanced or metastatic disease are ineligible for surgical resection. For such patients, first-line standard of care chemotherapy includes gemcitabine in combination with albumin-bound paclitaxel plus gemcitabine or FOLFIRINOX (folinic acid, 5—fluorouracil [5-FU], irinotecan, and oxaliplatin) in good performance status patients, which have a performance status of 0 or 1 as measured by the Eastern Cooperative Oncology Group performance scale (ECOG). Single agent gemcitabine remains the standard of care treatment for patients with ECOG 2 performance status, which denotes the presence of more advance disease and decreased patient function. It is estimated that only 50% of PDAC patients in the U.S.

are able to go on to receive second and occasionally third-line chemotherapy. With first-line followed by second-line therapy, PDAC patients have a median overall survival (mOS) up to 13.5 months.

AM0010 with anti-PD-1 in Non-Small Cell Lung Cancer

Market size

Lung cancer is the leading cause of cancer-related death in the United States and in the rest of the world. According to estimates by the American Cancer Society, approximately 222,500 new cases were expected to be diagnosed and approximately 155,870 people were expected to die of this disease in 2017 in the United States alone.

There are two types of lung cancer; non-small cell lung cancer (NSCLC) and small cell lung cancer (SCLC). NSCLC represents 80% to 85% of all lung cancers, is further subdivided into three distinct histological subtypes; non-squamous cell or adenocarcinoma (40% to 45%), squamous cell carcinoma (25% to 30%), and large cell carcinoma (10%).

The majority of lung cancer patients present with either stage IV / metastatic (57%) or stage III locally advanced (22%) disease. Of those patients presenting with metastatic disease, approximately 85% might be candidates for systemic drug therapy if they are fit and resilient (performance scores 0, 1, or 2). About 50% to 70% of NSCLC patients typically receive a second-line therapy, and approximately 25% to 35% receive a third-line therapy.

Treatment landscape for NSCLC Until recently, first-line therapy in NSCLC

consisted of platinum-based doublet regimens (e.g. carboplatin or cisplatin plus another chemotherapeutic agent such as pemetrexed or bevacizumab). The documented mOS for NSCLC patients receiving a platinum-based doublet as initial therapy is approximately 10 months. The five-year landmark survival rate for all patients with advanced NSCLC is approximately 15%.

Immune checkpoint inhibitors have shown promising results in NSCLC across histological subtypes and lines of therapy. Initial treatment selection in the first-line setting of NSCLC is usually contingent upon tumor PD-L1 expression status. High tumor PD-L1 expression is defined as >50% of the tumor cells having PD-L1 on their cell surface. This population of patients is more likely to respond to a PD-1 or PD-L1 inhibitor as an initial therapy for NSCLC. Low tumor PD-L1 expression is defined as 1% to 49% of the tumor cells having PD-L1 on their cell surface and non-PD-L1expression is defined as <1% of the tumor cells having PD-L1 on their cell surface. Low PD-L1 and non-PD-L1 expressing patients are less likely to respond to a PD-1 or PD-L1 inhibitor.

YEAR ENDED DECEMBER 31,

NINE MONTHS ENDED SEPTEMBER 30,

2015 2016 2016 2017

(in thousands, except share and per share data)

Consolidated Statements of Operations Data: Operating expenses:

Research and development $ 24,650 $ 29,194 $ 19,104 $ 23,683

General and administrative 2,841 4,567 2,964 4,327

Total operating expenses 27,491 33,761 22,068 28,010

Loss from operations (27,491 ) (33,761 ) (22,068 ) (28,010 ) Interest income 21 137 117 114

Net loss and comprehensive loss (27,470 ) (33,624 ) (21,951 ) (27,896 ) Net loss and comprehensive loss attributable to

noncontrolling interest 2,488 — — —

Net loss and comprehensive loss attributable to ARMO BioSciences, Inc. $ (24,982 ) $ (33,624 ) $ (21,951 ) $ (27,896 )

Net loss per share, basic and diluted, attributable to ARMO BioSciences, Inc. stockholders $ (30.59 ) $ (26.25 ) $ (17.76 ) $ (18.90 )

Weighted-average number of shares used in basic and diluted net loss per share attributable to ARMO BioSciences, Inc. stockholders 816,686 1,280,938 1,236,421 1,475,741

Pro forma net loss per share, basic and diluted, attributable to ARMO BioSciences, Inc. stockholders $ (2.11 ) $ (1.62 )

Weighted-average number of shares used in computing pro forma net loss per share, basic and diluted, attributable to ARMO BioSciences, Inc. stockholders 15,946,185 17,174,589

AS OF DECEMBER 31,

AS OF SEPTEMBER 30,

2017 2015 2016

(in thousands)

Balance Sheet Data: Cash and cash equivalents $ 45,250 $ 26,737 $ 66,516 Working capital 40,222 17,350 55,504 Total assets 46,075 27,901 70,306 Redeemable convertible preferred stock 99,596 109,587 177,084 Accumulated deficit (59,236 ) (92,860 ) (120,756 ) Total stockholders’ deficit (58,688 ) (91,301 )

Target Markets

Rapidly advance the development of AM0010 as a cornerstone treatment for

enhancing, augmenting and broadening the therapeutic effect of existing standard

of care and emerging therapies in a number of tumor types, including high unmet

need resistant and refractory malignancies. A cornerstone of their AM0010

development program is novel combinational and sequential approaches with standard of care chemotherapies, immune checkpoint inhibitors or other emerging immuno-oncology therapies. They believe AM0010 synergizes with these standard of care and emerging therapies to augment and expand anti-tumor responses beyond those seen when either agent is used separately. Consequently, they believe this synergy will lead to higher response rates, longer lasting responses and improved patient outcomes when compared to the current standard of care. More importantly, they believe this synergy may elicit responses in resistant and refractory tumors, broadening into areas of substantial unmet medical need where the therapeutic utility of existing and emerging treatments can be combined or sequenced with AM0010.

Rapidly advance AM0010 through a pivotal clinical trial in combination with

chemotherapy as a second-line therapy in PDAC. They are developing AM0010 in

combination with standard of care chemotherapy (FOLFOX) for the treatment of second-line PDAC patients. They plan to continue the Phase 3 SEQUOIA clinical trial of AM0010 in combination with FOLFOX compared with FOLFOX alone in PDAC patients that have progressed during or following initial treatment with a gemcitabine-containing regimen. They expect results from the first interim analysis in early 2018. The second interim analysis, which could provide the basis for a BLA submission, is expected to be conducted in 2020. Further development of AM0010 in treatment-naïve PDAC is dependent on the result of the SEQUOIA trial.

Rapidly advance the development of AM0010 in combination with established

immune checkpoint inhibitors and potentially with AM0001 in NSCLC across levels

of tumor PD-L1 expression and lines of therapy. They are developing AM0010 in

combination with standard of care immune checkpoint inhibitors in NSCLC across levels of PD-L1 expression and across lines of therapy. They plan to initiate Phase 2 clinical trials of AM0010 in combination with pembrolizumab compared to pembrolizumab standard of care in the front-line setting of patients with high tumor PD-L1 expression (CYPRESS-1) and AM0010 in combination with nivolumab compared to nivolumab standard of care in the second-line setting of patients with low tumor PD-L1 expression (CYPRESS-2). They plan to begin enrolling patients in these trials in the first quarter of 2018 and given the open label design of the trials they expect to have preliminary response data in a meaningful number of patients in both trials by late 2018, which they expect will inform their regulatory strategy and next steps in the development of AM0010 in NSCLC. They also expect to have additional data from both trials in 2019.

Based on the results of CYPRESS-1 and CYPRESS-2 and the evolving treatment landscape for NSCLC, they may expand the CYPRESS program and, importantly, seek to develop their own independent, proprietary combination regimen in the immuno-oncology space by including their pipeline anti-PD-1 checkpoint inhibitor (AM0001).

Rapidly advance the development of AM0010 in other select oncology indications

where strong treatment effect signals have been identified in their ongoing Phase

1/1b clinical trial. They continue to evaluate treatment effect signals from their Phase

1/1b clinical trial. To date, the strongest preliminary treatment effect signals outside PDAC and NSCLC have emerged in RCC, CRC, melanoma and breast cancer. In addition, there is early pre-clinical evidence that IL-10 may have clinical utility in acute myeloid leukemia (AML), myelodysplastic syndromes (MDS) and myeloproliferative neoplasms (MPN). Initiating a Phase 2 program in these or other areas will depend on definitive evaluation of these signals as well as the state of the emerging treatment landscape for these indications.

Rapidly advance the development of their immunotherapy pipeline product

candidates into clinical trials. They intend to develop their immuno-oncology

pipeline of assets, which includes AM0001, AM0015, AM0012 and AM0003. AM0001 is their anti-PD-1 checkpoint inhibitor currently undergoing IND-enabling studies and they expect to initiate a Phase 1 clinical trial in 2018 and plan to subsequently combine this

immune checkpoint inhibitor with AM0010 to develop their first proprietary immuno-oncology combination regimen. AM0015 and AM0012 are their product candidates that have demonstrated preclinical anti-tumor responses that could be additive or synergistic with anti-tumor effects of AM0010. AM0003 is their anti-LAG-3 checkpoint inhibitor program for which they are conducting preclinical studies.

Continued focus on internal discovery efforts. Based on their expertise in immuno-

oncology and the results from their clinical trials, they expect to commit resources to the research of additional product candidates that may work independently of, or complement, those in their existing pipeline. They seek to leverage the extensive experience of their team to further expand their expertise in CD8+ T cell and cytokine biology and to discover and develop novel, proprietary product candidates that activate the immune system to recognize and eradicate tumors.

Opportunistically in-license and acquire novel immuno-oncology assets. They plan

to leverage their clinical immuno-oncology expertise and their relationships in the oncology community to identify and in-license or acquire additional product candidates that they believe have the potential to become novel treatments for oncology indications with significant unmet medical needs.

Potentially seek strategic collaborative relationships while maintaining flexibility in

commercializing and maximizing the value of their development programs. They

currently have global development, marketing and commercialization rights for all of the product candidates in their pipeline. They plan to develop and seek regulatory approval for their use in oncology indications. While they may develop these products independently, they also may enter into strategic relationships with biotechnology or pharmaceutical companies to realize the full value of these products.

Company's Unique Strengths

In their Phase 1/1b clinical trial in over 350 cancer patients across more than 14

different types of cancer and many treatment settings, They have observed objective

tumor responses, including partial and complete responses, and found AM0010

was well-tolerated in patients as a single agent and in combination with

chemotherapeutic drugs or immune checkpoint inhibitors, nivolumab and

pembrolizuma.

The FDA and European Commission (EC) have granted AM0010 Orphan Drug

designation for the treatment of pancreatic cancer.

The FDA granted Fast Track designation for AM0010 in combination with

FOLFOX as a second-line therapy in patients with pancreatic cancer.

COMPLETE RESPONSES

PARTIAL RESPONSES

DURABLE RESPONSES*

Monotherapy

• Cutaneous T-Cell Lymphoma

• Melanoma • RCC

• PDAC • CRC

Combination with chemotherapy (FOLFOX)

• PDAC • Gastroesophageal

• PDAC

• PDAC

Combination with checkpoint inhibitors (anti-PD-1)

• NSCLC** • RCC**

• NSCLC • RCC • Melanoma

• NSCLC • Melanoma

* As measured by overall survival; the survival benefit for AM0010 alone or in combination with standard of

care in these populations with advanced stage diseases are longer than those observed historically based on medical literature in comparable or earlier stage populations.

** Partial responses with 100% reduction in measurable disease.

Company's Unique Risks

They are a late-stage immuno-oncology company with a limited operating history.

They have incurred significant losses since inception and they expect to incur losses

for the foreseeable future and may never achieve or maintain profitability. They are

a late-stage immuno-oncology company with a limited operating history. They have no products approved for commercial sale and have not generated any revenue from product sales to date, and they continue to incur significant research and development and other expenses related to their ongoing operations. As a result, they are not profitable and have incurred losses in each period since their inception. Their net loss was $27.9 million and $33.6 million for the nine months ended September 30, 2017 and for the year ended December 31, 2016, respectively. As of September 30, 2017, they had an accumulated deficit of $120.8 million.

Even if this offering is successful, they will need to obtain substantial additional

funding to complete the development and any commercialization of their product

candidates, if approved. If they are unable to raise this necessary capital when

needed, they would be forced to delay, reduce or eliminate their product development programs, commercialization efforts or other operations.

They have concluded that they do not have sufficient cash to fund their operations

through November 2018. In addition, the audit report of their independent

registered public accounting firm includes an explanatory paragraph that describes

conditions that raise substantial doubt about their ability to continue as a going

concern, which could have a material adverse impact on their business. Their

financial statements included in the prospectus have been prepared on a basis that assumes that they will continue as a going concern, and does not include any adjustments that may result from the outcome of this uncertainty. They have raised additional financing since the date of their December 31, 2016 audit report and now conclude they will not be able to fund their operations without additional financing, such as the proceeds of this offering, through November 2018.

They are heavily dependent on the success of their lead product candidate,

AM0010, since all of their other product candidates are still in the preclinical

development stage and will require significant clinical trials. If they are unable to

successfully complete clinical development, obtain regulatory approval for, or commercialize AM0010, or experience delays in doing so, their business will be materially harmed.

They are developing their lead product candidate, AM0010, to be used in

combination with standard of care cancer therapies, which exposes them to several

risks beyond their control. They are developing their lead product candidate, AM0010,

to be used in combination with standard of care cancer therapies. This exposes them to supply risk to the extent there is not an adequate supply of the standard of care therapies that AM0010 is designed or, if approved, approved to be used in combination with, as well as pricing risk if the standard of care therapies are expensive and the addition of AM0010 would be too costly. In addition, if the standard of care were to evolve or change, the clinical utility of their lead product candidate, AM0010, could be diminished or eliminated.

Their product candidates, for which they intend to seek approval, may face

competition sooner than anticipated. Their ability to compete may be affected in many

cases by insurers or other third-party payors seeking to encourage the use of biosimilar products. Even if a product is considered to be a reference product eligible for exclusivity, another company could market a competing version of that product if the FDA approves a full Biologics License Application (BLA) for such product containing the sponsor’s own preclinical data and data from adequate and well-controlled clinical trials to demonstrate the safety, purity and potency of their product. Furthermore, recent legislation has proposed that the 12 year exclusivity period for each a reference product may be reduced to seven years.

Even if they are able to commercialize any product candidates, such products may

become subject to unfavorable pricing regulations, third-party reimbursement

practices or healthcare reform initiatives, which would harm their business.

They rely on third parties to conduct their clinical trials and some aspects of their

research and preclinical studies, and those third parties may not perform

satisfactorily, including failing to meet deadlines for the completion of such trials, research or testing.

They contract with third parties for the manufacture of their product candidates for

preclinical studies, clinical trials and for commercialization. This reliance on third

parties increases the risk that they will not have sufficient quantities of their product candidates or medicines or that such supply will not be available to them at an acceptable cost, which could delay, prevent or impair their development or commercialization efforts.

If they are unable to obtain and maintain patent or trade secret protection for their

product candidates and preclinical programs, or if the scope of the patent

protection obtained is not of sufficient scope, their competitors could develop and

commercialize medicines and technology similar or identical to theirs, and their ability to successfully commercialize their products may be adversely affected.

Participation in this offering by certain of their existing owners would reduce the

available public float for their shares. Certain of their existing stockholders,

including stockholders affiliated with certain of their directors, have indicated an interest in purchasing up to an aggregate of approximately $40.0 million of their common stock in this offering, at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters could determine to sell more, less or no shares to any of these potential investors and any of these potential investors could determine to purchase more, less or no shares in this offering. To the extent existing stockholders affiliated with certain of their directors are allocated all or a portion of the shares in which they have indicated an interest in purchasing in this offering and purchase any such shares, such purchase would reduce the available public float for their shares because such entities would be restricted from selling the shares by restrictions under applicable securities laws. As a result, any purchase of shares by such entities in this offering may reduce the liquidity of their common stock relative to what it would have been had these shares been purchased by investors that were not existing stockholders.

The concentration of their stock ownership will likely limit your ability to influence

corporate matters, including the ability to influence the outcome of director

elections and other matters requiring stockholder approval. Upon the completion of

this offering, their executive officers, directors and the holders of more than 5% of their outstanding common stock, in the aggregate, will beneficially own approximately 60.8% of their common stock. As a result, these stockholders, acting together, will have significant influence over all matters that require approval by their stockholders.

Bottom Line

They are a late-stage immune-oncology company and, as such, have no revenues from the sale of any of their product candidates. Their lead product candidate, AM0010 (pegilodecakin) is a long-acting form of human Interleukin-10 (IL-10). IL-10 is a naturally occuring immune cell growth factor in humans that stimulates the survival, expansion and tumor killing (cytotoxic) capacity of a particular white blood cell of the immune system, called the CD8+ T cell. They have focused on CD8+ T cells because these cells have been shown to recognize and kill cancer cells. They have initiated SEQUOIA, a Phase 3 randomized pivotal clinical trial in PDAC patients, which compares a combination of AM0010 and FOLFOX to FOLFOX alone, as a second-line therapy after tumor progression during or following a gemcitabine-containing regimen. They expect the first interim analysis to be conducted in early 2018. The second interim analysis, which could provide the basis for a Biologics License Application (BLA) submission to the Food and Drug Administration (FDA), is expected to be conducted in 2020. The FDA and European Commission (EC) have granted AM0010 Orphan Drug designation for the treatment of pancreatic cancer. They are launching CYPRESS, a Phase 2b clinical development program in NSCLC which will initially include two randomized clinical trials in patients with different levels of tumor PD-L1 expression in different lines of treatment. CYPRESS-1 will compare the safety and efficacy of AM0010 plus pembrolizumab to standard of care pembrolizumab alone as front-line therapy for

patients with high tumor PD-L1 expression (>50%). They expect to have preliminary response data in a meaningful number of patients in both trials by late 2018, which they expect will inform their regulatory strategy and next steps in the development of AM0010 in NSCLC. They continue to evaluate the results from their ongoing Phase 1/1b clinical trial assessing encouraging signals that justify further development of AM0010 in additional tumor types, such as, but not limited to, RCC, colorectal cancer (CRC), melanoma and breast cancer. In addition to AM0010, their immuno-oncology pipeline includes a number of product candidates. AM0001 is their anti-PD-1 checkpoint inhibitor currently undergoing Investigational New Drug Application (IND) enabling studies. AM0015 is a pre-IND stage recombinant human Interleukin-15 (IL-15) cytokine that has demonstrated preclinical anti-tumor responses that are additive with AM0010. AM0012 is a recombinant human Interleukin-12 (IL-12) cytokine currently in preclinical studies. As part of their Phase 1/1b clinical trial, AM0010 has been studied in combination with pembrolizumab in melanoma patients whose tumors are resistant or refractory to immune checkpoint blockade and who failed a median number of three prior therapies. They are evaluating Phase 2 clinical trials to study AM0010, as a monotherapy or in a combination, in these indications in the future.

Approximately 53,670 new cases of pancreatic cancer are expected to be diagnosed in the United States in 2017. Over the last decade the incidence of pancreatic cancer has increased, largely due to the increasing prevalence of obesity and an aging population. In 2017, an estimated 43,090 deaths from pancreatic cancer are expected in the United States. Pancreatic ductal adenocarcinoma (PDAC) accounts for over 90% of pancreatic malignancies. They believe AM0010 in combination with chemotherapy represents a promising therapeutic option for patients with this serious life-threatening disease. Pancreatic cancer mortality rates lead all other cancers, with five-year survival rates of about 7%, which declines to 3% if the disease is diagnosed at distant stage. Lung cancer is the leading cause of cancer-related death in the United States and in the rest of the world. According to estimates by the American Cancer Society, approximately 222,500 new cases were expected to be diagnosed and approximately 155,870 people were expected to die of this disease in 2017 in the United States alone. NSCLC represents 80% to 85% of all lung cancers. Until recently, first-line therapy in NSCLC consisted of platinum-based doublet regimens. The documented mOS for NSCLC patients receiving a platinum-based doublet as initial therapy is approximately 10 months. The five-year landmark survival rate for all patients with advanced NSCLC is approximately 15%.

A cornerstone of their AM0010 development program is novel combinational and sequential approaches with standard of care chemotherapies, immune checkpoint inhibitors or other emerging immuno-oncology therapies. They believe this synergy may elicit responses in resistant and refractory tumors, broadening into areas of substantial unmet medical need where the therapeutic utility of existing and emerging treatments can be combined or sequenced with AM0010. They plan to continue the Phase 3 SEQUOIA clinical trial of AM0010 in combination with FOLFOX compared with FOLFOX alone in PDAC patients that have progressed during or following initial treatment with a gemcitabine-containing regimen. They expect results from the first interim analysis in early 2018. They are developing AM0010 in combination with standard of care immune checkpoint inhibitors in NSCLC across levels of PD-L1 expression and across lines of therapy. Based on the results of CYPRESS-1 and CYPRESS-2 and the evolving

treatment landscape for NSCLC, they may expand the CYPRESS program and, importantly, seek to develop their own independent, proprietary combination regimen in the immuno-oncology space by including their pipeline anti-PD-1 checkpoint inhibitor (AM0001). They intend to rapidly advance the development of AM0010 in other select oncology indications where strong treatment effect signals have been identified in their ongoing Phase 1/1b clinical trial, including RCC, CRC, melanoma and breast cancer. In addition, there is early pre-clinical evidence that IL-10 may have clinical utility in acute myeloid leukemia (AML), myelodysplastic syndromes (MDS) and myeloproliferative neoplasms (MPN). They intend to develop their immuno-oncology pipeline of assets, which includes AM0001, AM0015, AM0012 and AM0003, advancing them into clinical trials. Based on their expertise in immuno-oncology and the results from their clinical trials, they expect to commit resources to the research of additional product candidates that may work independently of, or complement, those in their existing pipeline. They plan to leverage their clinical immuno-oncology expertise and their relationships in the oncology community to identify and in-license or acquire additional product candidates that they believe have the potential to become novel treatments for oncology indications with significant unmet medical needs. They plan to develop and seek regulatory approval for their use in oncology indications. While they may develop these products independently, they also may enter into strategic relationships with biotechnology or pharmaceutical companies to realize the full value of these products.

In their Phase 1/1b clinical trial in over 350 cancer patients across more than 14 different types of cancer and many treatment settings, They have observed objective tumor responses, including partial and complete responses, and found AM0010 was well-tolerated in patients as a single agent and in combination with chemotherapeutic drugs or immune checkpoint inhibitors, nivolumab and pembrolizuma. The FDA and European Commission (EC) have granted AM0010 Orphan Drug designation for the treatment of pancreatic cancer. The FDA granted Fast Track designation for AM0010 in combination with FOLFOX as a second-line therapy in patients with pancreatic cancer. In their clinical trials, they have seen measurable positive results in a number of indications, including Cutaneous T-Cell Lymphoma, melanoma, RCC, PDAD, NSCLC and CRC.

They are a late-stage immuno-oncology company with a limited operating history. They have incurred significant losses since inception and they expect to incur losses for the foreseeable future and may never achieve or maintain profitability. Even if this offering is successful, they will need to obtain substantial additional funding to complete the development and any commercialization of their product candidates, if approved. They have concluded that they do not have sufficient cash to fund their operations through November 2018. In addition, the audit report of their independent registered public accounting firm includes an explanatory paragraph that describes conditions that raise substantial doubt about their ability to continue as a going concern, which could have a material adverse impact on their business. If they are unable to successfully complete clinical development, obtain regulatory approval for, or commercialize AM0010, or experience delays in doing so, their business will be materially harmed. They are developing their lead product candidate, AM0010, to be used in combination with standard of care cancer therapies, which exposes them to several risks beyond their control. This exposes them to supply risk to the extent there is not an adequate supply of

the standard of care therapies that AM0010 is designed or, if approved, approved to be used in combination with, as well as pricing risk if the standard of care therapies are expensive and the addition of AM0010 would be too costly. In addition, if the standard of care were to evolve or change, the clinical utility of their lead product candidate, AM0010, could be diminished or eliminated. Their product candidates, for which they intend to seek approval, may face competition sooner than anticipated. Recent legislation has proposed that the 12 year exclusivity period for each a reference product may be reduced to seven years. Even if they are able to commercialize any product candidates, such products may become subject to unfavorable pricing regulations, third-party reimbursement practices or healthcare reform initiatives, which would harm their business. They rely on third parties to conduct their clinical trials and some aspects of their research and preclinical studies, as well as for the manufacture of their product candidates for preclinical studies, clinical trials and for commercialization. If they are unable to obtain and maintain patent or trade secret protection for their product candidates and preclinical programs, or if the scope of the patent protection obtained is not of sufficient scope, their competitors could develop and commercialize medicines and technology similar or identical to theirs. Certain of their existing stockholders, including stockholders affiliated with certain of their directors, have indicated an interest in purchasing up to an aggregate of approximately $40.0 million of their common stock in this offering. Any purchase of shares by such entities in this offering may reduce the liquidity of their common stock relative to what it would have been had these shares been purchased by investors that were not existing stockholders. Upon the completion of this offering, their executive officers, directors and the holders of more than 5% of their outstanding common stock, in the aggregate, will beneficially own approximately 60.8% of their common stock. As a result, these stockholders, acting together, will have significant influence over all matters that require approval by their stockholders. Rating = 3

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________________________________________________

Entera Bio Ltd. ENTX $10.00-$12.00 5.0 million ordinary shares Underwriters: Oppenheimer & Co., Ladenburg Thalmann Co-Managers: Proposed trade date of 1/24. They are a clinical-stage biopharmaceutical company focused on the development and commercialization of orally delivered large molecule therapeutics for use in orphan indications and other areas with significant unmet medical need.

Entera Bio Ltd. ENTX

5,000,000 ordinary shares to be offered between $10.00 and $12.00 per share

Underwriters: Oppenheimer & Co., Ladenburg Thalmann Co-Managers:


Rating = 2


https://www.sec.gov/Archives/edgar/data/1638097/000114420418000927/tv482133-f1a.htm


Company Overview

They are a clinical-stage biopharmaceutical company focused on the development and commercialization of orally delivered large molecule therapeutics for use in orphan indications and other areas with significant unmet medical need. They are initially applying their technology to develop an oral formulation of parathyroid hormone, or PTH, which has been approved in the United States in injectable form for over a decade. Their lead oral PTH product candidate, EB612, has successfully completed a Phase 2a trial for hypoparathyroidism, a rare condition in which the body fails to produce sufficient amounts of PTH. The U.S. Food and Drug Administration, or FDA, and the European Medicines Agency, or EMA, have granted EB612 orphan drug designation for the treatment of hypoparathyroidism. They expect to initiate a Phase 2b/3 clinical trial of EB612 in the second half of 2018, and they plan to submit applications for regulatory approval of EB612 in the second half of 2020.

Hypoparathyroidism is a rare condition in which the body does not produce sufficient amounts of PTH, or the PTH produced lacks biologic activity. Individuals with a deficiency of PTH typically exhibit abnormally low levels of calcium in the blood, or hypocalcemia, and high levels of phosphorus, or hyperphosphatemia. Historically, the treatments for hypoparathyroidism have been calcium supplements, vitamin D supplements and phosphate binders, the chronic use of which results in serious side effects with significant costs to the healthcare system. Natpara®, a once-daily injectable form of PTH, has been approved for the treatment of hypoparathyroidism. Their lead product candidate, EB612, is delivered orally and can be administered in customized doses several times a day. Multiple dosing per day has been shown to more effectively treat the symptoms of hypoparathyroidism than a once-daily injection, thus reducing the serious side effects of supplement treatment and improving patient outcomes. Studies performed by researchers at the National Institutes of Health, or the NIH, have shown that dosing PTH multiple times per day significantly increases the efficacy of therapy and would be more effective for treating hypoparathyroidism. These studies found that the total daily PTH dose required to maintain serum calcium in the normal or near-normal range was reduced by 50% with twice-daily PTH (1-34) and also demonstrated that twice-daily dosing achieved better control over serum calcium and urinary calcium excretion as compared to once-daily dosing. In addition, they believe patients generally prefer oral drugs. For these reasons, they believe EB612 is clinically superior to existing therapies and has the potential to become the standard of care for hypoparathyroidism. If their preliminary results are borne out in additional trials, they believe this combination of advantages and long term clinical benefits will be very compelling to both patients and physicians.

Based on consultations with key opinion leaders in the hypoparathyroidism field who have reviewed their Phase 2a results and are familiar with the REPLACE study, they are planning for a Phase 2b/3 trial, designed to possibly be a pivotal study for registration. This Phase 2b/3 study will be designed to repeat the REPLACE study in virtually every aspect, as well as to achieve a reduction in urinary calcium.


They are also developing a distinct oral PTH product candidate, EB613, for the treatment of osteoporosis. Osteoporosis is a systemic skeletal disease characterized by low bone mass, deterioration of bone tissue and increased bone fragility and susceptibility to fracture. Forteo®, a once-daily injectable form of PTH, has been approved for the treatment of osteoporosis in the United States for over 10 years and is widely considered one of the most effective treatments due to its ability to build bone. Because their product candidate EB613 is delivered orally, they believe it will reduce the treatment burden on patients and lead to significantly higher patient and physician acceptance compared to an injectable form of PTH. They intend to commence a Phase 2a clinical trial of EB613 in the first half of 2018. After completing this trial, they intend to seek to collaborate with a strategic partner to further develop and commercialize EB613. They are also preparing to conduct a clinical trial of their oral PTH in non-union fractures, one indication within the field of bone healing.

Their product candidates utilize their proprietary technology for the oral delivery of large molecules. Drug development has shifted towards the use of peptides, proteins and other large molecules for the treatment of various diseases. Between 1993 and 2004, large-molecule clinical approval success rates have outpaced small molecules by about two-to-one. Large molecules have been particularly widely used in orphan indications. Oral drug delivery reduces the treatment burden on patients relative to injectable drugs and provides significantly more flexibility, both in size of dose and number of doses per day, than injectable drugs, which are frequently administered once per day by preset injection pen. However, peptides, proteins and other large molecule therapeutics can currently only be delivered via injections and other non-oral pathways because oral administration leads to poor absorption into the blood stream as well as enzymatic degradation within the gastrointestinal tract. Their proprietary oral drug delivery technology is designed to address both of these issues by utilizing a combination of a synthetic absorption enhancer to facilitate the enhanced absorption of large molecules and protease inhibitors to prevent enzymatic degradation.

They also intend to use their technology as a platform for the oral delivery of other protein and large molecule therapeutics. They initially intend to focus on the development of products based on previously approved therapeutic agents. They believe this will allow them to more efficiently and predictably advance product candidates through the development cycle based on well-defined clinical and regulatory approval pathways. They have conducted initial feasibility studies with a number of candidates and intend to commence clinical development for their next, non-PTH, product candidate by the end of 2018.

The following chart summarizes important information about each of their current product candidates, including their indications, and their current stage of development. They have not out-licensed any intellectual property rights to their PTH product candidates listed below, and, therefore, have retained the ability to pursue their worldwide commercialization.

They commenced operations in August 2010 after receiving startup financing in the form of $0.6 million in cash from D.N.A Biomedical Solutions Ltd. and a license from Oramed Ltd., a subsidiary of Oramed Pharmaceuticals, Inc., to certain patent rights relating to the oral administration of proteins. These previously licensed patent rights were assigned to them in 2011, subject to an exclusive, royalty-free license in specified fields under such patent rights that they granted to Oramed Ltd.

They subsequently advanced their oral PTH product candidates from preclinical studies in animals to a Phase 2a clinical trial of EB612 in hypoparathyroidism in less than five years.

While their operations are currently focused in their offices in Israel, they intend eventually to build a substantial U.S. presence to execute on their later stage development of their products, including clinical operations, regulatory operations, and commercialization.

IPO Detail

This is the initial public offering of Entera Bio Ltd. and no public market currently exists for its common stock. Entera Bio Ltd. is offering 5,000,000 ordinary shares of common stock as described in the prospectus. The company expects the initial public offering price of its common stock to be between $10.00 and $12.00 per share. The company has applied to list its common stock on the NASDAQ Global Market under the symbol “ENTX.”

Ordinary shares offered by the company 5,000,000 ordinary shares

Ordinary shares to be outstanding

immediately after this offering 11,897 252 ordinary shares

Use of Proceeds

They estimate that they will receive net proceeds of approximately $49.9 million from their sale of ordinary shares in

this offering. As of December 31, 2017, they had cash and cash equivalents of $11.7 million. They intend to use the

net proceeds from this offering, together with their cash and cash equivalents, as follows:

approximately $45.0 million to fund research and development expenses of their oral PTH candidate,

EB612;

approximately $1.5 million to fund research and development expenses of their oral PTH candidate, EB613;

approximately $2.5 million to fund other research and development expenses; and

the remainder for working capital and general corporate purposes.

Their expected use of net proceeds from this offering represents their current intentions based upon their present

plans and business condition. As of the date of this prospectus, they cannot predict with certainty all of the particular

uses for the net proceeds to be received upon the completion of this offering or the amounts that they will actually

spend on the uses set forth above.

Competition

Company

Stock

Symbol Exchange.

Eli Lilly and Co. LLY NYSE

Novartis AG (ADR) NVS NYSE

. Shire PLC (ADR) SHPG NASDAQ

Ascendis Pharma A/S ASND NASDAQ

Market Opportunity

Hypoparathyroidism is a rare condition in which the body does not produce sufficient amounts of PTH, or the PTH produced lacks biologic activity. Individuals with a deficiency of PTH typically exhibit abnormally low levels of calcium in the blood, or hypocalcemia, and high levels of phosphorus, or hyperphosphatemia. Hypoparathyroidism is estimated to affect approximately 58,700 insured individuals in the United States. Historically, the treatments for hypoparathyroidism have been calcium supplements, vitamin D supplements and phosphate binders, the chronic use of which results in serious side effects with significant costs to the healthcare system. Natpara®, a once-daily injectable form of PTH, has been approved for the treatment of hypoparathyroidism. Their lead product candidate, EB612, is delivered orally and can be administered in customized doses several times a day. Multiple dosing per day has been shown to more effectively treat the symptoms of hypoparathyroidism than a once-daily injection, thus reducing the serious side effects of supplement treatment and improving patient outcomes. Studies performed by researchers at the NIH have shown that dosing PTH multiple times per day significantly increases the efficacy of therapy and would be more effective for treating hypoparathyroidism. These studies found that the total daily PTH dose required to

maintain serum calcium in the normal or near-normal range was reduced by 50% with twice-daily PTH (1-34) and also demonstrated that twice-daily dosing achieved better control over serum calcium and urinary calcium excretion as compared to once-daily dosing. In addition, they believe patients generally prefer oral drugs. For these reasons, they believe EB612 is clinically superior to existing therapies and has the potential to become the standard of care for hypoparathyroidism.

Osteoporosis often leads to loss of mobility, admission to nursing homes and dependence on caregivers. These debilitating effects of osteoporosis have substantial costs. The prevalence of osteoporosis is growing and, according to the National Osteoporosis Foundation, or NOF, is significantly under-recognized and under-treated in the population. While the aging of the population is a primary driver of an increase in cases, osteoporosis is also increasing from the use of drugs that induce bone loss, such as chronic use of glucocorticoids and aromatase inhibitors that are increasingly used for breast cancer and the hormone therapies used for prostate cancer.

The NOF has estimated that 10 million people in the United States already have osteoporosis, and another approximately 43 million have low bone mass placing them at increased risk for osteoporosis. In addition, the NOF has estimated that osteoporosis is responsible for more than two million fractures in the United States each year resulting in an estimated $19 billion in costs annually. The NOF expects that the number of fractures in the United States due to osteoporosis will rise to three million by 2025, resulting in an estimated $25.3 billion in costs each year. Worldwide, osteoporosis affects an estimated 200 million women according to the International Osteoporosis Foundation, or IOF, and causes more than 8.9 million fractures annually, which is equivalent to an osteoporotic fracture occurring approximately every three seconds. The IOF has estimated that 1.6 million hip fractures occur worldwide each year, and by 2050 this number could reach between 4.5 million and 6.3 million. The IOF estimates that in Europe alone, the annual cost of osteoporotic fractures could surpass €76 billion by 2050.

The goal of pharmacological treatment of osteoporosis is to maintain or increase bone strength, to prevent factures throughout the patient’s life and to minimize osteoporosis-related morbidity and mortality by reducing the risk of fracture. Current treatments for osteoporosis generally fall into two categories: antiresorptive medications to slow bone loss and anabolic medications to increase the rate of bone formation. The global osteoporosis drug market was dominated for many years by bisphosphonates, which slow bone loss, although bisphosphonates’ market share has declined over recent years due to the occurrence of serious side effects, as well as the introduction of newly developed pharmacological treatments.

Bone Healing/Non-union Fractures

Currently, no pharmacological treatments are available to stimulate bone healing. In the United States, there are approximately seven million new fractures each year, with approximately 300,000 delayed union or non-union fractures. Estimates for the average non-union treatment cost vary from approximately $25,000 to $45,000.

(unaudited)

Nine Months Ended September 30,

(audited)

Year Ended December 31,

2017 2016 2016 2015

(In thousands, except shares and per share data)

Statements of comprehensive loss:

Research and development expenses $ 1,686 $ 1,851 $ 2,648 $ 2,115

General and administrative expenses 5,267 2,296 2,719 1,586

Total operating loss 6,953 4,147 5,367 3,701

Financial (income) expense:

(Income) loss from change in fair value of

financial liabilities at fair value 403 (3,917) (4,311) 447

Other financial expenses, net 66 112 143 134

Financial (income) expenses, net 469 (3,805) (4,168) 581

Net comprehensive loss $ 7,422 $ 342 $ 1,199 $ 4,282

Loss per ordinary share(1)

Basic $ 215 $ 10 $ 35 $ 124

Diluted 220 91 102 124

Weighted average number of ordinary shares

used in computing basic loss per ordinary

share 34,544 34,396 34,409 34,396

Weighted average number of ordinary shares

used in computing diluted loss per ordinary

share 37,098 51,958 51,972 34,396

(unaudited)

As of September 30,

2017

(In thousands)

Statements of financial position data:

Cash and cash equivalents 2,899

Restricted deposits 22

Other current assets 430

Total current assets 3,351

Property and equipment 215

Intangible assets 654

Total assets $ 4,220

Accounts payable-Trade and other 1,003

Receipts on account of sale of Series B preferred shares 1,575

Short term convertible loans 11,695

Total current liabilities 14,273

Long term convertible loans 3,919

Preferred shares 8,841

Warrants to purchase preferred shares and shares 4,723

Liability to issue preferred shares and warrants 1,044

Severance pay obligations, net 56

Total liabilities $ 32,856

Capital deficiency $ (28,636)

Working capital $ (10,922

Target Markets

Advance their lead product candidate, EB612, through clinical development and

into commercialization for the treatment of hypoparathyroidism: They completed a

Phase 2a clinical trial of EB612 for the treatment of hypoparathyroidism and reported supportive results in the third quarter of 2015. They plan to initiate a Phase 2b/3 clinical trial of EB612 in hypoparathyroidism commencing in the second half of 2018 and the filing of a BLA with the FDA for approval of EB612 in 2020.

Produce supportive clinical data for their second product candidate, EB613, for the

treatment of osteoporosis, before advancing into late-stage clinical trials: They

are currently preparing to commence a Phase 2a clinical trial of EB613 in the first half of 2018. After they complete this trial, they intend to collaborate with a strategic partner to further develop and commercialize the product.

Leverage their expertise in the oral delivery of PTH to develop product candidates

in additional indications: They intend to conduct exploratory Phase 2 studies for

the use of their oral PTH candidates in additional indications in which PTH plays a key biological role, including non-union fractures, one indication within the field of bone healing. They plan to use EB613, or a further modified formulation if studies suggest they could achieve a PK profile that is more efficacious, for these indications. They also plan to apply their drug delivery technology to other large molecules with chemical and other characteristics that would be advantageous with their technology in order to target orphan indications and other areas with significant unmet medical need.

Improve the efficacy profile of large molecule therapeutics through the application

of their proprietary oral delivery technology: Oral drug delivery lowers the treatment

burden on patients relative to injectable drugs, leading to higher patient and physician acceptance. However, peptides, proteins and other large molecule therapeutics can currently only be delivered via injections and other non-oral pathways because oral administration leads to negligible absorption into the blood stream as well as enzymatic degradation within the gastrointestinal tract. Their technology is designed to overcome both of these issues by enabling enhanced systemic absorption of large molecules and slowing their enzymatic degradation.

Focus their development and commercialization efforts on indications with

significant unmet medical need: They are focused on the development of orally

delivered large molecule therapeutics for the treatment of orphan indications and other indications with significant unmet medical need. Between 1993 and 2004, large-molecule clinical approval success rates have outpaced small molecules by about two-to-one and there are a wide range of large-molecules candidates within the orphan space for potential use with their oral drug delivery technology. For product candidates that target orphan indications, they intend to retain commercialization rights within key territories, including the United States, because of the ability to commercialize with a small sales force. For product candidates that target indications with larger patient populations, they may choose to partner with larger biopharmaceutical companies ahead of late stage development and commercialization.

Initially develop products based on FDA-approved large molecule

therapeutics: By initially focusing on the development of product candidates that

apply their technology to FDA-approved large molecule therapeutic agents with known mechanisms of action, they believe they can reduce the development risks associated with their product candidates. They believe this will allow them to advance their product candidates efficiently and predictably through the development cycle.


EB612 is designed to be dosed multiple times a day. Studies performed by the NIH

have shown that dosing PTH multiple times per day significantly increases the efficacy of therapy and would be more effective for treating hypoparathyroidism. These studies found that the total daily PTH dose required to maintain serum calcium in the normal or near-normal range was reduced by 50% with twice-daily PTH (1-34) and also demonstrated that twice-daily dosing achieved better control over serum calcium and urinary calcium excretion as compared to once-daily dosing.

EB612 is designed to be dosed according to patient needs. The hypoparathyroid

population is heterogeneous and patients have highly variable responsiveness to PTH. Therefore, the ability to customize PTH dosing throughout the day with an oral tablet is an advantage over a once-daily preset injection pen.

EB612 is expected to have less adverse events of hypercalcemia. Their planned

treatment regimen would be increased gradually and in parallel as serum calcium increases slightly. As a result, calcium and vitamin D supplements would be reduced gradually, while maintaining a relatively stable level of serum calcium. This is in contrast with Natpara’s initial high dose, which requires an immediate reduction in supplements in anticipation of a rapid increase in serum calcium levels. Furthermore, this immediate and prolonged increase in serum calcium increases risk of prolonged hypercalcemia compared to EB612.

EB612 can be administered in a more convenient manner. Natpara must be stored

under restrictive conditions (refrigeration requiring no freezing and no shaking), and a multiple step preparation must be performed every two weeks. EB612 will not require such additional preparations and will have no significant storage restrictions, except potentially for refrigeration.

They believe that their formulation of EB613 achieves the maximum concentration

necessary for therapeutic effect with three times less active pharmaceutical

ingredient, and lower variability, than that observed with Novartis’ suspended

product.

They believe that their oral delivery technology is superior to other oral

technologies that were and still may be in development for osteoporosis patients.

As non-union fractures and bone healing are non-chronic conditions, generally

entailing three to six months of treatment, they believe the acceptance of oral PTH

will be higher than other potential pharmacological alternatives.


They are a research and development stage company with a history of operating

losses and negative cash flow, and they may never achieve or maintain profitability. They are a research and development stage company with no revenues from their research and development activities. Consequently, they have incurred net losses and negative cash flows since their inception in 2009, including operating losses of $4.1 million and $7.0 million for the nine months ended September 30, 2016 and 2017, respectively, and $3.7 million and $5.4 million for the years ended December 31, 2015 and 2016. As of September 30, 2017, they had an accumulated deficit of $38.0 million.

Even if this offering is successful, they will need substantial additional capital in

order to satisfy their long-term growth strategy, which may not be available to

them on acceptable terms, or at all, and, if not available, may require them to delay, scale back, or cease their product development programs or operations.

They have a limited operating history and no history of commercializing

pharmaceutical products, which may make it difficult to evaluate the prospects for

their future viability.

All of their product candidates are in preclinical or clinical development. Clinical

drug development is expensive, time consuming and uncertain, and they may ultimately not be able to obtain regulatory approvals for the commercialization of some or all of their product candidates.

The results of previous clinical trials may not be predictive of future results, their

progress in trials for one product candidate may not be indicative of progress in trials for other product candidates, and their trials may not be designed so as to support regulatory approval.

Their product candidates may have serious adverse, undesirable or unacceptable

side effects that may delay or prevent marketing approval. If any such side effects

are identified during the development of their product candidates or following any regulatory approval, they may need to abandon their development of such product candidates, any approved label may be limited or they may be subject to other significant negative consequences following regulatory approval.

In order to obtain FDA approval for EB612 prior to the expiration of Natpara’s

orphan drug exclusivity in 2022, they need to show that EB612 is clinically superior

to Natpara. Moreover, although they have obtained orphan drug designation for

EB612 for the treatment of hypoparathyroidism, they may be unable to maintain the benefits associated with orphan drug designation, including the potential for market exclusivity.

Healthcare legislative changes may harm their business and future prospects

Even if approved, if any of their product candidates do not achieve broad market

acceptance among physicians, patients, the medical community and third-party

payors, their revenue generated from their sales will be limited.

Even if they obtain regulatory approval of any of their product candidates in a

major pharmaceutical market such as the United States or the European Union,

they may never obtain approval or commercialize their products in other major

markets, which would limit their ability to realize their full market potential.

They are highly dependent upon their ability to enter into agreements with

collaborators to develop, commercialize and market their products.

If they fail to establish, maintain, defend and enforce intellectual property rights

with respect to their technology, their business, prospects, financial condition and

results of operations may be materially adversely affected.

Under applicable employment laws, they may not be able to enforce covenants not

to compete and therefore may be unable to prevent their competitors from

benefiting from the expertise of some of their former employees. In addition, their

Israeli employees may be entitled to seek compensation for their inventions irrespective of their contractual agreements with them.

Immediately following this offering, D.N.A Biomedical will beneficially own

approximately 23.6% of their ordinary shares and may therefore be able to

significantly influence the outcome of matters requiring shareholder approval. Immediately following this offering, D.N.A Biomedical Solutions Ltd., or D.N.A Biomedical, will beneficially own approximately 23.6% of their outstanding shares. Accordingly, subject to special approvals required by Israeli law for transactions involving controlling shareholders, D.N.A Biomedical may be able to exercise significant influence over all matters requiring shareholder approval.

The Israeli government grants they have received for research and development

expenditures restrict their ability to manufacture products and transfer technologies

outside of Israel and require them to satisfy specified conditions. If they fail to

satisfy these conditions, they may be required to refund grants previously received together with interest and penalties or to pay other amounts according to the formulas set out in the relevant laws.

Security, political and economic instability in the Middle East may harm their

business.

Bottom Line

They are a clinical-stage biopharmaceutical company and, as such, have no revenues from the sale of any of their product candidates.

They are initially applying their technology to develop EB612, an oral formulation of parathyroid hormone, or PTH, which has been approved in the United States in injectable form for over a decade. They expect to initiate a Phase 2b/3 clinical trial of EB612 in the second half of 2018, and they plan to submit applications for regulatory approval of EB612 in the second half of 2020. Historically, the treatments for hypoparathyroidism have been calcium supplements, vitamin D supplements and phosphate binders, the chronic use of which results in serious side effects with significant costs to the healthcare system. Their lead product candidate, EB612, is delivered orally and can be administered in customized doses several times a day. Studies performed by researchers at the National Institutes of Health, or the NIH, have shown that dosing PTH multiple times per day significantly increases the efficacy of therapy and would be more effective for treating hypoparathyroidism. They are also developing a distinct oral PTH product candidate, EB613, for the treatment of osteoporosis. Because their product candidate EB613 is delivered orally, they believe it will reduce the treatment burden on patients and lead to significantly higher patient and physician acceptance compared to an injectable form of PTH. They intend to commence a Phase 2a clinical trial of EB613 in the first half of 2018. After completing this trial, they intend to seek to collaborate with a strategic partner to further develop and commercialize EB613. They are also preparing to conduct a clinical trial of their oral PTH in non-union fractures, one indication within the field of bone healing. Peptides, proteins and other large molecule therapeutics can currently only be delivered via injections and other non-oral pathways because oral administration leads to poor absorption into the blood stream as well as enzymatic degradation within the gastrointestinal tract. Their

proprietary oral drug delivery technology is designed to address both of these issues by utilizing a combination of a synthetic absorption enhancer to facilitate the enhanced absorption of large molecules and protease inhibitors to prevent enzymatic degradation. They also intend to use their technology as a platform for the oral delivery of other protein and large molecule therapeutics. They have conducted initial feasibility studies with a number of candidates and intend to commence clinical development for their next, non-PTH, product candidate by the end of 2018. While their operations are currently focused in their offices in Israel, they intend eventually to build a substantial U.S. presence to execute on their later stage development of their products, including clinical operations, regulatory operations, and commercialization.

Hypoparathyroidism is estimated to affect approximately 58,700 insured individuals in the United States. Historically, the treatments for hypoparathyroidism have been calcium supplements, vitamin D supplements and phosphate binders, the chronic use of which results in serious side effects with significant costs to the healthcare system.. Osteoporosis often leads to loss of mobility, admission to nursing homes and dependence on caregivers. These debilitating effects of osteoporosis have substantial costs. The NOF has estimated that 10 million people in the United States already have osteoporosis, and another approximately 43 million have low bone mass placing them at increased risk for osteoporosis. In addition, the NOF has estimated that osteoporosis is responsible for more than two million fractures in the United States each year resulting in an estimated $19 billion in costs annually. The NOF expects that the number of fractures in the United States due to osteoporosis will rise to three million by 2025, resulting in an estimated $25.3 billion in costs each year. Worldwide, osteoporosis affects an estimated 200 million women according to the International Osteoporosis Foundation, or IOF, and causes more than 8.9 million fractures annually. The IOF has estimated that 1.6 million hip fractures occur worldwide each year, and by 2050 this number could reach between 4.5 million and 6.3 million. The IOF estimates that in Europe alone, the annual cost of osteoporotic fractures could surpass €76 billion by 2050. Currently, no pharmacological treatments are available to stimulate bone healing. In the United States, there are approximately seven million new fractures each year, with approximately 300,000 delayed union or non-union fractures. Estimates for the average non-union treatment cost vary from approximately $25,000 to $45,000.

They plan to initiate a Phase 2b/3 clinical trial of EB612 in hypoparathyroidism commencing in the second half of 2018 and the filing of a BLA with the FDA for approval of EB612 in 2020. They are currently preparing to commence a Phase 2a clinical trial of EB613 in the first half of 2018. After they complete this trial, they intend to collaborate with a strategic partner to further develop and commercialize the product. They intend to conduct exploratory Phase 2 studies for the use of their oral PTH candidates in additional indications in which PTH plays a key biological role, including non-union fractures, one indication within the field of bone healing. They also plan to apply their drug delivery technology to other large molecules with chemical and other characteristics that would be advantageous with their technology in order to target orphan indications and other areas with significant unmet medical need. Their technology is designed to overcome both of these issues by enabling enhanced systemic absorption of large molecules and slowing their enzymatic degradation. They plan to improve the efficacy profile of large molecule therapeutics through the application of their proprietary oral

delivery technology. They are focused on the development of orally delivered large molecule therapeutics for the treatment of orphan indications and other indications with significant unmet medical need. For product candidates that target orphan indications, they intend to retain commercialization rights within key territories, including the United States, because of the ability to commercialize with a small sales force. For product candidates that target indications with larger patient populations, they may choose to partner with larger biopharmaceutical companies ahead of late stage development and commercialization. By initially focusing on the development of product candidates that apply their technology to FDA-approved large molecule therapeutic agents with known mechanisms of action, they believe they can reduce the development risks associated with their product candidates.

Studies found that the total daily PTH dose required to maintain serum calcium in the normal or near-normal range was reduced by 50% with twice-daily PTH and also demonstrated that twice-daily dosing achieved better control over serum calcium and urinary calcium excretion as compared to once-daily dosing. In addition, they believe patients generally prefer oral drugs. For these reasons, they believe EB612 is clinically superior to existing therapies and has the potential to become the standard of care for hypoparathyroidism. The hypoparathyroid population is heterogeneous and patients have highly variable responsiveness to PTH. Therefore, the ability to customize PTH dosing throughout the day with an oral tablet is an advantage over a once-daily preset injection pen. EB612 is expected to have less adverse events of hypercalcemia. Their planned treatment regimen would be increased gradually and in parallel as serum calcium increases slightly. As a result, calcium and vitamin D supplements would be reduced gradually, while maintaining a relatively stable level of serum calcium. Natpara must be stored under restrictive conditions (refrigeration requiring no freezing and no shaking), and a multiple step preparation must be performed every two weeks. EB612 will not require such additional preparations and will have no significant storage restrictions, except potentially for refrigeration. They believe that their formulation of EB613 achieves the maximum concentration necessary for therapeutic effect with three times less active pharmaceutical ingredient, and lower variability, than that observed with Novartis’ suspended product. They believe that their oral delivery technology is superior to other oral technologies that were and still may be in development for osteoporosis patients. As non-union fractures and bone healing are non-chronic conditions, generally entailing three to six months of treatment, they believe the acceptance of oral PTH will be higher than other potential pharmacological alternatives.

They are a research and development stage company with a history of operating losses and negative cash flow, and they may never achieve or maintain profitability. As of September 30, 2017, they had an accumulated deficit of $38.0 million. Even if this offering is successful, they will need substantial additional capital in order to satisfy their long-term growth strategy. They have a limited operating history and no history of commercializing pharmaceutical products, which may make it difficult to evaluate the prospects for their future viability. Clinical drug development is expensive, time consuming and uncertain, and they may ultimately not be able to obtain regulatory approvals for the commercialization of some or all of their product candidates. The results of previous clinical trials may not be predictive of future results. Their product candidates may have serious adverse, undesirable or unacceptable side effects that may

delay or prevent marketing approval. In order to obtain FDA approval for EB612 prior to the expiration of Natpara’s orphan drug exclusivity in 2022, they need to show that EB612 is clinically superior to Natpara. Moreover, although they have obtained orphan drug designation for EB612 for the treatment of hypoparathyroidism, they may be unable to maintain the benefits associated with orphan drug designation, including the potential for market exclusivity. Healthcare legislative changes may harm their business and future prospects. Even if approved, if any of their product candidates do not achieve broad market acceptance among physicians, patients, the medical community and third-party payors, their revenue generated from their sales will be limited. Even if they obtain regulatory approval of any of their product candidates in a major pharmaceutical market such as the United States or the European Union, they may never obtain approval or commercialize their products in other major markets, which would limit their ability to realize their full market potential. They are highly dependent upon their ability to enter into agreements with collaborators to develop, commercialize and market their products. If they fail to establish, maintain, defend and enforce intellectual property rights with respect to their technology, their business, prospects, financial condition and results of operations may be materially adversely affected. Under applicable employment laws, they may not be able to enforce covenants not to compete and therefore may be unable to prevent their competitors from benefiting from the expertise of some of their former employees. In addition, their Israeli employees may be entitled to seek compensation for their inventions irrespective of their contractual agreements with them. Immediately following this offering, D.N.A Biomedical will beneficially own approximately 23.6% of their ordinary shares and may therefore be able to significantly influence the outcome of matters requiring shareholder approval. The Israeli government grants they have received for research and development expenditures restrict their ability to manufacture products and transfer technologies outside of Israel and require them to satisfy specified conditions. Security, political and economic instability in the Middle East may harm their business. Rating = 2


_________________________________________________

Eyenovia, Inc. EYEN $10.00-$12.00 2.73 million shares Underwriters: Ladenburg Thalmann, Roth Capital Partners Co-Managers: Proposed trade date of 1/24. They are a clinical stage biopharmaceutical company developing a pipeline of ophthalmology products utilizing their patented piezo-print technology to deliver micro-doses of active pharmaceutical ingredients, or micro-therapeutics, topically to the eye.

Not a full write-up because of underwriter(s) choice and their perceived short term prospects.

Eyenovia, Inc. EYEN


Underwriters: Ladenburg Thalmann, Roth Capital Partners Co-Managers:


Rating = 2 Click here to view the prospectus. https://www.sec.gov/Archives/edgar/data/1682639/000114420418001370/tv481714_s1a.htm

They are a clinical stage biopharmaceutical company developing a pipeline of ophthalmology products utilizing their patented piezo-print technology to deliver micro-doses (6–8 µL) of active pharmaceutical ingredients, or micro-therapeutics, topically to the eye. This micro-dosing technology has the potential to replace traditional macro-dosing applications (e.g. conventional eye droppers that deliver 30–50 µL) that routinely overdose or under-dose when used in the topical administration of ophthalmic therapeutics. They believe their micro-therapeutic product candidates may be able to achieve similar pharmacologic effects as traditional macro-dosing applications while reducing the adverse effects associated with these techniques. They have received written Food and Drug Administration, or FDA, feedback indicating that they can proceed to Phase III clinical trials for two of their lead programs: MicroProst, a novel micro-therapeutic latanoprost formulation for chronic angle closure glaucoma, or CACG, an indication with no FDA-approved drug treatments; and MicroStat, a fixed combination of micro-therapeutic phenylephrine-tropicamide formulation for mydriasis, also known as pupil dilation for use in eye exams. MicroTears, their over-the-counter, or OTC, product candidate for dry eye, will not require Phase III clinical trials, and they plan to proceed with registration activities.

They have completed two Phase II clinical trials, treating more than 110 subjects, with results published in peer-reviewed literature. Applying multiple front-of-the-eye (the area in front of the lens) formulations in subjects for mydriasis, their piezo-print technology delivered microliter precision at the volume of the eye’s natural tear film capacity of 6–8 µL, which reduced ocular and systemic drug and preservative exposure when compared to eye drops, resulting in comparable efficacy with fewer side effects. They believe that these clinical trials support their advancement into late stage clinical trials utilizing the 505(b)(2) pathway. They intend to use this pathway for future clinical trials in new indications with significant unmet needs.

They believe that they are the only company with clinical stage technology for targeted micro-dosing of ophthalmic investigational therapies. Their solution is based on piezo-print technology, which is also used for pixel-sharp high-precision inkjet printing. The technology is optimized for and applied in ophthalmic delivery to achieve micro-dosing that is many times more precise than conventional eye droppers. In addition, as an electronic system, they are able to track when patients administer their medications and deliver this information to patients and physicians via Bluetooth connectivity. This enables physicians to track compliance and make decisions regarding therapeutic regimens with knowledge of patient compliance.

The FDA provided written feedback that their clinical programs will not be treated as a medical device or as a drug/device combination. All of their programs are treated as drug development programs because only the drug comes into contact with the eye. Consequently, they do not need a separate FDA approval for the piezo-print device or to comply with FDA regulations for medical devices.

MicroProst is their proprietary latanoprost prostaglandin micro-formulation product candidate being developed as a first-line indication for CACG. Currently, there are no FDA-approved therapies for CACG, which accounts for 10% and 50% of all glaucoma diagnoses in the U.S. and China, respectively. They believe that the market exceeds $700 million in the U.S. alone.

https://www.sec.gov/Archives/edgar/data/1682639/000114420418001370/tv481714_s1a.htm

https://www.sec.gov/Archives/edgar/data/1682639/000114420418001370/tv481714_s1a.htm

MicroStat is the potentially first-in-class fixed combination micro-formulation product candidate for mydriasis (eye dilation) intended to facilitate office-based eye examinations to serve the over 80 million dilated retina eye exams performed each year in the U.S. MicroStat has been designed to achieve adequate pupil dilation while reducing unintended effects of conventional mydriatic agents. They believe the market exceeds $150 million in the U.S. alone. Based on their Phase II clinical trials and subsequent FDA feedback, they are proceeding towards the initiation of the Phase III clinical trials of a fixed-combination, micro-formulation of phenylephrine 2.5% and tropicamide 1% for mydriasis.

MicroTears is a differentiated micro-droplet ocular surface tear replenishment product candidate for the $2 billion-plus (200 million units sold annually) OTC artificial tear market. Their piezo-technology enables accurate delivery directly to the ocular surface, which they believe enhances its effectiveness. The lower volume of MicroTears will also lower the incidents of droplet overflow. While no FDA studies are required for registration of a monograph formulation, they expect to conduct multiple Phase IV post-marketing studies to demonstrate the benefits of MicroTears. They plan to complete formulation and manufacturing scale-up activities for an expected market introduction in mid-to-late 2019.

In addition to MicroProst, MicroStat and MicroTears, they are developing an expanded pipeline of therapeutic product candidates and are preparing them for late-stage clinical trials. The first pipeline opportunity is MicroPine, which is a micro-therapeutic formulation of atropine to target myopia (or near sightedness) progression. Clinical trials conducted to date, as well as a recent technology analysis and review by the American Academy of Ophthalmology, indicate Level 1 (highest) evidence of efficacy for the role of low dose atropine for myopia progression. To date, no therapy has been possible due to side effects associated with existing macro-dosed drop formulations in the pediatric population using atropine. They met with the FDA on December 15, 2017 to discuss their Phase III trial design for Micropine. FDA feedback indicates that they can proceed to Phase III with a primary endpoint of reduction of myopia progression, enrolling children and adolescents with a three-year follow-up. They have begun development activities for MicroPine with a planned Phase III clinical trial expected to be initiated in 2019. Rating = 2


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Gates Industrial Corporation plc GTES $18.00-$21.00 38.5 million shares Underwriters: Citigroup, Morgan Stanley, UBS Investment Bank, Barclays, Credit Suisse, Goldman Sachs & Co., RBC Capital Markets Co-Managers: Blackstone Capital Markets, Deutsche Bank Securities, Wells Fargo Securities, Current Capital Securities, KeyBanc Capital Markets, Siebert Cisneros Shank & Co., SunTrust Robinson Humphrey, Academy Securities, BTIG, Guggenheim Securities Proposed trade date of 1/25. They are a global manufacturer of innovative, highly engineered power transmission and fluid power solutions.

Gates Industrial Corporation plc GTES


Underwriters: Citigroup, Morgan Stanley, UBS Investment Bank, Barclays, Credit Suisse, Goldman Sachs & Co., RBC Capital Markets Co-Managers: Blackstone Capital Markets, Deutsche Bank Securities, Wells Fargo Securities, Current Capital Securities, KeyBanc Capital Markets, Siebert Cisneros Shank & Co., SunTrust Robinson Humphrey, Academy Securities, BTIG, Guggenheim Securities


Rating = 2



Company Overview

They are a global manufacturer of innovative, highly engineered power transmission and fluid power solutions. They offer a broad portfolio of products to diverse replacement channel customers, and to original equipment (“first-fit”) manufacturers as specified components, with the majority of their revenue coming from replacement channels. Their products are used in applications across numerous end markets, which include construction, agriculture, energy, automotive, transportation, general industrial, consumer products and many others. Their revenue has historically been highly correlated with industrial activity and utilization, and not with any single end market given the diversification of their business and high exposure to replacement markets. Key indicators of their performance include industrial production, industrial sales and manufacturer shipments. They sell their products globally under the Gates brand, which is recognized by distributors, equipment manufacturers, installers and end users as a premium brand for quality and technological innovation; this reputation has been built for over a century since Gates’ founding in 1911. Within the diverse end markets they serve, their highly engineered products are critical components in applications for which the cost of downtime is high relative to the cost of their products, resulting in the willingness of end users to pay a premium for superior performance and availability. These applications subject their products to normal wear and tear, resulting in a natural replacement cycle that drives high-margin, recurring revenue. Their product portfolio represents one of the broadest ranges of power transmission and fluid power products in the markets they serve, and they maintain long-standing relationships with a diversified group of blue-chip customers throughout the world. As a leading designer, manufacturer and marketer of highly engineered, mission-critical products, they have become an industry leader across most of the regions and end markets in which they operate.

Gates was founded in 1911 by Charles C. Gates and since then has been recognized as an innovator in the power transmission and fluid power markets. Gates operated as a family-owned company until 1996, when it was acquired by Tomkins plc, a broad, industrial conglomerate based in the United Kingdom. In 2010, Tomkins was acquired by Onex Partners and the Canada Pension Plan Investment Board, who



proceeded to divest the individual Tomkins companies. Gates was acquired by funds affiliated with The Blackstone Group L.P. in July 2014.

They operate their business on a product-line basis through their two reporting segments—Power Transmission and Fluid Power—and participate in a diverse set of applications across numerous industrial end markets, as well as many consumer markets. In these markets, widely recognized macro trends such as population growth, urbanization, infrastructure build out, industrial automation and increased energy efficiency, are expected to support long-term demand for their products. Their strengths, combined with the inherent value propositions their products deliver, position them well to serve their customers in these markets.

Their highly engineered power transmission and fluid power products are often critical to the functioning of the equipment, process or system in which they are components, creating a dynamic where the cost of downtime or potential equipment damage is high relative to the cost of their products. For example, on an agricultural harvester, they estimate that the cost of system downtime during harvest season is approximately $5,300 per hour, whereas the cost of a replacement hydraulic hose assembly is approximately $300. Industrial synchronous drives, which can cost an end user as little as $75, are widely used to power key systems in industrial facilities. Failure of these drives can stop production and result in significant downtime costs. Because the cost of their products is low relative to the cost of downtime or equipment damage, their products are not only replaced as a result of normal wear and tear, but also preemptively as part of ongoing maintenance to the broader system.

Power Transmission. Their Power Transmission solutions enable and control

motion. They are used in applications in which belts, chains, cables, geared transmissions or direct drives transfer power from an engine or motor to another part or system. Belt-based power transmission drives typically consist of either a synchronous belt or an asynchronous belt (V-belt, CVT belt or Micro-V® belt) and related components (sprockets, pulleys, water pumps, tensioners or other accessories). Within their Power Transmission segment, they offer solutions across the following key application platforms:

Stationary drives: fixed drive systems such as those used in a factory driving a

machine or pump, or on a grain elevator driving the lift auger.

Mobile drives: drives on a piece of mobile machinery such as a combine

harvester or a road compactor, or in applications such as the brush head of a vacuum cleaner.

Engine systems: synchronous drives and related components for cam shafts and

auxiliary drives and asynchronous accessory drives for air conditioning (“A/C”) compressors, power steering, alternators and starter/generator systems.

Personal mobility: drives on motorcycles, scooters, bicycles, snowmobiles and

other power sports vehicles that are used to transfer power between the power source and the drive wheel(s) or track.

Vertical lift: elevators, cargo lifts and other applications in which a belt, cable,

chain or other lifting mechanism is used to carry load.

Customers choose power transmission solutions based on a number of factors, including application requirements such as load, speed, gear ratio, temperature, operating environment, ease of maintenance, noise, efficiency and reliability, as well as the support they receive from their suppliers, including application-specific engineering. Belt-based drive systems have many advantages over other alternatives.

Fluid Power. Their Fluid Power solutions are used in applications in which

hoses and rigid tubing assemblies either transfer power hydraulically or convey fluids, gases or granular materials from one location to another. Within their Fluid Power segment, they offer solutions across the following key application platforms:

Stationary hydraulics: applications within stationary machinery, such as an

injection molding machine or a manufacturing press.

Mobile hydraulics: applications used to power various implements in mobile

equipment used in construction, agriculture, mining and other heavy industries.

Engine systems: applications for engine systems such as coolant, fuel, A/C,

turbocharger, air intake and selective catalytic reduction (“SCR”) for diesel emissions.

Other industrial: applications in which hoses are used to convey fluids, gases or

granular material across several industries such as oil and gas drilling and refining, food and beverage and other process industries.

Customers choose fluid power solutions based on a number of factors including application-specific product performance parameters such as pressure and temperature ratings, corrosion and leak resistance, weight, flexibility, abrasion resistance and cleanliness, as well as compliance with standards and product availability. Attributes associated with the supplier, including brand, global footprint and reputation for reliability and quality, are also considered.

They sell their high-performance power transmission and fluid power products both as replacement components and as specified components on original equipment to customers worldwide. For Fiscal 2016, approximately 64% of their net sales were generated from replacement markets and 36% from first-fit markets globally. Their mix of replacement sales to first-fit sales varies by region based on their market strategy and the maturity of the equipment fleet and replacement channel. For example, in emerging markets such as China, their business is characterized by a higher first-fit presence, given the relatively underdeveloped replacement channels and newer car parc. In China and East Asia, approximately 40% of their Fiscal 2016 net sales were generated from replacement markets. As these markets mature, they believe that their first-fit market presence will drive growth in their replacement business. By contrast, in North America and Europe, where there are long-established replacement markets, approximately 73% and 68% of their Fiscal 2016 net sales, respectively, were derived from these higher-margin replacement channels.

Their products are sold in 128 countries across their four commercial regions: (1) the Americas; (2) Europe, Middle East & Africa (“EMEA”); (3) Greater China (“China”); and (4) East Asia & India (“East Asia”). They have a long-standing presence in each of these regions, and their commercial teams have demonstrated a track record of growing in emerging markets. These commercial capabilities are complemented by their global manufacturing footprint, which frequently allows them to manufacture products in close proximity to their customers. They have power transmission and fluid power operations in each commercial region and typically manufacture products for both first-fit customers and replacement customers in the same factory, which provides improved factory loading and demand leveling, as well as optimization of capital expenditures. Their “in-region, for-region” footprint and extensive distribution network provide them with a “close-to-customer” local mindset that enables rapid response for their customer base. This combination of capabilities enhances their value proposition and strengthens their customer relationships.

IPO Detail

This is the initial public offering of Gates Industrial Corporation plc and no public market currently exists for its common stock. Gates Industrial Corporation plc is offering 38,500,000 shares of common stock as described in the prospectus. The company expects the initial public offering price of its common stock to be between $18.00 and $21.00 per share. The company has applied to list its common stock on the New York Stock Exchange under the symbol “GTES.”




Use of Proceeds

They estimate that the net proceeds that they will receive from this offering will be approximately $709.5 million.

They intend to use the net proceeds from this offering (i) to redeem all €235.0 million ($276.5 million equivalent as

of September 30, 2017) principal amount of euro notes, (ii) to redeem approximately $403.3 million principal amount

of dollar notes, (iii) to redeem their £50,000 redeemable preferred share issued in connection with the pre-IPO

reorganization transactions and (iv) the remainder, if any, for general corporate purposes, which may include the

repayment of other outstanding indebtedness. As of September 30, 2017, €235.0 million ($276.5 million equivalent

as of September 30, 2017) aggregate principal amount of the euro notes and $1,190.0 million aggregate principal

amount of the dollar notes were outstanding. The euro notes and dollar notes mature on July 15, 2022 and have

interest rates of 5.75% per annum and 6.00% per annum, respectively.

Competition

Company

Stock

Symbol Exchange.

Hutchinson Technology Inc. (subsidiary of TDK Corp.) 6762 TYO

Nott Company Inc. Private

. Womack Machine Supply Private

S.G. Morris Co.

Fenner Drives (subsidiary of Fenner plc) FENR LON

Omfa Rubbers Ltd. Private

Market Opportunity

They participate in many sectors of the industrial and consumer markets. Their products play essential roles in a diverse range of applications across a wide variety of end markets ranging from harsh and hazardous industries such as agriculture, construction, manufacturing and energy, to everyday consumer applications such as printers, power washers, automatic doors and vacuum cleaners. Virtually every form of transportation, ranging from trucks, buses and automobiles to personal mobility vehicles such as motorcycles, scooters, bicycles, snowmobiles and other power sports vehicles, uses their products. They believe the large, diverse and global nature of the markets they serve provides attractive opportunities for profitable growth. Based on market research data, as well as their own analysis, they believe that they have a total core addressable market opportunity of approximately $59 billion. Power Transmission accounts for approximately $30 billion of the total core addressable market opportunity, divided approximately among the following product categories: $1.8 billion in synchronous drives, $3.1 billion in asynchronous drives, $7.5 billion in metals and $17.5 billion in other drive systems. Fluid Power represents approximately $29 billion of the total core addressable market opportunity, divided approximately among the following product categories: $11.2 billion in hydraulics, $14.0 billion in engine hose and $3.5 billion in industrial hose.

They believe the end markets they serve benefit from inherent growth provided by several attractive, secular long-term trends that create demand for the applications in which their products are used. Underlying all of the long-term trends is the growth of the world’s population, which is expected to reach 9.7 billion by 2050. Along with population growth comes an increased demand for water and food, the production of which is expected to increase 59% by 2050. This increased level of food production is expected to drive a corresponding increase in demand for both farming and food processing equipment. Related water demand will drive increased needs for water treatment facilities and pumping stations, all of which rely upon their products.

This population growth and a growing middle-class in emerging markets also drive an increased infrastructure build-out, which requires more construction equipment to build roads, bridges, rail systems and buildings. The world’s population also continues to urbanize, with 70% of people expected to live in cities by 2050, up from 50% today. Urbanization leads to more vertical infrastructure, and, with

more people living in high rise buildings, there will be an increased need for elevators and other vertical lift systems. These trends also positively impact the transportation markets their products are used in, ranging from trucks, buses and automobiles to personal mobility vehicles such as motorcycles, scooters and bicycles. Additionally, they expect these trends to continue to generate increased demand for energy production over the long term. Oil and gas drilling and refining, alternative energy generation and mining equipment all leverage Gates products.

Industries across the globe are also continuously investing in automation and productivity improvements. Energy efficiency, advanced technology and emerging economies are expected to continue to drive growth in the industrial automation market. As an example, new installations of industrial robots are forecast to grow at a 13% compound annual growth rate (“CAGR”) from 2017 to 2019, while the demand for 3D printing technology is also expected to increase. Belt drives generally outperform other forms of mechanical power transmission, giving even more reason to choose a belt drive versus alternatives in all of these applications.

Their revenue has historically been highly correlated with industrial activity and utilization, and not with any single end market given the diversification of their business and high exposure to replacement markets. Key indicators include industrial production, industrial sales and manufacturer shipments. They believe they are well positioned to outpace these indicators by leveraging their competitive strengths to penetrate underserved core markets.

(dollars in millions,

except

per share data)

Nine months

ended

September 30,

2017

Nine

months

ended

October 1,

2016 Fiscal

2016 Fiscal

2015

Post-

Acquisition

Predecessor 2014

Pre-

Acquisition

Predecessor 2014

Fiscal 2013

Fiscal 2012

Statement of

operations data: Net sales $ 2,259.9 $ 2,079.3 $ 2,747.0 $ 2,745.1 $ 1,445.1 $ 1,597.1 $ 2,947.3 $ 2,922.8

Operating income

(loss) from

continuing

operations 310.4 237.3 298.8 184.4 (104.6 ) 104.2 301.0 195.8

Net income (loss)

from continuing

operations 52.4 65.2 71.9 50.9 (86.9 ) 14.3 120.7 (118.2 )

Gain (loss) on

disposal of

discontinued

operations, net of

tax 0.1 3.8 12.4 — (2.3 ) (0.1 ) 1.0 793.0

(Loss) from

discontinued

operations, net of

tax benefit — — — — — (47.9 ) (6.8 ) 79.6

Net income (loss) 52.5 69.0 84.3 50.9 (89.2 ) (33.7 ) 114.9 754.4

Non-controlling

interests (20.0 ) (21.2 ) (26.6 ) (26.0 ) (7.7 ) (11.5 ) (28.4 ) (23.0 )

Net income (loss)

attributable to

shareholders $ 32.5 $ 47.8 $ 57.7 $ 24.9 $ (96.9 ) $ (45.2 ) $ 86.5 $ 731.4

Pro forma basic

and diluted

earnings per

share data

(unaudited)(1):

Pro forma earnings

(loss) per share

from continuing

operations $ 0.13 $ 0.18 $ 0.18 $ 0.10 $ (0.39 ) Pro forma earnings

(loss) per share

from

discontinued

operations — 0.01 0.05 — (0.01 ) Pro forma net

income (loss) per

share $ 0.13 $ 0.19 $ 0.23 $ 0.10 $ (0.40 )

(1) The pro forma earnings per share data is based on their historical consolidated statements of operations after

giving effect to the pre-IPO reorganization transactions as if they had occurred at the beginning of the Post-

Acquisition Predecessor period.

(dollars in millions)

As of

September 30,

2017

As of

December 31,

2016

As of

January 2,

2016

As of

January 3,

2015

As of

December 31,

2013

As of

December 31,

2012

Balance sheet data: Total assets $ 6,756.1 $ 6,383.3 $ 6,565.6 $ 7,143.5 $ 5,164.2 $ 5,323.7

Debt, long term and current

portion $ 3,915.5 $ 3,836.6 $ 3,907.3 $ 4,002.3 $ 1,718.4 $ 1,845.9

Target Markets

Further Penetrate Industrial Power Transmission Applications. They are targeting

specific opportunities within their existing industrial end markets and product portfolio to further penetrate industrial power transmission applications, particularly those currently driven by competing technologies, including roller chain, direct drive systems, gearboxes and steel cable. They estimate that belt-drives constitute approximately 25% of all industrial drive systems, with the largest portion being driven by chain and steel cable. This presents a significant and attractive opportunity for them to grow by leveraging their brand, distribution channel presence and the fundamental value proposition of belt-drive systems. Industrial belt-drive systems often compare favorably to other types of industrial drive systems in terms of their quiet, low-maintenance and efficient operation, as well as being relatively light-weight.

Materials science-based advances in their product portfolio provide them with opportunities to displace competing drive systems in larger, high-torque applications that belt drives have historically been unable to address. They are also able to utilize their application engineering capabilities to complement their product strength by assisting end users in optimal drive system design.

Extend Product Line in Fluid Power Gates products compete in the premium segment

of the market, where customers value quality, portfolio breadth and design capability. Customers in this segment use their products in numerous, demanding applications with a wide range of performance requirements. For example, there can be different product performance requirements for different hydraulic circuits within the same piece of construction equipment.

Through materials science-based innovation, VA/VE and process engineering they will continue to broaden their portfolio of fit-for-purpose fluid power products, optimizing their performance for different customer applications. This ongoing investment substantially increases the size of their addressable market and enables them to capture even more of the premium segment.

Drive Technical Innovation in Their Markets They continue to invest in advanced

development programs and their core R&D capabilities to ensure that they remain at the forefront of innovation and product performance in their markets. They have established global centers of excellence that specialize in different functional areas of R&D with special emphasis on materials science and advanced modeling techniques. They utilize long-standing relationships with their blue-chip customers to design products that meet or exceed their anticipated future performance requirements. Their commitment to continue to invest in these relationships and their R&D capabilities strengthens their position to serve their core replacement markets with highly innovative and differentiated products to further increase the strength of their brand.

Continue to Grow and Invest in Emerging Markets They have a long-standing

presence in key emerging markets and a track record of driving growth from the early stages of a market’s development. They have successfully entered these markets by focusing on first-fit partnerships to establish their brand while building out their channels to serve the replacement base. Emerging markets continue to exhibit higher growth rates than mature markets due to a number of factors, such as increases in industrial production, mechanization, urbanization, infrastructure development and vehicle ownership. To capitalize on these trends, they will continue to build out their catalog coverage, develop regionally appropriate product portfolios, expand their channel coverage and optimize regional manufacturing capacity.

Pursue Strategic Acquisitions They intend to continue to strategically pursue and

execute acquisitions to accelerate their growth strategies. Their markets are highly fragmented, providing numerous inorganic opportunities for them to expand their reach and capabilities. They maintain a disciplined approach to acquisitions and target strategic opportunities where they can realize synergies by leveraging their brand, channel presence, operating culture, global reach and other core competencies. They recently completed two acquisitions that were aligned with this philosophy: Techflow Flexibles in June 2017 and Atlas Hydraulics in October 2017.


Premier Recognized Brand They offer their products and services under the widely-

recognized Gates brand across their broad end markets and geographies. Since 1911, Gates has been recognized by distributors, installers, equipment manufacturers and end users as a premier name for power transmission and fluid power products, services and solutions. They are known for their premium quality, reliability, customer service, global footprint, leading technology and breadth of product offerings. In their replacement businesses, they experience strong pull-through demand from end users who specifically request Gates-branded products from their channel partners. They

believe that they are the partner of choice when major customers are developing new platforms or upgrading existing ones.

Global Presence Their commercial and manufacturing footprint is global. With over 100

sales, R&D and operations locations around the world, they have positioned ourselves close to their customers. Their products are sold in 128 countries with approximately 53% of Fiscal 2016 net sales originating from outside of North America and approximately 32% of their Fiscal 2016 net sales originating from emerging markets. Their broad geographic footprint provides diversification from regional cyclicality and positions them to capitalize on growth opportunities in every region.

Leading Market Positions\ The breadth of their catalog, their market share in many

product categories and their share of available content with key customers put them in what they believe is a leading market position in most channels, regions and end markets in which they operate. With $1,862.1 million of Fiscal 2016 net sales in Power Transmission and $884.9 million of Fiscal 2016 net sales in Fluid Power, they believe they are the top global player in power transmission belts as well as a top-three global player in industrial hydraulic hose and couplings, engine systems metals and oil and gas drilling hose. In Fiscal 2016, they estimate that 42% of their net sales were generated from leading market positions, while 83% of their net sales were generated from top three market positions. These leading market positions combined with their strong brand serve as platforms from which they can extend their solution coverage in underpenetrated segments and generate sales growth in excess of their end markets.

Channel Breadth and Relationships They believe that their regional commercial

teams have established one of the broadest distribution networks in their industry, across a variety of end market-focused channels. Their distributors range from large corporations with numerous locations to small, individually-owned companies with a single location. Located in 128 countries, their channel partners provide global coverage and stock inventory of their products in close proximity to end users. They are able to generate demand for their products, as well as offer a point of customer service and product knowledge for end users in their local language. Many of them also have the capability to configure or assemble their products to meet diverse end-user requirements where a suitable off-the-shelf solution is not available. They have a demonstrated track record of building their presence in replacement channels in emerging markets such as Eastern Europe and South America. In regions such as Southeast Asia and China, they are leveraging this experience to build out their channel presence utilizing unique programs. These extensive distribution networks give them the ability to access a broad base of end users and to reinforce the Gates brand. They believe that this established channel represents one of the largest replacement footprints in the industry, enabling access to a large addressable market and rapid launches of new products to end users.

Product and Catalog Coverage of Application-Critical Components Their power

transmission and fluid power product portfolios in the first-fit and replacement markets are some of the broadest in their industry. They believe their product breadth simplifies their customers’ purchasing decisions and creates loyalty to them. In the automotive replacement markets, product coverage of the light vehicles in a region, or car parc, is

essential for the success of their distributors and installers. Within their core synchronous and Micro-V® belt product lines, their products can be used across 99% of the North American, European and Chinese car parcs. These car parcs comprise over 70% of the global car parc of over 1.3 billion vehicles. They are focused in particular on expanding their catalog coverage in the more-fragmented car parcs in emerging markets. For their industrial markets, they also believe they maintain an industry-leading portfolio of catalogs containing both general purpose and application-specific products for a variety of end markets. They continuously invest in updating their product and catalog coverage to remain at the forefront of their industry and provide end users with convenient access to their comprehensive product portfolio.

Their highly engineered power transmission and fluid power products are often critical to the functioning of the equipment, process or system of which they are components, creating a dynamic where the cost of downtime or potential equipment damage is high relative to the cost of their products. Consequently, their products are typically replaced at regular intervals for preventative maintenance, resulting in high-margin, recurring revenue streams. Their catalog coverage, combined with the mission-critical nature of their products, makes them a valued partner to their customers.

History of Successful Innovation They have a storied history of successful

innovation, from commercializing the V-belt to pioneering the use of certain synthetic elastomers in serpentine belts. They believe that their materials science expertise forms the foundation of their innovation capabilities. Their products must be light-weight, withstand extreme temperature, pressure and load conditions, resist wear, maintain flexibility, avoid corrosion and fulfill other critical application requirements, all of which can only be met using the latest advancements in materials science technologies. For example, they believe their carbon fiber technologies are best-in-class and continue to support their leadership position in several industrial power transmission product categories. Their carbon fiber-based products outperform competitive offerings, further strengthening their leadership position. In addition, they have ongoing programs to develop Internet of Things (“IoT”) solutions enabling remote monitoring and predictive diagnostics. These programs, along with other digital tools, improve the overall value proposition they deliver to their customers.

They hold a substantial patent portfolio consisting of approximately 2,600 issued and filed patents, and have spent approximately 2% of net sales during each of the last three fiscal years on ongoing R&D activities. They employ over 500 engineers globally who are dedicated to product and technology development. Many of these engineers work closely with their customers to design and develop application-specific solutions that not only solve immediate customer needs but also feed into their broader innovation development efforts. Their R&D group works closely with their product line management team to ensure that their product and technology development roadmaps are closely tied to their growth initiatives.

Operating Excellence Driving Margin Enhancement The Gates Operating System

philosophy is their overarching business system that drives a culture of continuous improvement and consistent application of best-practices across all functions of the organization. Within the Gates Operating System, the operations-focused Gates

Production System (“GPS”) has been deployed throughout their manufacturing facilities to optimize their production efficiency. They have made significant improvements in factory productivity which have reduced production costs and freed up manufacturing capacity. They have also implemented highly effective sourcing programs that leverage the latest e-auction tools and programs to insource selected components. Their Value Analysis/Value Engineering (“VA/VE”) capability allows them to optimize select product designs for cost and performance to meet broader market requirements and improve profitability. The Gates Program Management System (“GPMS”) has also been deployed to improve how they manage customer programs, new product development projects and advanced technology projects. The implementation of the Gates Operating System has contributed to gross margin expansion of 280 basis points from Fiscal 2015 gross margin to their gross margin of 40.5% for the first nine months of 2017.

Strong Margins and Cash Flows from Operations Their operating model is designed

to generate strong profit margins and cash flows from operations. As a result of their new management team’s operating initiatives and their ongoing focus on continuous improvement, they have demonstrated a track record of margin improvement. Their margins are supported by their premier brand, superior product attributes, high service levels, operational scale and efficiency and their relationships with their customers. They have identified several additional cost-savings opportunities focused on improving productivity in their plants and expanding the scope of central procurement. They also have ongoing initiatives to improve inventory turns through lean manufacturing techniques and common product designs. Their capital expenditures have been strategically deployed to fund innovation and organic growth opportunities. They expect their continued focus on operational excellence and cost discipline to improve profit margins and working capital performance.


They are subject to economic, political and other risks associated with international

operations, and this could adversely affect their business and their strategy to

capitalize on their global reach.

Adverse changes in their relationships with, or the financial condition,

performance, purchasing patterns or inventory levels of, key channel partners could

adversely affect their business, financial condition and results of operations. Certain of their businesses sell a significant amount of their products to key channel partners, including distributors, which have valuable relationships with end users. Some of these channel partners may also sell their competitors’ products, and if they favor competing products for any reason they may fail to market their products effectively.

Pricing pressures from their customers may materially adversely affect their

business. They generate strong margins by selling premium products at premium prices.

Accordingly, their margins could suffer if their customers are no longer willing to pay a premium for their product and service offerings. They face the greatest

pricing pressure from their customers in the automotive first-fit end market. Virtually all vehicle manufacturers seek price reductions in both the initial bidding process and during the term of the award. They are also, from time to time, subject to pricing pressures from customers in their other end markets.

They have taken, and continue to take, cost-reduction actions, which may expose

them to additional risk and they may not be able to maintain the level of cost

reductions that they have achieved.

Their products could infringe on the intellectual property of others, which may cause

them to engage in costly litigation and, if they are not successful, could cause them to pay substantial damages and/or prohibit them from selling their products.

They will not seek to protect their intellectual property rights in all jurisdictions

throughout the world and they may not be able to adequately enforce their

intellectual property rights even in the jurisdictions where they seek protection.

Longer lives of products used in their end markets may adversely affect demand for

some of their replacement products. The average useful life of certain products in

their end markets has increased in recent years due to innovations in technologies and manufacturing processes. The longer product lives allow end users to replace parts less often. As a result, a portion of sales in the replacement markets they serve may be displaced. If this trend continues, it could adversely impact their replacement market sales.

The replacement market in emerging markets may develop in a manner that could

limit their ability to grow in those markets. In emerging markets such as China,

India, Eastern Europe and Russia, the replacement markets are still nascent as compared to those in more developed nations. In these markets, they have focused on building a first-fit presence in order to establish brand visibility in the end markets they serve. However, as the replacement markets in these regions grow, their products may not be selected as the replacement product, although they are the first-fit provider. If they are not able to convert their first-fit presence in these emerging markets into sales in the replacement end market, there may be a material adverse effect on their replacement end market growth potential in these emerging markets.

They are subject to liabilities with respect to businesses that they have divested in

the past. In recent years, they have divested a number of businesses. With respect to

some of these former businesses, they have contractually agreed to indemnify the buyer against liabilities arising prior to the divestiture, including lawsuits, tax liabilities, product liability claims or environmental matters. Even without ongoing contractual indemnification obligations, they could be exposed to liabilities arising out of such divestitures. As a result of these types of arrangements, conditions outside their control could materially adversely affect their future financial results.

Certain of their defined benefit pension plans are underfunded, and additional cash

contributions they may be required to make will reduce the cash available for their

business, such as the payment of their interest expense. Certain of their employees in

the United States, the United Kingdom, Canada, Mexico, Germany and Japan are participants in defined benefit pension plans which they sponsor and/or have obligations to contribute to. As of December 31, 2016, the unfunded amount of their defined benefit pension plans on a worldwide basis was approximately $61.7 million on an FASB ASC Topic 715 “Compensation—Retirement Benefits” basis. The amount of their contributions to their underfunded plans will depend upon asset returns, funding assumptions, regulatory requirements and a number of other factors and, as a result, the amount they may be required to contribute to such plans in the future may vary. Such cash contributions to the plans will reduce the cash available for their business such as the payment of interest expense on their notes or their other indebtedness.

Their substantial leverage could adversely affect their financial condition, their

ability to raise additional capital to fund their operations, their ability to operate

their business, their ability to react to changes in the economy or their industry or

their ability to pay their debts, and could divert their cash flow from operations to

debt payments. They are highly leveraged. As of September 30, 2017, the total

principal amount of their debt was approximately $4.0 billion (equivalent).

Their variable rate indebtedness subjects them to interest rate risk, which could

cause their indebtedness service obligations to increase significantly. Interest rates

may increase in the future. As a result, interest rates on their revolving credit facility or other variable rate debt offerings could be higher or lower than current levels. As of September 30, 2017, after taking into account their interest rate derivatives, approximately $1,305.7 million (equivalent), or 32.9%, of their outstanding debt had variable interest rates.

Their Sponsor and its affiliates control them and their interests may conflict with

theirs or yours in the future. Immediately following this offering, their Sponsor and its

affiliates will beneficially own approximately 85.9% of their ordinary shares. Moreover, under their articles of association (the “Articles”) and the shareholders agreement with their Sponsor that will be in effect by the completion of this offering, for so long as their Sponsor and its affiliates retain significant ownership of them, they will agree to nominate to their board individuals designated by such Sponsor. Even when their Sponsor and its affiliates cease to own ordinary shares representing a majority of the total voting power, for so long as their Sponsor continues to own a significant percentage of their ordinary shares, such Sponsor will still be able to significantly influence the composition of their board of directors and the approval of actions requiring shareholder approval through their voting power. Their Sponsor and its affiliates engage in a broad spectrum of activities. In the ordinary course of their business activities, their Sponsor and its affiliates may engage in activities where their interests conflict with their interests or those of their shareholders.

Bottom Line

During Fiscal 2016, they generated $2,747.0 million in net sales to over 8,000 customers in 128 countries, their net income was $84.3 million and their Adjusted EBITDA was

$594.9 million, representing an Adjusted EBITDA margin of 21.7%, an increase of 180 basis points from Fiscal 2015. During Fiscal 2015, they generated $2,745.1 million in net sales, their net income was $50.9 million and their Adjusted EBITDA was $547.2 million, representing an Adjusted EBITDA margin of 19.9%. During the nine months ended September 30, 2017, their net sales increased 8.7% to $2,259.9 million compared to $2,079.3 million for the nine months ended October 1, 2016, their net income was $52.5 million for the nine months ended September 30, 2017, compared to $69.0 million in the prior year period, and their Adjusted EBITDA increased 11.0% to $496.1 million, compared to $447.0 million in the prior year period, resulting in an Adjusted EBITDA margin of 22.0%, a 50 basis point increase compared to the prior year period. As of September 30, 2017, their total indebtedness was approximately $3,916.1 million, or $3,236.3 million on a pro forma basis after giving effect to this offering and the use of proceeds therefrom.

They offer a broad portfolio of products to diverse replacement channel customers, and to original equipment (“first-fit”) manufacturers as specified components, with the majority of their revenue coming from replacement channels. Their products are sold in 128 countries across their four commercial regions: (1) the Americas; (2) Europe, Middle East & Africa (“EMEA”); (3) Greater China (“China”); and (4) East Asia & India (“East Asia”). Within the diverse end markets they serve, their highly engineered products are critical components in applications for which the cost of downtime is high relative to the cost of their products, resulting in the willingness of end users to pay a premium for superior performance and availability. Gates operated as a family-owned company until 1996, when it was acquired by Tomkins plc, a broad, industrial conglomerate based in the United Kingdom. Gates was acquired by funds affiliated with The Blackstone Group L.P. in July 2014. They operate their business on a product-line basis through their two reporting segments—Power Transmission and Fluid Power—and participate in a diverse set of applications across numerous industrial end markets, as well as many consumer markets. Their Power Transmission solutions enable and control motion. They are used in applications in which belts, chains, cables, geared transmissions or direct drives transfer power from an engine or motor to another part or system. Their Fluid Power solutions are used in applications in which hoses and rigid tubing assemblies either transfer power hydraulically or convey fluids, gases or granular materials from one location to another. For Fiscal 2016, approximately 64% of their net sales were generated from replacement markets and 36% from first-fit markets globally. In emerging markets such as China, their business is characterized by a higher first-fit presence, given the relatively underdeveloped replacement channels and newer car parc. In China and East Asia, approximately 40% of their Fiscal 2016 net sales were generated from replacement markets. As these markets mature, they believe that their first-fit market presence will drive growth in their replacement business. By contrast, in North America and Europe, where there are long-established replacement markets, approximately 73% and 68% of their Fiscal 2016 net sales, respectively, were derived from these higher-margin replacement channels. Their “in-region, for-region” footprint and extensive distribution network provide them with a “close-to-customer” local mindset that enables rapid response for their customer base.

Virtually every form of transportation, ranging from trucks, buses and automobiles to personal mobility vehicles such as motorcycles, scooters, bicycles, snowmobiles and

other power sports vehicles, uses their products. They believe that they have a total core addressable market opportunity of approximately $59 billion. Power Transmission accounts for approximately $30 billion of the total core addressable market opportunity, divided approximately among the following product categories: $1.8 billion in synchronous drives, $3.1 billion in asynchronous drives, $7.5 billion in metals and $17.5 billion in other drive systems. Fluid Power represents approximately $29 billion of the total core addressable market opportunity, divided approximately among the following product categories: $11.2 billion in hydraulics, $14.0 billion in engine hose and $3.5 billion in industrial hose. Along with population growth comes an increased demand for water and food, the production of which is expected to increase 59% by 2050. This increased level of food production is expected to drive a corresponding increase in demand for both farming and food processing equipment. Population growth and a growing middle-class in emerging markets also drive an increased infrastructure build-out, which requires more construction equipment to build roads, bridges, rail systems and buildings. Oil and gas drilling and refining, alternative energy generation and mining equipment all leverage Gates products. Industries across the globe are also continuously investing in automation and productivity improvements. Their revenue has historically been highly correlated with industrial activity and utilization, and not with any single end market given the diversification of their business and high exposure to replacement markets.

They are targeting specific opportunities within their existing industrial end markets and product portfolio to further penetrate industrial power transmission applications, particularly those currently driven by competing technologies, including roller chain, direct drive systems, gearboxes and steel cable. Materials science-based advances in their product portfolio provide them with opportunities to displace competing drive systems in larger, high-torque applications that belt drives have historically been unable to address. Through materials science-based innovation, VA/VE and process engineering they will continue to broaden their portfolio of fit-for-purpose fluid power products, optimizing their performance for different customer applications. This ongoing investment substantially increases the size of their addressable market and enables them to capture even more of the premium segment. They continue to invest in advanced development programs and their core R&D capabilities to ensure that they remain at the forefront of innovation and product performance in their markets. Emerging markets continue to exhibit higher growth rates than mature markets due to a number of factors, such as increases in industrial production, mechanization, urbanization, infrastructure development and vehicle ownership. To capitalize on these trends, they will continue to build out their catalog coverage, develop regionally appropriate product portfolios, expand their channel coverage and optimize regional manufacturing capacity. They intend to continue to strategically pursue and execute acquisitions to accelerate their growth strategies. Their markets are highly fragmented, providing numerous inorganic opportunities for them to expand their reach and capabilities.

They are known for their premium quality, reliability, customer service, global footprint, leading technology and breadth of product offerings. They believe that they are the partner of choice when major customers are developing new platforms or upgrading existing ones. Their broad geographic footprint provides diversification from regional cyclicality and positions them to capitalize on growth opportunities in every region. The

breadth of their catalog, their market share in many product categories and their share of available content with key customers put them in what they believe is a leading market position in most channels, regions and end markets in which they operate. These leading market positions combined with their strong brand serve as platforms from which they can extend their solution coverage in underpenetrated segments and generate sales growth in excess of their end markets. They believe that their regional commercial teams have established one of the broadest distribution networks in their industry, across a variety of end market-focused channels. They believe that this established channel represents one of the largest replacement footprints in the industry, enabling access to a large addressable market and rapid launches of new products to end users. Their highly engineered power transmission and fluid power products are often critical to the functioning of the equipment, process or system of which they are components, creating a dynamic where the cost of downtime or potential equipment damage is high relative to the cost of their products. Consequently, their products are typically replaced at regular intervals for preventative maintenance, resulting in high-margin, recurring revenue streams. They have a storied history of successful innovation, from commercializing the V-belt to pioneering the use of certain synthetic elastomers in serpentine belts. They believe that their materials science expertise forms the foundation of their innovation capabilities. They have made significant improvements in factory productivity which have reduced production costs and freed up manufacturing capacity. They have also implemented highly effective sourcing programs that leverage the latest e-auction tools and programs to insource selected components. The implementation of the Gates Operating System has contributed to gross margin expansion of 280 basis points from Fiscal 2015 gross margin to their gross margin of 40.5% for the first nine months of 2017. As a result of their new management team’s operating initiatives and their ongoing focus on continuous improvement, they have demonstrated a track record of margin improvement. They expect their continued focus on operational excellence and cost discipline to improve profit margins and working capital performance.

They are subject to economic, political and other risks associated with international operations, and this could adversely affect their business and their strategy to capitalize on their global reach. Certain of their businesses sell a significant amount of their products to key channel partners, including distributors, which have valuable relationships with end users. Some of these channel partners may also sell their competitors’ products, and if they favor competing products for any reason they may fail to market their products effectively. Their margins could suffer if their customers are no longer willing to pay a premium for their product and service offerings. They face the greatest pricing pressure from their customers in the automotive first-fit end market. Virtually all vehicle manufacturers seek price reductions in both the initial bidding process and during the term of the award. They are also, from time to time, subject to pricing pressures from customers in their other end markets. They have taken, and continue to take, cost-reduction actions, which may expose them to additional risk and they may not be able to maintain the level of cost reductions that they have achieved. Their products could infringe on the intellectual property of others and they may not be able to adequately enforce their intellectual property rights even in the jurisdictions where they seek protection. The average useful life of certain products in their end markets has increased in recent years due to innovations in technologies and manufacturing processes. As a result, a portion of sales in the replacement markets they serve may be

displaced. If this trend continues, it could adversely impact their replacement market sales. In emerging markets such as China, India, Eastern Europe and Russia, they have focused on building a first-fit presence in order to establish brand visibility in the end markets they serve. However, as the replacement markets in these regions grow, their products may not be selected as the replacement product, although they are the first-fit provider. If they are not able to convert their first-fit presence in these emerging markets into sales in the replacement end market, there may be a material adverse effect on their replacement end market growth potential in these emerging markets. They are subject to liabilities with respect to businesses that they have divested in the past. They are highly leveraged. As of September 30, 2017, the total principal amount of their debt was approximately $4.0 billion (equivalent). . As of September 30, 2017, after taking into account their interest rate derivatives, approximately $1,305.7 million (equivalent), or 32.9%, of their outstanding debt had variable interest rates. Immediately following this offering, their Sponsor and its affiliates will beneficially own approximately 85.9% of their ordinary shares. For so long as their Sponsor continues to own a significant percentage of their ordinary shares, such Sponsor will still be able to significantly influence the composition of their board of directors and the approval of actions requiring shareholder approval. Rating = 2


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Menlo Therapeutics, Inc. MNLO $14.00-$16.00 5.67 million shares Underwriters: Jefferies, Piper Jaffray, Guggenheim Securities Co-Managers: JMP Securities Proposed trade date of 1/25. They are a late stage biopharmaceutical company focused on the development and commercialization of serlopitant for the treatment of pruritus, or itch, associated with dermatologic conditions such as atopic dermatitis, psoriasis and prurigo nodularis.

Menlo Therapeutics, Inc. MNLO


Underwriters: Jefferies, Piper Jaffray, Guggenheim Securities Co-Managers: JMP Securities


Rating = 2


https://www.sec.gov/Archives/edgar/data/1566044/000162828018000299/menlos-1a.htm

Company Overview

They are a late-stage biopharmaceutical company focused on the development and commercialization of serlopitant for the treatment of pruritus, or itch, associated with



dermatologic conditions such as atopic dermatitis, psoriasis and prurigo nodularis. They are concurrently evaluating the use of serlopitant for the treatment of refractory chronic cough, a cough that persists for greater than eight weeks despite treatment of any identified underlying cause. They believe that serlopitant, a highly selective small molecule inhibitor of the neurokinin 1 receptor, or NK1-R, given as a once-daily, oral tablet, has the potential to significantly alleviate pruritus and refractory chronic cough symptoms.

Pruritus is the primary patient complaint among atopic dermatitis, psoriasis and prurigo nodularis patients and represents a significant patient need. There are currently no therapies approved in the United States that are primarily intended to reduce the pruritus associated with these conditions. Refractory chronic cough also represents a significant opportunity, with no drugs specifically approved for this indication in the United States. They believe that serlopitant, if approved, could easily fit into the current treatment regimen for their target indications. They believe that serlopitant may be effective as an oral therapy adjunct to standard of care topical or systemic treatments for pruritic dermatologic conditions, and may also be effective as a monotherapy for patients for whom management of the pruritus or refractory chronic cough symptoms is the primary patient need.

They have initiated a broad clinical development program for serlopitant. They expect data from their ongoing Phase 2 clinical trial in pruritus associated with atopic dermatitis in the second quarter of 2018 and from their ongoing Phase 2 clinical trials in pruritus associated with psoriasis and refractory chronic cough by late 2018 or early 2019. They plan to initiate two Phase 3 clinical trials in pruritus associated with prurigo nodularis in the first half of 2018, with results expected in the first half of 2020. If these and future trials they may initiate are successful, they could potentially submit a New Drug Application, or NDA, for up to three indications in 2020: pruritus associated with atopic dermatitis, psoriasis and prurigo nodularis. Their development pipeline is summarized in the figure below:

They have completed two double-blind Phase 2 clinical trials in over 380 patients with pruritus and observed clinically relevant and statistically significant improvements in

pruritus in patients treated with serlopitant compared with patients treated with placebo. Serlopitant has been dosed in more than 1,000 individuals and has been shown to be well-tolerated, including when administered to patients in a clinical trial for up to one year.

IPO Detail

This is the initial public offering of Menlo Therapeutics, Inc. and no public market currently exists for its common stock. Menlo Therapeutics, Inc. is offering 5,666,667 shares of common stock as described in the prospectus. The company expects the initial public offering price of its common stock to be between $14.00 and $16.00 per share. The company has applied to list its common stock on the NASDAQ Global Market under the symbol “MNLO.”




Certain of their existing institutional investors, including investors affiliated with certain of their

directors, have indicated an interest in purchasing an aggregate of up to approximately $40

million in shares of their common stock in this offering at the initial public offering price. Any

such purchases, if completed, would be made on the same terms as the shares that are sold to the

public generally and not pursuant to any pre-existing contractual rights or obligations.

Use of Proceeds

They estimate that the net proceeds from this offering will be approximately $77.6 million. They currently

expect to use their net proceeds from this offering, together with their existing cash, as follows:

approximately $16.0 million of external clinical costs to complete their ongoing Phase 2 clinical

trials of serlopitant for pruritus associated with atopic dermatitis and psoriasis, and for refractory

chronic cough;

approximately $23.0 million of external clinical costs to significantly advance their planned Phase

3 development of serlopitant for pruritus associated with prurigo nodularis;

approximately $13.0 million of external development and manufacturing costs primarily

associated with supplying serlopitant for their clinical trials, and development and validation of

their commercial manufacturing process for serlopitant in preparation for their NDA and MAA

submissions;

$3.0 million milestone payment to Merck associated with initiating a Phase 3 clinical trial; and

the remainder for personnel expenses, other development activities, including potentially

commencing Phase 3 clinical trials for pruritus associated with atopic dermatitis and psoriasis and

for refractory chronic cough, working capital and other general corporate purposes, including the

costs of operating as a public company.

Competition

Company

Stock

Symbol Exchange.

Vanda Pharmaceuticals Inc. VNDA

NASDAQ

Trevi Therapeutics, Inc. Private

Galderma Laboratories, L.P. (Subsidiary of Nestle SA) NESN VTX

Sienna Biopharmaceuticals SNNA NASDAQ

Tioga Pharmaceuticals, Inc. Private

Cara Therapeutics CARA NASDAQ

Merck & Co., Inc. MK NYSE

NeRRe Therapeutics Ltd. Private

Tesaro Inc. TSRO NASDAQ

Market Opportunity

They have exclusive, royalty-free development and commercialization rights to serlopitant in all markets other than Japan, where they have licensed serlopitant to JT Torii, for development and commercialization. In the United States, serlopitant has composition of matter patent protection into 2025, which may be extended for up to five years, issued methods of use patent protection for pruritus applications into 2033, and a filed provisional patent application for use in cough.

Chronic Pruritus Overview

Chronic pruritus is a hallmark of many dermatologic and systemic diseases, such as atopic dermatitis, psoriasis and prurigo nodularis, and is the predominant reason that patients with these diseases experience so much discomfort. In a recent report published in the Journal of the American Academy of Dermatology, up to 26% of the worldwide population suffers from chronic pruritus at some point in their lives.

Atopic Dermatitis Overview

There are an estimated 26 million people in the United States who have atopic dermatitis, a chronic, inflammatory skin disease that is most commonly first diagnosed in childhood. Atopic dermatitis is characterized by skin barrier disruption and immune dysregulation. Patients with atopic dermatitis may have chronically inflamed skin lesions and often have persistent pruritus. Physicians and patients report pruritus as the primary patient complaint associated with this disease.

Of the total population of atopic dermatitis patients in the United States, an estimated 37% of those are actually diagnosed with the disease, and of those diagnosed, an estimated 45-50% of these patients are actively being treated by a

physician. Creams and ointments and topical corticosteroids or other topical or systemic anti-inflammatory agents are routinely used to manage skin health and to reduce skin inflammation in patients with atopic dermatitis. In their market research, dermatologists report that up to 30% of the patients they treat for atopic dermatitis have inadequately controlled pruritus.

Psoriasis Overview

According to the World Health Organization, psoriasis, a common chronic autoimmune disorder of the skin, causing redness, irritation and scaly lesions, affects up to five percent of the world’s population. Approximately 12 million people in the United States have psoriasis; of these, an estimated 7.5 million have been diagnosed with the skin disease and an estimated 50-60% of diagnosed patients are actively being treated. Of those patients in active treatment, an estimated 50-60% of these patients have moderate to severe pruritus. In a recent survey of 5,604 psoriasis patients, over 90% reported pruritus as a significantly bothersome symptom. The severity of the pruritus in psoriasis patients does not always correlate with the severity and number of skin lesions, suggesting that pruritus and skin inflammatory disease may be somewhat independent of each other in patients with psoriasis.

Mild to moderate psoriasis is typically treated with topical therapies such as corticosteroids or vitamin D analogs. Moderate to severe psoriasis may be treated with topical therapies, systemic immunosuppressive or immunomodulatory drugs, or phototherapy. While all of these therapies can help reduce the skin irritation and plaques in patients with psoriasis, and may also reduce pruritus to some degree, they may not adequately resolve the pruritus associated with psoriasis.

Prurigo Nodularis Overview

They estimate that there are approximately 350,000 people with prurigo nodularis in the United States. Prurigo nodularis is a chronic skin disorder affecting primarily older adults and is characterized by multiple, firm, itchy nodules typically found on a patient’s arms, legs and trunk. Prurigo nodularis results from a vicious cycle of repeated itching and scratching leading to formation of raised, inflamed skin nodules that can develop sores or become hard and crusty. The itching sensation in prurigo nodularis is extreme and often leads to scratching to the point of bleeding or pain. Prurigo nodularis may be associated with a variety of dermatologic and systemic diseases such as atopic dermatitis, psoriasis, diabetes, chronic renal failure and HIV infection.

No treatment for prurigo nodularis has been approved in the United States or Europe. A high priority in any treatment for prurigo nodularis is to identify and address any underlying cause of itching. However, specific trigger factors for the development of prurigo nodularis in an individual patient may be difficult to identify. Treatment of prurigo nodularis typically involves a multifaceted approach to treat the lesions and reduce itch. Therapies may include corticosteroids and other immunosuppressive or anti-inflammatory treatments, phototherapy and agents such as gabapentin and Lyrica (pregabalin). Prurigo nodularis is often treatment resistant with high recurrence rates.

Refractory Chronic Cough Overview

Cough is a symptom of many underlying conditions such as respiratory infections, inflammatory conditions such as asthma, irritants such as smoke, and diseases that limit lung function. While cough from acute conditions usually resolves, it has been estimated that over 10% of adults have, or have had, chronic cough, a cough that persists for greater than eight weeks, at some point in their lives. The most prevalent underlying conditions associated with chronic cough are asthma, gastroesophageal reflux disease, or upper respiratory infections. Approximately 40% of patients with chronic cough are diagnosed with refractory chronic cough, a chronic cough that persists despite treatment of any identified underlying cause.

Current treatment options for refractory chronic cough have demonstrated limited efficacy. The two most common antitussive drugs are codeine and dextromethorphan, neither of which appears to be efficacious in recently conducted trials. Furthermore, concerns about the safety and abuse liability of narcotics such as codeine have restricted their use.

More than 10 million patients in the United States suffer from refractory chronic cough, for which no drugs have been specifically approved in the United States. Many patients report that their condition is frequently disabling and has a marked effect on their quality of life. Similar to pruritus, treatment options for refractory chronic cough are limited and may have inadequate benefit for many patients.

Year Ended December 31,

Nine Months Ended September 30,

2015 2016 2016 2017

(in thousands, except share and per share numbers)

Statements of Operations Data:

Collaboration and license revenue $ — $ 674 $ 224 $ 1,807

Operating expenses:

Research and development 2,921 11,255 7,178 18,461



Loss from operations (4,608 ) (14,332 ) (9,407 ) (20,116 )

Interest income and other expense, net — 264 176 316

Net loss attributable to common stockholders $ (4,608 ) $ (14,068 ) $ (9,231 ) $ (19,800 )

Net loss attributable to common stockholder per share, basic and diluted $ (0.97 ) $ (2.82 ) $ (1.86 ) $ (3.89 )

Weighted-average number of common shares used to compute basic and diluted net loss per share 4,735,148 4,987,133 4,965,807 5,093,418

Pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited) $ (1.38 ) $ (1.72 )

Pro forma weighted-average number of common shares outstanding, basic and diluted (unaudited) 10,221,933 11,539,193

September 30, 2017

Actual Pro Forma(1) Pro Forma As Adjusted(2)

(in thousands)

Balance Sheet Data:

Cash, cash equivalents and investments $ 73,547 $ 73,547 $ 151,097

Working capital 68,560 68,560 146,110

Total assets 75,800 75,800 153,350

Convertible preferred stock 109,330 — —

Accumulated deficit (49,915 ) (49,915 ) (49,915 )

Total stockholders’ (deficit) equity (47,961 ) 61,369 138,919

Target Markets

Obtain regulatory approval for serlopitant for the treatment of pruritus

associated with multiple highly pruritic dermatologic conditions. They

plan to focus on the near-term development and potential regulatory approval and commercialization of serlopitant for the treatment of pruritus associated with multiple dermatologic conditions. Following their discussions with the United States Food and Drug Administration, or FDA, and European regulatory agencies, they are advancing into Phase 3 clinical trials for the treatment of pruritus associated with prurigo nodularis. They have also commenced Phase 2 clinical trials for the treatment of pruritus associated with atopic dermatitis and psoriasis. If the results of these trials are promising, they intend to rapidly advance into Phase 3 clinical trials for these indications, with the goal of seeking regulatory approval in the United States and Europe.

Build a specialty sales organization to commercialize and market

serlopitant in the United States, if approved. If approved by the FDA

for pruritus associated with their target dermatologic conditions, they intend to commercialize serlopitant by developing their own sales organization targeting a subset of the 10,000 to 12,000 dermatologists in the United States. If approved for pruritus associated with atopic dermatitis, they anticipate that they may need to expand this sales organization to reach high prescribing pediatricians and primary care physicians. Outside the United States, they intend to establish commercialization strategies for serlopitant as they approach possible commercial approval in each market, which may include collaborations with other companies.

Develop serlopitant to treat refractory chronic cough. They believe that

the mechanistic overlap of the NK1-R pathway in the pathology of pruritus and cough supports the development of serlopitant as a potentially efficacious therapy for patients suffering from refractory chronic cough. Their program builds upon data from several proof of concept studies with other NK1-R antagonists. They are evaluating the efficacy and safety of serlopitant in their ongoing Phase 2 clinical trial for refractory chronic cough.

Leverage their development and commercial infrastructure to expand

their pipeline over time. They may elect in the future to pursue

additional indications for serlopitant or in-license or acquire drug candidates or commercial products that leverage their development or commercial capabilities.


Serlopitant has been dosed in more than 1,000 individuals and has been shown to

be well-tolerated, including when administered to patients in a clinical trial for up

to one year. Serlopitant has been studied in 13 completed Phase 1 clinical trials and

four completed Phase 2 clinical trials, including the two Phase 2 clinical trials conducted by them for pruritus and two Phase 2 clinical trials conducted by Merck for other indications. In several of these clinical trials, much higher doses than their current target therapeutic dose have been used (in one study 50 mg was used for up to 28 days), and approximately 40 patients have been treated for up to one year at a dose comparable to their target therapeutic dose. They believe this safety experience supports development of serlopitant for chronic dosing.

Serlopitant, if approved, could fit easily into the current treatment regimen for their

target indications. Serlopitant, if approved, would be a once-daily oral tablet therapy

and could be used as an adjunct to standard of care topical or systemic treatments for pruritic dermatologic conditions. The drug interaction profile of serlopitant supports its use with a wide range of standard of care therapies, and the simple once-daily oral dosing regimen can be added to current therapy to manage pruritus. Serlopitant may also be used as a monotherapy for patients for whom management of the pruritus or refractory chronic cough symptoms is the primary patient need.


They have a limited operating history, have incurred significant losses since their

inception and anticipate that they will continue to incur losses for the foreseeable

future. They have only one product candidate in clinical trials and no commercial sales,

which, together with their limited operating history, makes it difficult to assess their future viability. Their net loss for the years ended December 31, 2015 and 2016 was approximately $4.6 million and $14.1 million, respectively, and $9.2 million and $19.8 million for the nine months ended September 30, 2016and 2017, respectively. As of September 30, 2017, they had an accumulated deficit of $49.9 million. They expect to continue to incur losses for the foreseeable future, and they anticipate these losses will increase as they continue their development, seek regulatory approval of, and, if approved, begin to commercialize serlopitant.

They will require substantial additional financing and a failure to obtain this

necessary capital when needed on acceptable terms, or at all, could force them to delay, limit, reduce or terminate their product development, other operations or commercialization efforts.

They are substantially dependent on the success of their sole product candidate,

serlopitant.

Success in non-clinical testing and early clinical trials does not ensure that later

clinical trials will be successful.

The regulatory approval process is highly uncertain and they may not obtain

regulatory approval for the commercialization of serlopitant.

Use of patient-reported outcome assessments, or PROs, in their clinical trials may

delay or impair the development of serlopitant and/or adversely impact their

clinical trials. The variability of PRO measures for itch and the high placebo response

rates could adversely impact their serlopitant development program. In addition, PROs for itch assessment have historically been observed to have high placebo group response rates, including in some of their trials. For example, in their Phase 2 clinical trial in patients with chronic pruritus, patients receiving placebo reported a greater than 25% decrease from baseline in itch VAS scores. Variability in the placebo group response has adversely impacted clinical results of other therapies being tested for itch reduction, and could adversely impact their clinical trial results. The variability of a PRO measure may be greater than some measures used for clinical trial assessments, and that variability can complicate clinical trial design, adversely impact the ability of a study to show a statistically significant improvement, and generally adversely impact a clinical development program by introducing additional uncertainties.

Investigator sponsored trials of serlopitant may produce results and safety signals

that are beyond their control and impact their development and commercialization

of serlopitant. Serlopitant is being evaluated in a 14-patient exploratory investigator

sponsored study at Stanford University as a potential treatment to reduce pruritus associated with epidermolysis bullosa, a rare primarily pediatric skin condition. If serious adverse events or other undesirable side effects, or unexpected characteristics of serlopitant, are observed in this trial, it may adversely affect or delay their clinical development of serlopitant, and the occurrence of these events would have a material adverse effect on their business.

They may in the future choose to permit other investigators to evaluate serlopitant or future product candidates in other investigator sponsored studies which could adversely impact their development programs.

They rely on third parties to conduct their non-clinical studies and their clinical

trials. If these third parties do not successfully carry out their contractual duties or

meet expected deadlines, they may be unable to obtain regulatory approval for or commercialize serlopitant.

They rely completely on third-party suppliers to manufacture serlopitant, and they

intend to continue to rely on third parties to produce non-clinical, clinical and

commercial supplies of serlopitant.

Serlopitant may cause undesirable side effects or have other properties that could

delay or prevent its regulatory approval or result in significant negative

consequences following marketing approval, if any. The number of patients

exposed to serlopitant treatment and the average exposure time in the clinical development program may be inadequate to detect rare adverse events that may only be detected once serlopitant is administered to more patients and for greater

periods of time.

They may become subject to claims alleging infringement of third parties’ patents

or proprietary rights and/or claims seeking to invalidate their patents, which would be

costly, time consuming and, if successfully asserted against them, delay or prevent the development and commercialization of serlopitant.

If their intellectual property related to serlopitant or any future product candidates

is not adequate, they may not be able to compete effectively in their market. They

rely upon a combination of patents, trade secret protection and confidentiality agreements to protect the intellectual property related to serlopitant and their development programs. Patents covering the composition of matter for serlopitant will expire in 2025, subject to potential extensions, where available, including, potential extension of up to five years in the United States. The expiration of their patents will limit their ability to profit from the commercialization of serlopitant. Furthermore, any disclosure to or misappropriation by third parties of their confidential or proprietary information could enable competitors to quickly duplicate or surpass their technological achievements, thus eroding their competitive position in their market.

They may not be able to enforce their intellectual property rights throughout the

world.

Their commercial potential may be limited by other companies that develop and sell

other novel products that are effective for their target indications, or that may be

more effective, safer or cost less than serlopitant.

Concentration of ownership of their common stock among their existing executive

officers, directors and principal stockholders may prevent new investors from

influencing significant corporate decisions. Upon the closing of this offering, their

executive officers, directors and current beneficial owners of 5% or more of their common stock and their respective affiliates will, in the aggregate, beneficially own 62.6% of their outstanding common stock. Certain of their existing institutional investors, including investors affiliated with certain of their directors, have indicated an interest in purchasing an aggregate of up to approximately $40 million in shares of their common stock in this offering at the initial public offering price. Any such purchases, if completed, would be made on the same terms as the shares that are sold to the public generally and not pursuant to any pre-existing contractual rights or obligations. If such investors purchase all of the shares they have indicated interests in purchasing, their executive officers, directors, current beneficial owners of 5% or more of their capital stock and their respective affiliates will, in the aggregate, beneficially own approximately 75.3% of their outstanding common stock upon the completion of this offering (based on the assumed initial public offering price of $15.00 per share. As a result, these persons, acting together, would be able to significantly influence all matters requiring stockholder approval.

Bottom Line

They are a late stage biopharmaceutical company and, as such, have no revenues from the sale

of any of their product candidates. They believe that serlopitant may be effective as an oral therapy adjunct to standard of care topical or systemic treatments for pruritic dermatologic conditions, and may also be effective as a monotherapy for patients for whom management of the pruritus or refractory chronic cough symptoms is the primary patient need. They expect data from their ongoing Phase 2 clinical trial in pruritus associated with atopic dermatitis in the second quarter of 2018 and from their ongoing Phase 2 clinical trials in pruritus associated with psoriasis and refractory chronic cough by late 2018 or early 2019. They plan to initiate two Phase 3 clinical trials in pruritus associated with prurigo nodularis in the first half of 2018, with results expected in the first half of 2020. Serlopitant has been dosed in more than 1,000 individuals and has been shown to be well-tolerated, including when administered to patients in a clinical trial for up to one year.

They have exclusive, royalty-free development and commercialization rights to serlopitant in all markets other than Japan, where they have licensed serlopitant to JT Torii, for development and commercialization. In a recent report published in the Journal of the American Academy of Dermatology, up to 26% of the worldwide population suffers from chronic pruritus at some point in their lives. There are an estimated 26 million people in the United States who have atopic dermatitis, a chronic, inflammatory skin disease that is most commonly first diagnosed in childhood. Of the total population of atopic dermatitis patients in the United States, an estimated 37% of those are actually diagnosed with the disease, and of those diagnosed, an estimated 45-50% of these patients are actively being treated by a physician. Dermatologists report that up to 30% of the patients they treat for atopic dermatitis have inadequately controlled pruritus. Approximately 12 million people in the United States have psoriasis; of these, an estimated 7.5 million have been diagnosed with the skin disease and an estimated 50-60% of diagnosed patients are actively being treated. Of those patients in active treatment, an estimated 50-60% of these patients have moderate to severe pruritus. In a recent survey of 5,604 psoriasis patients, over 90% reported pruritus as a significantly bothersome symptom. They estimate that there are approximately 350,000 people with prurigo nodularis in the United States. Prurigo nodularis is a chronic skin disorder affecting primarily older adults and is characterized by multiple, firm, itchy nodules typically found on a patient’s arms, legs and trunk. No treatment for prurigo nodularis has been approved in the United States or Europe. Prurigo nodularis is often treatment resistant with high recurrence rates. it has been estimated that over 10% of adults have, or have had, chronic cough, a cough that persists for greater than eight weeks, at some point in their lives. Current treatment options for refractory chronic cough have demonstrated limited efficacy. Concerns about the safety and abuse liability of narcotics such as codeine have restricted their use. Similar to pruritus, treatment options for refractory chronic cough are limited and may have inadequate benefit for many patients.

They plan to focus on the near-term development and potential regulatory approval and commercialization of serlopitant for the treatment of pruritus associated with multiple dermatologic conditions. If approved by the FDA for pruritus associated with their target dermatologic conditions, they intend to commercialize serlopitant by developing their own sales organization targeting a subset of the 10,000 to 12,000 dermatologists in the United States. Outside the United States, they intend to establish commercialization

strategies for serlopitant as they approach possible commercial approval in each market, which may include collaborations with other companies. They are evaluating the efficacy and safety of serlopitant in their ongoing Phase 2 clinical trial for refractory chronic cough. They may elect in the future to pursue additional indications for serlopitant or in-license or acquire drug candidates or commercial products that leverage their development or commercial capabilities.

Serlopitant has been dosed in more than 1,000 individuals and has been shown to be well-tolerated, including when administered to patients in a clinical trial for up to one year. Approximately 40 patients have been treated for up to one year at a dose comparable to their target therapeutic dose. They believe this safety experience supports development of serlopitant for chronic dosing. The drug interaction profile of serlopitant supports its use with a wide range of standard of care therapies, and the simple once-daily oral dosing regimen can be added to current therapy to manage pruritus. Serlopitant may also be used as a monotherapy for patients for whom management of the pruritus or refractory chronic cough symptoms is the primary patient need.

They have a limited operating history, have incurred significant losses since their inception and anticipate that they will continue to incur losses for the foreseeable future. As of September 30, 2017, they had an accumulated deficit of $49.9 million. They expect to continue to incur losses for the foreseeable future, and they anticipate these losses will increase as they continue their development, seek regulatory approval of, and, if approved, begin to commercialize serlopitant. They will require substantial additional financing. They are substantially dependent on the success of their sole product candidate, serlopitant. Success in non-clinical testing and early clinical trials does not ensure that later clinical trials will be successful. The regulatory approval process is highly uncertain and they may not obtain regulatory approval for the commercialization of serlopitant. Use of patient-reported outcome assessments, or PROs, in their clinical trials may delay or impair the development of serlopitant and/or adversely impact their clinical trials. In their Phase 2 clinical trial in patients with chronic pruritus, patients receiving placebo reported a greater than 25% decrease from baseline in itch VAS scores. Variability in the placebo group response has adversely impacted clinical results of other therapies being tested for itch reduction, and could adversely impact their clinical trial results. The variability of a PRO measure may be greater than some measures used for clinical trial assessments, and that variability can complicate clinical trial design, adversely impact the ability of a study to show a statistically significant improvement, and generally adversely impact a clinical development program by introducing additional uncertainties. Investigator sponsored trials of serlopitant may produce results and safety signals that are beyond their control and impact their development and commercialization of serlopitant. If the third parties conducting their non-clinical and clinical studies do not successfully carry out their contractual duties or meet expected deadlines, they may be unable to obtain regulatory approval for or commercialize serlopitant. They rely completely on third-party suppliers to manufacture serlopitant, and they intend to continue to rely on third parties to produce non-clinical, clinical and commercial supplies of serlopitant. The number of patients exposed to serlopitant treatment and the average exposure time in the clinical development program may be inadequate to detect rare adverse events that may only be detected once serlopitant is

administered to more patients and for greater periods of time. They may become subject to claims alleging infringement of third parties’ patents or proprietary rights. If their intellectual property related to serlopitant or any future product candidates is not adequate, they may not be able to compete effectively in their market. Patents covering the composition of matter for serlopitant will expire in 2025, subject to potential extensions, where available. Their commercial potential may be limited by other companies that develop and sell other novel products that are effective for their target indications, or that may be more effective, safer or cost less than serlopitant. They may not be able to enforce their intellectual property rights throughout the world. Their commercial potential may be limited by other companies that develop and sell other novel products that are effective for their target indications, or that may be more effective, safer or cost less than serlopitant. Upon the closing of this offering, their executive officers, directors and current beneficial owners of 5% or more of their common stock and their respective affiliates will, in the aggregate, beneficially own 62.6% of their outstanding common stock. If such investors purchase all of the shares they have indicated interests in purchasing, these individuals will, in the aggregate, beneficially own approximately 75.3% of their outstanding common stock upon the completion of this offering. As a result, these persons, acting together, would be able to significantly influence all matters requiring stockholder approval. Rating = 2


__________________________________________________

PagSeguro Digital Ltd. PAGS $17.50-$20.50 92.1 million shares Underwriters: Goldman Sachs & Co., Morgan Stanley, BofA Merrill Lynch, Bradesco BBI, Credit Suisse, Deutsche Bank Securities, Itau BBA, J.P. Morgan Co-Managers: Proposed trade date of 1/25. They are a disruptive provider of financial technology solutions focused primarily on Micro-Merchants, Small Companies and Medium-Sized Companies, or SMEs, in Brazil.

PagSeguro Digital Ltd. PAGS

shares to be offered between $17.50 and $20.50 per share

Underwriters: Goldman Sachs & Co., Morgan Stanley, BofA Merrill Lynch, Bradesco BBI, Credit Suisse, Deutsche Bank Securities, Itau BBA, J.P. Morgan Co-Managers:


Rating = 3


https://www.sec.gov/Archives/edgar/data/1712807/000119312518007476/d417437df1a.htm

Company Overview



They are a disruptive provider of financial technology solutions focused primarily on Micro-Merchants, Small Companies and Medium-Sized Companies, or SMEs, in Brazil. Among their peers, they are the only financial technology provider in Brazil whose business model covers all of the following five pillars:

• Multiple digital payment solutions

• In-person payments via POS devices that they sell to merchants

• Free digital accounts

• Issuer of prepaid cards to clients for spending or withdrawing account

balances

• Operating as an acquirer.

Their end-to-end digital ecosystem enables their customers not only to accept payments, but also to grow and manage their businesses. Before PagSeguro, many of these Micro-Merchants and SMEs were overlooked or underserved by incumbent payment providers and large financial institutions in Brazil. For example, according to a survey conducted by them in June 2017, 75% of merchants who own their entry-level mPOS device, the Minizinha, did not accept card payments prior to signing up with PagSeguro. They offer safe, affordable, simple, mobile-first solutions for merchants to accept payments and manage their cash through their PagSeguro digital accounts, without the need for a bank account. Their digital account offers more than 30 cash-in methods and six cash-out options including their PagSeguro prepaid card, all using their proprietary technology platform and backed by the trusted PagSeguro and UOL brands. Their digital ecosystem also features other digital financial services, business management tools and functionalities for their clients.

They launched PagSeguro in 2006 as an online payment platform to provide the digital payment infrastructure necessary for e-commerce to grow in Brazil. The credibility of their parent company UOL was key to this success. Founded in 1996, UOL is Brazil’s largest Internet content, digital products and services company. According to comScore, Inc., or comScore, 81.2 million unique visitors (approximately 73% of Brazilian internet users) accessed a UOL website in May 2017, representing an increase of 22% from 67 million in May 2016. In addition, according to Adobe Analytics (which they use to measure their audience) and Google Doubleclick for Publishers, or DFP (the adserver system that they utilize), as of May 2017, UOL achieved five billion page views, provided 15 billion display ads and had a potential video inventory of one billion video ads, each on a monthly average basis. Furthermore, UOL had more than 1.2 million monthly subscribers in May 2017. The PagSeguro and UOL brands together gave online consumers the confidence to share their sensitive personal and financial data with them, allowing them to shop online easily and safely. As an example, they brought trust to the online merchant-customer relationship by introducing a feature where they hold the consumer’s payment in escrow for a period of time after the purchase, as a precaution in case of any commercial claims.

In 2013, they expanded from online payments into point of sale, or POS, payments, allowing merchants to receive in-person payments. Focusing primarily on Micro-Merchants and SMEs, they sell a range of POS and mobile POS, or mPOS, devices

specifically designed to fit their business needs. Their devices all offer competitive transaction fees and access to their end-to-end digital ecosystem, with a PagSeguro prepaid card, and without the need for a bank account. They span from their entry-level product, the Minizinha, to the Moderninha Pro, the POS device with the most connectivity features in Brazil. Unlike the incumbent payment providers in Brazil, who rent their POS devices to merchants, they innovated by allowing merchants to acquire their own POS device from them in 12 monthly installments. For the equivalent of three to six months of rental fees with the incumbents, merchants can buy a comparable device from PagSeguro.

Their digital ecosystem helps drive financial inclusion in Brazil providing business solutions primarily designed for Micro-Merchants and SMEs. Their main target markets include unbanked merchants who have been ignored or underserved by the incumbents. These merchants are attracted by their disruptive technology, which enables them to offer innovative, scalable and low-cost products and services with simpler onboarding, no paperwork and a high acceptance rate, while maintaining levels of fraud below those required by the card schemes. Once on their platform, merchants can offer consumers more than 30 cash-in methods, choose to obtain early payment of their card receivables on consumer installment transactions, and manage their cash balances on their free PagSeguro digital account, which offers six cash-out options including bank transfers, online purchasing through their eWallet, and in-person and online purchases or cash withdrawals using their PagSeguro prepaid card. Their management tools help them start or grow their business with PagSeguro as a partner, with functionalities such as sales reports and inventory control, which they believe create a strong commercial bond with their clients. They believe the combination of all these features increases their clients’ loyalty, leading them to conduct additional business with them, in a virtuous cycle. Their merchants span businesses of all types and sizes, ranging from Micro-Merchants and Small Companies such as street vendors and beauty salons, to Medium-Sized Companies and Large Companies in retail and other sectors. They also have a growing presence in the business-to-business commerce segment.

At September 30, 2017, the PagSeguro network consisted of active clients in all 26 states and the federal district in Brazil. Their business has continued to grow rapidly, despite the major macroeconomic slow-down in Brazil since 2014:

At September 30, 2017, their active merchants totaled 2.5 million, compared with 1.4 million at year-end 2016 and 1.2 million at September 30, 2016. Their active merchants at year-end 2016 represented an increase of 55.6% compared with 0.9 million at year-end 2015. Their active merchants at year-end 2015 represented an increase of 80.0% compared with 0.5 million at year-end 2014.

In the first nine months of 2017, their TPV (total payment volume) totaled R$24.8 billion, compared with R$9.3 billion in the first nine months of 2016. Their TPV totaled R$14.1 billion in 2016, an increase of 90.8% compared with R$7.4 billion in 2015. Their TPV in 2015 represented an increase of 99.6% compared with R$3.7 billion in 2014. The growth in their TPV from R$4.9 billion in the first nine months of 2015 to R$24.8 billion in the first nine months of 2017 represented an average growth rate of 125.1% for the period.

IPO Detail

This is the initial public offering of PagSeguro Digital Ltd. and no public market currently exists for its common stock. PagSeguro Digital Ltd. is offering shares of common stock as described in the prospectus. The company expects the initial public offering price of its common stock to be between $17.50 and $20.50 per share. The company has applied to list its common stock on the New York Stock Exchange under the symbol “PAGS.”

Class A common stock offered by the

company 43,289,474 shares

Class A common stock offered by the

selling shareholder 48,815,789 shares


immediately after this offering 307,473,960 shares, 213,472,818 of these shares will be

Class B common shares beneficially owned by UOL, 92,105,263 of

these shares will be Class A common shares beneficially owned by

investors purchasing in this offering and 1,895,879 will be Class A

common shares beneficially owned by members of their management

In addition, 1,895,879 new Class A common shares will be issued without cash consideration to certain

members of their management who are beneficiaries under the LTIP immediately upon completion of this

offering. This expected number of shares issuable under the LTIP is based on the midpoint of the estimated

offering price range.

The Class A common shares will be entitled to one vote per share, whereas the Class B common shares

(which are not being sold in this offering) will be entitled to 10 votes per share.

Use of Proceeds

They estimate that the net proceeds to PagSeguro Digital from the sale of Class A common shares in this offering will be approximately US$789.0 million. They currently plan to use the net proceeds from this offering to finance working capital, particularly the early payment of receivables feature that they offer merchants, and to fund future selective acquisitions and investments in businesses, technologies or products that are complementary to their business. Any remaining net proceeds will be used for other general corporate purposes. Their management will have broad discretion in allocating the net proceeds from this offering.

Competition

Company

Stock

Symbol Exchange.

PayPal Holdings Inc. PYPL NASDAQ

MercadoPago (subsidiary of MercadoLibre) MELI NASDAQ

Wirecard AG WDI ETR

SumUp/Payleven Private

Market Opportunity

The Brazilian Payments Market Is Large, Yet Underpenetrated

Although Brazil is the largest economy in Latin America as measured by gross domestic product, or GDP, digital payment penetration in the country remains low compared to more developed economies. In 2015, 59% of the Brazilian population above age 15 reported having made or received a digital payment, compared to 92% in the United States and 97% in the United Kingdom, according to the World Bank. In addition, according to a December 2016 report by the Bank of International Settlements, or BIS, and data from the World Bank, card usage as a payment method in Brazil represented only approximately 28% of private consumption in 2015, compared to approximately 45% in the United States and 55% in the United Kingdom. Credit card penetration levels are a fundamental driver for the digital payments industry, yet, according to the World Bank, in 2015, only 32% of the Brazilian population above age 15 held a credit card, compared to 60% in the United States and 62% in the United Kingdom. Furthermore, 42% of the Brazilian population above age 15 made a purchase using a debit card in 2015, compared with 67% in the United States and 92% in the United Kingdom.

Brazil shows strong structural growth drivers for digital payments as its economy continues the transition away from cash. In 2014, according to ABECS and the Central Bank, the transaction volume for payment cards overtook the transaction volume for checks for the first time. Credit and debit card transaction volume in Brazil has increased at a compound annual growth rate of 14% from 2010 to 2016 according to ABECS. As a further indication of this growth, MasterCard stated that the Brazilian real was one of its three primary revenue billing currencies during 2016.

Access to mobile Internet in Brazil is growing. According to eMarketer, Brazil had the fourth largest online audience in the world with 139 million Internet users in 2016, representing penetration of 58.2% of the population, compared with penetration of 82.5% in the United States. Furthermore, according to the World Bank and calculated using the weighted average, Brazil has a high penetration of mobile phones, with 119 mobile phones per 100 inhabitants at December 31, 2016, compared to 118 in Organization for Economic Cooperation and Development, or OECD, member countries and 102 worldwide. This trend is driven in part by the rollout of 3G and 4G networks. According to the Brazilian Telecommunications Association (Associação Brasileira de Telecomunicações, or Telebrasil), 5,016 municipalities (where 98.3% of the Brazilian population resides) had access to 3G networks as of May 2017 and 372 new municipalities had received 3G networks in the prior 12 months, representing an 8% increase during that period. Access to 4G networks also continues to grow, reaching 76% of the Brazilian population during the first quarter of 2017, an increase of 21 percentage points from the first quarter of 2016, according to data from Telebrasil.

As access to mobile Internet has grown, so has the use of mobile banking. According to a research report prepared by Deloitte on behalf of the Brazilian Bank Federation (Federação Brasileira de Bancos, or Febraban), mobile banking increased 96% during 2016, with 34% of all online banking transactions in 2016 being made on cell phones or tablets. However, mobile banking and mobile e-commerce remain underpenetrated in Brazil. Globally, according to information compiled from Capgemini and BNP Paribas and extracted from World Payments Report 2017 dated as of October 9, 2017, the Mobile Payments purchase volume was expected to increase to US$59.7 billion in 2016 from US$24.6 billion in 2013; yet only 9% of the Brazilian population above age 15 reported having paid bills or made a purchase online in 2015, compared to 65% in the United States and 73% in the United Kingdom, according to the World Bank.

Micro-Merchants and SMEs Account for a Large Portion of the Brazilian

Economy and Need Suitable Payments Solutions to Flourish

According to SEBRAE and the Portal do Empreendedor, in 2016, Micro-Merchants and SMEs accounted for 99.8% of Brazil’s 12 million businesses. According to data published by Neoway Business Solutions in 2017, Micro-Merchants and SMEs represented 35.4%, or R$1.8 trillion, of the R$5.1 trillion total annual TPV from businesses in the following sectors: wholesale, retail, other commercial, electronics, pharmaceutical, hotels and food service, education, healthcare, professional and technical services, textiles and transportation.

Due to higher prices by banks and other incumbent providers many Micro-Merchants and SMEs remain unbanked and seek digital payments solutions. They believe that by attracting these merchants into their ecosystem with their superior value proposition, they can continue to drive significant additional revenue growth in the coming years.

Demand for payment solutions by Micro-Merchants and SMEs is resilient, both during times of higher economic activity when sales increase, as well as during times of lower economic activity and higher unemployment, when more individual entrepreneurs open new small businesses, as demonstrated by their growth rates since their launch.

Micro-Merchants and SMEs Need Working Capital Financing

In the standard payment cycle in Brazil, merchants receive sales revenues from credit card transactions 30 business days after the consumer transaction. In addition, Brazilian consumers expect merchants to allow them to choose at the point of purchase to have the purchase price either (i) charged to their credit card accounts in a single payment, as in other markets, or (ii) split into several payments and only charged to their credit card accounts in monthly installments. In this case, the merchant only receives the revenues after the respective monthly installment has been charged, rather than 30 business days after the original transaction. Together, the 30-day payment cycle and the installment option create working capital difficulties for merchants. They offer two services to help merchants improve their cash flow. To shorten the payment cycle, their “payment date election” service (regime de recebimento) allows their merchants to receive their credit card revenues from them either (i) in the regular 30-day payment cycle or (ii) if the merchant so elects, on the 14th or first business day.

To help their merchants offer the installment payment option to consumers, they offer to pay the monthly installment receivables to their merchants either (i) when each installment is charged to the consumer’s card or (ii) if the merchant elects their early payment feature, on an up-front basis. Micro-Merchants and SMEs have historically faced difficulties obtaining this service from the incumbent payment processing providers, and they often require merchants to request early payment on a transaction-by-transaction basis via phone call. They offer a solution to these bottlenecks through simpler onboarding and preapproval of a merchant’s early payments. The underlying receivables relating to these payments are owed to them by the credit card issuers, which are owned primarily by Brazil’s large retail banks. This early payment of receivables feature creates an important working capital alternative for their merchants while also generating income for them.

Statements of Operations Data

For the Years Ended December 31,

2016 2016 2015 2014

(US$ (R$) (R$) (R$)

(in millions, except amounts per share and%) Net revenue from transaction activities and other services 151.5 480.0 268.2 160.1 Net revenue from sales 82.3 260.6 176.5 48.2 Financial income 123.9 392.4 219.5 115.8 Other financial income 1.7 5.3 10.7 1.8

Total revenue and income 359.3 1,138.4 674.9 325.8

Cost of sales and services (196.9 ) (623.7 ) (382.5 ) (142.5 ) Selling expenses (63.1 ) (199.9 ) (162.6 ) (81.4 ) Administrative expenses (26.7 ) (84.5 ) (61.1 ) (51.3 ) Financial expenses (21.6 ) (68.3 ) (29.7 ) (11.1 ) Other (expenses) income, net (2.1 ) (6.7 ) 1.3 (3.3 )

Profit before Income Taxes 49.0 155.4 40.3 36.2 Current income tax and social contribution (2.3 ) (7.4 ) (2.6 ) (9.9 ) Deferred income tax and social contribution (6.4 ) (20.1 ) (2.2 ) 1.0

Income Tax and Social Contribution (8.7 ) (27.6 ) (4.8 ) (8.9 )

Net Income for the Year 40.3 127.8 35.5 27.2

Attributable to:

Owners of PagSeguro Brazil 40.1 127.2 35.1 26.0 Non-controlling interests 0.2 0.6 0.4 1.3

Basic and diluted earnings per common share – R$(2) 0.1531 0.4849 0.1338 0.0990

Balance Sheet Data

The following table presents key line items from PagSeguro Brazil’s consolidated balance sheet data:

At December 31,

2016 2016 2015 2014

(US$) (R$) (R$) (R$)

(in millions)

Current Assets Cash and cash equivalents 25.3 80.0 6.9 1.2 Financial investments 41.4 131.2 – – Note receivables 541.5 1,715.5 1,110.0 665.9 Receivables from related parties 95.0 300.8 55.9 84.3 Inventories 6.6 21.0 41.2 16.1 Taxes recoverable 5.6 17.7 5.8 6.7 Other receivables 1.4 4.5 21.0 4.3

Total Current Assets 716.8 2,270.8 1,240.8 778.6

Non-Current Assets Judicial deposits 0.2 0.5 0.4 0.5 Prepaid expenses – 0.1 0.4 – Deferred income tax and social contribution 2.6 8.3 6.7 8.1 Property and equipment 1.5 4.6 3.8 1.9 Intangible assets 27.2 86.1 48.6 28.5

Total Non-Current Assets 31.5 99.7 59.9 39.0

TOTAL ASSETS 748.2 2,370.4 1,300.7 817.6

Target Markets

Expand Their Customer Base and Deepen Their Relationships with Existing

Accounts Their focus is to continue acquiring new clients in their target markets

by investing strategically in their brand and solutions, targeting the business sectors and geographic regions where there are still significant opportunities to reach new customers, expanding TPV and, consequently, generating more revenues. They believe there remains a significant unmet need in these markets that their solutions can fulfill. They are focused on cultivating their ecosystem to address these everyday electronic payment needs. At the same time, they will introduce further value-added products and services aimed at larger clients, leveraging their lean, technological, scalable, proprietary and secure infrastructure.

They will continue to invest in retaining and deepening relationships with their existing clients, offering new cash-in and cash-out solutions to drive additional revenues and increasingly replacing bank accounts for customers that already have them. Many of their merchants have grown within their platform, for example from purchasing a single POS device to choosing to receive early payment of their card receivables on consumer installment transactions, and they believe their business management tools can be further leveraged to increase customer engagement. They intend to continue to be a first mover, extending their platform to offer a full integrated suite of financial products and services, further enhancing customer experience.

Continuous Innovation and Focus on Technology. Technology and innovation are in

the DNA of the UOL group and are at the core of their business success, with products and engineering personnel representing 61% of the total headcount of PagSeguro as at September 30, 2017. They will continue to invest in research and development to strengthen and extend their digital solutions. Using their qualified product and service design teams and research and development team, they intend to roll out a portfolio of new solutions, for both merchants and consumers, based on mobile apps, in order to drive more revenues while further strengthening their mobile-first commitment and simplifying their clients’ lives.

Their efficiencies of scale, relentless cost discipline, and ongoing improvements to systems and processes allow them to continue lowering their costs. As their scale has expanded over the past three years, their expenses have declined when compared to their Total revenue and income: for example, their Selling expenses and Administrative expenses, taken together, decreased to 17.2% of their Total revenue and income in the nine months ended September 30, 2017 from 21.2% in the nine months ended September 30, 2016 and decreased to 25.0% of their Total revenue and income

in 2016 from 40.7% in 2014. By maintaining their spirit of innovation combined with their cost focus, they intend to continue to drive costs down to achieve further profitable growth.

Seize Opportunities from Ongoing Amendments to Regulation. The Central Bank’s

regulatory program seeks to increase competition in the payments industry. Recently it terminated the exclusive banking arrangements between banks and some card and meal voucher schemes. By seizing these opportunities, disruptive product offerings like their PagSeguro prepaid cards gave unbanked customers access to a card payment solution. They were also the first payments provider in Brazil, other than the incumbent acquirers controlled by banks, to obtain accreditation from MasterCard and Visa as an acquirer, and they have also signed partnerships with Elo, American Express and other card schemes. They will continue using their local knowledge and proximity to customers to seize new business opportunities as the market continues to open.


Disruptive Provider of Payment Solutions to Clients. They have taken a new

approach to offering digital financial services to Brazilian clients, especially Micro-Merchants and SMEs. Instead of simply processing transactions, their end-to-end digital platform creates an ecosystem where their clients can transact and manage their cash, without the need to open a bank account. They are focused on providing disruptive products and solutions that are secure, affordable, scalable and easy to use, with simple and transparent pricing. According to a survey conducted by them in October 2016, 81% of their merchants used PagSeguro as their sole electronic payments service and according to a survey conducted by them in June 2017, 75% of Minizinha owners did not accept cards before signing up with them. For larger merchants who have larger transaction volumes and require more complex controls, they offer value-added services and features such as (i) flexible crediting dates; (ii) payment into separate bank accounts for each card scheme; (iii) a split payment solution, which automatically segregates credits between two different companies; (iv) a seamless single-click checkout option, allowing customers to make purchases with a single click; and (v) their EFTPOS integration solution, which they launched in August 2017. Their innovative approach also brought trust to the online merchant-customer relationship by introducing a feature where they hold the consumer’s payment in escrow for a period after the purchase, as a precaution in case of any commercial claims.

They have also created an innovative business model for merchants to access POS devices in Brazil, as they sell rather than rent their devices to merchants. For the equivalent of three to six months of leasing costs with their competitors, merchants can buy a comparable device from PagSeguro with no need to pay continuous rental fees.

Trusted Brand with Strong Merchant and Consumer Relationships. They have

promoted transaction security since their launch. UOL is a well-known and trusted brand with a large audience. According to comScore, 81.2 million unique visitors accessed the

UOL website in May 2017 (approximately 73% of Brazilian internet users). Consumers trust the PagSeguro and UOL brands with their sensitive personal and financial data. They continue to build and maintain brand recognition and trust through a variety of marketing campaigns, including advertising through traditional media, such as television, magazines and newspapers, and online advertising such as display media, videos, search results and social media. In addition, they continually invest in their merchant and consumer relationships by providing continuous customer service, account support and business solutions.

Customer-Centric Approach Focused on Innovation and Disruption of Incumbents. They have an in-depth understanding of their clients, the issues they face and the markets in which they operate. As a pioneer in the Brazilian digital payments market, they are able to anticipate trends and translate them into products and solutions that meet their customers’ needs more efficiently than global competitors operating in Brazil. The Brazilian market expects payment providers to offer a number of country-specific features, such as boletos and early payment of merchants’ receivables when consumers purchase in installments by credit card, all of which are central to Brazilian financial culture. They built their payments ecosystem and their merchant services offering around these specificities, offering tailor-made solutions for the Brazilian market.

Although all their solutions also work for desktop and other non-mobile platforms, they design their solutions on a mobile-first basis so that their clients can be self-sufficient at all times. This is important for them since, according to a client survey that they conducted, 49% of their new clients do not do business in a “bricks and mortar” location. All of their transaction systems are fully compatible with the mobile environment. They also maintain a strict focus on ongoing innovation, selecting and developing new products and services with a high level of speed to market. This is evidenced by their investment of R$68.0 million in expenditures on software and technology in the nine months ended September 30, 2017, equal to 4.0% of their Total revenue and income for the period. Additionally, they believe their distribution platform and marketing strategies are well-suited to reaching Micro-Merchants and SMEs in Brazil.

Innovative, Reliable and Scalable Proprietary Technology Platform. They manage

large volumes of system access data and transactions, with more than 99.9% availability from May 2016 to April 2017, using Internet data centers provided by UOL Diveo, a UOL group company that provides IT, outsourcing, data centers, cloud computing and other managed IT services to UOL, PagSeguro and 1,200 other large clients, including Amazon, with which UOL Diveo has an eight-year colocation contract, renewable for four more years. Their transactions per second monthly peak increased by a multiple of 39 between May 2015 and August 2017 and their monthly deployments increased by a multiple of 49 from January 2016 to January 2017. Backed by UOL Diveo, they are able to scale up their services while retaining high availability for peak-volume occasions such as Christmas, Mother’s Day and Black Friday. This high-availability and continuously deployed platform ensures that all of their clients are able to operate with the latest features and the newest innovations without needing to patch or upgrade their software. Their scale as a UOL group company

allows them to establish favorable partnerships with several suppliers, including software developers and hardware manufacturers. With their specialized team of 621 people focused on developing reliable, scalable and proprietary systems and new products and features, they regularly roll out innovative and disruptive solutions that are tailored to the Brazilian market.

In addition, their IT background combined with the 10 years of historical transaction data they have amassed since their launch allow them to develop proprietary technology and gain expertise against online fraud and chargebacks related to fraudulent transactions in Brazil. Their antifraud platform combines proprietary features, such as internal risk modeling and scoring through artificial intelligence and risk assessment tools that collect public and private market information, as well as front-line third-party solutions such as Feedzai, Emailage and Threatmetrix.


If they cannot keep pace with rapid technological developments to provide new and

innovative products and services, and address the rapidly evolving market for

transactions on mobile devices, the use of their product and services and,

consequently, their revenues could decline.

Substantial and increasingly intense competition, both within their industry and

from other payment methods, may harm their business. Competing services tied to

established banks and other financial institutions may offer greater liquidity and create greater consumer confidence in the safety and efficiency of their services than PagSeguro. Mergers and acquisitions by or among these companies may lead to even larger competitors with more resources. They may also face pricing pressures from competitors. Certain competitors are able to offer lower prices to merchants for similar services by cross-subsidizing their digital payments services using other services they offer. This competition may mean they need to reduce their pricing, which could reduce their profits. As they grow, merchants may demand more customized and favorable pricing from them, and competitive pressures may require them to agree to this, further reducing their profits

Their business is subject to cyberattacks and security and privacy breaches.

Their services must integrate with a variety of operating systems and networks, and

the hardware that enables merchants to accept payment cards must interoperate with mobile networks offered by telecom operators and third-party mobile devices utilizing those operating systems. If they are unable to ensure that their services or hardware interoperate with such networks, operating systems and devices, their business may be seriously harmed.

Their business is subject to extensive government regulation and oversight and their

status under these regulations may change. Violation of or compliance with present or

future regulation could be costly, expose them to substantial liability and force them to change their business practices, any of which could seriously harm their business and results of operations.

Their financial success is sensitive to the method consumers choose to make

payments, since these methods differ in profitability. Their profitability could be

harmed if the proportion of their business funded using less profitable methods goes

up. Transaction fees are higher when consumers fund payments using credit cards, and

lower when consumers fund payments with debit cards. Transaction fees are nominal when customers fund payment transactions by digital transfer of funds from bank accounts, and they pay no fees when customers fund payment transactions from an existing PagSeguro account balance. Their financial success is therefore sensitive to changes in the proportion of their business funded by consumers using credit and debit cards, which would increase their costs if they were unable to adjust the rates they charge their customers accordingly.

They are susceptible to illegal or improper uses of their platform, which could

expose them to additional liability and harm their business.

Unauthorized disclosure of sensitive or confidential customer information or their

failure or the perception by their customers that they failed to comply with privacy

laws or properly address privacy concerns could harm their business and standing

with their customers.

The Brazilian federal government has exercised, and continues to exercise,

significant influence over the Brazilian economy. This involvement as well as

Brazil’s political and economic conditions could harm them and the price of their

Class A common shares.

The ongoing economic uncertainty and political instability in Brazil may harm them

and the price of their Class A common shares.

Inflation and certain measures by the Brazilian government to curb inflation have

historically harmed the Brazilian economy and Brazilian capital markets, and high

levels of inflation in the future would harm their business and the price of their Class A common shares.

UOL, their largest shareholder, will own 100% of their outstanding Class B

common shares, which represent approximately 95.8% of the voting power of their

issued share capital following the offering, and will control all matters requiring

shareholder approval. This concentration of ownership and voting power limits

your ability to influence corporate matters. Their Class B common shares are entitled

to 10 votes per share and their Class A common shares, which are the common shares they are offering in this offering, are entitled to one vote per share. UOL will therefore control the outcome of all decisions at their shareholders’ meetings, and will be able to elect a majority of the members of their board of directors.

Their dual class capital structure means their stock will not be included in certain

indices. They cannot predict the impact this may have on their stock price. In July

2017, S&P Dow Jones, a provider of widely followed stock indices, announced that companies with multiple share classes, such as theirs, will not be eligible for inclusion in

certain of their indices. As a result, their Class A common shares will not be eligible for these stock indices. Many investment funds are precluded from investing in companies that are not included in such indices, and these funds would be unable to purchase their Class A common shares if they were not included in such indices. They cannot assure you that other stock indices will not take a similar approach to S&P Dow Jones and FTSE Russell in the future. Exclusion from indices could make their Class A common shares less attractive to investors and, as a result, the market price of their Class A common shares could be adversely affected.

Bottom Line

Their total revenue and income was $R325.8 million, R$674.9 million and R$1.14 billion and their net income was R$27.2 million, R$35.5 million and R$127.8 million in 2014, 2015, and 2016, respectively. They launched PagSeguro in 2006 as an online payment platform to provide the digital payment infrastructure necessary for e-commerce to grow in Brazil. Their end-to-end digital ecosystem enables their customers not only to accept payments, but also to grow and manage their businesses. Before PagSeguro, many of these Micro-Merchants and SMEs were overlooked or underserved by incumbent payment providers and large financial institutions in Brazil. In June 2017, 75% of merchants who own their entry-level mPOS device, the Minizinha, did not accept card payments prior to signing up with PagSeguro. The PagSeguro and UOL brands together gave online consumers the confidence to share their sensitive personal and financial data with them, allowing them to shop online easily and safely. In 2013, they expanded from online payments into point of sale, or POS, payments, allowing merchants to receive in-person payments. Focusing primarily on Micro-Merchants and SMEs, they sell a range of POS and mobile POS, or mPOS, devices specifically designed to fit their business needs. Unlike the incumbent payment providers in Brazil, who rent their POS devices to merchants, they innovated by allowing merchants to acquire their own POS device from them in 12 monthly installments. For the equivalent of three to six months of rental fees with the incumbents, merchants can buy a comparable device from PagSeguro. Their main target markets include unbanked merchants who have been ignored or underserved by the incumbents. Once on their platform, merchants can offer consumers more than 30 cash-in methods, choose to obtain early payment of their card receivables on consumer installment transactions, and manage their cash balances on their free PagSeguro digital account, which offers six cash-out options. Their merchants span businesses of all types and sizes, ranging from Micro-Merchants and Small Companies such as street vendors and beauty salons, to Medium-Sized Companies and Large Companies in retail and other sectors. They also have a growing presence in the business-to-business commerce segment. Their active merchants at year-end 2016 represented an increase of 55.6% compared with 0.9 million at year-end 2015. Their active merchants at year-end 2015 represented an increase of 80.0% compared with 0.5 million at year-end 2014. Although Brazil is the largest economy in Latin America as measured by gross domestic product, or GDP, digital payment penetration in the country remains low compared to

more developed economies. In 2016, card usage as a payment method in Brazil represented only approximately 28% of private consumption in 2015, compared to approximately 45% in the United States and 55% in the United Kingdom. In 2015, only 32% of the Brazilian population above age 15 held a credit card, compared to 60% in the United States and 62% in the United Kingdom. Furthermore, 42% of the Brazilian population above age 15 made a purchase using a debit card in 2015, compared with 67% in the United States and 92% in the United Kingdom. Credit and debit card transaction volume in Brazil has increased at a compound annual growth rate of 14% from 2010 to 2016 according to ABECS. As a further indication of this growth, MasterCard stated that the Brazilian real was one of its three primary revenue billing currencies during 2016. Brazil had the fourth largest online audience in the world with 139 million Internet users in 2016, representing penetration of 58.2% of the population, compared with penetration of 82.5% in the United States. Brazil has a high penetration of mobile phones, with 119 mobile phones per 100 inhabitants at December 31, 2016. Access to 4G networks also continues to grow, reaching 76% of the Brazilian population during the first quarter of 2017, an increase of 21 percentage points from the first quarter of 2016. Mobile banking in Brazil increased 96% during 2016, with 34% of all online banking transactions in 2016 being made on cell phones or tablets. Only 9% of the Brazilian population above age 15 reported having paid bills or made a purchase online in 2015, compared to 65% in the United States and 73% in the United Kingdom, according to the World Bank. In 2016, Micro-Merchants and SMEs accounted for 99.8% of Brazil’s 12 million businesses. Due to higher prices by banks and other incumbent providers many Micro-Merchants and SMEs remain unbanked and seek digital payments solutions. They believe that by attracting these merchants into their ecosystem with their superior value proposition, they can continue to drive significant additional revenue growth in the coming years. In the standard payment cycle in Brazil, merchants receive sales revenues from credit card transactions 30 business days after the consumer transaction or installment payment made. The 30-day payment cycle and the installment option create working capital difficulties for merchants. They offer two services to help merchants improve their cash flow with earlier or up-front payments. This early payment of receivables feature creates an important working capital alternative for their merchants while also generating income for them.

Their focus is to continue acquiring new clients in their target markets by investing strategically in their brand and solutions, targeting the business sectors and geographic regions where there are still significant opportunities to reach new customers, expanding TPV and, consequently, generating more revenues. They intend to continue to be a first mover, extending their platform to offer a full integrated suite of financial products and services, further enhancing customer experience. They will continue to invest in research and development to strengthen and extend their digital solutions. Their efficiencies of scale, relentless cost discipline, and ongoing improvements to systems and processes allow them to continue lowering their costs. As their scale has expanded over the past three years, their expenses have declined when compared to their Total revenue and income. The Central Bank’s regulatory program recently terminated the exclusive banking arrangements between banks and some card and meal voucher schemes. By seizing these opportunities, disruptive product offerings like their PagSeguro prepaid cards gave unbanked customers access to a card payment solution. They were also the first payments provider in Brazil, other than the incumbent acquirers controlled by banks,

to obtain accreditation from MasterCard and Visa as an acquirer, and they have also signed partnerships with Elo, American Express and other card schemes.

Their end-to-end digital platform creates an ecosystem where their clients can transact and manage their cash, without the need to open a bank account. They are focused on providing disruptive products and solutions that are secure, affordable, scalable and easy to use, with simple and transparent pricing. For larger merchants who have larger transaction volumes and require more complex controls, they offer value-added services and features. They have also created an innovative business model for merchants to access POS devices in Brazil, as they sell rather than rent their devices to merchants. They continue to build and maintain brand recognition and trust through a variety of marketing campaigns, including advertising through traditional media. They continually invest in their merchant and consumer relationships by providing continuous customer service, account support and business solutions. As a pioneer in the Brazilian digital payments market, they are able to anticipate trends and translate them into products and solutions that meet their customers’ needs more efficiently than global competitors operating in Brazil. Although all their solutions also work for desktop and other non-mobile platforms, they design their solutions on a mobile-first basis so that their clients can be self-sufficient at all times. All of their transaction systems are fully compatible with the mobile environment. Backed by UOL Diveo, they are able to scale up their services while retaining high availability for peak-volume occasions such as Christmas, Mother’s Day and Black Friday. This high-availability and continuously deployed platform ensures that all of their clients are able to operate with the latest features and the newest innovations without needing to patch or upgrade their software. Their antifraud platform combines proprietary features, such as internal risk modeling and scoring through artificial intelligence and risk assessment tools that collect public and private market information, as well as front-line third-party solutions such as Feedzai, Emailage and Threatmetrix.

If they cannot keep pace with rapid technological developments to provide new and innovative products and services, and address the rapidly evolving market for transactions on mobile devices, the use of their product and services and, consequently, their revenues could decline. Competing services tied to established banks and other financial institutions may offer greater liquidity and create greater consumer confidence in the safety and efficiency of their services than PagSeguro. Certain competitors are able to offer lower prices to merchants for similar services by cross-subsidizing their digital payments services using other services they offer. As they grow, merchants may demand more customized and favorable pricing from them, and competitive pressures may require them to agree to this, further reducing their profits. Their business is subject to cyberattacks and security and privacy breaches. Their services must integrate with a variety of operating systems and networks, and the hardware that enables merchants to accept payment cards must interoperate with mobile networks offered by telecom operators and third-party mobile devices utilizing those operating systems. Their business is subject to extensive government regulation and oversight and their status under these regulations may change. Their financial success is sensitive to the method consumers choose to make payments, since these methods differ in profitability. Their profitability could be harmed if the proportion of their business funded using less profitable methods goes up. Transaction fees are nominal when customers fund

payment transactions by digital transfer of funds from bank accounts, and they pay no fees when customers fund payment transactions from an existing PagSeguro account balance. They are susceptible to illegal or improper uses of their platform, which could expose them to additional liability and harm their business. Unauthorized disclosure of sensitive or confidential customer information or their failure or the perception by their customers that they failed to comply with privacy laws or properly address privacy concerns could harm their business and standing with their customers. The Brazilian federal government has exercised, and continues to exercise, significant influence over the Brazilian economy. This involvement as well as Brazil’s political and economic conditions could harm them and the price of their Class A common shares. The ongoing economic uncertainty and political instability in Brazil may harm them and the price of their Class A common shares. Inflation and certain measures by the Brazilian government to curb inflation have historically harmed the Brazilian economy and Brazilian capital markets. UOL, their largest shareholder, will own 100% of their outstanding Class B common shares, which represent approximately 95.8% of the voting power of their issued share capital following the offering, and will control all matters requiring shareholder approval. This concentration of ownership and voting power limits your ability to influence corporate matters. Their dual class capital structure means their stock will not be included in certain indices. Many investment funds are precluded from investing in companies that are not included in such indices. Exclusion from indices could make their Class A common shares less attractive to investors and, as a result, the market price of their Class A common shares could be adversely affected. Rating = 3


__________________________________________________

PlayAGS, Inc. AGS $16.00-$18.00 10.25 million shares Underwriters: Credit Suisse, Deutsche Bank Securities Jefferies, Macquarie Capital, BofA Merrill Lynch, Citigroup, Nomura, Stifel, SunTrust Robinson Humphrey Co-Managers: Roth Capital Partners, Union Gaming, The Williams Capital Group, Apollo Global Securities Proposed trade date of 1/26. They are a leading designer and supplier of electronic gaming machines and other products and services for the gaming industry.

PlayAGS, Inc. AGS


Underwriters: Credit Suisse, Deutsche Bank Securities Jefferies, Macquarie Capital, BofA Merrill Lynch, Citigroup, Nomura, Stifel, SunTrust Robinson Humphrey Co-Managers: Roth Capital Partners, Union Gaming, The Williams Capital Group, Apollo Global Securities


Rating = 2



Company Overview

They are a leading designer and supplier of electronic gaming machines (“EGMs”) and other products and services for the gaming industry. Founded in 2005, they historically focused on supplying EGMs, including slot machines, video bingo machines, and other electronic gaming devices, to the Native American gaming market, where they maintain an approximately 20% market share of all Class II EGMs. Since 2014, they have expanded their product line-up to include: (i) Class III EGMs for commercial and Native American casinos, (ii) table game products and (iii) interactive products, all of which they believe provide them with growth opportunities as they expand in markets where they currently have limited or no presence. Their expansion into Class III and ancillary product offerings has driven their strong growth and momentum in revenue, EGM adjusted EBITDA and their installed base, which have increased by 173%, 158% and 152%, respectively, since 2014. For the LTM period (The twelve month period ended September 30, 2017) approximately 83% of their total revenue was generated from recurring contracted lease agreements whereby they place EGMs and table game products at their customers’ gaming facilities under either a revenue sharing agreement (they receive a percentage of the revenues that these products generate) or fee-per-day agreement (they receive a daily or monthly fixed fee per EGM or table game product), or from recurring revenue generated by their Interactive gaming operations. They operate their business in three distinct segments: EGMs, Table Products (“Table Products”) and Interactive Social Casino Games (“Interactive”).

Electronic Gaming Machines

EGM is their largest segment, representing 94% of their revenue for the LTM period, which currently comes predominantly from Class II sources. They have a library of nearly 300 proprietary game titles that they deliver on several state-of-the-art EGM cabinets, including ICON (their core cabinet), Orion (their newly-introduced premium cabinet), and Big Red/Colossal Diamonds (their specialty large-format cabinet). They also have developed a new Latin-style bingo cabinet called ALORA, which they plan to use in select international markets, including the Philippines and Brazil. Their game titles are developed in-house and include a number of award-winning titles, including Golden Wins, Jade Wins, Buffalo Jackpots, Longhorn Jackpots, Colossal Diamonds and Fu Nan Fu Nu, as well as legacy titles with long-lasting playability that continue to appeal to players, such as Royal Reels and the So Hot family of games. They have released more than 40 new titles during the LTM period and they have over 50 titles set to launch.

Their cabinets and game titles are among the top performing premium leased games in the industry, demonstrated by Colossal Diamonds’ consistent ranking as a top-ten premium leased game, including as a top-five premium leased game in the third quarter of 2017, and consistently achieving win per day 2.0 times higher than the house average according to Eilers & Krejcik. In addition, according to Eilers & Krejcik, their



premium leased games outperform most of the EGMs manufactured by their competitors, generating win per day that is 2.7 times higher than the average of all of the gaming machines in the casinos where they have their EGMs placed. Additionally, their Orion product has received positive recognition within the industry, including winning silver at the 2017 Global Gaming Business Annual Gaming & Technology Awards.

They have increased their installed base of EGMs every year from 2005 through the LTM period, and as of September 30, 2017, their total EGM footprint comprised 22,015 units (14,544 domestic and 7,471 international). They remain highly focused on continuing to expand their installed base of leased EGMs in markets that they currently serve as well as new jurisdictions where they do not presently have any EGMs installed. Since their founding, they have made significant progress in expanding the number of markets where they are licensed to sell or lease their EGMs. In 2005, they were licensed in three states (5 total licenses). Currently, they are licensed in 31 U.S. states and two foreign countries (253 total licenses). As of September 30, 2017, their installed base represented only approximately 2% of the total addressable market of approximately 980,000 EGMs installed throughout the United States and Canada. According to Eilers & Krejcik, U.S. casino operators expect to allocate approximately 5.5% of their 2018 EGM purchases to AGS products, which would result in ship share more than three times higher than their ship share in 2016. They believe they are positioned to gain significant ship share over the next several years.

They offer their customers the option of either leasing or purchasing their EGMs and associated gaming systems. Currently, they derive substantially all of their EGM revenues from EGMs installed under revenue sharing or fee-per-day lease agreements, also known as “participation” agreements, and they refer to such revenue generation as their “participation model”. As they expand into new gaming markets and roll out their new and proprietary cabinets and titles, they expect the sales of gaming machines and systems will play an increasingly important role in their business and will complement their core participation model.

Table Products

In addition to their portfolio of EGMs, they also offer their customers more than 30 unique table product offerings, including live felt table games, side bet offerings, progressives, signage and other ancillary table game equipment. Their table products are designed with the goal of enhancing the table games section of the casino floor (commonly known as “the pit”). Over the past 10 years, there has been a trend of introducing side-bets on blackjack tables to increase the game’s overall hold. Their Table Products segment offers a full suite of side-bets and specialty table games that capitalize on this trend, and they believe that this segment will serve as an important growth engine for their company, including by generating further cross-selling opportunities with their EGM offerings. As of September 30, 2017, they had placed 2,350 table products domestically and internationally and they believe they are presently a leading supplier of table products to the gaming industry based on number of products placed.

Their Table Products segment focuses on high margin recurring revenue generated by leases. Nearly all of the revenue they generate in this segment is

recurring. They have acquired several proprietary table games and side-bets and developed others in-house. Their portfolio of table game products includes In-Bet, Buster Blackjack and Criss Cross Poker, all of which provide betting options that they believe enhance player excitement. Their table equipment offerings, including their single-deck card shuffler, Dex S, as well as their baccarat signage solution and their roulette readerboard, act as complementary offerings to their table games. They also offer a progressive bonusing solution for casino operators through Bonus Spin, which is a customizable virtual prize wheel that allows players to win an incremental jackpot of various cash prizes. Bonus Spin was recognized at the 2016 Casino Journal’s Annual Top 20 Most Innovative Gaming & Technology Product Awards. They believe that shufflers and progressive bonusing on table games is a category that provides them with substantial growth opportunities.

Interactive Social Casino Games

They operate both business-to-consumer (B2C) social gaming interactive casino products and also provide business-to-business (B2B) social gaming interactive casino products. Their B2C social casino games include online versions of their popular EGM titles and are accessible to players worldwide on multiple mobile platforms, which they believe establishes brand recognition and cross-selling opportunities. Although free to play, their social games generate recurring revenue through the in-game sale of virtual goods and currency. They have recently expanded into the B2B space through their core app, Lucky Play Casino, whereby they white label their social game product and enable their land-based casino customers to brand the social gaming product with their own casino name. As of September 30, 2017, their combined B2C offerings reached approximately 38,000 daily active users (“DAU”) and they have had approximately 3.8 million lifetime installations of their social casino app.

Acquisition of Rocket Assets

On December 6, 2017, they acquired an installed base of approximately 1,600 networked Class II slot machines, together with related intellectual property, which were operated by Rocket Gaming Systems (“Rocket”), for $57 million. The acquired Class II slot machines are located across the United States, with significant presence in key markets such as California, Oklahoma, Montana, Washington and Texas. This all-cash asset purchase expanded their already extensive Class II footprint and positions them for further growth in the Class II market.

With the newly acquired assets, their installed base of recurring revenue slot machines grew to approximately 23,600 units. The Class II portfolio from Rocket includes wide-area progressive and standalone video and spinning-reel games and platforms, including Galaxy, Northstar and the player-favorite Gold Series, a suite of games that feature a $1 million-plus progressive prize and is the longest-standing million dollar wide-area progressive on tribal casino floors.

The acquisition of the Rocket assets enables them to increase their presence at many top performing Class II customers, such as the Chickasaw Nation. They expect to upgrade all Rocket games to AGS games over a five-year period. The transaction is immediately accretive to their earnings and cash flow. For the last-

twelve month period ended September 30, 2017, the acquired assets from Rocket had revenues of approximately $16 million.

IPO Detail

This is the initial public offering of PlayAGS, Inc. and no public market currently exists for its common stock. PlayAGS, Inc. is offering shares of common stock as described in the prospectus. The company expects the initial public offering price of its common stock to be between $16.00 and $18.00 per share. The company has applied to list its common stock on the New York Stock Exchange under the symbol “AGS.”




Use of Proceeds

They expect to receive approximately $158.7 million of net proceeds in this offering. They intend to use

approximately $15.5 million of the net proceeds from this offering to pay fees and expenses they shall incur in

connection with this offering, which shall include underwriting discounts and commissions, legal and accounting

fees, SEC and FINRA registration fees, printing expenses and other similar fees and expenses. They intend to use

approximately $154.0 million of the net proceeds of this offering to redeem in full the PIK notes. The PIK notes bear

interest at 11.25% per annum and mature on May 20, 2024. They were originally issued on May 29, 2015, at an issue

price of 97% of their principal amount. The proceeds from the issuance of the PIK notes were used to pay part of the

consideration for the Cadillac Jack acquisition. The PIK notes were amended on May 30, 2017 in connection with the

repayment of the Seller Notes. In the event that the initial offering price yields net proceeds that are not sufficient to

redeem the PIK notes in full, they will use cash on hand or borrowings under their senior secured revolving credit

facility to redeem the remaining amount.

Deutsche Bank AG owns the aggregate outstanding principal amount of the PIK Notes. As a result, Deutsche Bank

AG will receive approximately $154.0 million of the net proceeds of this Offering, in connection with the redemption

of the PIK Notes. As a result, one of the underwriters in this Offering, Deutsche Bank Securities Inc., an affiliate of

Deutsche Bank AG, is deemed to have a “conflict of interest” with them within the meaning of Rule 5121. The

remaining net proceeds, if any, will be used for general corporate purposes.

Competition

Company

Stock

Symbol Exchange.

International Game Technology PLC IGT NYSE

Scientific Games Corp. SGMS NASDAQ

. Aristocrat Leisure Limited ALL ASX

Everi Holdings Inc. EVRI NYSE

Konami Holdings Corp. 9766 TYO

Ainsworth Game Technology Ltd. AGI ASX

Additionally, there are hundreds of non-gaming companies that design and develop social casino games and apps.

Market Opportunity

They operate primarily in the North American gaming market, which includes U.S. commercial casinos, Native American casinos, Canadian casinos, video lottery terminals (“VLT”) and Mexican casinos. According to Eilers & Krejcik, as of June 30, 2017, there were approximately 980,000 EGMs installed throughout the United States and Canada and 120,000 EGMs in Mexico. Eilers & Krejcik estimates moderate growth in the U.S. and Canadian EGM installed base through 2019. In the United States, Native American casinos represent a significant portion of the EGM market, with over 360,000 Class II and Class III EGMs, and have historically been their main area of focus.

Industry ship share

Consolidation across the gaming equipment industry over the last four years has resulted in the creation of the “Big-4” gaming suppliers, which they consider to be International Game Technology PLC (“IGT”), Scientific Games Corporation (“Scientific Games”), Konami Co. Ltd. (“Konami”) and Aristocrat Technologies Inc. (“Aristocrat”). They believe that many casino operators prefer to diversify their gaming floor mix rather than purchasing their EGMs only from the Big-4 suppliers. The ship share for Non-Big-4 suppliers has continued to grow over the past several years. According to Eilers & Krejcik, Non-Big-4 suppliers captured 24% ship share for all EGMs sold in the third quarter of 2017, of which AGS represented greater than 5% of the total purchases. They expect this trend in table games to continue, and AGS has positioned itself to capture this growth through new offerings and titles.

Class II Market—Native American

Native American gaming is regulated under the IGRA, which classifies legalized gaming into three categories: Class I, Class II, and Class III. Class I gaming includes traditional Native American social and ceremonial games and is regulated exclusively at the Native American tribe level. They do not compete in the Class I industry. Class II gaming includes EGMs that utilize bingo, electronic aids to bingo, and, if played at the same location where bingo is offered, pull-tabs and other games similar to bingo. Class II gaming machines can be operated in states that permit bingo-style gaming without any agreement with the state and without any revenue sharing with the state, whereas Class III gaming requires Native American tribes to enter into a compact with the state in which their casino is located, which typically includes revenue sharing with the state. Class II games are an attractive option for Native American tribes because: (i) revenue generated from Class II gaming is not subject to revenue sharing or taxes, (ii) there are no limits on the number of Class II gaming machines that may

be operated in any one facility; and (iii) a strong Class II alternative improves a tribe’s leverage when negotiating its Class III compact with the state.

As of September 30, 2017, the Native American Class II market consisted of approximately 60,000 EGMs, with AGS products representing over 16% of that market with approximately 10,000 recurring Class II EGMs placed in approximately 150 gaming facilities across 18 states. According to Eilers & Krejcik, the Class II market is expected to grow its installed base by approximately 2% over the next three years in the United States. Given the relatively small market size of the Class II market relative to the broader U.S. gaming market, the Class II market has historically not garnered the attention of larger gaming equipment manufacturers. They have been able to maintain their market share by partnering with their tribal customers to continually develop high-quality Class II titles that optimize the revenue generated at their casinos. The Class II market is highly relationship-based and they feel confident that they can maintain their current market position given the tenure and strength of their customer relationships.

Class III / Commercial U.S. and Canadian Markets

Class III machines can be found in commercial casinos and in Native American casinos that have entered into a state compact that permits a specified number of Class III machines. Currently, there are approximately 1,000 casinos throughout the U.S. and Canada with approximately 980,000 total EGMs. Excluding approximately 135,000 EGMs under route operations and approximately 60,000 Class II EGMs, there are 785,000 Class III EGMs throughout the U.S. and Canada, of which approximately 415,000 are in commercial casinos and approximately 370,000 are in tribal casinos. Eilers & Krejcik predict that the installed base of Class III/commercial game EGMs in the U.S. and Canada will grow by approximately 2%, or 16,000 units, over the next three years. In 2016, revenue increased in 18 of the 24 states with legalized commercial gaming. While the specific drivers of this growth differ from market-to-market, the nationwide growth trend can be attributed to stronger consumer confidence, lower levels of unemployment and more available disposable income. As of September 30, 2017, they had placed only 4,000 recurring Class III units (1,200 of which were video lottery terminals) in over 300 casinos, which represents less than 1% of the total number of EGMs placed in the U.S. and Canadian Class III and commercial gaming markets. Given their very low penetration in Class III Native American and commercial casinos, these markets present a significant growth opportunity.

Mexico

With the acquisition of Cadillac Jack in 2015, they acquired a strong foothold in the Mexican gaming market. According to Eilers & Krejcik, the Mexican market consists of approximately 120,000 EGMs, and their approximately 7,400 units, located in nearly 250 gaming facilities, represent just over 5% of the total market. Revenue generated by their EGMs in Mexico represented about 12% of their total revenue in the LTM period, and they have consistently been growing their installed base in the region.

Fiscal Year

Predecessor Successor

Nine Months

Ended September 30,

LTM

September 30,

1/1/13-

12/20/13 12/21/13-

12/31/13

(in thousands, except share and

per

share data and Key

Performance

Indicators) 2012 2013 2013 2014 2015 2016 2016 2017 2017

Consolidated Statements of

Operations: Gaming operations $ 57,792 $ 54,903 $ 1,953 $ 68,981 $ 117,013 $ 154,857 $ 117,093 $ 125,040 $ 162,804 Equipment sales 763 1,558 — 3,159 6,279 11,949 6,968 29,254 34,235

Total revenues 58,555 56,461 1,953 72,140 123,292 166,806 124,061 154,294 197,039

Operating expenses Cost of gaming

operations 13,798 12,001 320 14,169 23,291 26,736 19,627 21,794 28,903

Cost of equipment sales 395 893 — 1,607 1,548 6,237 4,244 14,326 16,319

Selling, general and

administrative 12,756 14,343 807 19,456 40,088 46,108 36,654 30,368 39,822 Research and

development 3,608 3,042 50 4,856 14,376 21,346 16,517 17,912 22,741

Write downs and other charges 29,845 10,326 7,469 7,068 11,766 3,262 2,153 2,655 3,764

Depreciation and

amortization 29,586 27,660 930 33,405 61,662 80,181 60,527 53,598 73,252

Total operating

expenses 89,988 68,265 9,576 80,561 152,731 183,870 139,722 140,653 184,801

Loss from operations (31,433 ) (11,804 ) (7,623 ) (8,421 ) (29,439 ) (17,064 ) (15,661 ) 13,641 12,238

Interest expense 10,270 17,116 485 17,235 41,642 59,963 44,151 42,380 58,192

Interest income (439 ) (1,410 ) — (42 ) (82 ) (57 ) (51 ) (80 ) (86 ) Loss on extinguishment

and modification of

debt — 14,661 — — — — — 8,129 8,129 Other expense (income) (66 ) 5 (6 ) 573 3,635 7,404 6,314 (4,805 ) (3,715 )

Loss before income taxes (41,198 ) (42,176 ) (8,102 ) (26,187 ) (74,634 ) (84,374 ) (66,075 ) (31,983 ) (50,282 ) Income tax benefit (expense) — — (54 ) (2,189 ) 36,089 3,000 4,935 (4,603 ) (6,538 )

Net loss $ (41,198 ) $ (42,176 ) $ (8,156 ) $ (28,376 ) $ (38,545 ) $ (81,374 ) $ (61,140 ) $ (36,586 ) $ (56,820 )

Basic and diluted loss per

common share: Basic N/A N/A $ (0.82 ) $ (2.84 ) $ (2.98 ) $ (5.45 ) $ (4.09 ) $ (2.45 ) $ (3.81 )

Diluted N/A N/A $ (0.82 ) $ (2.84 ) $ (2.98 ) $ (5.45 ) $ (4.09 ) $ (2.45 ) $ (3.81 )

Weighted average common

shares outstanding: Basic N/A N/A 10,000 10,000 12,918 14,932 14,932 14,932 14,932

Diluted N/A N/A 10,000 10,000 12,918 14,932 14,932 14,932 14,932 Key Performance Indicators: Domestic installed base 7,720 8,708 8,708 8,735 13,139 13,953 13,651 14,544 14,544

International installed base — — — — 6,112 6,898 6,457 7,471 7,471

Total installed base 7,720 8,708 8,708 8,735 19,251 20,851 20,108 22,015 22,015 Domestic revenue per day $ 21.34 $ 20.36 $ 19.03 $ 21.23 $ 24.33 $ 24.74 $ 25.19 $ 25.73 $ 25.16 International revenue per day — — — 9.83 9.23 9.50 8.37 8.40

Total revenue per day $ 21.34 $ 20.36 $ 19.03 $ 21.23 $ 20.93 $ 19.78 $ 20.20 $ 19.86 $ 19.55 EGM units sold 35 115 8 255 203 465 205 1,868 2,128 Average sales price $ 16,805 $ 10,761 $ 19,999 $ 9,497 $ 16,498 $ 14,897 $ 14,630 $ 15,835 $ 15,746

As of December 31, As of

September 30,

2013 2014 2015 2016 2017

Consolidated Balance Sheet Total assets $ 253,828 $ 256,152 $ 711,147 $ 634,092 639,761 Total liabilities 161,985 192,396 610,610 617,664 659,212 Total stockholders’ equity 91,843 63,756 100,537 16,428 (19,451 )

Target Markets

Build Momentum and Penetrate Class III and Commercial Jurisdictions Expansion

in Class III and commercial gaming jurisdictions represents a significant growth opportunity for them as there are many jurisdictions where they have only recently been licensed or allowed, including Indiana (2015), New Mexico (2017), Nevada (2014), Connecticut (2014), Iowa (2017), Mississippi (2015) and Louisiana (2017). Their third quarter 2017 ship share in many of these recently-licensed markets has been strong, with Indiana at 9%, Iowa at 10%, New Mexico at 9%, Nevada at 5%, Mississippi at 15% and Louisiana at 29%. They also have the opportunity to enter many of the large commercial gaming markets in the U.S. where they currently have no presence, including Colorado, Ohio and Pennsylvania and new gaming markets such as Massachusetts. These new markets provide them with a tremendous opportunity to expand their recurring installed base. According to Eilers & Krejcik, the total EGM market consists of 980,000 units. As of September 30, 2017, their total backlog of signed contracts for ICON and Orion EGMs represented approximately $10 million of EGM adjusted EBITDA (based on historic revenue per day, sales price and respective EGM adjusted EBITDA margins for Orion and ICON). They strategically allow their customers to purchase or lease their premium cabinets, whereas their competitors typically only lease (and will not sell) their premium products. They believe their willingness to sell their premium cabinets gives them a competitive advantage with their customers. As a result of their efforts, they have been able to attract a number of new customers over the past three years, including MGM, Caesars, Penn National Gaming and Las Vegas Sands.

Optimize Yield Across their Existing Footprint They believe there is a significant

opportunity to optimize the older EGMs in their existing installed base with newer, more profitable cabinets. By improving the performance of their installed base, they will generate incremental EGM adjusted EBITDA since their participation model enables them to share in the profitability of the EGMs that they place in their customers’ gaming facilities. They currently have an installed base of approximately 3,100 older cabinets that they believe, over time, can be upgraded with their newer cabinets to generate higher win per day. The typical refresh cycle for EGMs is approximately three years, which creates a natural, continuous driver of equipment sales and provides them with the ability to optimize their installed base by constantly refreshing it with newer cabinets. Over the past twelve months, they have optimized over 1,600 of their cabinets, which has led to approximately $4.5 million of incremental revenue, approximately 100% of which flows to EGM adjusted EBITDA. A specific example of this took place at the WinStar World Casino and Resort in Oklahoma, in which they optimized 28 underperforming legacy EGMs by replacing them with their new Orion cabinet, which resulted in a significant increase in incremental revenue. When annualized, the effect of this optimization results in an increase in incremental revenue of nearly $1.0 million. Another benefit of their yield optimization program is that they can take the older units from domestic casinos, refurbish them for approximately $1,500 and redeploy them in Mexico. These redeployed units broaden their international footprint and generate a high return on investment given the low cost to refurbish the units. Based on FY 2016 revenue per day and related refurbishment

expenditure figures, they estimate that their return on investment for each refurbished unit that is leased into the Mexican market is 191%.

Expand Globally They consider many factors when choosing to enter a new

international market, including the size of the opportunity and the regulatory environment. Since 2015, they have implemented a renewed strategy in Mexico, which has improved their relationship with their customers and enabled them to grow their installed base to approximately 7,400 units in nearly 250 facilities, which represents over 5% of the market. As of September 30, 2017, they had 7,471 units placed in Mexico, which was up 8% from the 6,898 units that were installed at the end of 2016. These units currently generate approximately $8.40 of revenue per day and an EGM adjusted EBITDA margin of approximately 69%.

They intend to enter the Philippines market in early 2018, which they believe has a total market size of approximately 70,000 units. They are currently in the process of obtaining an operating license to enter this market, which they expect to obtain in the first quarter of 2018 and begin installing units on a recurring basis shortly thereafter. They intend to offer their new ALORA cabinet, which is based on Latin-style bingo, in this market and they estimate that they will be able to generate participation rates of 22-25% of win per day, which compares favorably to the 20% that they typically receive in other international markets. The Philippines market represents a significant untapped opportunity for them. They intend to establish a footprint of approximately 3,000 to 5,000 units over a three to five year period.

Additionally, over the past twelve months they have expanded their presence in Canada through EGM sales into that market and they recently introduced their table products content to the Australian gaming market. On the near-term horizon, they believe that certain parts of Asia and Europe present high-growth opportunities for their business given the types of gaming content that they create, which they believe resonates with players from both of these cultures.

They also believe there are several other markets, such as Brazil, that present a significant growth opportunity for them. Over the past several months, the Brazilian legislature has put forth key legislation to legalize regulated gaming. They have implemented a comprehensive strategy to enter the Brazilian market and they have already executed memoranda of understanding (“MOU”) with nine potential gaming operators to place approximately 8,700 EGMs in Brazil as soon as the country legalizes gaming. Upon the legalization of regulated gaming in Brazil, they intend to establish a footprint of approximately 8,000 to 10,000 units over a three to five year period.

Further Expand Their Class II Market Leadership and Continue Growth of their

Recurring Revenue Base They believe that their existing core Class II product

offering is among the strongest in the industry and they are committed to growing their existing Class II installed base. Currently, they believe they are the second largest supplier of Class II games in the United States. They expect to continue gaining market share in their existing Class II jurisdictions as they introduce more games and new hardware, and they also intend to enter new Class II jurisdictions (they have acquired 68 new Class II licenses in the past three years). There is a

sizable Native American casino scheduled to open in the first quarter of 2018 and their Class II placements at this property should add over 175 games to their installed base. They believe that the unique advantages offered by Class II gaming will result in Native American operators continuing to grow the number of Class II units that they have in their casinos. Given their existing leadership in the Class II market, they feel that they are very well-positioned to capture their share of this continued growth in Class II.

Focus on Innovation & New Product Verticals for the Next Generation of Casino

Players In 2014, they began developing table products through the acquisitions of War

Blackjack and other related intellectual property with the objective of diversifying their product portfolio to include gaming experiences for a different gaming consumer profile. The extension of their business into table products, as well as their entry into the interactive social casino space, demonstrates their commitment to evolving their business to adapt to the preferences of the next-generation gambler. As of September 30, 2017, they had 2,350 table products leased to their customers. They plan to continue expanding their table products offerings through acquisitions and internal development and have high expectations for their newly launched Bonus Spin progressive technology and Dex S single-deck shuffler. They continue to convert their proven land-based casino content into online and mobile formats for social gaming. Their popular land-based slot machine games, such as Golden Wins, Jade Wins, Buffalo Jackpots and Firebull to name a few, have been among the strongest performers in their social casino game catalog. In addition to new game titles, they continue to explore other areas of growth for their Interactive segment including continued expansion of their newly launched B2B Social White Label Casino. The key benefit of their platform is that it has been battle-tested in the highly competitive social casino market, and is able to support casinos’ player-engagement initiatives, with powerful brand extension, communications, promotions, and monetization features. They believe in the potential of their powerful back end Customer Relationship Management (CRM) capabilities, their player segmentation platform, and their ability to customize and brand the product to meet each property’s unique requirements. They also believe that there are opportunities to offer real money gaming and other complementary products in certain markets in the future.


High-Margin, Recurring Revenue Model with Attractive Payback Periods

on Newly Deployed Capital Approximately 83% of their revenue in the LTM period was

derived from products that they leased to their customers and recurring revenue from their Interactive gaming operations. This strong base of recurring, contracted, high-margin revenue generated a 56% EGM adjusted EBITDA margin, which reflects the strong performance and longevity of their game titles and long-term relationships with their key customers. The cash flow generated from their recurring revenue sources has provided them with a stable source of capital to grow their footprint both domestically and internationally. Given the high-margin, recurring-revenue nature of their new EGMs, they benefit from payback periods on their leased units of only

approximately 12 months for their core units and approximately 8 months for their premium units.

Best-in-Class R&D Teams that Produce Industry-Leading Products Their R&D

teams have demonstrated industry leadership by creating several top-performing titles and innovative hardware designs, such as their newly-introduced premium cabinet, Orion Slant, which features a unique slanted top that has a more comfortable ergonomic design for players. The innovative nature of their products has, in part, led to 75% of their customer base electing to purchase at least one of their recently-released ICON or Orion cabinets. Their casino-owned EGMs outperform those from all other suppliers, generating win per day 1.8 times higher than the house average. Their premium leased games were the second-best across the industry, delivering win per day that was 2.7 times higher than the average of the casino floors (up from 2.0 times higher in the previous quarter) where their machines are placed. In addition to the performance of the machines, they believe their products contribute to high levels of customer satisfaction as evidenced by their strong trial unit conversion metrics. For the LTM period, 99% of customer trial units resulted in conversion to a lease or sale. Additionally, their share of top performing casino-owned games improved to 3.0% in the third quarter of 2017 from 1.8% in the prior quarter, according to Eilers & Krejcik.

Focus on the “Core Gambler” to Drive Profitability for Their Customers They

create slot machine titles predominantly for the “core gambler” (sometimes referred to as a “local player”), who they believe comprises 20% of the slot player demographic, but approximately 80% of the slot industry profits. The core gambler is an actively-engaged slot player, who typically gambles more frequently than a tourist visiting a destination market such as Las Vegas, and they believe this type of player represents an underserved, but highly-profitable demographic. Based on their internal research, they believe core gamblers visit casinos with high frequency and demonstrate strong loyalty to specific gaming titles. They design many of their games to appeal to this player base by creating high-volatility games that keep players invested and engaged during their gaming experience. They focus on building games that encourage players to spend more time on their devices and are designed to ensure the player has fun by providing various bonus triggers and multiple ways to win within the game. They believe that this strategic focus gives them a competitive edge because they are not distracted by spending a substantial amount of time, resources or development dollars to acquire expensive licenses and brands with limited shelf life for less frequent or less profitable gambler subsets

Broad and Diverse Product Portfolio They offer a wide variety of content and

technology with hundreds of titles, and they aim to be a “one-stop shop” for their customers. They have recently expanded their EGM cabinet offerings to include cutting-edge premium products, such as Orion (introduced in May 2017), and unique formats that stand out on the casino floor, such as Big Red (introduced in September 2014). For table products, they have diversified content for poker, blackjack and roulette derivatives, as well as bonusing enhancements that offer new and exciting gaming experiences. Their table products also include a variety of ancillary equipment designed to create greater efficiency for their customers, such as their new Dex S single-deck shuffler. They strategically pursue acquisitions and utilize their broad,

customer-focused distribution network to enhance their content, titles and overall installed base. An example of their strategy’s success was the Buster Blackjack side bet offering, in which they have increased their installed footprint by nearly four times since the acquisition. They will also continue to partner strategically with select developers to bring innovative and new product concepts to their customers by leveraging their distribution network as they have recently done with Alfastreet’s Royal Derby offering. Within their interactive segment, their B2C social games include online versions of their popular EGM game titles and are accessible to players worldwide on multiple mobile platforms, which they believe leads to establishing brand recognition and cross selling opportunities.

Unique and Value-Enhancing Culture that Attracts Top Talent Their corporate

culture is based on the core concepts of passion, performance and teamwork, which allows them to be nimble and flexible in their strategy and execution. They strive to cultivate a culture where employees care about their business and the specific work that they do, where they feel strongly that AGS is not just a place to work but is also a community. This philosophy starts in the recruiting process and continues with every business, social and cultural activity at AGS. The result is a unique culture that they believe sets them apart from other companies in their space and has been critical to their successful recruitment and retention of top talent. Because they offer a rewarding work environment and many employee-friendly benefits and perks that are not standard in the gaming industry, they believe AGS is known as a fun and open place to work. Through, among others, numerous wellness initiatives, benefits such as hands-on community volunteering activities, various events promoting team spirit, and frequent and direct executive-to-employee communication, they believe they have gained the reputation of being a top employer in the gaming industry. Their company has received numerous awards highlighting their culture of employee wellness, including being named one of Atlanta’s Best and Brightest Companies to Work For 2017. As they grow and expand their business, they believe that their employee-centric culture will continue to attract high-caliber talent that will further enhance their team.

Proven Ability to Successfully Integrate Acquisitions and Scale Their Platform

They have a strong track record of acquiring and integrating businesses with limited disruption to their core business. Over the past three years, they have effectively integrated over 20 acquisitions. The acquisition of Cadillac Jack demonstrated their ability to realize both cost and revenue synergies and, as a result of efficiently integrating two complementary businesses, to deliver strong financial results in 2016. They believe that their proven track record is the result of their ability to successfully identify businesses with products and cultures that are complementary to AGS.


Their success is dependent upon their ability to adapt to and offer products that

keep pace with evolving technology related to their businesses. The success of their

products and services is affected by changing technology and evolving industry standards

Their success depends in part on their ability to develop, enhance and/or introduce

successful gaming concepts and game content. Demand for their products and the

level of play of their products could be adversely affected by changes in player and operator preferences.

Their business is vulnerable to changing economic conditions and to other factors

that adversely affect the casino industry, which have negatively impacted and could

continue to negatively impact the play levels of their participation games, their

product sales and their ability to collect outstanding receivables from their

customers.

Smoking bans in casinos may reduce player traffic and affect their revenues. Some

U.S. jurisdictions have recently introduced or proposed smoking bans in public venues, including casinos, which may reduce player traffic in the facilities of their current and prospective customers, which may reduce revenues on their participation electronic gaming machines or impair their future growth prospects and therefore may adversely impact their revenues in those jurisdictions. Other participants in the gaming industry have reported declines in gaming revenues following the introduction of a smoking ban in jurisdictions in which they operate and they cannot predict the magnitude or timing of any decrease in revenues resulting from the introduction of a smoking ban in any jurisdiction in which they operate.

They have a history of operating losses and a significant accumulated deficit, and

they may not achieve or maintain profitability in the future. They have not been

profitable and cannot predict when they will achieve profitability, if ever. As of September 30, 2017, they had an accumulated deficit of approximately $193.0 million, as a result of historical operating losses. These losses have resulted principally from depreciation and amortization, interest, research and development, sales and marketing and administrative expenses. They also expect their costs to increase in future periods

They derive a significant portion of their revenue from Native American tribal

customers, and their ability to effectively operate in Native American gaming

markets is vulnerable to legal and regulatory uncertainties, including the ability to

enforce contractual rights on Native American land.

Slow growth in the development of new gaming jurisdictions or the number of new

casinos, declines in the rate of replacement of existing electronic gaming machines

and ownership changes and consolidation in the casino industry could limit or

reduce their future prospects.

The intellectual property rights of others may prevent them from developing new

products and services, entering new markets or may expose them to liability or

costly litigation and litigation regarding their intellectual property could have a

material adverse effect on the results of their business or intellectual property.

Their revenues are vulnerable to the impact of changes to the Class II regulatory

scheme. Their Native American tribal customers that operate Class II games under the

IGRA are subject to regulation by the National Indian Gaming Commission (NIGC). The NIGC has conducted and is expected to again conduct consultations with industry participants regarding Native American gaming activities, including the clarification of regulations regarding Class II electronic gaming machines. It is possible that any such changes in regulations, when finally enacted, could cause them to modify their Class II games to comply with the new regulations, which may result in their products becoming less competitive.

State compacts with their existing Native American tribal customers to allow

Class III gaming could reduce demand for their Class II games and their entry into

the Class III market may be difficult as they compete against larger companies in

the tribal Class III market. Most of their Class II Native American tribal customers have

entered into compacts with the states in which they operate to permit the operation of Class III games. While they seek to also provide Class III alternatives in these markets, they believe the number of their Class II game machine placements in those customers’ facilities could decline, and their operating results could be materially and adversely affected. As their Native American tribal customers continue to transition to gaming under compacts with the state, they continue to face significant uncertainty in the market that makes their business in these states difficult to manage and predict and they may be forced to compete with larger companies that specialize in Class III gaming.

The participation share rates for gaming revenue they receive pursuant to their

participation agreements with their Native American tribal customers has, on

average, decreased in recent years and may continue to decrease in the future. The

percentage of gaming revenue they receive pursuant to their participation agreements, or their participation share rates, with their Native American tribal customers has, on average, decreased in recent years, negatively affecting their profit margins. There can be no assurance that participation rates will not decrease further in the future. In addition, their Native American tribal customers may adopt policies or insist upon additional business terms during the renewal of their existing participation agreements that negatively affect the profitability of those relationships. In addition, any participation agreements they may enter into in the future with new customers or in new jurisdictions may not have terms as favorable as their existing participation agreements.

For the last twelve months ended September 30, 2017, two customers were each

responsible for approximately 12% and 11% of their total revenue, respectively,

and they generated approximately 24% and 12% of their total revenue in the states

of Oklahoma and Alabama, respectively. For the last twelve months ended September

30, 2017, approximately 24% of their total revenue was derived from gaming operations in Oklahoma, and approximately 11% of their total revenue was from one Native American gaming tribe in that state. Additionally, for the last twelve months ended September 30, 2017, approximately 12% of their total revenue was derived from gaming operations in Alabama, and approximately 12% of their total revenue was from one

Native American gaming tribe in that state. The significant concentration of their revenue in Oklahoma and Alabama means that local economic, regulatory and licensing changes in Oklahoma or Alabama may adversely affect their business disproportionately to changes in national economic conditions, including adverse economic declines or slower economic recovery from prior declines.

They may not be able to capitalize on the expansion of internet or other forms of

interactive gaming or other trends and changes in the gaming industries, including

due to laws and regulations governing these industries. They participate in the new

and evolving interactive gaming industry through their social and interactive gaming products. Part of their strategy is to take advantage of the liberalization of interactive gaming, both within the U.S. and internationally. These industries involve significant risks and uncertainties, including legal, business and financial risks. The success of these industries and of their interactive gaming products and services may be affected by future developments in social networks, including Apple, Google or Facebook developments, mobile platforms, regulatory developments, data privacy laws and other factors that they are unable to predict and are beyond their control.

Their substantial indebtedness could adversely affect their ability to raise

additional capital or to fund their operations, expose them to interest rate risk to

the extent of their variable rate debt, limit their ability to react to changes in the

economy, and prevent them from making debt service payments. They are a highly

leveraged company. After giving effect to this offering and the redemption of the PIK notes, they will have $515.3 million aggregate principal amount of outstanding indebtedness, in addition to $30.0 million available for borrowing under the revolving credit facility. After giving effect to this offering and the redemption of the PIK notes, they expect to have debt service costs of $40.8 million in fiscal 2018.

They continue to be controlled by Apollo, and Apollo’s interests may conflict with

their interests and the interests of other stockholders. After giving effect to the

Reclassification and this offering, VoteCo, an entity owned and controlled by individuals affiliated with Apollo, will beneficially own 69% of their common equity pursuant to an irrevocable proxy, which will provide VoteCo with sole voting and sole dispositive power over all shares beneficially owned by the Apollo Group. As a result, VoteCo will have the power to elect all of their directors. Therefore, individuals affiliated with Apollo will have effective control over the outcome of votes on all matters requiring approval by their stockholders. Apollo and its affiliates may also pursue acquisition opportunities that may be complementary to their business, and as a result, those acquisition opportunities may not be available to them. So long as the Apollo Group continues to directly or indirectly own a significant amount of their equity, even if such amount is less than 50%, Apollo and its affiliates will continue to be able to substantially influence or effectively control their ability to enter into corporate transactions.

Bottom Line

Their total revenues were $58.6 million, $58.4 million, $72.1 million, $123.3 million and $166.8 million and their net loss was $41.2 million, $50.3 million, $28.4 million, $38.5 million, $81.4 million and $61.1 million in 2012, 2013, 2014, 2015, and 2016, respectively. In the first three quarters of 2017 their total revenues increased 24.4% to $154.3 million and their net loss decreased 40.2% to $36.6 million, compared to the same period in the previous year.

Founded in 2005, they historically focused on supplying EGMs, including slot machines, video bingo machines, and other electronic gaming devices, to the Native American gaming market, where they maintain an approximately 20% market share of all Class II EGMs. Since 2014, they have expanded their product line-up to include: (i) Class III EGMs for commercial and Native American casinos, (ii) table game products and (iii) interactive products, all of which they believe provide them with growth opportunities as they expand in markets where they currently have limited or no presence. EGM is their largest segment, representing 94% of their revenue for the LTM period, which currently comes predominantly from Class II sources. They also have developed a new Latin-style bingo cabinet called ALORA, which they plan to use in select international markets, including the Philippines and Brazil. Their premium leased games outperform most of the EGMs manufactured by their competitors, generating win per day that is 2.7 times higher than the average of all of the gaming machines in the casinos where they have their EGMs placed. They have increased their installed base of EGMs every year from 2005 through the LTM period, and as of September 30, 2017, their total EGM footprint comprised 22,015 units (14,544 domestic and 7,471 international). U.S. casino operators expect to allocate approximately 5.5% of their 2018 EGM purchases to AGS products, which would result in ship share more than three times higher than their ship share in 2016. They offer their customers the option of either leasing or purchasing their EGMs and associated gaming systems. Currently, they derive substantially all of their EGM revenues from EGMs installed under revenue sharing or fee-per-day lease agreements. In addition to their portfolio of EGMs, they also offer their customers more than 30 unique table product offerings, including live felt table games, side bet offerings, progressives, signage and other ancillary table game equipment. Over the past 10 years, there has been a trend of introducing side-bets on blackjack tables to increase the game’s overall hold. Their Table Products segment offers a full suite of side-bets and specialty table games that capitalize on this trend. Their Table Products segment focuses on high margin recurring revenue generated by leases. Nearly all of the revenue they generate in this segment is recurring. They believe that shufflers and progressive bonusing on table games is a category that provides them with substantial growth opportunities. They operate both business-to-consumer (B2C) social gaming interactive casino products and also provide business-to-business (B2B) social gaming interactive casino products. Although free to play, their social games generate recurring revenue through the in-game sale of virtual goods and currency. As of September 30, 2017, their combined B2C offerings reached approximately 38,000 daily active users (“DAU”) and they have had approximately 3.8 million lifetime installations of their social casino app. The acquisition of the Rocket assets enables them to increase their presence at many top performing Class II customers, such as the Chickasaw Nation. They expect to upgrade all Rocket games to AGS games over a five-year period. The transaction is immediately accretive to their earnings and cash flow. For the last-twelve month period

ended September 30, 2017, the acquired assets from Rocket had revenues of approximately $16 million.

They operate primarily in the North American gaming market, which includes U.S. commercial casinos, Native American casinos, Canadian casinos, video lottery terminals (“VLT”) and Mexican casinos. The ship share for Non-Big-4 suppliers has continued to grow over the past several years. Class II games are an attractive option for Native American tribes because: (i) revenue generated from Class II gaming is not subject to revenue sharing or taxes, (ii) there are no limits on the number of Class II gaming machines that may be operated in any one facility; and (iii) a strong Class II alternative improves a tribe’s leverage when negotiating its Class III compact with the state. As of September 30, 2017, the Native American Class II market consisted of approximately 60,000 EGMs, with AGS products representing over 16% of that market with approximately 10,000 recurring Class II EGMs placed in approximately 150 gaming facilities across 18 states. The Class II market is expected to grow its installed base by approximately 2% over the next three years in the United States. Class III machines can be found in commercial casinos and in Native American casinos that have entered into a state compact that permits a specified number of Class III machines. It is predicted that the installed base of Class III/commercial game EGMs in the U.S. and Canada will grow by approximately 2%, or 16,000 units, over the next three years. As of September 30, 2017, they had placed only 4,000 recurring Class III units (1,200 of which were video lottery terminals) in over 300 casinos, which represents less than 1% of the total number of EGMs placed in the U.S. and Canadian Class III and commercial gaming markets. Given their very low penetration in Class III Native American and commercial casinos, these markets present a significant growth opportunity. With the acquisition of Cadillac Jack in 2015, they acquired a strong foothold in the Mexican gaming market. Revenue generated by their EGMs in Mexico represented about 12% of their total revenue in the LTM period, and they have consistently been growing their installed base in the region.

Expansion in Class III and commercial gaming jurisdictions represents a significant growth opportunity for them as there are many jurisdictions where they have only recently been licensed or allowed. They also have the opportunity to enter many of the large commercial gaming markets in the U.S. where they currently have no presence, including Colorado, Ohio and Pennsylvania and new gaming markets such as Massachusetts. They strategically allow their customers to purchase or lease their premium cabinets, whereas their competitors typically only lease (and will not sell) their premium products. They believe their willingness to sell their premium cabinets gives them a competitive advantage with their customers. As a result of their efforts, they have been able to attract a number of new customers over the past three years, including MGM, Caesars, Penn National Gaming and Las Vegas Sands. They believe there is a significant opportunity to optimize the older EGMs in their existing installed base with newer, more profitable cabinets. The typical refresh cycle for EGMs is approximately three years, which creates a natural, continuous driver of equipment sales and provides them with the ability to optimize their installed base by constantly refreshing it with newer cabinets. Another benefit of their yield optimization program is that they can take the older units from domestic casinos, refurbish them for approximately $1,500 and redeploy them in Mexico. They intend to enter the Philippines market in early 2018, which they believe has a total market size of approximately 70,000 units. They are currently in the

process of obtaining an operating license to enter this market, which they expect to obtain in the first quarter of 2018 and begin installing units on a recurring basis shortly thereafter. Additionally, over the past twelve months they have expanded their presence in Canada through EGM sales into that market and they recently introduced their table products content to the Australian gaming market. On the near-term horizon, they believe that certain parts of Asia and Europe present high-growth opportunities for their business given the types of gaming content that they create, which they believe resonates with players from both of these cultures. They also believe there are several other markets, such as Brazil, that present a significant growth opportunity for them. They believe that their existing core Class II product offering is among the strongest in the industry and they are committed to growing their existing Class II installed base. They expect to continue gaining market share in their existing Class II jurisdictions as they introduce more games and new hardware, and they also intend to enter new Class II jurisdictions. They believe that the unique advantages offered by Class II gaming will result in Native American operators continuing to grow the number of Class II units that they have in their casinos. They plan to continue expanding their table products offerings through acquisitions and internal development and have high expectations for their newly launched Bonus Spin progressive technology and Dex S single-deck shuffler. They continue to convert their proven land-based casino content into online and mobile formats for social gaming.

The cash flow generated from their recurring revenue sources has provided them with a stable source of capital to grow their footprint both domestically and internationally. Given the high-margin, recurring-revenue nature of their new EGMs, they benefit from payback periods on their leased units of only approximately 12 months for their core units and approximately 8 months for their premium units. Their casino-owned EGMs outperform those from all other suppliers, generating win per day 1.8 times higher than the house average. Their premium leased games were the second-best across the industry, delivering win per day that was 2.7 times higher than the average of the casino floors (up from 2.0 times higher in the previous quarter) where their machines are placed. They focus on building games that encourage players to spend more time on their devices and are designed to ensure the player has fun by providing various bonus triggers and multiple ways to win within the game. They believe that this strategic focus gives them a competitive edge because they are not distracted by spending a substantial amount of time, resources or development dollars to acquire expensive licenses and brands with limited shelf life for less frequent or less profitable gambler subsets. They offer a wide variety of content and technology with hundreds of titles, and they aim to be a “one-stop shop” for their customers. For table products, they have diversified content for poker, blackjack and roulette derivatives, as well as bonusing enhancements that offer new and exciting gaming experiences. Their table products also include a variety of ancillary equipment designed to create greater efficiency for their customers. Within their interactive segment, their B2C social games include online versions of their popular EGM game titles and are accessible to players worldwide on multiple mobile platforms, which they believe leads to establishing brand recognition and cross selling opportunities. As they grow and expand their business, they believe that their employee-centric culture will continue to attract high-caliber talent that will further enhance their team. They have a strong track record of acquiring and integrating businesses with

limited disruption to their core business. Over the past three years, they have effectively integrated over 20 acquisitions.

Their success is dependent upon their ability to adapt to and offer products that keep pace with evolving technology related to their businesses and on their ability to develop, enhance and/or introduce successful gaming concepts and game content. Their business is vulnerable to changing economic conditions and to other factors that adversely affect the casino industry, which have negatively impacted and could continue to negatively impact the play levels of their participation games, their product sales and their ability to collect outstanding receivables from their customers. Smoking bans in casinos may reduce player traffic and affect their revenues. Other participants in the gaming industry have reported declines in gaming revenues following the introduction of a smoking ban in jurisdictions in which they operate and they cannot predict the magnitude or timing of any decrease in revenues resulting from the introduction of a smoking ban in any jurisdiction in which they operate. They have not been profitable and cannot predict when they will achieve profitability, if ever. As of September 30, 2017, they had an accumulated deficit of approximately $193.0 million. They derive a significant portion of their revenue from Native American tribal customers, and their ability to effectively operate in Native American gaming markets is vulnerable to legal and regulatory uncertainties, including the ability to enforce contractual rights on Native American land. Slow growth in the development of new gaming jurisdictions or the number of new casinos, declines in the rate of replacement of existing electronic gaming machines and ownership changes and consolidation in the casino industry could limit or reduce their future prospects. The intellectual property rights of others may prevent them from developing new products and services, entering new markets or may expose them to liability or costly litigation and litigation regarding their intellectual property could have a material adverse effect on the results of their business or intellectual property. Their revenues are vulnerable to the impact of changes to the Class II regulatory scheme. It is possible that any changes in regulations, when finally enacted, could cause them to modify their Class II games to comply with the new regulations, which may result in their products becoming less competitive. State compacts with their existing Native American tribal customers to allow Class III gaming could reduce demand for their Class II games and their entry into the Class III market may be difficult as they compete against larger companies in the tribal Class III market. While they seek to also provide Class III alternatives in these markets, they believe the number of their Class II game machine placements in those customers’ facilities could decline, and their operating results could be materially and adversely affected. they may be forced to compete with larger companies that specialize in Class III gaming. The participation share rates for gaming revenue they receive pursuant to their participation agreements with their Native American tribal customers has, on average, decreased in recent years and may continue to decrease in the future. Any participation agreements they may enter into in the future with new customers or in new jurisdictions may not have terms as favorable as their existing participation agreements. For the last twelve months ended September 30, 2017, two customers were each responsible for approximately 12% and 11% of their total revenue, respectively, and they generated approximately 24% and 12% of their total revenue in the states of Oklahoma and Alabama, respectively. They may not be able to capitalize on the expansion of internet or other forms of interactive gaming or other trends and changes in the gaming industries, including due to laws and regulations

governing these industries. After giving effect to this offering and the redemption of the PIK notes, they will have $515.3 million aggregate principal amount of outstanding indebtedness, in addition to $30.0 million available for borrowing under the revolving credit facility. After giving effect to this offering and the redemption of the PIK notes, they expect to have debt service costs of $40.8 million in fiscal 2018. After giving effect to the Reclassification and this offering, VoteCo, an entity owned and controlled by individuals affiliated with Apollo, will beneficially own 69% of their common equity pursuant to an irrevocable proxy, which will provide VoteCo with sole voting and sole dispositive power over all shares beneficially owned by the Apollo Group. As a result, VoteCo will have the power to elect all of their directors. Therefore, individuals affiliated with Apollo will have effective control over the outcome of votes on all matters requiring approval by their stockholders. Rating = 2


_________________________________________________

Prolung, Inc. LUNG $7.00-$8.00 .93 million shares Underwriters: Maxim Group, Aegis Co-Managers: Proposed trade date of 1/25. They are a medical technology company specializing in predictive analytic, early stage lung cancer risk testing, which they refer to as the "ProLung Test."

Not a full write-up because of underwriter(s) choice and their perceived short term prospects.

Prolung, Inc. LUNG 933,334 shares to be offered between $7.00 and $8.00 per share

Underwriters: Maxim Group, Aegis Co-Managers:


Rating = 2 Click here to view the prospectus. https://www.sec.gov/Archives/edgar/data/1541884/000149315217011733/forms-1a.htm

They are a medical technology company specializing in predictive analytic, early stage lung cancer risk testing, which they refer to as the “ProLung Test.” Their noninvasive, painless and radiation-free ProLung Test was developed to rapidly assess the risk of malignancy in lung nodules found in the chest by a Computed Tomography (“CT”) scan, which is currently the primary method used for the early detection of lung cancer. As lung cancer is the leading cause of cancer death, early detection makes a substantial improvement in survival in a large population group. Timely identification of malignancy is essential for patients and their families. Currently, patients often wait from three months to three and one-half years to have the risk of malignancy assessed through periodic CT scan surveillance. Until malignancy is determined to be likely, invasive biopsy and treatment are significantly delayed. Current statistics reflect a 17% survival rate at five years for those diagnosed with lung cancer.

https://www.sec.gov/Archives/edgar/data/1541884/000149315217011733/forms-1a.htm

https://www.sec.gov/Archives/edgar/data/1541884/000149315217011733/forms-1a.htm

They believe the ProLung Test, in conjunction with the discovery of a nodule by CT scan, provides a more rapid assessment of the risk of malignancy, which must be determined prior to biopsy. Since a lung biopsy is invasive and may require life threatening thoracic surgery, physicians, patients, and insurance companies typically delay biopsy and therapy until the risk of malignancy outweighs the risk of further diagnostic procedures. For these patients, the delay reduces the treatment opportunity window and may cause sustained emotional trauma.

The ProLung Test acquires bioconductance measurement data by means of a patented probe and disposable diaphoretic electrodes placed on the patient’s back and arms. The ProLung Test registers and evaluates measurement data derived from 62 pathways through the chest and is processed by a patented predictive analytic algorithm. The results are summarized in a report that can be used by the physician, in concert with other risk factors such as nodule size, family history, smoking history and gender, to evaluate patients with nodules. The ProLung Test can be completed in fewer than 30 minutes. Most importantly, it guides the physician decision making without the often time consuming, expensive and watchful waiting period. They believe the ProLung Test provides considerable cost savings when compared with periodic CT imaging studies, repeated follow-up and potentially unnecessary surgery.

To their knowledge, the ProLung Test is the first bioconductive technology that has been developed for the risk stratification of lung cancer. In February 2015, the US Center for Medicare and Medicaid Services announced its coverage of lung cancer screening by CT. This newly reimbursed screening procedure increased the number of individuals with suspicious lung nodules who may be candidates for the ProLung Test. They made US approval and recognition of the ProLung Test their major priority, targeting lung cancer risk stratification and reducing time to treatment. They intend to seek government-backed reimbursement after FDA approval. They believe the ProLung Test can be offered at a fraction of the cost of current standard of care.

Their ProLung Test is approved and commercially available only in a limited number of countries and will not be available for sale in other countries, including the United States, until clinical development is completed and regulatory authorizations are obtained. They were asked by the FDA to complete a clinical study that was then currently underway. Before the FDA will clear the ProLung Test, they must resubmit the submission with the results of the requested study and resolve or negotiate the removal of the remaining issues previously identified by the FDA as well as address possible issues to be identified in the future. This may never occur. Rating = 2


___________________________________________________

resTORbio, Inc. TORC $14.00-$16.00 5.67 million shares Underwriters: BofA Merrill Lynch, Leerink Partners, Evercore ISI, Wedbush PacGrow Co-Managers: Proposed trade date of 1/26. They are a clinical-stage biopharmaceutical company focused on the development and commercialization of novel therapeutics for the treatment of aging-related diseases.

resTORbio, Inc. TORC


Underwriters: BofA Merrill Lynch, Leerink Partners, Evercore ISI, Wedbush PacGrow Co-Managers:


Rating = 2



Company Overview

They are a clinical-stage biopharmaceutical company focused on the development and commercialization of novel therapeutics for the treatment of aging-related diseases. Their lead program has demonstrated in several clinical trials, including a randomized, placebo-controlled trial, the potential to treat multiple diseases of aging for which there are no approved therapies. The decline in immune function that occurs during aging, or immunosenescence, increases susceptibility to a variety of diseases, including respiratory tract infections, or RTIs, that significantly contribute to morbidity and mortality in the elderly. Their approach focuses on the mechanistic target of rapamycin, or mTOR, pathway, an evolutionarily conserved pathway that regulates aging, and specifically on selective inhibition of the target of rapamycin complex 1, or TORC1. Their initial focus is on the development of RTB101, an orally administered, small molecule, potent TORC1 inhibitor, alone and in combination with other mTOR inhibitors such as everolimus—as a first-in-class immunotherapy program designed to improve immune function and thereby reduce the incidence of RTIs in the elderly regardless of the causative pathogen. They licensed the worldwide rights to their TORC1 program, including RTB101 alone or in combination with everolimus or other mTOR inhibitors, from Novartis International Pharmaceutical Ltd., or Novartis, in March 2017.

Their TORC1 immunotherapy approach is supported by a randomized, placebo-controlled Phase 2a clinical trial in 264 elderly subjects that provided statistically significant and clinically meaningful results. This trial demonstrated that treatment with RTB101 alone and in combination with everolimus can enhance the ability of the aging immune system to fight infectious pathogens and consequently reduce the incidence of all infections, including RTIs in elderly subjects. Six weeks of treatment with RTB101 alone and in combination with everolimus met a prespecified endpoint of reducing the incidence of infections by 33% and 38%, respectively, during a period of one year following initiation of therapy. They are evaluating RTB101 alone and in combination with everolimus in a Phase 2b clinical trial for the reduction in the incidence



of RTIs in the elderly and expect to report top-line data from this trial in the second half of 2018.

Their Product Pipeline

* Other infections include those that the elderly are at increased risk of contracting, such as urinary tract infections.

** For heart failure with preserved ejection fraction, autophagy-related neurodegenerative diseases and certain other

infections, they may be required to file an investigational new drug application, or IND, prior to initiating

Phase 2 clinical trials. They expect to have the ability to initiate these Phase 2 clinical trials without the need to

conduct prior Phase 1 clinical trials.

They also have a follow-on TORC1 inhibitor program at discovery stage.

They expect market exclusivity for RTB101 alone and in combination with everolimus until at least 2031 in the United States, 2032 in major European markets, and 2030 in Japan, and additional pending patent applications may prolong the exclusivity of these product candidates up to 2036.

TORC1 Inhibition for Improving Immune Function in the Elderly

Recent scientific findings, including those published in the scientific journals Cell, Nature and Science suggest that aging and aging-related conditions, such as immunosenescence, are attributable not only to random cellular wear and tear, but also to specific intra-cellular signaling pathways, including the mTOR pathway. mTOR is a protein kinase that signals via two multiprotein complexes, known as TORC1 and TORC2. TORC1 inhibition has been observed to prolong lifespan, enhance immune function, ameliorate heart failure, enhance memory and mobility and delay the onset of aging-related diseases in multiple animal studies. Specifically with respect to enhanced immune function, TORC1 inhibition was observed in preclinical studies to rejuvenate blood, or hematopoietic, stem cell function, increase infection-fighting white blood cell production and enhance antibody-mediated, or adaptive, immunity. On the other hand, TORC2 inhibition has been observed to decrease lifespan in preclinical studies and cause unwanted side effects of hyperlipidemia and hyperglycemia in certain animals and humans. Therefore, based on these observations and data from the Phase 2a clinical trial, Specifically with respect to enhanced immune function, TORC1 inhibition was observed in preclinical studies to rejuvenate blood, or hematopoietic, stem cell function, increase infection-fighting white blood cell production and enhance antibody-mediated, or adaptive, immunity

IPO Detail

This is the initial public offering of resTORbio, Inc. and no public market currently exists for its common stock. resTORbio, Inc. is offering 5,666,667 shares of common stock as described in the prospectus. The company expects the initial public offering price of its common stock to be between $14.00 and $16.00 per share. The company has applied to list its common stock on the NASDAQ Global Market under the symbol “TORC.”




Certain of their existing stockholders, including certain affiliates of their directors, have indicated an

interest in purchasing an aggregate of up to $35 million of shares of their common stock in this offering at

the initial public offering price. However, because indications of interest are not binding agreements or

commitments to purchase, the underwriters may determine to sell more, less or no shares in this offering to

any of these stockholders, or any of these stockholders may determine to purchase more, less or no shares

in this offering.

Use of Proceeds They estimate that the net proceeds to them from this offering, after deducting estimated underwriting discounts and

commissions and estimated offering expenses payable by them, will be approximately $77.6 million. They currently

estimate that they will use the net proceeds from this offering, together with their existing cash and cash equivalents,

as follows:

approximately $85 million to fund the development of RTB101, alone and in combination with everolimus,

for RTIs, through the completion of their ongoing Phase 2b clinical trial of RTB101 alone or in combination

with everolimus, the completion of a subsequent pivotal Phase 3 clinical program, assuming a successful

outcome in their Phase 2b clinical trial of RTB101 alone or in combination with everolimus, and the filing of

an NDA with the FDA, assuming a successful outcome in their Phase 3 clinical program;

approximately $16 million to fund the development of RTB101, alone and in combination with other

rapalogs such as everolimus, for other indications, through the completion of at least one additional proof of

concept trial in an additional indication and to fund the development of their other TORC1 follow-on

candidate and other pipeline candidates; and

the remainder, if any, for working capital and other general corporate purposes, which may include funding

for the costs of operating as a public company.

Competition

Company

Stock

Symbol Exchange.

Navitor Pharmaceuticals, Inc. Private

Calico Group LLC Private

. Unity Biotechnology, Inc. Private

PrEP BioPharm Limited Private

Innavac PTY Ltd. Private

Market Opportunity

High Unmet Need for Addressing Respiratory Tract Infections in the

Elderly

The reduced ability of elderly patients to effectively detect and fight infections is most commonly manifested in their susceptibility to RTIs and the negative effects such infections have on their overall health. According to the U.S. Census Bureau, RTIs are the fifth leading cause of death in people age 85 and over and the seventh leading cause of death in people age 65 and over, and result in high healthcare burdens and costs for the elderly population and the healthcare system. The majority of RTIs are caused by viruses for which there are no approved therapies. Despite this, antibiotics, which are ineffective against viruses, are often prescribed indiscriminately to treat RTIs, which may cause side effects related to antibiotic use and contribute to the growing global problem of antibiotic resistance. As the elderly represent the fastest growing population in the world as a whole, they believe there is significant unmet medical need for innovative therapeutic options for reducing the incidence of RTIs by enhancing the function of the aging immune system.

The elderly are the fastest growing population around the globe. According to the

U.S. Census Bureau, the population age 65 and older in the United States is expected to double by 2050 compared to 2012 estimates. According to global census data, there are nearly 150 million people age 65 and older, and approximately 20 million people age 85 years and older in the United States, the major European countries and Japan. Despite age being the major risk factor for multiple chronic diseases, they believe few therapies are being developed to target the aging immune system, and none have been approved.

RTIs contribute to high healthcare burden and costs. At least 11%, 56% and 80% of

CHF exacerbations, COPD exacerbations requiring hospitalization and asthma exacerbations, respectively, are associated with RTIs, and 7% of people aged 85 years and over go to the emergency room with RTIs each year. In addition, two-thirds of people aged 85 and over who go to the emergency room for infection-related reasons are hospitalized, and once hospitalized, one-third of people aged 85 and over are admitted to a nursing home.

Other Potential Indications for Their TORC1 Program

They may evaluate RTB101 alone or in combination with everolimus or other drugs for the treatment of additional indications, such as heart failure with preserved ejection fraction, urinary tract infections, Huntington’s disease and Parkinson’s disease. They plan to initiate at least one Phase 2 proof of concept study in 2018. They expect to select indications based on strong scientific rationale, preclinical or clinical data, unmet medical need and other relevant considerations.

Prevention of recurrent urinary tract infections

Urinary tract infections, or UTIs, are the most common bacterial infection in the elderly, with the incidence higher in women than men. According to studies of 959 and 395 women published in 2000 and 2010, respectively, nearly 10% of women older than 65 years of age and nearly 30% of women over the age of 85 reported having a UTI within the 12—month period preceding the study. The incidence of UTIs also increases substantially in men over the age of 85 years. Elderly subjects who have had a prior UTI are at increased risk of a recurrent UTI. Urinary tract infections are most commonly bacterial, and E. coli is the organism most frequently responsible for UTIs. Hence, empiric treatment of UTIs with antibiotics is common, and UTIs are the most common reason for antibiotic prescriptions in older adults.

Heart failure with preserved ejection fraction

Heart failure is one of the most common causes of hospitalizations in people age 65 and older, and heart failure with preserved ejection fraction, or HFpEF, affects about 2.25 million people in the United States, and a combined 6.24 million in the United States, Europe and Japan. HFpEF predominantly affects elderly subjects, particularly older women, in whom 90% of new heart failure cases are HFpEF. Patients with HFpEF experience the clinical symptoms of heart failure, despite having the percentage of total blood in the left ventricle of the heart that is pushed out with each heartbeat, known as ejection fractions, in the normal range. These symptoms are attributable in part to stiffened heart muscle that limits blood flow into the heart, known as diastolic dysfunction. Outcomes following hospitalization for decompensated HFpEF are poor. Approximately one third of patients are rehospitalized or die within 90 days of discharge. To date, there are no FDA approved therapies to reduce hospitalization or mortality for HFpEF.

Huntington’s disease

Huntington’s disease, or HD, is a disease that affects neurons in the brain and causes movement, psychiatric and cognitive impairment. HD is caused by mutations in a gene encoding protein called huntingtin. Mutant huntingtin forms aggregate in neurons and cause the neurons to degenerate. The mutant huntingtin aggregates can be cleared from neurons by a process called autophagy in which cells remove and recycle intracellular debris including protein aggregates. Preclinical data from brain slices in a HD mouse model has shown that RTB101 in combination with everolimus synergize to prevent neurodegeneration, likely by inducing autophagy and clearing mutant huntingtin aggregates. They believe these findings support the potential that RTB101 in combination with everolimus to have therapeutic benefit for the treatment of HD.

Parkinson’s disease

Parkinson’s disease, or PD, is a progressive neurodegenerative disease that affects approximately 7.5 million people worldwide. The incidence of PD increases rapidly in people 60 years of age and older, with a mean age at diagnosis of 70.5 years. Patients with PD develop shaking, rigidity, slowness of movement and difficulty walking. Similar to HD, PD may be attributed in part to neuronal damage

caused by the accumulation within neurons of abnormal aggregates containing the protein a-synuclein. Preclinical studies in mouse models of PD have shown that mTOR inhibition can induce autophagy, reduce a-synuclein accumulation and decrease neuronal cell death. Therefore, induction of autophagy with RTB101 in combination with everolimus may have therapeutic benefit for patients with PD.

July 5, 2016

(inception)

through

December 31, 2016

July 5, 2016

(inception)

through

September 30,

2016

Nine Months

Ended

September 30, 2017 (In thousands, except share and per share data)

Statements of Operations Data: Operating expenses:

Research and development $ — $ — $ 10,047

General and administrative 1 1 1,312

Total operating expenses 1 1 11,359

Loss from operations (1 ) (1 ) (11,359 )

Other income, net — — 635

Net loss $ (1 ) $ (1 ) $ (10,724 )

Net loss per share, basic and diluted $ (0.00 ) $ (0.00 ) $ (2.79 )

Weighted-average common shares

used in computing net loss per

share, basic and diluted

1,978,137 1,919,841 3,839,306

Pro forma net loss per share, basic

and diluted (unaudited)

$ (1.30 )

Weighted-average common shares

used in computing pro forma net

loss per share, basic and diluted

(unaudited)

8,230,457

As of

December 31,

2016 September 30,

2017

(In thousands)

Balance Sheet Data: Cash $ — $ 3,965

Working capital — 684

Total assets — 4,215

Total liabilities — 3,495

Redeemable convertible preferred stock — 9,764

Total stockholders’ (deficit) equity — (9,044 )

Target Markets

Rapidly advance their TORC1 program as immunotherapy for reducing the

incidence of RTIs in elderly subjects. They initiated their Phase 2b clinical trial of

RTB101 alone and in combination with everolimus in elderly subjects at increased risk of mortality and morbidity due to RTIs in the second quarter of 2017, and they expect to

report top-line data from this trial in the second half of 2018. If the results of their Phase 2b clinical trial are positive, they plan to initiate a Phase 3 clinical trial in 2019 with a goal to submit a new drug application, or NDA, to the FDA for regulatory approval of RTB101 alone or in combination with everolimus in the United States in 2020.

Develop their TORC1 program for additional indications. They also intend to

develop RTB101, alone or in combination with everolimus, for the treatment of additional aging-related diseases based on preclinical and clinical evidence on the effects of TORC1 inhibition. They believe that there is strong rationale to support the investigation of RTB101, alone or in combination with everolimus, for the treatment of additional aging-related indications, such as urinary tract infections, heart failure and neurodegenerative diseases.

Commercialize their product candidates in the United States and potentially

collaborate with others globally to maximize their commercial value. They plan to

directly commercialize their product candidates in the United States with a sales force targeting top-prescribing physicians with high flow of elderly patients and may consider collaborating with third parties to broaden the distribution of their product candidates in the United States. In other markets for which commercialization may be less capital efficient for them, they may selectively pursue strategic collaborations with third parties in order to maximize the commercial potential of their product candidates. They believe there are significant opportunities to market RTB101, if approved, in Europe and Japan, which they may choose to pursue in collaboration with others.

Maintain and grow a robust intellectual property portfolio in the field of TORC1

inhibition for aging-related diseases. They have an exclusive license to ten patent

families directed to compositions of matter, methods and formulations covering RTB101 alone or in combination with everolimus. They intend to aggressively pursue and maintain broad intellectual property protection for RTB101 alone or in combination with everolimus or other compounds for the prevention of RTIs and the prevention or treatment of other aging-related diseases through U.S. and international patents.

Develop, acquire or in-license product candidates that enhance their global

leadership position. They have additional TORC1 inhibitor compounds in

discovery that they may develop, and they may acquire or in-license other product candidates targeting TORC1 and other pathways that regulate aging to support their goal to be the leading biopharmaceutical company focused on the treatment of aging-related diseases with significant unmet medical need.


In the Phase 2a clinical trial, an increase of antiviral gene expression was observed

in the RTB101 10 mg monotherapy and RTB101 10 mg+everolimus 0.1 mg

combination arms. They plan to conduct a biomarker study to assess the speed at

which antiviral genes are upregulated after elderly subjects are treated with RTB101 alone or in combination with everolimus. If they observe a rapid increase of antiviral gene

expression, they believe RTB101 alone or in combination with everolimus may have therapeutic benefit for the treatment of viral RTIs.

In the phase 2a clinical trial, six weeks of treatment with RTB101 alone and in

combination with everolimus met a prespecified endpoint of reducing the incidence

of infections by 33% and 38%, respectively, during a period of one year following

initiation of therapy.

In the Phase 2a clinical trial, a decrease in the rate of UTIs was observed in the

RTB101 10 mg monotherapy and RTB101 10 mg+everolimus 0.1 mg combination

arms as compared to placebo. They believe these data suggest that RTB101 alone

or in combination with everolimus may have therapeutic benefit for reducing the rate of UTIs in the elderly, particularly elderly at risk for recurrent UTIs.

They expect market exclusivity for RTB101 alone and in combination with

everolimus until at least 2031 in the United States, 2032 in major European

markets, and 2030 in Japan, and additional pending patent applications may

prolong the exclusivity of these product candidates up to 2036.


They have incurred significant losses since their inception. They anticipate that they

will continue to incur significant losses for the foreseeable future, and they may

never achieve or maintain profitability. They are a clinical-stage biopharmaceutical

company with a limited operating history. Investment in biopharmaceutical product development is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail to demonstrate adequate effect or an acceptable safety profile, gain regulatory approval and become commercially viable.

They will need substantial additional funding, and if they are unable to raise capital

when needed, they could be forced to delay, reduce or eliminate their product

discovery and development programs or commercialization efforts.

Raising additional capital may cause dilution to their stockholders, including

purchasers of common stock in this offering, restrict their operations or require

them to relinquish rights to their technologies or product candidates.

Their business depends virtually entirely upon the success of RTB101 alone or in

combination with everolimus. If they are unable to obtain regulatory approval for or

successfully commercialize RTB101, alone or in combination with everolimus, their business may be materially harmed.

Competitive products may reduce or eliminate the commercial opportunity for

RTB101, alone or in combination with everolimus. If their competitors develop

technologies or product candidates more rapidly than they do, or their

technologies are more effective or safer than theirs, their ability to develop and successfully commercialize RTB101 alone or in combination with everolimus may be adversely affected.

Their product candidates may cause undesirable side effects or have other

properties that could delay or prevent their regulatory approval, limit the

commercial profile of an approved label, or result in significant negative

consequences following regulatory approval, if obtained.

If they fail to develop and commercialize RTB101, alone or in combination with

everolimus, for additional indications or fail to discover, develop and

commercialize other product candidates, they may be unable to grow their business

and their ability to achieve their strategic objectives would be impaired.

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

results of future clinical trials, and such results do not guarantee approval of a

product candidate by regulatory authorities.

Even if they complete the necessary preclinical studies and clinical trials, the

regulatory approval process for product candidates is expensive, time consuming

and uncertain and may prevent them or any future collaborators from obtaining

approvals for the commercialization of RTB101 alone or in combination with

everolimus or any other product candidate. As a result, they cannot predict when

or if, and in which territories, they, or any future collaborators, will obtain regulatory approval to commercialize a product candidate.

Governments outside the United States may impose strict price controls, which may

adversely affect their revenues, if any.

Their commercial success depends on their ability to protect their intellectual

property and proprietary technology.

They depend on intellectual property licensed from third parties and termination of

any of these licenses could result in the loss of significant rights, which would harm

their business.

They rely on third parties to assist in conducting their clinical trials. If they do not

perform satisfactorily, they may not be able to obtain regulatory approval or

commercialize their product candidates, or such approval or commercialization

may be delayed, and their business could be substantially harmed.

Their use of third parties to manufacture their product candidates and products

which they are studying in combination with their product candidates may increase

the risk that they will not have sufficient quantities of their product candidates,

products, or necessary quantities of such materials on time or at an acceptable cost.

Concentration of ownership of their common stock among their existing executive

officers, directors and principal stockholders may prevent new investors from

influencing significant corporate decisions. Based upon shares outstanding as of

December 31, 2017, and after giving effect to the conversion of all outstanding shares of preferred stock into shares of their common stock, upon the closing of this offering, their executive officers and directors, combined with their stockholders who owned more than 5% of their outstanding common stock before this offering and their affiliates, will, in the aggregate, beneficially own shares representing approximately 72.3% of their common stock. Certain of their existing stockholders, including certain affiliates of their directors, have indicated an interest in purchasing an aggregate of up to $35 million of shares of their common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, less or no shares in this offering to any of these stockholders, or any of these stockholders may determine to purchase more, less or no shares in this offering. The foregoing discussion does not give effect to any potential purchases by these stockholders in this offering. As a result, if these stockholders were to choose to act together, they would be able to control all matters submitted to their stockholders for approval.

Bottom Line

They are a clinical-stage biopharmaceutical company and, as such, have no revenues from the

sale of any of their product candidates.

Their lead program has demonstrated in several clinical trials, including a randomized, placebo-

controlled trial, the potential to treat multiple diseases of aging for which there are no approved

therapies. Their initial focus is on the development of RTB101, an orally administered, small

molecule, potent TORC1 inhibitor, alone and in combination with other mTOR inhibitors such as

everolimus—as a first-in-class immunotherapy program designed to improve immune function

and thereby reduce the incidence of RTIs in the elderly regardless of the causative pathogen.

Recent scientific findings, including those published in the scientific journals Cell, Nature and

Science suggest that aging and aging-related conditions, such as immunosenescence, are

attributable not only to random cellular wear and tear, but also to specific intra-cellular signaling

pathways, including the mTOR pathway. Specifically with respect to enhanced immune function,

TORC1 inhibition was observed in preclinical studies to rejuvenate blood, or hematopoietic, stem

cell function, increase infection-fighting white blood cell production and enhance antibody-

mediated, or adaptive, immunity.

RTIs are the fifth leading cause of death in people age 85 and over and the seventh leading

cause of death in people age 65 and over, and result in high healthcare burdens and costs for

the elderly population and the healthcare system. As the elderly represent the fastest growing

population in the world as a whole, they believe there is significant unmet medical need for

innovative therapeutic options for reducing the incidence of RTIs by enhancing the function of the

aging immune system. The elderly are the fastest growing population around the globe.

According to the U.S. Census Bureau, the population age 65 and older in the United States is

expected to double by 2050 compared to 2012 estimates. Despite age being the major risk factor

for multiple chronic diseases, they believe few therapies are being developed to target the aging

immune system, and none have been approved. At least 11%, 56% and 80% of CHF

exacerbations, COPD exacerbations requiring hospitalization and asthma exacerbations,

respectively, are associated with RTIs, and 7% of people aged 85 years and over go to the

emergency room with RTIs each year. In addition, two-thirds of people aged 85 and over who go

to the emergency room for infection-related reasons are hospitalized, and once

hospitalized, one-third of people aged 85 and over are admitted to a nursing home. They may

evaluate RTB101 alone or in combination with everolimus or other drugs for the treatment of

additional indications, such as heart failure with preserved ejection fraction, urinary tract

infections, Huntington’s disease and Parkinson’s disease. They plan to initiate at least one

Phase 2 proof of concept study in 2018. Urinary tract infections, or UTIs, are the most common

bacterial infection in the elderly, with the incidence higher in women than men. According to

studies of 959 and 395 women published in 2000 and 2010, respectively, nearly 10% of women

older than 65 years of age and nearly 30% of women over the age of 85 reported having a UTI

within the 12—month period preceding the study. The incidence of UTIs also increases

substantially in men over the age of 85 years. Heart failure is one of the most common causes of

hospitalizations in people age 65 and older, and heart failure with preserved ejection fraction, or

HFpEF, affects about 2.25 million people in the United States, and a combined 6.24 million in the

United States, Europe and Japan. Associated symptoms are attributable in part to stiffened heart

muscle that limits blood flow into the heart, known as diastolic dysfunction. Outcomes following

hospitalization for decompensated HFpEF are poor. Approximately one third of patients are

rehospitalized or die within 90 days of discharge. To date, there are no FDA approved therapies

to reduce hospitalization or mortality for HFpEF. Huntington’s disease, or HD, is a disease that

affects neurons in the brain and causes movement, psychiatric and cognitive impairment. .

Preclinical data from brain slices in a HD mouse model has shown that RTB101 in combination

with everolimus synergize to prevent neurodegeneration, likely by inducing autophagy and

clearing mutant huntingtin aggregates. They believe these findings support the potential that

RTB101 in combination with everolimus to have therapeutic benefit for the treatment of HD.

Parkinson’s disease, or PD, is a progressive neurodegenerative disease that affects

approximately 7.5 million people worldwide. The incidence of PD increases rapidly in people 60

years of age and older, with a mean age at diagnosis of 70.5 years. Patients with PD develop

shaking, rigidity, slowness of movement and difficulty walking. Preclinical studies in mouse

models of PD have shown that mTOR inhibition can induce autophagy, reduce a-synuclein

accumulation and decrease neuronal cell death. Therefore, induction of autophagy with RTB101

in combination with everolimus may have therapeutic benefit for patients with PD.

If the results of their Phase 2b clinical trial are positive, they plan to initiate a Phase 3 clinical trial

in 2019 with a goal to submit a new drug application, or NDA, to the FDA for regulatory approval

of RTB101 alone or in combination with everolimus in the United States in 2020. . They believe

that there is strong rationale to support the investigation of RTB101, alone or in combination with

everolimus, for the treatment of additional aging-related indications, such as urinary tract

infections, heart failure and neurodegenerative diseases. They plan to directly commercialize

their product candidates in the United States with a sales force targeting top-

prescribing physicians with high flow of elderly patients and may consider collaborating with third

parties to broaden the distribution of their product candidates in the United States. In other

markets for which commercialization may be less capital efficient for them, they may selectively

pursue strategic collaborations with third parties. They intend to aggressively pursue and

maintain broad intellectual property protection for RTB101 alone or in combination with

everolimus or other compounds for the prevention of RTIs and the prevention or treatment of

other aging-related diseases through U.S. and international patents. They have additional

TORC1 inhibitor compounds in discovery that they may develop, and they may acquire or in-

license other product candidates targeting TORC1 and other pathways that regulate aging to

support their goal to be the leading biopharmaceutical company focused on the treatment of

aging-related diseases with significant unmet medical need.

In the Phase 2a clinical trial, an increase of antiviral gene expression was observed in the

RTB101 10 mg monotherapy and RTB101 10 mg+everolimus 0.1 mg combination arms. In the

phase 2a clinical trial, six weeks of treatment with RTB101 alone and in combination with

everolimus met a prespecified endpoint of reducing the incidence of infections by 33% and 38%,

respectively, during a period of one year following initiation of therapy. In the Phase 2a clinical

trial, a decrease in the rate of UTIs was observed in the RTB101 10 mg monotherapy and

RTB101 10 mg+everolimus 0.1 mg combination arms as compared to placebo. They believe

these data suggest that RTB101 alone or in combination with everolimus may have therapeutic

benefit for reducing the rate of UTIs in the elderly, particularly elderly at risk for recurrent UTIs.

They expect market exclusivity for RTB101 alone and in combination with everolimus until at

least 2031 in the United States, 2032 in major European markets, and 2030 in Japan, and

additional pending patent applications may prolong the exclusivity of these product candidates

up to 2036.

They have incurred significant losses since their inception. They anticipate that they will continue

to incur significant losses for the foreseeable future, and they may never achieve or maintain

profitability. They will need substantial additional funding, and if they are unable to raise capital

when needed, they could be forced to delay, reduce or eliminate their product discovery and

development programs or commercialization efforts. Raising additional capital may cause dilution

to their stockholders, including purchasers of common stock in this offering, restrict their

operations or require them to relinquish rights to their technologies or product candidates. Their

business depends virtually entirely upon the success of RTB101 alone or in combination with

everolimus. If their competitors develop technologies or product candidates more rapidly than

they do, or their technologies are more effective or safer than theirs, their ability to develop and

successfully commercialize RTB101 alone or in combination with everolimus may be adversely

affected. Their product candidates may cause undesirable side effects or have other properties

that could delay or prevent their regulatory approval, limit the commercial profile of an approved

label, or result in significant negative consequences following regulatory approval, if obtained. If

they fail to develop and commercialize RTB101, alone or in combination with everolimus, for

additional indications or fail to discover, develop and commercialize other product candidates,

they may be unable to grow their business and their ability to achieve their strategic objectives

would be impaired. Results of preclinical studies and early clinical trials may not be predictive of

results of future clinical trials, and such results do not guarantee approval of a product candidate

by regulatory authorities. They cannot predict when or if, and in which territories, they, or any

future collaborators, will obtain regulatory approval to commercialize a product candidate.

Governments outside the United States may impose strict price controls, which may adversely

affect their revenues, if any. Their commercial success depends on their ability to protect their

intellectual property and proprietary technology. They depend on intellectual property licensed

from third parties and termination of any of these licenses could result in the loss of significant

rights, which would harm their business. They rely on third parties to assist in conducting their

clinical trials and manufacture their product candidates and products which they are studying in

combination with their product candidates. upon the closing of this offering, their executive

officers and directors, combined with their stockholders who owned more than 5% of their

outstanding common stock before this offering and their affiliates, will, in the aggregate,

beneficially own shares representing approximately 72.3% of their common stock. Certain of

their existing stockholders, including certain affiliates of their directors, have indicated an interest

in purchasing an aggregate of up to $35 million of shares of their common stock in this offering at

the initial public offering price. If these stockholders were to choose to act together, they would

be able to control all matters submitted to their stockholders for approval. Rating = 2


__________________________________________________

Solid Biosciences, LLC SLDB $16.00-$18.00 5.89 million shares Underwriters: J.P. Morgan, Goldman Sachs & Co., Leerink Partners Co-Managers: Nomura, Chardan Proposed trade date of 1/25. Their mission is to cure Duchenne muscular dystrophy, or DMD, a genetic muscle-wasting disease predominantly affecting boys, with symptoms that usually manifest between three and five years of age.

Solid Biosciences, LLC SLDB


Underwriters: J.P. Morgan, Goldman Sachs & Co., Leerink Partners Co-Managers: Nomura, Chardan


Rating = 2



Company Overview

Their mission is to cure Duchenne muscular dystrophy, or DMD, a genetic muscle-wasting disease predominantly affecting boys, with symptoms that usually manifest between three and five years of age. DMD is a progressive, irreversible and ultimately fatal disease that affects approximately one in every 3,500 to 5,000 live male births and has an estimated prevalence of 10,000 to 15,000 cases in the United States alone. DMD is caused by mutations in the dystrophin gene, which result in the absence or near-absence of dystrophin protein. Dystrophin protein works to strengthen muscle fibers and protect them from daily wear and tear. Without functioning dystrophin and certain associated proteins, muscles suffer excessive damage from normal daily activities and are unable to regenerate, leading to the build-up of fibrotic, or scar, and fat tissue. There is no cure for DMD and, for the vast majority of patients, there are no satisfactory symptomatic or disease-modifying treatments. Their lead product candidate, SGT-001, is a gene transfer under development to restore functional dystrophin protein expression in patients’ muscles. Based on their preclinical program



that included multiple animal species of different phenotypes and genetic variations, they believe the mechanism of action of SGT-001, if their clinical trials prove to be successful, has the potential to slow or even halt the progression of DMD, regardless of the type of genetic mutation or stage of the disease.

SGT-001 has been granted Rare Pediatric Disease Designation, or RPDD, in the United States and Orphan Drug Designations in both the United States and European Union. The safety and efficacy of SGT-001 are currently being evaluated in a Phase I/II clinical trial.

SGT-001 is a gene transfer candidate designed to address the underlying genetic cause of DMD by delivering a synthetic transgene that produces dystrophin-like protein that is only expressed in muscles of the body, including cardiac and respiratory muscles. The transgene is delivered via an adeno-associated virus, or AAV, vector, which also contains a muscle-specific promoter. Their vector is a modified version of an AAV, a naturally occurring, non-pathogenic virus selected for its ability to efficiently enter skeletal, diaphragm and cardiac muscle tissues. The vector will carry a synthetic dystrophin transgene construct, called microdystrophin, that retains the most critical components of the full-size dystrophin gene yet is small enough to fit within AAV packaging constraints. SGT-001 is designed to drive microdystrophin protein expression in affected muscles throughout the body. They have studied the efficacy, safety and durability of SGT-001 in multiple preclinical models and its functional benefits in DMD animal studies. In contrast to other therapeutic approaches that are designed to target specific mutations in the dystrophin gene, they believe SGT-001 is a mutation agnostic approach.

In the fourth quarter of 2017, they announced the initiation of a randomized, controlled, open-label, single-ascending dose Phase I/II clinical study, called IGNITE DMD, designed to evaluate SGT-001 in ambulatory and non-ambulatory males with DMD aged four to 17 years. The primary objectives of the study are to assess the safety and tolerability of SGT-001, as well as efficacy as defined by microdystrophin protein expression. The study will also assess muscle function and mass, respiratory and cardiovascular function, serum and muscle biomarkers associated with microdystrophin production, patient reported outcomes and quality of life measures, among other endpoints. The study will enroll approximately 16 to 32 patients with DMD, who will be randomly assigned to either an active treatment group or a delayed-treatment control group. Initially, adolescents aged 12 to 17 years will receive treatment, and at a later stage of the study, children aged four to 11 years will be dosed. Efficacy will be assessed by comparing microdystrophin protein expression in muscle biopsy before treatment and 12 months after treatment for each patient. Participants in the control group who continue to meet inclusion criteria and not meet exclusion criteria will receive active treatment after 12 months. Based on results from this study, they will evaluate the need for future clinical trials that may include other patient populations, as well as the need for larger confirmatory clinical trials. If approved, they intend to commercialize SGT-001 in the United States and European Union, and they may enter into licensing agreements or strategic collaborations to commercialize the product candidate in other markets.

Taking into account the prevalence and incidence of DMD and the anticipated dosing requirements for gene transfer, they anticipate that there will be a need for a substantial supply of SGT-001 for clinical trials and, if approved, for commercial markets. Through significant targeted investments to address this challenge, they believe they have generated sufficient drug product supply to initiate their first clinical trial. They continue to develop their manufacturing process to meet future clinical and commercial production needs for SGT-001.

While they believe DMD disease progression can be slowed or halted by gene transfer, many patients will still suffer from the manifestations of the disease, such as tissue damage to their muscles, inflammation, cardiac dysfunction and fibrosis. As part of their disease-focused business model, they are also building a portfolio of complementary disease-modifying therapies to address these manifestations. Their portfolio currently includes a preclinical biologic candidate, SB-001, a monoclonal antibody designed to reduce fibrosis and inflammation, as well as a number of emerging and complementary programs. They intend to commence preclinical studies for SB-001 in 2018.

In addition to developing their pipeline of product candidates, they believe it is critical to invest time and resources in tools and technologies designed to help them more effectively understand DMD, accurately monitor disease progression and assist patients in daily life. As part of this goal, they are developing biomarkers and sensors that may allow them to identify treatment targets faster, measure the therapeutic impact of potential product candidates better and reach decision points earlier. In addition, through their Solid Suit program, they are developing a line of soft, wearable assistive devices with the goal of providing functional and therapeutic benefits to DMD patients.

Their pipeline

IPO Detail

This is the initial public offering of Solid Biosciences, LLC and no public market currently exists for its common stock. Solid Biosciences, LLC is offering 5,890,000 shares of common stock as described in the prospectus. The company expects the initial public offering price of its common stock to be between $16.00 and $18.00 per share. The company has applied to list its common stock on the NASDAQ Global Market under the symbol “SLDB.”




Use of Proceeds They expect to receive net proceeds from this offering of approximately $89.3 million. They estimate that as of

December 31, 2017, their cash, cash equivalents and available-for-sale securities was approximately $69.0 million.

They intend to use the net proceeds from this offering, together with their existing cash, cash equivalents and

available-for-securities, as follows:

approximately $130.0 million to fund research and development expenses, including to advance SGT-

001through preliminary results from Phase I/II clinical trial activities, which they initiated in the fourth

quarter of 2017; and

the remainder for general and administrative expenses and other general corporate purposes.

Based on their current operational plans and assumptions, they expect that the net proceeds from this offering,

combined with their current cash, cash equivalents and available-for-sale securities, will be sufficient to fund

operations through the third quarter of 2019 and enable them to advance SGT-001 through preliminary results from

their planned Phase I/II clinical trial activities, which they initiated in the fourth quarter of 2017. They will need to

raise additional capital in order to complete the Phase I/II clinical trials and any potential future trials that may be

required by regulatory authorities.

Competition

Company

Stock

Symbol Exchange.

Pfizer Inc. PFE` NYSE

Sarepta Therapeutics, Inc. SRPT NASDAQ

. Genethon Private

PTC Therapeutics Inc. PTCT NASDAQ

Market Opportunity

DMD is an X-chromosome-linked, muscle-wasting disease, predominantly affecting boys. Progressive, irreversible and ultimately fatal, DMD occurs in approximately one in every 3,500 to 5,000 live male births and has an estimated prevalence of

10,000 to 15,000 cases in the United States alone. In DMD, mutations in the dystrophin gene result in the body’s inability to produce functioning dystrophin protein, which works to strengthen muscle fibers and protect them from daily wear and tear. Dystrophin protein also serves as the cornerstone of the dystrophin glycoprotein complex, or DGC, a group of proteins that links the inner and outer components of muscle cells to ensure proper muscle function.

Without dystrophin and the DGC, muscles suffer excessive damage from normal daily activities and are unable to regenerate, leading to the build-up of scar and fat tissue. More than 1,000 dystrophin gene mutations, which can be inherited or can occur spontaneously, have been identified in people with DMD.

For patients suffering from DMD, symptoms usually begin to manifest between three and five years of age, when they fail to reach developmental milestones or experience motor function challenges, such as difficulty walking or climbing stairs. Muscle wasting initially presents in the legs and pelvic area, then in the muscles of the shoulders, neck and arms. As the disease progresses, patients with DMD experience frequent falls, can no longer run, play sports or perform most daily functions, and are further weakened by physical activity. In addition to physical challenges, DMD also commonly involves cognitive difficulties and behavioral challenges.

By their early teens, DMD patients typically lose their ability to walk and become dependent on a wheelchair for mobility. By their 20s, patients essentially become paralyzed from the neck down and require a ventilator to breathe. Though disease severity and life expectancy vary, a patient’s quality of life dramatically decreases over time, with death typically occurring by early adulthood from either cardiac or respiratory complications.

There is no cure for DMD and, for the vast majority of patients, there are no satisfactory symptomatic or disease-modifying treatments.

Glucocorticoid treatment, the current standard-of-care, has been shown to temporarily improve muscle strength, prolong the period of ambulation and slow the progression of DMD. However, glucocorticoid use is associated with well-known adverse events, such as severe weight gain, stunted growth, weakening of bone structure and metabolic dysfunctions, among others. The most commonly used glucocorticoids include prednisone and deflazacort (EMFLAZA). Deflazacort has been commercially available in several countries outside of the United States and was recently approved in the United States for the treatment of DMD.

In recent years, certain regulators have conditionally approved two new therapies, eteplirsen (EXONDYS 51) and ataluren (Translarna), which target specific mutations in the dystrophin gene. However, each of these therapies are targeted at specific mutations of the dystrophin gene. The targeted mutations separately affect approximately 13% of the DMD patients.

Burden of disease

Despite recent therapeutic advances, DMD represents a significant societal and economic burden. The economic burden, estimated at $1.2 billion annually in the United States (excluding costly mortality and end-of-life care expenses), includes

costs associated with hospital admissions, medication, frequent doctor visits and investment in assistive devices, as well as indirect costs related to productivity losses for the caregivers and costs due to pain, anxiety and social handicap. Of this amount, approximately 45% is represented by indirect costs. Only a small proportion of DMD patients are employed and many caregivers reduce their hours or stop working altogether to care for their children, who progressively require more help with everyday tasks, such as eating, dressing and using the bathroom. In some cases, patients also experience serious mental health issues that require additional support and treatment.

Solid’s 360-degree solution

They aim to address the full spectrum of DMD disease manifestation, from its underlying genetic cause to other disorders that result from disease progression. They are advancing corrective therapies, disease-modifying therapies and assistive devices, as well as tools to accelerate drug development.

Year ended

December 31,

Nine months

ended

September 30,

2015 2016 2016 2017

(in thousands, except units and per unit data)

Consolidated statements of operations data: Revenue $ — $ — $ — $ —

Operating expenses: Research and development 4,192 20,116 13,048 27,959



Loss from operations (6,564 ) (25,576 ) (16,855) (39,696)

Other income (expense): Revaluation of preferred unit tranche rights (103 ) 1,163 1,163 (68)

Interest and other income 3 640 438 1,073

Total other income (expense), net (100 ) 1,803 1,601 1,005

Net loss $ (6,664 ) $ (23,773 ) $ (15,254) $ (38,691)

Net loss attributable to Solid Biosciences, LLC $ (6,377 ) $ (21,539 ) $ (13,783) $ (37,631)

Net loss attributable to common unitholders $ (6,445 ) $ (17,230 ) $ (12,585) $ (24,830)

Net loss per unit attributable to common unitholders,

basic and diluted $ (7.61 ) $ (10.14 ) $ (7.50) $ (1.99)

Weighted average common units outstanding, basic and

diluted 846,569 1,698,904 1,677,909 12,446,769

As of December 31, As of

September 30,

2015

2016

2017

(in thousands)

Consolidated balance sheet data: Cash, cash equivalents and available-for-sale securities $ 55,387 $ 37,658 $ 29,570

Working capital 41,772 33,099 18,966

Total assets 55,696 40,636 35,445

Redeemable preferred units 61,697 71,649 69,177

Accumulated members’ deficit (67,711 ) (84,941 ) (109,771)

Total deficit (19,925 ) (37,886 ) (45,583)

Target Markets

Rapidly advance SGT-001 through clinical trials and deliver it to patients. They

initiated a Phase I/II clinical trial to assess the safety and efficacy of SGT-001 in the fourth quarter of 2017. The FDA has granted SGT-001 RPDD, and both the FDA and EMA have granted the candidate Orphan Drug Designation for the treatment of DMD. If approved, they intend to commercialize SGT-001 in the United States and European Union, and they may enter into licensing agreements or strategic collaborations to commercialize the product in other markets.

Continue to advance SB-001 through preclinical development. They intend to

advance their initial disease-modifying therapy candidate, SB-001, aimed at addressing fibrosis and inflammation. They currently intend to commence preclinical studies for SB-001 in 2018.

Continue to build their product pipeline with high-potential product candidates for

DMD. Leveraging their network of world-renowned DMD experts and rigorous

product candidate selection process, they intend to identify and develop additional high-potential product candidates. These include the next generation of gene therapies, such as novel promoters, vectors and transgenes, as well as additional complementary disease-modifying therapies. They will continue to seek to protect and control the intellectual property, development and commercialization of their product candidates.

Continue to scale their manufacturing process to meet clinical and commercial

needs. They intend to supply their clinical development program for SGT-001 with drug

product produced at a cGMP compliant facility located at one of their Contract Development Manufacturing Organization, or CDMO, partners. Their in-house scientists will continue to work to increase the productivity and efficiency of their manufacturing process. They intend to establish the capability and capacity to supply SGT-001 at commercial scale from multiple sources, including eventually building their own GMP facility to ensure redundancy and reliability.

Develop tools to accelerate the discovery and development of therapies for

DMD. They believe it is critical to invest time and resources into developing tools that

are designed to help them more effectively measure disease progression and the therapeutic impact of their product candidates. They are focused on developing biomarkers and sensors that will allow them to identify treatment targets faster, measure the therapeutic impact of potential product candidates better and reach decision points earlier.

Partner with the DMD community to inform their programs. They will continue to

work with and listen closely to key stakeholders in the DMD community, including scientists, academic experts and patients and their families. This will allow them to remain guided by the needs of patients and inform future development programs and strategies to bring approved therapies to the community.


Singular focus on DMD. They are singularly focused on meeting the diverse needs of

all DMD patients, regardless of their genetic mutation or disease stage.

Deep understanding of the impact of the disease. They are founded by people

personally touched by DMD, and they have established meaningful partnerships within the DMD community, which provide them with unique insights into the disease.

Rigorous product candidate selection process. They subject each potential product

candidate to a highly focused, data-driven selection process that lies at the core of their business model.

Highly experienced management team focused on DMD. Their management team

has extensive expertise in DMD, gene therapy, product discovery, research and development, manufacturing, business strategy and finance.

Network of world-renowned experts advising their development efforts. They have

assembled a scientific advisory board and a broad network of the world’s leading experts in DMD, gene therapy, biologics manufacturing, immunology and clinical development.

Foundational work in scalable manufacturing processes. They are working to

develop a scalable manufacturing process to meet future clinical and commercial production needs for SGT-001.


They have incurred significant net losses since inception and anticipate that they

will continue to incur net losses for the foreseeable future and may never achieve or

maintain profitability. Since inception, they have incurred significant net losses. Their

net losses were $6.7 million and $23.8 million for the years ended December 31, 2015 and 2016, respectively, and $38.7 million for the nine months ended September 30, 2017. As of September 30, 2017, they had an accumulated deficit of $109.8 million. To date, they have devoted substantially all of their efforts to research and development, including clinical development of their gene transfer product candidate, SGT-001, as well as to building out their management team and infrastructure. They expect that it could be several years, if ever, before they have a commercialized product.

Even if this offering is successful, they will need additional funding, which may not

be available on acceptable terms, or at all. Failure to obtain this necessary capital

when needed may force them to delay, limit or terminate their product development efforts or other operations.

Raising additional capital may cause dilution to their existing stockholders, restrict

their operations or require them to relinquish rights to their technologies, SGT-

001 or their other product candidates.

SGT-001 is a gene transfer candidate based on a novel technology, which makes it

difficult to predict the time and cost of development and of subsequently obtaining

regulatory approval. To their knowledge, only one gene transfer product has been

approved in the United States for commercialization and only two such products have been approved in the European Union.

Their product candidates may cause undesirable side effects or have other

properties that could delay or prevent their regulatory approval, limit their

commercial potential or result in significant negative consequences following any

potential marketing approval. There have been several significant adverse side

effects in gene therapy treatments in the past, including reported cases of leukemia and death seen in other clinical trials using other vectors. While new recombinant vectors have been developed with the intent to reduce these side effects, gene therapy is still a relatively new approach to disease treatment and additional adverse side effects could develop. Patients will create antibodies to the AAV vector and a second administration of gene transfer might not be successful.

They have only recently initiated their first clinical trial for SGT-001 and have not

commenced preclinical studies for their other product candidates. They have never

completed a clinical trial, and may be unable to do so for any product candidates they may develop, including SGT-001.

Regulatory requirements governing gene and cell therapy products have changed

frequently and may continue to change in the future.

They may seek a breakthrough therapy designation for SGT-001 or their other

product candidates, but they might not receive such designation, and even if they

do, such designation may not lead to a faster development or regulatory review or

approval process.

They may not be successful in finding strategic collaborators for continuing

development of SGT-001 or their other product candidates or successfully

commercializing or competing in the market for certain indications. They intend to

establish strategic partnerships for developing SGT-001 or their other product candidates due to capital costs required to develop, manufacture and commercialize their product candidates. They may not be successful in their efforts to establish such strategic partnerships or other alternative arrangements because their research and development pipeline may be insufficient, SGT-001 may be deemed to be at too early of a stage of development for collaborative effort or third parties may not view SGT-001 as having the requisite potential to demonstrate safety and efficacy

They have limited gene transfer manufacturing experience and could experience

production problems and delays in obtaining regulatory approval of their

manufacturing processes, which could result in delays in the development or

commercialization of SGT-001 or their other product candidates. The

manufacturing process they use to produce SGT-001 is complex and has not been validated for commercial use. They have no experience manufacturing SGT-001 and their other product candidates.

Certain patients’ immune systems might prohibit the successful delivery of certain

gene therapy products, thereby potentially limiting treatment outcomes for these

patients. As with many AAV-mediated gene therapy approaches, certain patients’

immune systems might prohibit the successful delivery of certain gene therapy products, thereby potentially limiting treatment outcomes of these patients. While they are working to better understand seroprevalence as it relates to gene therapies for DMD, the exact DMD-wide seroprevalence is currently unknown and it varies by AAV serotype and age. They may not be able to address this potentially limiting factor for gene therapy as a treatment for certain patients.

Their gene transfer approach utilizes a vector derived from a virus, which may be

perceived as unsafe or may result in unforeseen adverse events. Negative public

opinion and increased regulatory scrutiny of gene therapy may damage public perception of the safety of their SGT-001 gene transfer product candidate and adversely affect their ability to conduct their business or obtain regulatory approvals for SGT-001.

Governments outside the United States tend to impose strict price controls, which

may adversely affect their revenue, if any.

They heavily rely on certain in-licensed patents and other intellectual property

rights in connection with their development of SGT-001 and may be required to

acquire or license additional patents or other intellectual property rights to

continue to develop and commercialize SGT-001.

Their licensed patents, and any patents they may own in the future, may be

challenged, narrowed, invalidated or held unenforceable.

After this offering, their executive officers, directors and principal stockholders will

maintain the ability to control all matters submitted to their stockholders for

approval. Assuming the sale by them of 5,890,000 shares of common stock in this

offering, their executive officers, directors and stockholders who owned more than 5% of their outstanding common stock before this offering will, in the aggregate, beneficially own shares representing approximately 66% of their capital stock upon completion of this offering. As a result, if these stockholders were to act together, they would be able to control all matters submitted to their stockholders for approval, as well as their management and affairs.

Bottom Line

They are a clinical stage pharmaceutical company and, as such, have no revenues from the sale of any of their product candidates.

DMD is a progressive, irreversible and ultimately fatal disease that affects approximately one in every 3,500 to 5,000 live male births and has an estimated prevalence of 10,000 to 15,000 cases in the United States alone. There is no cure for DMD and, for the vast majority of patients, there are no satisfactory symptomatic or disease-modifying treatments. SGT-001 has been granted Rare Pediatric Disease Designation, or RPDD, in the United States and Orphan Drug Designations in both the United States and European Union. The safety and efficacy of SGT-001 are currently being evaluated in a Phase I/II clinical trial. GT-001 is a gene transfer candidate designed to address the

underlying genetic cause of DMD by delivering a synthetic transgene that produces dystrophin-like protein that is only expressed in muscles of the body, including cardiac and respiratory muscles. Their vector is a modified version of an AAV, a naturally occurring, non-pathogenic virus selected for its ability to efficiently enter skeletal, diaphragm and cardiac muscle tissues. SGT-001 is designed to drive microdystrophin protein expression in affected muscles throughout the body. In contrast to other therapeutic approaches that are designed to target specific mutations in the dystrophin gene, they believe SGT-001 is a mutation agnostic approach. In the fourth quarter of 2017, they announced the initiation of a randomized, controlled, open-label, single-ascending dose Phase I/II clinical study, called IGNITE DMD, designed to evaluate SGT-001 in ambulatory and non-ambulatory males with DMD aged four to 17 years. The primary objectives of the study are to assess the safety and tolerability of SGT-001, as well as efficacy as defined by microdystrophin protein expression. Efficacy will be assessed by comparing microdystrophin protein expression in muscle biopsy before treatment and 12 months after treatment for each patient. Based on results from this study, they will evaluate the need for future clinical trials that may include other patient populations, as well as the need for larger confirmatory clinical trials. Through significant targeted investments to address this challenge, they believe they have generated sufficient drug product supply to initiate their first clinical trial. They continue to develop their manufacturing process to meet future clinical and commercial production needs for SGT-001. While they believe DMD disease progression can be slowed or halted by gene transfer, many patients will still suffer from the manifestations of the disease, such as tissue damage to their muscles, inflammation, cardiac dysfunction and fibrosis. As part of their disease-focused business model, they are also building a portfolio of complementary disease-modifying therapies to address these manifestations. Their portfolio currently includes a preclinical biologic candidate, SB-001, a monoclonal antibody designed to reduce fibrosis and inflammation, as well as a number of emerging and complementary programs. They intend to commence preclinical studies for SB-001 in 2018. Additionally, they are developing biomarkers and sensors that may allow them to identify treatment targets faster, measure the therapeutic impact of potential product candidates better and reach decision points earlier. In addition, through their Solid Suit program, they are developing a line of soft, wearable assistive devices with the goal of providing functional and therapeutic benefits to DMD patients.

Progressive, irreversible and ultimately fatal, DMD occurs in approximately one in every 3,500 to 5,000 live male births and has an estimated prevalence of 10,000 to 15,000 cases in the United States alone. More than 1,000 dystrophin gene mutations, which can be inherited or can occur spontaneously, have been identified in people with DMD. Patients with DMD experience frequent falls, can no longer run, play sports or perform most daily functions, and are further weakened by physical activity. In addition to physical challenges, DMD also commonly involves cognitive difficulties and behavioral challenges. By their 20s, patients essentially become paralyzed from the neck down and require a ventilator to breathe. There is no cure for DMD and, for the vast majority of patients, there are no satisfactory symptomatic or disease-modifying treatments. Glucocorticoid treatment, the current standard-of-care, has been shown to temporarily improve muscle strength, prolong the period of ambulation and slow the progression of DMD. However, glucocorticoid use is associated with well-known adverse events, such as severe weight gain, stunted growth, weakening of bone structure and metabolic

dysfunctions, among others. In recent years, certain regulators have conditionally approved two new therapies, eteplirsen (EXONDYS 51) and ataluren (Translarna), which target specific mutations in the dystrophin gene. However, each of these therapies are targeted at specific mutations of the dystrophin gene. The targeted mutations separately affect approximately 13% of the DMD patients. The economic burden, estimated at $1.2 billion annually in the United States (excluding costly mortality and end-of-life care expenses), includes costs associated with hospital admissions, medication, frequent doctor visits and investment in assistive devices, as well as indirect costs related to productivity losses for the caregivers and costs due to pain, anxiety and social handicap. Of this amount, approximately 45% is represented by indirect costs. They aim to address the full spectrum of DMD disease manifestation, from its underlying genetic cause to other disorders that result from disease progression. They are advancing corrective therapies, disease-modifying therapies and assistive devices, as well as tools to accelerate drug development.

If approved, they intend to commercialize SGT-001 in the United States and European Union, and they may enter into licensing agreements or strategic collaborations to commercialize the product in other markets. They intend to advance their initial disease-modifying therapy candidate, SB-001, aimed at addressing fibrosis and inflammation. They currently intend to commence preclinical studies for SB-001 in 2018. Leveraging their network of world-renowned DMD experts and rigorous product candidate selection process, they intend to identify and develop additional high-potential product candidates. These include the next generation of gene therapies, such as novel promoters, vectors and transgenes, as well as additional complementary disease-modifying therapies. They intend to establish the capability and capacity to supply SGT-001 at commercial scale from multiple sources, including eventually building their own GMP facility to ensure redundancy and reliability. They are focused on developing biomarkers and sensors that will allow them to identify treatment targets faster, measure the therapeutic impact of potential product candidates better and reach decision points earlier. They will continue to work with and listen closely to key stakeholders in the DMD community, including scientists, academic experts and patients and their families.

They are singularly focused on meeting the diverse needs of all DMD patients, regardless of their genetic mutation or disease stage. They are founded by people personally touched by DMD, and they have established meaningful partnerships within the DMD community, which provide them with unique insights into the disease. They subject each potential product candidate to a highly focused, data-driven selection process that lies at the core of their business model. Their management team has extensive expertise in DMD, gene therapy, product discovery, research and development, manufacturing, business strategy and finance. They have assembled a scientific advisory board and a broad network of the world’s leading experts in DMD, gene therapy, biologics manufacturing, immunology and clinical development. They are working to develop a scalable manufacturing process to meet future clinical and commercial production needs for SGT-001.

They have incurred significant net losses since inception and anticipate that they will continue to incur net losses for the foreseeable future and may never achieve or maintain profitability. As of September 30, 2017, they had an accumulated deficit of $109.8 million. Even if this offering is successful, they will need additional funding, which

may not be available on acceptable terms, or at all. Raising additional capital may cause dilution to their existing stockholders, restrict their operations or require them to relinquish rights to their technologies, SGT-001 or their other product candidates. SGT-001 is a gene transfer candidate based on a novel technology, which makes it difficult to predict the time and cost of development and of subsequently obtaining regulatory approval. To their knowledge, only one gene transfer product has been approved in the United States for commercialization and only two such products have been approved in the European Union. There have been several significant adverse side effects in gene therapy treatments in the past, including reported cases of leukemia and death seen in other clinical trials using other vectors. While new recombinant vectors have been developed with the intent to reduce these side effects, gene therapy is still a relatively new approach to disease treatment and additional adverse side effects could develop. They have only recently initiated their first clinical trial for SGT-001 and have not commenced preclinical studies for their other product candidates. Regulatory requirements governing gene and cell therapy products have changed frequently and may continue to change in the future. They may seek a breakthrough therapy designation for SGT-001 or their other product candidates, but they might not receive such designation, and even if they do, such designation may not lead to a faster development or regulatory review or approval process. They may not be successful in finding strategic collaborators for continuing development of SGT-001 or their other product candidates or successfully commercializing or competing in the market for certain indications. The manufacturing process they use to produce SGT-001 is complex and has not been validated for commercial use. They have no experience manufacturing SGT-001 and their other product candidates. As with many AAV-mediated gene therapy approaches, certain patients’ immune systems might prohibit the successful delivery of certain gene therapy products, thereby potentially limiting treatment outcomes of these patients. Their gene transfer approach utilizes a vector derived from a virus, which may be perceived as unsafe or may result in unforeseen adverse events. Governments outside the United States tend to impose strict price controls, which may adversely affect their revenue, if any.

They heavily rely on certain in-licensed patents and other intellectual property rights in connection with their development of SGT-001 and may be required to acquire or license additional patents or other intellectual property rights to continue to develop and commercialize SGT-001. SGT-001. Their licensed patents, and any patents they may own in the future, may be challenged, narrowed, invalidated or held unenforceable. Assuming the sale by them of 5,890,000 shares of common stock in this offering, their executive officers, directors and stockholders who owned more than 5% of their outstanding common stock before this offering will, in the aggregate, beneficially own shares representing approximately 66% of their capital stock upon completion of this offering. As a result, if these stockholders were to act together, they would be able to control all matters submitted to their stockholders for approval, as well as their management and affairs. Rating = 2


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Secondaries Our Buy, Neutral or Avoid ratings of the Secondaries shown below are intended as a recommendation for those who buy Secondaries on a regular basis. For example, this is not to be interpreted as a Buy recommendation in the traditional sense of adding to your stock portfolio; this is a short term (usually one day or opening trade) time period.

Scott Sweet Senior Managing Partner

Principal Researcher

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