Form 10-Q Nivalis Therapeutics, For: Mar 31

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2016.

For the transition period from            to           

Commission file number: 001-37449

Nivalis Therapeutics, Inc.

(Exact name of Registrant as specified in its charter)

(720) 945-7700

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒     No  ◻

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒     No  ◻

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ◻     No  ☒

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of April 30, 2016 was 15,462,030.

NIVALIS THERAPEUTICS, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

Nivalis Therapeutics, Inc.

Balance Sheets

(In thousands, except for share amounts)

The accompanying notes are an integral part of these financial statements.

Nivalis Therapeutics, Inc.

Statements of Operations and Comprehensive Loss

(In thousands, except per share amounts)

(Unaudited)

The accompanying notes are an integral part of these financial statements.

Nivalis Therapeutics, Inc.

Statement of Stockholders’ Equity

(In thousands)

(Unaudited)

The accompanying notes are an integral part of these financial statements.

Nivalis Therapeutics, Inc.

Statements of Cash Flows

(In thousands)

(Unaudited)

The accompanying notes are an integral part of these financial statements.

NIVALIS THERAPEUTICS, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

1. Organization and Description of Business

Nivalis Therapeutics, Inc. (the “Company” or “Nivalis”), incorporated in Delaware on August 1, 2012, is a clinical stage pharmaceutical company committed to the discovery, development and commercialization of therapeutics for people with cystic fibrosis. In addition to developing innovative solutions intended to extend and improve the lives of people with cystic fibrosis, Nivalis plans to utilize its proprietary S-nitrosoglutathione reductase (GSNOR) inhibitor portfolio to develop therapeutics for other diseases.

2. Liquidity Risks

The Company has incurred operating losses and has an accumulated deficit as a result of ongoing research and development spending. As of March  31,  2016, the Company had an accumulated deficit of $156.7 million. For the three months ended March 31, 2016, net loss  was $7.8 million and net cash used in operating activities was  $7.0 million. The Company anticipates that operating losses and net cash used in operating activities will continue and substantially increase over the next several years as it expands development activities for its N91115 product candidate.

The Company has historically financed its operations primarily through the sale of its equity securities and debt offerings. The Company will continue to be dependent upon such sources of funds until it is able to generate positive cash flows from its operations. Management has determined that the Company’s existing cash, cash equivalents and marketable securities as of March  31, 2016 will be sufficient to fund operations at least through the next twelve months.  

The Company expects to fund future operations through the sale of its equity securities, incurring debt, entering into partnerships, obtaining grants, or seeking other nondilutive sources of financing. There can be no assurance that sufficient funds from these sources will be available to the Company when needed or at all or on terms that are favorable to the Company. If the Company is unable to obtain additional funding from these or other sources when needed, or to the extent needed, it would have a negative impact on the Company’s financial condition and its ability to pursue its business strategy. It could force the Company to delay, limit, reduce or terminate research and development programs and commercialization efforts or cause the Company to cease operations in full.

3. Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates

The financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and include all adjustments necessary for the presentation of the Company’s financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes, including accrued liabilities and the fair value-based measurement of equity instruments. Actual results could differ materially from those estimates. The Company evaluates its estimates and assumptions as facts and circumstances dictate.

Unaudited Interim Financial Data

The balance sheet at December 31, 2015 was derived from the Company’s audited financial statements, but does not include all the disclosures required by GAAP. These financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto for the year ended December 31, 2015. The accompanying interim financial statements as of March 31, 2016 and for the three months ended March  31, 2016 and 2015, are unaudited. The unaudited interim financial statements have been prepared on a basis consistent with the audited financial statements, pursuant to the rules and regulations of the SEC for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary to fairly state the Company’s financial position as of March  31, 2016 and the results of operations and cash flows for the three months ended March  31, 2016 

and 2015. The results for the three months ended March  31, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016 or for any future interim period.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of 90 days or less at the time of purchase to be cash equivalents. Cash and cash equivalents consist of deposits with commercial banks in checking, interest-bearing and demand money market accounts.

Marketable Securities

The Company has designated marketable securities as available-for-sale securities and accounts for them at their respective fair values. Marketable securities are classified as short-term or long-term based on the nature of the securities and their availability to meet current operating requirements. Securities that are classified as available-for-sale are carried at fair value, including accrued interest, with temporary unrealized gains and losses reported as a component of stockholders' equity until their disposition. The Company reviews all available-for-sale securities at each period end to determine if they remain available-for-sale based on the Company’s then current intent and ability to sell the security if it is required to do so. The cost of securities sold is based on the specific identification method. All marketable securities are subject to a periodic impairment review. The Company will recognize an impairment charge when a decline in the fair value of the investments below the cost basis is judged to be other-than-temporary.

Accrued Direct Program Expenses

Substantial portions of the Company’s preclinical studies and clinical trials are performed by third-party laboratories, medical centers, contract research organizations and other vendors (collectively CROs). These CROs generally bill monthly or quarterly for services performed or upon achieving certain milestones. For preclinical studies, the Company accrues expenses based upon estimated percentage of work completed and the contract milestones remaining. For clinical studies, expenses are accrued based upon the number of patients enrolled and the duration of the study. The Company monitors patient enrollment, the progress of clinical studies and related activities to the extent possible through internal reviews of data reported to the Company by the CROs or within software tracking systems, correspondence with the CROs and clinical site visits. Company estimates depend on the timeliness and accuracy of the data provided by the CROs regarding the status of each program and total program spending. The Company periodically evaluates these estimates to determine if adjustments are necessary or appropriate based on information received.

Comprehensive Loss

Comprehensive loss is comprised of net loss and adjustments for the change in unrealized gains and losses on the Company’s investments in available-for-sale marketable securities. The Company presents comprehensive loss and its components in the statements of operations and comprehensive loss for the three months ended March  31, 2016, although the amount for this period was immaterial for disclosure purposes.

Net Loss per Share

The Company reports net loss per share in accordance with the standard codification of ASC “Earnings per Share” (“ASC 260”). Under ASC 260, basic earnings per share, which excludes dilution, is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could be exercised or converted into common shares, and is computed by dividing net loss by the weighted average of common shares outstanding plus the dilutive potential common shares. Diluted earnings per share excludes the impact of options to purchase common stock, restricted stock, warrants to purchase common stock and convertible preferred stock, as the effect would be anti-dilutive. During a loss period, the assumed exercise of in-the-money stock options and other potentially diluted instruments has an anti-dilutive effect and therefore, these instruments are excluded from the computation of dilutive earnings per share.

Recent Accounting Pronouncements

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in this update simplify several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, as well as classification within the statement of cash flows. The guidance will be effective for the annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently evaluating the impact of the new pronouncement on its financial statements.

For additional discussion of recent accounting pronouncements please refer to Note 3, “Summary of Significant Accounting Policies – Recent Accounting Pronouncements”, in the Company’s previously filed Annual Report on Form 10-K for the year ended December 31, 2015. The Company did not adopt any new accounting pronouncements during the three months ended March 31, 2016 that had a material effect on its financial statements.

Fair Value of Financial Instruments

The carrying amounts of cash equivalents and marketable securities approximate their fair value based upon quoted market prices. Certain financial instruments are not measured at fair value on a recurring basis, but are recorded at amounts that approximate their fair value due to their liquid or short-term nature, such as cash, accounts payable, accrued direct program expenses, and accrued employee benefits, and other financial instruments included within current assets or current liabilities. 

Fair Value Measurements

In general, asset and liability fair values are determined using the following categories:

Level 1 – inputs utilize quoted prices in active markets for identical assets or liabilities.

Level 2 – inputs include quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.

Level 3 – inputs are unobservable inputs and include situations where there is little, if any, market activity for the balance sheet items at period end. Pricing inputs are unobservable for the terms and are based on the Company’s own estimates about the assumptions that a market participant would use in pricing as asset.  

The Company’s financial instruments, including money market investments, reverse repurchase agreements, corporate debt securities, U.S. Treasury securities and obligations of U.S. government agencies, are measured at fair value on a recurring basis. There were no transfers between levels for the three months ended March 31, 2016.  

Assets and liabilities measured at fair value on a recurring basis consisted of the following types of instruments as of March  31, 2016 and December 31, 2015 (in thousands):  

4. Cash, Cash Equivalents and Marketable Securities

The following is a summary of cash, cash equivalents and marketable securities as of March  31, 2016 and December 31, 2015 (in thousands):

5. Stockholders’ Equity

Concurrent with the Company’s initial public offering completed in June 2015  (the “IPO”), the Company increased its authorized number of shares of common stock to 200,000,000 shares, eliminated its authorized shares of convertible preferred stock and authorized 10,000,000 shares of preferred stock for future issuance.

Common Stock

On June 22, 2015, the Company completed its IPO of 6,325,000 shares of its common stock, including 875,000 shares from the exercise of the underwriters’ over-allotment option. The Company received proceeds of $78.8 million from its IPO, net of $9.8 million in expenses and underwriters’ discounts and commissions relating to the issuance and distribution of the securities. 

At March  31,  2016, shares of common stock have been reserved for issuance as follows:

6. Net Loss per Share

The Company excluded the following common stock equivalents, outstanding as of March  31, 2016 and 2015, from the computation of diluted net loss per share for the applicable quarterly periods because they had an anti-dilutive impact on the computation:

7. Subsequent Events

Effective April 18, 2016, the Company appointed David Rodman, M.D., as Chief Medical Officer and Executive Vice President of Discovery. In connection with Dr. Rodman’s appointment, the Company’s Compensation Committee approved a grant of stock options to purchase 108,333 shares of the Company’s common stock (the “Options”) and 216,667 restricted stock units (“RSUs”). The Options and RSUs are considered to be inducement grants in accordance with NASDAQ Listing Rule 5635(c)(4). The Options and RSUs are subject to the terms and conditions of an Inducement Stock Option Agreement and an Inducement Restricted Stock Unit Agreement between the Company and Dr. Rodman.

The Company evaluated events up to the filing date of these interim financial statements and determined that no other subsequent activity required disclosure.

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Information

This Quarterly Report on Form 10-Q and the information incorporated herein by reference includes statements that are, or may be deemed, “forward-looking statements.” In some cases, these forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “plans,” “intends,” “may,” “could,” “might,” “will,” “should,” “approximately” or, in each case, their negative or other variations thereon or comparable terminology, although not all forward-looking statements contain these words. They appear in a number of places throughout this Quarterly Report on Form 10-Q and include statements regarding our intentions, beliefs, projections, outlook, analyses or current expectations concerning, among other things, our ongoing and planned preclinical studies and clinical trials, the timing of and our ability to make regulatory filings and obtain and maintain regulatory approvals for our product candidates, the degree of clinical utility of our products, particularly in specific patient populations, expectations regarding clinical trial data, our liquidity and future funding needs, our results of operations, financial condition, prospects, growth and strategies, the industry in which we operate and the trends that may affect the industry or us.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events, competitive dynamics and industry change and depend on the economic circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity and the development of the industry in which we operate may differ materially from the forward-looking statements contained herein. Any forward-looking statements that we make in this Quarterly Report on Form 10-Q speak only as of the date of this report, and we undertake no obligation to update such statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.

You should also read carefully the factors described in the “Risk Factors” section of our annual report on Form 10-K filed with the SEC for the year ended December 31, 2015 and in this Quarterly Report on Form 10-Q to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements as well as statements we make in our other reports filed with the SEC concerning our business development programs, financial condition and results of operations. You may obtain a copy of all reports we file with the SEC on our website at www.nivalis.com. Our website and the information contained on, or that can be accessed through, the website will not be deemed to be incorporated by reference in, and are not considered part of, this report.

Overview

We are a clinical stage pharmaceutical company committed to the discovery, development and commercialization of therapeutics for people with cystic fibrosis. In addition to developing innovative solutions intended to extend and improve the lives of people with cystic fibrosis, we plan to utilize our proprietary S-nitrosoglutathione reductase, or GSNOR, inhibitor portfolio to develop therapeutics for other diseases.

Cystic fibrosis, or CF, is a life-shortening genetic disease that affects an estimated 70,000 people worldwide, predominately in the United States and Europe. CF is characterized by a defect in the chloride channel of human cells known as the “cystic fibrosis transmembrane conductance regulator,” or CFTR, which is caused by mutations in the CFTR gene. N91115 works through a novel mechanism of action called GSNOR inhibition to modulate the unstable and defective CFTR protein responsible for CF. GSNOR inhibition restores GSNO levels thereby modifying the chaperones responsible for CFTR protein degradation. This stabilizing effect increases the amount of CFTR protein at the cell surface and the function of the CFTR chloride channel which, in turn, leads to an increase in net chloride secretion. Nivalis discovered and owns exclusive rights to N91115 in the United States and all other major markets, including U.S. composition of matter patent protection until at least 2031.

Our Phase 1b clinical trial of N91115 in people with CF who had two copies of the F508del-CFTR mutation was completed in September 2015. The randomized, double-blind, placebo-controlled, parallel group study of orally administered N91115 demonstrated favorable safety, tolerability and pharmacokinetics of various doses of N91115 (50,

100 and 200 mg twice daily) in a total of 51 people with CF. Furthermore, a trend toward a modest reduction in sweat chloride, a marker of CFTR activity, was observed in the highest dose tested. This reduction in sweat chloride was statistically significant within group but not when compared with placebo.    

During November 2015, we initiated a Phase 2, 12-week, double-blind, randomized, placebo-controlled, parallel group study to investigate the efficacy and safety of N91115 in 135 adult patients with CF who have two copies  of the F508del-CFTR mutation and are being treated with Orkambi™ (lumacaftor/ivacaftor). In early April 2016, we reached the 50 percent enrollment milestone for this clinical trial.

During March 2016, we initiated, and will soon begin dosing patients in a Phase 2, proof-of-concept study to further evaluate the effect of N91115 in patients who have one copy of the F508del-CFTR mutation and a second mutation that results in a gating defect in the CFTR protein. The study is designed to evaluate the efficacy and safety of N91115 in adult patients who have these mutations and who are being treated with Kalydeco™ (ivacaftor). 

Our operations to date have focused on discovery and development of our portfolio of GSNOR inhibitors, including N91115 and N6022. N6022 was the first product candidate to emerge from our GSNOR inhibitor portfolio and was optimized for inhaled delivery with low oral bioavailability. In order to provide translational evidence of GSNOR’s role in lung disease, we initially explored the effects of N6022 in patients with mild asthma using an intravenous formulation. N6022 demonstrated a significant, beneficial effect on the airways in these patients, thus confirming the beneficial effects of N6022 observed in our preclinical studies of asthma. N6022 paved the way for N91115 by establishing initial safety of the class in healthy subjects and patients with CF. Because an oral dosage form is preferable in CF, a systemic disease that is not confined to the lungs, we elected to discontinue further development of N6022 in the chronic management of CF, but we may pursue development of N6022 in an inhaled dosage form for other potential indications.

During June 2015, we completed our initial public offering, or IPO, of an aggregate 6,325,000 shares of common stock at a price to the public of $14.00 per share for aggregate gross proceeds of $88.6 million, before $9.8 million in underwriting commissions and discounts and offering expenses. Our common stock is listed on the NASDAQ Global Market under the symbol “NVLS”.

Since inception, we have financed our operations primarily through the proceeds from our IPO, as well as private placements of equity and convertible debt. From our inception in July 2003 to March 31, 2016, we raised $220.0 million in net proceeds from these sources. As of March 31, 2016, we had cash, cash equivalents and marketable securities of $80.2 million and no debt.

We have incurred losses from operations in each year since our inception. Our net loss was  $7.8 million for the three months ended March 31, 2016, and we had an accumulated deficit of $156.7 million. We expect to continue incurring losses for the foreseeable future as we advance our lead product candidate, N91115, through clinical development, regulatory approval and, if approved, commercialization. We expect that research and development expenses will increase as we continue to develop our product candidates, and general and administrative costs will increase as we operate as a public company. We anticipate that we will need to raise additional capital, in addition to the IPO proceeds raised in June 2015, prior to the commercialization of N91115 or any other potential product candidate. Until such time that we can generate revenue from product sales, which, based on our current development plans, we do not expect to occur until 2018 at the earliest, we expect to finance our operating activities primarily through selling equity, incurring debt, entering into partnerships, and obtaining grants or seeking other nondilutive sources of financing. However, we may be unable to raise additional funds or enter into such arrangements when needed on favorable terms, if at all. Our failure to raise capital when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. It could force us to delay, limit, reduce or terminate our research and development programs and commercialization efforts or cause us to cease operations in full.

Financial Operations Overview

Revenue

To date, we have not generated any revenue. In the future, we may generate revenue from sales or licensing of N91115 or other potential product candidates. Based on our current development plans, however, we do not expect to

generate product revenue until 2018 at the earliest. If we fail to complete the clinical development of an N91115-based therapy, our ability to generate future revenue, and our results of operations and financial position, will be adversely affected.

Research and Development Expense

Research and development expense consists of costs incurred for the development of our product candidates, which include:

Research and development costs are expensed as incurred. Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development primarily due to the increased size and duration of later-stage clinical trials. Thus, we  expect our research and development expenses to increase for the foreseeable future as we seek to advance clinical development of our lead product candidate, N91115.

Below is a summary of our research and development expenses by categories of costs for the periods presented. The other expenses category includes travel, lab and office supplies, clinical trial management software license fees, business insurance and other miscellaneous expenses.

All of our research and development expenses for the three months ended March  31, 2016 and 2015 relate to the development of N91115. We have expended an aggregate of approximately $20.2 million for direct program expenses related to N91115 from inception through March  31, 2016. The successful development of N91115 or any other potential product candidate is uncertain. We cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of, or when the period in which we receive material net cash inflows may commence, from N91115 or any other potential product candidate. This uncertainty is due to the numerous risks and uncertainties associated with the duration and cost of clinical trials which vary significantly over the life of a project as a result of differences arising during clinical development, including:

Our expenditures are subject to additional uncertainties, including the commercial uptake of Orkambi, our preclinical study and clinical trial expenses, our costs to acquire, develop and manufacture preclinical study and clinical trial materials, the timing of regulatory approval for N91115 and post-commercialization and other incremental research and development costs for N91115 or any other potential product candidate. We may obtain unexpected results from our clinical trials. We may elect to discontinue, delay or modify clinical trials of some product candidates or focus on others. Changes in variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the U.S. Food and Drug Administration, or FDA, or other regulatory authorities were to require us to conduct preclinical studies or clinical trials beyond those which we anticipate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the clinical development of our product candidates and we may not obtain results from trials that are delayed when anticipated.

General and Administrative Expense

General and administrative expense consists principally of salaries and related costs not included in research and development expenses, including stock-based compensation, for personnel in executive, finance, business development and information technology functions, facility costs and professional fees for legal, patent review, consulting and accounting services.

We anticipate that our general and administrative expense will increase during the next two fiscal years due to many factors. The most significant of these factors include:

Interest Income

Interest income for the three months ended March 31, 2016 and 2015 consists of interest earned on marketable securities and money market funds.

Results of Operations

Comparison of the Three Months Ended March  31, 2016 and 2015.

Research and Development Expenses.  Research and development expenses for the three months ended March 31, 2016 and 2015 were as follows:

The increase in research and development expenses for the three months ended March 31, 2016 compared to the same period in the prior year was primarily due to $2.4 million in increased N91115 clinical trial expenses for the Phase

2 trial that was initiated in November 2015 and reached 50% patient enrollment in early April 2016. Partially offsetting this increase was a decrease of approximately $600,000 for clinical trial expenses incurred during the first quarter of 2015 related to our Phase 1b trial that was completed in 2015. In addition, salary expense and employee benefits increased by approximately $211,000 during the three months ended March 31, 2016 compared with the same period in the prior year due to increased headcount and annual merit salary increases. Stock-based compensation expense increased by approximately $171,000 during this same period due to stock options granted to Research and Development employees.

General and Administrative Expenses.  General and administrative expenses for the three months ended March  31, 2016 and 2015 were as follows: 

The increase in general and administrative expenses for the three months ended March  31, 2016 compared to the same period in the prior year was primarily due to increased expenses related to operating as a publicly-traded company, including increased investor relations and various marketing expenses, audit fees and patent expenses.  Additionally, stock-based compensation expense increased by approximately $381,000 during the three months ended March 31, 2016 compared with the same period in the prior year, due to stock option grants during September 2015. During this same comparison period, salary expense and employee benefits increased by approximately $163,000 due to increased headcount and annual merit salary increases.

Interest Income.  

Interest income for the three months ended March 31, 2016 increased by $95,000 compared to the same period in the prior year. This increase was due to higher investment interest rates earned on a higher average cash and marketable securities balance following the completion of our IPO during June 2015.

Liquidity and Capital Resources

Since inception, we have funded our operations primarily through the proceeds from our IPO in June 2015 as well as private placements of equity and convertible debt in prior years.  As of March  31, 2016, we had cash, cash equivalents and marketable securities of $80.2 million and no debt.

The following table sets forth the primary uses of cash for the three months ended March  31, 2016 and 2015: 

Operating Activities

During the first quarter of fiscal 2016,  our net loss of $7.8 million included noncash charges of $737,000, primarily associated with stock-based compensation. During this same period, our net operating liabilities, excluding cash, cash equivalents and marketable securities, increased by $90,000 and thus decreased our net cash used in operating activities to $7.0 million. Net operating liabilities increased primarily because of higher accounts payable and accrued direct program expenses of $1.3 million, decreases in accrued employee benefits of $963,000, decreases in accrued other liabilities of $134,000 and increases in prepaid expenses of $69,000.  Increases in accounts payable and accrued direct program expenses were directly related to research and development costs for our Phase 2 clinical trial that initiated in  November 2015. Accrued employee benefit costs decreased due to payment of employee performance bonuses during February 2016.  

During the first quarter of fiscal 2015, our net loss of $4.3 million included noncash charges of $167,000, primarily associated with stock-based compensation. During this same period, our net operating liabilities, excluding cash and cash equivalents,  decreased by $748,000. This was primarily the result of $2.7 million in increased prepaid expenses which were partially offset by increases in accounts payable and accrued employee benefits. Prepaid expenses increased by $2.2 million related to deferred IPO expenses while the balance was related to prepaid long term toxicology studies related to N91115. Increases in accounts payable of $1.7 million were directly related to accrued IPO expenses while the increase in accrued employee benefits of $305,000 was primarily related to accrued amounts for the fiscal 2015 employee incentive plan.

Investing Activities

The net cash used in investing activities of $1.9 million for the three months ended March  31, 2016 was primarily related to the net purchases  of marketable securities.  

Funding Requirements

We believe our existing cash, cash equivalents and marketable securities will provide resources to complete our recently initiated Phase 2 clinical trial and to fund our operating expenses and capital expenditure requirements to mid-2017 when we expect to be enrolling patients in our Phase 3 clinical program for N91115. We have based these estimates on assumptions that may prove to be incorrect, and given the risks and uncertainties associated with drug development and commercialization, we could require additional capital resources sooner than expected. Our present and future funding requirements will depend on many factors, including but not limited to:

Existing cash, cash equivalents and marketable securities will not be sufficient to fund our operations through successful development and commercialization of N91115 or any other potential product candidate. If we were unable to obtain additional financing, we may be required to reduce the scope of, delay, or eliminate some or all of our planned development and commercialization activities, which could harm our business. For more information as to the risks associated with our future funding requirements, see the risk factors under Item 1A. – “Risk Factors” of this Quarterly

Report on Form 10-Q and under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015 that we have filed with the SEC.

Critical Accounting Policies and Significant Judgments and Estimates

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

For a description of our critical accounting policies, please see Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. There have not been any material changes to our critical accounting policies since December 31, 2015.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations at March 31, 2016:

We have entered into contracts with third parties to provide future services, which include research and development, clinical development support and testing services. These purchase obligations include both cancellable and non-cancellable amounts. We also have an operating lease obligation for office and laboratory space, which will expire on March 31, 2018. We have the option to renew the lease for an additional three-year term and the option to terminate the lease at any time after March 31, 2017, for a termination fee of $25,000.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet activities, as defined in Item 303(a)(4) of Regulation S-K.

Recent Accounting Pronouncements

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in this update simplify several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, as well as classification within the statement of cash flows. The guidance will be effective for the annual periods beginning after December 15, 2016, and interim periods within those annual periods. We are currently evaluating the impact of the new pronouncement on our financial statements.

For additional discussion of recent accounting pronouncements please refer to Note 3, “Summary of Significant Accounting Policies – Recent Accounting Pronouncements”, in our previously filed Annual Report on Form 10-K for the year ended December 31, 2015. There were no new accounting pronouncements adopted during the three months ended March 31, 2016 that had a material effect on our financial statements.

We qualify as an “emerging growth company” pursuant to the provisions of the JOBS Act, which allows us to delay adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we irrevocably chose to “opt out” of such extended transition period, and as a result, we plan to comply with any new or revised accounting standards on the relevant dates on which non-emerging growth companies must adopt such standards.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk related to changes in interest rates. As of March  31, 2016, we had cash, cash equivalents and marketable securities of $80.2 million, consisting of deposits with commercial banks in checking, interest-bearing and demand money market accounts,  reverse repurchase agreements, corporate debt securities, U.S. treasury securities and obligations of U.S. government agencies. The primary objectives of our investment policy are to preserve principal and maintain proper liquidity to meet operating needs.

Our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure to any single issue, issuer or type of investment. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments are in short-term securities. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our portfolio.

ITEM 4.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Rule 13a−15(e) promulgated under the Exchange Act, that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective. In connection with the filing of this Quarterly Report on Form 10-Q, an evaluation was carried out by our management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March  31, 2016.

Changes in Internal Control over Financial Reporting

This Quarterly Report on Form 10-Q does not include a report on changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter due to a transition period established by the Exchange Act for newly public companies. 

PART II. OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

We are not currently a party to any legal proceedings.

ITEM 1A.RISK FACTORS

Our business faces significant risks and uncertainties. Certain factors may have a material adverse effect on our business prospects, financial condition and results of operations, and you should carefully consider them. Accordingly, in evaluating our business, we encourage you to carefully consider the risk factors described under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 and in our other public filings with the SEC. Other events that we do not currently anticipate or that we currently deem immaterial may also affect our business, prospects, financial condition and results of operations.

There have been no material changes to the risk factors included in our previously filed Annual Report on Form 10-K for the year ended December 31, 2015. Additional risks and uncertainties not presently known to us or that we currently believe are immaterial also may negatively impact our business.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Use of Proceeds

Our initial public offering, or IPO, of common stock was effected through a Registration Statement on Form S-1 (File No. 333-204127) declared effective by the SEC on June 16, 2015. On June 22, 2015, we sold 6,325,000 shares of common stock, including 825,000 shares sold to the underwriters pursuant to their option to purchase such shares to cover over allotments, at an initial public offering price of $14.00 per share, for aggregate gross proceeds of $88.6 million and net proceeds of $78.8 million after deducting underwriting discounts and commissions and expenses. The underwriters of the offering were Cowen & Company, LLC, Stifel, Nicolaus & Company, Incorporated, Robert W. Baird & Co., Incorporated and H.C. Wainwright & Co., LLC. Following the sale of the shares in connection with the closing of the IPO, the offering terminated.

Through March 31, 2016, we had not used any of our IPO proceeds for working capital or general corporate expenses. There has been no material change in our planned use of the net proceeds from the IPO as described in the final prospectus for the offering filed with the SEC pursuant to Rule 424(b).

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5.OTHER INFORMATION

None.

ITEM 6.EXHIBITS

(a) Exhibits

The exhibits listed on the accompanying exhibit index are filed or incorporated by reference (as stated therein) as part of this Quarterly Report on Form 10-Q.

INDEX TO EXHIBITS

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Exhibit 10.1

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (this “Agreement”), effective as of April 18, 2016, is between Nivalis Therapeutics, Inc., a Delaware corporation (the “Company”), and David M. Rodman, M.D. (“Employee”).

In consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows:

1.Employment.  The Company hereby employs Employee and Employee hereby agrees to be employed by the Company for the period and upon the terms and conditions hereinafter set forth.

2.Capacity and Duties.  Employee shall be employed by the Company as the Company’s Chief Medical Officer and Executive Vice President of Discovery. During his employment, Employee shall perform the duties and bear the responsibilities commensurate with his position and shall serve the Company faithfully and to the best of his ability, under the direction of the Board of Directors.  Employee shall devote his entire working time, attention and energies to the business of the Company.  His actions shall at all times be such that they do not discredit the Company or its products and services.  Employee shall not engage in any other business activity or activities that, in the judgment of the Board of Directors, may conflict with the proper performance of Employee’s duties hereunder, including constituting a conflict of interest between such activity and Company’s business.

3.Compensation and Benefits.

(a)For all services rendered by Employee the Company shall pay Employee during the term of this Agreement an annual salary (“Base Salary”) as set forth herein, payable semi-monthly in arrears.  Employee’s initial Base Salary shall be $450,000.00.  During the term of this Agreement, the amount of Employee’s Base Salary shall be subject to periodic reviews and adjustments as determined by the Board of Directors in its sole discretion. 

(b)The Employee shall be eligible to receive an annual performance-based cash bonus in respect of each calendar year, beginning with the 2016 calendar year, to the extent earned based on the achievement of personal and financial performance objectives approved by the Company’s Board of Directors no later than 45 days after the commencement of the relevant bonus period. The target annual bonus that the Employee may earn is equal to 40% of the Employee’s Base Salary at the rate in effect at the end of the relevant calendar year; the bonus will not be pro-rated to reflect any partial year of employment.  The Board of Directors, or a committee thereof, may not approve the payment of an annual performance bonus if applicable performance goals are not attained.  The amount of any such annual bonus awarded for a calendar year shall be determined by the Board or a committee thereof after the end of the calendar year to which such bonus relates, and shall be paid to the Employee when annual bonuses are paid to other senior executives of the Company generally, but in no event later than April 30 of the calendar year following the year for which the bonus is earned.  To be eligible

for any such annual bonus under this Section 3(b), the Employee must be actively employed by the Company at the time the Company pays bonuses for the relevant year.

(c)The Company shall provide Employee, during the term of this Agreement, with the benefits of such insurance plans, hospitalization plans and other employee fringe benefit plans as shall be generally provided to employees of the Company and for which Employee may be eligible under the terms and conditions thereof.  Nothing herein contained shall require the Company to adopt or maintain any such employee benefit plans.

(c)During the term of this Agreement, except as otherwise provided in Section 5(b), Employee shall be entitled to sick leave and annual vacation consistent with the Company’s customary paid time off policies.

(d)During the term of this Agreement, the Company shall reimburse Employee for all reasonable out-of-pocket expenses incurred by Employee in connection with the business of the Company and in the performance of his duties under this Agreement to the extent consistent with applicable Company policy in effect from time to time and upon presentation to the Company of an itemized accounting of such expenses with reasonable supporting data.

(e)In consideration of the Employee entering into this Agreement and as an inducement to join the Company, the Employee shall be granted a non-qualified stock option to purchase 108,333 shares of the Company’s common stock (the “Option”) and a restricted stock unit representing 216,667 shares of the Company’s common stock (the “RSU”), subject to approval of the Board of Directors or a committee thereof. The exercise price per share of the Option shall be the fair market value of the Company’s common stock (equal to the closing price of the Company’s common stock as reported by the Nasdaq Stock Market) on the Option grant date.  Subject to terms of an Option award agreement, twenty-five percent (25%) of the shares subject to the Option shall vest on the first anniversary of Employee’s employment start date (anticipated to be April 18, 2016), and 1/48th of the shares subject to the Option shall vest monthly thereafter so that one hundred percent (100%) of the shares subject to the Option are vested on the fourth anniversary of the employment start date, so long as the Employee remains employed at each such vesting date. Subject to the terms of an RSU award agreement, 1/12th of the RSU’s shall vest on the first day of each calendar quarter commencing with the calendar quarter immediately following the Employee’s start date. In the event of any conflict or ambiguity between this Agreement and the Option award agreement or the RSU award agreement, the Option award agreement and the RSU award agreement, as applicable, shall govern.

(f)In further consideration of the Employee entering into this Agreement and as an inducement to join the Company, the Company shall pay the Employee a one-time signing bonus equal to $200,000, less any applicable taxes and withholdings. If prior to the three-year anniversary of the Employee’s start date Employee resigns his employment or the Company terminates his employment pursuant to Section 5(c), then the Employee shall reimburse the Company (A) the full amount of such signing bonus if the Employee’s employment so terminates on or prior to the one-year anniversary of his start date or (B) a pro rata amount of such signing bonus equal to $200,000 multiplied by the percentage of days following the

Employee’s termination date remaining in such three-year period if the Employee’s employment so terminates after the one-year anniversary of his start date.

4.Term of Employment.  Unless sooner terminated in accordance with Section 5, the initial term of this Agreement shall be one (1) year from the effective date of this Agreement, and thereafter shall continue for one year terms from year to year unless and until either party shall give notice to the other at least 30 days prior to the end of the original or then current renewal term of his or its intention to terminate at the end of such term.  

5.Termination/Severance.

(a)If Employee dies during the term of this Agreement, the Company shall pay his estate the compensation that would otherwise be payable to him for the month in which his death occurs, this Agreement shall be considered terminated on the last day of such month and the Company shall cause any issued but unvested stock options or restricted stock units granted to Employee to immediately vest.

(b)If during the term of this Agreement, Employee is prevented from performing his duties by reason of illness or incapacity for a continuous period of 120 days, the Company may terminate this Agreement upon 30 days’ prior notice thereof to Employee or his duly appointed legal representative. For the purposes of this Section 5(b), a period of illness or incapacity shall be deemed “continuous” notwithstanding Employee’s performance of his duties during such period for continuous periods of less than 15 days in duration. 

(c)The Company may terminate this Agreement at any time for Employee’s (1) gross negligence; (2) a material breach of any obligation created by this Agreement; (3) a violation of any policy, procedure or guideline of the Company, or any material injury to the economic or ethical welfare of the Company caused by Employee’s malfeasance, misfeasance, misconduct or inattention to Employee’s duties and responsibilities, or any other material failure to comply with the Company’s reasonable performance expectations, upon notice of the same from the Company and failure to cure such violation, injury or failure within 30 days; or (4) misconduct, including but not limited to, commission of any felony, or of any misdemeanor involving dishonesty or moral turpitude, or violation of any state or federal law in the course of his employment; theft or misuse of the Company’s property or time.

(d)The Company may terminate this Agreement at any time for any or no reason upon 15 days’ notice to Employee.  

(e)If this Agreement is terminated by the Company prior to the end of the term pursuant to any provision other than Sections 4, 5(a) or 5(c) (the “Termination Date”), then, provided Employee executes the release described in Section 5(f) below and complies with his obligations under the Confidential Information Agreement and Noncompete Agreement incorporated by reference in Sections 6 and 7 of this Agreement:  

(i) the Company shall pay to Employee as severance an amount equal to twelve (12) month’s Base Salary, in equal installments, subject to all applicable deductions and withholdings;

(ii) if the Employee timely and properly elects to continue his Company-sponsored group health coverage following the Termination Date pursuant to COBRA, the Company will reimburse Employee each month for his cost to purchase such coverage until the earlier of (A) the date that is twelve (12) months following the Termination Date or (B) the date the Employee ceases to be eligible for such COBRA coverage; and

(iii)  the Company shall cause any issued but unvested options and restricted stock units scheduled to vest in the twelve (12) months following Employee’s Termination Date to immediately vest; provided, however, that this sentence shall not diminish the 100% vesting contemplated by 5(g) below in connection with a Change of Control.  

The payments and benefits set forth in Sections 5(e)(i), (ii), and (iii) are collectively referred to as the “Severance Benefits.”

(f)As a condition of receiving the Severance Benefits, the Employee agrees to execute, deliver and not revoke, within sixty (60) days following the Termination Date, a general release in such form as is requested by the Company, such release to be delivered, and to have become fully irrevocable, on or before the end of such sixty (60)-day period.  If such a general release has not been executed and delivered and become irrevocable on or before the end of such sixty (60)-day period, no amounts or benefits under Section 5(e) shall be or become payable. The Company shall pay Employee the Severance Benefits commencing with the first regular payroll period after the release becomes irrevocable; provided, however, that in no event shall the timing of Employee’s execution of the release, directly or indirectly, result in the Employee designating the calendar year of payment, and if a payment that is subject to execution of the release could be made in more than one taxable year, such payment shall be made in the later taxable year. 

(g)If, within twelve (12) months following the date a Change of Control occurs, the Company terminates this Agreement other than pursuant to Sections 4, 5(a) or 5(c) above, all outstanding options and restricted stock units granted to Employee as of such event shall immediately vest (to the extent they are not already vested).  For purposes of this Agreement, “Change in Control” shall mean the sale of all or substantially all of the outstanding shares of capital stock, assets or business of the Company, by merger, consolidation, sale of assets or otherwise (other than a transaction in which all or substantially all of the persons who were beneficial owners of the capital stock of the Company immediately prior to such transaction beneficially own, directly or indirectly, more than 50% of the outstanding voting securities (on an as-converted to Common Stock basis) of the (i) resulting, surviving or acquiring entity in such transaction in the case of a merger, consolidation or sale of outstanding shares, or (ii) acquiring entity in the case of a sale of assets).  Notwithstanding the foregoing, sale of Company stock pursuant to an initial public offering or follow-on public offering shall not constitute a Change in Control.

(h)The payment to the Employee of the amounts payable under this Section 5 shall constitute the sole remedy of the Employee in the event of a termination of the Employee's employment by the Company that results in payment of benefits under this Section 5.

6.Confidential Information.  This Agreement incorporates by reference all the terms of that certain Proprietary Information and Inventions Agreement dated as of April 18, 2016 between Employee and the Company, as if fully set forth herein.

7.Covenants Not to Compete or Interfere.  This Agreement incorporates all the terms of that certain Noncompete Agreement dated as of April 18, 2016 between Employee and the Company, as if fully set forth herein.  The parties hereby acknowledge that any Severance Benefits paid made under Section 5 of this Agreement shall be consideration for Employee’s covenant not to compete with the Company.

8.Waiver of Breach.  A waiver by the Company of a breach of any provision of this Agreement by Employee shall not operate or be construed as a waiver of any subsequent breach by Employee.

9.Severability.  It is the desire and intent of the parties that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular provision or portion of this Agreement shall be adjudicated to be invalid or unenforceable, this Agreement shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of this Section in the particular jurisdiction in which such adjudication is made.

10.Notices.  All communications, requests, consents and other notices provided for in this Agreement shall be in writing and shall be deemed given if mailed by first class mail, postage prepaid, addressed as follows: (i) If to the Company: to its principal office at 3122 Sterling Circle, Suite 200, Boulder, Colorado 80301; (ii) If to Employee: to the Employee’s home address listed in the Company’s personnel records, or such other address as either party may hereafter designate by notice as herein provided. Notwithstanding the foregoing provisions of this Section 10, so long as Employee is employed by the Company, any such communication, request, consent or other notice shall be deemed given if delivered as follows: if to the Company, by hand delivery to any executive officer of the Company (other than Employee), and if to Employee, by hand delivery to him.

11.Governing Law.  This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Colorado without regard to choice of law provisions thereof, and the parties each agree to exclusive jurisdiction in the state and federal courts in Colorado.

12.Waiver of Jury Trial.  EMPLOYEE AND THE COMPANY HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT.  THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE

SUBJECT MATTER OF THIS AGREEMENT, INCLUDING WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS.  EMPLOYEE AND THE COMPANY WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.  IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.

13.Assignment.  The Company may assign, without the consent of Employee, its rights and obligations under this Agreement to any affiliate of the Company or to any acquirer of substantially all of the business of the Company, and all covenants and agreements hereunder shall inure to the benefit of and be enforceable by or against any such assignee. Neither this Agreement nor any rights or duties hereunder may be assigned or delegated by Employee.

14.Entire Agreement.  This Agreement sets forth the entire agreement and understanding of the parties and supersedes all prior understandings, agreements or representations by or between the parties, whether written or oral, which relate in any way to the subject matter hereof.

15.Amendments.  No provision of this Agreement shall be altered, amended, revoked or waived except by an instrument in writing signed by the party sought to be charged with such amendment, revocation or waiver.

16.Binding Effect.  Except as otherwise provided herein, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective legal representatives, heirs, successors and assigns.

17. Section 409A.  Payments pursuant to this Agreement are intended to comply with or be exempt from Section 409A of the Internal Revenue Code or 1986 (the “Code”) and accompanying regulations and other binding guidance promulgated thereunder (“Section 409A”), and the provisions of this Agreement will be administered, interpreted and construed accordingly.  Any payments under this Agreement that may be excluded from Section 409A either as separation pay due to an involuntary separation from service or as a short-term deferral shall be excluded from Section 409A to the maximum extent possible. For purposes of Section 409A, each installment payment provided under this Agreement shall be treated as a separate payment.  Any payments to be made under this Agreement upon a termination of employment shall only be made upon a “separation from service” under Section 409A.  To the extent that any reimbursement of expenses or in-kind benefits constitutes “deferred compensation” under Section 409A, (i) such reimbursement or benefit will be provided no later than December 31 of the year following the year in which the expense was incurred; (ii) the amount of expenses reimbursed in one year will not affect the amount eligible for reimbursement in any subsequent year; and (iii) the right to reimbursement of expenses or in-kind benefits may not be liquidated or exchanged for any other benefit.  Notwithstanding the foregoing, the Company makes no representations that the payments and benefits provided under this Agreement comply with Section 409A and in no event shall the Company be liable for all or any portion of any taxes,

penalties, interest or other expenses that may be incurred by the Employee on account of non-compliance with Section 409A.    

Any provision of this Agreement to the contrary notwithstanding, if the Employee is deemed to be a “specified employee” (within the meaning of Section 409A), then with regard to any Severance Benefit or other payment or benefit under this Agreement that is “deferred compensation” (within the meaning of Section 409A) and which is paid as a result of the Employee’s “separation from service” (within the meaning of Section 409A), such payment or benefit shall be made or provided at the date which is the earlier of (A) six (6) months and one (1) day following the date of  Employee’s separation from service, and (B) the Employee’s death (the “Delay Period”).  Upon the expiration of the Delay Period, all payments and benefits delayed pursuant to the preceding sentence (whether they would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid or reimbursed to the Employee in a lump sum without interest, and any remaining payments and benefits due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein.   

18.Certain Additional Payments by the Company; Code Section 280G.

(a)Anything in this Agreement to the contrary notwithstanding, if any payment or benefit Employee would receive pursuant to this Agreement ("Payment") would (i) constitute a "parachute payment" within the meaning of Section 280G of the Code, and (ii) but for this sentence, be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then such Payment shall be reduced to the Reduced Amount.  The "Reduced Amount" shall be either (x) the largest portion of the Payment that would result in no portion of the Payment being subject to the Excise Tax or (y) the largest portion, up to and including the total, of the Payment, whichever amount, after taking into account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax (all computed at the highest applicable marginal rate), results in Employee’s receipt, on an after-tax basis, of the greater amount of the Payment notwithstanding that all or some portion of the Payment may be subject to the Excise Tax.  If a reduction in payments or benefits constituting "parachute payments" is necessary so that the Payment equals the Reduced Amount, reduction shall occur in the following order: (A) payments which do not constitute nonqualified deferred compensation subject to Section 409A; (B) cash payments shall be reduced first and in reverse chronological order such that the cash payment owed on the latest date following the occurrence of the event triggering such Excise Tax will be the first cash payment to be reduced; and (C) employee benefits shall be reduced last (but only to the extent such benefits may be reduced under applicable law, including, but not limited to the Code and the Employee Retirement Income Security Act of 1974, as amended) and in reverse chronological order such that the benefit owed on the latest date following the occurrence of the event triggering such Excise Tax will be the first benefit to be reduced.  Any reduction shall be made in accordance with Section 409A. 

(b)The determinations and calculations required hereunder shall be made by nationally recognized accounting firm that is (i) not be serving as accountant or auditor for the person who acquires ownership or effective control or ownership of a substantial portion of the Company’s assets (within the meaning of Section 280G of the Code) or any affiliate of such person, and (ii) agreed upon by the Company and Employee  (the “Accounting Firm”).   The

Company shall bear all expenses with respect to the determinations by the Accounting Firm required to be made hereunder.

(c)The Accounting Firm engaged to make the determinations hereunder shall provide its calculations, together with detailed supporting documentation, to the Company and Employee within fifteen (15) business days after the date on which right to a Payment is triggered (if requested at that time by the Company or Employee) or such other time as requested by the Company or Employee. Any good faith determinations of the accounting firm made hereunder shall be final, binding and conclusive upon the Company and Employee.

19.Clawback.  Any incentive based compensation, or any other compensation, paid or payable to Employee pursuant to this Agreement or any other agreement or arrangement with the Company, which is subject to recovery under any law, government regulation, order or stock exchange listing requirement, will be subject to such deductions and clawback (recovery) as may be required to be made pursuant to law, government regulation, order, stock exchange listing requirement (or any policy of the Company adopted pursuant to any such law, government regulation, order or stock exchange listing requirement). Employee specifically authorizes the Company to withhold from future wages any amounts that may become due under this provision; provided, however, nothing in this provision is intended to permit a change in the terms of payment of any deferred compensation subject to Section 409A in any manner that would violate or create a plan failure under Section 409A. This Section 19 shall survive the termination of this Agreement for a period of three (3) years.

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IN WITNESS WHEREOF, the Company and Employee have caused this Agreement to be effective as of the day and year first above written.