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EXHIBIT 10.10

 

 

THE SECURITIES BEING SUBSCRIBED FOR PURSUANT TO THIS SUBSCRIPTION AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE SECURITIES MAY NOT BE SOLD OR OFFERED
FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT AND SUCH STATE LAWS AS MAY BE APPLICABLE, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. ADDITIONAL RESTRICTIONS ON TRANSFER OF THE SECURITIES ARE SET FORTH IN THIS SUBSCRIPTION AGREEMENT.

 

SUBSCRIPTION AGREEMENT

 

THIS SUBSCRIPTION AGREEMENT (this "Agreement"), dated as of March 4, 2016, is by and between Dolphin Digital Media, Inc., a Florida corporation (the "Company") and
Dolphin Entertainment, Inc., a Florida corporation (the "Subscriber").

 

WHEREAS, the Subscriber is the holder of an outstanding promissory note of the Company, dated December 31, 2011 (the "Existing Note") in the aggregate principal amount of

$2,120,622.60, of which $3,073,410 in currently due and outstanding as of the date hereof (including accrued but unpaid interest);

 

WHEREAS, the Company and the Subscriber have agreed, subject to the terms and conditions set forth herein, to convert the aggregate principal amount (including accrued but unpaid interest) of the Existing Note into shares of common stock of the Company, par value

$0.015 per share ("Common Stock"), in order to improve the financial position of the Company (the "Conversion");

 

WHEREAS, the Company and the Subscriber have agreed to execute this Agreement to evidence their agreement with respect to the Conversion and the issuance of the Subscriber Shares; and

 

WHEREAS, the Company and the Subscriber are executing and delivering this Agreement in reliance upon an exemption from securities registration afforded by the provisions of Section 4(a)(2) and/or Regulation D, as promulgated by the United States Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities
Act").

 

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties to this Agreement hereby agree as follows:

 

SECTION 1. Subscription for Subscriber; Subscription Price.

 

1.1 Purchase. The Subscriber, intending to be legally bound, hereby irrevocably agrees to subscribe for the number of shares of Common Stock set forth on the signature page
hereto (the "Subscriber Shares"). The parties agree that the number of Subscriber Shares has been determined in accordance with Section 1.2. This subscription is submitted to the Company in accordance with and subject to the terms and conditions described in this Agreement.

 

	
 

 

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1.2 Conversion of Existing Note; Calculation of Number of Subscriber Shares. The number of Subscriber Shares being issued hereunder is determined in accordance with the following
formula:

 

The aggregate amount outstanding under the Existing Note divided by $ 0.25.

 

Based upon the foregoing, the number of Subscriber Shares being subscribed for hereunder shall be 12,293,640.

 

1.3 Closing; Conditions to Closing. Closing on the purchase and sale of the Subscriber Shares shall be consummated on such date as the Company accepts the Subscriber's offer
to purchase the Subscriber Shares as evidenced by the Company's counter-execution of the signature page to this Agreement, and the satisfaction of each of the conditions to closing set forth below ("Closing"). On or prior to the date of each Closing, the following shall have occurred:

 

(a) The Subscriber shall have delivered to the Company a dated and executed signature page to this Agreement, with all blanks required to be completed by the Subscriber properly completed;

 

(b) The Subscriber shall have delivered to the Company the cancelled Existing Note; and

 

(c) Any other conditions to Closing set forth in this Agreement shall have been satisfied or waived.

 

SECTION 2. Representations, Warranties and Covenants of Company: The Company represents and warrants to the Subscriber that:

 

2.1 Organization and Standing. The Company is a corporation duly organized and validly existing under, and by virtue of, the laws of the State of Florida. The Company has the
requisite corporate power to own and operate its properties and assets, and to carry on its business as presently conducted and as proposed to be conducted.

 

2.2 No Conflicts. This Agreement does not: (i) conflict with any provision of the Company's Articles
of Incorporation or Bylaws, as each may have been amended from time to time to date; or (ii) result in a violation of any federal, state, local or foreign law, rule, regulation, order, judgment or decree (including Federal and state securities laws and regulations) applicable to the Company or by which any property or asset of the Company is bound or affected.

 

2.4 Authorization. The execution, delivery and performance of this Agreement by the Company has been duly authorized by all requisite
corporate action, and constitutes the valid and binding obligations of the Company enforceable in accordance with its terms, subject as to enforcement of remedies to applicable bankruptcy, insolvency, reorganization, or similar laws relating to or affecting the enforcement of creditors' rights.

 

  

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2.5 Capitalization. The authorized capital stock of the Company immediately upon the consummation of the transactions contemplated by this Agreement shall consist of:

 

(a) 10,000,000 shares of preferred stock (the "Preferred Stock")
of which:

 

(1) 1,042,753 shares have been duly designated Series A Convertible Preferred Stock, all of which are duly and validly issued and outstanding, fully paid and non-assessable, with no personal liability attaching to the ownership thereof;

 

(2) 4,000,000 shares have been duly designated Series B Convertible Preferred Stock;

 

(3) 1,000,000 shares have been duly designated Series C Convertible Preferred Stock; and

 

(b) 400,000,000 shares have been duly designated as Common Stock, of which 106,841,992 shares are duly and validly issued and outstanding, fully paid and non-assessable, with no personal liability attaching to the ownership thereof.

 

SECTION 3. Representations, Warranties and Covenants of Subscriber. Subscriber represents and warrants to the Company that:

 

3.1 Own Account. The Existing Note and the Subscriber Shares that the Subscriber would acquire upon conversion have been (or would be) acquired solely for its,
his or her account and are not being (or would not be) purchased with a view to, or for resale in connection with, any distribution within the meaning of the Securities Act or related laws and regulations or any other applicable securities laws of any other jurisdiction (collectively, the "Securities Laws"). The Subscriber will not resell or offer to resell the Common Stock except in accordance with the terms of
the Bylaws of the Company and in compliance with all applicable Securities Laws. The Subscriber will not take, or cause to be taken, any action that would cause the Subscriber to be deemed an underwriter, as defined in Section 2(11) of the Securities Act.

 

3.2 Organization and Standing of Subscriber. If the Subscriber is an entity, such Subscriber is a corporation, partnership or other entity duly incorporated
or organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization and has the requisite corporate power to own its assets and to carry on its business.

 

3.3 Authorization and Power. The Subscriber has all requisite authority (and in the case of an individual, the capacity) to purchase the Subscriber Shares,
and enter into this Agreement and to perform all the obligations required to be performed by the Subscriber hereunder and thereunder, and such purchase will not contravene any law, rule or regulation binding on the undersigned or any investment guideline or restriction applicable to the Subscriber.

 

  

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3.4 No Conflicts. The execution, delivery and performance of this Agreement and the consummation by the Subscriber of the transactions contemplated
hereby or relating hereto do not and will not (i) result in a violation of the Subscriber's charter documents or bylaws or other organizational documents (if the Subscriber is not an individual) or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of any agreement or instrument
or obligation to which the Subscriber is a party or by which its properties or assets are bound, or result in a violation of any law, rule, or regulation, or any order, judgment or decree of any court or governmental agency applicable to the Subscriber or its properties. The Subscriber is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under this Agreement
or to purchase the Subscriber Shares in accordance with the terms hereof.

 

3.5 Residence. The Subscriber is a resident of the state set forth on the signature page hereto and is not acquiring the Subscriber Shares as a nominee or agent
otherwise for any other person.

 

3.6 No Reliance. The Subscriber confirms that it is not relying on any communication (written or oral) of the Company or any of its affiliates, as investment
advice or as a recommendation to purchase the Subscriber Shares. It is understood that information and explanations related to the terms and conditions of the Subscriber Shares provided by the Company or any of its affiliates shall not be considered investment advice or a recommendation to purchase the Subscriber Shares, and that neither the Company nor any of its affiliates is acting or has acted as an advisor to the Subscriber in deciding to invest in the Subscriber Shares. The Subscriber acknowledges that
neither the Company nor any of its affiliates has made any representation regarding the proper characterization of the Subscriber Shares for purposes of determining the undersigned's authority to invest in the Subscriber Shares.

 

3.7 Investment Experience.

 

(a) The Subscriber has such knowledge, skill and experience in business, financial and investment matters that it is capable of evaluating the merits and risks of an investment in the Subscriber Shares. The Subscriber has made its own
legal, tax, accounting and financial evaluation of the merits and risks of an investment in Company.

 

(b) The Subscriber has had access to the legal, financial, tax and accounting information concerning the Company and the Subscriber Shares as it deems necessary to enable it to make an informed investment decision concerning the purchase
of the Subscriber Shares.

 

(c) The Subscriber understands that the Subscriber Shares that the Subscriber is acquiring upon conversion of the Existing Note have not and will not be registered under the Securities Laws. The Subscriber understands that it, he or
she has no rights whatsoever to request, and that the Company is under no obligation whatsoever to furnish, a registration of the Subscriber Shares under the Securities Laws.

 

  

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(d) The Subscriber is aware that the Subscriber will have to make the payment of the Purchase Price through the surrender of the Existing Note. The Subscriber can bear the economic risk of losing its entire investment
in the Company without impairing the Subscriber's ability to provide for itself, himself or herself and/or his or her family (as applicable) in the same manner that the Subscriber would have been able to provide prior to making an investment in the Company.

 

3.8 Risk Factors; Investment Suitability: No Reliance. The Subscriber has read carefully and understands the Risk Factors of the Company attached hereto as Exhibit A. The
Subscriber has, to the extent the Subscriber believes such discussion is necessary, discussed with its professional legal, tax, accounting and financial advisors the suitability of an investment in the Common Stock for its particular tax and financial situation and has determined that the Common Stock being subscribed for are a suitable investment for the Subscriber. THE SUBSCRIBER CONFIRMS THAT IT IS NOT RELYING UPON ANY INFORMATION, REPRESENTATION OR WARRANTY BY THE COMPANY OR ANY OF ITS AGENTS IN DETERMINING
TO CONSUMMATE THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT AND IS RELYING ONLY ON THE SUBSCRIBER'S OWN EXAMINATION OF THE COMPANY AND THE TERMS OF THIS AGREEMENT, INCLUDING THE MERITS AND RISKS INVOLVED IN MAKING ITS INVESTMENT DECISION.

 

3.9 No Brokers. The Subscriber has taken no action which would give rise to any claim by any person for brokerage commissions,
finders' fees or the like relating to this Agreement or the transactions contemplated hereby.

 

3.10 Confidentiality. The Subscriber understands and hereby acknowledges and agrees that
all of the information appearing herein and otherwise provided to the Subscriber in connection with the purchase of the Subscriber Shares made hereby is confidential and that the Subscriber and the Subscriber's representatives and agents may not disclose such information to any person that is not a party to the transactions contemplated hereby.

 

3.11 No General Solicitation. The Subscriber acknowledges that neither the Company nor any other person offered to sell the
Subscriber Shares to it by means of any form of general solicitation or advertising, including but not limited to: (a) any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio or (b) any seminar or meeting whose attendees were invited by any general solicitation or general advertising.

 

3.12 Legend. The Subscriber understands that the Subscriber Shares purchased by it, him or her will be "restricted securities"
as that term is defined in Rule 144 under the Securities Act and that the certificate(s), if any, representing the Subscriber Shares will bear a restrictive legend thereon in substantially the form that appears below:

 

"THESE SHARES OF COMMON STOCK HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THEY MAY NOT BE OFFERED, SOLD, PLEDGED, HYPOTHECATED. ASSIGNED OR TRANSFERRED EXCEPT (I) PURSUANT
TO A REGISTRATION STATEMENT UNDER THE SECURITIES ACT WHICH HAS BECOME EFFECTIVE AND IS CURRENT WITH RESPECT TO THESE SECURITIES, OR (II) PURSUANT TO A SPECIFIC EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT, BUT ONLY UPON THE HOLDER HEREOF FIRST HAVING OBTAINED THE WRITTEN OPINION OF COUNSEL TO THE ISSUER, OR OTHER COUNSEL, REASONABLY ACCEPTABLE TO THE ISSUER, THAT THE PROPOSED DISPOSITION IS CONSISTENT WITH ALL APPLICABLE PROVISIONS OF THE SECURITIES ACT AS WELL AS ANY APPLICABLE "BLUE SKY" OR OTHER SIMILAR
SECURITIES LAW."

 

  

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3.13 Additional Information. The Subscriber agrees to furnish any additional information requested by the Company or any of its affiliates to assure compliance
with applicable U.S. federal and state securities laws in connection with the issuance of the Subscriber Shares.

 

3.14 Survival. The Subscriber understands that all representations and warranties and agreements hereunder shall survive execution and delivery of this Agreement
and the issuance of the Subscriber Shares.

 

SECTION 4. Indemnification. The Subscriber agrees to indemnify, hold harmless, reimburse and defend the Company and each of the Company's officers, directors, agents, attorneys, affiliates, and control persons against any claim, cost, expense,
liability, obligation, loss or damage (including reasonable legal fees) of any nature, incurred by or imposed upon the Company or its successor or any such person which results, arises out of or is based upon any material misrepresentation by such Subscriber in this Agreement or in any exhibits attached hereto, or other agreement delivered pursuant hereto.

 

SECTION 5. Amendments. This Agreement may not be modified or amended except pursuant to an instrument in writing signed by the Company and the Subscriber. No waiver of any provision this Agreement shall be binding unless executed in writing
by the party to be bound thereby. No waiver of any provision of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (regardless of whether similar), nor shall any such waiver constitute a continuing waiver unless otherwise expressly provided.

 

SECTION 6. Headings. The headings of the sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Agreement.

 

SECTION 7. Severability. In case any provision contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way
be affected or impaired thereby.

 

SECTION 8. Governing Law. This Agreement and any disputes or claims arising out of or in connection with its subject matter shall be governed by and construed in accordance with the
laws of the State of Florida without regard to the rules of conflict of laws of such state that would cause the laws of another jurisdiction to apply. The parties hereto acknowledge and agree that venue and jurisdiction for any claim, suit or controversy related to or arising out of this Agreement shall lie in the state or federal courts located in Miami-Dade County, Florida. THE PARTIES HEREBY WAIVE THE RIGHT TO JURY TRIAL OF ANY MATTERS ARISING OUT OF THIS AGREEMENT OR THE CONDUCT OF THE RELATIONSHIP BETWEEN
THEM.

 

 

  

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SECTION 9. Notices. All notices, requests, demands or other communications to the respective parties hereto shall be in writing addressed to the respective parties and their respective addresses as follows:

 

to the Company, at:

 

2151 LeJeune Road 

Suite 150-Mezzanine 

Coral Gables, FL 33134 

United States

Attention: Mirta Negrini Facsimile: 305 774-0405

E-mail: mirta@dolphindigitalmedia.com 

 

to Subscriber at:

 

2151 LeJeune Road

Suite 150-Mezzanine 

Coral Gables, FL 33134 

United States

Attention : William O'Dowd IV

E-mail: billodowd@dolphindigitalmedia.com

 

or to such address of which either party may subsequently give notice. All notices, requests, demands or other communications to the respective parties hereto shall be in writing addressed to the respective parties at their respective addresses shown beneath their signatures hereto. All such notices, requests, demands and communications described above
and all other notices, demands, requests and other communications made in connection with this Agreement shall be effective and be deemed to have been received (i) if delivered by hand, upon personal delivery, (ii) if delivered by reputable overnight courier service, one business day after its
delivery to such courier service with all charges prepaid (or charged to the account of the sender) and with receipt confirmed (by a record of receipt maintained) by such overnight courier, (iii) if delivered by United States mail upon the earlier of actual receipt and three business days after deposit, registered or certified mail, return receipt requested, with proper postage prepaid, (iv) if delivered by facsimile, upon sender's receipt of confirmation of proper transmission, and (v) if delivered by electronic
transmission, upon transmission.

 

 

SECTION 10. Counterparts; Facsimile Signatures. This Agreement may be executed in one or more counterparts, each of which shall constitute an original, but all of which, taken together,
shall constitute but one instrument. Facsimile or other electronically scanned and transmitted signatures shall be deemed originals for all purposes of this Agreement.

 

  

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SECTION 11. Entire Agreement. This Agreement contains the entire understanding of the parties with respect to the matters covered herein and therein; and, except as specifically set forth herein or therein, neither the Company nor the Subscriber
makes any representation, warranty, covenant or undertaking with respect to such matters.

 

SECTION 12. Fees and Expenses. Except as set forth in the Bylaws of the Company, each party hereto shall pay its respective fees and expenses related to the transactions contemplated by this Agreement.

 

SECTION 13. Parties. This Agreement is made solely for the benefit of and is binding upon the Company and the Subscriber, and no other person or entity shall acquire or have any right under or by virtue of this Agreement.

 

SECTION 14. Assignment. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the parties hereto and their respective successors and assigns. This Agreement and the rights of
the Subscriber hereunder may be assigned by Subscriber only with the prior written consent of the Company. The Company may not assign this Agreement without the written consent of the Subscriber.

 

SECTION 15. Further Assurances. Each party agrees to cooperate fully with the other party hereto and to execute such further instruments, documents and agreements and to give such further written assurance as may be reasonably requested by
the other party to evidence and reflect the transactions described herein and contemplated hereby and to carry into effect the intents and purposes of this Agreement.

 

[Signature pages follow}

 

 

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The Subscriber hereby agrees to purchase 12,293,640 shares of Common Stock in consideration of the payment in full of the Existing Note. Entered into as of the day and year first written above.

 

 

 

	
 
	
SUBSCRIBER
	
 

	
 
	
  
	
 

	
 
	
DOLPHIN ENTERTAINMENT, INC.
	
 

	
 
	
 
	
 
	
 

	
 
	
By:  

	
/s/ William O'Dowd
	
 

	
 
	
 
	
Name: William O'Dowd IV
	
 

	
 
	
 
	
Title: President
	
 

 

  

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IN WITNESS WHEREOF, the undersigned has executed this Agreement as of the date first above written.

 

 

	
 
	
DOLPHIN DIGITAL MEDIA, INC
	
 

	
 
	
 
	
 
	
 

	
 
	
By:  

	
/s/ Mirta A Negrini
	
 

	
 
	
 
	
Name: Mirta A Negrini
	
 

	
 
	
 
	
Title: Chief Financial and Operating Officer
	
 

 

 

 

  

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EXHIBIT A

 

Risk Factors

An investment in the Shares involves a number of risks. You should carefully consider each of the risks described below in evaluating us, our business and an investment in the Shares. The risks described below are not the only risks facing us or that may materially adversely affect our business. Additional risks
and uncertainties not currently known to us or that we currently deem to be immaterial, could materially and adversely affect our business, financial condition, results of operations and cash flows or cause the value of the Shares to decline. We cannot assure you that any of the events discussed in the risk factors below will
not occur, and if such events do occur you may lose all or part of your investment in the Shares.

 

Risks Related to our Business and Financial Condition

 

Our independent auditors have expressed substantial doubt about our ability to continue as a going concern.

For each of the years ended December 31, 2014 and 2013, our independent auditors issued an explanatory paragraph in their audit report expressing substantial doubt about our ability to continue as a going concern based upon our net loss and negative cash flows from operations for the years ended December 31, 2014 and
2013 and our levels of working capital as of December 31, 2014 and 2013. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. Management is planning to raise any necessary additional funds through loans and additional sales of its common stock; however, there can be no assurance that we will be successful in raising any necessary additional capital. If we
are not successful in raising additional capital, we may not have enough financial resources to support our business and operations and as a result may not be able to continue as a going concern.

 

We have a history of operating losses and may continue to incur operating losses.

We have a history of operating losses and may be unable to generate sufficient revenue to achieve profitability in the future. For the fiscal year ended December 31, 2014, our operating losses were $1,873,505. Our accumulated deficit was $38,560,694 at December 31, 2014. Furthermore, we do not anticipate having an operating profit
in 2015. Our ability to generate operating profit in the future will depend on our ability to successfully produce and commercialize multiple web series, as no single project is likely to generate sufficient revenue to cover our operating expenses. If we are unable to generate an operating profit at some point, we will not be able to meet our debt service requirements or our working capital requirements. As a result we may need to (i) issue additional equity, which could dilute the value of your share holdings,
(ii) sell a portion or all of our assets, including any project rights which might have otherwise generated revenue, or (iii) cease operations.

 

  

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The agreement with our CEO from which we derived the majority of our revenues in 2013 and 2014 expired on December 31, 2014 and was not renewed.

For the years ended December 31, 2013 and 2014 the majority of our revenues were derived from production management and back office services to Dolphin Films, an entity which was directly owned by Mr. O'Dowd during such years. This agreement ended on December 31, 2014 and was not renewed for 2015 as the specific projects for which
our services were engaged were completed. If we are unable to generate sufficient revenues from other sources during 2015, the loss of this related party transaction will have a material negative impact on our cash flows and could result in us significantly reducing our operations, selling additional equity to fund operations or ceasing operations. Our business requires a substantial investment of capital and failure to access sufficient capital while awaiting delayed revenues will have a material adverse effect
on our results of operation.

 

The production, acquisition and distribution of a digital production require a significant amount of capital. A significant amount of time may elapse between our expenditure of funds and the receipt of revenues from our productions. We do not have a traditional credit facility with a financial institution on which to depend for our liquidity needs and
a time lapse may require us to fund a significant portion of our capital requirements through related party transactions with our CEO or other financing sources. There can be no assurance that any additional financing resources will be available to us as and when required, or on terms that will be acceptable to us. Our inability to raise capital necessary to sustain our operations while awaiting delayed revenues would have a material adverse effect on our liquidity and results of operations.

 

We may be unable to recoup our investments in digital projects.

Similar to others in the entertainment industry, we purchase scripts and project ideas for which we have no current production plans and for which we have not identified a potential distributor. In 2011 and 2012, we purchased scripts for eleven digital projects related to a particular financing structure. We currently have nine projects
that have not been developed with a total cost of $468,000. As of December 31, 2014, we have not identified a distributor or sufficient advertisers who are interested in the development and distribution of those digital projects. If we are unable to generate interest in the nine projects, then the costs incurred to purchase those scripts will be written off, which will adversely affect our results of operations.

 

Delays, cost overruns, cancellation or abandonment of the completion or release of our digital web Series may have an adverse effect on our business.

There are substantial financial risks relating to production, completion and release of digital films or series. Actual film costs may exceed their budgets and factors such as labor disputes, unavailability of a star performer, equipment shortages, disputes with production teams or adverse weather conditions may cause cost overruns
and delay or hamper film completion. We are typically responsible for paying all production costs in accordance with a budget and received a fixed producer's fee for our services plus a portion of any project income, however to the extent that delays, failure to complete projects or cost overruns result in us not completing the film or Series within budget, there may not be enough funds left to pay us our producer's fee, to generate
any project income or complete the project at all. If this were to occur, it would significantly and adversely affect our revenue and results of operations.

 

  

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We have identified material weaknesses in our internal controls over financial reporting and our ability to both timely and accurately report our financial results could be adversely affected.

In connection with the preparation of our financial statements for the years ended December 31, 2014 and 2013, we identified several material weaknesses in our internal controls over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting
such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As of December 31, 2014, we concluded that our internal control over financial reporting was not effective due to the following material weaknesses:

 

●

Design deficiencies related to the entity level control environment, including risk assessment, information and communication and monitoring controls:

 

o

The Board of Directors does not maintain minutes of its meetings.

 

o

There is no documented fraud risk assessment or risk management oversight function.

 

o

There are no documented procedures related to financial reporting matters (both internal and external) to the appropriate parties.

 

o

There is no budget prepared and therefore monitoring controls are not designed effectively as current results cannot be compared to expectations.

 

o

There is no documented process to monitor and remediate deficiencies in internal controls.

 

●

Inadequate documented review and approval of certain aspects of the accounting process including the documented review of accounting reconciliations and journal entries that they considered to be a material weakness in internal control. Specifically:

 

o

There is no documented period end closing procedures, specifically the individuals that are responsible for preparation, review and approval of period end close functions.

 

o

Reconciliations are performed on all balance sheet accounts, including non­ controlling interest on at least a quarterly basis; however there is no documented review and approval by a member of management that is segregated from the period end financial reporting process.

 

o

There is no review and approval for the posting of journal entries.

 

  

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●

Inadequate segregation of duties within the accounting process, including the following:

 

o

One individual has the ability to add vendors to the master vendor file. This individual also has access to the Company checkbook that is maintained in a secured location.

 

o

One individual has sole access to our information technology system to initiate, process and record financial information. We have not developed any internal controls related to information technology systems including change management, physical security, access or program development.

 

While we have taken a number of remedial actions to address these material weaknesses, we cannot predict the outcome of our remediation efforts at this time. Each of the material weaknesses described above could result in a misstatement of our accounts or disclosures
that would result in a material misstatement of our annual or interim consolidated financial statements that would not be prevented or detected. We cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to remediate the material weaknesses described above or avoid potential future material weaknesses. If we are unable to report
financial information timely and accurately or to maintain effective disclosure controls and procedures, our stock price could be negatively impacted and we could be subject to, among other things, regulatory or enforcement actions by the SEC.

 

We rely on third party relationships with online digital platforms for our advertising revenue and we may be unable to secure such relationships.

We anticipate entering into distribution agreements containing revenue share provisions with online digital platforms to distribute our digital productions. Pursuant to these revenue share provisions, we will earn a portion of advertising revenues once our digital productions are distributed online. If we
fail to secure such relationships with online digital platforms, we will not be able to earn advertising revenues from our digital projects, which could have a material adverse effect on our liquidity and results of operations.

 

We may be unable to attract or retain advertisers, which could negatively impact our results of operation.

Typically, online digital platforms are responsible for securing advertisers and, as such, our ability to earn advertising revenues would depend on their success in doing so. However, at times we have, and may continue to, proactively secure advertising commitments against anticipated web series. Our ability to retain advertisers
is contingent on our ability to successfully complete and deliver online projects which are commercially successful, which we may fail to do. Advertising revenues could also be adversely impacted by factors outside our control such as failure of our digital productions to attract our target viewer audiences, lack of future demand for our digital productions, the inability of third party online digital platforms to deliver ads in an effective manner, competition for advertising revenue from existing competitors
or new digital media companies, declines in advertising rates, adverse legal developments relating to online advertising, including legislative and regulatory developments and Developments in litigation. The existence of any of these factors could result in a decrease of our anticipated advertising revenues.

 

  

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Our kids clubs depend on sponsorship donations to generate revenue.

We generate revenues from our online kids clubs through a portion of the sale of memberships to various donors. Donors typically sponsor a school for $10,000 which entitles each child in the school to receive an annual online kids club membership and entitles the school to receive a Reading Oasis. Receipt of sponsorship donations
are unpredictable and depend on a number of factors such as our ability to successfully brand, market and implement the online kids clubs as well as local and international business and economic conditions.

 

Our CEO owns approximately 48% of our outstanding share capital and his interests may be different from yours.

As of December 31, 2014, our CEO, Mr. O'Dowd beneficially owned approximately 48% of our outstanding share capital. Consequently, Mr. O'Dowd has substantial influence over our business, including election of directors, declaration of dividends and decisions regarding whether or not to issue stock and for what consideration,
whether or not to sell all or substantially all of our assets and for what consideration and other significant corporate actions. It is possible that Mr. O'Dowd may act in a manner that advances his best interests but may not be aligned with your interests or the best interests of the Company.

 

Risks Related to the Industry

 

We have and may in the future be adversely affected by union activity.

We retain the services of actors who are covered by collective bargaining agreements with Screen Actors Guild - American Federation of Television and Radio Artists ("SAG­ AFTRA") and we may also become signatories to certain guilds such as Directors Guild of America and Writers Guild of America in order to allow us to hire directors
and talent for our productions. Collective bargaining agreements are industry-wide agreements, and we lack practical control over the negotiations and terms of these agreements. In addition, our digital projects fall within SAG-AFTRA's definition of "new media", which is an emerging category covered by its New Media and Interactive Media Agreements for actors. As such, our ability to retain actors is subject to uncertainties that arise from SAG-AFTRA's administration of this relatively new category of collective
bargaining agreements. Such uncertainties have resulted and may continue to result in delays in production of our digital projects.

 

In addition, if negotiations to renew expiring collective bargaining agreements are not successful or become unproductive, the union could take actions such as strikes, work slowdowns or work stoppages. Strikes, work slowdowns or work stoppages or the possibility of such actions could result in delays in production of our digital projects. We could also
incur higher costs from such actions, new collective bargaining agreements or the renewal of collective bargaining agreements on less favorable terms. Depending on their duration, union activity or labor disputes could have an adverse effect on our results of operations.

 

  

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The popularity and commercial success of our digital productions are subject to numerous factors, over which we may have limited or no control.

The popularity and commercial success of our digital productions depends on many factors including, but not limited to, the key talent involved, the timing of release, the promotion and marketing of the digital production, the quality and acceptance of other competing programs released into the marketplace at or near the same time,
the availability of alternative forms of entertainment, general economic conditions, the genre and specific subject matter of the digital production, its critical acclaim and the breadth, timing and format of its initial release. We cannot predict the impact of such factors on any digital production, and many are factors that are beyond our control. As a result of these factors and many others, our digital productions may not be as successful as we anticipate, and as a result, our results of operations may suffer.

 

We may be unable to consistently create and distribute filmed entertainment that meets the changing preferences of our consumers.

Changing consumer tastes affect our ability to predict which digital productions will be popular with web audiences. As we invest in various digital projects, stars and directors, it is highly likely that at least some of the digital projects in which we invest will not appeal to our target audiences. If we are unable to produce web
content that appeals to our target audiences the costs of such digital productions could exceed revenues generated and anticipated profits may not be realized. Our failure to realize anticipated profits could have a material adverse effect on our results of operations.

 

The creation of content for the entertainment industry is highly competitive and we will be competing with companies with much greater resources than we have.

The business in which we engage is highly competitive. Our primary business operations are subject to competition from companies which, in many instances, have greater development, production, and distribution and capital resources than us. We compete for the services of writers, producers, directors, actors and other artists to produce
our digital content. In addition, larger companies have a broader and more diverse selection of scripts than we do, which translates to a greater probability that they will be able to more closely fit the demands and interests of advertisers than we can. Such competition for the industry's talent and resources may have an effect on our ability to acquire and produce product.

 

Others may assert intellectual property infringement claims or liability claims for media content against us which may force us to incur substantial legal expenses.

There is a possibility that others may claim that our productions and production techniques misappropriate or infringe the intellectual property rights of third parties with respect to their previously developed digital web series, stories, characters,
other entertainment or intellectual property . In addition, as a distributor of media content, we may face potential liability for such claims as defamation, invasion of privacy, negligence or other claims based on the nature and content of the materials distributed. If successfully asserted, our insurance may not be adequate to cover any of the foregoing claims. Irrespective of the validity or the successful assertion of such claims, we
could incur significant costs and diversion of resources in defending against them, which could have a material adverse effect on our operating results.

 

  

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If we fail to protect our intellectual property and proprietary rights adequately, our business could be adversely affected.

Our ability to compete depends, in part, upon successful protection of our intellectual property. We attempt to protect proprietary and intellectual property rights to our productions through available copyright and trademark laws and distribution arrangements with companies for limited durations. Unauthorized parties may attempt
to copy aspects of our intellectual property or to obtain and use property that we regard as proprietary. We cannot assure you that our means of protecting our proprietary rights will be adequate. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as the laws of the United States. Intellectual property protections may also be unavailable, limited or difficult to enforce in some countries, which could make it easier for competitors to steal our intellectual
property. Our failure to protect adequately our intellectual property and proprietary rights could adversely affect our business and results of operations.

 

Our online activities are subject to a variety of laws and regulations relating to privacy and child protection, which, if violated, could subject us to an increased risk of litigation and regulatory actions.

In addition to our company websites and applications, we use third-party applications, websites, and social media platforms to promote our projects and engage consumers, as well as monitor and collect certain information about users of our online forums. A variety of laws and regulations have been adopted in recent years
aimed at protecting children using the internet such as the Children's Online Privacy and Protection Act of 1998 ("COPPA"). COPPA sets forth, among other things, a number of restrictions on what website operators can present to children under the age of 13 and what information can be collected from them. There are also a variety of laws and regulations governing individual privacy and the protection and use of information collected from such individuals, particularly in relation to an individual's personally
identifiable information (e.g., credit card numbers). Many foreign countries have adopted similar laws governing individual privacy, including safeguards which relate to the interaction with children. If our online activities were to violate any applicable current or future laws and regulations, we could be subject to litigation and regulatory actions, including fines and other penalties.

 

Risks Related to our Common Stock

 

Future equity issuances could result in dilution of your investment and a decline in our stock price.

We may need to raise additional capital in the near term, and may seek to do so by conducting one or more private placements of equity securities, selling additional securities in a registered public offering, or through a combination of one or more of such financing alternatives. Such issuance of additional securities would dilute
the equity interests of our existing shareholders, perhaps substantially, and may cause our stock price to decline.

 

  

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As an issuer of ''penny stock," the protection provided by the federal securities laws relating to forward-looking statements does not apply to us and as a result we could be subject to legal action which may be costly.

Although federal securities laws provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, for as long as we are a penny stock, we will not have the benefit of this safe harbor protection
in the event of any legal action based upon a claim that the material provided by us contained a material misstatement of fact or was misleading in any material respect because of our failure to include any statements necessary to make the statements not misleading.

 

Our common stock is quoted only on the OTC Bulletin Board, which has and may continue to have an unfavorable impact on our stock price and liquidity.

Our common stock is quoted on the OTC Bulletin Board. The OTC Bulletin Board is a significantly more limited market than the New York Stock Exchange or NASDAQ system. Since January 1, 2015, we have recorded only 10 days of trading on our common stock, resulting in an illiquid market available for existing and potential shareholders
to trade shares of our common stock. The quotation of our shares on the OTC Bulletin Board may continue to result in an illiquid market available for existing and potential stockholders to trade shares of our common stock and depress the trading price of our common stock, and may have a long-term adverse impact on our ability to raise capital in the future.

 

 

 

  

18cnat-ex1011_886.htm

Exhibit 10.11

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (this “Agreement”) is entered into by and between Conatus Pharmaceuticals Inc., a Delaware corporation (the “Company”), and Charles J. Cashion (“Employee”), and shall be effective as of December 17, 2008 (the “Effective Date”).

WHEREAS, the Company and Employee are parties to that certain Founder’s Agreement dated as of July 13, 2005, as amended by that certain First Amendment to Founder’s Agreement dated as of January 15, 2006 (the “Prior Agreement”); and

WHEREAS, the Company and Employee desire to replace the Prior Agreement with this Agreement. 

NOW, THEREFORE, in consideration of the mutual promises herein contained, the parties agree as follows:

1.Definitions.  As used in this Agreement, the following terms shall have the following meanings:

 

(a)Board.  “Board” means the Board of Directors of the Company.

 

(b)Cause.  “Cause” means any of the following:

(i) the commission of an act of fraud, embezzlement or dishonesty by Employee that has a material adverse impact on the Company or any successor or affiliate thereof; 

(ii) a conviction of, or plea of “guilty” or “no contest” to, a felony by Employee or any crime involving fraud, misappropriation, embezzlement or moral turpitude; 

(iii) any unauthorized use or disclosure by Employee of confidential information or trade secrets of the Company or any successor or affiliate thereof that has a material adverse impact on any such entity; 

(iv) Employee’s gross negligence, insubordination or material violation of any duty of loyalty to the Company or any other material misconduct on the part of Employee; 

(v)Employee’s ongoing and repeated failure or refusal to perform or neglect of Employee’s duties as required by this Agreement, which failure, refusal or neglect continues for fifteen (15) days following Employee’s receipt of written notice from the Board or the Company’s Chief Executive Officer (the “CEO”) stating with specificity the nature of such failure, refusal or neglect; or 

(vi) Employee’s breach of any material provision of this Agreement;

provided, however, that prior to the determination that “Cause” under this Section 1(b) has occurred, the Company shall (w) provide to Employee in writing, in reasonable detail, the reasons for the determination that such “Cause” exists, (x) other than with respect to clause (v) above 

 

 

 

which specifies the applicable period of time for Employee to remedy his or her breach, afford Employee a reasonable opportunity to remedy any such breach (if such breach is capable of being remedied), (y) provide Employee an opportunity to be heard prior to the final decision to terminate Employee’s employment hereunder for such “Cause” and (z) make any decision that such “Cause” exists in good faith.

The foregoing definition shall not in any way preclude or restrict the right of the Company or any successor or affiliate thereof to discharge or dismiss Employee for any other acts or omissions, but such other acts or omissions shall not be deemed, for purposes of this Agreement, to constitute grounds for termination for Cause.

(c)Change of Control.  “Change of Control” means and includes each of the following:

(i)a transaction or series of transactions (other than an offering of common stock of the Company to the general public through a registration statement filed with the Securities and Exchange Commission) whereby any “person” or related “group” of “persons” (as such terms are used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules thereunder) (other than the Company, any of its subsidiaries, an employee benefit plan maintained by the Company or any of its subsidiaries or a “person” that, prior to such transaction, directly or indirectly controls, is controlled by, or is under common control with, the Company) directly or indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of securities of the Company possessing more than fifty percent (50%) of the total combined voting power of the Company’s securities outstanding immediately after such acquisition; or

(ii)during any period of two consecutive years, individuals who, at the beginning of such period, constitute the Board together with any new director(s) (other than a director designated by a person who shall have entered into an agreement with the Company to effect a transaction described in subsections (i) or (iii) of this Section 1(c)) whose election by the Board or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two year period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or

(iii)the consummation by the Company (whether directly involving the Company or indirectly involving the Company through one or more intermediaries) of a merger, consolidation, reorganization, or business combination, a sale or other disposition of all or substantially all of the Company’s assets, or the acquisition of assets or stock of another entity, in each case, other than a transaction

(A)which results in the Company’s voting securities outstanding immediately before the transaction continuing to represent (either by remaining outstanding or by being converted into voting securities of the Company or the person that, as a result of the transaction, controls, directly or indirectly, the Company or owns, directly or indirectly, all or substantially all of the Company’s assets or otherwise succeeds to the business of the Company (the Company or such person, the “Successor Entity”)) directly or indirectly, at least fifty percent 

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(50%) of the combined voting power of the Successor Entity’s outstanding voting securities immediately after the transaction, and 

(B)after which no person or group beneficially owns voting securities representing fifty percent (50%) or more of the combined voting power of the Successor Entity; provided, however, that no person or group shall be treated for purposes of this paragraph (iii) as beneficially owning fifty percent (50%) or more of combined voting power of the Successor Entity solely as a result of the voting power held in the Company prior to the consummation of the transaction; or

(iv)the Company’s stockholders approve a liquidation or dissolution of the Company.

For purposes of subsection (i) above, the calculation of voting power shall be made as if the date of the acquisition were a record date for a vote of the Company’s stockholders, and for purposes of subsection (iii) above, the calculation of voting power shall be made as if the date of the consummation of the transaction were a record date for a vote of the Company’s stockholders.

Notwithstanding the foregoing, a transaction shall not constitute a “Change of Control” if: (i) its sole purpose is to change the state of the Company’s incorporation; (ii) its sole purpose is to create a holding company that will be owned in substantially the same proportions by the persons who held the Company’s securities immediately before such transaction; (iii) it constitutes the Company’s initial public offering of its securities; or (iv) it is a transaction effected primarily for the purpose of financing the Company with cash (as determined by the Board in its discretion and without regard to whether such transaction is effectuated by a merger, equity financing or otherwise).

 

 (d)Code.  “Code” means the Internal Revenue Code of 1986, as amended from time to time, and the Treasury Regulations and other guidance issued thereunder.

(e)Good Reason.  Employee’s resignation for “Good Reason” means Employee’s resignation following the occurrence of any of the following events or conditions without Employee’s written consent:

(i)a material diminution in Employee’s authority, duties or responsibilities;

(ii)a material diminution in Employee’s base compensation, except in connection with a general reduction in the base compensation of the Company’s or any successor’s or affiliate’s personnel with similar status and responsibilities;

(iii)a material change in the geographic location at which Employee must perform his or her duties (and the Company and Employee agree that any requirement that Employee be based at any place outside a 50-mile radius of his or her place of employment as of the Effective Date, except for reasonably required travel on the Company’s or any successor’s or affiliate’s business that is not materially greater than such travel requirements prior to the Effective Date, shall be considered a material change); or

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(iv)any other action or inaction that constitutes a material breach by the Company or any successor or affiliate of its obligations to Employee under this Agreement. 

Notwithstanding the foregoing, Good Reason shall only exist if Employee shall have provided the Company with written notice within ninety (90) days of the initial occurrence of any of the foregoing events or conditions, and the Company or any successor or affiliate fails to eliminate the conditions constituting Good Reason within thirty (30) days after receipt of written notice of such event or condition from Employee.  Employee’s termination by reason of resignation from employment with the Company for Good Reason shall be treated as involuntary.  Employee’s resignation from employment with the Company for “Good Reason” must occur within twelve (12) months following the initial occurrence of one of the foregoing events or conditions.  

(f)Permanent Disability.  Employee’s “Permanent Disability” shall be deemed to have occurred if Employee shall become physically or mentally incapacitated or disabled or otherwise unable fully to discharge his or her duties hereunder for a period of ninety (90) consecutive calendar days or for one hundred twenty (120) calendar days in any one hundred eighty (180) calendar-day period.  The existence of Employee’s Permanent Disability shall be determined by the Company on the advice of a physician chosen by the Company and the Company reserves the right to have the Employee examined by a physician chosen by the Company at the Company’s expense.

(g)Stock Awards.  “Stock Awards” means all stock options, restricted stock and such other awards granted pursuant to the Company’s stock option and equity incentive award plans or agreements and any shares of stock issued upon exercise thereof, and any founders’ stock issued to Employee in connection with the formation of the Company.  

2.Employment Period.   During the term of Employee’s employment hereunder (the “Employment Period”), Employee shall be considered an employee of the Company.  The Company and Employee acknowledge that Employee’s employment during the Employment Period will be at-will, as defined under applicable law, and that Employee’s employment with the Company during the Employment Period may be terminated by either party at any time for any or no reason, with or without notice.  If Employee’s employment during the Employment Period terminates for any reason, Employee shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided in this Agreement.  

3.Services to Be Rendered.  

(a)Duties and Responsibilities.  Employee shall serve as Senior Vice President Finance and Chief Financial Officer of the Company of the Company.  In the performance of such duties, Employee shall report directly to the CEO and shall be subject to the direction of the CEO and to such limits upon Employee’s authority as the CEO may from time to time impose.  In the event of the CEO’s incapacity or unavailability, Employee shall be subject to the direction of the Board or its designee.  Employee hereby consents to serve as an officer and/or director of the Company or any subsidiary or affiliate thereof without any additional salary or compensation, if so requested by the Board or the CEO.  Employee’s primary place of work shall be the Company’s facility in San Diego, California, or such other location within San 

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Diego County as may be designated by the Board or the CEO from time to time.  Employee shall also render services at such other places within or outside the United States as the Board or the CEO may direct from time to time.  Employee shall be subject to and comply with the policies and procedures generally applicable to employees of the Company to the extent the same are not inconsistent with any term of this Agreement. 

(b)Exclusive Services.  Employee shall at all times faithfully, industriously and to the best of his or her ability, experience and talent perform to the satisfaction of the Board and the CEO all of the duties that may be assigned to Employee hereunder and shall devote substantially all of his or her productive time and efforts to the performance of such duties.  

4.Compensation and Benefits During Employment Period.  During the Employment Period, the Company shall pay or provide, as the case may be, to Employee the compensation and other benefits and rights set forth in this Section 4.

(a)Base Salary.  The Company shall pay to Employee a base salary of $236,250 per year, payable in accordance with the Company’s usual pay practices (and in any event no less frequently than bi-monthly).  Employee’s base salary shall be subject to review annually by and at the sole discretion of the Board or its designee.

 (b)Annual Bonus.  Employee shall be eligible to earn, for each fiscal year of the Company ending during the Employment Period, an annual cash performance bonus (an “Annual Bonus”) based on Employee’s and/or the Company’s attainment of objective financial or other operating criteria established by the Board or its designee.  Upon full attainment of the aforementioned criteria, as determined by the Board or its designee, the Annual Bonus will be equal to thirty percent (30%) of Employee’s then-current base salary actually paid for such fiscal year.  The Annual Bonus shall be paid to Employee by the Company between January 1st and March 15th of the calendar year following the end of the fiscal year to which such Annual Bonus relates.  Employee’s receipt of an Annual Bonus shall be conditioned on Employee’s continued employment with the Company on the date such Annual Bonus is paid.  The Annual Bonus shall be pro-rated for any partial fiscal year during the Employment Period.  As of the Effective Date, the Company’s fiscal year ends on December 31.  In the event of any change to the Company’s fiscal year, the aforementioned financial or other operating criteria established by the Board or its designee for purposes of determining Employee’s Annual Bonus shall be adjusted in a manner mutually agreeable to the Company and Employee so as not to disadvantage either party.

(c)Benefits.  Employee shall be entitled to participate in benefits under the Company’s benefit plans and arrangements, including, without limitation, any employee benefit plan or arrangement made available in the future by the Company to its senior executives, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. The Company shall have the right to amend or delete any such benefit plan or arrangement made available by the Company to its senior executives and not otherwise specifically provided for herein.  The Company’s failure to continue provide Employee with benefits substantially equivalent (in terms of benefit levels and/or reward opportunities) to those provided to Employee under each material employee benefit plan, program and practice of the Company as in effect immediately prior to the Effective Date, except in connection with a general reduction in the benefits of the Company’s or any successor’s or affiliate’s personnel 

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with similar status and responsibilities, shall constitute a material breach of this Agreement by the Company. 

(d)Expenses.  The Company shall reimburse Employee for reasonable out-of-pocket business expenses incurred in connection with the performance of his or her duties hereunder, subject to (i) such policies as the Company may from time to time establish, (ii) Employee furnishing the Company with evidence in the form of receipts satisfactory to the Company substantiating the claimed expenditures, (iii) Employee receiving advance approval from the CEO in the case of expenses for travel outside of North America, and (iv) Employee receiving advance approval from the CEO in the case of expenses (or a series of related expenses) in excess of $10,000.  Any amounts payable under this Section 4(d) shall be made in accordance with Treasury Regulation Section 1.409A-3(i)(1)(iv) and shall be paid on or before the last day of Employee’s taxable year following the taxable year in which Employee incurred the expenses.  The amounts provided under this Section 4(d) during any taxable year of Employee’s will not affect such amounts provided in any other taxable year of Employee’s, and Employee’s right to reimbursement for such amounts shall not be subject to liquidation or exchange for any other benefit.

(e)Paid Time Off; Vacation.  Employee shall be entitled to such periods of paid time off (“PTO”) each year as provided under the Company’s PTO policy and as otherwise provided for senior executive officers; provided that Employee shall be entitled to at least three (3) weeks paid vacation per year.

(f)Equity Plans.  Employee shall be entitled to participate in any equity or other employee benefit plan that is generally available to senior executive officers, as distinguished from general management, of the Company.  Except as otherwise provided in this Agreement, Employee’s participation in and benefits under any such plan shall be on the terms and subject to the conditions specified in the governing document of the particular plan.

(g)Acceleration of Vesting of Stock Awards.  

(i)The vesting and/or exercisability of one hundred percent (100%) of Employee’s outstanding Stock Awards shall be automatically accelerated on the date of a Change of Control.  

(ii)Subject to Section 5(c), if Employee’s employment is terminated by the Company without Cause or by Employee for Good Reason, the vesting and/or exercisability of each of Employee’s outstanding Stock Awards shall be automatically accelerated on the date of termination as to the number of Stock Awards that would vest over the twelve (12) month period following the date of termination had Employee remained continuously employed by the Company during such period.

(iii)The foregoing provisions are hereby deemed to be a part of each Stock Award and to supersede any less favorable provision in any agreement or plan regarding such Stock Award.

5.Termination of Employment Period and Severance.  Employee shall be entitled to receive benefits upon termination of the Employment Period only as set forth in this Section 5.

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(a)Termination Without Cause or For Good Reason.  If Employee’s employment is terminated by the Company without Cause or by Employee for Good Reason, Employee shall be entitled to receive, in lieu of any severance benefits to which Employee may otherwise be entitled under any severance plan or program of the Company, the benefits provided below: 

(i)the Company shall pay to Employee his or her fully earned but unpaid base salary, when due, through the date of termination at the rate then in effect, plus all other amounts to which Employee is entitled under any compensation plan or practice of the Company at the time of termination;

(ii)subject to Sections 5(c), 5(g) and 5(h) and Employee’s continuing compliance with Section 6, Employee shall be entitled to receive Employee’s monthly base salary as in effect immediately prior to the date of termination for the twelve (12) month period following the date of termination, payable in a lump sum no later than sixty (60) days following the date of Employee’s termination of employment; and

 (iii) subject to Sections 5(c), 5(g) and 5(h) and Employee’s continuing compliance with Section 6, for the period beginning on the date of termination and ending on the date which is twelve (12) full months following the date of termination (or, if earlier, the date on which the applicable continuation period under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”) expires), the Company shall pay for and provide to Employee and his or her eligible dependents who were covered under the Company’s health insurance plans immediately prior to the date of termination healthcare insurance benefits substantially similar to those provided to Employee and his or her eligible dependents immediately prior to the date of termination, including, if necessary, paying the costs associated with continuation coverage pursuant to COBRA.

(b)Termination for Cause, Voluntary Resignation Without Good Reason, Death or Permanent Disability.  If Employee’s employment is terminated by the Company for Cause, by Employee without Good Reason or as a result of Employee’s death or Permanent Disability, the Company shall not have any other or further obligations to Employee (or his or her estate) under this Agreement (including any financial obligations) except that Employee (or his or her estate) shall be entitled to receive (i) Employee’s fully earned but unpaid base salary, through the date of termination at the rate then in effect, and (ii) all other amounts or benefits to which Employee is entitled under any compensation, retirement or benefit plan or practice of the Company at the time of termination in accordance with the terms of such plans or practices, including, without limitation, any continuation of benefits required by COBRA or applicable law.  In addition, if Employee’s employment is terminated by the Company for Cause, by Employee without Good Reason or as a result of Employee’s death or Permanent Disability, all vesting of Employee’s unvested Stock Awards previously granted to him or her by the Company shall cease and none of such unvested Stock Awards shall be exercisable following the date of such termination.  The foregoing shall be in addition to, and not in lieu of, any and all other rights and remedies which may be available to the Company under the circumstances, whether at law or in equity.

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(c)Release.  As a condition to Employee’s receipt of any post-termination benefits pursuant to Sections 4(g)(ii) or 5(a) above, on or prior to the sixtieth (60th) day following the date of Employee’s termination of employment, Employee shall have executed and delivered a Release (the “Release”) in a form reasonably acceptable to the Company and any applicable revocation period applicable to such Release shall have expired.  Such Release shall specifically relate to all of Employee’s rights and claims in existence at the time of such execution, including any claims related to Employee’s employment by the Company and his or her termination of employment, and shall exclude any continuing obligations the Company may have to Employee following the date of termination under this Agreement or any other agreement providing for obligations to survive Employee’s termination of employment.   

(d)Exclusive Remedy.  Except as otherwise expressly required by law (e.g., COBRA) or as specifically provided herein, all of Employee’s rights to salary, severance, benefits, bonuses and other amounts hereunder (if any) accruing after the termination of Employee’s employment shall cease upon such termination.  In the event of a termination of Employee’s employment with the Company, Employee’s sole remedy shall be to receive the payments and benefits described in this Section 5.  In addition, Employee acknowledges and agrees that he or she is not entitled to any reimbursement by the Company for any taxes payable by Employee as a result of the payments and benefits received by Employee pursuant to this Section 5, including, without limitation, any excise tax imposed by Section 4999 of the Code.

(e)No Mitigation.  Employee shall not be required to mitigate the amount of any payment provided for in this Section 5 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 5 be reduced by any compensation earned by Employee as the result of employment by another employer or self-employment or by retirement benefits; provided, however, that loans, advances or other amounts owed by Employee to the Company may be offset by the Company against amounts payable to Employee under this Section 5; provided, further, that, as provided in Section 5(a), Employee’s right to continued healthcare and life insurance benefits following his or her termination of employment will terminate on the date on which the applicable continuation period under COBRA expires.    

(f)Return of the Company’s Property.  If Employee’s employment is terminated for any reason, the Company shall have the right, at its option, to require Employee to vacate his or her offices prior to or on the effective date of termination and to cease all activities on the Company’s behalf.  Upon the termination of his or her employment in any manner, as a condition to the Employee’s receipt of any post-termination benefits described in this Agreement, Employee shall immediately surrender to the Company all lists, books and records of, or in connection with, the Company’s business, and all other property belonging to the Company, it being distinctly understood that all such lists, books and records, and other documents, are the property of the Company.  Employee shall deliver to the Company a signed statement certifying compliance with this Section 5(f) prior to the receipt of any post-termination benefits described in this Agreement.

(g)Short-Term Deferral.  This Agreement is not intended to provide for any deferral of compensation subject to Section 409A of the Code, and, accordingly, the severance payment payable under Section 5(a)(ii) shall be paid no later than the later of:  (i) the fifteenth 

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(15th) day of the third month following Executive’s first taxable year in which such severance benefit is no longer subject to a substantial risk of forfeiture, and (ii) the fifteenth (15th) day of the third month following the first taxable year of the Company in which such severance benefit is no longer subject to a substantial risk of forfeiture, as determined in accordance with Section 409A of the Code and any Treasury Regulations and other guidance issued thereunder.   

(h)Payment Delay.  Notwithstanding anything herein to the contrary, to the extent any payments to Employee pursuant to Section 5(a)(ii) are treated as non-qualified deferred compensation subject to Section 409A of the Code, then (i) no amount shall be payable pursuant to such section unless Employee’s termination of employment constitutes a “separation from service” with the Company (as such term is defined in Treasury Regulation Section 1.409A-1(h) and any successor provision thereto) (a “Separation from Service”), and (ii) if Employee, at the time of his or her Separation from Service, is determined by the Company to be a “specified employee” for purposes of Section 409A(a)(2)(B)(i) of the Code and the Company determines that delayed commencement of any portion of the termination benefits payable to Employee pursuant to this Agreement is required in order to avoid a prohibited distribution under Section 409A(a)(2)(B)(i) of the Code (any such delayed commencement, a “Payment Delay”), then such portion of Employee’s termination benefits described in Section 5(a)(ii) shall not be provided to Employee prior to the earlier of (A) the expiration of the six-month period measured from the date of Employee’s Separation from Service, (B) the date of Employee’s death or (C) such earlier date as is permitted under Section 409A.  Upon the expiration of the applicable Code Section 409A(a)(2)(B)(i) deferral period, all payments deferred pursuant to a Payment Delay shall be paid in a lump sum to Employee within thirty (30) days following such expiration, and any remaining payments due under the Agreement shall be paid as otherwise provided herein.  The determination of whether Employee is a “specified employee” for purposes of Section 409A(a)(2)(B)(i) of the Code as of the time of his or her Separation from Service shall made by the Company in accordance with the terms of Section 409A of the Code and applicable guidance thereunder (including without limitation Treasury Regulation Section 1.409A-1(i) and any successor provision thereto).

(i)Interpretation.  To the extent the payments and benefits under this Agreement are subject to Section 409A of the Code, this Agreement shall be interpreted, construed and administered in a manner that satisfies the requirements of Sections 409A(a)(2), (3) and (4) of the Code and the Treasury Regulations thereunder (and any applicable transition relief under Section 409A of the Code).  As provided in Internal Revenue Notice 2007-86, notwithstanding any other provision of this Agreement, with respect to an election or amendment to change a time or form of payment under this Agreement made on or after January 1, 2008 and on or before December 31, 2008, the election or amendment shall apply only with respect to payments that would not otherwise be payable in 2008, and shall not cause payments to be made in 2008 that would not otherwise be payable in 2008.

6.Certain Covenants.

 

(a)Noncompetition.  Except as may otherwise be approved by the Board, during the Employment Period, Employee shall not have any ownership interest (of record or beneficial) in, or perform services as an employee, salesman, consultant, officer or director of, or otherwise aid or assist in any manner, any firm, corporation, partnership, proprietorship or other 

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business that engages in any county, city or part thereof in the United States and/or any foreign country in a business which competes directly or indirectly (as determined by the Board) with the Company’s business in such county, city or part thereof, so long as the Company, or any successor in interest of the Company to the business and goodwill of the Company, remains engaged in such business in such county, city or part thereof or continues to solicit customers or potential customers therein; provided, however, that Employee may own, directly or indirectly, solely as an investment, securities of any entity if Employee (x) is not a controlling person of, or a member of a group which controls, such entity; or (y) does not, directly or indirectly, own ten percent (10%) or more of any class of securities of any such entity.  Subject to the terms of the Proprietary Information and Inventions Agreement referred to in Section 6(b), nothing in this Agreement shall preclude Employee from devoting time to personal and family investments or serving on community and civic boards, or participating in industry associations, provided such activities do not interfere with his or her duties to the Company, as determined in good faith by the CEO.  Employee agrees that he or she will not join any boards, other than community and civic boards (which do not interfere with his or her duties to the Company), without the prior approval of the CEO. 

(b)Confidential Information.  Employee and the Company have entered into the Company’s standard proprietary information and inventions agreement (the “Proprietary Information and Inventions Agreement”).  Employee agrees to perform each and every obligation of Employee therein contained.

(c)Solicitation of Employees.  Employee shall not during the Employment Period and for the applicable severance period for which Employee receives severance benefits following any termination hereof pursuant to Section 5(a) above (the “Restricted Period”), directly or indirectly, solicit or encourage to leave the employment of the Company or any of its affiliates, any employee of the Company or any of its affiliates.

(d)Solicitation of Consultants.  Employee shall not during the Employment Period and for the Restricted Period, directly or indirectly, hire, solicit or encourage to cease work with the Company or any of its affiliates any consultant then under contract with the Company or any of its affiliates within one year of the termination of such consultant’s engagement by the Company or any of its affiliates.

(e)Rights and Remedies Upon Breach.  If Employee breaches or threatens to commit a breach of any of the provisions of this Section 6 (the “Restrictive Covenants”), the Company shall have the following rights and remedies, each of which rights and remedies shall be independent of the other and severally enforceable, and all of which rights and remedies shall be in addition to, and not in lieu of, any other rights and remedies available to the Company under law or in equity:

(i)Specific Performance.  The right and remedy to have the Restrictive Covenants specifically enforced by any court having equity jurisdiction, all without the need to post a bond or any other security or to prove any amount of actual damage or that money damages would not provide an adequate remedy, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Company and that money damages will not provide adequate remedy to the Company; 

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(ii)Accounting and Indemnification.  The right and remedy to require Employee (i) to account for and pay over to the Company all compensation, profits, monies, accruals, increments or other benefits derived or received by Employee or any associated party deriving such benefits as a result of any such breach of the Restrictive Covenants; and (ii) to indemnify the Company against any other losses, damages (including special and consequential damages), costs and expenses, including actual attorneys’ fees and court costs, which may be incurred by them and which result from or arise out of any such breach or threatened breach of the Restrictive Covenants; and 

(iii)Termination of Severance Payments.   In the event Employee breaches any of the provisions of this Section 6, the Company shall be entitled to immediately cease all payments under Section 5(a) above.

(f)Severability of Covenants/Blue Pencilling.  If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full effect, without regard to the invalid portions.  If any court determines that any of the Restrictive Covenants, or any part thereof, are unenforceable because of the duration of such provision or the area covered thereby, such court shall have the power to reduce the duration or area of such provision and, in its reduced form, such provision shall then be enforceable and shall be enforced.  Employee hereby waives any and all right to attack the validity of the Restrictive Covenants on the grounds of the breadth of their geographic scope or the length of their term.

(g)Enforceability in Jurisdictions.  The Company and Employee intend to and do hereby confer jurisdiction to enforce the Restrictive Covenants upon the courts of any jurisdiction within the geographical scope of such covenants.  If the courts of any one or more of such jurisdictions hold the Restrictive Covenants wholly unenforceable by reason of the breadth of such scope or otherwise, it is the intention of the Company and Employee that such determination not bar or in any way affect the right of the Company to the relief provided above in the courts of any other jurisdiction within the geographical scope of such covenants, as to breaches of such covenants in such other respective jurisdictions, such covenants as they relate to each jurisdiction being, for this purpose, severable into diverse and independent covenants.

(h)Definitions.  For purposes of this Section 6, the term “Company” means not only Conatus Pharmaceuticals Inc., but also any company, partnership or entity which, directly or indirectly, controls, is controlled by or is under common control with Conatus Pharmaceuticals Inc.

7.Insurance; Indemnification.  The Company shall have the right to take out life, health, accident, “key-man” or other insurance covering Employee, in the name of the Company and at the Company’s expense in any amount deemed appropriate by the Company.  Employee shall assist the Company in obtaining such insurance, including, without limitation, submitting to any required examinations and providing information and data required by insurance companies.  Employee will be provided with indemnification against third party claims related to his or her work for the Company as required by Delaware law.  The Company shall provide Employee with directors and officers liability insurance coverage at least as favorable as that which the Company may maintain from time to time for other executive officers.

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8.Arbitration.  Any dispute, claim or controversy based on, arising out of or relating to this Agreement, or the breach thereof, including questions regarding the arbitrability of a particular dispute, shall be settled by final and binding arbitration in San Diego, California, before a single neutral arbitrator in accordance with the National Rules for the Resolution of Employment Disputes (the “Rules”) of the American Arbitration Association, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction.  Arbitration may be compelled pursuant to the California Arbitration Act (Code of Civil Procedure §§ 1280 et seq.).  If the parties are unable to agree upon an arbitrator, one shall be appointed by the AAA in accordance with its Rules.  Each party shall pay the fees of its own attorneys, the expenses of its witnesses and all other expenses connected with presenting its case; however, Employee and the Company agree that, to the extent permitted by law, the arbitrator may, in his or her discretion, award reasonable attorneys’ fees to the prevailing party; provided, further, that the prevailing party shall be reimbursed for such fees, costs and expenses within forty-five (45) days following any such award; provided, further, that the parties’ obligations pursuant to the provisos set forth above shall terminate on the tenth (10th) anniversary of the date of Employee’s termination of employment.  Other costs of the arbitration, including the cost of any record or transcripts of the arbitration, AAA’s administrative fees, the fee of the arbitrator, and all other fees and costs, shall be borne by the Company.  This Section 8 is intended to be the exclusive method for resolving any and all claims by the parties against each other for payment of damages under this Agreement, or the breach thereof; provided, however, that neither this Agreement nor the submission to arbitration shall limit the parties’ right to seek provisional relief, including without limitation injunctive relief, in any court of competent jurisdiction pursuant to California Code of Civil Procedure § 1281.8 or any similar statute of an applicable jurisdiction.  Seeking any such relief shall not be deemed to be a waiver of such party’s right to compel arbitration.  Both Employee and the Company expressly waive their right to a jury trial to the extent permitted by applicable law. 

9.Miscellaneous.

(a)Modification; Prior Claims.  This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof, supersedes all existing agreements between them concerning such subject matter, including, without limitation, the Prior Agreement, and may be modified only by a written instrument duly executed by each party.

 

(b)Assignment; Assumption by Successor.  The rights of the Company under this Agreement may, without the consent of Employee, be assigned by the Company, in its sole and unfettered discretion, to any person, firm, corporation or other business entity which at any time, whether by purchase, merger or otherwise, directly or indirectly, acquires all or substantially all of the assets or business of the Company.  The Company will require any successor (whether direct or indirect, by purchase, merger or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and to agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place; provided, however, that no such assumption shall relieve the Company of its obligations hereunder.  As used in this Agreement, the “Company” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise.

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(c)Survival.  The covenants, agreements, representations and warranties contained in or made in Sections 4, 5, 6, 8 and 9 of this Agreement shall survive any termination of this Agreement. 

(d)Third‐Party Beneficiaries.  This Agreement does not create, and shall not be construed as creating, any rights enforceable by any person not a party to this Agreement.

(e)Waiver.  The failure of either party hereto at any time to enforce performance by the other party of any provision of this Agreement shall in no way affect such party’s rights thereafter to enforce the same, nor shall the waiver by either party of any breach of any provision hereof be deemed to be a waiver by such party of any other breach of the same or any other provision hereof.

(f)Section Headings.  The headings of the several sections in this Agreement are inserted solely for the convenience of the parties and are not a part of and are not intended to govern, limit or aid in the construction of any term or provision hereof.

(g)Notices.  All notices, requests and other communications hereunder shall be in writing and shall be delivered by courier or other means of personal service (including by means of a nationally recognized courier service or professional messenger service), or sent by telex or telecopy or mailed first class, postage prepaid, by certified mail, return receipt requested, in all cases, addressed to:

If to the Company or the Board:

Conatus Pharmaceuticals Inc.
4365 Executive Drive, Suite 200
San Diego, California 92121

Attention:  Secretary

If to Employee:

Charles J. Cashion

All notices, requests and other communications shall be deemed given on the date of actual receipt or delivery as evidenced by written receipt, acknowledgement or other evidence of actual receipt or delivery to the address.  In case of service by telecopy, a copy of such notice shall be personally delivered or sent by registered or certified mail, in the manner set forth above, within three business days thereafter.  Any party hereto may from time to time by notice in writing served as set forth above designate a different address or a different or additional person to which all such notices or communications thereafter are to be given.

(h)Severability.  All Sections, clauses and covenants contained in this Agreement are severable, and in the event any of them shall be held to be invalid by any court, this Agreement shall be interpreted as if such invalid Sections, clauses or covenants were not contained herein.

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(i)Governing Law and Venue.  This Agreement is to be governed by and construed in accordance with the laws of the State of California applicable to contracts made and to be performed wholly within such State, and without regard to the conflicts of laws principles thereof.  Except as provided in Sections 6 and 8, any suit brought hereon shall be brought in the state or federal courts sitting in San Diego, California, the parties hereto hereby waiving any claim or defense that such forum is not convenient or proper.  Each party hereby agrees that any such court shall have in personam jurisdiction over it and consents to service of process in any manner authorized by California law. 

(j)Non-transferability of Interest.  None of the rights of Employee to receive any form of compensation payable pursuant to this Agreement shall be assignable or transferable except through a testamentary disposition or by the laws of descent and distribution upon the death of Employee.  Any attempted assignment, transfer, conveyance, or other disposition (other than as aforesaid) of any interest in the rights of Employee to receive any form of compensation to be made by the Company pursuant to this Agreement shall be void.

(k)Gender.  Where the context so requires, the use of the masculine gender shall include the feminine and/or neuter genders and the singular shall include the plural, and vice versa, and the word “person” shall include any corporation, firm, partnership or other form of association.

(l)Counterparts.  This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement.

(m)Construction.  The language in all parts of this Agreement shall in all cases be construed simply, according to its fair meaning, and not strictly for or against any of the parties hereto.  Without limitation, there shall be no presumption against any party on the ground that such party was responsible for drafting this Agreement or any part thereof.

(n)Withholding and other Deductions.  All compensation payable to Employee hereunder shall be subject to such deductions as the Company is from time to time required to make pursuant to law, governmental regulation or order.

 (Signature Page Follows)

 

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above.

CONATUS PHARMACEUTICALS INC.

 

By:/s/ Steven J. Mento
Name: Steven J. Mento
Title: President & CEO

 

  /s/ Charles J. Cashion 
Charles J. Cashion

 

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