TOWN OF JUPITER
DATE:
December 14, 2012
TO:
Honorable Mayor and Members of Town Council
FROM:
Andrew D. Lukasik, Town Manager
SUBJECT: Approval of a loan guarantee in the amount of $115,000 to CHS
Pharma, Inc. and granting authorization to the Town Manager and
Town Attorney to develop the necessary agreements to implement the
terms for approval by the Mayor.
EXECUTIVE SUMMARY:
Town staff recommends approval of a $115,000 loan guarantee to CHS Pharma, Inc. for the acquisition of technology
that is currently licensed from the Florida Atlantic Research Corporation and granting authorization to the Town
Manager and Town Attorney to develop the necessary agreements to implement the terms for approval by the Mayor.
Company Background: CHS Pharma, Inc is a biotechnology product development company focusing on a
pharmaceutical treatment for Actinic Keratosis (AK). AK is a very common dermatologic problem. It is a
precancerous skin growth generally caused by sun exposure which is usually characterized by rough, red, scaly
crusted areas that appear on the outer layer of skin. While not life threatening, if untreated, it can progress to
carcinomas that can become fatal.
CHS’s application and technologies are unique in that preliminary studies have indicated that Sulindac, an existing
product, when combined, with an oxidizing agent, such as hydrogen peroxide or dichloroacetic acid, not only helps to
eradicate the AK, but preferentially targets it, leaving the normal cells unharmed. While the precise mechanism of
action is being investigated, CHS believes that its technologies offer significant promise in the growing AK and skin
cancer markets.
CHS was formed as a Florida limited liability company in February, 2005 and in October, 2005 licensed its
technology, which was developed by Dr. Herb Weissbach of Florida Atlantic University, from FAU Research
Corporation, an affiliate of Florida Atlantic University. To date, CHS has raised in excess of $500,000 from its
members and a State of Florida Commercialization Research Grant, which has been used for various preliminary
studies regarding a treatment for AK.
Previous Loan Guarantee Details: In April, 2010, the Town Council approved a loan guarantee to provide for a
$275,000 loan to CHS Pharma (fka CHS Resources, Inc.) as recommended by the Town’s Economic Development
Advisory Board. The original loan guarantee provisions included that the Town would guarantee $233,750 (85%) of a
$275,000 loan and that the Town would be granted stock options in CHS equal to 2.5% of the company’s total equity
for providing the loan guarantee. The exercise price of the stock options was to be equal to the price of equity in
CHS’ next round of fund raising.
The proceeds from the funding were to be used to prepare and file an IND with the FDA with respect to the
application of the CHS’ product for the treatment of AK and operational costs related to the relocation of the
Company. CHS has relocated its offices to Jupiter, however, the commercialization effort was not pursued and,
instead, the technology was improved to reduce the time a consumer would have to use the product by expediting the
aging process of cancer cells (i.e. application time reduced from 21 to 3 days).
As a result of this effort, CHS Pharma was unable to maintain its licensing payments to FAU and was on the verge of
falling behind on its loan payments to First United Bank (Town staff has worked with the bank to keep CHS’ loan from
defaulting even though the payments have fallen behind schedule). To keep CHS from defaulting, the Town has
advanced $9,487.50 from accumulated interest on the CHS CD (which is the CD the Town maintains at Seacoast
Bank) to keep the loan current. FAU was on the verge of repealing the licensing agreement with CHS, but the Town
and others who see the technology’s potential advocated on its behalf and, consequently, CHS has negotiated a
pathway to secure the technology from FAU and commercialize the technology.
Current Financing Request and Use of Proceeds: As mentioned above, CHS Pharma has embarked on a new
strategy to commercialize its technology: The company will be purchasing the technology from FAU and will be filing
an IND for an Investigational New Drug Application (IND) with the U.S. Food and Drug Administration (FDA) for a
topical treatment for AK and other skin cancers with the assistance of Sancillio & Company, Inc (SCI).
SCI is a local R&D/biomanufacturing company, which also has received a loan guarantee from the Town, and has a
history of successful commercialization of technology. SCI will take the technology through the FDA phase I process.
SCI recently completed a due diligence analysis of the technology and has agreed to take the technology through the
phase I process (which costs approximately $1.5 million) at no up-front cost to CHS but for significant ownership of
the company. Its willingness to take the product through phase I at no cost is an indication of its confidence in the
technology’s ability to be commercialized.
To facilitate this new pathway to commercialization, Town staff is recommending that the Town provide an additional
loan guarantee of $105,000 to allow CHS to acquire the licensed technology from FAU and pay for associated legal
expenses. In exchange for this additional funding, the Town will receive an increase in the Town’s share of stock
options from 2.5% to 10% of the company with a strike price set at $0.01 as opposed to the value at the next round of
financing. Simply put, this means that the Town, in one transaction, will purchase and sell CHS stocks. While the
Town will “purchase” the stocks for $0.01 per share, it will not actually have an outlay of cash. When the transaction
is made, the Town will receive the difference between the $0.01 per share purchase price and the per share value of
the company when the Town calls in its stock options. This return, then, can be reinvested in the Economic
Development Fund for future use.
Additional terms of the loan guarantee include the following:
Prior to the Town’s deposit of $115,000 with First United bank to guarantee the loan, an amount of $30,000 of
private funding be deposited with the bank to service the loan expenses, and
The Town will be reimbursed the $9,487.50 of interest revenue from the original loan guarantee Certificate of
Deposit that was used to service the debt on behalf of CHS at the time of the closing.
The $145,000 being deposited with First United Bank will also be used by CHS to apply for a Florida
Commercialization Fund grant to pay other, ongoing operating costs.
All terms are being included in agreements being drafted by the Town Attorney.
RECOMMENDATION:
Approval of a loan guarantee to provide for a $115,000 loan guarantee to CHS Pharma, Inc and granting
authorization to the Town Manager and Town Attorney to develop the necessary agreements to implement the terms
for approval by the Mayor.
Strategic Priority:
Strong Local Economy
Attachments:
Resolution
Economic Development Fund Update
Term Sheet
Presentation
Funding Source:
x
Approved in Budget
$
Additional Funding Required
$
$115,000
Sources:
Sources:
Economic Development Fund
TERM SHEET
OFFERING OF FINANCIAL SUPPORT
For
CHS Pharma, LLC (CHS)
From
Town of Jupiter (TOJ)
December 2012
*
*
*
THIS TERM SHEET SUMMARIZES THE PRINCIPAL TERMS OF THE OFFER OF FINANCIAL SUPPORT
FROM THE TOWN OF JUPITER. THE TRANSACTIONS CONTEMPLATED BY THIS TERM SHEET ARE
SUBJECT TO THE SATISFACTORY COMPLETION OF DUE DILIGENCE BY THE TOWN OF JUPITER.
THIS TERM SHEET DOES NOT CONSTITUTE EITHER AN OFFER TO SELL OR AN OFFER TO
PURCHASE SECURITIES. THIS DOCUMENT IS INTENDED TO SET FORTH THE INTENT OF THE
PARTIES AND IS NOT INTENDED TO BE BINDING UPON ANY PARTY OR PERSON.
This term sheet summarizes the principal terms and conditions of an offer of financial support from the
Town of Jupiter (the “Offer”).
The Offer
Form of Offer: Loan Guarantee
Amount / Term: $115,000 loan for a maximum period of 60 months.
Guarantee In addition to any financial covenants required by the lender of CHS, the TOJ will provide a
Amount: cash guarantee of $115,000 and CHS will provide $30,000 as cash or cash equivalents.
Prior to the Town’s deposit of $115,000 to guarantee the loan, the amount of $30,000 of
private funding is to be deposited with the bank with the use restricted solely to service of
the loan expenses.
Repayment The Loan will be repaid monthly. The loan will be paid in full at the end of the 60 month
term. Terms of repayment may include interest only payments for the first 36 months of the
term and interest/principle payments for the remaining 24 months at an interest rate to be
determined by the lender of CHS’ choice.
Use of Funds: The investment will be used to fund the development of pharmaceutical treatments for
Actinic Keratosis.
Stipulations The Loan will be secured by all the assets of CHS. The company will execute a UCC-1
confirming the lender’s title ownership to the equipment until such time that the loan is
repaid in full.
CHS shall execute a personal guarantee agreement that shall be a continuing, unconditional,
and irrevocable guarantee to repay and indemnify TOJ in the amount equal to the cash
guarantee provided. The personal guarantee will not require a minimum net asset threshold
to be valid.
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CHS shall be subject to any provisions or stipulations required by the lender.
CHS must continue to be located within the boundaries of any of the cities or unincorporated
Palm Beach County that constitute "North County" (Jupiter, Palm Beach Gardens, Riviera
Beach, Mangonia Park, Lake Park and unincorporated Palm Beach County) during the term
of the loan. Failure to meet this obligation will require the Loan to become immediately due
and repaid in full.
CHS shall deliver a lease or purchase agreement or any documentation found to be adequate
by the TOJ to indicate that CHS has secured a physical location in North County in which to
operate.
The Town will be reimbursed the $9,487.50 of interest revenue from the original loan
guarantee Certificate of Deposit that was used to service the debt on behalf of CHS at the
time of the closing on the loan.
Management: The company will maintain the existing members of the Board of Directors. TOJ will be
notified of any change in the management of CHS during the term of the loan. CHS is an
LLC with Stephen Chakoff and Saeid Rezvankhah as its Managing Members, CHS will
maintain Stephen Chakoff and Saeid Rezvankhah as the Managing Members during the
term of the loan and keep the Scientific Advisory Board intact.
CHS will cooperate fully with the efforts of Sancilio & Company, Inc (SCI), which has been
engaged by CHS to complete the FDA development and approval process.
Change in In the event of a change in control, the Loan may, in the sole discretion of the TOJ become
Control: immediately due and repaid in full.
Information CHS will provide all required documents for due diligence and regular loan covenant review
Rights: to the lender.
Expenses: The TOJ will pay for its own legal and related fees for creation of the final agreement and
the issuance loan guarantee. CHS will pay for all legal and accounting fees that it incurs for
advice related to this Offer.
Lender: CHS may negotiate the terms of the loan with a lender of its choosing.
Final Agreement: The TOJ will request a law firm of its own choosing to draft a Final Agreement which
incorporate the terms outlined herein as well as all other terms and indemnifications required
by the TOJ.
Equity The TOJ will be granted stock options in CHS equal to 10% of the equity in CHS at the
Participation: time of consummation of the loan but subsequent to the Sancillio & Company, Inc (SCI)
investment (55%) for providing the loan guarantee. Value of the stock options will be $0.01.
Financial CHS shall furnish to the TOJ the following financial information, in each instance prepared
Reporting: in accordance with generally accepted accounting principles consistently applied and
otherwise in form and substance satisfactory to the TOJ:
1) Annual Financial Statements: CHS shall deliver to the TOJ, within 120 days after the
close of each fiscal year, financial statements that reflect its operations during such fiscal
year, including, without limitation, a balance sheet, profit and loss statement and statement
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of cash flows, with supporting schedules.
2) Budget/Projections: CHS shall deliver to the TOJ current budget and projection
statements as soon as available and in any event within 30 days after the close of each fiscal
quarter; all in reasonable detail.
Project CHS shall provide semi-annual reports advising the TOJ of the status of the project for
Reporting: which funding has been requested.
Closing CHS will be obligated to: (i) provide financial information as requested by the TOJ or the
Conditions: Lender, (ii) obtain all required consents and approvals from its shareholders, partners, or
directors, (iii) affirm that their business is in compliance with all federal and state laws that
are applicable to the CHS’s business, (iv) attest to being authorized to execute the final
agreement, and (v) execute the final agreement.
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Town of Jupiter
Economic Development Advisory Board Fund
Funding Update
Initial Fund Deposit
May, 2012
3,000,000
Completed Transactions:
Transdermal Technologies
350,000 *
Direct loan
Leinco Technologies
350,000 *
Direct Loan
WPB
Int pyts Nov 2010.
Int only til Nov 2013
Palm Beach Community College
72,500
Educational Grant
PBG
Grant only
Ocean Ridge BioSceince Phase I
50,000
Loan Guarantee
PBG
Maturity Sept 2013
Sancilio & Company
350,000
Loan Guarantee
PBG
Maturity June 2012
Biotools
191,250
Loan Guarantee
PBC
Maturity Sept 2013
CURNA
350,000 *
Loan Guarantee
TOJ
Maturity Sept 2013
Cytonics
297,500 *
Loan Guarantee
TOJ
Maturity Janury 2014
GLG Pharma
212,500
Loan Guarantee
TOJ
Maturity June 2014
CHS Pharma
233,750
Loan Guarantee
TOJ
Maturity July 2015
Endeavour Capital
300,000
Loan Guarantee
TOJ
Maturity October 2016
GLG Pharma - Phase II
137,500
Loan Guarantee
TOJ
Maturity March 2016
Akron Biotech
350,000
Loan Guarantee
TOJ
Maturity February 2017
Grant - State
required match
TOJ
Project Cube
30,000
Total funded projects
3,275,000
Plus : Repayments to Town
1,347,500 *
Balance after funded projects and
reimbursments
1,072,500
CHS Pharma
Town of Jupiter
Economic Development Fund
Request for Funding
December 18, 2012
CHS Pharma
Request for Funding
• Working to commercialize technology developed
by Florida Atlantic University that treats Actinic
Keratosis (AK), a precancerous skin condition
• Require a $105,000 loan guarantee from the Town
of Jupiter Economic Development Fund to acquire
from FAU, their IP Portfolio related to the
technology developed by Dr. Weissbach, to
pursue commercialization in collaboration with
Sancilio & Company.
CHS Pharma
Company Background
•
•
•
•
•
Established in 2005
Early-Stage Product Development
Relocated to Jupiter in 2010
Completed formulation and POC studies
Have a platform technology
– Actinic Keratosis (AK)
– Dry Macular Degeneration (Dry AMD)
• Seasoned Management/Consultants/BOD
Technology Development
1. Sulindac was one of the first antiinflammatory drugs similar to Ibuprofen or
Aleve.
2. Our research discovered that sulindac
enhances the killing of cancer cells exposed to
harmful agents that cause oxidative damage.
Normal cells are protected against these
agents.
Normal Cells React Differently To Sulindac
Than Cancer Cells
Cancer Cells
Normal Cells
Sulindac
+
oxidative stress
Protection
Enhanced Killing
Potential Uses
Cardiac Ischemia
Stroke
Retinal diseases
Lung diseases
UVB skin damage
Actinic keratosis
Skin and other cancers
CHS Pharma – Treatment for Actinic
Keratoses (AK)*
1. Based on research performed at FAU, CHS Pharma
has developed a dual drug treatment for AK. The drug
combination is sulindac + hydrogen peroxide.
2. A proof of concept clinical trial sponsored by CHS
Pharma indicated that this treatment has similar
efficacy as other drug treatments (e.g. efudex, zyclara,
solaraze, picato).
3. The major advantage of the CHS Pharma drug
treatment is the lack of inflammation and damage to
surrounding normal tissues, seen with the other drugs.
*Actinic Keratoses is precancerous skin lesion with a market of >$700 million.
Patient - Day 30 Using Efudex
Source: http://www.sannerud.com/people/efudex/
Patient – Day 44 with Efudex
Source: http://www.sannerud.com/people/efudex/
Effect of sulindac and hydrogen peroxide
on actinic keratoses
NO
AFTER
AFTER
TREATMENT
3 WEEKS
6 WEEKS
Technology Summary
1-
2-
3-
Research at FAU has led to the development of a
treatment for actinic keratoses using a drug
combination containing sulindac.
Sulindac can protect normal cells against oxidative
damage that could lead to new therapies for several
age related diseases.
The intellectual property for both the sulindac
effect on cancer killing and protection of normal
cells has been licensed to CHS Pharma and patents
have been issued.*
* Weissbach, H., Brot, N. Catalytic antioxidants and methods of use. Florida Atlantic University October 2006: US
Patent 7,129,374.
* Weissbach, H., Resnick, L., Binninger, D. Treatment or prevention of cancer and precancerous disorders. Florida
Atlantic University September 2012: US Patent: 8,258,181.
Commercialization Pathway
• Acquisition of IP portfolio from FAU
– Loan from Jupiter will be used to purchase the
technology
• Partnership with SCI
– SCI to conduct Pre-Clinical leading to IND
– SCI to have ownership interest in company
Loan Parameters
• $115,000 loan guarantee
– Acquire technology from FAU and pay associated legal
expenses
– This is in addition to the existing $275,000 loan
guarantee (guaranteed 85% Town/15% private funding)
– Requires initial deposit of $30,000 of private monies
• Repayment of Town Interest Revenue
– $9,487.50 to be repaid to Town at the time of the
closing on the loan.
– These were funds the Town expended to temporarily
maintain CHS’ existing loan.
Loan Parameters
• Increase the Town’s warrant position
– Increased from 2.5% to 10%
– Strike price (meaning the initial value of the
warrant/stock options at $0.01 instead of being based
upon the company valuation at the next round of
funding
• Avoids the problem the Town experienced when a company
sold before a strike price was established.
• The Town nets the difference between the strike price and the
value of the shares when the Town calls the warrants/stock
options
• This occurs in one transaction; the Town will NOT expend
funds to purchase the stocks.
RESOLUTION NO. 99-12
A RESOLUTION OF THE TOWN COUNCIL OF THE TOWN
OF JUPITER FLORIDA APPROVING A LOAN GUARANTEE
IN AN AMOUNT NOT TO EXCEED $115,000 FOR A LOAN
AMOUNT NOT TO EXCEED $115,000 FOR CHS PHARMA,
LLC; AND PROVIDING FOR AN EFFECTIVE DATE.
WHEREAS, The Florida Constitution, applicable laws of the State of Florida and the
Charter of the Town of Jupiter, Florida (the Charter), authorize and grant the Town Council
broad home rule authority to act in the best interests of its citizens; and
WHEREAS, CHS Pharma, LLC (CHS) is applying for a business purpose bank loan
to acquire and commercialize technology currently being licensed by CHS from Florida
Atlantic University and the Town has agreed to support this application by making funds
available to be used as cash collateral for the CHS loan; and
WHEREAS, as part of its commitment to Palm Beach County to be the location of
Scripps Florida, the Town created an Economic Development Advisory Board whose
purpose it was to assist businesses in the biotechnology sector to relocate or expand their
businesses in Palm Beach County and the Town; and
WHEREAS, the Town’s Economic Development Advisory Board had previously
recommended, and the Town Council approved that the Town provide a loan guarantee in
an amount not to exceed $233,750 for CHS loan amount not to exceed $275,000; and
WHEREAS, the Town Council has determined that it is in the best interest of the
Town to accept Town staff’s recommendation to provide additional funding to CHS; and
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WHEREAS, funds for the loan guarantee would be set aside from the $3 million
contribution the Town Council has previously committed to Palm Beach County in order for
the selection of the Town as the location for the Scripps Florida headquarters.
NOW, THEREFORE, BE IT RESOLVED BY THE TOWN COUNCIL OF THE TOWN
OF JUPITER, FLORIDA, AS FOLLOWS:
Section 1.
The foregoing recitals are true, correct and incorporated into this
Resolution.
Section 2.
The Town Council hereby agrees to provide a loan guarantee in the
amount of $115,000 for a loan amount not to exceed $115,000 with a local bank for CHS
Pharma, LLC in accordance with the attached term sheet developed by Town staff.
Section 3.
This Resolution shall take effect immediately upon adoption.
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