UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

 

FORM 8-K

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of

The Securities Exchange Act of 1934

 

February 2, 2018

 

Date of Report (Date of earliest event reported)

 

INNOVATE BIOPHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)

 

  Delaware     001-37797     27-3948465  
  (State or other jurisdiction of
incorporation)
    (Commission File
Number)
    (I.R.S. Employer
Identification No.)
 

 

8480 Honeycutt Road, Suite 120
Raleigh, North Carolina 27615

(Address of principal executive offices)

 

(919) 275-1933

(Registrant's telephone number, including area code)

 

Monster Digital, Inc.

2655 First Street, Suite 250

Simi Valley, California 93065

(Former name or former address, if changed since last report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

 

Emerging growth company x

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

 

 

 

 

 

Item 2.01. Completion of Acquisition or Disposition of Assets.

 

On January 29, 2018, Monster Digital, Inc. (the “ Company ”), completed its reverse recapitalization with Innovate Biopharmaceuticals, Inc., which changed its name in connection with the transaction to “IB Pharmaceuticals Inc.” (“ Innovate ”), in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of July 3, 2017, by and among the Company, Monster Merger Sub., Inc. (“ Merger Sub ”), and Innovate (the “ Merger Agreement ”), pursuant to which Merger Sub merged with and into Innovate, with Innovate surviving as a wholly owned subsidiary of the Company (the “ Merger ”).

 

Also, on January 29, 2018, in connection with and immediately prior to the effective time of the Merger (the “ Effective Time ”), the Company (i) effected a reverse stock split at a ratio of one new share for every ten shares of its common stock outstanding (the “ Reverse Stock Split ”), (ii) increased the number of authorized shares of the Company’s common stock from 100,000,000 to 350,000,000 and (iii) changed its name to “Innovate Biopharmaceuticals, Inc.” Following the completion of the Merger, the business conducted by the Company became primarily the business conducted by Innovate, which is a clinical stage biotechnology company focused on developing novel autoimmune/inflammation therapeutic drugs.

 

Under the terms of the Merger Agreement, the Company issued shares of its common stock to Innovate’s stockholders, at an exchange ratio of 0.37813802 of a share of common stock (post Reverse Stock Split), in exchange for each share of Innovate common stock outstanding as of the Effective Time. The Company also assumed all of the stock options issued and outstanding under the 2015 Stock Incentive Plan (the “ Innovate Plan ”), with such stock options henceforth representing the right to purchase a number of shares of the Company’s common stock equal to 0.37813802 multiplied by the number of shares of Innovate’s common stock previously represented by such stock options.

 

Immediately prior to the Merger, Innovate issued and sold an aggregate of approximately $18.1 million of shares of Innovate common stock, including the conversion of $9,229,819 in outstanding convertible debt, to certain current stockholders of Innovate and certain new investors. Additionally, Innovate issued five-year warrants to each cash purchaser of common stock with a price per exercise price of $3.1764 after giving effect the exchange ratio.

 

Immediately following the Effective Time, there were approximately 25.8 million shares of the Company’s common stock outstanding. Immediately following the Effective Time, the former Innovate security holders owned approximately 94% of the fully-diluted common stock of the Company, with the Company’s security holders immediately prior to the Merger owning approximately 6% of the fully-diluted common stock of the Company.

 

The Company’s shares of common stock, which were previously listed on The Nasdaq Capital Market and traded through the close of business on January 31, 2018 under the ticker symbol “MSDI,” commenced trading on The Nasdaq Capital Market, under the symbol “INNT” on February 1, 2018. The Company’s common stock has a new CUSIP number, 45782F105.

 

The descriptions of the Merger and Merger Agreement included herein are not complete and are subject to and qualified in their entirety by reference to the Merger Agreement, a copy of which was attached as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 6, 2017, and incorporated herein by reference.

 

On January 30, 2018, the Company issued a press release announcing the completion of the Merger. A copy of the press release is attached hereto as Exhibit 99.1.

 

Item 2.03. Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.

 

On January 29, 2018, the Company entered into a Note Purchase Agreement (the “ Note Purchase Agreement ”) between the Company and Gustavia Capital Partners LLC (the “ Lender ”). The Note Purchase Agreement included customary representations and warranties of the Company and Lender and customary closing conditions.

 

The Company issued a senior promissory note (the “ Note ”) pursuant to the Note Purchase Agreement in the aggregate principal amount of $4,800,000, against receipt of a cash payment by the Lender to the Company equal to $3,000,000 (less certain expense deductions).

 

On September 30, 2018 (the “ Maturity Date ”), the Company shall pay the Lender an amount in cash equal to 105% of the outstanding principal amount of the Note plus accrued and unpaid interest and Later Charges (as defined in the Note). The Company may not prepay the Note, however, the Company may, at any time prior to the Maturity Date, redeem all of the Outstanding Amount (as defined in the Note) at a price equal to 105% of the Outstanding Amount.

 

The Note bears interest at per annum rate of interest equal to 12.5%, compounded quarterly, and is due and payable in arrears on each Interest Date (as defined in the Note), with the first Interest Date on March 30, 2018.

 

The Note contains customary affirmative and negative covenants, including among others, covenants limiting the ability of the Company and its subsidiaries to transfer or dispose of any assets, incur indebtedness, change the nature of its business, grant liens, make investments, make certain restricted payments, issue securities, and enter into transactions with affiliates, in each case subject to certain exceptions.

 

Upon an event of default, the Lender may require the Company to redeem all or a portion of the Note. The Company shall redeem at a cash price equal to 105% of the Outstanding Amount. The events of default under the Note Purchase Agreement include, among others, payment defaults, covenant defaults, a material adverse effect default, bankruptcy and insolvency defaults, a failure to consummate the Merger (as defined in the Note), cross-defaults to other material indebtedness, judgment defaults, and defaults related to inaccuracy of representations and warranties. A default interest rate will apply on all obligations during the existence of an event of default under the Note at a per annum rate of interest equal to 18.0%.

 

The foregoing description of the Note Purchase Agreement and Note is qualified in its entirety by reference to the full text of the Note Purchase Agreement and Note which the Company is filing with this Form 8-K.

 

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Item 3.02. Unregistered Sales of Equity Securities.

 

Pursuant to the terms of the Merger Agreement and in connection with the Merger, the Company issued shares of its common stock to Innovate’s stockholders. The number of shares issued, the nature of the transaction and the nature and amount of consideration received by the Company are described in Item 2.01 of this Form 8-K, which is incorporated by reference into this Item 3.02. The shares of Company Common Stock issued in connection with the Merger were not registered under the Securities Act of 1933, as amended (the “ Securities Act ”), in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act and/or Regulation D and Rule 506 promulgated thereunder.

 

Item 3.03. Material Modification to Rights of Security Holders.

 

To the extent required by Item 3.03 of Form 8-K, the information contained in Item 2.01 of this Current Report on Form 8-K is incorporated by reference herein.

 

On January 29, 2018, immediately prior to the Effective Time, the Company amended and restated its certificate of incorporation to (i) effect the Reverse Stock Split, (ii) increase the number of authorized shares of the Company’s common stock from 100,000,000 to 350,000,000 and (ii) change the Company’s name to “Innovate Biopharmaceuticals, Inc.” The amendment of the Company’s certificate of incorporation was approved by the Company’s stockholders at a special meeting of its stockholders on November 9, 2017.

 

The foregoing descriptions of the Company’s amended and restated certificate of incorporation are not complete and are subject to and qualified in their entirety by reference Company’s amended and restated certificate of incorporation, a copy of which is attached as Exhibit 3.1 hereto and is incorporated herein by reference.

 

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Item 5.01. Changes in Control of Registrant.

 

The information set forth in Item 2.01 of this Current Report on Form 8-K is incorporated by reference into this Item 5.01.

 

In accordance with the Merger Agreement, on January 29, 2018, effective as of the Effective Time, David H. Clarke, Jonathan Clark, Robert B. Machinist, Christopher M. Miner and Steven Barre resigned from the Board and any respective committees of the Board to which they belonged. Also on January 29, 2018, the Board appointed, effective as of the Effective Time, Sandeep Laumas, M.D., Christopher Prior, Ph.D., Jay Madan, M.S., Roy Proujanksy, M.D., Lorin Johnson, Ph.D., Anthony Maida, Ph.D., M.A., M.B.A, and Anna Kazanchyan, M.D. as directors of the Company whose terms expire at the Registrant’s next annual meeting of stockholders.

 

Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.

 

(b) Pursuant to the Merger Agreement, on January 29, 2018, effective as of the Effective Time, David H. Clarke, Jonathan Clark, Robert B. Machinist, Christopher M. Miner and Steven Barre resigned from the Board and any respective committees of the Board on which they served, which resignations were not the result of any disagreements with the Company relating to the Company’s operations, policies or practices.

 

Also, pursuant to the Merger Agreement, on January 29, 2018, effective as of the Effective Time, David H. Clarke, the Company’s Chief Executive Officer, Jonathan Clark, the Company’s Interim President, David Olert, the Company’s Vice President of Finance and Chief Financial Officer, and Stephen R. Brownsell, the Company’s Vice President, resigned as officers of the Company.

 

(c) Effective as of the Effective Time, the Board appointed Sandeep Laumas as the Company’s Executive Chairman, Christopher Prior as the Company’s Chief Executive Officer, and Jay Madan as the Company’s President. There are no family relationships among any of the Company’s directors and executive officers. The information set forth in Item 8.01 of this Current Report on Form 8-K regarding the biographical information, compensation arrangements and related party transaction information for the newly appointed executive officers of the Company is incorporated by reference to this Item 5.02(c). Each of the newly appointed executive officers of the Company entered into the Company’s standard form of indemnification agreement with the Company on January 29, 2018, the form of which is attached hereto as Exhibit 10.3 and incorporated herein by reference.

 

(d) The information set forth in Item 5.01 of this Current Report on Form 8-K with respect to the appointment of directors to the Company’s board of directors pursuant to and in accordance with the Merger Agreement is incorporated by reference into this Item 5.02(d). The information set forth in Item 8.01 of this Current Report on Form 8-K regarding the related party transaction information for the newly appointed directors of the Company is incorporated by reference to this Item 5.02(d). Each of Roy Proujansky, Lorin Johnson, Anthony Maida, and Anna Kazanchyan entered into the Company’s standard form of indemnification agreement with the Company on January 29, 2018, the form of which is attached hereto as Exhibit 10.3 and incorporated herein by reference.

 

Audit Committee

 

On January 29, 2018, Anthony Maida, Lorin Johnson and Anna Kazanchyan were appointed to the Audit Committee. Anthony Maida will serve as the chair of the Audit Committee.

 

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Compensation Committee

 

On January 29, 2018, Anna Kazanchyan, Lorin Johnson and Anthony Maida were appointed to the compensation committee of the Board. Anna Kazanchyan will serve as chair of the compensation committee.

 

Nominating and Corporate Governance Committee

 

On January 29, 2018, Lorin Johnson, Anna Kazanchyan and Anthony Maida were appointed to the nominating and corporate governance committee of the Board. Lorin Johnson will serve as chair of the nominating and corporate governance committee.

 

Item 5.03 Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year.

 

(a)   To the extent required by Item 5.03 of Form 8-K, the information contained in Item 2.01 and Item 3.03 of this Current Report on Form 8-K is incorporated by reference herein.

 

Effective as of the Effective Time, the Board approved the amendment of the Company’s Bylaws to (i) amend Section 10 of Article I to eliminate the right of stockholders of the Company to act by written consent and (ii) conform to the name of the Company to “Innovate Biopharmaceuticals, Inc.” The foregoing description is qualified in its entirety by reference to the Bylaws, as amended, attached hereto as Exhibit 3.2 and incorporated herein by reference.

 

Item 8.01 Other Events.

 

In connection with the Merger and related transactions described in this Current Report on Form 8-K, the Company provides the following information related to Innovate set forth in this Item 8.01.

 

TABLE OF CONTENTS

 

Cautionary Statement Concerning Forward-Looking Statements 5
   
Formation 5
   
Innovate Business 6
   
Risk Factors 43
   
Innovate Management’s Discussion and Analysis of Financial Condition and Results of Operations 78
   
Security Ownership of Certain Beneficial Owners and Management 84
   
Management 86
   
Related Party Transactions 98
   
Indemnification of Directors and Officers 99
   
Financial Statements 99

 

Cautionary Statement Concerning Forward-Looking Statements

 

The information in Item 8.01 of this Current Report on Form 8-K, particularly in the sections entitled “Innovate Business,” and “Innovate Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the information incorporated herein by reference, include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on current expectations and beliefs and involve numerous risks and uncertainties that could cause actual results to differ materially from expectations. These forward-looking statements should not be relied upon as predictions of future events as we cannot assure you that the events or circumstances reflected in these statements will be achieved or will occur. When used in this report, the words “believe,” “may,” “could,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “indicate,” “seek,” “should,” “would” and similar expressions are intended to identify forward-looking statements, though not all forward-looking statements contain these identifying words. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements.

 

If any of these risks or uncertainties materializes or any of these assumptions proves incorrect, our results could differ materially from the forward-looking statements in this report.  All forward-looking statements in this report are current only as of the date of this report. We do not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any statement is made or to reflect the occurrence of unanticipated events.

 

Formation

 

The Company was incorporated in Delaware in November 2010 under the name “Monster Digital, Inc.” In January 2018, the Company merged its wholly-owned subsidiary, Monster Merger Sub, Inc., with and into IB Pharmaceuticals Inc. and changed the name of the Company to “Innovate Biopharmaceuticals, Inc.”

 

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INNOVATE BUSINESS

 

Overview

 

Innovate is a clinical-stage biopharmaceutical company developing novel therapies for autoimmune and inflammatory disorders. Innovate’s lead program, larazotide acetate (larazotide or INN-202), is entering Phase 3 registration trials and has the potential to be the first-to-market therapeutic for celiac disease, an unmet medical need, which effects an estimated 1% of the North American population or approximately 3 million individuals. Celiac patients have no treatment alternative other than a strict lifelong adherence to a gluten-free diet (GFD), which is difficult to maintain and can result in a lack in nutrients. Additionally, current FDA labeling standards allow up to 20 parts per million of gluten in GFD-labelled foods, which can be sufficient in many patients to cause celiac symptoms, including abdominal pain, cramping, bloating, gas, headaches, ataxia, ‘‘brain fog’’ and fatigue. Long-term sequelae of celiac disease include non-Hodgkin lymphoma, osteoporosis and anemia. Innovate’s second clinical program, INN-108, is in development for the treatment of mild-to-moderate ulcerative colitis (UC), an inflammatory bowel disease (IBD) with more than 1.25 million people affected in the major markets.

 

Innovate is led by an executive management team and board of directors that have held senior positions at leading pharmaceutical and biotechnology companies and that possess substantial experience across the spectrum of drug discovery, development and commercialization. Innovate’s CEO co-founded two successful biotechnology companies which were acquired by biotech and large pharmaceutical companies. Innovate’s medical and regulatory team conducted the Phase 2b trial for larazotide and have managed multiple other large scale clinical trials with successful New Drug Application (NDA) submissions and approvals. Members of Innovate’s board of directors have played key roles at Johnson & Johnson, Bristol-Myers Squibb, and AstraZeneca. One of Innovate’s directors was a co-founder of Salix Pharmaceuticals, the largest gastroenterology-focused company which was acquired for $16 billion in 2015.

 

 

Figure 1: Larazotide’s mechanism of action is applicable to several other diseases.

 

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Larazotide is an 8-amino acid synthetic peptide orally administered as a capsule which has been tested in more than 500 celiac patients with proven safety and efficacy in clinical trials. The FDA has granted larazotide Fast Track Designation for celiac disease. Larazotide’s proven safety profile is due to its lack of systemic absorption into the blood circulation which allows it to act locally in the small bowel. Additionally, larazotide has a first-in-class mechanism of action (MoA) as a tight junction regulator. Pre-clinical studies showed larazotide causes a reduction in permeability across the epithelial barrier, making it the only drug known to Innovate which is in clinical trials with this MoA. Increased intestinal permeability is a MoA which underlies several other diseases, including Crohn’s disease, irritable bowel syndrome (IBS) and non-alcoholic steatohepatitis (NASH), among others (Figure 1). Innovate is engaging in academic collaborations to expand larazotide’s clinical indications with a shorter time to clinical proof-of-concept due to larazotide’s safety profile and exposure in more than 800 subjects.

 

With the release of the Phase 2b trial data in 342 patients as a late-breaker presentation at the 2014 Digestive Disease Week (DDW), larazotide became the first and the only drug for the treatment of celiac disease (published data) yet to meet its primary endpoint with statistical significance. The Phase 2b data showed clinically meaningful and statistically significant (p=0.022) reduction in abdominal and non-GI (headache) symptoms. After a successful End-of-Phase 2 meeting with the FDA, which confirmed the regulatory path forward to approval, Innovate is preparing to launch the Phase 3 registration program later this year with topline pivotal data expected by 2019.

 

For celiac patients, larazotide is being investigated as an adjunct to a GFD for patients who continue to experience symptoms despite following a GFD. As a result of the difficulty of maintaining a gluten-free lifestyle due to access to and cost of gluten-free foods, contamination from gluten and social pressures, more than half the celiac population experiences multiple, potentially debilitating symptoms per month. A recent study from the UK indicates that more than 70% of patients diagnosed with celiac disease consume gluten either intentionally or inadvertently (Hall et al. 2013). In academic studies and proprietary market research, there is a clear need for a therapeutic for this large and growing population.

 

Innovate’s second drug candidate, INN-108, is in development for the treatment of mild-to-moderate UC. It is an oral tablet that uses an azo-bonded pro-drug approach linking mesalamine to 4-APAA (approved as Actarit in Japan in 1994 for the treatment of rheumatoid arthritis) and is entering a proof-of-concept Phase 2 trial in 2018, after having completed a successful Phase 1 trial demonstrating safety at currently approved doses of mesalamine. The azo-bond protects INN-108 (Figure 2) from the low pH in the stomach, allowing it to transit to the colon where the UC lesions are primarily located. In the colon, the azo bond is broken enzymatically, leading to mesalamine and 4-APAA releasing and having a synergistic anti-inflammatory effect. Although the majority of patients present with mild-to-moderate UC, which can progress to severe UC, the focus of drug development has been in moderate-to-severe UC with little innovation or drug development for mild-to-moderate UC. The mainstay of treatment for mild-to-moderate UC remains various oral reformulations of mesalamine or 5-ASA (5-amino salicylic acid) such as Shire’s Lialda (approved 2007) and Pentasa (approved 1993), Allergan’s Asacol HD (approved 2008) and Valeant/Salix’s Apriso (approved 2008).

   

 

 

Figure 2: 4-APAA is covalently bonded to 5-ASA via a high energy azo-bond which is only cleaved enzymatically in the colon.

 

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Innovate also owns the global rights to INN-329, a proprietary formulation of secretin, a peptide hormone which is used to improve visualization in magnetic resonance cholangiopancreatography (MRCP) procedures. Secretin is a 27-amino acid long hormone which rapidly stimulates release of pancreatic secretions, thus improving visualization of the pancreatic ducts during imaging procedures. Secretin has also been tested in a variety of central nervous system conditions such as autism.

 

Innovate is based in Raleigh, North Carolina, was incorporated under the laws of North Carolina under the name ‘‘GI Therapeutics, Inc.’’ in 2012, and changed its name when it converted to a Delaware corporation in 2014.

 

Innovate ’s Strategy

Innovate’s goal is to become a leading biopharmaceutical company by developing novel therapeutics that have the potential to transform current treatment paradigms for patients and to address unmet medical needs. Innovate is currently pursuing the development of oral drugs for autoimmune and inflammatory diseases that target established biological pathways. The critical components of Innovate’s strategy are as follows:

 

Advance larazotide for celiac disease into Phase 3 clinical trials. Innovate’s immediate priority is to initiate the Phase 3 trials for larazotide for the treatment of celiac disease. Innovate had a successful End-of-Phase 2 meeting with the FDA in 2017. With the guidance and agreement reached with the FDA, Innovate plans to initiate its Phase 3 trials by mid-2018.

 

Accelerate Development of larazotide for NASH. The mechanism of action of larazotide to decrease intestinal permeability is one of the key recognized pathogenic factors in NASH. Innovate is initiating development of larazotide in combination with select NASH therapies in clinical trials with the potential for synergistic therapeutic benefit.

 

Further the Development of larazotide for Crohn ’s Disease. The mechanism of action of larazotide to decrease intestinal permeability can have a beneficial therapeutic effect in IBD. In an IL-10 knockout animal model, larazotide showed promising data which can position it for a proof-of-concept study alone and in combinations with select immunological therapies.

 

Advance INN-108 for ulcerative colitis into a proof-of-concept Phase 2 trial . Innovate is currently developing the plans to initiate the proof of concept Phase 2 trials for INN-108 for the treatment of ulcerative colitis. INN-108 will be initially developed for mild-to-moderate ulcerative colitis in adults.

  

Seek Partnerships to Commercialize Late Stage Pipeline Drugs. With large addressable markets, such as celiac disease, Innovate plans to seek out partners with an established presence and history of successful commercialization.

 

Leverage and protect Innovate ’s existing intellectual property portfolio and secure patents for additional indications. Innovate intends to continue to expand its intellectual property protection strategy, grounded in securing composition of matter patents and method of use patents for newer indications. Innovate plans to develop newer formulations for the product candidates for other indications and improved performance of existing indications.

 

In-license additional intellectual property and pipeline drugs to expand Innovate ’s presence in the treatment of autoimmune and inflammatory diseases . In addition to broadening its current pipeline through indication expansion, Innovate plans to explore expansion of its product pipeline through strategic partnerships and product acquisitions, as it did in 2016 through its in licensing of larazotide, Alba Therapeutics, Inc.’s celiac program. Future pipeline expansion decisions will be based on the unmet medical needs within the gastrointestinal disease area including, but not limited to, celiac disease and ulcerative colitis, the commercial opportunity, and the ability to rapidly develop and commercialize a product candidate.

 

Leverage the expertise of Innovate ’s management team and network of scientific advisors and key opinion leaders . Innovate is led by a strong management team with deep experience in drug development, collaborations, operations, and corporate finance. Innovate’s team has been involved in a broad spectrum of R&D activities leading to successful outcomes, including FDA approvals and drug launches. Innovate will continue to leverage the collective experience and talent of its management team, network of leading scientific experts, and key opinion leaders (KOLs) to strategize and implement its development and eventually its commercialization strategy.

 

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Out-license Innovate ’s non-core assets/indications and establish research collaborations . Innovate continually reviews its internal research priorities and therapeutic focus areas and may decide to out-license non-core assets/indications that arise from current and future available data. Innovate may seek research collaborations that leverage the capabilities of its core assets in order to monetize and expand upon the breadth of opportunities that may be uniquely accessible through its drug candidates.

 

Outsource capital intensive operations . Innovate plans to continue to outsource capital intensive operations, including most clinical development and all manufacturing operations of its product candidates in order to facilitate the rapid development of its pipeline by using high quality specialist vendors and consultants in a capital efficient manner.

  

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Innovate’s Drug Product Pipeline

 

Innovate’s current pipeline is focused on two clinical stage assets, one for celiac disease and one for ulcerative colitis. Innovate continues to leverage additional proof-of-concept work for larazotide to expand into additional indications, including irritable bowel syndrome (IBS) and inflammatory bowel disease (IBD). The following table summarizes key information about Innovate’s pipeline of drug product candidates to date (Table 1):

 

 

 

Table 1: Innovate’s key pipeline products are clinical stage with an established safety profile, large markets for chronically dosed therapies, and key milestones during the next 24 months.

  

Larazotide (INN-202) for Celiac Disease

 

Larazotide has been developed for the treatment of celiac disease and has successfully completed a Phase 2b trial showing clinically meaningful and statistically significant reduction in abdominal and non-GI (headache) symptoms. Innovate is planning to launch the Phase 3 trials in mid-2018.

 

Larazotide is an orally administered, locally acting, non-systemic, synthetic 8-amino acid (Figure 3), first-in-class tight junction regulator being investigated as an adjunct to a gluten-free diet in celiac disease patients who still experience persistent GI symptoms despite being on a gluten-free diet. Larazotide’s established safety profile and the lack of absorption into the blood stream are advantages for a chronically dosed lifetime medication.

 

The larazotide drug product is an enteric coated (EC) drug product formulated as enteric-coated multiparticulate beads filled into hard gelatin capsules for oral delivery. The enteric coating is designed to allow the bead particles to bypass the stomach and release larazotide upon entry into the small intestine (duodenum). A mixed bead formulation is used to allow partial release of larazotide upon entry into the duodenum and to release the remaining larazotide approximately 30 minutes later. In clinical trials, larazotide has been dosed 15 minutes before meals allowing time for its effect in the small bowel before exposure to gluten.

 

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Figure 3: Larazotide acetate is an 8-amino acid peptide formulated into a proprietary oral capsule

 

Larazotide’s Mechanism of Action

 

In research studies supportive of the mechanism of action, larazotide has been shown to stimulate recovery of mucosal barrier function via the regulation of tight junctions both in vitro and in vivo , including in the celiac disease mouse model (Gopalakrishnan, 2012; Gopalakrishnan, 2012). In doing so, it is proposed that larazotide reduces the signs and symptoms associated with celiac disease.

 

In several autoimmune diseases, this increased intestinal permeability or paracellular leakage allows increased exposure to a triggering antigen and a consequent inflammatory response, the characteristics of which are determined by the particular disease and the genetic makeup of the individual. A new paradigm for autoimmune disease is that there are three contributing factors to the development of disease:

 

  1. A genetically susceptible immune system that allows the host to react abnormally to an environmental antigen;

 

  2. An environmental antigen that triggers the disease process; and

 

  3. The ability of the environmental antigen to interact with the immune system.

 

Larazotide inhibits tight junction opening triggered by both gluten and inflammatory cytokines, thus reducing uptake of gluten. Larazotide disrupts the intestinal permeability-inflammation loop, and reduces symptoms associated with celiac disease.

 

Larazotide’s Unique Dose Response

 

Previously published in vitro work has shown a wide linear dose response using Caco-2 cells, larazotide has been shown in numerous clinical trials to exhibit significant benefit at reducing symptoms but only at the lower doses while inhibition of this activity occurs at the higher doses. To explain this observation, Dr. Anthony Bliksager from North Carolina State University, evaluated the pharmacology of larazotide at the luminal surface of the small intestine in an ex vivo pig model. A section of the gut was ligated, placed in an Ussing chamber and changes in permeability measured by electrical resistance. The data confirmed full length larazotide is capable of fully restoring intestinal wall integrity to that of the non-ischemic control following an ischemic insult. Subsequently, it was discovered a specific aminopeptidase only located within the brush borders of the intestinal epithelium which cleaved larazotide into two fragments missing the either one or both N-terminus glycine (G) residues ( GG VLVQPG). Both cleaved fragments, GVLVQPG and VLVQPG, are inactive in this ex vivo pig model. Moreover, when these two fragments are combined with the active full length larazotide, activity is abolished. These data confirm that local buildup of these inactive fragments derived from higher doses of larazotide compete and block function of larazotide after threshold concentration. The in vitro experiments using Caco-2 monolayers did not show the same pharmacology as they are missing the brush border and thus lack the aminopeptidase to degrade larazotide. These data also provide an explanation for the clinical observations of an optimal low dose of larazotide which avoids the reservoir of competing inactive fragments generated at high doses of larazotide.

 

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Figure 4: An aminopeptidase in the brush border cleaves larazotide into two fragments, #1 and #2, which then act as inhibitors of larazotide

   

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Figure 5: Illustrative effect of gluten ingestion, breakdown to gliadin which can cross a defective epithelial barrier in the small bowel thus activating the intestinal-inflammatory loop and causing symptoms and villous atrophy.

 

The Intestinal Barrier, Tight Junctions, and Intestinal Permeability

 

The intestine is the largest interface between a person and his or her environment, and an intact intestinal barrier is essential in maintaining overall health. An important function of the intestinal barrier is to regulate the trafficking of macromolecules between the environment and the host. Together with gut-associated lymphoid tissue (GALT) and the neuroendocrine network, the intestinal epithelial barrier controls the equilibrium between tolerance and immunity to non self-antigens. When the finely tuned trafficking of macromolecules is dysregulated, both intestinal and extra-intestinal autoimmune disorders can occur in genetically susceptible individuals (Figure 5).

 

Transcellular fluxes (through the cell membrane) allow nutrients and small molecules to enter the cell from the luminal side of the intestine and exit on the serosal side (internal milieu). Paracellular fluxes (between cells) in contrast are limited by size and charge constraints imposed by the tight junctions between epithelial cells. The paracellular pathway is the key regulator of intestinal permeability to larger more complex macromolecules that may be immunogenically significant.

 

Intestinal epithelial cells adhere to each other through junction complexes. The tight junction, also referred to as zonula occludens, represents the major barrier to diffusion within the paracellular space between intestinal cells. Multiple proteins that make up the tight junction have been identified including occludin, claudin family members, and junctional adhesion protein (JAM). These interact with cytosolic proteins (ZO-1, ZO-2, and ZO-3) that function as adaptors between the tight junction proteins and actin and myosin contractile elements within the cell. Acting together, they open and close the paracellular junctions between cells. It is now apparent that tight junctions are dynamic structures that are involved in developmental, physio logical, and pathological processes.

 

The role of tight junction dysfunction in the pathogenesis of autoimmune diseases is under active investigation. Many autoimmune populations have increased intestinal permeability and it is believed that this may play a fundamental role in the development of autoimmunity. In susceptible populations, the opening of tight junctions between intestinal epithelial cells may lead to exposure to oral antigens via paracellular transport and a consequent autoimmune response. A wide range of gastrointestinal and systemic inflammatory diseases are associated with abnormal intestinal permeability including celiac disease, type 1 diabetes, inflammatory bowel diseases (Crohn’s disease and ulcerative colitis), and ankylosing spondylitis.

 

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Summary of Key Clinical Trials using Larazotide in Celiac Disease

 

Larazotide has been administered to humans in seven (7) clinical trials. These include three Phase 1 trials: (two trials in healthy subjects and a Phase 1b proof of concept (PoC) trial in subjects with celiac disease), two (2) Phase 2 gluten challenge studies in subjects with controlled celiac disease, and additionally two (2) Phase 2 trials in subjects with active celiac disease (Table 2). After demonstrating safety in the Phase 1 studies, larazotide was tested to explore which endpoint would be suitable for celiac disease. After looking at permeability changes in the gut, which turned out to be highly variable in a large trial setting, and then mucosal healing, which likely requires a longer-term study, symptom reduction showed the most consistent and reliable reduction both in a gluten challenge and a ‘‘real-life’’ trial. Importantly, after exposure in more than 800 subjects, the safety profile of larazotide remained similar to placebo due to its lack of absorption into the bloodstream — a critical advantage for a chronically dosed drug.

 

Trial   Clinical Trial   No. of Subjects
-001   Phase 1: Single Escalating Doses in Healthy Volunteers   24
-002   Phase 1b: Multiple Dose POC in Celiac Patients – Gluten Challenge   21
-003   Phase 1: Multiple Escalating Dose in Volunteers   24
-004   Phase 2a: Multiple Dose POC in Celiac Patients Gluten Challenge 2 weeks   86
-006   Phase 2b: Dose Ranging, in Celiac Patients Gluten Challenge, 6 weeks   184
-011   Phase 2b: POC and Dose Ranging in Active Celiac Patients   105
-06B   Phase 2b: Similar to -006, in Celiac Patients   42
-012   Phase 2b: Multiple dose in Celiac patients with Symptoms on a GFD   342

 

Table 2: Significant drug exposure in more than 800 subjects in multiple clinical trials consistently showed a solid safety profile similar to placebo, which is a critical advantage for chronic lifetime administration.

 

Clinical Trial (‘006) Results Revealed Key Insight into Symptom Reduction as a Primary Endpoint

 

A Phase 2b study with a gluten challenge (CLIN1001-006) was conducted in 184 subjects with well-controlled celiac disease on a GFD. Subjects were randomized to one of four treatment groups, (placebo, 1 mg, 4 mg, or 8 mg larazotide) and asked to take treatment 15 minutes prior to each meal (TID). Nine hundred (900) mg of gluten was taken with each meal. Subjects remained on their GFD throughout the duration of the trial. The trial results revealed key insight into how to move the program forward by focusing on reduction of symptoms. The 1-mg dose prevented the development of gluten-induced symptoms as measured by GSRS (a patient-reported outcome (PRO) devised and validated by AstraZeneca), and all drug treatment groups had lower anti-transglutaminase antibody levels than the placebo group. Results of pre-specified secondary endpoints suggest that larazotide reduced antigen exposure as manifested by reduced production of anti-tTG levels and immune reactivity towards gluten and gluten-related gastrointestinal symptoms in subjects with celiac disease undergoing a gluten challenge.

 

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Figure 6: Trial design for Phase 2b and Phase 3 is the same with a screening period followed by 12 weeks of randomization, larazotide acetate vs. placebo.

 

 

 

Figure 7: Responder Rate Analysis: Larazotide is the only celiac drug to meet its primary endpoint with statistical significance and a clinically meaningful improvement in the copyrighted CeD PRO (celiac disease patient reported outcome), an FDA-agreed upon primary endpoint for Phase 3 (shown above).

 

Source: Gastroenterology 2015; 148:1311–1319; p. 1315

 

Clinical Trial (‘012) Met the Primary Endpoint with Statistical Significance (CeD-GSRS/CeD PRO)

 

The purpose of the ‘012 study was to assess the efficacy (reduction and relief of signs and symptoms of celiac disease) of 3 different doses of larazotide (0.5 mg, 1 mg, and 2 mg TID) versus placebo for the treatment of celiac disease in adults as an adjunct to a GFD. Larazotide or placebo which was administered TID, 15 minutes prior to each meal. After a screening period, subjects were asked to continue following their current GFD diets into a placebo-run in phase for 4 weeks after which they were randomized to drug versus placebo. Subjects maintained an electronic diary capturing: daily symptoms celiac disease patient reported outcome (CeD-PRO), weekly symptoms (CeD-GSRS), bowel moments (BSFS), and a self-reported daily general well-being assessment (Figure 6).

 

The primary endpoint of average on-treatment CeD GSRS score throughout the treatment period was met at the 0.5 mg TID dose. In addition, a number of pre-specified secondary and exploratory endpoints, such as symptomatic days and symptom-free days, collectively demonstrated that a dose of 0.5 mg TID was superior to placebo and higher doses of larazotide. No difference was observed between the two higher dose levels (1 and 2 mg TID) or placebo, suggesting a narrow dose range around the 0.5mg dose which seems to correlate with pre-clinical data.

  

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Figure 8: Treatment effect of larazotide acetate from the Phase 2b trial (‘012) compared to approved IBS/CIC drugs with varying treatment effects mostly in the mid to high single digit range.

 

Source: Gastroenterology 2015; 148:1311–1319; p. 1315 and FDA Drug Labels

 

The CeD PRO, a copyrighted PRO created specifically for celiac disease and wholly owned by Innovate, showed a statically significant (p=0.022) result with a treatment effect of 14.3% (drug responder rate minus placebo responder rate). Although, there are no celiac drugs approved as a comparator, the treatment effect was greater than several other GI dugs approved for irritable bowel syndrome (IBS) and chronic idiopathic constipation (CIC) which use a similar clinical trial design and have GI/abdominal symptoms similar to celiac disease (Figure 8).

 

Clinical Path Forward to Phase 3 Trials

 

After a successful End-of-Phase 2 meeting with the FDA, agreements were reached on the key aspects of the Phase 3 trials. The FDA agreed on using the previously validated CeD PRO as the primary endpoint with two doses of larazotide which bracket the range of efficacy in previous trials. Two Phase 3 trials with a size of about 450 patients each would allow for more than a 90% power to replicate the Phase 2b trial results. Most other criteria such as inclusion, exclusion, site selection/coordination will remain the same as the ‘012 Phase 2b trial. One of the leading causes of Phase 3 trial failure is toxicity which appears when drugs are tested in larger populations and in the case of larazotide, we believe this risk is diminished due to larazotide’s lack of systemic absorption into the blood circulation.

 

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About Celiac Disease

 

Celiac disease is a genetic autoimmune disease triggered by the ingestion of gluten-containing foods such as wheat, barley, and rye. Individuals with celiac disease have increased intestinal permeability, commonly referred to as a ‘‘leaky’’ gut. This allows macromolecules that normally remain on the luminal side of the intestine to pass through to the serosal side through tight junctions via paracellular diffusion (Figure 9). In the case of celiac disease, this permeability may allow gluten break-down products, the triggering antigens of celiac disease, to reach gut-associated lymphoid tissue (GALT), initiating an inflammatory response. Celiac disease is characterized by chronic inflammation of the small intestinal mucosa that may result in diverse symptoms, malabsorption, atrophy of intestinal villi, and a variety of clinical manifestations.

 

 

Figure 9: The epithelial barrier separates the intestinal content from the immune system (lamina propria) and the vasculature.

 

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Figure 10: Intestinal villi atrophy in celiac patients, a characteristic finding upon biopsy of the duodenum.

 

Large Population — Unmet Need (no drug approved); Serious Long-Term Sequelae

 

Celiac disease affects an estimated 1% of the Western population (Dubé, 2005). Currently, there are no therapeutics available to treat celiac disease, and the current management of celiac disease is a life-long adherence to a gluten-free diet. Changes in dietary habits are difficult to maintain, and foods labeled as gluten-free may still contain small amounts of gluten (up to 20 ppm per FDA labeling standards). Dietary compliance is imperfect in a large fraction of patients (Rostom, 2006) and difficult to adhere to on an ongoing basis (Green, 2007). In a recent survey conducted in the United Kingdom non-adherence to the gluten-free diet was found to be as high as 70% (Hall, 2013).

 

There are serious long-term consequences to exposure to gluten in patients with celiac disease, including the risk of developing osteoporosis, stomach, esophageal, or colon cancer, and T-cell lymphoma (Green 2003, Green 2007). The continuous GI symptoms often result in significant morbidity with a substantial reduction in quality of life. In addition, not all patients respond to a gluten-free diet. Patients with known celiac disease may continue to have or re-develop symptoms despite being on a gluten-free diet (Rostom 2006). This suggests a need for a therapeutic agent for the treatment of celiac disease (Green, 2007; Hall, 2013).

 

Celiac disease represents a unique model of an autoimmune disorder in that the following elements are known:

 

  1. The triggering environmental factor is glutenin or gliadin, the proline, glutamine and glycine rich glycoprotein fractions of gluten;

 

  2. There is a close genetic association with HLA haplotypes DQ2 and/or DQ8; and

 

  3. A highly specific humoral autoimmune response occurs.

 

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Genetics of Celiac Disease

 

The high incidence of celiac disease in first degree relatives of celiac patients (10 − 15%) and high concordance rate in monozygotic twins (80%) suggest a strong genetic component. Gliadin deamidation by tissue transglutaminase (tTG) enhances the recognition of gliadin peptides by human leukocyte antigen (HLA) DQ2 and DQ8 T cells in genetically predisposed subjects, which in turn may initiate the cascade of autoimmune reactions responsible for mucosal destruction. This interaction implies that gliadin and/or its breakdown peptides in some way cross the intestinal epithelial barrier and reach the lamina propria of the intestinal mucosa where they are recognized by antigen-presenting cells. The enhanced paracellular permeability of individuals with celiac disease would allow passage of macromolecules through the paracellular spaces with resulting autoimmune inflammation. There is a strong genetic predisposition to celiac disease, with major risk associated with HLA DQ2 (approximately 95% of celiac disease patients) and HLA-DQ8 (approximately 5% of celiac disease patients). The prevalence of celiac disease in the U.S. is estimated to be approximately 1%; however approximately 30% of the general U.S. population is HLA DQ2 positive (Figure 11), indicating that additional factors are involved in the development of celiac disease.

 

 

Figure 11: Distribution of HLA-DQ2/DQ8 in the general US population and in celiac disease.

Source: J. Clin. Invest. 2007 Jan 2;117(1):41.

 

In celiac disease, an inflammatory reaction occurs in the intestine that is characterized by infiltration of immune cells in the lamina propria and epithelial compartments with chronic inflammatory cells and progressive architectural changes to the mucosa. Both adaptive and innate branches of the immune system are involved. The adaptive response is mediated by gluten-reactive CD4+ T cells in the lamina propria that recognize gluten-derived peptides when presented by the HLA class II molecules DQ2 or DQ8. The CD4+ T cells then produce pro-inflammatory cytokines such as interferon gamma. This results in an inflammatory cascade with the release of cytokines, anti-tTG antibodies, T cells, and other tissue-damaging mediators leading to villous injury and crypt hyperplasia in the intestine. Anti-human tissue transglutaminase (anti-tTG) antibodies are also produced, which form the basis of serological diagnosis of celiac disease.

 

Anti-tTG Antibodies: Highly Sensitive and Specific Blood-based ELISA Diagnostic Test

 

The current approach for diagnosis of celiac disease, is to use anti-tissue transglutaminase-2 (tTG-2) antibody tests as an initial screen with definitive diagnosis from biopsy of the small intestine mucosa. The diagnosis of celiac disease is confirmed by demonstration of characteristic histologic changes in the small intestinal mucosa, which are scored based on criteria initially put forth by Marsh and later modified. In 2012, the European Society of Pediatric Gastroenterology, Hepatology, and Nutrition (ESPGHAN) Guidelines allowed symptomatic children with serum anti-tTG antibody levels 10 times upper limit of normal (ULN) to avoid duodenal biopsies after positive HLA test and serum anti-endomysial antibodies (EMAs). It’s likely with further improvement in diagnostic testing, the guidelines will expand to include adults in the EU and eventually in the US as well, making it easier to quickly and cost effectively screen the broader population.

 

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The need for multiple clinical and laboratory findings to diagnose celiac disease makes monitoring disease progression difficult. International guidelines give standardized definitions and criteria for the diagnosis of celiac disease, however there are not clear standards for follow-up and monitoring of treatment. This is particularly true for celiac patients diagnosed as adults, who respond differently and less completely to a GFD than do celiac patients diagnosed as children. It is not clear who should perform follow-up of patients with celiac disease and at what frequency but the American College of Gastroenterology suggests that an annual follow-up seems reasonable. Recommendations for monitoring disease progression include assessing symptoms and dietary compliance, and repeating serology tests. Markers of celiac disease progression and improvement that are both validated and provide a timely assessment of disease activity are lacking.

 

Role of Tissue Transglutaminase in Celiac Disease

 

Anti-tTG-2 antibodies are produced in the small-intestinal mucosa (Picarelli et al. 1996), where they can bind tTG-2 present in the basement membrane and around blood vessels and form deposits characteristic of the disease. tTG-2 has been implicated in a variety of human disorders including several neurodegenerative conditions and cancer. Transglutaminases (TGs) were first discovered in the 1950s and are a family of enzymes which catalyze Ca2+-dependent post-translational modification of proteins. Of the seven isoforms discovered so far all share the same basic four-domain tertiary structure, with minor variations, although their catalytic mechanism is conserved, resembling that of the cysteine proteases. tTGs cause transamidation, esterification, and hydrolysis; all of which lead to post-translational modifications in the target proteins. Characteristically, tTG’s mediate selective protein cross-linking by forming covalent isopeptide linkages between two target proteins. The resulting cross-linked products in many cases have high molecular masses and are unusually resistant to proteolytic degradation and mechanical strain. As in the case of the gliadin fragments in celiac disease, they are able to pass thru the leaky paracellular pathway from the lumen to the lamina propria , where the immune cells reside and are then activated.

 

Gliadin fragments, in addition to being rich in proline, also have high glutamine content, which makes them suitable substrates for tTG-2, which targets glutamine residues. For augmented DQ2/8 binding, the conversion of glutamine residues to glutamic acid is catalyzed by tTG-2 as a deamidation reaction. After deamidation, the gliadin peptides become highly negatively charged in key anchor positions, thereby increasing their affinity to the HLA molecules. CD4+ T cells recognize the deamidated gliadin peptides bound to the HLA DQ2 or DQ8 molecules by their T cell receptors, thus activating intestinal inflammation leading to villous atrophy.

 

Gluten and Food Labeling

 

Gluten is a complex molecule contained in several grains such as wheat, rye and barley. Gluten can be subdivided into two major protein subgroups according to their solubility in alcohol and aqueous solutions. These subclasses consist of gliadins, soluble in 40 − 70% ethanol and glutenins which are large, polymeric molecules insoluble in both alcohol and aqueous solutions. The gliadins and glutenins can be further subdivided into groups according to their molecular weight. Glutenins can be subdivided into low and high molecular weight proteins, while the gliadin protein family contains α -, β -, γ - and ω - types. Both glutenins and gliadins are characterized by a high amount of prolines (20%) and glutamines (40%) that protect them from complete degradation in the gastrointestinal tract and make them difficult to digest. Currently 31 nine-amino acid peptide sequences in the prolamins of wheat and related species have been defined as being celiac toxic or celiac ‘‘epitopes.’’ These epitopes are located in the repetitive domains of the prolamins, which are proline and glutamine-rich, and the high levels of proline make the peptide resistant to proteolysis. In addition, the prolamin-reactive T cells also recognize these epitopes to a greater extent when specific glutamine residues in their sequences have been deamidated to glutamic acid by tTG-2. The immunodominant sequence after wheat challenge corresponds to a well-characterized 33 residue peptide from α -gliadin, ‘‘33-mer,’’ that is resistant to gastrointestinal digestion (with pepsin and trypsin) and was initially identified as the major celiac toxic peptide in the gliadins.

 

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The FDA finalized a standard definition of ‘‘gluten-free’’ in August 2013. As of August 5, 2014, all manufacturers of FDA-regulated packaged food making a gluten-free claim must comply with the guidelines outlined by the FDA ( www.fda.gov/gluten-freelabeling ). A ‘‘gluten free’’ claim still allows up to 20 ppm of gluten which leads to more than 100mg/day up to 500 mg/day of gluten exposure. Due to presence of gluten in foods, beer/liquor, cosmetics and household products, exposure is virtually impossible to completely avoid, and with cross-contamination, celiac patients cannot avoid exposure to gluten therefore, making symptoms more frequent than expected.

 

CNS

  Endocrine   Oncology/Heme   Skin   Other
Headaches   Type 1 Diabetes  

Enteropathy

associated T-cell

lymphoma (EATL)

  Dermatitis herpetiformis   Rheumatoid arthritis (RA)
Gluten ataxia  

Autoimmune

thyroid

  Anemia   Alopecia areata  

Reduced bone

density

Peripheral neuropathies   Addison’s disease       Vitiligo   Sjogren’s syndrome

 

Non-GI Manifestations of Celiac Disease and Co-Morbidities

 

Table 3: Diseases associated with celiac disease

 

Headache, Gluten Ataxia: Nervous System Manifestation of Celiac Disease

 

The association between celiac disease and neurologic disorders has been supported by numerous studies over the past 40 years. While peripheral neuropathy and ataxia have been the most frequently reported neurologic extra-intestinal manifestations of celiac disease a growing body of literature has established headache as a common presentation of celiac disease as well. The exact prevalence of headache among patients ranges from about 30% to 6% (Lebwohl, 2016).

 

Dermatitis herpetiformis: Skin Manifestation of Celiac Disease

 

Dermatitis herpetiformis (DH) is an inflammatory cutaneous disease characterized by intensely pruritic polymorphic lesions with a chronic-relapsing course, first described by Duhring in 1884. DH’s only treatment is a strict lifelong GFD, for achieving and maintaining a permanent control. It appears in around 25% patients with CD, at any age of life, mainly in adults and is a very characteristic clinical presenting symptom.

  

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Figure 12: LPS (Lipopolysaccharide) or Endotoxin produced by bacteria in the “leaky gut” has been implicated in the pathogenesis of NASH. Larazotide can prevent LPS translocation to the liver via the portal circulation.

 

Non-alcoholic steatohepatitis (NASH)

 

NASH is a growing disorder (up to 25%) in the general population though its incidence is elevated 6-fold in celiac patients. It has been suggested several times that NASH is associated with increased gut permeability caused by disruption of intercellular tight junctions in the intestine allowing lipopolysaccharide (LPS) from bacteria to pass into the portal circulation to the liver. Explosive growth in the market for NASH therapeutics is expected according to Global Data across the seven major markets of the U.S., France, Germany, Italy, Spain, the UK, and Japan, with such market set to grow to around $25.3 billion by 2026. Larazotide can be used in combination with the multitude of NASH drugs in clinical trials as a safe drug with a different and potentially synergistic therapeutic effect.

 

Enteropathy-associated T-cell lymphoma (EATL): High Mortality Rate and Unmet Need

 

Cancer associated with celiac disease occurs in about 2% − 3% of the celiac population, with the most common representing approximately 2 3 of the cases, being Enteropathy-associated T-cell lymphoma (EATL). EATL effects approximately 1% of the celiac population. EATL is an intestinal tumor of intraepithelial T lymphocytes found throughout the small intestines and increased in number in celiac disease. Intestinal intraepithelial α - β T-cells, in various stages of transformation, are thought to be the normal-cell counterpart for EATL. Currently there are no standardized treatment regimens and surgery and/or radiation maybe indicated depending on tumor bulk and spread followed by anthracycline-containing chemotherapy such as CHOP is often used. Relapses after CHOP or CHOP-like chemotherapy occur 1 − 60 months from diagnosis in 80% of responsive patients, with a mortality of 85% due to progressive disease or complications.

 

Refractory Celiac Disease

 

Refractory celiac disease is clinically defined as the persistence of pathologic changes in the intestine consistent with celiac disease despite a strict gluten-free diet for more than 12 months. These pathologic changes include increased intraepithelial lymphocytes, villous atrophy, and crypt hyperplasia. Cases of refractory celiac disease are commonly divided into two types:

 

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Type I refractory celiac disease  — These lesions typically show no atypia in the intraepithelial lymphocytes, normal surface T cell receptor, CD3 and CD8 expression by intraepithelial T lymphocytes and a polyclonal pattern on T cell receptor gene rearrangement studies.

 

Type II refractory celiac disease  — These lesions also have no atypia in the intraepithelial lymphocytes, but demonstrate a loss of surface T cell receptor, CD3, or CD8 expression and may have a monoclonal T cell receptor gene rearrangement.

 

The clinical significance of refractory celiac disease type is incompletely understood. While type I refractory celiac disease is unlikely to progress to EATL, type II may be a precursor lesion to EATL. Imaging with computed tomography, positron emission tomography, and video capsule endoscopy may help to identify cases of refractory celiac disease that have progressed to EATL.

 

Type I Diabetes Mellitus

 

Celiac disease is overrepresented in type 1 diabetes (T1DM), which shares a mutual genetic predisposition with celiac disease; both diseases are associated with the HLA class II genes (HLA-DQB1) on chromosome 6p21 (Smyth et al. 2008). The incidence of celiac disease is increased by 8 to 10-fold in the T1DM population versus the overall population incidence. In fact, T1DM patients with the HLADQ2/8 haplotype are also positive for anti-tTG antibodies, an established highly sensitive test for celiac disease.

 

The association of Human Leukocyte Antigens (HLA) with type 1 diabetes was first reported in the 1970s. Classical HLA molecules are cell-surface proteins that bind and present peptide antigens for recognition by the T cell receptor (TCR). The shape of the peptide binding groove and charges within it determine the type of peptides which bind to a given HLA and the combination then activates the TCR and in celiac disease leads to the intestinal-inflammatory loop causing villous atrophy and in T1DM causing destruction of the insulin secreting pancreatic β - cells.

 

In addition to the genetic link, several studies over the past two decades have implicated a leaky or damaged intestinal barrier leading to passage of toxins and/or viruses as a potential causative factor in T1DM. (Vaarala, 2008). Increased intestinal permeability, also common to celiac disease, and reports of gliadin activated lymphocytes trafficking to the pancreas lead to a link amongst autoimmunity, intestinal permeability, intestinal inflammation and potential role of gliadin. A growing body of evidence also suggests the beneficial effects of a GFD (for patients with concomitant celiac disease) may actually protect against the long-term complications of T1DM. such as retinopathy, nephropathy and others. Heretofore, until larazotide, no drug, to Innovate’s knowledge, with an MoA to decrease intestinal permeability has advanced into clinical trials and with its established safety profile as an oral capsule, a targeted exploratory clinical study could help further elucidate the role of intestinal permeability as a therapeutic modality for T1DM as well.

 

Non-Celiac Gluten Sensitivity: Large Growing Patient population with Celiac Symptoms

 

Non-celiac gluten sensitivity (NCGS) is a syndrome diagnosed in patients with symptoms that respond to removal of gluten from the diet, after celiac disease and wheat allergy have been excluded. NCGS patients lack the villous atrophy of the small intestine, yet biopsies show reduced numbers of T-regulatory cells, which may indicate that the innate immune system is involved. Anti-tTG antibodies are not elevated in NCGS as in celiac disease which is another key difference between the two diseases. Anti-gliadin antibodies (AGA) may be an indicator of NCGS as up to 50% of such patients presenting to gastroenterologists have detectable circulating levels, primarily of IgG AGA.

 

The ‘‘classical’’ presentation of NCGS is a combination of GI symptoms including abdominal pain, bloating, bowel habit abnormalities (either diarrhea or constipation), and extra-intestinal symptoms such as ‘‘brain fog,’’ depression, headache, fatigue, and leg or arm numbness. NCGS has been described in the literature since the 1980s and is distinct from celiac disease, however, both share symptomatic relief from a GFD, implying benefit from preventing gluten from passing through the epithelial barrier is beneficial.

 

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Other Indications using Larazotide’s Mechanism of Action

 

Larazotide for Crohn’s Disease: IL-10 Knockout Mouse Model

 

The effect of larazotide on disease attenuation in an IL-10 knockout mouse study was studied (Arrieta, 2009). Larazotide was placed in the drinking water of the mice at a low dose (0.1 mg/ml) or high dose (1.0 mg/ml) during the period from 4 to 17 weeks of age. Results were compared to wild type mice, IL-10 knockout mice with no treatment, and IL-10 knockout mice treated with probiotics. Intestinal and colonic permeability was significantly reduced in the high dose larazotide treatment group, but not in the untreated IL-10 knockout group. Larazotide treatment caused a reduction in all tissue markers of colonic inflammation (IFN γ and TNF α ) and in histological inflammation.

 

Larazotide for Environmental Enteric Dysfunction (EED): Positive in vitro Data; Potential for PriorityReview Voucher

 

Environmental enteric dysfunction (EED) is a rare pediatric tropical disease in the US and Europe, however, more than 165 million children in developing countries in Africa and Asia suffer from it. As per section 524 of the Federal Food, Drug, and Cosmetic Act (FD&C) Act, EED would likely fall under ‘‘Current List of Tropical Disease’’ number ‘S,’ thus making a drug approved for EED in the US eligible for a Priority Review Voucher (PRV). PRVs save time to approval for a drug and can be sold to a large pharma company. The most recent PRV sold by BioMarin Pharmaceuticals Inc. yielded them $125 million.

 

The histological presentation of EED is very similar to celiac disease with villous atrophy and chronic inflammation of the small bowel and the pathogenesis of EED is linked to increased intestinal permeability. We have tested Larazotide against some of the pathogens commonly found in EED (unpublished) and found positive in vitro results which will need to be confirmed in animal models before starting a clinical trial in EED.

 

INN-108: Mild-to-Moderate Ulcerative Colitis

 

INN-108 is in development for mild-to-moderate ulcerative colitis (UC) and is expected to enter a proof-of-concept Phase 2 trial in the second half of 2018 after a successful Phase 1 trial demonstrating safety at currently approved doses of mesalamine. UC is an inflammatory bowel disorder (IBD) that affects more than 1.25 million people in the major markets and is characterized by inflammation and ulcers in the colon and rectum. UC is a chronic disease that can be debilitating and sometimes lead to life-threatening complications. While poorly understood, a multitude of environmental factors and genetic vulnerabilities are thought to lead to the dysregulation of the immune response via a defective epithelial barrier. Although the majority of patients present with mild-to-moderate UC which can progress to severe UC, the focus of drug development has been in moderate-to-severe UC with little innovation or drug development for mild-to-moderate UC. The mainstay of treatment for mild-to-moderate UC remain various oral reformulations of mesalamine or 5-ASA (5-amino salicylic acid) such as Shire’s Lialda (approved 2007) and Pentasa (approved 1993), Allergan’s Asacol HD (approved 2008) and Valeant/Salix’s Apriso (approved 2008).

 

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INN-108 uses an azo-bonded pro-drug approach linking mesalamine to 4-APAA. Mitsubishi Pharma developed 4-APAA as Actarit in Japan which was approved in 1994 for rheumatoid arthritis. IBD drugs were all originally approved for rheumatoid arthritis (RA), from the oldest 5-ASA, sulfasalazine, to the latest biologics, Humira and Enbrel. 4-APAA has more than two decades of safety data as a standalone drug and has an MoA which is differentiated from mesalamine though the ultimate effect for both is anti-inflammatory (Figure 13). Taken orally as a tablet, the azo-bond protects INN-108 from the low pH in the stomach, thus allowing it to transit to the colon where the UC lesions are located. In the colon, the azo bond is broken enzymatically leading to the release of mesalamine and 4-APAA which have a synergistic anti-inflammatory effect. With the addition of 4-APAA, which is not approved in the U.S. or EU, to the already approved mesalamine, the synergistic effect could lead to superior clinical efficacy over the currently approved oral mesalamines.

 

 

Figure 13: 4-APAA is covalently bonded to 5-ASA via a high energy azo-bond which is only cleaved enzymatically in the colon. The anti-inflammatory effect of each of 5-ASA and 4-APAA via different pathways which could lead to a potential synergistic anti-inflammatory effect as seen in animal studies.

 

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INN-108: UC Animal Model Data Shows Synergy between 4-APAA and Mesalamine

 

The effects of chronic treatment with INN-108 on Clostridium diffıcile toxin A — induced colitis of the colon is shown in Figure 14. Orally administered INN-108 was significantly more potent than sulfasalazine or 4-APAA alone (McVey, 2005).

 

 

Figure 14: A rat UC model using toxin A induced-colitis as the insult leads to sloughing of the colonic epithelium with increasing doses. Using sulfasalazine vs. INN-108 to protect against the toxin A injury showed INN-108 was significantly more potent that sulfasalazine.

Source: McVey DC et al. Digestive Diseases and Sciences. 2005 Mar 1;50(3):565-73.

 

INN-108 Clinical Development Pathway

 

After completing a Phase 1 study with 24 subjects, safety was established with dosing of mesalamine and 4-APAA at 2 grams each for a total of 4 grams TID. The typical dose of the various approved mesalamine formulations range from 1.5g to 2.4g per day, thus INN-108’s mesalamine content is within the established approved dose range. The addition of 4-APAA is thought to improve the efficacy above mesalamine, which would allow INN-108 to be used either after or instead of current mesalamines. In a Phase 2 trial, Innovate plans to compare INN-108 to mesalamine seeking to demonstrate a greater clinical effect than mesalamine alone.

Source: McVey DC et al. Digestive Diseases and Sciences. 2005 Mar 1;50(3):565-73.

 

Ulcerative Colitis: Lack of Innovation in New Drug Development for Past Several Decades

 

Conventional therapies broadly inhibit mechanisms involved in the inflammatory process and are commonly used to effectively treat patients experiencing a mild-to-moderate form of the disease. For mild-to-moderate UC, oral mesalamine has an established efficacy and safety profile. However, gastroenterologists cite the need for new therapies for mild-to-moderate UC.

 

Patients who do not respond to mesalamine are eventually transitioned to biologics. The primary targets for biologics have been to control the immune response and inflammatory cascade, by inhibiting or downregulating molecules such as TNF- α , NF- κ B, IL-1 β and IFN1- γ . We believe INN-108 bridges the gap between mesalamine and biologics by its mechanism of action of both inhibiting the inflammatory process as well as down-regulating the cytokines.

 

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Branded mesalamine formulations didn’t face any generics and have been a profit generator until July 2017, when Zydus Cadila launched the first generic of Shire’s Lialda. Within weeks generic Lialda grabbed about 40% unit market share as per IMS. This rapid generic penetration would be expected over time for the remaining mesalamines as well. Thus, if INN-108 shows improved efficacy over mesalamine, it could convert branded mesalamines, some generics as well as steroids/AZA/6-MP and early use of biologics. INN-108 could offer a more cost effective and more efficacious profile than mesalamines and avoid or delay the need for high-cost biologics (Figure 15).

 

 

 

Figure 15: INN-108’s market opportunity improved over mesalamine without the side effects from Steroids/AZA/6-MP

 

About Ulcerative Colitis

 

UC is a chronic intermittent relapsing inflammatory disorder of the large intestine and rectum. While poorly understood, a multitude of environmental factors and genetic vulnerabilities are thought to lead to the dysregulation of the immune response via a defective epithelial barrier. As a result, chronic inflammation and ulceration of the colon occurs. UC is specific to the colon and affects only the mucosal lining of the colon. Common symptoms of UC include diarrhea, bloody stools, and abdominal pain. The majority of patients are intermittent in their disease course, in that they experience a relapse among periods of remission. However, some patients experience only a single episode of the disease prior to maintaining remission whereas other patients are chronically symptomatic and may require a proctocolectomy to treat their condition.

 

History of Drug Development in Mild-to-Moderate Ulcerative Colitis

 

The original compound used in UC was sulfasalazine (Azulfidine), a conjugate of 5-ASA linked to sulfapyridine by an azo bond, which is split into the two molecules by bacterial azoreductases in the colon. The 5-ASA component or mesalamine is the active therapeutic moiety of sulfasalazine, with sulfapyridine thought to have little if any therapeutic effect. Sulfapyridine, however, is the cause of most of the significant adverse side effects of sulfasalazine.

 

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This led to the development of other 5-ASA preparations utilizing azo chemistry to deliver high concentrations of mesalamine or 5-ASA to the colon by preventing early absorption of the drug in the small intestine. Such preparations include olsalazine (Dipentum), consisting of two molecules of 5-ASA bonded together by an azo bond, and balsalazide (Colazal), consisting of 5-ASA azo bonded to an inert carrier (4-aminobenzoyl- β -alanine). The efficacy of these newer oral forms of 5-ASA is comparable to that of sulfasalazine, but they are better tolerated. However, some side effects persist which prevent wider use. In each of these preparations, the only active moiety is mesalamine or 5-ASA, an anti-inflammatory agent.

 

INN-329

 

INN-329 is a proprietary formulation of secretin, a peptide hormone which is used to improve visualization in a magnetic resonance MRCP procedures. Secretin is a 27-amino acid long hormone which rapidly stimulates release of pancreatic secretions, thus improving visualization of the pancreatic ducts during imaging procedures. Secretin has also been tested in a variety of central nervous system conditions such as autism, though currently approved only for pancreatic function testing and imaging with endoscopic retrograde cholangiopancreatography (ERCP). The currently marketed synthetic secretin, approved by the FDA in 2004, is not approved by the FDA or the EMEA for Secretin-MRCP (S-MRCP) procedures. Innovate acquired the assets of secretin from Repligen Corporation in December 2014.

 

MRCP has been used for more than 20 years as a non-invasive tool for imaging pancreatic ducts. With the addition of secretin, pancreatic secretions are increased leading to significantly improved visualization of the pancreatic ducts for detection of abnormalities, including pancreatic cancer. The gold standard for pancreatic duct imaging had been ERCP, an expensive and invasive procedure with complications such as pancreatitis (3 − 5%), bleeding (1 − 2%), perforation (1%), infection (1 − 2%) and death (1/250). More than a half-million ERCP procedures are performed annually in the US and as the role of ERCP diminishes for screening, it will further the need for approval of secretin for S-MRCP. Innovate expects to repeat a Phase 3 trial with a partner, if and when secured, as per previous discussion with the FDA to look at improvement in visualization of the pancreatic duct via MRCP with and without secretin.

 

Innovate’s Intellectual Property

 

Innovate strives to protect the proprietary technology that it believes is important to its business, including its product candidates and its processes. Innovate seeks patent protection in the United States and internationally for its products, their methods of use, and processes of manufacture and any other technology to which Innovate has rights, as appropriate. Additionally, Innovate has licensed the rights to intellectual property related to certain of its product candidates, including patents and patent applications that cover the products or their methods of use or processes of manufacture. The terms of the licenses are described below under the heading ‘‘Licensing Agreements.’’ The patent families related to the intellectual property covered by the licenses include 29 U.S. patents and 107 foreign patents with expirations dates ranging from 2018 to 2035. Innovate also relies on trade secrets that may be important to the development of its business.

 

Innovate’s success will in part depend on the ability to obtain and maintain patent and other proprietary rights in commercially important technology, inventions and know-how related to its business, the validity and enforceability of its patents, the continued confidentiality of its trade secrets as well as its ability to operate without infringing the valid and enforceable patents and proprietary rights of third parties. Innovate also relies on continuing technological innovation and in-licensing opportunities to develop and maintain its proprietary position.

 

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Innovate cannot be sure that patents will be granted with respect to any of its pending patent applications or with respect to any patent applications it may own or license in the future, nor can Innovate be sure that any of its existing patents or any patents it may own or license in the future will be useful in protecting its technology and products. For this and more comprehensive risks related to Innovate’s intellectual property, please see ‘‘Risk Factors — Risks Related to Innovate’s Intellectual Property.’’

 

CeD PRO: Copyrighted Primary Endpoint for Celiac Disease Tested in a Successful Clinical Trial

 

The patient reported outcome (PRO) primary end point for celiac disease (CeD PRO). was developed based on FDA guidance and is copyrighted. Innovate believes that if larazotide is the first approved drug for celiac disease, the CeD PRO will become part of the drug label creating another barrier to entry for potential competitors. Subsequently, any company seeking to develop a drug for celiac disease would either need to develop their own PRO or would be required to license the CeD PRO from Innovate.

 

Strategic Collaborations and License Agreements

 

Innovate has entered into collaboration agreements with several academic institutions and other contract research organizations to investigate pre-clinical studies for the use of its drug candidates in potential other indications or to further broaden its understanding of its current indications.

 

Licensing Agreements

 

License with Alba Therapeutics Corporation

 

In February 2016, Innovate entered into a license agreement (the ‘‘Alba License’’) with Alba Therapeutics Corporation (‘‘Alba’’) to obtain an exclusive worldwide license to certain intellectual property relating to larazotide and related compounds.

 

Innovate’s initial area of focus for this asset relates to the treatment of celiac disease. This program is now referred to as INN-202 by Innovate. The license agreement gives Innovate the rights to (i) the patent families owned by University of Maryland, Baltimore (UMB) and licensed to Alba, (ii) the patent families (ALB-015, ALB-062, and ALB-065) are owned by Alba Therapeutics Corporation, and (iii) one patent family (ALB-030) that is jointly owned. In connection with the Alba License, Innovate also entered into a sublicense agreement with Alba under which Alba sublicensed the UMB patents to Innovate (the ‘‘Alba Sublicense’’).

 

As consideration for the Alba License, Innovate agreed to pay a one-time, non-refundable fee at the time of execution and set payments upon the achievement of certain milestones in connection with the development of the product, including the dosing of the first patient in the Phase 3 clinical trial, acceptance and approval of the New Drug Application, the first commercial sale, and the achievement of certain net sales targets. The last milestone payment is due upon the achievement of annual net sales of INN-202 in excess of $1.5 billion. Upon the first commercial sale of INN-202, the license becomes perpetual and irrevocable. The term of the Alba Sublicense extends until the earlier of (i) the termination of the Alba License, (ii) the termination of the underlying license agreement, or (iii) an assignment of the underlying license agreement to Innovate. After Innovate makes the first milestone payment after the dosing of the first patient in the Phase 3 clinical trial and is able to demonstrate sufficient financial resources to complete the trial, Innovate has the exclusive option to purchase the assets covered by the license. During the term of the Alba License, Alba has the right to sell the covered assets to Innovate upon delivering a notice to Innovate of such intent.

 

License with Seachaid Pharmaceuticals, Inc.

 

In April 2013, Innovate entered into a license agreement (the ‘‘ Seachaid License ’’) with Seachaid Pharmaceuticals, Inc. (‘‘ Seachaid ’’) to further develop and commercialize the licensed product, the compound known as APAZA. This program is now referred to as INN-108 by Innovate.

 

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The license agreement gives Innovate the exclusive rights to (i) commercialize products covered by the patents owned or controlled by Seachaid related to the composition, formulation or use of any APAZA compound in the territory that includes the U.S., Canada, Japan, and most countries in Europe, and (ii) use, research, develop, export and make products worldwide for the purposes of such commercialization.

 

As consideration for the Seachaid License, Innovate agreed to pay a one-time, non-refundable fee at the earlier of the time Innovate met certain financing levels or 18 months following the execution of the agreement and set payments upon the achievement of certain milestones in connection with the development of the product, filing of the New Drug Application, the first commercial sale, and the achievement of certain net sales targets. There are future royalty payments based on achieving sales targets, and Innovate is required to pay Seachaid a portion of any sublicense revenue. The royalty payments continue for each licensed product and in each applicable country until the earlier of (i) the date of expiration of the last valid claim for such products to expire or (ii) the date that one or more generic equivalents if such product makes up 50 percent or more of sales in the applicable country. The term of the Seachaid License extends on a product-by-product and country-by-country basis until the expiration of the royalty period for the applicable product in the applicable country.

 

Asset Purchase Agreement

 

In December 2014, Innovate entered into an Asset Purchase Agreement (the ‘‘ Asset Purchase Agreement ’’) with Repligen Corporation (‘‘ Repligen ’’) to acquire Repligen’s RG-1068 program for the development of secretin for the pancreatic imaging market and MRCP) procedures. This program is now referred to as INN-329 by the Innovate. As consideration for the Asset Purchase Agreement, Innovate agreed to make a non-refundable cash payment on the date of the agreement and future royalty payments consisting of a percentage of annual net sales, with the royalty payment percentage increasing as annual net sales increase. The royalty payments are made on a product-by-product and country-by-country basis and the obligation to make the payments expires with respect to each country upon the later of (i) the expiration of regulatory exclusivity for the product in that country or (ii) ten years after the first commercial sale in that country. The royalty amount is subject to reduction in certain situations, such as the entry of generic competition in the market.

 

Manufacturing and Supply

 

Innovate contracts with third parties for the manufacturing of all of its product candidates, including INN-108, INN-202 and INN-329 for pre-clinical and clinical studies, and intends to continue to do so in the future. Innovate does not own or operate any manufacturing facilities and Innovate has no plans to build any owned clinical or commercial scale manufacturing capabilities. Innovate believes that the use of contract manufacturing organization (CMOs) eliminates the need to directly invest in manufacturing facilities, equipment and additional staff. Although Innovate relies on contract manufacturers, its personnel and consultants have extensive manufacturing experience overseeing CMOs.

 

As Innovate furthers its molecules, Innovate will consider secondary or back-up manufacturers for both active pharmaceutical ingredient and drug product manufacturing. To date, Innovate’s third-party manufacturers have met the manufacturing requirements for the product candidates in a timely manner. Innovate expects third-party manufacturers to be capable of providing sufficient quantities of Innovate’s product candidates to meet anticipated full-scale commercial demands but Innovate has not assessed these capabilities beyond the supply of clinical materials to date. Innovate currently engages CMOs on a ‘‘fee for services’’ basis based on Innovate’s current development plans. Innovate plans to identify CMOs and enter into longer term contracts or commitments as Innovate moves its product candidates into Phase 3 clinical trials.

 

Innovate believes there are alternate sources of manufacturing that have been and could be engaged and enabled to satisfy its clinical and commercial requirements, however Innovate cannot guarantee that identifying and establishing alternative relationships with such sources will be successful, cost effective, or completed on a timely basis without significant delay in the development or commercialization of Innovate’s product candidates. All of the vendors used by Innovate conduct their operations under current Good Manufacturing Practices, or cGMP, a regulatory standard for the manufacture of pharmaceuticals.

 

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Commercialization

 

Innovate owns exclusive rights to all three of its product candidates in the United States and all other major markets, including Japan and the European Union. Innovate plans to pursue regulatory approvals for its products in the United States and the European Union, and may independently commercialize these products in the United States. In doing so, Innovate may engage with strategic partners to help implement optimal sales and promotion activities.

 

Innovate’s commercialization strategy will target key prescribing physicians including specialists such as gastroenterologists, as well as provide patients with support programs to ensure product access. Outside of the United States, Innovate plans to seek partners to commercialize its products via out-licensing agreements or other similar commercial arrangements.

 

Competition

 

The pharmaceutical industry is highly competitive and characterized by intense and rapidly changing competition to develop new technologies and proprietary products. Innovate’s potential competitors include both major and specialty pharmaceutical companies worldwide.

 

The competitive landscape in celiac disease is currently limited, which we believe is due to lack of significant past R&D investments and lack of recognition and education around the disease. To Innovate’s knowledge, there are no late stage competitors entering Phase 3 clinical trials or any who have successfully completed Phase 2 studies to date. However, in recent years large pharmaceutical companies have begun to expand their focus areas to autoimmune diseases such as celiac disease, and given the unmet medical needs in these areas, Innovate anticipates increasing competition. A few early stage programs are active, with time to enter Phase 1 clinical trials still several years away, including Roche/Genetech’s RG7625 (cathepsin S inhibitor), Takeda/PvP’s KumaMax (gluten degrading enzyme), Celimmune/Amgen’s AMG-714 (an IL-15 MAb) and Dr. Falk Pharma/Zeria’s ZED-1227 (a tTG-2 inhibitor). ImmunogenX’s IMGX003 (two gluten degrading enzymes) failed to meet its primary endpoint in a Phase 2b trial in 2015.

 

Product   Status   Mechanism   Company   Route   Product Type
AMG 714   Phase 2  

Anti-IL-15

MAb

 

Celimmune/

Amgen

 

Subcutaneous;

2x/month

 

MAb

(humanized)

ZED-1227   Phase 1b   TGase-2 inhibitor  

Zedira GmbH/

Dr Falk

Pharma

  Oral  

Small molecule

(peptidomimetic)

Nexvax2   Phase 1   Tolerizing vaccine   ImmusanT   Intradermal   3 gliadin epitopes (peptides)
KumaMax   Pre-clinical   Enzymatic degradation of gluten  

Takeda/PvP

Biologics

  Oral   Recombinant enzyme

 

Table 4: Current celiac drugs in development are still in pre-clinical to early Phase 2 proof-of-concept stage. No drugs have completed a successful Phase 2b other than larazotide.

 

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Ulcerative colitis drug development has historically been primarily focused on the moderate-to-severe UC population with little investment and R&D in mild-to-moderate UC, which is the majority of the patient populations. Current treatments for mild-to-moderate UC include the mesalamine reformulations that are pictured in Figure 16 and described above under the heading ‘‘History of Drug Development in Mild to Moderate Ulcerative Colitis,’’ as well as Lialda, Pentasa, Asacol HD and Apriso, Valeant/Salix’s Uceris (oral MMX-formulated budesonide; a corticosteroid) and 5-mercaptopurine (severe side effects). Eventually, half of the mild-to-moderate UC patients progress from mesalamine to the more expensive biologics, which creates a significant potential market opportunity for any drug that is more effective than mesalamine and less expensive than the biologics.

 

 

Figure 16: Other than various reformulations of mesalamine which have been used for the past several decades, no new drugs have been approved for mild-to-moderate UC

 

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Government Regulations

 

The FDA and other regulatory authorities at federal, state, and local levels, as well as in foreign countries, extensively regulate, among other things, the research, development, testing, manufacture, quality control, import, export, safety, effectiveness, labeling, packaging, storage, distribution, record keeping, approval, advertising, promotion, marketing, post-approval monitoring, and post-approval reporting of drugs, such as those Innovate is developing. Innovate, along with third-party contractors, will be required to navigate the various preclinical, clinical and commercial approval requirements of the governing regulatory agencies of the countries in which it wishes to conduct studies or seek approval or licensure of its product candidates. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local, and foreign statutes and regulations require the expenditure of substantial time and financial resources.

 

Government Regulation of Drugs

 

The process required by the FDA before drug product candidates may be marketed in the United States generally involves the following:

 

completion of preclinical laboratory tests and animal studies performed in accordance with the FDA’s current Good Laboratory Practices, or GLP, regulation;

 

submission to the FDA of an Investigational New Drug application, or IND, which must become effective before clinical trials may begin and must be updated annually or when significant changes are made;

 

approval by an independent Institutional Review Board, or IRB, or ethics committee for each clinical site before a clinical trial can begin;

 

performance of adequate and well-controlled human clinical trials to establish the safety, purity and potency of the proposed product candidate for its intended purpose;

 

reparation of and submission to the FDA of a New Drug Application, or NDA, after completion of all required clinical trials;

 

a determination by the FDA within 60 days of its receipt of a NDA to file the application for review;

 

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satisfactory completion of an FDA Advisory Committee review, if applicable;

 

satisfactory completion of an FDA pre-approval inspection of the manufacturing facility or facilities at which the proposed product is produced to assess compliance with current Good Manufacturing Practices, or cGMP, and to assure that the facilities, methods and controls are adequate to preserve the product’s continued safety, purity and potency, and of selected clinical investigational sites to assess compliance with current Good Clinical Practices, or cGCPs; and

 

FDA review and approval of the NDA to permit commercial marketing of the product for particular indications for use in the United States, which must be updated annually and when significant changes are made.

 

The testing and approval processes require substantial time, effort and financial resources, and Innovate cannot be certain that any approvals for its product candidates will be granted on a timely basis, if at all. Prior to beginning the first clinical trial with a product candidate, Innovate must submit an IND to the FDA. An IND is a request for authorization from the FDA to administer an investigational new drug product to humans. The central focus of an IND submission is on the general investigational plan and the protocol(s) for clinical studies. The IND also includes results of animal and in vitro studies assessing the toxicology, pharmacokinetics, pharmacology, and pharmacodynamic characteristics of the product; chemistry, manufacturing, and controls information; and any available human data or literature to support the use of the investigational product. An IND must become effective before human clinical trials may begin. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises safety concerns or questions about the proposed clinical trial. In such a case, the IND may be placed on clinical hold and the IND sponsor and the FDA must resolve any outstanding concerns or questions before the clinical trial can begin. Submission of an IND therefore may or may not result in FDA authorization to begin a clinical trial.

 

Clinical trials involve the administration of the investigational product to human subjects under the supervision of qualified investigators in accordance with cGCPs, which include the requirement that all research subjects provide their informed consent for their participation in any clinical study. Clinical trials are conducted under protocols detailing, among other things, the objectives of the study, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. A separate submission to the existing IND must be made for each successive clinical trial conducted during product development and for any subsequent protocol amendments. Furthermore, an independent Institutional Review Board, or IRB, for each site proposing to conduct the clinical trial must review and approve the plan for any clinical trial and its informed consent form before the clinical trial begins at that site, and must monitor the study until completed. Regulatory authorities, the IRB or the sponsor may suspend a clinical trial at any time on various grounds, including a finding that the subjects are being exposed to an unacceptable health risk or that the trial is unlikely to meet its stated objectives. Some studies also include oversight by an independent group of qualified experts organized by the clinical study sponsor, known as a data safety monitoring board, which provides authorization for whether or not a study may move forward at designated check points based on access to certain data from the study and may halt the clinical trial if it determines that there is an unacceptable safety risk for subjects or other grounds, such as no demonstration of efficacy. There are also requirements governing the reporting of ongoing clinical studies and clinical study results to public registries.

 

For purposes of NDA approval, human clinical trials are typically conducted in three sequential phases that may overlap.

 

Phase 1.  The drug product is initially introduced into healthy human subjects and tested for safety. In the case of some products for severe or life-threatening diseases, the initial human testing is often conducted in patients.

 

Phase 2.  The drug product is evaluated in a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance, optimal dosage and dosing schedule.

 

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Phase 3.  Clinical trials are undertaken to further evaluate dosage, clinical efficacy, potency, and safety in an expanded patient population at geographically dispersed clinical trial sites. These clinical trials are intended to establish the overall risk to benefit ratio of the product and provide an adequate basis for product labeling.

 

Phase 4.  In some cases, the FDA may require, or companies may voluntarily pursue, additional clinical trials after a product is approved to gain more information about the product. These so-called Phase 4 studies may be required as a condition to approval of the NDA.

 

Phase 1, Phase 2 and Phase 3 testing may not be completed successfully within a specified period, if at all, and there can be no assurance that the data collected will support FDA approval or licensure of the product. Concurrent with clinical trials, companies may complete additional animal studies and develop additional information about the drug characteristics of the product candidate, and must finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product candidate. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the product candidate does not undergo unacceptable deterioration over its shelf life.

 

NDA Submission and Review by the FDA

 

Assuming successful completion of all required testing in accordance with all applicable regulatory requirements, the results of product development, nonclinical studies and clinical trials are submitted to the FDA as part of a NDA requesting approval to market the product for one or more indications. The NDA must include all relevant data available from pertinent preclinical and clinical studies, including negative or ambiguous results as well as positive findings, together with detailed information relating to the product’s chemistry, manufacturing, controls, and proposed labeling, among other things. Data can come from company-sponsored clinical studies intended to test the safety and effectiveness of a use of the product, or from a number of alternative sources, including studies initiated by investigators. The submission of a NDA requires payment of a substantial User Fee to FDA, and the sponsor of an approved NDA is also subject to annual product and establishment user fees. These fees are typically increased annually. A waiver of user fees may be obtained under certain limited circumstances.

 

Within 60 days following submission of the application, the FDA reviews an NDA to determine if it is substantially complete before the agency accepts it for filing. The FDA may refuse to file any NDA that it deems incomplete or not properly reviewable at the time of submission and may request additional information. In this event, the NDA must be resubmitted with the additional information. Once a NDA has been filed, the FDA’s goal is to review the application within ten months after it accepts the application for filing, or, if the application relates to an unmet medical need in a serious or life-threatening indication, six months after the FDA accepts the application for filing. The review process is often significantly extended by FDA requests for additional information or clarification. The FDA reviews a NDA to determine, among other things, whether a product is safe and effective for the indication being pursued, and the facility in which it is manufactured, processed, packed, or held meets standards designed to assure the product’s continued safety and effectiveness. The FDA may convene an advisory committee to provide clinical insight on application review questions. Before approving a NDA, the FDA will typically inspect the facility or facilities where the product is manufactured. The FDA will not approve an application unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving a NDA, the FDA will typically inspect one or more clinical sites to assure compliance with cGCP. If the FDA determines that the application, manufacturing process or manufacturing facilities are not acceptable, it will outline the deficiencies in the submission and often will request additional testing or information. Notwithstanding the submission of any requested additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval.

 

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The testing and approval process requires substantial time, effort and financial resources, and each may take several years to complete. The FDA may not grant approval on a timely basis, or at all, and Innovate may encounter difficulties or unanticipated costs in its efforts to secure necessary governmental approvals, which could delay or preclude us from marketing its products. After the FDA evaluates a NDA and conducts inspections of manufacturing facilities where the investigational product and/or its drug substance will be produced, the FDA may issue an approval letter or a Complete Response Letter. An approval letter authorizes commercial marketing of the product with specific prescribing information for specific indications. A Complete Response Letter indicates that the review cycle of the application is complete and the application is not ready for approval. A Complete Response Letter may request additional information or clarification. The FDA may delay or refuse approval of a NDA if applicable regulatory criteria are not satisfied, require additional testing or information and/or require post-marketing testing and surveillance to monitor safety or efficacy of a product.

 

If regulatory approval of a product is granted, such approval may entail limitations on the indicated uses for which such product may be marketed. For example, the FDA may approve the NDA with a Risk Evaluation and Mitigation Strategy, or REMS, plan to mitigate risks, which could include medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. The FDA also may condition approval on, among other things, changes to proposed labeling or the development of adequate controls and specifications. Once approved, the FDA may withdraw the product approval if compliance with pre- and post-marketing regulatory standards is not maintained or if problems occur after the product reaches the marketplace. The FDA may require one or more Phase 4 post-market studies and surveillance to further assess and monitor the product’s safety and effectiveness after commercialization, and may limit further marketing of the product based on the results of these post-marketing studies. In addition, new government requirements, including those resulting from new legislation, may be established, or the FDA’s policies may change, which could delay or prevent regulatory approval of its products under development.

 

A sponsor may seek approval of its product candidate under programs designed to accelerate FDA’s review and approval of new drugs that meet certain criteria. Specifically, new drug products are eligible for fast track designation if they are intended to treat a serious or life-threatening condition and demonstrate the potential to address unmet medical needs for the condition. For a fast track product, the FDA may consider sections of the NDA for review on a rolling basis before the complete application is submitted if relevant criteria are met. A fast track designated product candidate may also qualify for priority review, under which the FDA sets the target date for FDA action on the NDA at six months after the FDA accepts the application for filing. Priority review is granted when there is evidence that the proposed product would be a significant improvement in the safety or effectiveness of the treatment, diagnosis, or prevention of a serious condition. If criteria are not met for priority review, the application is subject to the standard FDA review period of 10 months after FDA accepts the application for filing. Priority review designation does not change the scientific/medical standard for approval or the quality of evidence necessary to support approval.

 

Under the accelerated approval program, the FDA may approve an NDA on the basis of either a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity, or prevalence of the condition and the availability or lack of alternative treatments. Post-marketing studies or completion of ongoing studies after marketing approval are generally required to verify the biologic’s clinical benefit in relationship to the surrogate endpoint or ultimate outcome in relationship to the clinical benefit. In addition, the Food and Drug Administration Safety and Innovation Act, or FDASIA, which was enacted and signed into law in 2012, established breakthrough therapy designation. A sponsor may seek FDA designation of its product candidate as a breakthrough therapy if the product candidate is intended, alone or in combination with one or more other drugs or biologics, to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the therapy may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. Sponsors may request the FDA to designate a breakthrough therapy at the time of or any time after the submission of an IND, but ideally before an end-of-phase 2 meeting with FDA. If the FDA designates a breakthrough therapy, it may take actions appropriate to expedite the development and review of the application, which may include holding meetings with the sponsor and the review team throughout the development of the therapy; providing timely advice to, and interactive communication with, the sponsor regarding the development of the drug to ensure that the development program to gather the nonclinical and clinical data necessary for approval is as efficient as practicable; involving senior managers and experienced review staff, as appropriate, in a collaborative, cross-disciplinary review; assigning a cross-disciplinary project lead for the FDA review team to facilitate an efficient review of the development program and to serve as a scientific liaison between the review team and the sponsor; and considering alternative clinical trial designs when scientifically appropriate, which may result in smaller or more efficient clinical trials that require less time to complete and may minimize the number of patients exposed to a potentially less efficacious treatment. Breakthrough designation also allows the sponsor to file sections of the NDA for review on a rolling basis. Innovate may seek designation as a breakthrough therapy for some or all of its product candidates.

 

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Fast Track designation, priority review and breakthrough therapy designation do not change the standards for approval but may expedite the development or approval process.

 

Orphan Drug Status

 

Under the Orphan Drug Act, the FDA may grant orphan drug designation to drug candidates intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the United States and for which there is no reasonable expectation that costs of research and development of the drug for the indication can be recovered by sales of the drug in the United States. Orphan drug designation must be requested before submitting an NDA. After the FDA grants orphan drug designation, the generic identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Although there may be some increased communication opportunities, orphan drug designation does not convey any advantage in or shorten the duration of the regulatory review and approval process.

 

If a drug candidate that has orphan drug designation subsequently receives the first FDA approval for the disease for which it has such designation, the product is entitled to orphan drug exclusivity, which means that the FDA may not approve any other applications, including a full NDA, to market the same drug for the same indication for seven years, except in very limited circumstances, such as if the second applicant demonstrates the clinical superiority of its product or if FDA finds that the holder of the orphan drug exclusivity has not shown that it can assure the availability of sufficient quantities of the orphan drug to meet the needs of patients with the disease or condition for which the drug was designated. Orphan drug exclusivity does not prevent the FDA from approving a different drug for the same disease or condition, or the same drug for a different disease or condition. Among the other benefits of orphan drug designation are tax credits for certain research and a waiver of the NDA application user fee.

 

Orphan drug exclusivity could block the approval of Innovate’s drug candidates for seven years if a competitor obtains approval of the same product as defined by the FDA or if Innovate’s drug candidate is determined to be contained within the competitor’s product for the same indication or disease.

 

As in the United States, designation as an orphan drug for the treatment of a specific indication in the European Union, must be made before the application for marketing authorization is made. Orphan drugs in Europe enjoy economic and marketing benefits, including up to 10 years of market exclusivity for the approved indication unless another applicant can show that its product is safer, more effective or otherwise clinically superior to the orphan designated product.

 

The FDA and foreign regulators expect holders of exclusivity for orphan drugs to assure the availability of sufficient quantities of their orphan drugs to meet the needs of patients. Failure to do so could result in the withdrawal of marketing exclusivity for the orphan drug.

 

Post-Approval Requirements

 

Any products manufactured or distributed by Innovate pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, among other things, requirements relating to record-keeping, reporting of adverse experiences, periodic reporting, distribution, and advertising and promotion of the product. After approval, most changes to the approved product, such as adding new indications or other labeling claims, are subject to prior FDA review and approval. There also are continuing, annual user fee requirements for any marketed products and the establishments at which such products are manufactured, as well as new application fees for supplemental applications with clinical data. Drug manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with GMP, which impose certain procedural and documentation requirements upon Innovate and its third-party manufacturers. Changes to the manufacturing process are strictly regulated, and, depending on the significance of the change, may require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP and impose reporting requirements upon us and any third-party manufacturers that Innovate may decide to use. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain compliance with cGMP and other aspects of regulatory compliance. Innovate cannot be certain that it or its present or future suppliers will be able to comply with the cGMP regulations and other FDA regulatory requirements. If Innovate’s present or future suppliers are not able to comply with these requirements, the FDA may, among other things, halt its clinical trials, require them to recall a product from distribution, or withdraw approval of the NDA.

 

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Future FDA and state inspections may identify compliance issues at Innovate’s facilities or at the facilities of its contract manufacturers that may disrupt production or distribution, or require substantial resources to correct. In addition, discovery of previously unknown problems with a product or the failure to comply with applicable requirements may result in restrictions on a product, manufacturer or holder of an approved NDA, including withdrawal or recall of the product from the market or other voluntary, FDA-initiated or judicial action that could delay or prohibit further marketing.

 

The FDA may withdraw approval of an NDA if compliance with regulatory requirements and standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical studies to assess new safety risks; or imposition of distribution restrictions or other restrictions under a REMS program. Other potential consequences include, among other things:

 

restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market, or product recalls;

 

fines, warning letters, or holds on post-approval clinical studies;

 

refusal of the FDA to approve pending applications or supplements to approved applications, or suspension or revocation of product license approvals;

 

product seizure or detention, or refusal to permit the import or export of products; or

 

injunctions or the imposition of civil or criminal penalties.

 

The FDA closely regulates the marketing, labeling, advertising and promotion of drugs and biologics. A company can make only those claims relating to safety and efficacy that are approved by the FDA and in accordance with the provisions of the approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses. Failure to comply with these requirements can result in, among other things, adverse publicity, warning letters, corrective advertising and potential civil and criminal penalties. Physicians may prescribe legally available products for uses that are not described in the product’s labeling and that differ from those tested by Innovate and approved by the FDA. Such off-label uses are common across medical specialties. Physicians may believe that such off-label uses are the best treatment for many patients in varied circumstances. The FDA does not regulate the behavior of physicians in their choice of treatments. The FDA does, however, restrict manufacturer’s communications on the subject of off-label use of their products.

 

Other Healthcare Laws and Compliance Requirements

 

Innovate’s sales, promotion, medical education, clinical research and other activities following product approval will be subject to regulation by numerous regulatory and law enforcement authorities in the United States in addition to FDA, including potentially the Federal Trade Commission, the Department of Justice, the Centers for Medicare and Medicaid Services, or CMS, other divisions of the U.S. Department of Health and Human Services and state and local governments. Innovate’s promotional and scientific/educational programs and interactions with healthcare professionals must comply with the federal Anti-Kickback Statute, the civil False Claims Act, physician payment transparency laws, privacy laws, security laws, and additional federal and state laws similar to the foregoing.

 

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The federal Anti-Kickback Statute prohibits, among other things, the knowing and willing, direct or indirect offer, receipt, solicitation or payment of remuneration in exchange for or to induce the referral of patients, including the purchase, order or lease of any good, facility, item or service that would be paid for in whole or part by Medicare, Medicaid or other federal health care programs. Remuneration has been broadly defined to include anything of value, including cash, improper discounts, and free or reduced price items and services. The federal Anti-Kickback Statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers, formulary managers, and beneficiaries on the other. Although there are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe harbors are drawn narrowly. Practices that involve remuneration that may be alleged to be intended to induce prescribing, purchases or recommendations may be subject to increased scrutiny and review if they do not qualify for an exception or safe harbor. Failure to meet all of the requirements of a particular applicable statutory exception or regulatory safe harbor does not make the conduct per se illegal under the federal Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative review of all its facts and circumstances. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the federal Anti-Kickback Statute has been violated. The government has enforced the federal Anti-Kickback Statute to reach large settlements with healthcare companies based on sham research or consulting and other financial arrangements with physicians. Further, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation. In addition, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act. Many states have similar laws that apply to their state health care programs as well as private payers.

 

Federal false claims and false statement laws, including the federal civil False Claims Act, or FCA, impose liability on persons and/or entities that, among other things, knowingly present or cause to be presented claims that are false or fraudulent or not provided as claimed for payment or approval by a federal health care program. The FCA has been used to prosecute persons or entities that “cause” the submission of claims for payment that are inaccurate or fraudulent, by, for example, providing inaccurate billing or coding information to customers, promoting a product off-label, submitting claims for services not provided as claimed, or submitting claims for services that were provided but not medically necessary. Actions under the FCA may be brought by the Attorney General or as a qui tam action by a private individual, or whistleblower, in the name of the government. Violations of the FCA can result in significant monetary penalties and treble damages. The federal government is using the FCA, and the accompanying threat of significant liability, in its investigation and prosecution of pharmaceutical and biotechnology companies throughout the country, for example, in connection with the promotion of products for unapproved uses and other illegal sales and marketing practices. The government has obtained multi-million and multi-billion dollar settlements under the FCA in addition to individual criminal convictions under applicable criminal statutes. In addition, certain companies that were found to be in violation of the FCA have been forced to implement extensive corrective action plans, and have often become subject to consent decrees or corporate integrity agreements, restricting the manner in which they conduct their business.

 

The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, created additional federal criminal statutes that prohibit, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payers; knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services; and willfully obstructing a criminal investigation of a healthcare offense. Like the federal Anti-Kickback Statute, the Affordable Care Act amended the intent standard for certain healthcare fraud statutes under HIPAA such that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.

 

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Given the significant size of actual and potential settlements, it is expected that the federal government will continue to devote substantial resources to investigating healthcare providers’ and manufacturers’ compliance with applicable fraud and abuse laws. Many states have similar fraud and abuse statutes or regulations that may be broader in scope and may apply regardless of payer, in addition to items and services reimbursed under Medicaid and other state programs. To the extent that Innovate’s products, once commercialized, are sold in a foreign country, Innovate may be subject to similar foreign laws.

 

There has been a recent trend of increased federal and state regulation of payments made to physicians and other healthcare providers. The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively, the Affordable Care Act, among other things, imposed new reporting requirements on certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program, with specific exceptions, for payments or other transfers of value made by them to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members. Covered manufacturers are required to collect and report detailed payment data and submit legal attestation to the accuracy of such data to the government each year. Failure to submit required information may result in civil monetary penalties of up to an aggregate of $150,000 per year (or up to an aggregate of $1 million per year for “knowing failures”), for all payments, transfers of value or ownership or investment interests that are not timely, accurately and completely reported in an annual submission. Additionally, entities that do not comply with mandatory reporting requirements may be subject to a corporate integrity agreement. Certain states also mandate implementation of commercial compliance programs, impose restrictions on covered manufacturers’ marketing practices and/or require the tracking and reporting of gifts, compensation and other remuneration to physicians and other healthcare professionals.

 

Innovate may be subject to data privacy and security regulation by both the federal government and the states in which it conducts its business. HIPAA, as amended by the Health Information Technology and Clinical Health Act, or HITECH, and their respective implementing regulations impose specified requirements on certain health care providers, plans and clearinghouses (collectively, “covered entities”) and their “business associates,” relating to the privacy, security and transmission of individually identifiable health information. Among other things, HITECH makes HIPAA’s security standards directly applicable to “business associates,” defined as independent contractors or agents of covered entities that create, receive, maintain or transmit protected health information in connection with providing a service for or on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce HIPAA and seek attorney’s fees and costs associated with pursuing federal civil actions. In addition, certain states have their own laws that govern the privacy and security of health information in certain circumstances, many of which differ from each other and/or HIPAA in significant ways and may not have the same effect, thus complicating compliance efforts.

 

If Innovate’s operations are found to be in violation of any of such laws or any other governmental regulations that apply to them, Innovate may be subject to penalties, including, without limitation, civil and criminal penalties, damages, fines, disgorgement, the curtailment or restructuring of its operations, exclusion from participation in federal and state healthcare programs, imprisonment, contractual damages, reputational harm, and diminished profits and future earnings, any of which could adversely affect its ability to operate its business and its financial results.

 

In addition to the foregoing health care laws, Innovate is also subject to the U.S. Foreign Corrupt Practices Act, or FCPA, and similar worldwide anti-bribery laws, which generally prohibit companies and their intermediaries from making improper payments to government officials or private-sector recipients for the purpose of obtaining or retaining business. Innovate has plans to adopt an anti-corruption policy, which will become effective upon the completion of this transaction, and expects to prepare and implement procedures to ensure compliance with such policy. The anti-corruption policy mandates compliance with the FCPA and similar anti-bribery laws applicable to its business throughout the world. However, Innovate cannot assure you that such a policy or procedures implemented to enforce such a policy will protect them from intentional, reckless or negligent acts committed by its employees, distributors, partners, collaborators or agents. Violations of these laws, or allegations of such violations, could result in fines, penalties or prosecution and have a negative impact on its business, results of operations and reputation.

 

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Coverage and Reimbursement

 

Sales of pharmaceutical products depend significantly on the extent to which coverage and adequate reimbursement are provided by third-party payers. Third-party payers include state and federal government health care programs, managed care providers, private health insurers and other organizations. Although Innovate currently believes that third-party payers will provide coverage and reimbursement for its product candidates, if approved, Innovate cannot be certain of this. Third-party payers are increasingly challenging the price, examining the cost-effectiveness, and reducing reimbursement for medical products and services. In addition, significant uncertainty exists as to the reimbursement status of newly approved healthcare products. The U.S. government, state legislatures and foreign governments have continued implementing cost containment programs, including price controls, restrictions on coverage and reimbursement and requirements for substitution of generic products. Adoption of price controls and cost containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit Innovate’s net revenue and results. Innovate may need to conduct expensive clinical studies to demonstrate the comparative cost-effectiveness of its products. The product candidates that Innovate develops may not be considered cost-effective and thus may not be covered or sufficiently reimbursed. It is time consuming and expensive for them to seek coverage and reimbursement from third-party payers, as each payer will make its own determination as to whether to cover a product and at what level of reimbursement. Thus, one payer’s decision to provide coverage and adequate reimbursement for a product does not assure that another payer will provide coverage or that the reimbursement levels will be adequate. Moreover, a payer’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Reimbursement may not be available or sufficient to allow them to sell its products on a competitive and profitable basis.

 

Healthcare Reform

 

The United States and some foreign jurisdictions are considering or have enacted a number of legislative and regulatory proposals to change the healthcare system in ways that could materially affect Innovate’s ability to sell its products profitably. Among policy makers and payers in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding access. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives.

 

By way of example, in 2010 the Affordable Care Act was signed into law, intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for the healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. Among the provisions of the Affordable Care Act of importance to Innovate’s potential drug candidates are:

 

an annual, nondeductible fee on any entity that manufactures or imports specified branded prescription drugs and biologic agents, apportioned among these entities according to their market share in certain government healthcare programs;

 

an increase in the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program to 23.1% and 13.0% of the average manufacturer price for branded and generic drugs, respectively;

 

a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected;

 

a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for a manufacturer’s outpatient drugs to be covered under Medicare Part D;

 

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extension of a manufacturer’s Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations;

 

expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals and by adding new mandatory eligibility categories for certain individuals with income at or below 133% of the federal poverty level, thereby potentially increasing a manufacturer’s Medicaid rebate liability;

 

expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program; and

 

a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research.

 

In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. These changes include, among others, the Budget Control Act of 2011, which mandates aggregate reductions to Medicare payments to providers of up to 2% per fiscal year effective in 2013, and, due to subsequent legislative amendments, will remain in effect through 2024, unless additional Congressional action is taken. The American Taxpayer Relief Act of 2012, among other things, further reduced Medicare payments to several providers, including hospitals and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These new laws may result in additional reductions in Medicare and other healthcare funding, which could have a material adverse effect on customers for Innovate’s product candidates, if approved, and, accordingly, its financial operations.

 

Innovate expects that healthcare reform measures that may be adopted in the future, including the possible repeal and replacement of the Affordable Care Act which the Trump administration has stated is a priority, are unpredictable, and the potential impact on Innovate’s operations and financial position are uncertain, but may result in more rigorous coverage criteria and lower reimbursement, and place additional downward pressure on the price that it receives for any approved product. Any reduction in reimbursement from Medicare or other government-funded programs may result in a similar reduction in payments from private payers. The implementation of cost containment measures or other healthcare reforms may prevent Innovate from being able to generate revenue, attain profitability or commercialize their drugs.

 

Foreign Regulation

 

In addition to regulations in the United States, Innovate will be subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution of its products to the extent Innovate chooses to develop or sell any products outside of the United States. The approval process varies from country to country and the time may be longer or shorter than that required to obtain FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country.

 

Innovate’s Employees

 

As of December 31, 2017, Innovate had 4 full-time employees. Innovate also engages consultants to provide services to Innovate, including clinical development, manufacturing support, regulatory support, business development, and general business operational support.

 

Facilities

 

Innovate’s main office is based in Raleigh, North Carolina, where the company leases approximately 2480 square feet of office space. The lease expires on September 30, 2020.

 

Innovate believes that its existing facilities are adequate for its near-term needs. Innovate believes that suitable alternative space would be available if required in the future on commercially reasonable terms.

 

Legal Matters

 

Innovate is not currently a party to any legal or governmental regulatory proceedings, nor is Innovate’s management currently aware of any pending or threatened legal or governmental regulatory proceedings proposed to be initiated against Innovate that would have a material adverse effect on its business, financial condition or operating results. Innovate’s industry is characterized by frequent claims and litigation including securities litigation, claims regarding patent and other intellectual property rights and claims for product liability. As a result, in the future, Innovate may be involved in various legal proceedings from time to time.

 

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RISK FACTORS

 

Risks Related to Innovate’s Capital Requirements and Financial Condition

 

Innovate has a limited operating history and has incurred significant losses since inception, and expects that it will continue to incur losses for the foreseeable future, which makes it difficult to assess Innovate’s future viability.

 

Innovate is a clinical development-stage biopharmaceutical company with a limited operating history upon which to evaluate its business and prospects. Innovate has not been profitable since it commenced operations in 2012, and may never achieve or sustain profitability. In addition, Innovate has limited history as an organization and has not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the biopharmaceutical industry. Drug development is a highly speculative undertaking and involves a substantial degree of risk. Innovate has not yet obtained any regulatory approvals for any of its product candidates, commercialized any of its product candidates, or generated any revenue from sales of products. Innovate has devoted significant resources to research and development and other expenses related to its ongoing clinical trials and operations, in addition to acquiring product candidates.

 

Since inception, most of Innovate’s resources have been dedicated to the acquisition and development of its product candidates, INN-202 (larazotide acetate), INN-108 and INN-329 (secretin). Innovate will require significant additional capital to continue operations and to execute on its current business strategy to develop INN-202 through to regulatory approval and further develop INN-108 and INN-329 for eventually seeking regulatory approval. Innovate cannot estimate with reasonable certainty the actual amounts necessary to successfully complete the development and commercialization of its product candidates and there is no certainty that Innovate will be able to raise the necessary capital on reasonable terms or at all.

 

Innovate’s auditor has expressed substantial doubt about its ability to continue as a going concern.

 

The audit report on Innovate’s financial statements for the years ended December 31, 2016 and 2015, includes an explanatory paragraph related to Innovate’s recurring losses from operations and dependence on additional financing to continue as a going concern. Innovate has incurred net losses for the years ended December 31, 2016 and 2015, and had an accumulated deficit of $7.7 million as of December 31, 2016.  In view of these matters, Innovate’s ability to continue as a going concern is dependent upon its ability to raise additional debt or equity financing or enter into strategic partnerships. Since its inception, Innovate has financed its operations through convertible debt financings. Innovate intends to continue to finance its operations through debt or equity financing and/or strategic partnerships.  The failure to obtain sufficient financing or strategic partnerships could adversely affect Innovate’s ability to achieve its business objectives and continue as a going concern.

 

Innovate will require substantial additional financing to obtain regulatory approval for INN-202 for celiac disease, and for further development of INN-108 (for ulcerative colitis) and INN-329 (for magnetic resonance cholangiopancreatography or MRCP), and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force Innovate to delay, limit, reduce or terminate Innovate’s product development efforts or other operations.

 

For the year ended December 31, 2016, and the nine months ended September 30, 2017, Innovate incurred losses from operations of $5.4 million and $8.9 million, respectively, and net cash used in operating activities was $2.2 million and $3.2 million, respectively. At September 30, 2017, Innovate had an accumulated deficit of $17 million, its cash, cash equivalents and investment securities were $1.5 million, and its working capital deficit was $11.1 million. Innovate expects to continue to incur substantial operating losses for the next several years as it advances its product candidates through clinical development, US and other regional regulatory approvals, and commercialization. No revenue from operations will likely be available until, and unless, one of its product candidates is approved by the FDA or another regulatory agency and successfully marketed, or Innovate enters into an arrangement that provides for licensing revenue or other partnering-related funding, outcomes which Innovate may not achieve on a timely basis, or at all.

 

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Innovate’s capital requirements for the foreseeable future will depend in large part on, and could increase significantly as a result of, its expenditures on its development programs. Future expenditures on its development programs are subject to many uncertainties, and will depend on, and could increase significantly as a result of, many factors, including:

 

· the number, size, complexity, results and timing of its drug development programs;

 

· the number of clinical and nonclinical studies necessary to demonstrate acceptable evidence of the safety and efficacy of its product candidates;

 

· the terms of any collaborative or other strategic arrangement that Innovate may establish;

 

· changes in standards of care which could increase the size and complexity of clinical studies;

 

· the ability to locate patients to participate in a study given the limited number of patients available for orphan or ultra-orphan indications;

 

· the number of patients who participate, the rate of enrollment, and the ratio of randomized to evaluable patients in each clinical study;

 

· the number and location of sites and the rate of site initiation in each study;

 

· the duration of patient treatment and follow-up;

 

· the potential for additional safety monitoring or other post-marketing studies that may be requested by regulatory agencies;

 

· the time and cost to manufacture clinical trial material and commercial product, including process development and scale-up activities, and to conduct stability studies, which can last several years;

 

· the degree of difficulty and cost involved in securing alternate manufacturers or suppliers of drug product, components or delivery devices, as necessary to meet FDA requirements and/or commercial demand;

 

· the costs, requirements, timing of, and the ability to, secure regulatory approvals;

 

· the extent to which Innovate increases its workforce and the costs involved in recruiting, training and incentivizing new employees;

 

· the costs related to developing, acquiring and/or contracting for sales, marketing and distribution capabilities, supply chain management capabilities, and regulatory compliance capabilities, if Innovate obtains regulatory approval for a product candidate and commercializes it without a partner;

 

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· the costs involved in evaluating competing technologies and market developments or the loss in sales in case of such competition; and

 

· the costs involved in establishing, enforcing or defending patent claims and other proprietary rights.

 

Additional capital may not be available when Innovate needs it, on terms that are acceptable to it or at all. If adequate funds are not available to Innovate on a timely basis, it will be required to delay, limit, reduce or terminate manufacturing, development activities or other activities that may be necessary to commercialize its product candidates, conduct preclinical or clinical studies, distribution capabilities, its establishment of sales and marketing, or other development activities.

 

If Innovate raises additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, it may have to relinquish certain valuable rights to its product candidates, technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable. If Innovate raises additional capital through public or private equity offerings, the ownership interest of its stockholders will be diluted and the terms of any new equity securities may have preferential rights over its common stock. If Innovate raises additional capital through debt financing, it may be subject to covenants limiting or restricting its ability to take specific actions, such as incurring additional debt or making capital expenditures, or subject to specified financial ratios, any of which could restrict its ability to develop and commercialize its product candidates or operate as a business.

 

Innovate has not generated any revenue from product sales and may never be profitable.

 

Innovate has no products approved for commercialization and has never generated any revenue from product sales. Innovate’s ability to generate revenue and achieve profitability depends on its ability, alone or with strategic collaboration partners, to successfully complete the development of, and obtain the requisite regulatory approvals necessary to commercialize, one or more of its product candidates.

 

The recently passed comprehensive tax reform bill could adversely affect Innovate’s business and financial condition.

 

On December 22, 2017, President Trump signed into law new legislation that significantly revises the Code.  The newly enacted federal income tax law, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits.  Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal tax law is uncertain and Innovate’s business and financial condition could be adversely affected.  In addition, it is uncertain if and to what extent various states will conform to the newly enacted federal tax law.  The impact of this tax reform on holders of Innovate’s common stock is also uncertain and could be adverse.  We urge our stockholders to consult with their legal and tax advisors with respect to this legislation and the potential tax consequences of investing in or holding our common stock.

 

Risks Related to Innovate’s Business Strategy and Operations

 

Innovate does not have any products that are approved for commercial sale.

 

Innovate currently does not have any therapeutic products approved for commercial sale. Innovate has not received, and may not receive within the next several years, if at all, any revenues from the commercialization of its product candidates if approved.

 

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Innovate is substantially dependent upon the clinical, regulatory and commercial success of its three product candidates, INN-202, INN-108 and INN-329. Clinical drug development involves a lengthy and expensive process with an uncertain outcome, results of earlier studies and trials may not be predictive of future trial results, and Innovate’s clinical trials may fail to adequately demonstrate to the satisfaction of regulatory authorities the safety and efficacy of its three product candidates.

 

The success of Innovate’s business is dependent on its ability to advance the clinical development of INN-202 for the treatment of celiac disease, INN-108 for the treatment of mild to moderate ulcerative colitis, and INN-329 for MRCP. INN-202 has had successful completion of Phase 2 trials and Phase 3 pivotal studies and long-term safety studies remain to be conducted. INN-108 will be entering into Phase 2 efficacy trials for mild to moderate ulcerative colitis. INN-329 requires some additional studies to be performed for completion of Phase 3 trials.

 

Clinical testing is expensive and can take many years to complete. The outcome of this testing is inherently uncertain. A failure of one or more of Innovate’s clinical trials can occur at any time during the clinical trial process. The results of preclinical studies and early clinical trials of Innovate’s product candidates may not necessarily be predictive of the results of later-stage clinical trials. There is a high failure rate for drugs proceeding through clinical trials, and product candidates in later stages of clinical trials may fail to show the required safety and efficacy despite having progressed through preclinical studies and initial clinical trials. Many companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier clinical trials, and Innovate cannot be certain that it will not face similar setbacks. Even if Innovate’s clinical trials are completed, the results may not be sufficient to obtain regulatory approval for its product candidates.

 

Because of the developmental nature of Innovate’s product candidates, Innovate is subject to risks associated with initiating, completing and achieving positive outcomes from its current and future clinical trials, including:

 

· inability to enroll enough patients in the clinical trials;

 

· slow implementation, enrollment and completion of the clinical trials;

 

· low patient compliance and adherence to dosing and reporting requirements, such as incomplete reporting of patient reported outcomes in the clinical trials or missed doses;

 

· lack of safety and efficacy in the clinical trials;

 

· delays in the manufacture of supplies for drug components due to delays in formulation, process development, or manufacturing activities;

 

· requirements for additional nonclinical or clinical studies based on changes to formulation and/or changes to regulatory requirements;

 

· requirements for additional clinical studies based on inconclusive clinical results or changes in market, standard of care, and/or regulatory requirements;

 

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If Innovate successfully completes the necessary clinical trials for its product candidates, its success will be subject to the risks associated with obtaining regulatory approvals, product launch, and commercialization, including:

 

· delays during regulatory review and/or requirements for additional CMC, nonclinical, or clinical studies, resulting in increased costs and/or delays in marketing approval and subsequent commercialization of the product candidates in the United States and other markets;

 

· FDA rejection of Innovate’s New Drug Application (“NDA”) submissions for its product candidates;

 

· regulatory rejection in the EU, Japan, and other markets;

 

· inability to consistently manufacture commercial supplies of drug and delivery devices resulting in slowed market development and lower revenue;

 

· poor commercial sales due to:

 

o the ability of Innovate’s future sales organization or its potential commercialization partners to effectively sell the product candidates;

 

o Innovate’s lack of success in educating physicians and patients about the benefits, administration, and use of its product candidates;

 

o low patient demand for the product candidates;

 

o the availability, perceived advantages, relative cost, relative safety and relative efficacy of other products or treatments for the targeted indications of the product candidates;

 

o poor prescription coverage and inadequate reimbursement for its product candidates;

 

· Innovate’s inability to enforce its intellectual property rights in and to its product candidates; and

 

· reduction in the safety profile of its product candidates following approval.

 

Many of these clinical, regulatory and commercial matters are beyond Innovate’s control and are subject to other risks described elsewhere in this “Risk Factors” annex. Accordingly, Innovate cannot assure that it will be able to advance its product candidates further through final clinical development, or obtain regulatory approval of, commercialize or generate significant revenue from them. If Innovate cannot do so, or is significantly delayed in doing so, its business will be materially harmed.

 

If Innovate fails to attract and retain senior management and key scientific personnel, it may be unable to successfully develop and commercialize its product candidates.

 

Innovate has historically operated with a limited number of employees. As of December 31, 2017, Innovate had four full-time employees, including one employee engaged part-time in research and development. Therefore, institutional knowledge is concentrated within a small number of employees. Innovate’s success depends in part on its continued ability to attract, retain and motivate highly qualified management, clinical and scientific personnel. Innovate’s future success is highly dependent upon the contributions of its senior management team. The loss of services of any of these individuals could delay or prevent the successful development of its product pipeline, completion of its planned clinical trials or the commercialization of its product candidates.

 

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There may be intense competition from other companies and organizations for qualified personnel. Other companies and organizations with which Innovate competes for personnel may have greater financial and other resources and different risk profiles than Innovate, and a history of successful development and commercialization of its product candidates. Replacing key employees may be difficult and costly; and Innovate may not have other personnel with the capacity to assume all the responsibilities of a key employee upon his/her departure. If Innovate cannot attract and retain skilled personnel, as needed, Innovate may not achieve its development and other goals.

 

In addition, the success of Innovate’s business will depend on its ability to develop and maintain relationships with respected service providers and industry-leading consultants and advisers. If Innovate cannot develop and maintain such relationships, as needed, the rate and success at which Innovate can develop and commercialize product candidates may be limited. In addition, its outsourcing strategy, which has included engaging consultants to manage key functional areas, may subject Innovate to scrutiny under labor laws and regulations, which may divert management time and attention and have an adverse effect on its business and financial condition.

 

Innovate has identified a material weakness in its internal control over financial reporting and may identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal control, which may impair its ability to produce accurate financial statements or prevent fraud.

 

Currently, Innovate has limited resources to address its internal controls and procedures and relies on part-time consultants to assist Innovate with its financial accounting and compliance obligations. In connection with the preparation of Innovate’s audited financial statements for the year ended December 31, 2016, Innovate’s independent auditors advised management that a material weakness existed in internal controls over financial reporting due to Innovate’s inability to adequately segregate duties as a result of Innovate’s limited number of accounting personnel. 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 the subject company’s annual or interim financial statements will not be prevented or detected on a timely basis. Although Innovate is committed to continuing to improve its internal control processes and intends to implement a plan to remediate this material weakness, Innovate cannot be certain of the effectiveness of such plan or that, in the future, additional material weaknesses or significant deficiencies will not exist or otherwise be discovered. If Innovate is unable to maintain proper and effective internal controls, it may not be able to produce timely and accurate financial statements and prevent fraud. In addition, if Innovate is unable to successfully remediate the material weaknesses in our internal controls or if Innovate is unable to produce accurate and timely financial statements, Innovate’s stock price may be adversely affected and Innovate may be unable to maintain compliance with applicable stock exchange listing requirements.

 

Innovate’s employees, independent contractors and consultants, principal investigators, CROs, CMOs and other vendors, and any future commercial partners may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could cause significant liability for Innovate and harm its reputation.

 

Innovate is exposed to the risk that its employees, independent contractors and consultants, principal investigators, clinical research organizations (CROs), contract manufacturing organizations (CMOs) and other vendors, and any future commercial partners may engage in fraudulent conduct or other misconduct. This type of misconduct may include intentional failures to comply with FDA regulations or similar regulations of comparable foreign regulatory authorities, to provide accurate information to the FDA or comparable foreign regulatory authorities, to comply with manufacturing standards required by cGMP or Innovate standards, to comply with federal and state healthcare fraud and abuse laws and regulations and similar laws and regulations established and enforced by comparable foreign regulatory authorities, and to report financial information or data accurately or disclose unauthorized activities to them. The misconduct of its employees and other Innovate service providers could involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to its reputation. Innovate intends to adopt a code of business ethics and conduct, but it is not always possible to identify and deter such misconduct, and the precautions Innovate takes to detect and prevent this activity, such as the implementation of a quality system which entails vendor audits by quality experts, may not be effective in controlling unknown or unmanaged risks or losses or in protecting Innovate from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against them, and Innovate is not successful in defending itself or asserting its rights, those actions could have a significant impact on its business and results of operations, including the imposition of significant fines or other sanctions.

 

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Innovate does not have, and does not have plans to establish manufacturing facilities. Innovate completely relies on third parties for the manufacture and supply of its clinical trial drug and delivery device supplies and, if approved, commercial product materials. The loss of any of these vendors or a vendor’s failure to provide Innovate with an adequate supply of clinical trial or commercial product material in a timely manner and on commercially acceptable terms, or at all, could harm its business.

 

Innovate outsources the manufacture of its product candidates and does not plan to establish its own manufacturing facilities. To manufacture Innovate’s product candidates, Innovate has made numerous custom modifications at CMOs, making Innovate highly dependent on these CMOs. For clinical and commercial supplies, if approved, Innovate has supply agreements with third party CMOs for drug substance and finished drug product. While Innovate has secured long-term commercial supply agreements with many of the third party CMOs, Innovate would need to negotiate agreements for commercial supply with several important CMOs, and Innovate may not be able to reach agreement on acceptable terms. In addition, Innovate relies on these third parties to conduct or assist Innovate in key manufacturing development activities, including qualification of equipment, developing and validating methods, defining critical process parameters, releasing component materials and conducting stability testing, among other things. If these third parties are unable to perform their tasks successfully in a timely manner, whether for technical, financial or other reasons, Innovate may be unable to secure clinical trial material, or commercial supply material if approved, which likely would delay the initiation, conduct or completion of its clinical studies or prevent Innovate from having enough commercial supply material for sale, which would have a material and adverse effect on its business.

 

Currently, Innovate does not have alternative vendors to back up its primary vendors of clinical trial material or, if approved, commercial supply material. Identification of and discussions with other vendors may be protracted and/or unsuccessful, or these new vendors may be unsuccessful in producing the same results as the current primary vendors producing the material. Therefore, if its primary vendors become unable or unwilling to perform their required activities, Innovate could experience protracted delays or interruptions in the supply of clinical trial material and, ultimately, product for commercial sale, which would materially and adversely affect its development programs, commercial activities, operating results and financial condition. In addition, the FDA or regulatory authorities outside of the United States may require Innovate to have an alternate manufacturer of a drug product before approving it for marketing and sale in the United States or abroad and securing such alternate manufacturer before approval of an NDA could result in considerable additional time and cost prior to NDA approval.

 

Any new manufacturer or supplier of finished drug product or its component materials, including drug substance and delivery devices, would be required to qualify under applicable regulatory requirements and would need to have sufficient rights under applicable intellectual property laws to the method of manufacturing of such product or ingredients required by Innovate. The FDA or foreign regulatory agency may require Innovate to conduct additional clinical studies, collect stability data and provide additional information concerning any new supplier, or change in a validated manufacturing process, including scaling-up production, before Innovate could distribute products from that manufacturer or supplier or revised process. For example, if Innovate were to engage a third party other than its current CMOs to supply the drug substance or drug product for future clinical trial, or commercial product, the FDA or regulatory authorities outside of the United States may require Innovate to conduct additional clinical and nonclinical studies to ensure comparability of the drug substance or drug product manufactured by its current CMOs to that manufactured by the new supplier.

 

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The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production, particularly in scaling-up initial production. These problems include difficulties with production costs and yields, quality control, including stability of the product candidate and quality assurance testing, and shortages of qualified personnel. Innovate’s product candidates have not been manufactured at the scale Innovate believes will be necessary to maximize its commercial value and, accordingly, Innovate may encounter difficulties in attempting to scale-up production and may not succeed in that effort on a timely basis or at all. In addition, the FDA or other regulatory authorities may impose additional requirements as Innovate scales-up initial production capabilities, which may delay its scale-up activities and/or add expense.

 

All manufacturers of Innovate’s clinical trial material and, if approved, commercial product, including drug substance manufacturers, must comply with cGMP requirements enforced by the FDA through its facilities inspection program and applicable requirements of foreign regulatory authorities. These requirements include quality control, quality assurance and the maintenance of records and documentation. Manufacturers of Innovate’s clinical trial material may be unable to comply with these cGMP requirements and with other FDA, state and foreign regulatory requirements. While Innovate or its representatives generally monitor and audit its manufacturers’ systems, Innovate does not have full control over their ongoing compliance with these regulations. And while the responsibility to maintain cGMP compliance is shared between Innovate and the third-party manufacturer, Innovate bears ultimate responsibility for its supply chain and compliance with regulatory standards. Failure to comply with these requirements may result in fines and civil penalties, suspension of production, suspension or delay or failure to obtain product approval, product seizure or recall, or withdrawal of product approval.

 

If Innovate’s manufacturers encounter any of the aforementioned difficulties or otherwise fail to comply with their contractual obligations or there are delays entering commercial supply agreements due to capital constraints, Innovate may have insufficient quantities of material to support ongoing and/or planned clinical studies or to meet commercial demand, if approved. In addition, any delay or interruption in the supply of materials necessary or useful to manufacture its product candidates could delay the completion of its clinical studies, increase the costs associated with its development programs and, depending upon the period of delay, require Innovate to commence new clinical studies at significant additional expense or terminate the studies completely. Delays or interruptions in the supply of commercial product could result in increased cost of goods sold and lost sales. Innovate cannot provide assurance that manufacturing or quality control problems will not arise in connection with the manufacture of its clinical trial material or commercial product, if approved, or that third-party manufacturers will be able to maintain the necessary governmental licenses and approvals to continue manufacturing such clinical trial material or commercial product, as applicable. In addition, if Innovate products are manufactured entirely or partially outside the United States, Innovate may experience interruptions in supply due to shipping or customs difficulties or regional instability. Furthermore, changes in currency fluctuations, shipping costs, or import tariffs could adversely affect cost of goods sold. Any of the above factors could cause Innovate to delay or suspend anticipated or ongoing trials, regulatory submissions or commercialization of its product candidates, entail higher costs or result in Innovate being unable to effectively commercialize its products. Innovate’s dependence upon third parties for the manufacture of its clinical trial material may adversely affect its future costs and its ability to develop and commercialize its product candidates on a timely and competitive basis.

 

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Innovate currently relies significantly on third parties to conduct its nonclinical testing and clinical studies and other aspects of its development programs and if those third parties do not satisfactorily perform their contractual obligations or meet anticipated deadlines, the development of its product candidates could be adversely affected.

 

Innovate does not currently employ personnel or possess the facilities necessary to conduct many of the activities associated with its programs. Innovate engages consultants, advisors, clinical research organizations (CROs), and others to assist in the design and conduct of nonclinical and clinical studies of its product candidates, with interpretation of the results of those studies and with regulatory activities, and Innovate expects to continue to outsource all or a significant amount of such activities. As a result, many important aspects of its development programs are and will continue to be outside its direct control, and its third-party service providers may not perform their activities as required or expected including the maintenance of GCP, GLP and GMP compliance, which are ultimately Innovate’s responsibility to ensure. Further, such third parties may not be as committed to the success of Innovate’s programs as Innovate’s own employees and, therefore, may not devote the same time, thoughtfulness or creativity to completing projects or problem-solving as Innovate’s own employees would. To the extent Innovate is unable to successfully manage the performance of third-party service providers, its business may be adversely affected.

 

The CROs that Innovate may engage to execute its clinical studies play a significant role in the conduct of the studies, including the collection and analysis of study data, and Innovate likely will depend on CROs and clinical investigators to conduct future clinical studies and to assist in analyzing data from completed studies and developing regulatory strategies for its product candidates. Individuals working at the CROs with which it will contract, as well as investigators at the sites at which its studies are conducted, are not Innovate’s employees, and Innovate has limited control over the amount or timing of resources that they devote to their programs. If Innovate’s CROs, study investigators, and/or third-party sponsors fail to devote sufficient time and resources to studies of its product candidates, if Innovate and/or its CROs do not comply with all GLP and GCP regulatory and contractual requirements, or if their performance is substandard, it may delay commencement and/or completion of these studies, submission of applications for regulatory approval, regulatory approval, and commercialization of its product candidates. Failure of CROs to meet their obligations to Innovate could adversely affect development of its product candidates.

 

In addition, CROs Innovate engages may have relationships with other commercial entities, some of which may compete with Innovate. Through intentional or unintentional means, Innovate’s competitors may benefit from lessons learned on the Innovate project that could ultimately harm Innovate’s competitive position. Moreover, if a CRO fails to properly, or at all, perform its activities during a clinical study, Innovate may not be able to enter into arrangements with alternative CROs on acceptable terms or in a timely manner, or at all. Switching CROs may increase costs and divert management time and attention. In addition, there likely would be a transition period before a new CRO commences work. These challenges could result in delays in the commencement or completion of Innovate’s clinical studies, which could materially impact its ability to meet its desired and/or announced development timelines and have a material adverse impact on its business and financial condition.

 

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Innovate may not achieve its projected development goals within the time frames that Innovate has announced.

 

Innovate has set goals for accomplishing certain objectives material to the successful development of its product candidates. The actual timing of these events may vary due to many factors, including delays or failures in its nonclinical testing, clinical studies and manufacturing and regulatory activities and the uncertainties inherent in the regulatory approval process. From time to time, Innovate creates estimates for the completion of enrollment of or announcement of data from clinical studies of its product candidates. However, predicting the rate of enrollment or the time from completion of enrollment to announcement of data for any clinical study requires Innovate to make significant assumptions that may prove to be incorrect. As discussed in other risk factors above, its estimated enrollment rates and the actual rates may differ materially and the time required to complete enrollment of any clinical study may be considerably longer than Innovate estimates. Such delays may adversely affect its financial condition and results of operations.

 

Even if Innovate completes a clinical study with successful results, Innovate may not achieve its projected development goals within the periods Innovate initially anticipates or announces. If a development plan for a product candidate becomes more extensive and costly than anticipated, Innovate may determine that the associated time and cost are not financially justifiable and, as a result, may discontinue development in a particular indication or of the product candidate as a whole. In addition, even if a study did complete with successful results, changes may occur in regulatory requirements or policy during the period of product development and/or regulatory review of an NDA that relate to the data required to be included in NDAs which may require additional studies that may be costly and time consuming. Any of these actions may be viewed negatively, which could adversely impact its financial condition.

 

Further, throughout development, Innovate must provide adequate assurance to the FDA and other regulatory authorities that Innovate can consistently develop and produce its product candidates in conformance with GLP, GCP, cGMP, and other regulatory standards. As discussed above, Innovate relies on CMOs for the manufacture of clinical, and future commercial, quantities of its product candidates. If future FDA or other regulatory authority inspections identify cGMP compliance deficiencies at these third-party facilities, production of its clinical trial material or, in the future, commercial product, could be disrupted, causing potentially substantial delay in or failure of development or commercialization of its product candidates.

 

Innovate currently has limited marketing capabilities and no sales organization. If Innovate is unable to establish sales and marketing capabilities on its own or through third parties, it will be unable to successfully commercialize its products, if approved, or generate product revenue.

 

To commercialize Innovate’s products, if approved, in the United States and other jurisdictions it seeks to enter, Innovate must build its marketing, sales, managerial and other non-technical capabilities or make arrangements with third parties to perform these services, and it may not be successful in doing so. If Innovate’s products receive regulatory approval, it expects to market such products in the United States through a focused, specialized sales force, which will be costly and time consuming. Innovate has no prior experience in the marketing and sale of pharmaceutical products and there are significant risks involved in building and managing a sales organization, including its ability to hire, retain and incentivize qualified individuals, generate sufficient sales leads, provide adequate training to sales and marketing personnel and effectively manage a geographically dispersed sales and marketing team. Outside of the United States, Innovate may consider collaboration arrangements. If Innovate is unable to enter into such arrangements on acceptable terms or at all, it may not be able to successfully commercialize its products in certain markets. Any failure or delay in the development of its internal sales, marketing and distribution capabilities would adversely impact the commercialization of its products. If Innovate is not successful in commercializing its products, either on its own or through collaborations with one or more third parties, its future product revenue will suffer and it would incur significant additional losses.

 

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To establish a sales and marketing infrastructure and expand its manufacturing capabilities, Innovate will need to increase the size of its organization, and Innovate may experience difficulties in managing this growth.

 

As of December 31, 2017, Innovate had four full-time employees, including one employee engaged part-time in research and development. As Innovate advances its product candidates through the development process and to commercialization, it will need to continue to expand its development, regulatory, quality, managerial, sales and marketing, operational, finance and other resources to manage its operations and clinical trials, continue its development activities and commercialize its product candidates, if approved. As its operations expand, Innovate expects that it will need to manage additional relationships with various manufacturers and collaborative partners, suppliers and other organizations.

 

Due to Innovate’s limited financial resources and its limited experience in managing a company with such anticipated growth, Innovate may not be able to effectively manage the expansion of its operations or recruit and train additional qualified personnel. In addition, the physical expansion of its operations may lead to significant costs and may divert its management and resources. Any inability to manage growth could delay the execution of its development and strategic objectives, or disrupt its operations, which could materially impact its business, revenue and operating results.

 

Innovate’s product candidates may cause undesirable side effects or adverse events, or have other properties that could delay or prevent its clinical development, regulatory approval or commercialization.

 

As with many pharmaceutical products, undesirable side effects or adverse events caused by Innovate’s product candidates could interrupt, delay or halt clinical studies and could result in the denial of regulatory approval by the FDA or other regulatory authorities for any or all indications, and in turn prevent Innovate from commercializing its product candidates. A significant challenge in clinical development is that the patient population in early studies, where small numbers of patients are required, is different from the patient population observed in later stage studies, where larger groups of patients are required. For example, patients in earlier stage studies may be sicker, more compliant, or otherwise motivated than patients in larger studies.

 

If undesirable side effects occur, they could possibly prevent approval, which would have a material and adverse effect on its business.

 

If any of its product candidates receive marketing approval and Innovate or others later identify undesirable side effects caused by the product:

 

· regulatory authorities may require the addition of labeling statements, such as a “black box” warning or a contraindication;

 

· Innovate may be required to change the way the product is administered, conduct additional clinical studies or change the labeling of the product; and

 

· regulatory authorities may withdraw approval of the product;

 

· its reputation may suffer.

 

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Any of these events could prevent Innovate from achieving or maintaining market acceptance of the affected product or could substantially increase the costs and expenses of commercializing the product, which in turn could delay or prevent Innovate from generating significant revenue from its sale.

 

Innovate’s business and operations would suffer in the event of third-party computer system failures, cyber-attacks on third-party systems or deficiency in its cyber security.

 

Innovate relies on information technology systems, including third-party “cloud based” service providers, to keep financial records, maintain laboratory data, clinical data and corporate records, to communicate with staff and external parties, and to operate other critical functions. This includes critical systems such as email, other communication tools, electronic document repositories, and archives. If any of these third-party information technology (IT) providers are compromised due to computer viruses, unauthorized access, malware, natural disasters, fire, terrorism, war and telecommunication failures, electrical failures, cyber-attacks or cyber-intrusions over the internet, then sensitive emails or documents could be exposed or deleted. Similarly, Innovate could incur business disruption if its access to the internet is compromised and Innovate is unable to connect with third-party IT providers. The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. In addition, Innovate relies on those third parties to safeguard important confidential personal data regarding its employees and patients enrolled in its clinical trials. If a disruption event were to occur and cause interruptions in a third-party IT provider’s operations, it could result in a disruption of its drug development programs. For example, the loss of clinical trial data from completed, ongoing or planned clinical trials could result in delays in its regulatory approval efforts and significantly increase its costs to recover or reproduce the data. To the extent that any disruption or security breach results in a loss of or damage to its data or applications, or inappropriate disclosure of confidential or proprietary information, Innovate could incur liability and development of its product candidates could be delayed, or could fail.

 

Risks Related to Drug Development and Commercialization

 

Innovate depends on the successful completion of clinical studies of its product candidates, and any positive results in prior clinical studies do not ensure that ongoing or future clinical studies will be successful.

 

Pharmaceutical products are subject to stringent regulatory requirements covering quality, safety, and efficacy. The burden of proof is on the manufacturer, such as Innovate, to show with substantial clinical data that the risk/benefit profile for any new drug is favorable. Only after successfully completing extensive pharmaceutical development, nonclinical testing, and clinical studies may a product be considered for regulatory approval.

 

If Innovate licenses rights to develop its product candidates to independent third parties or otherwise permit such third parties to evaluate its product candidates in clinical studies, Innovate may have limited control over those clinical studies. Any safety or efficacy concern identified in a third-party sponsored study could adversely affect its or another licensee’s development of its product candidate and prospects for its regulatory approval, even if the data from that study are subject to varying interpretations and analyses.

 

There is significant risk that ongoing and future clinical studies of its product candidates are unsuccessful. Negative or inconclusive results could cause the FDA and other regulatory authorities to require Innovate to repeat or conduct additional clinical studies, which could significantly increase the time and expense associated with development of that product candidate or cause Innovate to elect to discontinue one or more clinical programs. Failure to complete a clinical study of a product candidate or an unsuccessful result of a clinical study could have a material adverse effect on its business.

 

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Clinical drug development involves a lengthy and expensive process, with an uncertain outcome. Innovate may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of its drug candidates.

 

Clinical studies are expensive, difficult to design and implement, may take many years to complete, and outcomes are inherently uncertain. A drug product may fail to demonstrate positive results at any stage of testing despite having progressed satisfactorily through nonclinical testing and initial clinical studies. There is significant risk in clinical development where later stage clinical studies are designed and powered based on the analysis of data from earlier studies, with these earlier studies involving a smaller number of patients, and the results of the earlier studies being driven primarily by a subset of responsive patients. In addition, interim results of a clinical study do not necessarily predict final results. Further, clinical study data frequently are susceptible to varying interpretations. Medical professionals and/or regulatory authorities may analyze or weigh study data differently than the sponsor company, resulting in delay or failure to obtain marketing approval for a product candidate. Additionally, the possible lack of standardization across multiple investigative sites may induce variability in the results, which can interfere with the evaluation of treatment effects.

 

Delays in commencement and completion of clinical studies are common and have many causes. Delays in clinical studies of Innovate’s product candidates could increase overall development costs and jeopardize its ability to obtain regulatory approval and successfully commercialize any approved products.

 

Clinical studies may not commence on time or be completed on schedule, if at all. The commencement and completion of clinical studies can be delayed for a variety of reasons, including:

 

· inability to raise sufficient funding to initiate or to continue a clinical study;

 

· delays in obtaining regulatory approval to commence a clinical study;

 

· delays in identifying and reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical study sites and investigators, which agreements can be subject to extensive negotiation and may vary significantly among study sites;

 

· delays in obtaining regulatory approval in a prospective country;

 

· delays in obtaining ethic committee approval to conduct a clinical study at a prospective site;

 

· delays in reaching agreements on acceptable terms with prospective contract manufacturing organizations, or CMOs, or other vendors for the production and supply of clinical trial material and, if necessary, drug administration devices, which agreements can be subject to extensive negotiation;

 

· delays in the production or delivery of sufficient quantities of clinical trial material from its CMOs and other vendors to initiate or continue a clinical study;

 

· delays due to product candidate recalls as a result of stability failure, excessive product complaints or other failures of the product candidate during its use or testing;

 

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· invalidation of clinical data caused by premature unblinding or integrity issues;

 

· invalidation of clinical data caused by mixing up of the active drug and placebo through randomization or manufacturing errors;

 

· delays on the part of its CROs, CMOs, and other third-party contractors in developing procedures and protocols or otherwise conducting activities in accordance with applicable policies and procedures and in accordance with agreed upon timelines;

 

· delays in identifying and hiring or engaging, as applicable, additional employees or consultants to assist in managing clinical study-related activities;

 

· delays in recruiting and enrolling individuals to participate in a clinical study, which historically can be challenging in orphan diseases;

 

· delays caused by patients dropping out of a clinical study due to side effects, concurrent disorders, difficulties in adhering to the study protocol, unknown issues related to different patient profiles than in previous studies, or otherwise;

 

· delays in having patients complete participation in a clinical study, including returning for post-treatment follow-up;

 

· delays resulting from study sites dropping out of a trial, providing inadequate staff support for the study, problems with shipment of study supplies to clinical sites, or focusing its staff’s efforts on enrolling studies that compete for the same patient population;

 

· suspension of enrollment at a study site or the imposition of a clinical hold by the FDA or other regulatory authority following an inspection of clinical study operations at study sites or finding of a drug-related serious adverse event; and

 

· delays in quality control/quality assurance procedures necessary for study database lock and analysis of unblinded data.

 

Innovate may experience difficulties in the enrollment of patients in its clinical trials, which may delay or prevent Innovate from obtaining regulatory approval.

 

Innovate may not be able to continue clinical trials for its product candidates if Innovate is unable to locate and enroll a sufficient number of eligible patients to participate in these trials as required by the FDA or similar regulatory authorities outside the United States. In particular, because Innovate is focused on diseases in genomically defined patient populations, our ability to enroll eligible patients may be limited or may result in slower enrollment than we anticipate. In addition, some of our competitors have ongoing clinical trials for drug candidates that treat the same indications as our drug candidates, and patients who would otherwise be eligible for our clinical trials may instead enroll in clinical trials of our competitors’ drug candidates.

 

Patient enrollment, a critical component to successful completion of a clinical study, is affected by many factors, including:

 

· the size of the target patient population;

 

· other ongoing studies competing for the same patient population;

 

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· the eligibility criteria for the clinical trial;

 

· the design of the clinical study;

 

· the perceived risks and benefits of the product candidate under study;

 

· the efforts to facilitate timely enrollment in clinical trials;

 

· the proximity and availability of clinical trial sites for prospective patients; and

 

· the ability to monitor patients adequately during and after treatment.

 

Clinical studies may not begin on time or be completed in the time frames Innovate anticipates. The length of time necessary to successfully complete clinical studies varies significantly and is difficult to predict accurately. Innovate may make statements regarding anticipated timing for completion of enrollment in and/or availability of results from its clinical studies, but such predictions are subject to a number of significant assumptions and actual timing may differ materially for a variety of reasons, including patient enrollment rates, length of time needed to prepare raw study data for analysis and then to review and analyze it, and other factors described above. If Innovate experiences delays in the completion of a clinical study, if a clinical study is terminated, or if failure to conduct a study in accordance with regulatory requirements or the study’s protocol leads to deficient safety and/or efficacy data, the regulatory approval and/or commercial prospects for its product candidates may be harmed and its ability to generate product revenue will be delayed. In addition, any delays in completing its clinical studies likely will increase its development costs. Further, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical studies may ultimately lead to the denial of regulatory approval of a product candidate. Even if Innovate ultimately commercializes its product candidates, the standard of care may have changed or other therapies for the same indications may have been introduced to the market in the interim and may establish a competitive threat to Innovate or may diminish the need for Innovate’s products.

 

Clinical studies are very expensive, difficult to design and implement, often take many years to complete, and the outcome is inherently uncertain.

 

Clinical development of pharmaceutical products for humans is generally very expensive, takes many years to complete and failures can occur at any stage of clinical testing. Innovate estimates that clinical development of its product candidates will take several additional years to complete, but because of the variety of factors that can affect the design, timing, and outcome of clinical studies, Innovate is unable to estimate the exact funds required to complete research and development, to obtain regulatory approval and to commercialize all of its product candidates. Innovate will need significant additional capital to continue to advance its products as per current business plans.

 

Failure at any stage of clinical testing is not uncommon and Innovate may encounter problems that would require additional, unplanned studies or cause Innovate to abandon a clinical development program.

 

In addition, a clinical study may be suspended or terminated by Innovate, an IRB, a data safety monitoring board, the FDA or other regulatory authorities due to a number of factors, including:

 

· lack of adequate funding to continue the study;

 

· failure to conduct the study in accordance with regulatory requirements or the study’s protocol;

 

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· inspection of clinical study operations or sites by the FDA or other regulatory authorities resulting in the imposition of a clinical hold;

 

· unforeseen safety issues, including adverse side effects; or

 

· changes in governmental regulations or administrative actions.

 

Changes in governmental regulations and guidance relating to clinical studies may occur and Innovate may need to amend study protocols to reflect these changes, or Innovate may amend study protocols for other reasons. Amendments may require Innovate to resubmit protocols to IRBs for reexamination and approval or renegotiate terms with CROs, study sites and investigators, all of which may adversely impact the costs or timing of or its ability to successfully complete a trial.

 

There is significant uncertainty regarding the regulatory approval process for any investigational new drug, substantial further testing and validation of its product candidates and related manufacturing processes may be required, and regulatory approval may be conditioned, delayed or denied, any of which could delay or prevent Innovate from successfully marketing its product candidates and substantially harm its business.

 

Pharmaceutical products generally are subject to rigorous nonclinical testing and clinical studies and other approval procedures mandated by the FDA and foreign regulatory authorities. Various federal and foreign statutes and regulations also govern or materially influence the manufacturing, safety, labeling, storage, record keeping and marketing of pharmaceutical products. The process of obtaining these approvals and the subsequent compliance with appropriate U.S. and foreign statutes and regulations is time-consuming and requires the expenditure of substantial resources.

 

Innovate is preparing INN-202, larazotide acetate, for Phase 3 clinical trials, the success of which will be needed for FDA approval to market INN-202 in the United States to treat celiac disease in patients with persistent symptoms while adhering to a gluten free diet. While significant communication with the FDA on the Phase 3 study design has occurred, even if the Phase 3 clinical study meets all of its statistical goals and protocol end points, the FDA may not view the results as robust and convincing. They may require additional clinical studies and/or other costly studies, which could require Innovate to expend substantial additional resources and could significantly extend the timeline for clinical development prior to market approval. Additionally, Innovate is required by the FDA to conduct a long-term safety study. The results of this study will not be known until a short time prior to potential submission of an NDA for INN-202. If the safety study cannot be completed for technical or other reasons, or provides results that the FDA determines to be concerning, this may cause a delay or failure in obtaining approval for INN-202.

 

INN-108 plans to initiate Phase 2 clinical trials for mild-to-moderate ulcerative colitis. Concurrently, Innovate plans to make formulation changes to INN-108 that would simplify the dosing in pediatric patients. While this change is expected by Innovate to reduce studies and/or other documentation requirements, the regulatory agencies may require additional clinical or nonclinical studies prior to approval, even if current clinical studies are deemed successful, which could require Innovate to expend substantial additional resources and significantly extend the timeline for clinical development of INN-108.

 

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Innovate is preparing INN-329, secretin, for additional testing in its Phase 3 clinical trial, the success of which will be needed for FDA approval to market INN-329 in the United States for MRCP procedures. While significant communication with the FDA on the Phase 3 study design has occurred in the past, Innovate will be required to initiate communication with the FDA to finalize the study design and to seek their approval for the additional Phase 3 trial design. Even if the Phase 3 clinical study meets all of its statistical goals and protocol end points, the FDA may not view the results as robust and convincing. The FDA may require additional clinical studies and/or other costly studies, which could require Innovate to expend substantial additional resources and could significantly extend the timeline for clinical development prior to market approval. Additionally, Innovate is required by the FDA to conduct a long term safety study. The results of this study will not be known until a short time prior to potential submission of an NDA for INN-329. If the safety study cannot be completed for technical or other reasons, or provides results that the FDA determines to be concerning, this may cause a delay or failure in obtaining approval for INN-329.

 

Significant uncertainty exists with respect to the regulatory approval process for any investigational new drug, including INN-202, INN-108 and INN-329. Regardless of any guidance the FDA or foreign regulatory agencies may provide a drug’s sponsor during its development, the FDA or foreign regulatory agencies retain complete discretion in deciding whether to accept an NDA or the equivalent foreign regulatory approval submission for filing or, if accepted, approve an NDA. There are many components to an NDA or marketing authorization application submission in addition to clinical study data. For example, the FDA or foreign regulatory agencies will review the sponsor’s internal systems and processes, as well as those of its CROs, CMOs and other vendors, related to development of its product candidates, including those pertaining to its clinical studies and manufacturing processes. Before accepting an NDA for review or before approving the NDA, the FDA or foreign regulatory agencies may request that Innovate provide additional information that may require significant resources and time to generate and there is no guarantee that its product candidates will be approved for any indication for which Innovate may apply. The FDA or foreign regulatory agencies may choose not to approve an NDA for any of a variety of reasons, including a decision related to the safety or efficacy data, manufacturing controls or systems, or for any other issues that the agency may identify related to the development of its product candidates. Even if one or more Phase 3 clinical studies are successful in providing statistically significant evidence of the efficacy and safety of the investigational drug, the FDA or foreign regulatory agencies may not consider efficacy and safety data from the submitted studies adequate scientific support for a conclusion of effectiveness and/or safety and may require one or more additional Phase 3 or other studies prior to granting marketing approval. If this were to occur, the overall development cost for the product candidate would be substantially greater and its competitors may bring products to market before Innovate, which could impair its ability to generate revenues from the product candidates, or even seek approval, if blocked by a competitor’s Orphan Drug exclusivity, which would have a material adverse effect on Innovate’s business, financial condition and results of operations.

 

Further, development of Innovate’s product candidates and/or regulatory approval may be delayed for reasons beyond its control. For example, U.S. federal government shut-down or budget sequestration, such as ones that occurred during 2013 and 2018, may result in significant reductions to the FDA’s budget, employees and operations, which may lead to slower response times and longer review periods, potentially affecting Innovate’s ability to progress development of its product candidates or obtain regulatory approval for its product candidates.

 

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Even if the FDA or foreign regulatory agencies grant approvals for Innovate’s product candidates, the conditions or scope of the approval(s) may limit successful commercialization of the product candidates and impair Innovate’s ability to generate substantial sales revenue. The FDA or foreign regulatory agencies may also only grant marketing approval contingent on the performance of costly post-approval nonclinical or clinical studies, or subject to warnings or contraindications that limit commercialization. Additionally, even after granting approval, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion and recordkeeping for its products will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration, and continued compliance with current good manufacturing processes, or cGMP, good clinical practices, international conference on harmonization regulations and good laboratory practices, which are regulations and guidelines that are enforced by the FDA or foreign regulatory agencies for all of its clinical development and for any clinical studies that Innovate conducts post-approval. The FDA or foreign regulatory agencies may decide to withdraw approval, add warnings or narrow the approved indications in the product label, or establish risk management programs that could restrict distribution of its products. These actions could result from, among other things, safety concerns, including unexpected side effects or drug-drug interaction problems, or concerns over misuse of a product. If any of these actions were to occur following approval, Innovate may have to discontinue commercialization of the product, limit its sales and marketing efforts, implement risk minimization procedures, and/or conduct post-approval studies, which in turn could result in significant expense and delay or limit its ability to generate sales revenues.

 

Regulations may be changed prior to submission of an NDA that require higher hurdles than currently anticipated. These may occur as a result of drug scandals, recalls, or a political environment unrelated to Innovate’s products.

 

Even if Innovate receives regulatory approval for a product candidate, Innovate may face regulatory difficulties that could materially and adversely affect its business, financial condition and results of operations.

 

Even if initial regulatory approval is obtained, as a condition to the initial approval the FDA or a foreign regulatory agency may impose significant restrictions on a product’s indicated uses or marketing or impose ongoing requirements for potentially costly post-approval studies or marketing surveillance programs, any of which would limit the commercial potential of the product. Its product candidates also will be subject to ongoing FDA requirements related to the manufacturing processes, labeling, packaging, storage, distribution, advertising, promotion, record-keeping and submission of safety and other post-market information regarding the product. For instance, the FDA may require changes to approved drug labels, require post-approval clinical studies and impose distribution and use restrictions on certain drug products. In addition, approved products, manufacturers and manufacturers’ facilities are subject to continuing regulatory review and periodic inspections. If previously unknown problems with a product are discovered, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, the FDA may impose restrictions on that product or Innovate, including requiring withdrawal of the product from the market. If Innovate or a CMO of Innovate’s fails to comply with applicable regulatory requirements, a regulatory agency may:

 

· issue warning letters or untitled letters;

 

· impose civil or criminal penalties;

 

· suspend or terminate any ongoing clinical studies;

 

· close the facilities of a CMO;

 

· refuse to approve pending applications or supplements to approved applications;

 

· suspend or withdraw regulatory approval;

 

· exclude its product from reimbursement under government healthcare programs, including Medicaid or Medicare;

 

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· impose restrictions or affirmative obligations on Innovate’s or its CMO’s operations, including costly new manufacturing requirements; or

 

· seize or detain products or require a product recall.

 

If any of Innovate’s product candidates for which Innovate receives regulatory approval fails to achieve significant market acceptance among the medical community, patients or third-party payers, the revenue Innovate generates from its sales will be limited and its business may not be profitable.

 

Innovate’s success will depend in substantial part on the extent to which its product candidates, if approved, are accepted by the medical community and patients and reimbursed by third-party payers, including government payers. Innovate cannot predict with reasonable accuracy whether physicians, patients, healthcare insurers or health maintenance organizations, or the medical community in general, will accept or utilize any of its products, if approved. If its product candidates are approved but do not achieve an adequate level of acceptance by these parties, Innovate may not generate sufficient revenue to become or to remain profitable. In addition, its efforts to educate the medical community and third-party payers regarding benefits of its products may require significant resources and may never be successful.

 

The degree of market acceptance with respect to each of its approved products, if any, will depend upon a number of factors, including:

 

· the safety and efficacy of its products as demonstrated in clinical studies;

 

· acceptance in the medical and patient communities of its products as a safe and effective treatment;

 

· the perceived advantages of its product over alternative treatments, including with respect to the incidence and severity of any adverse side effects and the cost of treatment;

 

· the indications for which its product is approved;

 

· claims or other information (including limitations or warnings) in its product’s approved labeling;

 

· reimbursement and coverage policies of government and other third-party payers;

 

· smaller than expected market size due to lack of disease awareness of a rare disease, or the patient population with a specific rare disease being smaller than anticipated;

 

· availability of alternative treatments;

 

· pricing and cost-effectiveness of its product relative to alternative treatments;

 

· inappropriate diagnostic efforts due to limited knowledge and/or resources among clinicians;

 

· the prevalence of off-label substitution of chemically equivalent products or alternative treatments; and

 

· the resources Innovate devotes to marketing its product and restrictions on promotional claims Innovate can make with respect to the product.

 

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If Innovate determines that a product candidate may not achieve adequate market acceptance or that the potential market size does not justify additional expenditure on the program, Innovate may reduce its expenditures on the development and/or the process of seeking regulatory approval of the product candidate while Innovate evaluates whether and on what timeline to move the program forward.

 

Even if Innovate receives regulatory approval to market one or more of its product candidates in the United States, Innovate may never receive approval or commercialize its products outside of the United States, which would limit its ability to realize the full commercial potential of its product candidates.

 

In order to market products outside of the United States, Innovate must establish and comply with the numerous and varying regulatory requirements of other countries regarding safety and efficacy. Approval procedures vary among countries and can involve additional product testing and validation and additional administrative review periods. The time required to obtain approval in other countries generally differs from that required to obtain FDA approval. The regulatory approval process in other countries may include all of the risks detailed above regarding FDA approval in the United States, as well as other risks. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others. Failure to obtain regulatory approval in other countries or any delay or setback in obtaining such approval could have the same adverse effects detailed above regarding FDA approval in the United States. As described above, such effects include the risks that its product candidates may not be approved for all indications requested, which could limit the uses of its product candidates and have an adverse effect on product sales, and that such approval may be subject to limitations on the indicated uses for which the product may be marketed or require costly, post-marketing follow-up studies.

 

Conversely, if the product candidates do receive approval outside the US in the future, Innovate may not meet the FDA requirements in the United States for approval.

 

Innovate must comply with the U.S. Foreign Corrupt Practices Act and similar foreign anti-corruption laws.

 

The U.S. Foreign Corrupt Practices Act, to which Innovate is subject, prohibits corporations and individuals from engaging in certain activities to obtain or retain business or to influence a person working in an official capacity. It is illegal to pay, to offer to pay or to authorize the payment of anything of value to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity. Other countries, such as the U.K., have similar laws with which Innovate must comply. Innovate faces the risk that an employee or agent could be accused of violating one or more of these laws, particularly in geographies where significant overlap exists between local government and healthcare industries. Such an accusation, even if unwarranted, could prove disruptive to Innovate’s developmental and commercialization efforts.

 

Risks Related to Innovate’s Intellectual Property

 

Innovate’s success will depend in part on obtaining and maintaining effective patent and other intellectual property protection for its product candidates and proprietary technology.

 

Innovate relies on patents and other intellectual property to maintain exclusivity for its product candidates. INN-202 and INN-108 are covered by several issued patents in the U.S. as well as patents outside the U.S., with patent applications pending in several jurisdictions. INN-329 is not protected by patents. Further, the INN-202 primary end point is a proprietary Patient Report Outcome measure (CeD PRO) that is protected by copyright. Intellectual property relating to the INN-202 program is exclusively licensed from Alba Therapeutics Corp. Intellectual property relating to INN-108 program is exclusively licensed from Seachaid Pharmaceuticals Inc. Innovate’s success will depend in part on its ability to:

 

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· obtain and maintain patents and other exclusivity with respect to its products;

 

· prevent third parties from infringing upon its proprietary rights;

 

· maintain proprietary know-how and trade secrets;

 

· operate without infringing upon the patents and proprietary rights of others; and

 

· obtain and maintain appropriate licenses to patents or proprietary rights held by third parties if infringement would otherwise occur or if necessary to secure exclusive rights to them, both in the United States and in foreign countries.

 

The patent and intellectual property positions of biopharmaceutical companies generally are highly uncertain, involve complex legal and factual questions, and have been and continue to be the subject of much litigation. There is no guarantee that Innovate has or will develop or obtain the rights to products or processes that are patentable, that patents will issue from any pending applications or that claims issued will be sufficient to protect the technology Innovate develops or has developed or that is used by Innovate, its CMOs or its other service providers. In addition, any patents that are issued and/or licensed to Innovate may be limited in scope or challenged, invalidated, infringed or circumvented, including by its competitors, and any rights Innovate has under issued and/or licensed patents may not provide competitive advantages to Innovate. If competitors can develop and commercialize technology and products similar to Innovate’s, its ability to successfully commercialize its technology and products may be impaired.

 

Patent applications in the United States are confidential for a period of time until they are published, and publication of discoveries in scientific or patent literature typically lags actual discoveries by several months. As a result, Innovate cannot be certain that the inventors listed in any patent or patent application owned or licensed by Innovate were the first to conceive of the inventions covered by such patents and patent applications (for U.S. patent applications filed before March 16, 2013), or that such inventors were the first to file patent applications for such inventions outside the United States and, after March 15, 2013, in the United States. In addition, changes in or different interpretations of patent laws in the United States and foreign countries may affect Innovate’s patent rights and limit the patents Innovate can obtain, which could permit others to use its discoveries or to develop and to commercialize Innovate’s technology and products without any compensation to Innovate.

 

Innovate also relies on unpatented know-how and trade secrets and continuing technological innovation to develop and maintain its competitive position, which Innovate seeks to protect, in part, through confidentiality agreements with employees, consultants, collaborators and others. Innovate also has invention or patent assignment agreements with its employees and certain consultants. The steps Innovate has taken to protect its proprietary rights, however, may not be adequate to preclude misappropriation of or otherwise protect its proprietary information or prevent infringement of its intellectual property rights, and Innovate may not have adequate remedies for any such misappropriation or infringement. In addition, it is possible that inventions relevant to Innovate’s business could be developed by a person not bound by an invention assignment agreement with Innovate or independently discovered by a competitor.

 

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Innovate also intends to rely on regulatory exclusivity for protection of its product candidates, if approved for commercial sale. Implementation and enforcement of regulatory exclusivity, which may consist of regulatory data protection and market protection, varies widely from country to country. Failure to qualify for regulatory exclusivity, or failure to obtain or to maintain the extent or duration of such protections that Innovate expects for its product candidates, if approved, could affect its decision on whether to market the products in a particular country or countries or could otherwise have an adverse impact on its revenue or results of operations.

 

Innovate may rely on trademarks, trade names and brand names to distinguish its products, if approved for commercial sale, from the products of its competitors. However, Innovate’s trademark applications may not be approved. Third parties may also oppose Innovate’s trademark applications or otherwise challenge its use of the trademarks in which case Innovate may expend substantial resources to defend its proposed or approved trademarks and may enter into agreements with third parties that may limit Innovate’s use of its trademarks. In the event that Innovate’s trademarks are successfully challenged, Innovate could be forced to rebrand its products, which could result in loss of brand recognition and could require Innovate to devote significant resources to advertising and marketing these new brands. Further, Innovate’s competitors may infringe its trademarks or Innovate may not have adequate resources to enforce its trademarks.

 

Innovate’s success depends on its ability to prevent competitors from duplicating or developing and commercializing equivalent versions of its product candidates, and intellectual property protection may not be sufficient or effective to exclude this competition.

 

Innovate has patent protection in the United States and other countries to cover the composition of matter, formulation and method of use for INN-202 and INN-108. However, these patents may not provide Innovate with significant competitive advantages, because the validity, scope, term, or enforceability of the patents may be challenged and, if instituted, one or more of the challenges may be successful. Patents may be challenged in the United States under post-grant review proceedings, inter partes reexamination, ex parte re-examination, or challenged in district court. Any patents issued in foreign jurisdictions may be subjected to comparable proceedings lodged in various foreign patent offices, or courts. These proceedings could result in either loss of the patent or loss or reduction in the scope of one or more of the claims of the patent. Even if a patent issues, and is held valid and enforceable, competitors may be able to design around Innovate’s patent rights, such as by using pre-existing or newly developed technology, in which case competitors may not infringe Innovate’s issued claims and may be able to market and sell products that compete directly with Innovate’s before and after its patents expire.

 

Further, the INN-202 primary end point is a proprietary Patient Report Outcome measure (CeD PRO) that is protected by copyright. However, copyright protection may not be sufficient to exclude others from developing products that compete with INN-202.

 

The patent prosecution process is expensive and time-consuming. Innovate and any future licensors and licensees may not apply for or prosecute patents on certain aspects of its product candidates at a reasonable cost, in a timely fashion, or at all. Innovate may not have the right to control the preparation, filing and prosecution of some patent applications related to its product candidates or technologies. As a result, these patents and patent applications may not be prosecuted and enforced in a manner consistent with the best interests of Innovate. It is also possible that Innovate or any future or present licensors or licensees will fail to identify patentable aspects of inventions made in the course of development and commercialization activities before it is too late to obtain patent protection on them. Further, it is possible that defects of form in the preparation or filing of Innovate’s patent applications may exist, or may arise in the future, such as with respect to proper priority claims, inventorship, assignment, term or claim scope. If there are material defects in the form or preparation of its patents or patent applications, such patents or applications may be invalid or unenforceable. In addition, one or more parties may independently develop similar technologies or methods, duplicate its technologies or methods, or design around the patented aspects of its products, technologies or methods. Any of these circumstances could impair Innovate’s ability to protect its products, if approved, in ways which may have an adverse impact on Innovate’s business, financial condition and operating results.

 

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Furthermore, the issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and Innovate’s owned and licensed patents may be challenged in the courts or patent offices in and outside of the United States. Such challenges may result in loss of exclusivity or freedom to operate or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit Innovate’s ability to use its patents to stop others from using or commercializing similar or identical products or technology, or to limit the duration of the patent protection of its technology and drugs. Given the amount of time required for the development, testing and regulatory review of new drug candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, Innovate’s owned and licensed patent portfolio may not provide Innovate with sufficient rights to exclude others from commercializing drugs similar to or identical to those of Innovate.

 

Enforcement of intellectual property rights in certain countries outside the United States, including China in particular, has been limited or non-existent. Future enforcement of patents and proprietary rights in many other countries will likely be problematic or unpredictable. Moreover, the issuance of a patent in one country does not assure the issuance of a similar patent in another country. Claim interpretation and infringement laws vary by nation, so the extent of any patent protection is uncertain and may vary in different jurisdictions.

 

Obtaining and maintaining patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and Innovate’s patent protection could be reduced or eliminated for non-compliance with these requirements.

 

Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and applications are required to be paid to the United States Patent and Trademark Office, or USPTO, and various governmental patent agencies outside of the United States in several stages over the lifetime of the patents and applications. The USPTO and various non-U.S. governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process and after a patent has issued. There are situations in which non-compliance can result in decreased patent term or in abandonment or lapse of the patent or patent application, leading to partial or complete loss of patent rights in the relevant jurisdiction.

 

Third parties may claim that Innovate’s products, if approved, infringe on their proprietary rights and may challenge the approved use or uses of a product or its patent rights through litigation or administrative proceedings, and defending such actions may be costly and time consuming, divert management attention away from Innovate’s business, and result in an unfavorable outcome that could have an adverse effect on Innovate’s business.

 

Innovate’s commercial success depends on its ability and the ability of its CMOs and component suppliers to develop, manufacture, market and sell its products and product candidates and use its proprietary technologies without infringing the proprietary rights of third parties. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which Innovate is or may be developing products. Because patent applications can take many years to publish and issue, there currently may be pending applications, unknown to Innovate, that may later result in issued patents that its products, product candidates or technologies infringe, or that the process of manufacturing its products or any of its respective component materials, or the component materials themselves, infringe, or that the use of its products, product candidates or technologies infringe.

 

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Innovate or its CMOs or component material suppliers may be exposed to, or threatened with, litigation by third parties alleging that Innovate’s products, product candidates and/or technologies infringe its patents and/or other intellectual property rights, or that one or more of the processes for manufacturing its products or any of its respective component materials, or the component materials themselves, or the use of its products, product candidates or technologies, infringe its patents and/or other intellectual property rights. If a third-party patent or other intellectual property right is found to cover its products, product candidates, technologies or its uses, or any of the underlying manufacturing processes or components, Innovate could be required to pay damages and could be unable to commercialize its products or to use its technologies or methods unless Innovate is able to obtain a license to the patent or intellectual property right. A license may not be available to Innovate in a timely manner or on acceptable terms, or at all. In addition, during litigation, the third-party alleging infringement could obtain a preliminary injunction or other equitable remedy that could prohibit Innovate from making, using, selling or importing its products, technologies or methods.

 

There generally is a substantial amount of litigation involving patent and other intellectual property rights in the industries in which Innovate operates and the cost of such litigation may be considerable. Innovate can provide no assurance that its product candidates or technologies will not infringe patents or rights owned by others, licenses to which might not be available to Innovate in a timely manner or on acceptable terms, or at all. If a third party claims that Innovate or its CMOs or component material suppliers infringe its intellectual property rights, Innovate may face a number of issues, including, but not limited to:

 

· infringement and other intellectual property claims which, with or without merit, may be expensive and time consuming to litigate and may divert management’s time and attention from Innovate’s core business;

 

· substantial damages for infringement, including the potential for treble damages and attorneys’ fees, which Innovate may have to pay if it is determined that the product and/or its use at issue infringes or violates the third party’s rights;

 

· a court prohibiting Innovate from selling or licensing the product unless the third-party licenses its intellectual property rights to Innovate, which it may not be required to do;

 

· if a license is available from the third party, Innovate may have to pay substantial royalties, fees and/or grant cross-licenses to the third party; and

 

· redesigning Innovate’s products or processes so they do not infringe, which may not be possible or may require substantial expense and time.

 

No assurance can be given that patents do not exist, have not been filed, or could not be filed or issued, which contain claims covering Innovate’s products, product candidates or technology or those of its CMOs or component material suppliers or the use of its products, product candidates or technologies. Because of the large number of patents issued and patent applications filed in the industries in which Innovate operates, there is a risk that third parties may allege they have patent rights encompassing Innovate’s products, product candidates or technologies, or those of its CMOs or component material suppliers, or uses of its products, product candidates or technologies.

 

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In the future, it may be necessary for Innovate to enforce its proprietary rights, or to determine the scope, validity and unenforceability of other parties’ proprietary rights, through litigation or other dispute proceedings, which may be costly, and to the extent Innovate is unsuccessful, adversely affect its rights. In these proceedings, a court or administrative body could determine that its claims, including those related to enforcing patent rights, are not valid or that an alleged infringer has not infringed its rights. The uncertainty resulting from the mere institution and continuation of any patent- or other proprietary rights-related litigation or interference proceeding could have a material and adverse effect on its business prospects, operating results and financial condition.

 

Risks Related to Innovate’s Industry

 

Innovate is subject to uncertainty relating to healthcare reform measures and reimbursement policies that, if not favorable to its products, could hinder or prevent its products’ commercial successes, if any of its product candidates are approved.

 

The unavailability or inadequacy of third-party payer coverage and reimbursement could negatively affect the market acceptance of its product candidates and the future revenues Innovate may expect to receive from those products. The commercial success of its product candidates, if approved, will depend in part on the extent to which the costs of such products will be covered by third-party payers, such as government health programs, commercial insurance and other organizations. Third-party payers are increasingly challenging the prices and examining the medical necessity and cost-effectiveness of medical products and services, in addition to their safety and efficacy. If these third-party payers do not consider its products to be cost-effective compared to other therapies, Innovate may not obtain coverage for its products after approval as a benefit under the third-party payers’ plans or, even if Innovate does, the level of coverage or payment may not be sufficient to allow Innovate to sell its products on a profitable basis.

 

Significant uncertainty exists as to the reimbursement status for newly approved drug products, including coding, coverage and payment. There is no uniform policy requirement for coverage and reimbursement for drug products among third-party payers in the United States, therefore coverage and reimbursement for drug products can differ significantly from payer to payer. The coverage determination process is often a time-consuming and costly process that will require Innovate to provide scientific and clinical support for the use of its products to each payer separately, with no assurance that coverage and adequate payment will be applied consistently or obtained. The process for determining whether a payer will cover and how much it will reimburse a product may be separate from the process of seeking approval of the product or for setting the price of the product. Even if reimbursement is provided, market acceptance of its products may be adversely affected if the amount of payment for its products proves to be unprofitable for healthcare providers or less profitable than alternative treatments or if administrative burdens make its products less desirable to use. Third-party payer reimbursement to providers of its products, if approved, may be subject to a bundled payment that also includes the procedure of administering its products or third-party payers may require providers to perform additional patient testing to justify the use of its products. To the extent there is no separate payment for its product(s), there may be further uncertainty as to the adequacy of reimbursement amounts.

 

The continuing efforts of governments, private insurance companies, and other organizations to contain or to reduce costs of healthcare may adversely affect:

 

· Innovate’s ability to set an appropriate price for its products;

 

· the rate and scope of adoption of its products by healthcare providers;

 

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· its ability to generate revenue or achieve or maintain profitability;

 

· the future revenue and profitability of its potential customers, suppliers and collaborators; and

 

· its access to additional capital.

 

Innovate’s ability to successfully commercialize its products will depend in part on the extent to which governmental authorities, private health insurers and other organizations establish what Innovate believes are appropriate coverage and reimbursement for its products. The containment of healthcare costs has become a priority of federal and state governments worldwide and the prices of drug products have been a focus in this effort. For example, there have been several recent U.S. Congressional inquiries and proposed bills designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs, and the new U.S. President has stated that reducing drug pricing is a priority for his administration. Innovate expects that federal, state and local governments in the United States, as well as in other countries, will continue to consider legislation directed at lowering the total cost of healthcare. In addition, in certain foreign markets, the pricing of drug products is subject to government control and reimbursement may in some cases be unavailable or insufficient. It is uncertain whether and how future legislation, whether domestic or abroad, could affect prospects for its product candidates or what actions federal, state, or private payers for healthcare treatment and services may take in response to any such healthcare reform proposals or legislation. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures reforms may prevent or limit its ability to generate revenue, attain profitability or commercialize its product candidates, especially in light of Innovate’s plans to price its product candidates at a high level.

 

Furthermore, Innovate expects that Congress will again attempt to pass reform measures that may be adopted in the future, including the possible repeal and replacement of the Affordable Care Act, which the Trump administration has stated is a priority. These potential courses of action are unpredictable; and the potential impact of new legislation on Innovate’s operations and financial position is uncertain, but may result in more rigorous coverage criteria, lower reimbursement, and additional downward pressure on the price Innovate may receive for an approved product. Any reduction in reimbursement from Medicare or other government-funded programs may result in a similar reduction in payments from private payers. The implementation of cost containment measures or other healthcare reforms may prevent Innovate from being able to generate revenue, attain profitability or commercialize its products, if approved.

 

Innovate expects competition in the marketplace for its product candidates, should any of them receive regulatory approval.

 

Larazotide acetate has issued patents for composition of matter, method of use and its formulation in the United States, Innovate’s primary market. INN-202 has either been issued patents or is prosecuting patent applications in numerous countries outside the United States. The barrier to entry for any company developing larazotide acetate for celiac disease is very high. Innovate believes that INN-202 is the first drug entering into Phase 3 clinical trials for celiac disease. Additionally, if larazotide acetate is the first drug granted FDA approval for celiac disease, competitors may need to license or to seek approval from Innovate for the usage of its CeD-PRO as an endpoint in subsequent celiac disease trials.

 

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Innovate has received for Orphan Drug Designation from the FDA for INN-108 for pediatric ulcerative colitis. Orphan Drug Designation will provide market exclusivity in the U.S. for seven years, but only if (1) INN-108 receives market approval before a competitor using the same active compound for the same indication, (2) Innovate is able to produce sufficient supply to meet demand in the marketplace, and (3) another product with the same active ingredient(s) is not deemed clinically superior.

 

INN-329, secretin, has received Orphan Drug Designation from the FDA. Orphan Drug Designation will provide market exclusivity in the U.S. for seven years, but only if (1) INN-329 receives market approval before a competitor using a similar peptide for the same indication, (2) Innovate is able to produce sufficient supply to meet demand in the marketplace, and (3) another product with the same active ingredient is not deemed clinically superior.

 

The industries in which Innovate operates (biopharmaceutical, specialty pharmaceutical, biotechnology and pharmaceutical) are highly competitive and subject to rapid and significant changes. Developments by others may render potential application of any of its product candidates in a particular indication obsolete or noncompetitive, even prior to completion of its development and approval for that indication.

 

If successfully developed and approved, Innovate expects its product candidates will face competition. Innovate may not be able to compete successfully against organizations with competitive products, particularly large pharmaceutical companies. Many of its potential competitors have significantly greater financial, technical and human resources than Innovate, and may be better equipped to develop, manufacture, market and distribute products. Many of these companies operate large, well-funded research, development and commercialization programs, have extensive experience in nonclinical and clinical studies, obtaining FDA and other regulatory approvals and manufacturing and marketing products, and have multiple products that have been approved or are in late-stage development. These advantages may enable them to receive approval from the FDA or any foreign regulatory agency before Innovate and prevent Innovate from competing due to their orphan drug protections. Smaller companies may also prove to be significant competitors, particularly through collaborative arrangements with large pharmaceutical and biotechnology companies. Furthermore, heightened awareness on the part of academic institutions, government agencies and other public and private research organizations of the potential commercial value of their inventions have led them to actively seek to commercialize the technologies they develop, which increases competition for investment in Innovate’s programs. Competitive products may be more effective, easier to dose, or more effectively marketed and sold, than theirs, which would have a material adverse effect on Innovate’s ability to generate revenue.

 

Innovate faces potential product liability exposure and, if successful claims are brought against it, Innovate may incur substantial liability for a product or product candidate and may have to limit its commercialization. In the future, Innovate anticipates that it will need to obtain additional or increased product liability insurance coverage and it is uncertain whether such increased or additional insurance coverage can be obtained on commercially reasonable terms, if at all.

 

Innovate’s business (in particular, the use of its product candidates in clinical studies and the sale of any products for which it obtains marketing approval) will expose Innovate to product liability risks. Product liability claims might be brought against Innovate by patients, healthcare providers, pharmaceutical companies or others selling or involved in the use of its products. If Innovate cannot successfully defend itself against any such claims, Innovate will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

· significant costs of related litigation;

 

· decreased demand for its products and loss of revenue;

 

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· impairment of its business reputation;

 

· a “clinical hold,” suspension or termination of a clinical study or amendments to a study design;

 

· delays in enrolling patients to participate in its clinical studies;

 

· withdrawal of clinical study participants;

 

· substantial monetary awards to patients or other claimants; and

 

· the inability to commercialize its products and product candidates.

 

Innovate maintains limited product liability insurance for its clinical studies, but its insurance coverage may not reimburse Innovate or may not be sufficient to reimburse Innovate for all expenses or losses it may suffer. Moreover, insurance coverage is becoming increasingly expensive and, in the future, Innovate may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect itself against losses.

 

Innovate expects that it will expand its insurance coverage to include the sale of commercial products if it obtains marketing approval for any of its product candidates, but Innovate may be unable to obtain product liability insurance on commercially acceptable terms or may not be able to maintain such insurance at a reasonable cost or in sufficient amounts to protect Innovate against potential losses. Large judgments have been awarded in class action lawsuits based on drug products that had unanticipated side effects. A successful product liability claim or series of claims brought against Innovate, if judgments exceed its insurance coverage, could decrease its cash and adversely affect its business.

 

Risks Related to Our Common Stock

 

The market price of the Company’s common stock is likely to be volatile, and the stock price may drop following the Merger.

 

The stock market in general and the market for pharmaceutical companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. A certain degree of market price volatility may also occur as a result of the completion of the Merger and listing of the shares of the combined company. The market price of the Company’s common stock following the closing of the Merger may be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control, including:

 

· regulatory or legal developments in the United States and foreign countries;

 

· results from or delays in clinical trials of our product candidates;

 

· announcements of regulatory approval or disapproval of INN-202 (for celiac disease), INN-108 (for ulcerative colitis), INN-329 (for magnetic resonance cholangiopancreatography or MRCP) or any future product candidates;

 

· commercialization of our product candidates;

 

· FDA or other U.S. or foreign regulatory actions affecting us or our industry;

 

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· introductions and announcements of new products by us, any commercialization partners or our competitors, and the timing of these introductions and announcements;

 

· variations in our financial results or those of companies that are perceived to be similar to us;

 

· changes in the structure of healthcare payment systems;

 

· announcements by us or our competitors of significant acquisitions, licenses, strategic partnerships, joint ventures or capital commitments;

 

· market conditions in the pharmaceutical and biopharmaceutical sectors and issuance of securities analysts’ reports or recommendations;

 

· actual or anticipated quarterly variations in our results of operations or those of our future competitors;

 

· changes in financial estimates or guidance, including our ability to meet our future revenue and operating profit or loss estimates or guidance;

 

· sales of substantial amounts of our stock by insiders and large stockholders, or the expectation that such sales might occur;

 

· general economic, industry and market conditions;

 

· additions or departures of key personnel;

 

· intellectual property, product liability or other litigation against us;

 

· expiration or termination of our potential relationships with strategic partners;

 

· negative reactions from investors to the prospects of the combined organization’s business and prospects from the Merger;

 

· the effect of the Merger on the combined organization’s business and prospects is not consistent with the expectations of financial or industry analysts;

 

· the combined organization does not achieve the perceived benefits of the Merger as rapidly or to the extent anticipated by financial or industry analysts; and

 

· the other factors described in this section entitled “Risk Factors.”

 

If securities or industry analysts do not publish research or publish unfavorable research about the Company’s business, the Company’s common stock price and trading volume could decline.

 

Equity research analysts do not currently provide research coverage of the Company’s common stock. In particular, as a smaller company, it may be difficult for us to attract the interest of equity research analysts. A lack of research coverage may adversely affect the liquidity of and market price of the Company’s common stock. To the extent we obtain equity research analyst coverage, we will not have any control of the analysts or the content and opinions included in their reports. The market price of the stock could decline if one or more equity research analysts downgrade the common stock or issue other unfavorable commentary or research. If one or more equity research analysts ceases coverage of the Company, or fails to publish reports on us regularly, demand for the common stock could decrease, which in turn could cause the market price of the common stock or trading volume to decline.

 

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Sales of substantial amounts of the Company’s common stock in the public markets, or the perception that such sales might occur, could cause the market price of the Company’s common stock to drop significantly, even if our business is doing well.

 

Sales of a substantial number of shares of the Company’s common stock in the public market could occur at any time. If our stockholders sell, or the market perceives that our stockholders intend to sell, substantial amounts of the Monster common stock in the public market following the closing of the Merger, the market price of the Company’s common stock could decline significantly.

 

Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us.

 

Our certificate of incorporation and restated bylaws following as they will be in effect following the Merger provide that we will indemnify our directors and officers, in each case to the fullest extent permitted by Delaware law.

 

To the extent that a claim for indemnification is brought by any of our directors or officers, it would reduce the amount of funds available for use in our business.

 

If the Company sells shares of its common stock in the future, stockholders may experience immediate dilution and, as a result, the market price of the Company’s common stock may decline.

 

The Company may from time to time issue additional shares of its common stock at a discount from the then-current trading price. As a result, the Company’s stockholders would experience immediate dilution upon the purchase of any shares of such common stock sold at such discount. In addition, as opportunities present themselves, the Company may enter into financing or similar arrangements in the future, including the issuance of debt securities, preferred stock or common stock. If the Company issues common stock or securities convertible into common stock, its common stockholders would experience additional dilution and, as a result, the market price of the Company’s common stock may decline.

 

Concentration of ownership of our common stock among our existing principal stockholders may effectively limit the voting power of other stockholders.

 

Our executive officers, directors and current beneficial owners of 5% or more of our common stock, in aggregate, beneficially own approximately 42% of our outstanding common stock. Accordingly, these stockholders, acting together, will continue to be able to significantly influence all matters requiring stockholder approval, including the election and removal of directors and any merger or other significant corporate transactions. These stockholders may therefore delay or prevent a change of control, even if such a change of control would benefit the other stockholders. The significant concentration of stock ownership may adversely affect the market price of the Company’s common stock due to investors’ perception that conflicts of interest may exist or arise.

 

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Anti-takeover provisions in our corporate charter documents and under Delaware law could make an acquisition of us more difficult, which could discourage takeover attempts and lead to management entrenchment, and the market price of our common stock may be lower as a result.

 

Certain provisions in our certificate of incorporation and bylaws may make it difficult for a third party to acquire, or attempt to acquire, control of our company, even if a change in control was considered favorable by the stockholders. For example, the Board will have the authority to issue up to 10,000,000 shares of preferred stock. The Board can fix the price, rights, preferences, privileges, and restrictions of the preferred stock without any further vote or action by our stockholders. The issuance of shares of preferred stock may delay or prevent a change in control transaction. As a result, the market price of our common stock and the voting and other rights of our stockholders may be adversely affected. An issuance of shares of preferred stock may result in the loss of voting control to other stockholders.

 

Our charter documents will also contain other provisions that could have an anti-takeover effect, including provisions that:

 

· establish that the Board is divided into three classes, Class I, Class II and Class III, with each class serving staggered three year terms;

 

· provide that vacancies on the Board may be filled only by a majority of directors then in office, even though less than a quorum;

 

· provide that our directors may only be removed for cause;

 

· eliminate cumulative voting in the election of directors;

 

· authorize the Board to issue shares of preferred stock and determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval;

 

· provide the Board with the exclusive right to elect a director to fill a vacancy or newly created directorship;

 

· permit stockholders to only take actions at a duly called annual or special meeting and not by written consent;

 

· prohibit stockholders from calling a special meeting of stockholders;

 

· require that stockholders give advance notice to nominate directors or submit proposals for consideration at stockholder meetings;

 

· authorize the Board, by a majority vote, to amend the bylaws; and

 

· require the affirmative vote of at least 66 2/3% or more of the outstanding common stock to amend many of the provisions described above.

 

In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us. Finally, our amended and restated certificate of incorporation will also provide that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders. These provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. They could also have the effect of discouraging others from making tender offers for our common stock, including transactions that may be in your best interests. These provisions may also prevent changes in our management or limit the price that certain investors are willing to pay for our stock.

 

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We may be subject to securities litigation, which is expensive and could divert management attention.

 

The market price of our common stock may be volatile, and in the past companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

 

Innovate has not paid cash dividends in the past and does not expect to pay dividends in the future. Any return on investment may be limited to the value of its common stock.

 

Innovate has never paid cash dividends on its common stock and does not anticipate paying cash dividends in the near future. The payment of dividends on its common stock will depend on earnings, financial condition and other business and economic factors affecting Innovate at such time as the board of directors may consider relevant. If Innovate does not pay dividends, its common stock may be less valuable because a return on investment will only occur if its stock price appreciates.

 

Our ability to use our net operating loss carryforwards and certain other tax attributes to offset future taxable income may be subject to certain limitations.

 

Innovate has U.S. federal net operating loss carryforwards, or NOLs, which expire in various years if not utilized.  In addition, we have federal research and development credit carryforwards. The federal research and development credit carryforwards expire in various years if not utilized. Under Sections 382 and 383 of Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOLs and other pre-change tax attributes, such as research tax credits, to offset its future post-change income and taxes may be limited.  In general, an “ownership change” occurs if there is a cumulative change in our ownership by “5% shareholders” that exceeds 50 percentage points over a rolling three-year period.  Similar rules may apply under state tax laws.  We have not performed a formal study to determine whether any of our NOLs are subject to these limitations.  We have recorded deferred tax assets for our NOLs and research and development credits and have recorded a full valuation allowance against these deferred tax assets.  In the event that it is determined that we have in the past experienced additional ownership changes, or if we experience one or more ownership changes as a result of future transactions in our stock, then we may be further limited in our ability to use our NOLs and other tax assets to reduce taxes owed on the net taxable income that we earn in the event that we attain profitability. Any such limitations on the ability to use our NOLs and other tax assets could adversely impact our business, financial condition and operating results in the event that we attain profitability.

 

We will incur costs as a result of operating as a public company and our management will be required to devote substantial time to new compliance initiatives and corporate governance practices, including maintaining an effective system of internal control over financial reporting.

 

As a public company listed in the United States, and increasingly after we are no longer an “emerging growth company,” we will incur significant additional legal, accounting and other expenses that Innovate did not incur as a private company. In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act and regulations implemented by the SEC and Nasdaq, may increase legal and financial compliance costs and make some activities more time consuming. These laws, regulations and standards are subject to varying interpretations and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If notwithstanding our efforts to comply with new laws, regulations and standards, we fail to comply, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

 

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As a public company in the United States, we will be required, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. We will need to disclose any material weaknesses identified by our management in our internal control over financial reporting, and, when we are no longer an “emerging growth company”, we will need to provide a statement that our independent registered public accounting firm has issued an opinion on our internal control over financial reporting.

 

The controls and other procedures are designed to ensure that information required to be disclosed by us in the reports that we file with the Securities and Exchange Commission, or SEC, is disclosed accurately and is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. We are in the early stages of conforming our internal control procedures to the requirements of Section 404 and we may not be able to complete our evaluation, testing and any required remediation needed to comply with Section 404 in a timely fashion. Our independent registered public accounting firm was not engaged to perform an audit of our internal control over financial reporting for the year ended December 31, 2017, or for any other period. Accordingly, no such opinion will be expressed.

 

Even after we develop these new procedures, these new controls may become inadequate because of changes in conditions or the degree of compliance with these policies or procedures may deteriorate and material weaknesses in our internal control over financial reporting may be discovered. We may err in the design or operation of our controls, and all internal control systems, no matter how well designed and operated, can provide only reasonable assurance that the objectives of the control system are met. Because there are inherent limitations in all control systems, there can be no absolute assurance that all control issues have been or will be detected. If we are unable, or are perceived as unable, to produce reliable financial reports due to internal control deficiencies, investors could lose confidence in our reported financial information and operating results, which could result in a negative market reaction.

 

To fully comply with Section 404, we will need to retain additional employees to supplement our current finance staff, and we may not be able to do so in a timely manner, or at all. In addition, in the process of evaluating our internal control over financial reporting, we expect that certain of our internal control practices will need to be updated to comply with the requirements of Section 404 and the regulations promulgated thereunder, and we may not be able to do so on a timely basis, or at all. In the event that we are not able to demonstrate compliance with Section 404 in a timely manner, or are unable to produce timely or accurate financial statements, we may be subject to sanctions or investigations by regulatory authorities, such as the SEC or the stock exchange on which our stock is listed, and investors may lose confidence in our operating results and the price of our common stock could decline. Furthermore, if we are unable to certify that our internal control over financial reporting is effective and in compliance with Section 404, we may be subject to sanctions or investigations by regulatory authorities, such as the SEC or stock exchanges, and we could lose investor confidence in the accuracy and completeness of our financial reports, which could hurt our business, the price of our common stock and our ability to access the capital markets.

 

We also expect that being a public company will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on committees of our board of directors or as members of senior management.

 

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We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

 

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups, or JOBS, Act enacted in April 2012, and may remain an “emerging growth company” for up to five years following the completion of our initial public offering, although, if we have more than $1.0 billion in annual revenue, the market value of our common stock that is held by non-affiliates exceeds $700 million as of June 30 of any year, or we issue more than $1.0 billion of non-convertible debt over a three-year period before the end of that five-year period, we would cease to be an “emerging growth company” as of the following December 31. For as long as we remain an “emerging growth company,” we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not “emerging growth companies.” These exemptions include:

 

· being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s discussion and analysis of financial condition and results of operations” disclosure;

 

· not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting;

 

· not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;

 

· reduced disclosure obligations regarding executive compensation; and

 

· exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

 

In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards, delaying the adoption of these accounting standards until they would apply to private companies. We have irrevocably elected not to avail ourselves of this exemption and, as a result, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies. We cannot predict whether investors will find our common stock less attractive as a result of our reliance on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and the market price of our common stock may be reduced or more volatile.

 

Risks Related to the Company Following the Merger

 

Monster and Innovate stockholders may not realize a benefit from the Merger commensurate with the ownership dilution they will experience in connection with the Merger.

 

If the combined organization is unable to realize the full strategic and financial benefits currently anticipated from the Merger, Monster and Innovate stockholders will have experienced substantial dilution of their ownership interests in their respective companies without receiving any commensurate benefit, or only receiving part of the commensurate benefit to the extent the combined organization is able to realize only part of the strategic and financial benefits currently anticipated from the Merger.

 

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Because the lack of a public market for Innovate shares makes it difficult to evaluate the fairness of the Merger, the stockholders of Innovate may receive consideration in the Merger that is less than the fair market value of the Innovate shares.

 

Prior to the Merger, the outstanding capital stock of Innovate was privately held and was not traded in any public market. The lack of a public market makes it extremely difficult to determine the fair market value of Innovate. Because the percentage of Monster equity issued to Innovate stockholders was determined based on negotiations between the parties, it is possible that the value of Monster common stock to be received by Innovate stockholders in the Merger is less than the fair market value of Innovate.

 

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INNOVATE MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis of Innovate’s financial condition and results of operations together with the section entitled “Selected Financial Data” and Innovate’s financial statements and related notes included elsewhere in this Current Report on Form 8-K. This discussion and other parts of this Current Report on Form 8-K contain forward-looking statements that involve risks and uncertainties, such as its plans, objectives, expectations, intentions and beliefs. Innovate’s actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section entitled “Risk Factors” included elsewhere in this Current Report on Form 8-K.

 

Company Overview

 

Innovate is a clinical-stage biopharmaceutical company developing novel therapies for autoimmune and inflammatory disorders. Innovate’s lead product candidate, larazotide acetate (INN-202), is an orally administered 8-amino acid synthetic peptide that has the potential to be the first-to-market therapeutic for celiac disease (CeD), and is currently entering phase 3 registration trials. Innovate’s second product candidate, INN-108, is an oral tablet that uses an azo-bonded pro-drug approach linking mesalamine to 4-APAA and is in development for the treatment of mild to moderate ulcerative colitis (UC). INN-108 is entering a proof-of-concept Phase 2 trial in 2018, after having successfully completed a Phase 1 trial.

 

Since its inception in January 2012, Innovate has focused its efforts and resources on identifying and developing its programs. Innovate has not had any products approved for commercial sale and has incurred operating losses in each year since inception. Substantially all of its operating losses resulted from expenses incurred in connection with its research and development programs and from general and administrative costs associated with its operations.

 

Innovate expects to continue to incur significant expenses and increasing operating losses for the foreseeable future, which may fluctuate significantly between periods. Innovate anticipates that its expenses will increase substantially as it:

 

continues research and development, including preclinical and clinical development of its existing product candidates;

 

potentially seeks regulatory approval for its product candidates;

 

commercializes any product candidates for which it obtains regulatory approval;

 

maintains and protects its intellectual property rights;

 

adds operational, financial and management information systems and personnel; and

 

incurs additional legal, accounting and other expenses in operating as a public company.

 

Recent Developments

 

On January 29, 2018, Monster Digital, Inc., a Delaware corporation now known as Innovate Biopharmaceuticals, Inc. (the “Company”) completed its merger with privately-held Innovate Biopharmaceuticals Inc. (“IB Pharmaceuticals Inc.”) in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated July 3, 2017, whereby Monster Merger Sub., Inc. (“Merger Sub”), a wholly owned subsidiary of the Company merged with and into IB Pharmaceuticals Inc., with IB Pharmaceuticals Inc. surviving as the Company’s wholly owned subsidiary (the “Merger”). In connection with the Merger, the Company changed its name from Monster Digital, Inc. to Innovate Biopharmaceuticals, Inc. All references to the “Company” refer to Innovate Biopharmaceuticals, Inc. as of and following the closing of the Merger on January 29, 2018 (the “Closing Date”) and all references to “Monster” refer to Monster Digital, Inc. prior to the closing of the Merger on the Closing Date.

 

Immediately prior to the closing of the Merger, accredited investors purchased shares of common stock of IB Pharmaceuticals Inc. in a private placement for gross proceeds of approximately $18.13 million (the “Equity Issuance”). IB Pharmaceuticals Inc. issued five-year warrants to each purchaser of common stock with a price per exercise price of $1.2011 (subject to adjustment in connection with the Merger). Concurrently with the Equity Issuance, convertible promissory notes issued by IB Pharmaceuticals Inc. in the aggregate principal amount of approximately $8.65 million were converted into shares of IB Pharmaceuticals Inc. common stock at a price per share of $0.7206 (the “Conversion”).

 

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H.C. Wainwright & Co., LLC (“HCW”) and GP Nurmenkari Inc. (“GPN”) were retained as the placement agents for the Equity Issuance. HCW was paid a flat fee of $250,000.00, a cash fee of $285,000.06 (equal to 10% of the gross proceeds of the Equity Issuance up to a certain cap), a cash fee of $9,018.15 (equal to 3.5% of the gross proceeds in excess of a certain cap), and non-accountable expense allowance of $50,000. GPN was paid a cash fee of $891,266.11 (equal to 10% of the gross proceeds of certain investors in the Equity Issuance) and non-accountable expense allowance of $50,000. IB Pharmaceuticals Inc. issued to affiliates of HCW five-year warrants to purchase 557,097 shares of common stock with an exercise price per share equal to $1.2011(subject to adjustment in connection with the Merger). IB Pharmaceuticals Inc. issued to GPN five-year warrants to purchase 927,529 shares of common stock with an exercise price per share equal to $1.2011(subject to adjustment in connection with the Merger); provided that a small number of warrants (representing 318,776 shares of underlying IB Pharmaceuticals Inc. common stock) were issued to affiliates of GPN with an exercise price per share equal to $0.9609 (subject to adjustment in connection with the Merger). Upon the closing of the Merger, the outstanding shares of IB Pharmaceuticals Inc.’s common stock were exchanged for shares of common stock of Monster at an exchange ratio of one share of IB Pharmaceuticals Inc. common stock to 0.37813802 shares of Monster common stock (the “Exchange Ratio”). Immediately following the closing of the Merger, after giving effect to the Equity Issuance and applying the Exchange Ratio, Monster’s securityholders owned approximately 5.8% of the outstanding common stock of the Company on a fully-diluted basis and IB Pharmaceuticals Inc.’s securityholders owned approximately 94.2% of the outstanding common stock of the Company.

 

On January 29, 2018, the Company entered into a Note Purchase Agreement and Senior Note Payable (“Note”) with a lender.  The principal amount of the Note is $4,800,000 (“Principal”).  The Note was issued at a discount of $1,800,000 and net of $20,000 for financing costs, for total proceeds of $2,980,000.  The Note matures on September 30, 2018 (“Maturity Date”), however, the Maturity Date may be extended at the option of the lender under certain circumstances as outlined in the Note.  Interest on the Note accrues starting on January 29, 2018 at a rate of 12.5% per annum and payments of interest only are due beginning on March 30, 2018 and compound quarterly.  Upon the Maturity Date of the Note, the Company is required to pay the lender an amount representing 105% of all outstanding Principal, accrued and unpaid interest, and any unpaid late charges, if applicable (“Outstanding Amount”).   The Note contains redemption features and certain non-financial covenants and penalties to the Company in the case of certain events of default, as defined in the Note.

  

Innovate announced on September 6, 2017, that it received U.S. Food and Drug Administration orphan drug designation for INN-108 as an oral therapy proposed for the treatment of pediatric ulceration colitis.

 

Critical Accounting Policies

 

Use of Estimates  The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. Areas of the financial statements where estimates may have the most significant effect include accrued expenses, share-based compensation, deferred compensation, valuation allowance for income tax assets and management’s assessment of Innovate’s ability to continue as a going concern. Changes in the facts or circumstances underlying these estimates could result in material changes and actual results could differ from these estimates.

 

Accrued Expenses  Innovate incurs periodic expenses such as research and development, salaries, taxes, and professional fees. An adjusting entry to accrue expenses is necessary when expenses have been incurred by Innovate prior to them being paid. When a vendor’s invoice is not received, Innovate is required to estimate its accrued expenses. This process involves reviewing quotations and contracts, identifying services that have been performed on Innovate’s behalf and estimating the level of service performed and the associated cost incurred for the service when Innovate has not yet been invoiced or otherwise notified of the actual cost. The majority of Innovate’s service providers invoice monthly in arrears for services performed or when contractual milestones are met. Innovate estimates accrued expenses as of each balance sheet date based on facts and circumstances known at that time. Innovate periodically confirms the accuracy of its estimates with the service providers and makes adjustments if necessary.

 

Research and Development  Innovate expenses the cost of research and development as incurred. Research and development expenses comprise costs incurred from contracted services and other external costs. Nonrefundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity is performed or when the goods have been received, rather than when payment is made, in accordance with Accounting Standards Codification (“ASC”) 730,  Research and Development .

 

Share-Based Compensation  Innovate accounts for share-based compensation using the fair value method of accounting which requires all such compensation to employees, including the grant of employee stock options, to be recognized in the Statements of Operations based on its fair value at the grant date. The expense associated with share-based compensation is recognized on a straight-line basis over the requisite service period of each award; however, the amount of compensation expense recognized at any date must at least equal the portion of the grant-date value of the award that is vested at that date. For share-based compensation granted to non-employees, the measurement date is generally considered to be the date when all services have been rendered or the date that options are fully vested.

 

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Liquidity and Going Concern  The accompanying financial statements have been prepared on a basis which assumes that Innovate will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. There is substantial doubt that Innovate will continue as a going concern for at least 12 months following the date these financial statements are issued, without additional financing based on Innovate’s limited operating history and recurring operating losses. Management’s plans with regard to these matters include seeking additional debt or equity financing arrangements, including one or more bridge financings prior to closing of the Merger. There is no assurance such financing will be available to Innovate when required or that such financing will be available under favorable terms, or that Innovate can achieve its developmental milestones. The accompanying financial statements do not include any adjustments that might be necessary should Innovate be unable to continue as a going concern.

  

Results of Operations

 

Comparison of the Three Months Ended September 30, 2017 and 2016

 

The following table sets forth the key components of Innovate’s results of operations for the three months ended September 30, 2017 and 2016:

 

    Three Months Ended September 30,        
                   
    2017     2016     Change  
Operating expenses:                        
Research and development expenses   $ 367,551     $ 239,297     $ 128,254  
General and administrative expenses     1,973,256       1,733,246       240,010  
                         
Total operating expenses     2,340,807       1,972,543       368,264  
                         
Other income (expense):                        
Interest income     -       -       -  
Interest expense     (110,508 )     (57,164 )     (53,344 )
                         
Total other expense, net     (110,508 )     (57,164 )     (53,344 )
                         
Net loss   $ (2,451,315 )   $ (2,029,707 )   $ (421,608 )

 

Research and Development Expense   

 

Research and development expense for the three months ended September 30, 2017, increased by approximately $128,000, or 53.6% as compared to the three months ended September 30, 2016. The increase was primarily due to a $314,000 increase in share-based compensation expense for stock options granted to consultants working on Innovate’s development programs plus an approximate $9,000 increase in clinical and regulatory costs for the development of Innovate’s INN-202 and INN-108 programs, partially offset by an approximate $193,000 decrease in manufacturing related expense.

 

General and Administrative Expense 

 

General and administrative expense for the three months ended September 30, 2017, increased by approximately $240,000, or 13.8%, as compared to the three months ended September 30, 2016. The increase was primarily due to an approximate aggregate increase of $402,000 in accounting, legal, and transaction advisory services related to the Company’s anticipated Merger plus an approximate aggregate increase of $182,000 in business development expenses in connection with the Company’s INN-202 and INN-108 programs, partially offset by an approximate $374,000 net decrease in employee compensation and share-based compensation expense.

 

Interest Expense 

 

Interest expense for the three months ended September 30, 2017, increased by approximately $53,000, or 93.3%, as compared to the three months ended September 30, 2016. The increase was due to the increase in the principal amount of convertible debt outstanding from $2.7 million at September 30, 2016, to $7.7 million at September 30, 2017.

 

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Comparison of the Nine Months Ended September 30, 2017 and 2016

 

The following table sets forth the key components of Innovate’s results of operations for the nine months ended September 30, 2017 and 2016:

 

    Nine Months Ended September 30,        
                   
    2017     2016     Change  
Operating expenses:                        
Research and development expenses   $ 2,832,787     $ 885,449     $ 1,947,338  
General and administrative expenses     6,115,088       2,705,976       3,409,112  
                         
Total operating expenses     8,947,875       3,591,425       5,356,450  
                         
Other income (expense):                        
Interest income     -       94       (94 )
Interest expense     (281,638 )     (150,101 )     (131,537 )
                         
Total other expense, net     (281,638 )     (150,007 )     (131,631 )
                         
Net loss   $ (9,229,513 )   $ (3,741,432 )   $ (5,488,081 )

 

Research and Development Expense

 

Research and development expense for the nine months ended September 30, 2017 increased approximately $1.9 million, or 220% as compared to the nine months ended September 30, 2016. The increase was primarily due to an increase of $1.6 million in share-based compensation expense for stock options granted to consultants working on Innovate’s development programs and to an approximate $845,000 net increase in manufacturing, clinical and regulatory costs for the development of Innovate’s INN-202 and INN-108 programs, partially offset by the absence of $525,000 in license fees.

 

General and Administrative Expense

 

General and administrative expense for the nine months ended September 30, 2017 increased approximately $3.4 million, or 126% as compared to the nine months ended September 30, 2016. The increase was primarily comprised of a $2.1 million increase in share-based compensation expense, an approximate $885,000 aggregate increase in legal, accounting, and transaction advisory services primarily related to the Company’s preparation for its anticipated Merger, plus an approximate aggregate increase of $384,000 in business development and patent support expenses primarily in connection with the Company’s INN-202 and INN-108 programs.

 

Interest Expense

 

Interest expense for the nine months ended September 30, 2017 increased by approximately $132,000, or 87.6%, as compared to the nine months ended September 30, 2016. The increase was due to the increase in the principal amount of convertible debt outstanding from $2.7 million at September 30, 2016 to $7.7 million at September 30, 2017.

 

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Liquidity and Capital Resources

 

Sources of Liquidity

 

To date, Innovate has funded its operations primarily through the issuance of approximately $8.6 million of convertible promissory notes. As of September 30, 2017, Innovate had cash of approximately $1.5 million, compared to approximately $361,000 as of December 31, 2016. Innovate expects to incur substantial expenditures in the foreseeable future for the development and clinical trials of its INN-202 and INN-108 product candidates. Innovate will continue to require additional financing to develop its product candidates and fund operations for the foreseeable future. Innovate will continue to seek funds through debt or equity financings, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements, or other sources of financing. If Innovate is unable to raise additional funds when needed, its ability to develop its product candidates may be impaired. Innovate may also be required to delay, reduce, or terminate some or all of its development programs and clinical trials.

 

Cash Flows

 

The following table sets forth the primary sources and uses of cash for the nine months ended September 30, 2017 and 2016:

 

    Nine Months Ended September 30,  
             
    2017     2016  
Cash provided by (used in):                
Operating activities   $ (3,165,404 )   $ (1,533,549 )
Investing activities     (1,600 )     (80,731 )
Financing activities     4,285,024       1,853,000  
                 
Net increase in cash   $ 1,118,020     $ 238,720  

 

Operating Activities

 

For the nine months ended September 30, 2017, Innovate’s net cash used in operating activities of approximately $3.2 million primarily consisted of a net loss of $9.2 million, offset by adjustments for share-based compensation of $4.7 million, accrued interest of approximately $252,000, and an increase in accounts payable of $1.1 million.

 

For the nine months ended September 30, 2016, Innovate’s net cash used in operating activities of approximately $1.5 million primarily consisted of a net loss of $3.7 million, offset by adjustments for share-based compensation of $1.0 million and accrued interest of approximately $123,000, and increases of approximately $782,000, $409,000, and $128,000 in accrued expenses, accounts payable, and prepaid expenses and other current assets, respectively.

 

Investing Activities

 

Net cash used in investing activities for 2017 represented the purchase of computer equipment. Net cash used for investing activities in 2016 represented net loans to a related party and approximately $6,000 for the purchase of computer equipment.

 

Financing Activities

 

Net cash provided by financing activities for all periods presented primarily consisted of proceeds from convertible promissory notes.

 

Future Funding Requirements

 

Innovate has not generated any revenue from product sales or any other activities. Innovate does not expect to generate significant revenue unless and until it obtains regulatory approval of and commercializes, or out licenses, any of its product candidates and does not know when, or if, these will occur. In addition, Innovate expects its expenses to significantly increase in connection with its ongoing development activities, particularly as it continues the research, development and clinical trials of, and seeks regulatory approval for, its product candidates. In addition, subject to obtaining regulatory approval of its product candidates, Innovate expects to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. Innovate anticipates that it will need substantial additional funding in connection with its continuing operations, including increased costs associated with becoming a public company since its consummation of the Merger.

 

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Contractual Obligations and Commitments

 

As of September 30, 2017, Innovate did not have any lease obligations for its operating facilities in Raleigh, North Carolina. The lease expired in April 2017, and Innovate was under a month-to-month lease at a cost of approximately $1,600 per month.

 

In October 2017, the Company entered into a new three-year lease for office space that expires on September 30, 2020. Base annual rent is $60,000, or $5,000 per month. The first two months of rent were paid in advance upon lease signing and the next ten months of rent were paid in advance on November 30, 2017. Beginning with month thirteen, monthly payments of $5,000 will be paid in advance of the first day of each month of the remaining term. A security deposit of $5,000 was paid in October 2017. The lease contains a two-year renewal option.

 

The Company has employment agreements with certain executives of the Company (the “Executive Agreements”). Under the terms of the Executive Agreements, the Company has agreed to pay the executives certain payments upon the achievement of financial milestone events. These milestone events were based on total debt or equity funding received by the Company. During the nine months ended September 30, 2017, the initial funding milestone was reached and the executives were paid $145,000 in accordance with the terms of the Executive Agreements. The executives are eligible to receive up to $1,595,000 in additional milestone payments upon the achievement of a financing event with gross proceeds of at least $45,000,000 by March 15, 2018. As of September 30, 2017, these deferred compensation payments were included in accrued expenses.

 

The following table summarizes Innovate’s contractual obligations as of September 30, 2017:

 

    Less than 1 Year     1 to 3 years     4 to 5 Years     After 5 Years     Total  
Principal payments of convertible debt   $ 7,732,335       -       -       -     $ 7,732,335  
Accrued interest on convertible debt     416,075       -       -       -       416,075  
Deferred compensation     1,595,000       -       -       -       1,595,000  
Total contractual obligations   $ 9,743,410       -       -       -     $ 9,743,410  

 

During the period from October through January 24, 2018, the Company issued additional convertible debt in an aggregate amount of $845,000 to third-party investors.

 

Innovate is obligated to make future payments to third parties under in-license agreements, including sublicense fees, royalties, and payments that become due and payable on the achievement of certain development and commercialization milestones. As the amount and timing of sublicense fees and the achievement and timing of these milestones are not probable and estimable, such commitments have not been included on Innovate’s balance sheet or in the contractual obligations table above.

 

On January 29, 2018, the Company entered into a Note Purchase Agreement and Senior Note Payable (“Note”) with a lender.  The principal amount of the Note is $4,800,000 (“Principal”).  The Note was issued at a discount of $1,800,000 and net of $20,000 for financing costs, for total proceeds of $2,980,000.  The Note matures on September 30, 2018 (“Maturity Date”), however, the Maturity Date may be extended at the option of the lender under certain circumstances as outlined in the Note.  Interest on the Note accrues starting on January 29, 2018 at a rate of 12.5% per annum and payments of interest only are due beginning on March 30, 2018 and compound quarterly.  Upon the Maturity Date of the Note, the Company is required to pay the lender an amount representing 105% of all outstanding Principal, accrued and unpaid interest, and any unpaid late charges, if applicable (“Outstanding Amount”).  The Company has the right to redeem the Note at any time prior to the Maturity Date provided an event of default has not occurred.  The redemption amount consists of the Outstanding Amount prior to the redemption date plus an additional amount of interest that would have accrued from the redemption date through January 29, 2019.  The Note contains certain non-financial covenants and penalties to the Company in the case of certain events of default, as defined in the Note.

 

Off-Balance Sheet Arrangements

 

As of September 30, 2017, Innovate had no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K as promulgated by the SEC.

 

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Security Ownership of Certain Beneficial Owners and Management

 

The following table and the related notes present information on the beneficial ownership of shares of the Company’s capital stock as of January 29, 2018 by:

 

· each of the Company’s directors as of the closing of the Merger;

 

· each of the Company’s executive officers as of the closing of the merger and each of the Company’s named executive officers for the year ended December 31, 2017;

 

· all of the Company’s current directors and executive officers as a group; and

 

· each stockholder known by the Company to beneficially own more than five percent of its common stock on an as converted basis.

 

Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities. Shares of common stock that may be acquired by an individual or group within 60 days of January 29, 2018, pursuant to the exercise of options or warrants, are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table.

 

Except as indicated in footnotes to this table, the Company believes that the stockholders named in this table have sole voting and investment power with respect to all shares of common stock shown to be beneficially owned by them, based on information provided to the Company by such stockholders. Unless otherwise indicated, the address for each stockholder listed is: c/o Innovate Biopharmaceuticals, Inc., 8480 Honeycutt Road, Suite 200, Raleigh, NC 27615.

 

Name and Address of Beneficial Owner   Shares Beneficially Owned     Percent of Outstanding  
Principal Stockholders:            
BrynMawr Technology Holdings     1,891,104       7.34 %
Moonstar Family Group     2,697,290       10.47 %
The Sea Island Partnership     2,902,060       11.26 %
Triangle Healthcare Partners     1,726,260       6.70 %
Directors and Named Executive Officers:                
Jay Madan (1)     1,087,117       4.21 %
Sandeep Laumas, M.D. (2)     718,966       2.78 %
Christopher Prior, Ph.D. (3)     1,990,686       7.17 %
Lorin K. Johnson, Ph.D. (4)     234,445       *  
Anthony E. Maida III, Ph.D. (5)     45,376       *  
Anna Kazanchyan, M.D.     -       -  
Roy Proujanksy, M.D.     -       -  
David H. Clarke (6)     126,372       *  
Jonathan Clark     28,500       *  
Stephen R. Brownsell     13,500       *  
David Olert (7)     8,684       *  
All directors and executive officers as a group (7 persons) (8)     4,076,674       14.47 %

 

* Represents beneficial ownership of less than 1% of the shares of common stock

 

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(1) Includes 130,031 shares held by Madan Global, Inc., 122,516 shares held by OM Healthcare Partners LLC, 122,516 shares held by OM Healthcare Partners II LLC, and 122,516 shares held by OM Healthcare Partners III LLC, and 65,546 shares issuable upon the exercise of an option held by Mr. Madan that are exercisable within 60 days of January 29, 2018.
(2) Includes 651,322 shares held by Bearing Circle Capital LLC and 67,644 shares issuable upon the exercise of an option held by Dr. Laumas that are exercisable within 60 days of January 29, 2018. Dr. Laumas is affiliated with Bearing Circle Capital LLC and has voting and investment power over the shares held by Bearing Circle Capital LLC.
(3) Consists of 1,990,686 shares issuable upon the exercise of options held by Dr. Prior that are exercisable within 60 days of January 29, 2018.
(4) Consists of 234,445 shares issuable upon the exercise of options held by Dr. Johnson that are exercisable within 60 days of January 29, 2018.
(5) Consists of 45,376 shares issuable upon the exercise of an option held by Dr. Maida that is exercisable within 60 days of January 29, 2018.
  (6) Includes 56,720 shares held by Mr. Clarke, 1,807 shares held by Leslie Clarke, Mr. Clarke’s wife, and 52,835 shares held by GBS Holdings, Inc., an entity which may be deemed controlled by Mr. Clarke but which is owned by Leslie Clarke and the children of Mr. Clarke. Also includes warrants to purchase (i) 548 shares of common stock held by Mr. Clarke, (ii) 539 shares of common stock held by Leslie Clarke, and (iii) 13,923 shares of common stock held by GBS Holdings, Inc. Mr. Clarke may be deemed the indirect beneficial owner of these securities since he has shared sale, voting and investment control over the securities with his wife. The address of GSB Holdings, Inc. and Mr. Clarke is 14179 Laurel Trail, Wellington, Florida 33414.
  (7) Includes 1,684 shares issuable upon the exercise of options held by Mr. Olert that are exercisable within 60 days of January 29, 2018.
(8) Includes 2,403,694 shares issuable upon the exercise of options held by the Company’s current directors and executive that are exercisable within 60 days of January 29, 2018.

 

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MANAGEMENT

 

Executive Officers and Directors

 

At the effective time of the merger, each of Sandeep Laumas, Christopher Prior, Jay Madan, Lorin Johnson, Anna Kazanchyan, Anthony Maida, and Roy Proujansky was appointed to the Board and such individuals constitute our Board as of the date of this report. Additionally, pursuant to the Merger Agreement, our executive management team changed at the effective time of the merger by the resignation of the then-serving executive officers of Monster Digital, Inc. and the appointment of Sandeep Laumas as our Executive Chairman, Christopher Prior as our Chief Executive Officer, and Jay Madan as our President.

 

The following table sets forth the names, ages and positions of each of our directors and executive officers as of the date of this report:

 

Name   Age   Position(s)
Executive Officers        
Sandeep Laumas, M.D.   49   Executive Chairman
Christopher Prior, Ph.D.   65   Chief Executive Officer and Director
Jay Madan, M.S.   52   President and Director
Lorin K. Johnson, Ph.D.   65   Director
Anna Kazanchyan, M.D.   49   Director
Anthony E. Maida, Ph.D., M.A., M.B.A   65   Director
Roy Proujansky, M.D.   61   Director

 

Executive Officers  

 

Sandeep Laumas, M.D.   Dr. Laumas joined Innovate in 2014 as its Executive Chairman. In August 2007 Dr. Laumas founded Bearing Circle Capital, LP and has served as its Managing Director since such time. Dr. Laumas began his career at Goldman Sachs & Co. in 1996 as an equity analyst in the healthcare investment banking division working on mergers, acquisitions, and corporate finance transactions before transitioning to the healthcare equity research division. After leaving Goldman Sachs in 2000, Dr. Laumas moved to the buy side as an analyst at Balyasny Asset Management from 2001 to 2003. Dr. Laumas was a Managing Director of North Sound Capital from 2003 to 2007, where he was responsible for the global healthcare investment portfolio. From February 2011 to 2012 he was a member of the board of directors of Super Religare Laboratories Limited, Southeast Asia’s largest clinical laboratory service company. Dr. Laumas also served as a Director of Parkway Holdings Ltd. (acquired by IHH Healthcare for $3 Billion: Singapore: IHH) from May through August 2010. Dr. Laumas received his A.B. (Chemistry) from Cornell University in 1990, M.D. from Albany Medical College in 1995 with a research gap year at the Dana-Farber Cancer Institute and completed his medical internship in 1996 from the Yale University School of Medicine.

 

The Company believes that Dr. Laumas’ prior board service and years of experience investing in the healthcare industry qualifies Dr. Laumas to serve on the Board.

 

Christopher P. Prior, Ph.D.   Dr. Prior joined Innovate as its Chief Executive Officer in 2015. From April 2008 to October 2014, he served as the Chief Executive Officer of Phasebio Pharmaceuticals, Inc., a clinical stage biopharmaceutical company. Prior to that, he founded Principia Pharmaceutical Corporation, a company that develops biopharmaceutical products for chronic diseases, where he served as President, and BioRexis Pharmaceuticals Corporation, a biopharmaceutical company developing diabetes candidates and novel therapeutic agents, where he served as the President and Chief Scientific Officer. During the course of his 30-year career, he has generated more than 25 INDs and achieved four product approvals from the FDA. Dr. Prior received his Bachelor of Science, with honors, in Chemistry from the University of London, and received a Ph.D. in Biochemistry from Columbia University. Dr. Prior also completed a research fellowship at The Rockefeller Medical Institute in New York. Dr. Prior is a member of the New York Academy of Sciences and is the author of numerous publications and patents focused on the development of therapeutics.

 

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The Company believes that Dr. Prior’s role as chief executive officer of Innovate and extensive experience as an executive in the biopharmaceutical industry qualifies him to serve on the board of directors.

 

Jay P. Madan, M.S.    Mr. Madan founded Innovate in 2012 and has served as its President and as a member of the board of directors since such time. Prior to that, Mr. Madan was an independent contractor advising multiple life sciences companies, including Reliance Life Sciences, Millipore, Baxter, Dade Behring, and Goodwin. This experience in working across multiple teams led him to develop a global network of healthcare professionals. From July 2007 to November 2008, Mr. Madan served as the VP of Business Development at Reliance Biopharmaceuticals Pvt. Ltd., a part of Reliance Industries Ltd., India’s largest conglomerate. While at Reliance and Goodwin, Mr. Madan was focused on the development of their contract manufacturing businesses. Mr. Madan holds a Bachelor of Science degree in Chemical Engineering from University of Mumbai and an M.S. in Chemical Engineering from Washington State University.

 

The Company believes that Mr. Madan’s role as a co-founder of Innovate and extensive experience in the life sciences and biotech industries qualifies him to serve on the Board.

 

Non-Employee Directors

 

Lorin K. Johnson, Ph.D.   Dr. Johnson is the founder and Chief Scientist of Glycyx PharmaVentures Ltd., a biopharma investment and development company. In 1989, he co-founded Salix Pharmaceuticals, Inc. (NASDAQ: SLXP), a specialty pharmaceutical company, and held senior leadership positions prior to its $15.8 billion acquisition by Valeant Pharmaceuticals International, Inc. (NYSEA: VRX) in April 2015. Prior to Salix, Dr. Johnson served as Director of Scientific Operations and Chief Scientist at Scios, Inc. (formerly, California Biotechnology, Inc). He is a board member of Sigmoid Pharma, a GI specialty drug delivery company based in Dublin, Ireland. In addition to his career in industry, Dr. Johnson has served as an Assistant Professor of Pathology at Stanford University Medical Center and held academic positions at Stanford University School of Medicine and the University of California, San Francisco. He is the co-author of 75 journal articles and book chapters and is the co-inventor on 18 issued patents. Dr. Johnson holds a PhD from the University of Southern California and was a Postdoctoral Fellow at the University of California, San Francisco.

 

The Company believes that Dr. Johnson’s extensive experience in the pharmaceutical and life science industries, both as an executive and investor, qualifies him to serve on the Board.

 

Anna Kazanchyan, M.D.   Dr. Kazanchyan founded Saghmos Therapeutics, a company focused on the prevention of contrast-induced acute kidney injury, in September 2016 and serves as its CEO and Chairwoman. Dr. Kazanchyan has served as a member of the board of directors of Foamix Pharmaceuticals (NASDAQ: FOMX) since December 2014 and currently serves on its compensation committee. She is also the founder and Managing Partner since April 2004 of Primary i-Research, LLC, where she provides due diligence to leading healthcare investment funds and evaluates investment prospects of biopharmaceutical companies based on the scientific, clinical, regulatory, and commercial outlook for their products. In addition, she has been a strategic advisor to CEOs of biopharmaceutical companies (start-ups to global companies) and has advised companies on matters related to business development, regulatory strategy, marketing, and commercial/competitive landscape. Previously, Dr. Kazanchyan was Senior Biotechnology Analyst at Wachovia Securities, and was a member of the #1 and #2 Institutional-Investor ranked Biotechnology Equity Research teams at Goldman Sachs and Citigroup, respectively. She received an M.D. from Harvard Medical School and a B.A. in Biology, summa cum laude, from Clark University.

 

The Company believes that Dr. Kazanchyan’s 20 years of experience leading and advising companies in the biopharmaceutical and therapeutics industries qualifies her to serve on the Board.

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Anthony E. Maida III, Ph.D., M.A., M.B.A.    Dr. Maida has wide experience in the biotechnology industry for more than two decades serving as a CEO, member of the board of directors and working with biotechnology investors. From 1997 through 2010, Dr. Maida served as Chairman, Founder and Director of BioConsul Drug Development Corporation and Principal of Anthony Maida Consulting International, servicing pharmaceutical and investment firms, in the clinical development of therapeutic products and product/company acquisitions. From June 2009 through June 2010, Dr. Maida served as Vice President of Clinical Research and General Manager, Oncology, Worldwide for PharmaNet, Inc., a clinical research organization. Since June 2010, Dr. Maida has served as Senior Vice President, Clinical Research for Northwest Biotherapeutics, Inc., a cancer vaccine company focused on therapy for patients with glioblastoma multiforme and prostate cancer. From 1992 to September of 1999, Dr. Maida was President and Chief Executive Officer of Jenner Biotherapies, Inc., an immunotherapy company. Dr. Maida has served in a number of executive roles including President and CEO of Replicon NeuroTherapeutics, Inc. Dr. Maida is currently a member of the Board of Directors and Audit Chair of Spectrum Pharmaceuticals, Inc (NASDAQ GS: SPPI)., Vitality Biopharma, Inc. (OTCQB: VBIO) and OncoSec Medical Inc. (OTCQB: ONCS). Dr. Maida holds a B.A. in Biology and History, an M.B.A., an M.A. in Toxicology and a Ph.D. in Immunology. He is a member of the American Society of Clinical Oncology (ASCO), the American Association for Cancer Research (AACR), the Society of Neuro-Oncology, the International Society for Biological Therapy of Cancer and the American Chemical Society (ACS).

 

The Company believes that Dr. Maida’s extensive experience as an executive at various biotechnology and biopharmaceutical companies as well as his service on private and public company boards qualifies him to serve on the Board.

 

Roy Proujansky, M.D. Dr. Proujansky is a pediatric gastroenterologist who since July 2013 has served as the Executive Vice President and Chief Executive of Delaware Valley Operations (DuPont Hospital for Children) for the Nemours Children’s Health System, a non-profit children’s health organization. Before his current position, Dr. Proujansky served as Executive Vice President for Patient Operations and Chief Operating Officer of Nemours from 2006 to July 2013. From 2000 to 2006, Dr. Proujansky was the Robert L. Brent Professor and Chairman of Pediatrics and Associate Dean for Jefferson Medical College at Thomas Jefferson University. Additionally, from 1998 to 2015, Dr. Proujansky was the co-director or direct supervisor of Nemours Research Programs and has authored forty-seven original publications and book chapters in the field of pediatric gastroenterology. Dr. Proujansky received an M.D. from Northwestern University, an MBA from the University of Massachusetts at Amherst and a B.S. in Medical Science from Northwestern University.

 

The Company believes Dr. Proujansky’s extensive knowledge and experience in the field of pediatric gastroenterology qualifies him to serve on the Board.

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Composition of the Board of Directors

 

The Board consists of seven directors, and each director’s term expires upon the election and qualification of successor directors at the annual meeting of the stockholders to be held in 2018.

 

There are no family relationships among any of the directors and executive officers.

 

Director Independence

 

The Board has determined that a majority of its directors are independent as defined under NASDAQ listing standards. The Board has also determined that each current member of each of the Nominating and Corporate Governance Committee and Compensation Committee is independent as defined under NASDAQ listing standards and that each current member of the Audit Committee and Compensation Committee is independent as defined under NASDAQ listing standards and applicable SEC rules. In making this determination, the Board found that none of these directors had a material or other disqualifying relationship with the Company.

 

Committees of the Board of Directors

 

The Board has an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee.

 

Audit Committee

 

The Audit Committee of the Board consists of Anthony Maida, Lorin Johnson and Anna Kazanchyan, with Dr. Maida acting as the chair. The primary functions of the Audit Committee include, among other things:

 

  reviewing and approving the engagement of the independent registered public accounting firm to perform audit services and any permissible non-audit services;

 

  evaluating the performance of the independent registered public accounting firm and deciding whether to retain their services;

 

  monitoring the rotation of partners on the engagement team of the independent registered public accounting firm;

 

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  reviewing annual and quarterly financial statements and reports and discussing the statements and reports with the Company’s independent registered public accounting firm and management, including a review of disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations;”

 

  considering and approving or disapproving all related party transactions;

 

  reviewing, with the Company’s independent registered public accounting firm and management, significant issues that may arise regarding accounting principles and financial statement presentation, as well as matters concerning the scope, adequacy and effectiveness of financial controls;

 

  conducting an annual assessment of the performance of the Audit Committee and its members, and the adequacy of its charter; and

 

  establishing procedures for the receipt, retention and treatment of complaints received by the Company regarding financial controls, accounting or auditing matters.

 

Each member of the Audit Committee satisfies the independence requirements under NASDAQ listing standards and Rule 10A-3(b)(1) of the Exchange Act and is a person who the Board has determined has the requisite financial expertise required under the applicable requirements of NASDAQ. In arriving at this determination, the Board examined each Audit Committee member’s scope of experience and the nature of their employment in the corporate finance sector. The Board has also determined that Dr. Maida qualifies as an “audit committee financial expert,” as defined in applicable SEC rules.

 

Compensation Committee

 

The Compensation Committee of the Board consists of Anna Kazanchyan, Lorin Johnson and Anthony Maida, with Dr. Kazanchyan acting as the chair. The functions of the Compensation Committee include, among other things:

 

  determining the compensation and other terms of employment of the chief executive officer and its other executive officers and reviewing and approving corporate performance goals and objectives relevant to such compensation;

 

  reviewing and recommending to the full Board the compensation of the Monster directors;

 

  evaluating and administering the equity incentive plans, compensation plans and similar programs advisable for the Company, as well as reviewing and recommending to the Board the adoption, modification or termination of plans and programs;

 

  establishing policies with respect to equity compensation arrangements;

 

  if required, reviewing with management the Company’s disclosures under the caption “Compensation Discussion and Analysis” and recommending to the full the Board its inclusion in the Company’s periodic reports to be filed with the SEC; and

 

  reviewing and evaluating, at least annually, the performance of the Compensation Committee and the adequacy of its charter.

 

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The Board has determined that each current member of the Compensation Committee is independent under NASDAQ listing standards, a “non-employee director” as defined in Rule 16b-3 promulgated under the Exchange Act and an “outside director” as that term is defined in Section 162(m) of the Code.

 

Nominating and Corporate Governance Committee

 

The Nominating and Governance Committee of the Board currently consists of Lorin Johnson, Anna Kazanchyan and Anthony Maida, with Dr. Johnson acting as the chair. The functions of the Nominating and Corporate Governance Committee include, among other things, the following:

 

  reviewing periodically and evaluating director performance on the Board and its applicable committees, and recommending to the Board and management areas for improvement;

 

  interviewing, evaluating, nominating and recommending individuals for membership on the Board;

 

  reviewing and recommending to our board of directors any amendments to the Company’s corporate governance policies; and

 

  reviewing and assessing, at least annually, the performance of the Nominating and Corporate Governance committee and the adequacy of its charter.

 

The Board has determined that each member of the Nominating and Corporate Governance Committee is independent under Nasdaq listing standards.

 

The Board may from time to time establish other committees.

 

2016 Innovate Director Compensation

 

Innovate did not have any directors in the year ended December 31, 2016, who were not employed by Innovate.

 

Compensation Committee Interlocks and Insider Participation

 

Each member of the Compensation Committee is an “outside” director as that term is defined in Section 162(m) of the Internal Revenue Code, a “non-employee” director within the meaning of Rule 16b-3 of the rules promulgated under the Exchange Act and independent within the meaning of the independent director guidelines of the NasdaqCM. None of the executive officers serve as a member of the board of directors or compensation committee of any entity that has one or more executive officers who serves on the Board or Compensation Committee.

 

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Executive Compensation

 

This section discusses the material components of the executive compensation program offered to Innovate’s named executive officers identified below.

 

2016 Summary Compensation Table

 

The following table provides information regarding Innovate’s named executive officers during the fiscal year ended December 31, 2016. These individuals are referred to elsewhere in this current report as the “named executive officers” of Innovate.

 

Name and Principal Position   Year     Salary     Bonus     Option
Awards (1)
    Total  
Sandeep Laumas, M.D.
Executive Chairman
    2016     $ 18,000 (2)   $ 2,100     $     $ 20,100  
Christopher Prior, Ph.D.
Chief Executive Officer
    2016     $ 18,000     $ 2,100     $ 1,250,392     $ 1,270,492  
Jay P. Madan
President, Corporate Development
    2016     $ 30,000 (3)   $ 4,500     $     $ 34,500  

 

 

 

(1) The amounts in the “Option Awards” column reflect the aggregate grant date fair value of stock options granted during the calendar year computed in accordance with the provisions of Accounting Standards Codification (ASC) 718, Compensation — Stock Compensation. The assumptions that Innovate used to calculate these amounts are discussed in the notes to the December 31, 2016 and 2015 audited financial statements of Innovate included elsewhere in this proxy statement/information statement. These amounts do not reflect the actual economic value that will be realized by the named executive officer upon the vesting of the stock options, the exercise of the stock options, or the sale of the common stock underlying such stock options.

 

(2) As described below under the heading “Employment and Severance Agreements,” under the terms of Dr. Laumas’ employment agreement, a portion of the amount of the 2016 base salary set forth in the agreement was deferred and would be paid if Innovate reached a specified financial milestone prior to March 15, 2017. The milestone was not reached by that date, and the amount in the table reflects the amounts paid in 2016.

 

(3) As described below under the heading “Employment and Severance Agreements,” under the terms of Mr. Madan’s employment agreement, a portion of the amount of the 2016 base salary set forth in the agreement was deferred and would be paid if Innovate reached a specified financial milestone prior to March 15, 2017. The milestone was not reached by that date, and the amount in the table reflects the amounts paid in 2016.

 

Narrative Disclosure to Summary Compensation Table

 

The primary elements of compensation for Innovate’s named executive officers are base salary, bonus and equity-based compensation awards. The named executive officers also participate in employee benefit plans and programs that Innovate offers to its other full-time employees on the same basis.

 

Base Salary

 

The base salary payable to Innovate’s named executive officers is intended to provide a fixed component of compensation that reflects the executive’s skill set, experience, role and responsibilities.

 

Bonus

 

Although Innovate does not have a written bonus plan, the Innovate Board may, in its discretion, award bonuses to its executive officers on a case-by-case basis. These awards are structured to reward named executive officers for the successful performance of Innovate as a whole and of each participating named executive officer as an individual. The bonus amounts awarded in 2016 were on an entirely discretionary basis. In addition, as described under the heading “Employment and Severance Agreements,” each of the named executive officers is eligible under the terms of their respective employment agreements to receive set bonus amounts based on Innovate’s achievement of certain financial milestones.

 

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Health, Welfare and Additional Benefits

 

Each of Innovate’s named executive officers is eligible to participate in Innovate’s employee benefit plans and programs, including medical, dental and vision benefits, to the same extent as its other full-time employees, subject to the terms and eligibility requirements of those plans.

 

Although Innovate does not have a formal policy with respect to the grant of equity incentive awards to its executive officers or any formal equity ownership guidelines applicable to them, Innovate believes that equity grants provide its executives with a strong link to Innovate’s long-term performance, create an ownership culture and help to align the interests of Innovate’s executives and its stockholders. In addition, Innovate believes that equity grants with a time-based vesting feature promote executive retention because this feature incentivizes executive officers to remain in Innovate’s employment during the vesting period. In 2016, Innovate granted Dr. Prior options to purchase up to an aggregate of 5,400,000 shares (as adjusted for a one-for-three stock split in 2016). The options have an exercise price of $0.1133, and vested as to 4,050,000 shares on November 2, 2015, with 37,500 vesting each month over a period of three years thereafter.

 

2016 Outstanding Equity Awards at Year-End

 

The following table presents the outstanding equity awards held by Innovate’s named executive officers as of December 31, 2016.

 

    Option Awards
Name   Number of
Securities
Underlying
Unexercised
Options
Exercisable
    Number of
Securities
Underlying
Unexercised
Options
Unexercisable
    Option
Exercise
price
    Option
Expiration
date
Christopher Prior, Ph.D.     4,537,500       862,500     $ 0.1133     June 30, 2026

 

Employment and Severance Agreements

 

Innovate has entered into employment agreements with each of its named executive officers described below, and standard confidential information and/or inventions assignment agreements, under which each of its named executive officers has agreed not to disclose Innovate’s confidential information. Each agreement is for an initial term of three years from the Minimum Financial Milestone Event, defined as the sale by Innovate of its equity securities in a bona fide equity financing in which Innovate receives gross proceeds of not less than $5,000,000, and is thereafter automatically renewed until the employment agreement is terminated or either party provides notice of non-renewal.

 

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Sandeep Laumas, M.D.

 

Innovate entered into an executive employment agreement with Dr. Laumas in October 2015, which was subsequently amended in February 2016, March 2017 and August 2017.

 

The agreement provided for an initial base salary of $75,000, which was increased to $111,000 effective July 1, 2016. The agreement provides that the base salary was to be deferred until the time of the Minimum Financial Milestone Event; however, if such Minimum Financial Milestone Event did not occur on or before March 15, 2017, Dr. Laumas agreed to forfeit such base salary for the period of January 1, 2016, through December 31, 2016. The Minimum Financial Milestone Event occurred after March 15, 2017.

 

Commencing January 1, 2017, Dr. Laumas’ annual base salary exceeding $75,000 was subjected to deferral, with such deferral and salary accrual commencing January 1, 2017 and continuing until the Minimum Financial Milestone Event occurred, so long as the Minimum Financial Milestone Event occurred on or prior to March 15, 2018. If the Minimum Financial Milestone Event does not occur on or before March 15, 2018, Dr. Laumas agreed to forfeit such 2017 deferred salary for the period of January 1, 2017, through December 31, 2017.

 

From and after the occurrence of the Minimum Financial Milestone Event, Dr. Laumas’ annual base salary shall be $150,000 and shall not be subject to deferral. Upon the occurrence of the Second Financial Milestone Event, Dr. Laumas’ annual base salary increases to $160,000. Upon the occurrence of the Third Financial Milestone Event, Dr. Laumas’ annual base salary increases to $175,000. Upon the occurrence of the Fourth Financial Milestone Event, Dr. Laumas’ annual base salary would increase to $300,000.

 

The agreement also provides that Dr. Laumas will be eligible to receive a one-time lump sum cash bonus in the amount of $25,000 upon the occurrence of the Minimum Financial Milestone Event, a one-time lump sum cash bonus in the amount of $110,000 upon the occurrence of the Second Financial Milestone Event, a one-time lump sum cash bonus in the appoint of $175,000 upon the occurrence of the Minimum Third Milestone Event, and a one-time lump sum cash bonus in the amount of $175,000 upon the occurrence of the Minimum Fourth Milestone Event.

 

For the months of July, August and September 2016, Dr. Laumas was eligible for a discretionary monthly bonus in the amount of $700 per month. If a Minimum Financial Milestone Event has not occurred by March 15, 2017, Dr. Laumas was eligible for a discretionary bonus of $75,000, awarded in Innovate’s discretion upon the achievement of certain corporate objectives on or before December 31, 2017.

 

Dr. Laumas is also eligible to receive periodic stock or option awards in the discretion of Innovate.

 

Christopher P. Prior, Ph.D.

 

Innovate entered into an executive employment agreement with Dr. Prior in November 2015, which was subsequently amended in February 2016, twice in March 2017, and in August 2017.

 

Upon the occurrence of the Minimum Financial Milestone Event, Dr. Prior was entitled to an annual base salary of $240,000. Upon the occurrence of the Second Financial Milestone Event, defined as the sale by Innovate of its equity securities in a bona fide equity financing or the sale of assets or entry into out-licensing and/or partnering agreements in which Innovate receives gross proceeds of not less than $10,000,000 (including proceeds from the Minimum Financial Milestone Event), Dr. Prior’s annual base salary increases to $260,000. Upon the occurrence of the Third Financial Milestone Event, defined as the sale by Innovate of its equity securities in a bona fide equity financing or the sale of assets or entry into out-licensing and/or partnering agreements in which Innovate receives gross proceeds of not less than $25,000,000 (including proceeds from the Minimum Financial Milestone Event and the Second Financial Milestone Event), Dr. Prior’s annual base salary increases to $300,000. Upon the occurrence of the Fourth Financial Milestone Event, defined as the sale by Innovate of its equity securities in a bona finde equity financing or the sale of assets or entry into out-licensing and/or partnering agreements in which Innovate receives gross proceeds of not less than $45,000,000 (including proceeds from the Minimum Financial Milestone Event, the Second Milestone Financial Event and the Third Milestone Financial Event), Dr. Prior’s annual base salary increases to $425,000.

 

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The agreement also provides that Dr. Prior will be eligible to receive a one-time lump sum cash bonus in the amount of $60,000 upon the occurrence of the Minimum Financial Milestone Event, a one-time lump sum cash bonus in the amount of $125,000 upon the occurrence of the Second Financial Milestone Event, a one-time lump sum cash bonus in the appoint of $175,000 upon the occurrence of the Minimum Third Milestone Event, and a one-time lump sum cash bonus in the appoint of $175,000 upon the occurrence of the Minimum Fourth Milestone Event.

 

Following the completion of the Minimum Financial Milestone Event, Dr. Prior became eligible for an annual grant of restricted stock for each year of service subject to the completion of certain milestones and the approval of the Innovate Board. Such grants would vest with respect to 25% of the restricted stock on the one year anniversary of the date of grant and thereafter with respect to 75% of the stock over the following three years. Upon a change of control, 100% of the unvested shares of restricted stock would vest.

 

Jay P. Madan, M.S.

 

Innovate entered into an executive employment agreement with Mr. Madan in October 2015, which was subsequently amended in February 2016, March 2017 and August 2017.

 

The agreement provided for an initial base salary of $90,000, which was increased to $150,000 effective July 1, 2016. The agreement provides that the 2016 base salary was to be deferred until the time of the Minimum Financial Milestone Event; however, if such Minimum Financial Milestone Event did not occur on or before March 15, 2017, Mr. Madan agreed to forfeit such base salary for the period of January 1, 2016, through December 31, 2016. The Minimum Financial Milestone Event occurred after March 15, 2017.

 

Commencing January 1, 2017, Mr. Madan’s annual base salary exceeding $90,000 was subjected to deferral, with such deferral and salary accrual continuing until the Minimum Financial Milestone Event occurred; however, if the Minimum Financial Milestone Event does not occur on or before March 15, 2018, Mr. Madan agreed to forfeit the 2017 deferred salary.

 

From and after the occurrence of the Minimum Financial Milestone Event, the agreement provides Mr. Madan’s annual base salary shall be $180,000 and shall not be subject to deferral. Upon the occurrence of the Second Financial Milestone Event, Mr. Madan’s annual base salary increases to $210,000. Upon the occurrence of the Third Financial Milestone Event, Mr. Madan’s annual base salary increases to $250,000. Upon the occurrence of the Fourth Financial Milestone Event, Mr. Madan’s annual base salary increases to $350,000.

 

The agreement also provides that Mr. Madan will be eligible to receive a one-time lump sum cash bonus in the amount of $30,000 upon the occurrence of the Minimum Financial Milestone Event, a one-time lump sum cash bonus in the amount of $115,000 upon the occurrence of the Second Financial Milestone Event, a one-time lump sum cash bonus in the appoint of $150,000 upon the occurrence of the Minimum Third Milestone Event, and a one-time lump sum cash bonus in the amount of $125,000 upon the occurrence of the Minimum Fourth Milestone Event.

 

For the months of July, August and September 2016, Mr. Madan was eligible for a discretionary monthly bonus in the amount of $1,500 per month. If a Minimum Financial Milestone Event has not occurred by March 15, 2017, Mr. Madan was eligible for a discretionary bonus of $90,000, awarded in Innovate’s discretion upon the achievement of certain corporate objectives on or before December 31, 2017.

 

Mr. Madan is also eligible to receive periodic stock or option awards in the discretion of Innovate.

 

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Potential Payments Upon Termination of Employment or Change in Control

 

Pursuant to the terms of the executive employment agreement with Dr. Prior, upon termination of the agreement if Innovate does not renew the agreement for a reason unrelated to “cause” (as defined in the agreement), by Dr. Prior for “good reason” (as defined in the agreement”), or by Innovate for reasons other than “cause” (as defined in the agreements), death, or disability, liquidation or dissolution of Innovate, then, subject to Dr. Prior timely signing and not revoking a separation agreement and release of claims agreement, Dr. Prior would be entitled to receive:

 

a lump sum payment equal to (i) twelve months of his then-current base salary; and

 

reimbursements for payments he makes for continued healthcare coverage pursuant to COBRA until the earlier of (i) the date twelve months from the termination date or (ii) the date on which he obtains reasonably comparable coverage.

 

Pursuant to the terms of the executive employment agreement with each of Dr. Laumas and Mr. Madan, upon termination of the agreement if Innovate does not renew the agreement for a reason unrelated to “cause” (as defined in the agreements), by the executive for “good reason” (as defined in the agreements), or by Innovate for reasons other than “cause” (as defined in the agreements), death, or disability, liquidation or dissolution of Innovate, then, subject to the executive’s timely signing and not revoking a separation agreement and release of claims agreement, the executive would be entitled to receive:

 

a lump sum payment equal to (i) six months of his then-current base salary; and

 

reimbursements for payments he makes for continued healthcare coverage pursuant to COBRA until the earlier of (i) the date six months from the termination date or (ii) the date on which he obtains reasonably comparable coverage.

 

Additionally, upon termination of the agreement with each of the above-named executives, pursuant to expiration of the term based on a non-renewal notice or by the executive for “good reason” or for other than “good reason” upon 30 days’ notice, Innovate may elect to pay an amount equal to the executive’s then current base salary for all or any portion of the applicable notice periods required pursuant to the agreements in lieu of all or any portion of such notice period.

 

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Indemnification of Officers and Directors

 

Innovate has entered into agreements to indemnify its directors, executive officers and other employees as determined by the board of directors. With specified exceptions, these agreements provide for indemnification for related expenses including, among other things, attorneys’ fees, judgments, fines and settlement amounts incurred by any of these individuals in any action or proceeding. Innovate believes that the provisions in its Bylaws and indemnification agreements described above are necessary to attract and retain talented and experienced officers and directors.

 

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RELATED PARTY TRANSACTIONS

 

Described below are transactions occurring since January 1, 2015, and any currently proposed transactions to which Innovate was a party and in which:

 

  The amounts involved exceeded or will exceed $120,000; and

 

  A director, executive officer, holder of more than 5% of the outstanding capital stock of Innovate, or any member of such person’s immediate family had or will have a direct or indirect material interest, other than compensation, termination and change of control arrangements that are described under the section titled “Executive Compensation” in this proxy statement/information statement.

 

In 2016, Innovate made a loan to Jay Madan and his affiliates of $135,000. Mr. Madan repaid $60,000 of the borrowed amount in 2016 and $75,000 remains outstanding.

 

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Indemnification of Directors and Officers

 

Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation’s board of directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities, including reimbursement for expenses incurred, arising under the Securities Act of 1933, as amended. The Company’s amended and restated certificate of incorporation provides for indemnification of our directors, officers, employees and other agents to the maximum extent permitted by the Delaware General Corporation Law, and our amended and restated bylaws provide for indemnification of our directors, officers, employees and other agents to the maximum extent permitted by the Delaware General Corporation Law.

 

We have entered into indemnification agreements with our directors and executive officers, whereby we have agreed to indemnify our directors and executive officers to the fullest extent permitted by law, including indemnification against expenses and liabilities incurred in legal proceedings to which the director or executive officer was, or is threatened to be made, a party by reason of the fact that such director or executive officer is or was our director, officer, employee or agent, provided that such director or executive officer acted in good faith and in a manner that the director or executive officer reasonably believed to be in, or not opposed to, the our best interest. At present, there is no pending litigation or proceeding involving any of our directors or executive officers regarding which indemnification is sought, nor are we aware of any threatened litigation that may result in claims for indemnification.

 

We maintain insurance policies that indemnify our directors and officers against various liabilities arising under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, that might be incurred by any director or officer in his capacity as such.

 

Financial Statements

 

Reference is made to the financial statements and pro forma financial information relating to Innovate contained in item 9.01 of this Current Report on form 8-K, which is incorporated herein by reference.

 

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Item 9.01. Financial Statements and Exhibits.

 

(a) Financial Statements of Business Acquired.

  

Innovate

Biopharmaceuticals, Inc.

 

Condensed Financial Statements

For the Three and Nine-Months Ended September 30, 2017 and 2016

 

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Innovate Biopharmaceuticals, Inc.

 

Table of Contents

 

Condensed Financial Statements

 

Condensed Balance Sheets as of September 30, 2017 (unaudited) and  December 31, 2016 F-2
 
Unaudited Condensed Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2017 and 2016 F-3
   
Unaudited Condensed Statements of Cash Flows for the nine months ended  September 30, 2017 and 2016 F-4
   
Notes to Unaudited Condensed Financial Statements F-5

 

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INNOVATE BIOPHARMACEUTICALS, INC.

Condensed Balance Sheets

 

    September 30,     December 31,  
    2017     2016  
    (Unaudited)     (Note 1)  
Assets                
                 
Cash   $ 1,478,831     $ 360,811  
Due from related party     75,000       75,000  
Prepaid expenses and other current assets     52,528       12,085  
                 
Total current assets     1,606,359       447,896  
                 
Computer equipment, net     6,845       7,767  
                 
Total assets   $ 1,613,204     $ 455,663  
                 
Liabilities                
                 
Current liabilities:                
Accounts payable   $ 2,819,292     $ 1,752,045  
Accrued expenses     1,726,536       1,723,225  
Convertible promissory notes, net     7,475,444       -  
Convertible promissory notes, related party, net     243,065       -  
Accrued interest     416,075       -  
                 
Total current liabilities     12,680,412       3,475,270  
                 
Convertible promissory notes, net     -       3,166,137  
Convertible promissory notes, related party, net     -       238,199  
Accrued interest     -       163,611  
                 
Total liabilities     12,680,412       7,043,217  
                 
Commitments and contingencies (Note 8)                
                 
Stockholders’ deficit                
                 
Common stock; $0.001 par value, 250,000,000 shares authorized, 31,545,000 shares issued and outstanding   $ 31,545     $ 31,545  
Additional paid-in-capital     5,878,634       1,128,800  
Stock subscription receivable     -       (25 )
Accumulated deficit     (16,977,387 )     (7,747,874 )
                 
Total stockholders’ deficit     (11,067,208 )     (6,587,554 )
                 
Total liabilities and stockholders’ deficit   $ 1,613,204     $ 455,663  

 

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

 

  F- 2  

 

 

INNOVATE BIOPHARMACEUTICALS, INC.

Condensed Statements of Operations and Comprehensive Loss

(Unaudited)

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
                         
    2017     2016     2017     2016  
Operating expenses:                                
Research and development expenses   $ 367,551     $ 239,297     $ 2,832,787     $ 885,449  
General and administrative expenses     1,973,256       1,733,246       6,115,088       2,705,976  
                                 
Total operating expenses     2,340,807       1,972,543       8,947,875       3,591,425  
                                 
Other income (expense):                                
Interest income     -       -       -       94  
Interest expense     (110,508 )     (57,164 )     (281,638 )     (150,101 )
                                 
Total other expense, net     (110,508 )     (57,164 )     (281,638 )     (150,007 )
                                 
Net loss   $ (2,451,315 )   $ (2,029,707 )   $ (9,229,513 )   $ (3,741,432 )
                                 
Comprehensive loss   $ (2,451,315 )   $ (2,029,707 )   $ (9,229,513 )   $ (3,741,432 )
                                 
Net loss per common share - basic and diluted   $ (0.08 )   $ (0.06 )   $ (0.29 )   $ (0.12 )
                                 
Weighted-average common shares outstanding -   basic and diluted     31,545,000       31,545,000       31,545,000       31,545,000  

 

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

 

  F- 3  

 

 

INNOVATE BIOPHARMACEUTICALS, INC.

Condensed Statements of Cash Flows

(Unaudited)

 

    Nine Months Ended September 30,  
             
    2017     2016  
Cash flows from operating activities                
                 
Net loss   $ (9,229,513 )   $ (3,741,432 )
Adjustments to reconcile net loss to net cash used in  operating activities:                
Share-based compensation     4,749,834       1,023,000  
Accrued interest on convertible promissory notes     252,464       123,021  
Amortization of debt discount     29,174       27,080  
Depreciation     2,522       235  
Changes in operating assets and liabilities:                
Prepaid expenses and other assets     (40,443 )     (128,355 )
Accounts payable     1,067,247       408,719  
Accrued expense     3,311       782,348  
Due to related party     -       (28,165 )
                 
Net cash used by operating activities     (3,165,404 )     (1,533,549 )
                 
Cash flows from investing activities                
                 
Purchase of computer equipment     (1,600 )     (5,731 )
Advances to related party     -       (135,000 )
Payments from related party     -       60,000  
                 
Net cash used by investing activities     (1,600 )     (80,731 )
                 
Cash flows from financing activities                
                 
Borrowings from convertible promissory notes     4,284,999       1,853,000  
Payment of stock subscription receivable     25       -  
                 
Net cash provided by financing activities     4,285,024       1,853,000  
                 
Net increase (decrease) in cash     1,118,020       238,720  
                 
Cash as of beginning of period     360,811       4,207  
                 
Cash as of end of period   $ 1,478,831     $ 242,927  
                 
Supplemental schedule of noncash financing activities                
                 
Conversion of due to related party to convertible promissory notes   $ -     $ 35,737  
                 
Conversion of accrued interest to convertible  promissory notes   $ -     $ 28,574  
                 
Debt conversion feature   $ -     $ 80,000  

 

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

 

  F- 4  

 

 

Innovate Biopharmaceuticals, Inc.

Notes to Condensed Financial Statements

 

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Business Description

 

Innovate Biopharmaceuticals, Inc. (the “Company”) was originally incorporated in the state of North Carolina on January 12, 2012, as GI Therapeutics, Inc. The Company is developing clinical stage products for celiac disease, pancreatic imaging and ulcerative colitis/inflammatory bowel diseases.

 

On April 10, 2014, the Company changed its name from GI Therapeutics, Inc. to Innovate Biopharmaceuticals, Inc. and reincorporated in Delaware on June 23, 2014.

 

Business Risks

 

The Company faces risks associated with companies whose products are in the early stage of development. These risks include, among others, the Company’s need for additional financing to achieve key development milestones, the need to defend intellectual property rights, and the dependence on key members of management.

 

Basis of Presentation

 

The unaudited interim condensed financial statements as of and for the nine months ended September 30, 2017, have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These financial statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary for a fair statement of the balance sheets, operating results, and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Operating results for the three and nine months ended September 30, 2017, are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been omitted in accordance with the SEC’s rules and regulations for interim reporting.

 

The accompanying unaudited financial statements and related notes should be read in conjunction with the Company’s audited financial statements for the years ended December 31, 2016 and 2015.

 

  F- 5  

 

 

Innovate Biopharmaceuticals, Inc.

Notes to Condensed Financial Statements

 

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Significant Accounting Policies

 

There have been no material changes to the Company’s significant accounting policies during the nine months ended September 30, 2017 and 2016, as compared to the significant accounting policies disclosed in Note 1 of the financial statements for the years ended December 31, 2016 and 2015. However, the following accounting policies are the most critical in fully understanding the Company’s financial condition and results of operations.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. Areas of the financial statements where estimates may have the most significant effect include accrued expenses, share-based compensation, deferred compensation, valuation allowance for income tax assets and management’s assessment of the Company’s ability to continue as a going concern. Changes in the facts or circumstances underlying these estimates could result in material changes and actual results could differ from these estimates.

 

Accrued Expenses

 

The Company incurs periodic expenses such as research and development, salaries, taxes, and professional fees. An adjusting entry to accrue expenses is necessary when expenses have been incurred by the Company prior to them being invoiced. When a vendor’s invoice is not received, the Company is required to estimate its accrued expenses. This process involves reviewing quotations and contracts, identifying services that have been performed on the Company’s behalf and estimating the level of service performed and the associated cost incurred for the service when the Company has not yet been invoiced or otherwise notified of the actual cost. The majority of the Company’s service providers invoice monthly in arrears for services performed or when contractual milestones are met. The Company estimates accrued expenses as of each balance sheet date based on facts and circumstances known at that time. The Company periodically confirms the accuracy of its estimates with the service providers and makes adjustments if necessary.

 

  F- 6  

 

 

Innovate Biopharmaceuticals, Inc.

Notes to Condensed Financial Statements

 

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Accrued expenses consisted of the following as of September 30, 2017 and December 31, 2016:

 

    2017     2016  
             
Compensation and benefits   $ 1,617,776     $ 1,682,900  
Research and development     27,760       15,833  
Professional fees     81,000       24,492  
                 
Total   $ 1,726,536     $ 1,723,225  

 

Research and Development

 

The Company expenses the cost of research and development as incurred. Research and development expenses comprise costs incurred from contracted services and other external costs. Nonrefundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity is performed or when the goods have been received, rather than when payment is made, in accordance with Accounting Standards Codification (“ASC”) 730, Research and Development .

 

Share-Based Compensation

 

The Company accounts for share-based compensation using the fair value method of accounting which requires all such compensation to employees, including the grant of employee stock options, to be recognized in the Statements of Operations and Comprehensive Loss based on its fair value at the grant date. The expense associated with share-based compensation is recognized on a straight-line basis over the requisite service period of each award; however, the amount of compensation expense recognized at any date must at least equal the portion of the grant-date value of the award that is vested at that date. For share-based compensation granted to non-employees, the measurement date is generally considered to be the date when all services have been rendered or the date that options are fully vested.

 

  F- 7  

 

 

Innovate Biopharmaceuticals, Inc.

Notes to Condensed Financial Statements

 

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Net Loss per Share

 

The Company calculates net loss per share as a measurement of the Company’s performance while giving effect to all dilutive potential common shares that were outstanding during the reporting period. The Company had a net loss for all periods presented; accordingly, the inclusion of common stock options or other similar instruments would be anti-dilutive. Therefore, the weighted average shares used to calculate both basic and diluted earnings per share are the same.

 

For the three months ended September 30, 2017 and 2016, 4,755,727 and 4,320,773 potentially dilutive securities related to stock options issued and outstanding have been excluded from the computation of diluted weighted shares outstanding because the effect would be anti-dilutive. For the nine months ended September 30, 2017 and 2016, 4,551,142 and 635,000 potentially dilutive securities related to stock options issued and outstanding have been excluded from the computation of diluted weighted shares outstanding because the effect would be anti-dilutive.

 

Comprehensive Loss

 

Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. The Company is required to record all components of comprehensive loss in the financial statements in the period in which they are recognized. Net loss and other comprehensive loss, including foreign currency translation adjustments and unrealized gains and losses on investments are reported, net of their related tax effect, to arrive at a comprehensive loss. For the nine months ended September 30, 2017 and 2016, comprehensive loss was equal to the net loss.

 

  F- 8  

 

 

Innovate Biopharmaceuticals, Inc.

Notes to Condensed Financial Statements

 

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Recent Accounting Pronouncements

 

In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting . The FASB issued ASU 2017-09 to clarify and reduce both (i) diversity in practice and (ii) cost and complexity when applying the guidance in Topic 718, to a change to the terms and conditions of a share-based payment award. This guidance is effective for the Company for the year-ending December 31, 2018. Early adoption is permitted. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. The Company is currently evaluating the effect of this guidance on its financial statements.

 

Reclassification of Prior Year Presentation

 

Certain prior year amounts have been reclassified for consistency with the current period presentation. On the condensed balance sheet, certain amounts have been reclassified from “Convertible promissory notes, net” to “Convertible promissory notes, related party, net.” These reclassifications had no effect on the reported results of operations or on the reported amount of cash flows from financing activities for the prior year.

 

NOTE 2: LIQUIDITY AND GOING CONCERN

 

The accompanying financial statements have been prepared on a basis which assumes that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. There is substantial doubt that the Company will continue as a going concern for at least 12 months following the date these financial statements are issued, without additional financing based on the Company’s limited operating history and recurring operating losses. Management’s plans with regard to these matters include seeking additional debt or equity financing arrangements (Note 9). There is no assurance such financing will be available to the Company when required or that such financing will be available under favorable terms, or that the Company can achieve its developmental milestones. The accompanying financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

 

  F- 9  

 

 

Innovate Biopharmaceuticals, Inc.

Notes to Condensed Financial Statements

 

NOTE 3: RELATED PARTY TRANSACTIONS

 

Certain owners of the Company were hired as executive employees (“Executives”) of the Company during 2016. In prior years, these Executives paid certain expenses on behalf of the Company and provided certain consulting services through companies owned by the Executives (“Executive Companies”). During 2016, the Company advanced payments to Executive Companies under short-term note receivable arrangements. As of September 30, 2017, and December 31, 2016, there was $75,000 included in due from related party for a note receivable owed to the Company with a due date of March 31, 2018.

 

During the three and nine months ended September 30, 2017 and 2016, certain Executives and the CEO of the Company provided services to the Company in accordance with the terms of their executive agreements (Note 8). The Company recorded compensation expense for services performed of approximately $166,000 and $470,000, for the three months ended September 30, 2017 and 2016, respectively, and $871,000 and $936,000 for the nine months ended September 30, 2017 and 2016, respectively. Included in accrued expenses as of September 30, 2017 and December 31, 2016, was approximately $1,618,000 and $1,683,000 of compensation expense, respectively.

 

As of September 30, 2017, and December 31, 2016, there was approximately $195,000 of convertible promissory notes and approximately $21,000 and $12,000 of accrued interest, respectively, owed to certain Executives, including entities where these Executives were deemed to have beneficial ownership. In addition, as of September 30, 2017 and December 31, 2016, the Company owes certain relatives of the CEO approximately $50,000 for convertible promissory notes and approximately $6,000 and $3,000 for accrued interest, respectively.

 

The Company obtains legal services from a law firm that owns a minority portion of the Company’s common stock. The Company incurred expenses with this law firm of approximately $24,000 and $13,000 during the three months ended September 30, 2017 and 2016, respectively, and $68,000 and $79,000, during the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017 and December 31, 2016, approximately $119,000 and $113,000 was recorded in accounts payable to this law firm, respectively.

 

  F- 10  

 

 

Innovate Biopharmaceuticals, Inc.

Notes to Condensed Financial Statements

 

NOTE 4: CONVERTIBLE PROMISSORY NOTES

 

During 2013, the Company entered into a convertible note purchase agreement (the “2013 Notes”) and issued $120,025 in convertible notes which were to convert at 80% of the price paid per share in the next equity financing of $2,500,000 or more. The 2013 Notes bore interest at 5% annually and the outstanding principal and accrued interest were due and payable on December 31, 2015.

 

During 2015, the Company entered into convertible note purchase agreements (the “2015 Notes”) and issued $650,000 in convertible notes which were to convert at 80.00% of the price paid per share in the next equity financing of $2,500,000 or more. The 2015 Notes bore interest at 5% annually and the outstanding principal and accrued interest were due and payable on December 31, 2015, for certain notes issued and December 31, 2017, for other notes issued, provided no conversion had occurred on or prior to such date.

 

The 2013 Notes and 2015 Notes included a redemption provision that required the Company, unless the note is converted, if there is a liquidity event, as defined in the agreement, to redeem the note in the amount equal to 150% of the principal balance, plus accrued and unpaid interest. The Company evaluated this redemption feature under the provisions of ASC 405, Accounting for Contingencies , and determined that the likelihood of the Company being required to redeem the note at 150% of its principal balance was not probable.

 

During January 2016, the Company issued an additional $150,000 of 2015 Notes. On January 22, 2016, the 2013 Notes and 2015 Notes and accrued interest totaling approximately $949,000 were exchanged for new convertible promissory notes (the “2016 Notes”) bearing an interest rate of 7% annually with a maturity date for the outstanding principal and accrued interest of January 22, 2018. The 2016 Notes will convert at 75% of the price paid per share in the next equity financing of $7,500,000 or more. The redemption provision from the 2015 Notes and 2013 Notes was eliminated upon the issuance of the 2016 Notes.

 

  F- 11  

 

 

Innovate Biopharmaceuticals, Inc.

Notes to Condensed Financial Statements

 

NOTE 4: CONVERTIBLE PROMISSORY NOTES (continued)

 

The Company examined the terms of the exchange of the 2015 Notes and 2013 Notes and determined that the exchange did not result in a debt extinguishment under the guidance of ASC 470-50, Debt Modifications and Extinguishments . There was a change in the fair value of the embedded conversion option from changing the conversion rate from 80% to 75% immediately before and after the modification, which resulted in an increase to the fair value of the embedded conversion feature. In accordance with ASC 470-50, the carrying amount of the debt instrument must be adjusted for an increase in the fair value of the embedded conversion option resulting from the modification.

 

The estimated fair value of the change in the embedded conversion option approximated $80,000 and was recorded as a debt discount and additional paid-in-capital at the modification date of January 22, 2016. The estimated fair value of the embedded conversion option was calculated as the difference in the conversion amount of the original conversion option of 80% versus the new conversion option of 75% at the exchange date, certain future dates and the maturity date of the 2016 Notes based on a probability-weighted scenario, discounted using the effective interest rate of the 2013 and 2015 Notes. Debt discount amortized to interest expense using the effective interest method was approximately $9,000 and $10,000 during the three months ended September 30, 2017 and 2016 and approximately $29,000 and $27,000 during the nine months ended September 30, 2017 and 2016.

 

After the conversion of the 2015 Notes and 2013 Notes, the Company issued approximately $2,499,000 of additional 2016 Notes in 2016, and approximately $1,885,000 of additional 2016 Notes during the nine months ended September 30, 2017.

 

In April 2017 the Company issued new convertible promissory notes (the “April 2017 Notes”) bearing an interest rate of 7% annually with a maturity date for the outstanding principal and accrued interest of June 30, 2018. The April 2017 Notes will convert at 75% of the price paid per share in the next equity financing of $20,000,000 or more. For the nine months ended September 30, 2017, the Company issued $1,000,000 in April 2017 Notes.

 

In September 2017, the Company issued new convertible promissory notes (the “September 2017 Notes”) bearing an interest rate of 7% annually with a maturity date for the outstanding principal and accrued interest of June 30, 2018. The September 2017 Notes will convert at 75% of the price paid per share in the next equity financing of $7,500,000 or more. For the nine months ended September 30, 2017 the Company issued $1,400,000 in September 2017 Notes (Note 9).

 

The 2016 Notes, April 2017 Notes and September 2017 Notes are secured by all assets of the Company.

 

The conversion discount embedded in the 2016 Notes, April 2017 Notes and September 2017 Notes creates a contingent beneficial conversion feature which will be recorded as a charge to interest expense when the contingency occurs.

 

  F- 12  

 

 

Innovate Biopharmaceuticals, Inc.

Notes to Condensed Financial Statements

 

NOTE 4: CONVERTIBLE PROMISSORY NOTES (continued)

  

The convertible promissory notes consist of the following as of September 30, 2017 and December 31, 2016:

 

    2017     2016  
             
Convertible promissory notes   $ 7,486,936     $ 3,201,937  
Less debt discount     (11,492 )     (35,800 )
                 
Total   $ 7,475,444     $ 3,166,137  

 

The convertible promissory notes, related party consist of the following as of September 30, 2017 and December 31, 2016:

 

    2017     2016  
             
Convertible promissory notes, related party   $ 245,399     $ 245,399  
Less debt discount     (2,334 )     (7,200 )
                 
Total   $ 243,065     $ 238,199  

 

NOTE 5: LICENSE AGREEMENTS

 

During 2015, the Company entered into an Option Agreement (the “Alba Option”) with Alba Therapeutics Corporation (“Alba”). The Alba Option provided the Company with a period of time to evaluate Alba’s intellectual property and enter into a license agreement with Alba. During 2015, the Company paid $225,000 to Alba for the Alba Option, which was recorded as research and development expense in the Company’s Statements of Operations. In January 2016, the Company paid the remaining $25,000 option fee and exercised its rights under the Alba Option and in February 2016, entered into another agreement with Alba (the “Alba License”) to obtain the rights to certain intellectual property relating to larazotide acetate and related compounds. The Company’s initial area of focus for these assets relates to the treatment of celiac disease.

 

Upon execution of the Alba License, the Company paid Alba a non-refundable license fee of $500,000. In addition, the Company is required to make milestone payments to Alba upon the achievement of certain clinical and regulatory milestones totaling up to $1,500,000 and payments upon regulatory approval and commercial sales of a licensed product totaling up to $150,000,000, which is based on sales ranging from $100,000,000 to $1,500,000,000. There was no research and development expense related to the Alba License for the nine months ended September 30, 2017. The Company recorded $525,000 in research and development expenses from the Alba License for the three and nine months ended September 30, 2016.

 

  F- 13  

 

 

Innovate Biopharmaceuticals, Inc.

Notes to Condensed Financial Statements

 

NOTE 5: LICENSE AGREEMENTS (continued)

 

Upon the Company paying Alba $2,500,000 for the first commercial sale of a licensed product, the Alba License becomes perpetual and irrevocable. Upon the achievement of net sales in a year exceeding $1,500,000,000, the Alba License also becomes milestone fee free. The Alba License provides Alba with certain termination rights; including failure of the Company to use Commercially Reasonable Efforts to develop the licensed products.

 

During 2013, the Company entered into an exclusive license agreement with Seachaid Pharmaceuticals, Inc. (the “Seachaid Agreement”) to further develop and commercialize the licensed product. The agreement shall continue in effect on a country-by-country basis, unless terminated sooner in accordance with the termination provisions of the agreement, until the expiration of the royalty term for such product and such country. The royalty term for each such product and such country shall continue until the earlier of the expiration of certain patent rights (as defined in the agreement) or the date that the sales for one or more generic equivalents makes up a certain percentage of sales in an applicable country during a calendar year. There was no expense recorded from the Seachaid Agreement for the nine months ended September 30, 2017 and 2016.

 

The agreement also calls for milestone payments totaling up to $6,000,000 to be paid when certain clinical and regulatory milestones are met. There are also commercialization milestone payments ranging from $1,000,000 to $2,500,000 depending on net sales of the products in a single calendar year, followed by royalty payments to be made based on net product sales.

 

During 2014, the Company entered into an Asset Purchase Agreement with Repligen Corporation (“Repligen”) to acquire Repligen’s RG-1068 program for the development of secretin for the Pancreatic Imaging Market and Magnetic Resonance Cholangiopancreatography. This program is now referred to as INN-329 by the Company. Upon commercialization of a product, royalty payments are to be made based on a percentage of net product sales.

 

  F- 14  

 

 

Innovate Biopharmaceuticals, Inc.

Notes to Condensed Financial Statements

 

NOTE 6: STOCKHOLDERS’ DEFICIT

 

Pursuant to the Articles of Incorporation and Bylaws approved in January 2012, the Company was authorized to issue 1,000,000 shares of common stock having no par value. The Company filed Amended and Restated Articles of Incorporation and Amended and Restated Bylaws in February 2014, which included a 1-to-4 stock split, and increased the authorized shares to 5,000,000 shares of common stock having no par value. During September 2015, the Company amended its Articles of Incorporation and Amended and Restated Bylaws further to increase the authorized shares of stock to 100,000,000 shares of common stock at a par value of $.001 including a 1-to-3 stock split. During August 2016, the Company amended its Articles of Incorporation and Amended and Restated Bylaws further to increase the authorized shares of stock to 250,000,000 shares of common stock at a par value of $0.001 including a 1-to-3 stock split. As a result, the Company recorded a reclassification to increase the amount recorded for common stock to equal its par value as of December 31, 2016. This reclassification had no effect on the results of operations or the total amount of stockholders’ deficit. Share amounts for all periods presented are shown at post-split amounts.

 

NOTE 7: SHARE-BASED COMPENSATION

 

The Company has reserved 20,000,000 shares of common stock for issuance to officers, directors, employees and consultants of the Company in accordance with the terms of its 2015 Stock Incentive Plan (the “Stock Plan”).

 

As of September 30, 2017, there were 1,841,425 shares available for future stock option grants under the Stock Plan. The terms of the agreements are determined by the Company’s board of directors. The Company’s awards vest based on the terms in the agreements with some awards vesting immediately and others over a period of nine months to four years with a term of ten years.

 

The following summarizes share-based compensation expense recognized in the Company’s financial statements for the three and nine months ended September 30, 2017 and 2016:

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
                         
    2017     2016     2017     2016  
Research and development expenses   $ 314,206     $ -     $ 1,627,606     $ -  
General and administrative expenses     962,728       1,023,000       3,122,228       1,023,000  
                                 
Total   $ 1,276,934     $ 1,023,000     $ 4,749,834     $ 1,023,000  

 

  F- 15  

 

 

Innovate Biopharmaceuticals, Inc.

Notes to Condensed Financial Statements

 

NOTE 7: SHARE-BASED COMPENSATION (continued)

 

The Company utilizes the Black-Scholes option pricing model to value awards under its Stock Plan. Key valuation assumptions include:

 

§ Expected dividend yield. The expected dividend is assumed to be zero as the Company has never paid dividends and has no current plans to pay any dividends on the Company’s common stock.

 

§ Expected stock-price volatility. As the Company’s common stock is not publicly traded, the expected volatility is derived from the average historical volatilities of publicly traded companies within the Company’s industry that the Company considers to be comparable to the Company’s business over a period approximately equal to the expected term.

 

§ Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the expected term.

 

§ Expected term. The expected term represents the period that the stock-based awards are expected to be outstanding. The Company’s historical share option exercise experience does not provide a reasonable basis upon which to estimate an expected term because of a lack of sufficient data. Therefore, for employee option, the Company estimates the expected term by using the simplified method provided by the Securities and Exchange Commission. The simplified method calculates the expected term as the average of the time-to-vesting and the contractual life of the options. The expected term for awards to non-employees is the contractual term of the options.

 

The fair value of stock options was estimated using the following assumptions for the three and nine months ended September 30, 2017 and September 30, 2016:

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
    2017     2016     2017     2016  
                         
Expected volatility     62.06 %     70.60 %     73.00 %     70.60 %
Risk free rate     1.56 %     1.00 %     2.20 %     1.00 %
Dividend yield     0 %     0 %     0 %     0 %
Expected term in years (weighted average)     6.5       5.3       8.7       5.3  

 

  F- 16  

 

 

Innovate Biopharmaceuticals, Inc.

Notes to Condensed Financial Statements

 

NOTE 7: SHARE-BASED COMPENSATION (continued)

 

The following table summarizes stock option activity under the Stock Plan:

 

    Number of
Shares
    Weighted-
Average
Exercise
Price
    Aggregate
Intrinsic
Value
    Weighted-
Average
Remaining
Contractual
Life
(In Years)
 
Outstanding at September 30, 2016     5,400,000     $ 0.11     $ 1,004,400       9.76  
Options granted     -       -       -       -  
Options forfeited     -       -       -       -  
Options exercised     -       -       -       -  
Outstanding at December 31, 2016     5,400,000       0.11       3,618,000       8.84  
Options granted     12,758,575       0.79       -       -  
Options forfeited     -       -       -       -  
Options exercised     -       -       -       -  
Outstanding at September 30, 2017     18,158,575       0.59       5,255,540       9.29  
Exercisable at September 30, 2017     11,876,520       0.51       4,378,896       9.19  
Vested and expected to vest at
September 30, 2017
    17,785,738     $ 0.59     $ 5,214,800       9.28  

  

The weighted average grant date fair value of options granted was $0.55 and $0.23 during the three months ended September 30, 2017 and 2016, respectively, and $0.60 and $0.23 for the nine months ended September 30, 2017 and 2016, respectively.

 

As of September 30, 2017, there was approximately $3,674,000 of total unrecognized compensation cost related to un-vested stock-based compensation arrangements. This cost is expected to be recognized over a weighted average period of 2.5 years.

 

The Stock Plan provides for accelerated vesting under certain change-of-control transactions.

 

  F- 17  

 

 

Innovate Biopharmaceuticals, Inc.

Notes to Condensed Financial Statements

 

NOTE 8: COMMITMENTS AND CONTINGENCIES

 

The Company has employment agreements with certain executives of the Company (the “Executive Agreements”). Under the terms of the Executive Agreements, the Company has agreed to pay the executives certain payments upon the achievement of financial milestone events. These milestone events were based on total debt or equity funding received by the Company. During the nine months ended September 30, 2017, the initial funding milestone was reached and the executives were paid $145,000 in accordance with the terms of the Executive Agreements. The executives are eligible to receive up to $1,595,000 in additional milestone payments upon the achievement of a financing event with gross proceeds of at least $45,000,000 by March 15, 2018. As of September 30, 2017, these deferred compensation payments were included in accrued expenses.

 

NOTE 9: SUBSEQUENT EVENTS

 

During July 2017, the Company entered into a definitive Merger Agreement with Monster Digital, Inc. (“Monster”), a publicly held company listed on the NASDAQ Exchange, under which the shareholders of the Company would become the majority owners of Monster. The Company expects to close this Merger in 2017.

 

In late September 2017, the Company issued additional September 2017 Notes in the aggregate amount of $250,000 to third-party investors. (Note 4). The proceeds from these notes were received in early October 2017.

 

In November 2017 through January 2018, the Company issued additional 2016 Notes in the aggregate amount of $865,000 to third-party investors (Note 4).

 

On January 29, 2018, Monster Digital, Inc., a Delaware corporation now known as Innovate Biopharmaceuticals, Inc. (the “Company”) completed its merger with privately-held Innovate Biopharmaceuticals Inc. (“IB Pharmaceuticals Inc.”) in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated July 3, 2017, whereby Monster Merger Sub., Inc. (“Merger Sub”), a wholly owned subsidiary of the Company merged with and into IB Pharmaceuticals Inc., with IB Pharmaceuticals Inc. surviving as the Company’s wholly owned subsidiary (the “Merger”). In connection with the Merger, the Company changed its name from Monster Digital, Inc. to Innovate Biopharmaceuticals, Inc. All references to the “Company” refer to Innovate Biopharmaceuticals, Inc. as of and following the closing of the Merger on January 29, 2018 (the “Closing Date”) and all references to “Monster” refer to Monster Digital, Inc. prior to the closing of the Merger on the Closing Date.

 

Immediately prior to the closing of the Merger, accredited investors purchased shares of common stock of IB Pharmaceuticals Inc. in a private placement for gross proceeds of approximately $18.13 million (the “Equity Issuance”). IB Pharmaceuticals Inc. issued five-year warrants to each purchaser of common stock with a price per exercise price of $1.2011 (subject to adjustment in connection with the Merger). Concurrently with the Equity Issuance, convertible promissory notes issued by IB Pharmaceuticals Inc. in the aggregate principal amount of approximately $8.65 million were converted into shares of IB Pharmaceuticals Inc. common stock at a price per share of $0.7206 (the “Conversion”).

 

H.C. Wainwright & Co., LLC (“HCW”) and GP Nurmenkari Inc. (“GPN”) were retained as the placement agents for the Equity Issuance. HCW was paid a flat fee of $250,000.00, a cash fee of $285,000.06 (equal to 10% of the gross proceeds of the Equity Issuance up to a certain cap), a cash fee of $9,018.15 (equal to 3.5% of the gross proceeds in excess of a certain cap), and non-accountable expense allowance of $50,000. GPN was paid a cash fee of $891,266.11 (equal to 10% of the gross proceeds of certain investors in the Equity Issuance) and non-accountable expense allowance of $50,000. IB Pharmaceuticals Inc. issued to affiliates of HCW five-year warrants to purchase 557,097 shares of common stock with an exercise price per share equal to $1.2011(subject to adjustment in connection with the Merger). IB Pharmaceuticals Inc. issued to GPN five-year warrants to purchase 927,529 shares of common stock with an exercise price per share equal to $1.2011(subject to adjustment in connection with the Merger); provided that a small number of warrants (representing 318,776 shares of underlying IB Pharmaceuticals Inc. common stock) were issued to affiliates of GPN with an exercise price per share equal to $0.9609 (subject to adjustment in connection with the Merger). Upon the closing of the Merger, the outstanding shares of IB Pharmaceuticals Inc.’s common stock were exchanged for shares of common stock of Monster at an exchange ratio of one share of IB Pharmaceuticals Inc. common stock to 0.37813802 shares of Monster common stock (the “Exchange Ratio”). Immediately following the closing of the Merger, after giving effect to the Equity Issuance and applying the Exchange Ratio, Monster’s securityholders owned approximately 5.8% of the outstanding common stock of the Company on a fully-diluted basis and IB Pharmaceuticals Inc.’s securityholders owned approximately 94.2% of the outstanding common stock of the Company.

 

On January 29, 2018, the Company entered into a Note Purchase Agreement and Senior Note Payable (“Note”) with a lender.  The principal amount of the Note is $4,800,000 (“Principal”).  The Note was issued at a discount of $1,800,000 and net of $20,000 for financing costs, for total proceeds of $2,980,000.  The Note matures on September 30, 2018 (“Maturity Date”), however, the Maturity Date may be extended at the option of the lender under certain circumstances as outlined in the Note.  Interest on the Note accrues starting on January 29, 2018 at a rate of 12.5% per annum and payments of interest only are due beginning on March 30, 2018 and compound quarterly.  Upon the Maturity Date of the Note, the Company is required to pay the lender an amount representing 105% of all outstanding Principal, accrued and unpaid interest, and any unpaid late charges, if applicable (“Outstanding Amount”).   The Note contains redemption features and certain non-financial covenants and penalties to the Company in the case of certain events of default, as defined in the Note.

 

In October 2017, the Company entered into a new three-year lease for office space that expires on September 30, 2020. Base annual rent is $60,000, or $5,000 per month. The first two months of rent were paid in advance upon lease signing and the next ten months of rent will be paid in advance on November 30, 2017. Beginning with month thirteen, monthly payments of $5,000 will be paid in advance of the first day of each month of the remaining term. A security deposit of $5,000 was paid in October 2017. The lease contains a two-year renewal option.

 

Subsequent events have been evaluated through February 2, 2018, the date at which the financial statements were available to be issued.

  

  F- 18  

 

  

(b) Pro Forma Financial Information.

 

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA

 

The following unaudited pro forma condensed consolidated financial data presents the pro forma financial position and results of operations of (1) Monster based on the historical consolidated financial statements of Monster, after giving effect to the spin-off of all of the business, assets and certain liabilities of Monster; and (2) the consolidated business based on the historical consolidated financial statements of Monster and Innovate, after giving effect to the Monster spin-off and Merger.

 

The unaudited pro forma consolidated financial information, including the notes thereto, should be read in conjunction with the separate historical financial statements of Monster and Innovate and the sections of this Form 8-K statement entitled “ Innovate Management’s Discussion and Analysis of Financial Condition and Results of Operations .” Monster’s historical unaudited consolidated financial statements as of and for the nine months ended September 30, 2017 are included in its Quarterly Report on Form 10-Q filed on November 8, 2017. Monster’s audited consolidated financial statements for the year ended December 31, 2016 are included in its Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 31, 2017. Innovate’s historical unaudited financial statements for the nine months ended September 30, 2017 and 2016, and audited financial statements for the year ended December 31, 2016, which are included elsewhere in this Form 8-K.

 

Unaudited Pro Forma Financial Information For Spin-Co Adjustment

 

The following selected unaudited pro forma financial data presents the pro forma financial position and results of operations of Monster based on the historical consolidated financial statements of Monster, after giving effect to the spin-off transaction whereby, all of the business, assets and certain of the liabilities of Monster not assumed by Innovate have been acquired by Holdco (“Spin-Co”).

 

The unaudited pro forma consolidated balance sheet data as of September 30, 2017 gives effect to the Spin-Co transaction as if it took place on September 30, 2017. The unaudited pro forma consolidated statement of operations data for the nine months ended September 30, 2017 gives effect to the Spin-Co transaction as if it took place on January 1, 2017. The unaudited pro forma consolidated statement of operations data for the year ended December 31, 2016 gives effect to the Spin-Co transaction as if it took place on January 1, 2016.

 

Because the unaudited pro forma consolidated balance sheet data reflects the financial information of Monster as of September 30, 2017, it does not reflect any changes to the current assets which have occurred since September 30, 2017 or which may occur following the date of this Form 8-K.

  

 

 

 

Unaudited Pro Forma Condensed Consolidated Balance Sheet

 

September 30, 2017
(in thousands, except share data and per share data)
  Historical
Monster
    SpinCo
Adjustments
(Note 3)
    Monster Merger Sub     Pro Forma Adjustments     Note 4     Adjusted
Historical
Monster
 
ASSETS                                    
Current assets:                                                
Cash   $ 174     $ (174 )                   (a)(c)     $  
Accounts receivable     127       (127 )                        
Inventory     498       (498 )                        
Prepaids & other     257       (257 )                        
Total current assets     1,056       (1,056 )                        
Deposits     14       (14 )                          
Trademark     2,319       (2,319 )                        
Total   $ 3,389     $ (3,389 )                       $  
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY                                                
Current liabilities:                                                
Line of credit   $ (107 )   $ (107 )                         $  
Accounts payable     624       (351 )     273                     273  
Accrued expenses     1,506       (763 )     743                   743  
Customer deposits     1,336       (736 )     600       (600 )     (b)      
Due to related parties     34       (34 )                        
Notes payable     1,270       (38 )     1,232       (1,232 )     (d)      
Total current liabilities     4,877       (2,029 )     2,848       (1,832 )         1,016  
Stockholders’ (deficit) equity:                                                
Common stock     1             1       (1)              
Additional paid-in capital     35,986             35,986       (35,986 )     (a)(b)(c)(d)(e)(f)      
Accumulated deficit     (37,475 )     (1,360 )     (38,835 )     37,819       (a)(c)(e)(f)     (1,016)  
Total stockholders’ (deficit) equity     (1,488 )     (1,360 )     (2,848 )     1,832             (1,016)  
Total   $ 3,389     $ (3,389 )                       $  

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

 

 

 

 

Unaudited Pro Forma Condensed Consolidated Statement of Operations

 

For the Nine Months Ended September 30, 2017
(in thousands, except per share data)
  Historical
Monster
    SpinCo
Adjustments
(Note 3)
   

Monster

Merger Sub,

Inc.

   

Pro Forma

Adjustments

    Note 4   Adjusted
Historical
Monster
 
Consolidated Statement of Operations Data:                                            
Revenue   $ 1,277     $ (1,277 )                   $  
Cost of sales     (1,432 )     1,432                        
Gross profit     (155 )     155                        
Operating expenses:                                            
Research and development     170       (170 )                      
Sales and marketing     1,286       (1,286 )                      
General and administrative     3,807       (889 )     2,918       1,585     (aa)     4,503  
Total operating expenses     5,263       (2,345 )     2,918       1,585           4,503  
                                             
Operating Income (loss)     (5,418 )     2,500       (2,918 )                    
                                             
Other (income) expense:                                            
Interest expense     37       (1 )     36       (1,585 )         36  
Gain on settlement of debt     (68 )     68                        
Income tax                                  
Total other (income) expense, net     (67 )     67                            
Net income (loss)   $ (5,387 )   $ 2,433       (2,954 )     (1,585 )       $ (4,539 )
Net loss per share                                            
Basic and diluted   $ (0.62 )                                    
Weighted-average common shares outstanding:                                            
Basic and diluted     8,684                                      

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

 

 

 

 

Unaudited Pro Forma Condensed Consolidated Statement of Operations

 

For the Year Ended December 31, 2016
(in thousands, except per share data)
  Historical
Monster
    SpinCo
Adjustments
(Note 3)
        Adjusted
Historical
Monster
 
Consolidated Statement of Operations Data:                            
Revenue   $ 4,065     $ (4,065 )   a   $    
Cost of sales     (3,329 )     (3,329 )   a      
Gross profit     736       (736 )          
Operating expenses:                            
Research and development     270       (270 )   a      
Sales and marketing     2,425       (2,425 )   a      
General and administrative     3,984       (526 )   a     3,458  
Total operating expenses     6,679       (3,221 )         3,458  
Other (income) expense:                            
Interest expense     825       (71 )   a     754  
Gain on settlement of debt     (557 )               (557 )
Income tax     2       (1 )   a     1  
Total other (income) expense, net     270       (72 )         198  
Net income (loss)   $ (6,213 )   $ 2,557         $ (3,656 )
Net loss per share                            
Basic and diluted   $ (3.33 )               $ (1.96 )
Weighted-average common shares outstanding:                            
Basic and diluted     1,863                   1,863  

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

 

 

 

 

NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1) Basis of Presentation

 

The unaudited pro forma condensed consolidated financial information was prepared in accordance with U.S. GAAP and pursuant to the rules and regulations of SEC Regulation S-X.

 

In the unaudited pro forma condensed consolidated financial data, the Merger has been accounted for as a capital transaction rather than as a business combination as the business of Monster was spun off prior to the Merger. In accordance with U.S. GAAP, the Merger will be accounted for as a reverse recapitalization, equivalent to the issuance of common shares by Innovate for the net monetary assets of Monster accompanied by a re-capitalization. The accounting is similar to that resulting from a reverse acquisition, except that no goodwill or other intangible assets are recorded. Monster will be the legal acquirer but, for accounting purposes, Innovate will be treated as the accounting acquirer. Innovate will record Monster’s liabilities assumed upon the consummation of the Merger at fair value. Effective with the consummation of the Merger, the historical financial statements of Innovate became the historical financial statements of the consolidated company.

 

The unaudited pro forma consolidated financial data is based on the audited financial statements of Monster and Innovate as of December 31, 2016 and the unaudited financial statements of Monster and of Innovate as of September 30, 2017. As such, the financial data set forth below is not a prediction or estimate of the amounts that would be reflected in Monster’s balance sheet as of the day of closing of the transactions. Other than as disclosed in the footnotes thereto, the unaudited pro forma consolidated financial data does not reflect any additional liabilities, off-balance sheet commitments or other obligations that may become payable after the date of such financial data.

 

The unaudited pro forma consolidated financial information has been prepared for illustrative purposes only and is not necessarily indicative of the financial position or results of operations in future periods or the results that actually would have been realized had Monster and Innovate been a consolidated company during the specified periods.

 

2) Description of Transaction

 

On January 29, 2018, Monster Digital, Inc., a Delaware corporation now known as Innovate Biopharmaceuticals Inc. (the “Company”) completed its merger with privately-held Innovate Biopharmaceuticals Inc. (“IB Pharmaceuticals Inc.”) in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated July 3, 2017, whereby Monster Merger Sub., Inc. (“Merger Sub”), a wholly owned subsidiary of the Company merged with and into IB Pharmaceuticals Inc., with IB Pharmaceuticals Inc. surviving as the Company’s wholly owned subsidiary (the “Merger”). In connection with the Merger, the Company changed its name from Monster Digital, Inc. to Innovate Biopharmaceuticals, Inc. All references to the “Company” refer to Innovate Biopharmaceuticals, Inc. as of and following the closing of the Merger on January 29, 2018 (the “Closing Date”) and all references to “Monster” refer to Monster Digital, Inc. prior to the closing of the Merger on the Closing Date.

 

Immediately prior to the closing of the Merger, accredited investors purchased shares of common stock of IB Pharmaceuticals Inc. in a private placement for gross proceeds of approximately $18.1 million (the “Equity Issuance”). IB Pharmaceuticals Inc. issued five-year warrants to each purchaser of common stock with a price per exercise price of $1.2011 (subject to adjustment in connection with the Merger). Concurrently with the Equity Issuance, convertible promissory notes issued by IB Pharmaceuticals Inc. in the aggregate principal amount of approximately $8.65 million were converted into shares of IB Pharmaceuticals Inc. common stock at a price per share of $0.7206 (the “Conversion”).

 

H.C. Wainwright & Co., LLC (“HCW”) and GP Nurmenkari Inc. (“GPN”) were retained as the placement agents for the Equity Issuance. HCW was paid a flat fee of $250,000, a cash fee of $285,000 (equal to 10% of the gross proceeds of the Equity Issuance up to a certain cap), a cash fee of $9,018 (equal to 3.5% of the gross proceeds in excess of a certain cap), and non-accountable expense allowance of $50,000. GPN was paid a cash fee of $891,266 (equal to 10% of the gross proceeds of certain investors in the Equity Issuance) and non-accountable expense allowance of $50,000. IB Pharmaceuticals Inc. issued to affiliates of HCW five-year warrants to purchase up to 557,097 shares of common stock with an exercise price per share equal to $1.2011(subject to adjustment in connection with the Merger). IB Pharmaceuticals Inc. issued to affiliates of GPN five-year warrants to purchase up to 927,529 shares of common stock with an exercise price per share equal to $1.2011(subject to adjustment in connection with the Merger); provided that a small number of warrants (representing 318,776 shares of underlying IB Pharmaceuticals Inc. common stock) were issued to affiliates of GPN with an exercise price per share equal to $0.9609 (subject to adjustment in connection with the Merger).

 

Upon the closing of the Merger, the outstanding shares of IB Pharmaceuticals Inc.’s common stock were exchanged for shares of common stock of Monster at an exchange ratio of one share of IB Pharmaceuticals Inc. common stock to 0.37813802 shares of Monster common stock (the “Exchange Ratio”). Immediately following the closing of the Merger, after giving effect to the Equity Issuance and applying the Exchange Ratio, Monster’s securityholders owned approximately 5.8% of the outstanding common stock of the Company on a fully-diluted basis and IB Pharmaceuticals Inc.’s securityholders owned approximately 94.2% of the outstanding common stock of the Company on a fully-diluted basis.

 

 

 

   

  3) Spin-Co Adjustments

 

Spin-Co is the action sports camera business operated by Monster Digital, Inc. In regards to the September 30, 2017 pro forma balance sheet presentation, other than certain liabilities of approximately $1.0 million that were assumed by Innovate, all assets and liabilities of Spin-Co are eliminated as Spin-Co adjustments with net assets distributed to the stockholders of Monster Digital, Inc. In regards to the December 31, 2016 and September 30, 2017 statements of operations, the revenue and cost of sales related to the camera business and the expenses associated with the generation of those revenues are eliminated as Spin-Co adjustments.

 

  (aa) These adjustments reflect the spin-out transaction on the effective date of the Merger, whereby all of the business, assets and certain of the liabilities of Monster not assumed by Innovate further to the Merger were acquired by Spin-Co. The remaining general and administrative expenses shown in the Adjusted Historical Monster column consist of public company operating expenses including legal fees, insurance, executive salaries and stock compensation associated with operating a public company.

 

Unaudited Pro Forma Financial Information for Merger

 

The following selected unaudited pro forma consolidated financial data presents the pro forma financial position and results of operations of the consolidated business based on the historical consolidated financial statements of Monster and Innovate, after giving effect to the Spin-Co adjustment and the Merger.

 

The unaudited pro forma consolidated balance sheet data as of September 30, 2017 gives effect to the Monster Spin-Co adjustment and the Merger as if each took place on September 30, 2017. The unaudited pro forma consolidated statement of operations data for the six months ended September 30, 2017 gives effect to the Spin-Co adjustment and the Merger as if each took place on January 1, 2017. The unaudited pro forma consolidated statement of operations data for the year ended December 31, 2016 gives effect to the Spin-Co adjustment and the Merger as if each took place on January 1, 2016.

 

The pro forma condensed consolidated balance sheet and condensed consolidated statement of operations information gives effect to the Equity Issuance and the Conversion at a $60.0 million pre-Merger valuation amount (the “ Valuation ”).

 

 

 

 

Unaudited Pro Forma Condensed Consolidated Balance Sheet

 

    Historical                 Adjusted     Adjusted  
September 30, 2017   Innovate     Proforma           Historical     Proforma  
(in thousands, except share data and per share data)   (Unaudited)     Adjustments           Monster     Total  
Assets                                        
Cash   $ 1,479     $ 16,532        (g)     $ -     $ 20,765  
              2,980        (g)                  
      -       (226 )      (h)       -       -  
Prepaid expenses and other     128       20        (g)       -       148  
Total current assets     1,607       19,306               -       20,913  
                                         
Equipment, net     7       -               -       7  
Total assets   $ 1,614     $ 19,306             $ -     $ 20,920  
                                         
Liabilities                                        
Current liabilities:                                        
Accounts payable   $ 2,819     $ (1,116 )      (h)     $ 273  (l)   $ 1,976  
Accrued expenses including interest     2,143       (416 )      (h)       743 (l)     4,088  
      -       1,618        (j)       -       -  
Debt     -       4,800        (g)       -       4,800  
Debt Discount     -       (1,800 )      (g)       -       (1,800 )
Convertible promissory notes, net     7,490       (7,490 )      (h)       -       -  
Convertible promissory notes, related party, net     228       (228 )      (h)       -       -  
Total current liabilities   $ 12,680     $ (4,632 )           $ 1,016     $ 9,064  
                                         
Total liabilities   $ 12,680     $ (4,632 )           $ 1,016     $ 9,064  
                                         
Stockholders’ deficit                                        
Common stock   $ 32       (29 )      (k)       -     $ 3  
Additional paid-in-capital     5,879       16,532        (g)       -       35,249  
      -       9,230        (h)       -       -  
      -       3,579        (i)       -       -  
      -       29        (k)       -       -  
Accumulated deficit     (16,977 )     (206 )      (h)       (1,016 )(l)     (23,396 )
      -       (3,579 )      (i)       -       -  
      -       (1,618 )      (j)       -       -  
Total stockholders’ (deficit) equity   $ (11,066 )   $ 23,938             $ (1,016 )   $ 11,856  
                                         
Total liabilities and stockholders’ (deficit) equity   $ 1,614     $ 19,306             $ -     $ 20,920  

 

 

(1) See the Spin-Co adjustments in the  “Unaudited Pro Forma Financial Information for Spin-Co Adjustment”  for the Adjusted Historical Monster adjustments.

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

 

 

 

 

Unaudited Pro Forma Condensed Consolidated Statement of Operations

 

For the Nine Months Ended September 30, 2017
(in thousands, except per share data)
  Historical
Innovate
    Adjusted
Historical
Monster (1)
    Pro Forma
Adjustments
        Pro Forma
Consolidated
 
Consolidated Statement of Operations Data:                                    
Revenue   $     $     $         $  
Cost of sales                            
Gross profit                            
Operating expenses:                                    
Research and development     2,833                       2,833  
Sales and marketing                            
General and administrative     6,115       4,503       (258 )   a     10,360  
Total operating expenses     8,948       4,503       (258 )         13,193  
Other (income) expense:                                    
Interest expense     282       36                 318  
Gain on settlement of debt                            
Income tax                            
Total other expense, net     282       36                 318  
Net income (loss)   $ (9,230 )   $ (4,539 )   $ 258         $ (13,511 )
Net loss per share                                    
Basic and diluted   $ (0.47 )   $ (0.44 )   $           $ (0.52 )
Weighted-average common shares outstanding:                                    
Basic and diluted     11,928       1,863       11,980      m     25,771  

 

 

(1) See the Spin-Co adjustments in the  “Unaudited Pro Forma Financial Information for Spin-Co Adjustment”  for the Adjusted Historical Monster adjustments.

 

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

 

 

 

 

Unaudited Pro Forma Condensed Consolidated Statement of Operations

 

For the Year Ended December 31, 2016
(in thousands, except per share data)
  Historical
Innovate
    Adjusted
Historical
Monster (1)
    Pro Forma
Adjustments
        Pro Forma
Consolidated
 
Consolidated Statement of Operations Data:                                    
Revenue   $     $     $       $  
Cost of sales                            
Gross profit                            
Operating expenses:                                    
Research and development     1,946                       1,946  
Sales and marketing                            
General and administrative     3,470       3,458                 6,928  
Total operating expenses     5,416       3,458                 8,874  
Other (income) expense:                                    
Interest expense     204       754                 958  
Gain on settlement of debt           (557 )               (557 )
Income tax           1                 1  
Total other expense, net     204       198                 402  
Net loss   $ (5,620 )   $ (3,656 )   $         $ (9,276 )
Net loss per share                                    
Basic and diluted   $ (0.18 )   $ (0.66 )   $           $ (0.04 )
Weighted-average common shares outstanding:                                    
Basic and diluted     31,545       5,524             k     212,612  

 

 

(1) See the Spin-Co adjustments in the  “Unaudited Pro Forma Financial Information for Spin-Co Adjustment”  for the Adjusted Historical Monster adjustments.

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

 

 

 

 

Notes to the Unaudited Pro Forma Condensed Consolidated Financial Information

 

Description of Transaction and Basis of Presentation

 

The unaudited pro forma condensed consolidated financial information was prepared in accordance with U.S. GAAP and pursuant to the rules and regulations of SEC Regulation S-X, and present the pro forma financial position and results of operations of the consolidated companies based upon the historical data of Monster and Innovate. The pro forma condensed consolidated financial information assume that the Merger occurred on September 30, 2017, and do not provide a reasonable estimate of the assets of the consolidated company on or following the date of the closing. In particular, the pro forma financials do not reflect the reduction in either Monster or Innovate’s cash, resulting from the operations of such entities since September 30, 2017 or since the date of this proxy statement.

 

2) Pro Forma Adjustments

 

Pro forma adjustments are necessary to reflect the acquisition consideration exchanged and to adjust amounts related to the tangible assets and liabilities of Monster to reflect the preliminary estimate of their fair values, and to reflect the impact on the statements of operations of the Merger as if the companies had been consolidated during the periods presented therein. The unaudited pro forma condensed consolidated financial information includes pro forma adjustments that are (i) directly attributable to the transaction, (ii) factually supportable, and (iii) with respect to the unaudited pro forma condensed consolidated statements of operations, expected to have a continuing impact on the results of operations of the consolidated company. Such adjustments do not contemplate the consumption of cash resources to fund continuing operating costs of Monster for the period subsequent to September 30, 2017, which are expected to be material and will therefore affect the exchange ratio calculation. The pro forma adjustments included in the unaudited pro forma condensed consolidated financial statements are as follows:

 

a) Represents the exercise of warrants that occurred in November 2017. The proceeds of the warrant exercise were used to fund the operations of Monster.

 

b) Represents a conversion of debt to equity that occurred in November 2017

 

c) Represents shares of Monster common stock issued in January 2018. The proceeds of the exercise funded the operations of Monster.

 

d) Represents the full conversion of convertible debt at the consummation of the reverse merger

  

  e) Represents the elimination of Monster’s historical accumulated deficit of $38,835.

 

  f) Represents $384 of unamortized, non-cash, stock-based compensation related to the issuance of restricted common stock and options of Monster.

 

  (g) Represents the net proceeds of $16,532 from the sale of $18,133 of Innovate common stock (the Equity Issuance), net of $1,580 of offering costs, plus the $2,980 in proceeds from a $4,800 debt financing, net of a $1,800 debt discount and $20 in debt legal costs.

 

(h) Represents convertible promissory notes of $8,647 and related accrued interest through January 29, 2018 of $582 that converted concurrent with the consummation of the Merger, at a discount to equity securities issued by Innovate pursuant to the Equity Issuance. This amount excludes $200 in convertible promissory notes which matured on January 22 for which the holders chose to redeem their notes and accrued interest for cash instead of converting. Promissory notes entered subsequent to September 30, 2017 are being used for general operating purposes.

 

 

 

 

(i) The conversion described in (b) creates a beneficial conversion feature, which is recorded as additional interest expense and additional paid-in capital. This pro forma adjustment is not reflected in the unaudited pro forma condensed combined statements of operations as this amount is not expected to have a continuing effect on the operating results of the Company.

 

(j) Represents accrued investment banker and legal fees directly related to the merger. This pro forma adjustment is not reflected in the unaudited pro forma condensed combined statements of operations as this amount is not expected to have a continuing effect on the operating results of the Company.

 

(k) Adjusts outstanding common shares to their par value.

 

(l) Represents accrued expenses that are directly attributable to the closing of the transaction, including approximately $402 for tail insurance coverage to be purchased by Monster, for its directors and officers, and estimated transaction costs to complete the transaction of approximately $600.

 

m) The basic and diluted shares outstanding on a pro forma consolidated basis were calculated based on the shares issued for the Conversion and Equity Issuance of Innovate upon Merger close. The pro forma consolidated shares outstanding is calculated as follows:

  

Description   ($000s)
Pro Forma
 
Innovate common shares     11,928  
Innovate convertible debt and accrued interest     3,775  
Innovate Equity Issuance     8,205  
Innovate warrants and options     8,855  
Monster common shares     1,863  
Monster convertible debt and accrued interest     -  
Monster warrants and options     154  
Total pro forma shares outstanding     34,780  

 

 

 

 

 

(d) Exhibits.

 

Exhibit No.   Description
3.1   Amended and Restated Certificate of Incorporation of the Company
3.2   Bylaws of Innovate Biopharmaceuticals, Inc., as amended
4.1   Form of Warrant
4.2   Senior Note dated January 29, 2018
10.1   Subscription Agreement dated January 29, 2018
10.2   Note Purchase Agreement dated January 29, 2018
10.3#   Form of Director and Officer Indemnification Agreement
99.1   Press Release dated January 30, 2018

 

# Indicates management contract or compensatory plan

 

 

 

 

SIGNATURES

 

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

 

  Date: February 2, 2018   INNOVATE BIOPHARMACEUTICALS, INC.
a Delaware corporation
       
    By: /s/ Jay P. Madan  
      Jay P. Madan
      President

 

 

 

Exhibit 3.1

 

 

MONSTER DIGITAL, INC.

 

AMENDED AND RESTATED CERTIFICATE OF INCORPORATION

 

Monster Digital, Inc. a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows:

 

A.                 The corporation was originally incorporated under the name of WRASP 35, Inc., and the original Certificate of Incorporation of the corporation was filed with the Secretary of State of the State of Delaware on November 9, 2010.

 

B.                  This Amended and Restated Certificate of Incorporation was duly adopted in accordance with Sections 242 and 245 of the General Corporation Law of the State of Delaware (the “ DGCL ”), and has been duly approved by the written consent of the stockholders of the corporation in accordance with Section 228 of the DGCL.

 

C.                  The Certificate of Incorporation of the corporation is hereby amended and restated in its entirety to read as follows:

 

ARTICLE I

 

The name of the corporation is Innovate Biopharmaceuticals, Inc.

 

ARTICLE II

 

The address of the corporation’s registered office in the State of Delaware is 251 Little Falls Drive, Wilmington, Delaware, 19808, New Castle County. The name of the corporation’s registered agent at such address is Corporation Service Company.

 

ARTICLE III

 

The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the DGCL.

 

ARTICLE IV

 

Effective immediately upon the filing of this Amended and Restated Certificate of Incorporation (the “ Filing Date ”) and without any further action on the part of the corporation or any stockholder, each ten (10) shares of Common Stock of the corporation that are issued and outstanding on the Filing Date shall be reverse split and combined into one (1) share of Common Stock of the corporation (the “ Reverse Stock Split ”). The Reverse Stock Split shall be effected on a certificate-by-certificate basis. All share and per share amounts set forth in this Amended and Restated Certificate of Incorporation have been revised to reflect the Reverse Stock Split, and, accordingly, no further adjustment pursuant to this Amended and Restated Certificate of Incorporation shall be made as a result of the Reverse Stock Split.

 

 

 

 

The total number of shares of stock that the corporation shall have authority to issue is 360,000,000, consisting of the following:

 

350,000,000 shares of Common Stock, par value $0.0001 per share. Each share of Common Stock shall entitle the holder thereof to one (1) vote on each matter submitted to a vote at a meeting of stockholders.

 

10,000,000 shares of Preferred Stock, par value $0.0001 per share, which may be issued from time to time in one or more series pursuant to a resolution or resolutions providing for such issue duly adopted by the Board of Directors (authority to do so being hereby expressly vested in the Board of Directors). The Board of Directors is further authorized, subject to limitations prescribed by law, to fix by resolution or resolutions the designations, powers, preferences and rights, and the qualifications, limitations or restrictions thereof, of any wholly unissued series of Preferred Stock, including without limitation authority to fix by resolution or resolutions the dividend rights, dividend rate, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), redemption price or prices, and liquidation preferences of any such series, and the number of shares constituting any such series and the designation thereof, or any of the foregoing.

 

The Board of Directors is further authorized to increase (but not above the total number of authorized shares of the class) or decrease (but not below the number of shares of any such series then outstanding) the number of shares of any series, the number of which was fixed by it, subsequent to the issuance of shares of such series then outstanding, subject to the powers, preferences and rights, and the qualifications, limitations and restrictions thereof stated in the Certificate of Incorporation or the resolution of the Board of Directors originally fixing the number of shares of such series. If the number of shares of any series is so decreased, then the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series.

 

ARTICLE V

 

The number of directors that constitutes the entire Board of Directors of the corporation shall be fixed by, or in the manner provided in, the Bylaws of the corporation. At each annual meeting of stockholders, directors of the corporation shall be elected to hold office until the expiration of the term for which they are elected and until their successors have been duly elected and qualified or until their earlier resignation or removal; except that if any such election shall not be so held, such election shall take place at a stockholders’ meeting called and held in accordance with the DGCL.

 

Effective upon the effective date of the corporation’s initial public offering (the “ Effective Date ”), the directors of the corporation shall be divided into three classes as nearly equal in size as is practicable, hereby designated Class I, Class II and Class III. The Board of Directors may assign members of the Board of Directors already in office to such classes at the time such classification becomes effective. The term of office of the initial Class I directors shall expire at the first regularly-scheduled annual meeting of the stockholders following the Effective Date, the term of office of the initial Class II directors shall expire at the second annual meeting of the stockholders following the Effective Date and the term of office of the initial Class III directors shall expire at the third annual meeting of the stockholders following the Effective Date. At each annual meeting of stockholders, commencing with the first regularly-scheduled annual meeting of stockholders following the Effective Date, each of the successors elected to replace the directors of a Class whose term shall have expired at such annual meeting shall be elected to hold office until the third annual meeting next succeeding his or her election and until his or her respective successor shall have been duly elected and qualified.

 

  - 2 -  

 

 

Notwithstanding the foregoing provisions of this Article, each director shall serve until his or her successor is duly elected and qualified or until his or her death, resignation, or removal. If the number of directors is hereafter changed, any newly created directorships or decrease in directorships shall be so apportioned among the classes as to make all classes as nearly equal in number as is practicable, provided that no decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director.

 

Vacancies occurring on the Board of Directors for any reason and newly created directorships resulting from an increase in the authorized number of directors may be filled only by vote of a majority of the remaining members of the Board of Directors, although less than a quorum, or by a sole remaining director, at any meeting of the Board of Directors. A person so elected by the Board of Directors to fill a vacancy or newly created directorship shall hold office until the next election of the class for which such director shall have been chosen and until his or her successor shall be duly elected and qualified.

 

ARTICLE VI

 

In furtherance and not in limitation of the powers conferred by statute, the Board of Directors of the corporation is expressly authorized to adopt, amend or repeal the Bylaws of the corporation.

 

ARTICLE VII

 

Elections of directors need not be by written ballot unless the Bylaws of the corporation shall so provide.

 

ARTICLE VIII

 

No action shall be taken by the stockholders of the corporation except at an annual or special meeting of the stockholders called in accordance with the Bylaws, and no action shall be taken by the stockholders by written consent.

 

ARTICLE IX

 

To the fullest extent permitted by the DGCL, as it presently exists or may hereafter be amended from time to time, a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. If the DGCL is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the DGCL, as so amended.

 

  - 3 -  

 

 

Neither any amendment nor repeal of this Article, nor the adoption of any provision of this corporation’s Certificate of Incorporation inconsistent with this Article, shall eliminate or reduce the effect of this Article in respect of any matter occurring, or any cause of action, suit or proceeding accruing or arising or that, but for this Article, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision.

 

ARTICLE X

 

Subject to any provisions in the Bylaws of the corporation related to indemnification of directors or officers of the corporation, the corporation may indemnify, to the fullest extent permitted by applicable law, any director or officer of the corporation who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (a “ Proceeding ”) by reason of the fact that he or she is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with any such Proceeding. The corporation shall be required to indemnify a person in connection with a Proceeding initiated by such person only if the Proceeding was authorized by the Board.

 

The corporation shall have the power to indemnify, to the extent permitted by the DGCL, as it presently exists or may hereafter be amended from time to time, any employee or agent of the corporation who was or is a party or is threatened to be made a party to any Proceeding by reason of the fact that he or she is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with any such Proceeding.

 

A right to indemnification or to advancement of expenses arising under a provision of this Certificate of Incorporation or a bylaw of the corporation shall not be eliminated or impaired by an amendment to this Certificate of Incorporation or the Bylaws of the corporation after the occurrence of the act or omission that is the subject of the civil, criminal, administrative or investigative action, suit or proceeding for which indemnification or advancement of expenses is sought, unless the provision in effect at the time of such act or omission explicitly authorizes such elimination or impairment after such action or omission has occurred.

 

ARTICLE XI

 

Except as provided in ARTICLE IX and ARTICLE X above, the corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation.

 

  - 4 -  

 

 

IN WITNESS WHEREOF, Monster Digital, Inc. has caused this Amended and Restated Certificate of Incorporation to be signed by the Chief Executive Officer of the corporation on this 29 th day of January, 2018

 

 

  By:  /s/ Christopher P. Prior  
    Christopher P. Prior  
    Chief Executive Officer  

 

  - 5 -  

 

 

Exhibit 3.2

 

INNOVATE BIOPHARMACEUTICALS, INC.

a Delaware corporation

(the "Corporation")

 

AMENDED AND RESTATED BYLAWS

 

ARTICLE I.

MEETINGS OF STOCKHOLDERS

 

SECTION 1.  Annual Meetings of Stockholders . The annual meeting of the stockholders of the Corporation shall be held on such date, within 180 days of the end of each prior fiscal year, as shall be designated by the Board of Directors and stated in the notice of the meeting, and on any subsequent day or days to which such meeting may be adjourned, for the purposes of electing directors and of transacting such other business as may properly come before the meeting. The Board of Directors shall designate the place and time for the holding of such meeting.

 

At the annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the annual meeting. To be properly brought before the annual meeting of stockholders, business must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (iii) otherwise properly brought before the meeting by a stockholder of the Corporation who is a stockholder of record at the time of giving notice provided for in this Section 1 of Article I, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in this Section I of Article I. For business to be properly brought before an annual meeting by a stockholder, the stockholder, in addition to any other applicable requirements, must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 90 days prior to the anniversary date of the immediately preceding annual meeting of stockholders of the Corporation. A stockholders notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting: (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (c) the class and number of shares of voting stock of the Corporation which are beneficially owned by the stockholder, (d) a representation that the meeting to bring the proposed business before the annual meeting, and (e) a description of any material interest of the stockholder in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 1 of Article I. The presiding officer of an annual meeting shall, if the facts warrant, determine and declare to the meeting that the business was not properly brought before the meeting in accordance with the provisions of this Section 1 of Article I, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted.

 

     

 

 

For business to be properly brought before an annual meeting by a stockholder, the stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section 1 of Article I.

 

SECTION 2.  Special Meetings of Stockholders . Special meetings of the stockholders may be called at any time by the Board of Directors pursuant to a resolution approved by a majority of the entire Board of Directors, by the Chairman of the Board, or the President of the Corporation. Upon written request of the persons who have duly called a special meeting, it shall be the duty of the Secretary of the Corporation to fix the date of the meeting to be held not less than ten or more than sixty days after the receipt of the request and to give due notice thereof in accordance with Section 4 of this Article. If the Secretary shall neglect or refuse to fix the date of the meeting and give notice thereof, the persons calling the meeting may do so.

 

SECTION 3.  Place of Meeting . Every special meeting of the stockholders shall be held at such place within or without the State of Delaware as the Board of Directors or person who has duly called a special meeting may designate, or, in the absence of such designation, at the registered office of the Corporation in the State of Delaware.

 

SECTION 4.  Notice of Meeting . Except as otherwise required by law, written notice of every meeting of the stockholders shall be given by the Secretary of the Corporation to each stockholder of record entitled to vote at the meeting, by placing such notice in the mail at least ten days, but not more than sixty days, prior to the day named for the meeting addressed to each stockholder at his address appearing on the books of the Corporation or supplied by him to the Corporation for the purpose of notice.

 

SECTION 5.  Record Date . The Board of Directors may fix a date, not less than ten or more than sixty days preceding the date of any meeting of stockholders, as a record date for the determination of stockholders entitled to notice of, or to vote at, any such meeting. The Board of Directors shall not close the books of the Corporation against transfers of shares during the whole or any part of such period. The initial determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of such meeting; provided, that the Board of Directors may, in its discretion, fix a new record date for the adjourned

 

SECTION 6.  Proxies . The notice of every meeting of the stockholders may be accompanied by a form of proxy approved by the Board of Directors in favor of such person or persons as the Board of Directors may select.

 

     

 

 

SECTION 7.  Quorum and Voting . A majority of the outstanding shares of stock of the Corporation entitled to vote, present in person or represented by proxy, shall constitute a quorum at any meeting of the stockholders, and the stockholders present at any duly convened meeting may continue to do business until adjournment notwithstanding any withdrawal from the meeting of holders of shares counted in determining the existence of a quorum. Directors shall be elected by a plurality of the votes cast in the election. For all other matters as to which no other voting requirement is specified by the General Corporation Law of the State of Delaware (the "General Corporation Law"), the Certificate of Incorporation (the "Certificate of Incorporation") or these By-laws, the affirmative vote required for stockholder action shall be that of a majority of the shares present in person or represented by proxy at the meeting (as counted for purposes of determining the existence of a quorum at the meeting). If so provided in the Certificate of Incorporation, stockholders may cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes which such stockholder normally is entitled to cast) at a stockholders' meeting at which directors are to be elected. In the case of a matter submitted for a vote of the stockholders as to which a stockholder approval requirement is applicable under the stockholder approval policy of any exchange or quotation system on which the capital stock of the Company is quoted or traded, for exemption under the requirements of Rule 16b-3 under the Securities Exchange Act of 1934 or under any provision of the Internal Revenue Code, in each case for which no higher voting requirement is specified by the General Corporation Law, the Certificate of Incorporation or these Bylaws, the vote required for approval shall be the requisite vote specified in such stockholder approval policy, Rule 16b-3 or Internal Revenue Code provision, as the case may be (or the highest such requirement if more-than one is applicable). For the approval of the appointment of independent public accountants (if submitted for a vote of the stockholders), the vote required for approval shall be a majority of the votes cast on the matter.

 

SECTION 8.  Adjournment . Any meeting of the stockholders may be adjourned from time to time, without notice other than by announcement at the meeting at which such adjournment is taken, and at any such adjourned meeting at which a quorum shall be present any action may be taken that could have been taken at the meeting originally called; provided that if the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the adjourned meeting.

 

SECTION 9.  Nominations for Election as a Director . Except with respect to the initial directors elected by the Incorporator, only persons who are nominated in accordance with the procedures set forth in these Bylaws shall be eligible for election as, and to serve as, directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders (a) by or at the direction of the Board of Directors or (b) by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this Section 9 of Article I, who shall be entitled to vote for the election of directors at the meeting and who complies with the notice procedures set forth in this Section 9 of Article 1. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation.

 

     

 

 

To be timely, a stockholder's notice shall be delivered or mailed and received at the principal executive offices of the Corporation (i) with respect to an election to be held at the annual meeting of the stockholders of the Corporation, not less than 90 days prior to the anniversary date of the immediately preceding annual meeting of stockholders of the Corporation, and (ii) with respect to an election to be held at a special meeting of stockholders of the Corporation for the election of directors, not later than the close of business on the tenth day following the day on which notice of the date of the special meeting was mailed to stockholders of the Corporation as provided in Section 4 of Article I or public disclosure of the date of the special meeting was made, whichever first occurs.

 

Such stockholder's notice to the Secretary shall set forth (x) as to each person whom the Stockholder proposes to nominate for election or re-election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serve as a director if elected), and (y) as to the stockholder, giving the notice (i) the name and address, as they appear on the Corporation's books, of such stockholder and (ii) the class and number of shares of voting stock of the Corporation which are beneficially owned by such stockholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee.

 

Other than directors chosen pursuant to the provisions of Section 2 of Article 11, no person shall be eligible to serve as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 9 of Article l. The presiding officer of the meeting of stockholders shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded.

 

For a nomination by a stockholder to be proper, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section 9 of Article 1.

 

SECTION 10.  No Action by Written Consent . No action shall be taken by the stockholders except at an annual or special meeting of stockholders. Stockholders may not act by written consent in lieu of a meeting.

 

     

 

 

ARTICLE II.

BOARD OF DIRECTORS

 

SECTION 1.  Number of Directors . The business, affairs and property of the Corporation shall be managed by a board of not less than three or more than seven directors. The number of directors constituting the Board of Directors may be increased or decreased from time to time by resolution by the Board of Directors; provided, however, that no such decrease shall have the effect of shortening the term of any incumbent director. Each director shall hold office for the full term to which he shall have been elected and until his successor is duly elected and shall qualify, or until his earlier death, resignation, disqualification or removal. A director need not be a resident of the State of Delaware or a stockholder of the Corporation.

 

SECTION 2.  Vacancies . Except as provided in the Certificate of Incorporation of the Corporation, newly created directorships resulting from any increase in the number of directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other cause shall be filled by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office until such director's successor shall have been elected and qualified. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director.

 

SECTION 3.  Removal by Stockholders . Any director of the Corporation may be removed, whether or not for cause, from his office as a director by vote or other action of stockholders by the holders of the majority of the shares then entitled to vote at an election of directors.

 

SECTION 4.  Regular Meetings . Regular meetings of the Board of Directors shall be held at such place or places within or without the State of Delaware, at such hour and on such day as may be fixed by resolution of the Board of Directors, without further notice of such meetings. The time or place of holding regular meetings of the Board of Director may be changed by the Chairman of the Board or the President by giving written notice thereof as provided in Section 6 of this Article II.

 

SECTION 5.  Special Meetings . Special meetings of the Board of Directors shall be held, whenever called by the Chairman of the Board, the Chairman of the Executive Committee, the President, by two directors or by resolution adopted by the Board of Directors, at such place or places within or without the State of Delaware as may be stated in the notice of the meeting.

 

SECTION 6.  Notice . Notice of the time and place of, and general nature of the business to be transacted at, all special meetings of the Board of Directors, and written notice of any change in the time or place of holding the regular meetings of the Board of Directors, shall be delivered personally or by telephone to each director or sent by first-class mail, telecopier or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the Corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone, telecopier or by telegram, it shall be delivered personally or by telephone or by telecopier or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director provided, however, that notice of any meeting need not be given to any director if waived by him in writing, or if he shall be present at such meeting other than for purposes of objecting to the validity of the meeting.

 

     

 

 

SECTION 7.  Quorum . A majority of the directors in office shall constitute a quorum of the Board of Directors for the transaction of business; but a lesser number may adjourn from day to day until a quorum is present. Except as otherwise provided by law or in these Bylaws, all questions shall be decided by the vote of a majority of the directors present at a meeting at which a quorum is present.

 

SECTION 8.  Action by Written Consent . Any action which may be taken at a meeting of the directors or members of any committee thereof may be taken without a meeting if consent in writing setting forth the action so taken shall be signed by all of the directors or members of such committee as the case may be and shall be filed with the Secretary of the Corporation.

 

SECTION 9.  Meetings by Conference Telephone . Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, members of the Board of Directors of the Corporation, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 9 shall constitute presence in person at such meeting.

 

SECTION 10.  Chairman or Vice Chairmen . The Board of Directors may designate one or more of its members to be Chairman or Vice Chairmen of the Board, Chairman of the Executive Committee, and Chairman of any other committees of the Board and to hold such other positions on the Board as the Board of Directors may designate.

 

SECTION 11.  Compensation and Reimbursement of Expenses . The directors shall receive such compensation for their services as shall be determined by the Board of Directors and may be paid their expenses, if any, of attendance at each meeting of the Board of Directors. No such reimbursement shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like reimbursement for attending committee meetings.

 

     

 

 

ARTICLE III.

COMMITTEES

 

The Board of Directors may, by resolution adopted by a majority of the whole Board, designate one or more of its members to constitute (i) an Executive Committee which committee, during intervals between meetings of the Board, shall have and exercise the authority of the Board of Directors in the management of the business of the Corporation to the extent permitted by law; and (ii) one or more additional committees such as an Audit Committee to review the Corporation's financial statements and financial information and to act as liaison with the Corporation's auditors, a Compensation Committee to review and propose compensation for the officers and executives of the Corporation, which, to the extent provided in said resolution or resolutions and permitted by law, shall have and may exercise the power of the Board of Directors in the management of the business and affairs of the Corporation insofar as it pertains to the responsibilities of such committee or committees, and may authorize the seal of the Corporation to be affixed to all papers on which the Corporation desires to place a seal. Such additional committee or committees shall have such name or names as may be stated in these Bylaws or as may be determined from time to time by resolutions adopted by the Board of Directors.

 

ARTICLE IV.

OFFICERS

 

SECTION 1.  Designation and Removal . The officers of the Corporation shall consist of a Chairman of the Board, a Chief Executive Officer, a President, a Chief Operating Officer, a Chief Financial Officer, a Secretary, a Treasurer and such Executive, Group, Senior or other Vice Presidents, and other officers as may be elected or appointed by the Board of Directors. Any number of offices may be held by the same person. All officers shall hold office until their successors are elected or appointed, except that the Board of Directors may remove any officer at anytime at its discretion. The Board of Directors may empower the Chairman of the Board or the President to appoint such officers as the business of the Corporation may require, provided that notice of such appointment and its acceptance is deposited with the minutes of the Board of Directors. Any officer may be removed, either with or without cause, by an affirmative vote of the majority of the Board of Directors at any regular or special meeting of the Board of Directors or, except in the case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors. Nothing herein shall affect such rights as an officer may have under such officer's employment contract.

 

Any officer may resign at any time by giving written notice to the Corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice. Unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the right if any, of the Corporation under any employment contract to which the officer is a party.

 

     

 

 

SECTION 2.  Powers and Duties . The officers of the Corporation shall have such powers and duties as generally pertain to their offices, except as modified herein or by the Board of Directors, as well as such powers and duties as from time to time may be conferred by the Board of Directors. The Chairman of the Board shall have such duties as may be assigned to him by the Board of Directors and shall preside at meetings of the Board and at meetings of the stockholders. The Vice Chairmen shall provide guidance to the Board of Directors and either of the Vice Chairmen may act as the Chairman, as designated by a majority of the Board of Directors, if the Chairman is incapacitated or otherwise unavailable. The President shall be the chief executive officer of the Corporation and shall have general supervision over the business, affairs, and property of the Corporation.

 

ARTICLE V.

SEAL

 

The seal of the Corporation shall be in such form as the Board of Directors shall prescribe.

 

ARTICLE VI.

CERTIFICATES OF STOCK

 

Shares of the capital stock of the Corporation may be certificated or uncertificated, as provided under the DGCL. The shares of stock of the Corporation represented by certificates of stock, shall be signed by the President or such Vice President or other officer designated by the Board of Directors, countersigned by the Treasurer or the Secretary or an Assistant Treasurer or an Assistant Secretary; and such signature of the President, Vice President, or other officer, such countersignature of the Treasurer or Secretary or Assistant Treasurer or Assistant Secretary, or any of them, may be executed in facsimile, engraved or printed. In case any officer who has signed or whose facsimile signature has been placed upon any share certificate shall have ceased to be such officer because of death. resignation or otherwise before the certificate is issued, it may be issued by the Corporation with the same effect as if the officer had not ceased to be such at the date of its issue. Said certificates of stock shall be in such form as the Board of Directors may from time to time prescribe.

 

ARTICLE VII.

INDEMNIFICATION

 

SECTION 1.  General . The Corporation shall indemnify, and advance Expenses (as this and all other capitalized words are defined in Section 14 of this Article) to, Indemnitee to the fullest extent permitted by applicable law in effect on the date of effectiveness of these Bylaws, and to such greater extent as applicable law may thereafter permit The rights of Indemnitee provided under the preceding sentence shall include, but not be limited to, the right to be indemnified to the fullest extent permitted by § 145(b) of the D.G.C.L. in Proceedings by or in the right of the Corporation and to the fullest extent permitted by § 145(a) of the D.G.C.L. in all other Proceedings.

 

     

 

 

SECTION 2.  Expenses Related to Proceedings . If Indemnitee is, by reason of his Corporate Status, a witness in any proceeding or is a party to and is successful, on the merits or otherwise, in any Proceeding, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith as a witness or party as the case may be. If Indemnitee is a party to a proceeding and is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to any Matter in such Proceeding, the Corporation shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf relating to each Matter. The termination of any Matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such Matter.

 

SECTION 3.  Advancement of Expenses . Indemnitee shall be advanced Expenses within ten days after requesting them to the fullest extent permitted by § 145(c) of the D.G.C.L.

 

SECTION 4.  Request for Indemnification and/or Advancement of Expenses . To obtain indemnification or advancement of expenses, Indemnitee shall submit to the Corporation a written request with such information as is reasonably available to Indemnitee. The Secretary of the Corporation shall promptly advise the Board of Directors of such request and in the case of a request for advancement of expenses, any undertaking required by § 145(e) of the D.G.C.L.

 

SECTION 5.  Determination of Entitlement: No Change of Control . If there has been no Change of Control at the time the request for indemnification is sent, Indemnitee's entitlement to indemnification shall be determined in accordance with § 145(d) of the D.G.C.L. If entitlement to indemnification is to be determined by Independent Counsel, the Corporation shall furnish notice to Indemnitee within ten days after receipt of the request for indemnification, specifying the identity and address of Independent Counsel. The Indemnitee may, within fourteen days after receipt of such written notice of selection, deliver to the Corporation a written objection to such selection. Such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of Independent Counsel and the objection shall set forth with particularity the factual basis of such assertion. If there is an objection to the selection of Independent Counsel, either the Corporation or Indemnitee may petition the Court of Chancery of the State of Delaware or any other court of competent jurisdiction for a determination that the objection is without a reasonable basis and/or for the appointment of Independent Counsel selected by the Court.

 

SECTION 6.  Determination of Entitlement: Change of Control . If there has been a Change of Control at the time the request for indemnification is sent, Indemnitee's entitlement to indemnification shall be determined in a written opinion by Independent Counsel selected jointly by Indemnitee and the Board of Directors. If no Independent Counsel has been agreed to within 21 days after either Indemnitee or the Board of Directors has first proposed a candidate for Independent Counsel, then either Indemnitee or the Board of Directors may petition the court of Chancery of the State of Delaware or any other Court of competent jurisdiction for appointment as Independent Counsel of a person selected by the Court.

 

     

 

 

SECTION 7.  Procedures of Independent Counsel . If a Change of Control shall have occurred before the request for indemnification is sent by Indemnitee, Indemnitee shall be presumed (except as otherwise expressly provided in this Article) to be entitled to indemnification upon submission of a request for indemnification in accordance with Section 4 of this Article, and thereafter the Corporation shall have the burden of proof to overcome the presumption in reaching a determination contrary to the presumption. The presumption shall be used by Independent Counsel as a basis for a determination of entitlement to indemnification unless the Corporation provides information sufficient to overcome such presumption by clear and convincing evidence or the investigation, review and analysis of Independent Counsel convinces him by clear and convincing evidence that the presumption should not apply.

 

Except in the event that the determination of entitlement to indemnification is to be made by Independent Counsel, if the person or persons empowered under Section 5 or 6 of this Article to determine entitlement to indemnification shall not have made and furnished to Indemnitee in writing a determination within sixty days after receipt by the Corporation of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled to such indemnification unless Indemnitee knowingly misrepresented a material fact in connection with the request for indemnification or such indemnification is prohibited by law. The termination of any Proceeding or of any Matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Article) of itself adversely affect the fight of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, or with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful.

 

SECTION 8.  Independent Counsel Expenses . The Corporation shall pay any and all reasonable fees and expenses of Independent Counsel incurred acting pursuant to this Article and in any proceeding to which it is a party or witness in respect of its investigation and written report and shall pay all reasonable fees and expenses incident to the procedures in which such Independent Counsel was selected or appointed. No Independent Counsel may serve if a timely objection has been made to his selection until a Court has determined that such objection is without a reasonable basis or such objection is withdrawn.

 

     

 

 

SECTION 9.  Adjudication. In the event that (i) a determination is made pursuant to Section 5 or 6 that Indemnitee is not entitled to indemnification under this Article, (ii) advancement of Expenses is not timely made pursuant to Section 3 of this Article, (iii) Independent Counsel has not made and delivered a written opinion determining the request for indemnification (a) within 90 days after being appointed by the Court, or (b) within 90 days after objections to his selection have been overruled by the Court, or (c) within 90 days after the time for the Corporation or Indemnitee to object to his selection, or (iv) payment of indemnification is not made within 5 days after a determination of entitlement to indemnification has been made or deemed to been made pursuant to Section 5, 6 or 7 of this Article, Indemnitee shall be entitled to an adjudication in an appropriate court of the State of Delaware, or in any other court of competent jurisdiction, of his entitlement to such indemnification or advancement of Expenses. In the event that a determination shall have been made that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section shall be conducted in all respects as a de novo trial on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. If a Change of Control shall have occurred, in any judicial proceeding commenced pursuant to this Section, the Corporation shall have the burden of proving that Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be. If a determination shall have been made or deemed to have been made that Indemnitee is entitled to indemnification, the Corporation shall be bound by such determination in any judicial proceeding commenced pursuant to this Section 9, or otherwise, unless Indemnitee knowingly misrepresented a material fact in connection with the request for indemnification, or such indemnification is prohibited by law.

 

The Corporation shall be precluded from asserting in any judicial proceeding commenced pursuant to this Section 9 that the procedures and presumptions of this Article are not valid, binding and enforceable and shall stipulate in any such court that the Corporation is bound by all provisions of this Article. In the event that Indemnitee, pursuant to this Section 9, seeks a judicial adjudication to enforce his rights under, or to recover damages for breach of, this Article, Indemnitee shall be entitled to recover from the Corporation, and shall be indemnified by the Corporation against, any and all Expenses actually and reasonably incurred by him in such judicial adjudication, but only if he prevails therein. If it shall be determined in such judicial adjudication that Indemnitee is entitled to receive part but not all of the indemnification or advancement of Expenses sought, the Expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately prorated.

 

SECTION 10.  Nonexclusivity of Rights . The rights of indemnification and advancement of Expenses as provided by this Article shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Certificate of Incorporation, the Bylaws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. No amendment, alteration or repeal of this Article or any provision thereof shall be effective as to any Indemnitee for acts, events and circumstances that occurred, in whole or in part, before such amendment, alteration or repeal. The provisions of this Article shall continue as to an Indemnitee whose Corporate Status has ceased and shall inure to the benefit of his heirs, executors and administrators.

 

SECTION 11.  Insurance and Subrogation . To the extent the Corporation maintains an insurance policy or policies providing liability insurance for directors or officers of the Corporation or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person serves at the request of the Corporation, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of coverage available for any such director or officer under such policy or policies.

 

In the event of any payment hereunder, the Company shall be subrogated to the extent of such payment to all the rights of recovery of Indemnitee, who shall execute all papers required and take all action a necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.

 

     

 

 

The Company shall not be liable under this Article to make any payment of amounts otherwise indemnifiable hereunder if, and to the extent that, Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise.

 

SECTION 12.  Severability . If any provision or provisions of this Article shall be held to be invalid, illegal or unenforceable for any reason whatsoever, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby; and, to the fullest extent possible, the provisions of this Article shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable.

 

SECTION 13.  Certain Persons Not Entitled to Indemnification . Notwithstanding any other provision of this Article, no person shall be entitled to indemnification or advancement of Expenses under this Article with respect to any Proceeding, or any Matter therein brought or made by such person against the Corporation.

 

SECTION 14.  Definitions . For purposes of this Article:

 

"Change of Control" means a change in control of the Corporation after the date of adoption of these Bylaws in any one of the following circumstances: (i) there shall have occurred an event required to be reported in response to Item 6(c) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Securities Exchange Act of 1934 (the "Act"), whether or not the Corporation is then subject to such reporting requirement; (ii) any "person" (as such term is used in Section 13(d) and 14(d) of the Act) shall have become the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Corporation representing 20% or more of the combined voting power of the Corporation's then outstanding voting securities without prior approval of at least two-thirds of the members of the Board of Directors in office immediately prior to such person attaining such percentage interest; (iii) the Corporation is a party to a merger, consolidation, sale of assets or other reorganization, or a proxy contest, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter; (iv) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (including for this purpose any new director whose election or nomination for election by the Corporation's stockholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors.

 

"Corporate Status" describes the status of a person who is or was a director, officer, employee, agent or fiduciary of the Corporation or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the request of the Corporation.

 

"D.G.C.L." means the Delaware General Corporation Law, as currently in effect or as amended from time to time.

 

     

 

 

"Expenses" shall include all reasonable attorneys' fees, retainers, court costs, transcript costs, fees of experts. witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, or being or preparing to be a witness in a Proceeding,, provided that such fees are actually incurred.

 

"Indemnitee" includes any person who is, or is threatened to be made, a witness in or a party to any Proceeding as described in Section I or 2 of this Article by reason of his Corporate Status.

 

"Independent Counsel" means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the five years previous to his selection or appointment has been, retained to represent: (i) the Corporation or Indemnitee in any matter material to either such party, or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder.

 

"Matter" is a claim, a material issue, or a substantial request for relief.

 

"Proceeding" includes any action, suit, arbitration, alternate dispute resolution mechanism, investigation, administrative hearing or any other proceeding whether civil, criminal, administrative or investigative, except one initiated by an Indemnitee pursuant to Section 9 of this Article to enforce his rights under this Article.

 

SECTION 15.  Notices . Any communication required or permitted to the Corporation shall be addressed to the Secretary of the Corporation and any such communication to Indemnitee shall be addressed to his home address unless he specifies otherwise and shall be personally delivered or delivered by overnight mail delivery.

 

SECTION 16.  Contractual Rights . The right to be indemnified or to the advancement or reimbursement of Expenses (i) is a contract right based upon good and valuable consideration, Pursuant to which Indemnitee may sue as if these provisions were set forth in a separate written contract between him or her and the Corporation, (ii) is and is intended to be retroactive and shall be available as to events occurring prior to the adoption of these provisions, and (iii) shall continue after any rescission or restrictive modification of such provisions as to events occurring prior thereto.

 

     

 

 

ARTICLE VIII.

AMENDMENTS

 

These Bylaws may be altered, amended, added to or repealed by the stockholders at any annual or special meeting or by written consent, by the vote or consent of stockholders entitled to cast at least a majority of the votes which all stockholders are entitled to cast (i.e., by -the vote of a majority of the outstanding shares entitled to vote), and, except as may be otherwise required by law, the power to alter, amend, add to or repeal these Bylaws is also vested in the Board of Directors (subject always to the power of the stockholders to change such action); provided, however, that notice of the general nature of any such action proposed to be taken shall be included in the notice of the meeting of stockholders or of the Board of Directors at which such action is taken.

 

     

 

 

Exhibit 4.1

 

NEITHER THIS SECURITY NOR THE SECURITIES FOR WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.

 

EXHIBIT A

 

COMMON STOCK PURCHASE WARRANT

 

INNOVATE BIOPHARMACEUTICALS, Inc.

 

Warrant Shares: _______ Initial Exercise Date: January 29, 2018
   
  Issue Date: January 29, 2018

 

THIS COMMON STOCK PURCHASE WARRANT (the “ Warrant ”) certifies that, for value received, _____________ or its assigns (the “ Holder ”) is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the date hereof (the “ Initial Exercise Date ”) and on or prior to the close of business on the five (5) year anniversary of the Initial Exercise Date (the “ Termination Date ”), provided that, if such date is not a Trading Day, the Termination Date should be the immediately following Trading Day, but not thereafter, to subscribe for and purchase from Innovate Biopharmaceuticals, Inc., a Delaware corporation (the “ Company ”), up to ______ shares (as subject to adjustment hereunder, the “ Warrant Shares ”) of Common Stock. The purchase price of one share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b).

 

Immediately following the closing of the Merger (as defined in the Purchase Agreement), the issuer of this Warrant for all purposes hereunder shall mean Innovate Biopharmaceuticals, Inc., formerly known as Monster Digital, Inc., and the number of Warrant Shares issuable hereunder and Exercise Price shall be adjusted pursuant to the terms of the Merger Agreement.

 

Section 1 .           Definitions . Capitalized terms used and not otherwise defined herein shall have the meanings set forth in that certain Subscription Agreement (the “ Purchase Agreement ”), dated January 29, 2018, among the Company and the purchasers signatory thereto.

 

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Section 2 .           Exercise .

 

a)         Exercise of Warrant . Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after the Initial Exercise Date and on or before the Termination Date by delivery to the Company of a duly executed facsimile copy or PDF copy submitted by e-mail (or e-mail attachment) of the Notice of Exercise in the form annexed hereto (the “ Notice of Exercise ”). Within the earlier of (i) two (2) Trading Days and (ii) the number of Trading Days comprising the Standard Settlement Period (as defined in Section 2(d)(i) herein) following the date of exercise as aforesaid, the Holder shall deliver the aggregate Exercise Price for the Warrant Shares specified in the applicable Notice of Exercise by wire transfer or cashier’s check drawn on a United States bank unless the cashless exercise procedure specified in Section 2(c) below is specified in the applicable Notice of Exercise. No ink-original Notice of Exercise shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Notice of Exercise be required. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company for cancellation within three (3) Trading Days of the date on which the final Notice of Exercise is delivered to the Company. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of Exercise within one (1) Business Day of receipt of such notice. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.

 

Without limiting the rights of a Holder to receive Warrant Shares on a “cashless exercise” solely in respect of the circumstance set forth in Section 2(c), and without limiting the liquidated damages provision in Section 2(d)(i) and the buy-in provision in Section 2(d)(iv), in no event will the Company be required to net cash settle a Warrant exercise.

 

b)         Exercise Price . The exercise price per share of the Common Stock under this Warrant shall be $1.2011, subject to adjustment hereunder (the “ Exercise Price ”).

 

c)         Cashless Exercise . Notwithstanding anything herein to the contrary, the only circumstance under which the Holder may exercise the Warrant pursuant to a “cashless exercise” is when, at the time of exercise, there is no effective registration statement registering, or the prospectus contained therein is not available for the issuance or resale of the Warrant Shares to or by the Holder. For the avoidance of doubt, in the event there is no effective registration statement, this Warrant may only be exercised by way of “cashless exercise.” A “cashless exercise” entitles the Holder to receive a number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:

 

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(A) = as applicable: (i) the VWAP on the Trading Day immediately preceding the date of the applicable Notice of Exercise if such Notice of Exercise is (1) both executed and delivered pursuant to Section 2(a) hereof on a day that is not a Trading Day or (2) both executed and delivered pursuant to Section 2(a) hereof on a Trading Day prior to the opening of “regular trading hours” (as defined in Rule 600(b)(64) of Regulation NMS promulgated under the federal securities laws) on such Trading Day, (ii) at the option of the Holder, either (y) the VWAP on the Trading Day immediately preceding the date of the applicable Notice of Exercise or (z) the Bid Price of the Common Stock on the principal Trading Market as reported by Bloomberg L.P. as of the time of the Holder’s execution of the applicable Notice of Exercise if such Notice of Exercise is executed during “regular trading hours” on a Trading Day and is delivered within two (2) hours thereafter (including until two (2) hours after the close of “regular trading hours” on a Trading Day) pursuant to Section 2(a) hereof or (iii) the VWAP on the date of the applicable Notice of Exercise if the date of such Notice of Exercise is a Trading Day and such Notice of Exercise is both executed and delivered pursuant to Section 2(a) hereof after the close of “regular trading hours” on such Trading Day;
   
(B) = the Exercise Price of this Warrant, as adjusted hereunder; and
   
(X) = the number of Warrant Shares that would be issuable upon exercise of this Warrant in accordance with the terms of this Warrant if such exercise were by means of a cash exercise rather than a cashless exercise.

 

If Warrant Shares are issued in such a cashless exercise, the parties acknowledge and agree that in accordance with Section 3(a)(9) of the Securities Act, the Warrant Shares shall take on the characteristics of the Warrants being exercised, and the holding period of the Warrant Shares being issued may be tacked on to the holding period of this Warrant.  The Company agrees not to take any position contrary to this Section 2(c).

 

Bid Price ” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the bid price of the Common Stock for the time in question (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b)  if OTCQB or OTCQX is not a Trading Market, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on OTCQB or OTCQX as applicable, (c) if the Common Stock is not then listed or quoted for trading on OTCQB or OTCQX and if prices for the Common Stock are then reported in the “Pink Sheets” published by OTC Markets Group, Inc. (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported, or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Purchasers of a majority in interest of the Securities then outstanding and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.

 

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VWAP ” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b)  if OTCQB or OTCQX is not a Trading Market, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on OTCQB or OTCQX as applicable, (c) if the Common Stock is not then listed or quoted for trading on OTCQB or OTCQX and if prices for the Common Stock are then reported in the “Pink Sheets” published by OTC Markets Group, Inc. (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported, or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Purchasers of a majority in interest of the Securities then outstanding and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.

 

Notwithstanding anything herein to the contrary, on the Termination Date, this Warrant shall be automatically exercised via cashless exercise pursuant to this Section 2(c).

  

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d)            Mechanics of Exercise .

 

i.           Delivery of Warrant Shares Upon Exercise . The Company shall cause the Warrant Shares purchased hereunder to be transmitted by the Transfer Agent to the Holder by crediting the account of the Holder’s or its designee’s balance account with The Depository Trust Company through its Deposit or Withdrawal at Custodian system (“ DWAC ”) if the Company is then a participant in such system and either (A) there is an effective registration statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares by the Holder or (B) the Warrant Shares are eligible for resale by the Holder without volume or manner-of-sale limitations pursuant to Rule 144 (assuming cashless exercise of the Warrants), and otherwise by physical delivery of a certificate, registered in the Company’s share register in the name of the Holder or its designee, for the number of Warrant Shares to which the Holder is entitled pursuant to such exercise to the address specified by the Holder in the Notice of Exercise by the date that is the earlier of (i) the earlier of (A) two (2) Trading Days after the delivery to the Company of the Notice of Exercise and (B) one (1) Trading Day after delivery of the aggregate Exercise Price to the Company and (ii) the number of Trading Days comprising the Standard Settlement Period after the delivery to the Company of the Notice of Exercise (such date, the “ Warrant Share Delivery Date ”). Upon delivery of the Notice of Exercise, the Holder shall be deemed for all corporate purposes to have become the holder of record of the Warrant Shares with respect to which this Warrant has been exercised, irrespective of the date of delivery of the Warrant Shares, provided that payment of the aggregate Exercise Price (other than in the case of a cashless exercise) is received within the earlier of (i) two (2) Trading Days and (ii) the number of Trading Days comprising the Standard Settlement Period following delivery of the Notice of Exercise. If the Company fails for any reason to deliver to the Holder the Warrant Shares subject to a Notice of Exercise by the Warrant Share Delivery Date, the Company shall pay to the Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of Warrant Shares subject to such exercise (based on the VWAP of the Common Stock on the date of the applicable Notice of Exercise), $10 per Trading Day (increasing to $20 per Trading Day on the fifth Trading Day after such liquidated damages begin to accrue) for each Trading Day after such Warrant Share Delivery Date until such Warrant Shares are delivered or Holder rescinds such exercise. The Company agrees to maintain a transfer agent that is a participant in the FAST program so long as this Warrant remains outstanding and exercisable. As used herein, “ Standard Settlement Period ” means the standard settlement period, expressed in a number of Trading Days, on the Company’s primary Trading Market with respect to the Common Stock as in effect on the date of delivery of the Notice of Exercise.

 

ii.          Delivery of New Warrants Upon Exercise . If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant certificate, at the time of delivery of the Warrant Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.

 

iii.          Rescission Rights . If the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares pursuant to Section 2(d)(i) by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise.

 

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iv.          Compensation for Buy-In on Failure to Timely Deliver Warrant Shares Upon Exercise . In addition to any other rights available to the Holder, if the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares in accordance with the provisions of Section 2(d)(i) above pursuant to an exercise on or before the Warrant Share Delivery Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a “ Buy-In ”), then the Company shall (A) pay in cash to the Holder the amount, if any, by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (1) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation was executed, and (B) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored (in which case such exercise shall be deemed rescinded) or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (A) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof.

 

v.           No Fractional Shares or Scrip . No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, the Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or round up to the next whole share.

 

vi.          Charges, Taxes and Expenses . Issuance of Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such Warrant Shares, all of which taxes and expenses shall be paid by the Company, and such Warrant Shares shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided , however , that in the event that Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. The Company shall pay all Transfer Agent fees required for same-day processing of any Notice of Exercise and all fees to the Depository Trust Company (or another established clearing corporation performing similar functions) required for same-day electronic delivery of the Warrant Shares.

 

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vii.          Closing of Books . The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.

 

e)            Holder’s Exercise Limitations . The Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2 or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder’s Affiliates, and any other Persons acting as a group together with the Holder or any of the Holder’s Affiliates (such Persons, “ Attribution Parties ”)), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below).  For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates and Attribution Parties shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (i) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates or Attribution Parties and (ii) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Common Stock Equivalents) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates or Attribution Parties.  Except as set forth in the preceding sentence, for purposes of this Section 2(e), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 2(e) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of this Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 2(e), in determining the number of outstanding shares of Common Stock, a Holder may rely on the number of outstanding shares of Common Stock as reflected in (A) the Company’s most recent periodic or annual report filed with the Commission, as the case may be, (B) a more recent public announcement by the Company or (C) a more recent written notice by the Company or the Transfer Agent setting forth the number of shares of Common Stock outstanding.  Upon the written or oral request of a Holder, the Company shall within one (1) Trading Day confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding.  In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates or Attribution Parties since the date as of which such number of outstanding shares of Common Stock was reported. The “ Beneficial Ownership Limitation ” shall be 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant. The Holder, upon notice to the Company, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 2(e), provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon exercise of this Warrant held by the Holder and the provisions of this Section 2(e) shall continue to apply. Any increase in the Beneficial Ownership Limitation will not be effective until the 61 st day after such notice is delivered to the Company. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 2(e) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Warrant.

 

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Section 3 .           Certain Adjustments .

 

a)         Stock Dividends and Splits . If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon exercise of this Warrant), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event, and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged. Any adjustment made pursuant to this Section 3(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.

 

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b)         Reserved .

 

c)         Subsequent Rights Offerings . In addition to any adjustments pursuant to Section 3(a) above, if at any time the Company grants, issues or sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock (the “ Purchase Rights ”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).

 

d)         Pro Rata Distributions . During such time as this Warrant is outstanding, if the Company shall declare or make any dividend or other distribution of its assets (or rights to acquire its assets) to holders of shares of Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a “ Distribution ”), at any time after the issuance of this Warrant, then, in each such case, the Holder shall be entitled to participate in such Distribution to the same extent that the Holder would have participated therein if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date of which a record is taken for such Distribution, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the participation in such Distribution ( provided , however , to the extent that the Holder's right to participate in any such Distribution would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Distribution to such extent (or in the beneficial ownership of any shares of Common Stock as a result of such Distribution to such extent) and the portion of such Distribution shall be held in abeyance for the benefit of the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation). To the extent that this Warrant has not been partially or completely exercised at the time of such Distribution, such portion of the Distribution shall be held in abeyance for the benefit of the Holder until the Holder has exercised this Warrant.

 

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e)         Fundamental Transaction . If, at any time while this Warrant is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property, or (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person or group of Persons whereby such other Person or group acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination) (each a “ Fundamental Transaction ”), then, upon any subsequent exercise of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder (without regard to any limitation in Section 2(e) on the exercise of this Warrant), the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “ Alternate Consideration ”) receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such Fundamental Transaction (without regard to any limitation in Section 2(e) on the exercise of this Warrant). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. Notwithstanding anything to the contrary, in the event of a Fundamental Transaction, the Company or any Successor Entity (as defined below) shall, at the Holder’s option, exercisable at any time concurrently with, or within 30 days after, the consummation of the Fundamental Transaction (or, if later, the date of the public announcement of the applicable Fundamental Transaction), purchase this Warrant from the Holder by paying to the Holder an amount of cash equal to the Black Scholes Value of the remaining unexercised portion of this Warrant on the date of the consummation of such Fundamental Transaction; provided , however , that, if the Fundamental Transaction is not within the Company's control, including not approved by the Company's Board of Directors or the consideration is not in all stock of the Successor Entity, Holder shall only be entitled to receive from the Company or any Successor Entity, as of the date of consummation of such Fundamental Transaction, the same type or form of consideration (and in the same proportion), at the Black Scholes Value (as defined below) of the unexercised portion of this Warrant, that is being offered and paid to the holders of Common Stock of the Company in connection with the Fundamental Transaction, whether that consideration be in the form of cash, stock or any combination thereof, or whether the holders of Common Stock are given the choice to receive from among alternative forms of consideration in connection with the Fundamental Transaction. “ Black Scholes Value ” means the value of this Warrant based on the Black and Scholes Option Pricing Model obtained from the “OV” function on Bloomberg, L.P. (“ Bloomberg ”) determined as of the day of consummation of the applicable Fundamental Transaction for pricing purposes and reflecting (A) a risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to the time between the date of the public announcement of the applicable Fundamental Transaction and the Termination Date, (B) an expected volatility equal to the greater of 100% and the 100 day volatility obtained from the HVT function on Bloomberg as of the Trading Day immediately following the public announcement of the applicable Fundamental Transaction, (C) the underlying price per share used in such calculation shall be the sum of the price per share being offered in cash, if any, plus the value of any non-cash consideration, if any, being offered in such Fundamental Transaction and (D) a remaining option time equal to the time between the date of the public announcement of the applicable Fundamental Transaction and the Termination Date. The payment of the Black Scholes Value will be made by wire transfer of immediately available funds (or by delivery of such other consideration, as applicable) within five Business Days of the Holder’s election (or, if later, on the effective date of the Fundamental Transaction) . The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor (the “ Successor Entity ”) to assume in writing all of the obligations of the Company under this Warrant and the other Transaction Documents in accordance with the provisions of this Section 3(e) pursuant to written agreements in form and substance reasonably satisfactory to the Holder and approved by the Holder (without unreasonable delay) prior to such Fundamental Transaction and shall, at the option of the Holder, deliver to the Holder in exchange for this Warrant a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Warrant which is exercisable for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the shares of Common Stock acquirable and receivable upon exercise of this Warrant (without regard to any limitations on the exercise of this Warrant) prior to such Fundamental Transaction, and with an exercise price which applies the exercise price hereunder to such shares of capital stock (but taking into account the relative value of the shares of Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such exercise price being for the purpose of protecting the economic value of this Warrant immediately prior to the consummation of such Fundamental Transaction), and which is reasonably satisfactory in form and substance to the Holder. Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Warrant and the other Transaction Documents referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Warrant and the other Transaction Documents with the same effect as if such Successor Entity had been named as the Company herein.

 

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f)            Calculations . All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 3, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.

 

g)            Notice to Holder .

 

i.             Adjustment to Exercise Price . Whenever the Exercise Price is adjusted pursuant to any provision of this Section 3, the Company shall promptly deliver to the Holder by facsimile or email a notice setting forth the Exercise Price after such adjustment and any resulting adjustment to the number of Warrant Shares and setting forth a brief statement of the facts requiring such adjustment.

 

ii.            Notice to Allow Exercise by Holder . If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property, or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be delivered by facsimile or email to the Holder at its last facsimile number or email address as it shall appear upon the Warrant Register of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to deliver such notice or any defect therein or in the delivery thereof shall not affect the validity of the corporate action required to be specified in such notice. To the extent that any notice provided in this Warrant constitutes, or contains, material, non-public information regarding the Company or any of the Subsidiaries, the Company shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K. The Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.

 

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Section 4 .           Transfer of Warrant .

 

a)         Transferability . Subject to compliance with any applicable securities laws and the conditions set forth in Section 4(d) hereof and to the provisions of Section 4.1 of the Purchase Agreement, this Warrant and all rights hereunder (including, without limitation, any registration rights) are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company unless the Holder has assigned this Warrant in full, in which case, the Holder shall surrender this Warrant to the Company within two (2) Trading Days of the date on which the Holder delivers an assignment form to the Company assigning this Warrant in full. The Warrant, if properly assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.

 

b)         New Warrants . This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the Issue Date of this Warrant and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.

 

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c)          Warrant Register . The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the “ Warrant Register ”), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.

 

d)          Transfer Restrictions . If, at the time of the surrender of this Warrant in connection with any transfer of this Warrant, the transfer of this Warrant shall not be either (i) registered pursuant to an effective registration statement under the Securities Act and under applicable state securities or blue sky laws or (ii) eligible for resale without volume or manner-of-sale restrictions or current public information requirements pursuant to Rule 144, the Company may require, as a condition of allowing such transfer, that the Holder or transferee of this Warrant, as the case may be, comply with the provisions of Section 5.7 of the Purchase Agreement.

 

e)          Representation by the Holder . The Holder, by the acceptance hereof, represents and warrants that it is acquiring this Warrant and, upon any exercise hereof, will acquire the Warrant Shares issuable upon such exercise, for its own account and not with a view to or for distributing or reselling such Warrant Shares or any part thereof in violation of the Securities Act or any applicable state securities law, except pursuant to sales registered or exempted under the Securities Act.

 

Section 5 .           Miscellaneous .

 

a)          No Rights as Stockholder Until Exercise . This Warrant does not entitle the Holder to any voting rights, dividends or other rights as a stockholder of the Company prior to the exercise hereof as set forth in Section 2(d)(i), except as expressly set forth in Section 3.

 

b)          Loss, Theft, Destruction or Mutilation of Warrant . The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.

 

c)          Saturdays, Sundays, Holidays, etc . If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Business Day, then, such action may be taken or such right may be exercised on the next succeeding Business Day.

 

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d)            Authorized Shares .

 

The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of issuing the necessary Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).

 

Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (i) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (ii) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant and (iii) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof, as may be, necessary to enable the Company to perform its obligations under this Warrant.

 

Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.

 

e)           Jurisdiction . All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be determined in accordance with the provisions of the Purchase Agreement.

 

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f)           Restrictions . The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, and the Holder does not utilize cashless exercise, will have restrictions upon resale imposed by state and federal securities laws.

 

g)          Nonwaiver and Expenses . No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice the Holder’s rights, powers or remedies. Without limiting any other provision of this Warrant or the Purchase Agreement, if the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to the Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by the Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.

 

h)          Notices . Any notice, request or other document required or permitted to be given or delivered to the Holder by the Company shall be delivered in accordance with the notice provisions of the Purchase Agreement.

 

i)           Limitation of Liability . No provision hereof, in the absence of any affirmative action by the Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.

 

j)           Remedies . The Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive and not to assert the defense in any action for specific performance that a remedy at law would be adequate.

 

k)          Successors and Assigns . Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.

 

l)           Amendment . This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder.

 

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m)         Severability . Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.

 

n)          Headings . The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

 

********************

 

(Signature Page Follows)

 

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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.

 

  INNOVATE BIOPHARMACEUTICALS, Inc.

  By:  
    Name:
    Title:

 

  17  

 

 

NOTICE OF EXERCISE

 

To:          INNOVATE BIOPHARMACEUTICALS, Inc.

 

(1) The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

 

(2)  Payment shall take the form of (check applicable box):

 

¨ in lawful money of the United States; or

 

¨ if permitted the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 2(c).

 

(3)  Please issue said Warrant Shares in the name of the undersigned or in such other name as is specified below:

 

_______________________________

 

The Warrant Shares shall be delivered to the following DWAC Account Number:

 

_______________________________

 

_______________________________

 

_______________________________

 

(4) Accredited Investor. The undersigned is an “accredited investor” as defined in Regulation D promulgated under the Securities Act of 1933, as amended.

 

[SIGNATURE OF HOLDER]

          

Name of Investing Entity:  

Signature of Authorized Signatory of Investing Entity :  

Name of Authorized Signatory:  

Title of Authorized Signatory:  

Date:  

 

 

 

 

EXHIBIT B

 

ASSIGNMENT FORM

(To assign the foregoing Warrant, execute this form and supply required information. Do not use this form to purchase shares.)

 

FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to

 

Name:    
  (Please Print)  
     
Address:    
  (Please Print)  
     
Phone Number:    
     
Email Address:    
     
Dated: _______________ __, ______    
     
Holder’s Signature:____________________    
     
Holder’s Address: __________________ ___    

 

 

 

 

Exhibit 4.2

 

THE ISSUANCE AND SALE OF THE SECURITY REPRESENTED BY THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL TO THE HOLDER (IF REQUESTED BY THE COMPANY), IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD OR ELIGIBLE TO BE SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

 

THIS NOTE HAS BEEN ISSUED WITH ORIGINAL ISSUE DISCOUNT (“OID”). PURSUANT TO TREASURY REGULATION §1.1275-3(b)(1), STEVE LAUMAS, A REPRESENTATIVE OF THE COMPANY HEREOF WILL, BEGINNING TEN DAYS AFTER THE ISSUANCE DATE OF THIS NOTE, PROMPTLY MAKE AVAILABLE TO THE HOLDER UPON REQUEST THE INFORMATION DESCRIBED IN TREASURY REGULATION §1.1275-3(b)(1)(i). MR. LAUMAS MAY BE REACHED AT TELEPHONE NUMBER (919) 275-1933.

 

Innovate Biopharmaceuticals Inc.

 

Senior Note

 

Issuance Date:  January 29, 2018 Original Principal Amount:
U.S. $4,800,000

 

FOR VALUE RECEIVED, Innovate Biopharmaceuticals Inc., a Delaware corporation (the “ Company ”), hereby promises to pay to the order of Gustavia Capital Partners LLC or its registered assigns (“ Holder ”), the amount set forth above as the Original Principal Amount (as reduced pursuant to the terms hereof pursuant to redemption or otherwise, the “ Principal ”) when due, whether upon the Maturity Date (as defined below), acceleration, redemption or otherwise (in each case in accordance with the terms hereof) and to pay interest (“ Interest ”) on any outstanding Principal at a rate per annum equal to the Interest Rate (as defined below), from the date set out above as the Issuance Date (the “ Issuance Date ”) until the same becomes due and payable, whether upon an Interest Date (as defined below), the Maturity Date, acceleration, redemption or otherwise (in each case in accordance with the terms hereof). This Senior Note (including all Senior Notes issued in exchange, transfer or replacement hereof, this “ Note ”) is one of an issue of Senior Notes issued pursuant to the Note Purchase Agreement, dated as of January 29, 2018 (the “ Subscription Date ”), by and among the Company and the investors (the “ Buyers ”) referred to therein, as amended from time to time (collectively, the “ Notes ,” and such other Senior Notes, the “ Other Notes ”). Certain capitalized terms used herein are defined in Section 25.

 

1.   PAYMENTS OF PRINCIPAL . On the Maturity Date, the Company shall pay to the Holder an amount in cash representing 105% of all outstanding Principal, accrued and unpaid Interest, and accrued and unpaid Late Charges (as defined in Section 18(c)) on such Principal and Interest. Other than as specifically permitted by this Note, the Company may not prepay any portion of the outstanding Principal, accrued and unpaid Interest or accrued and unpaid Late Charges on Principal and Interest, if any.

 

 

 

 

2.   INTEREST; INTEREST RATE .

 

(a)  Interest on this Note shall commence accruing on the Issuance Date and shall be computed on the basis of a 360-day year and twelve 30-day months and shall be payable in arrears on each Interest Date, with the first Interest Date on March 30, 2018, and shall compound each calendar quarter and shall be payable in accordance with the terms of this Note. Interest shall be payable on each Interest Date, to the record holder of this Note on the applicable Interest Date, in cash.

 

(b)  From and after the occurrence and during the continuance of any Event of Default, the Interest Rate shall automatically be increased to eighteen percent (18.0%) per annum. In the event that such Event of Default is subsequently cured, the adjustment referred to in the preceding sentence shall cease to be effective as of the calendar day immediately following the date of such cure; provided that the Interest as calculated and unpaid at such increased rate during the continuance of such Event of Default shall continue to apply to the extent relating to the days after the occurrence of such Event of Default through and including the date of such cure of such Event of Default.

 

3.   RIGHTS UPON EVENT OF DEFAULT .

 

(a)   Event of Default . Each of the following events shall constitute an “ Event of Default ” and each of the events in clauses (iii), (iv) and (v) shall constitute a “ Bankruptcy Event of Default ”:

 

(i)  the Company’s or any Subsidiary’s failure to pay to the Holder any amount of Principal, Interest, Late Charges or other amounts when and as due under this Note (including, without limitation, the Company’s or any Subsidiary’s failure to pay any redemption payments or amounts hereunder) or any other Transaction Document (as defined in the Note Purchase Agreement) or any other agreement, document, certificate or other instrument delivered in connection with the transactions contemplated hereby and thereby, except, in the case of a failure to pay Interest and Late Charges when and as due, in which case only if such failure remains uncured for a period of at least two (2) Business Days;

 

(ii)  the occurrence of any default under, redemption of or acceleration prior to maturity of at least an aggregate of $100,000 of Indebtedness (as defined in the Note Purchase Agreement) of the Company or any of its Subsidiaries, other than with respect to any Other Notes;

 

(iii)  bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for the relief of debtors shall be instituted by or against the Company or any Subsidiary and, if instituted against the Company or any Subsidiary by a third party, shall not be dismissed within thirty (30) days of their initiation;

 

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(iv)  the commencement by the Company or any Subsidiary of a voluntary case or proceeding under any applicable federal, state or foreign bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree, order, judgment or other similar document in respect of the Company or any Subsidiary in an involuntary case or proceeding under any applicable federal, state or foreign bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable federal, state or foreign law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or any Subsidiary or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the execution of a composition of debts, or the occurrence of any other similar federal, state or foreign proceeding, or the admission by it in writing of its inability to pay its debts generally as they become due, the taking of corporate action by the Company or any Subsidiary in furtherance of any such action or the taking of any action by any Person to commence a Uniform Commercial Code foreclosure sale or any other similar action under federal, state or foreign law;

 

(v)  the entry by a court of (i) a decree, order, judgment or other similar document in respect of the Company or any Subsidiary of a voluntary or involuntary case or proceeding under any applicable federal, state or foreign bankruptcy, insolvency, reorganization or other similar law or (ii) a decree, order, judgment or other similar document adjudging the Company or any Subsidiary as bankrupt or insolvent, or approving as properly filed a petition seeking liquidation, reorganization, arrangement, adjustment or composition of or in respect of the Company or any Subsidiary under any applicable federal, state or foreign law or (iii) a decree, order, judgment or other similar document appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or any Subsidiary or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree, order, judgment or other similar document or any such other decree, order, judgment or other similar document unstayed and in effect for a period of thirty (30) consecutive days;

 

(vi)  a final judgment or judgments for the payment of money aggregating in excess of $100,000 are rendered against the Company and/or any of its Subsidiaries and which judgments are not, within thirty (30) days after the entry thereof, bonded, discharged, settled or stayed pending appeal, or are not discharged within thirty (30) days after the expiration of such stay; provided, however, any judgment which is covered by insurance or an indemnity from a credit worthy party shall not be included in calculating the $100,000 amount set forth above so long as the Company provides the Holder a written statement from such insurer or indemnity provider (which written statement shall be reasonably satisfactory to the Holder) to the effect that such judgment is covered by insurance or an indemnity and the Company or such Subsidiary (as the case may be) will receive the proceeds of such insurance or indemnity within thirty (30) days of the issuance of such judgment;

 

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(vii)  the Company and/or any Subsidiary, individually or in the aggregate, either (i) fails to pay, when due, or within any applicable grace period, any payment with respect to any Indebtedness in excess of $100,000 due to any third party (other than, with respect to unsecured Indebtedness only, payments contested by the Company and/or such Subsidiary (as the case may be) in good faith by proper proceedings and with respect to which adequate reserves have been set aside for the payment thereof in accordance with GAAP) or is otherwise in breach or violation of any agreement for monies owed or owing in an amount in excess of $100,000, which breach or violation permits the other party thereto to declare a default or otherwise accelerate amounts due thereunder, or (ii) suffer to exist any other circumstance or event that would, with or without the passage of time or the giving of notice, result in a default or event of default under any agreement binding the Company or any Subsidiary, which default or event of default would or is likely to have a material adverse effect on the business, assets, operations (including results thereof), liabilities, properties, condition (including financial condition) or prospects of the Company or any of its Subsidiaries, individually or in the aggregate;

 

(viii)  other than as specifically set forth in another clause of this Section 3(a), the Company or any Subsidiary breaches any representation, warranty, covenant or other term or condition of any Transaction Document, except, in the case of a breach of a covenant or other term or condition that is curable, only if such breach remains uncured for a period of two (2) consecutive Business Days;

 

(ix)  any breach or failure in any respect by the Company or any Subsidiary to comply with any provision of Section 9 of this Note;

 

(x)  any Material Adverse Effect (as defined in the Note Purchase Agreement) occurs, provided, that, one or more adverse events that occur with respect to the Company’s clinical trial(s) shall not constitute a “Material Adverse Effect”;

 

(xi)  the Company fails to consummate the Merger on or prior to February 1, 2018;

 

(xii)  any Change of Control (other than the Merger) occurs; or

 

(xiii)  any Event of Default (as defined in the Other Notes) occurs with respect to any Other Notes.

 

(b)   Notice of an Event of Default; Redemption Right . Upon the occurrence of an Event of Default with respect to this Note or any Other Note, the Company shall within one (1) Business Day deliver written notice thereof via facsimile, electronic mail or overnight courier (an “ Event of Default Notice ”) to the Holder. At any time after the earlier of the Holder's receipt of an Event of Default Notice and the Holder becoming aware of an Event of Default, the Holder may require the Company to redeem all or any portion of this Note by delivering written notice thereof (the “ Event of Default Redemption Notice ”) to the Company, which Event of Default Redemption Notice shall indicate the portion of this Note the Holder is electing to redeem. Each portion of this Note subject to redemption by the Company pursuant to this Section 3(b) shall be redeemed by the Company at a price in cash equal to the product of (i) the Outstanding Amount multiplied by (ii) the Redemption Premium (the “ Event of Default Redemption Price ”). Redemptions required by this Section 3(b) shall be made in accordance with the provisions of Section 6. To the extent redemptions required by this Section 3(b) are deemed or determined by a court of competent jurisdiction to be prepayments of the Note by the Company, such redemptions shall be deemed to be voluntary prepayments.

 

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(c)   Mandatory Redemption upon Bankruptcy Event of Default . Notwithstanding anything to the contrary herein, upon any Bankruptcy Event of Default, whether occurring prior to or following the Maturity Date, the Company shall immediately pay to the Holder an amount in cash equal to the Event of Default Redemption Price, in addition to any and all other amounts due hereunder, without the requirement for any notice or demand or other action by the Holder or any other person or entity, provided that the Holder may, in its sole discretion, waive such right to receive payment upon a Bankruptcy Event of Default, in whole or in part, and any such waiver shall not affect any other rights of the Holder hereunder, including any other rights in respect of such Bankruptcy Event of Default, and any right to payment of the Event of Default Redemption Price or any other Event of Default Redemption Price, as applicable.

 

4.   RIGHTS UPON FUNDAMENTAL TRANSACTION . The Company shall not enter into or be party to a Fundamental Transaction unless the Successor Entity assumes in writing all of the obligations of the Company under this Note and the other Transaction Documents in accordance with the provisions of this Section 4(a) pursuant to written agreements in form and substance satisfactory to the Required Holders (as defined in the Note Purchase Agreement) and approved by the Required Holders prior to such Fundamental Transaction, including agreements to deliver to each holder of Notes in exchange for such Notes a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to the Notes, including, without limitation, having a principal amount and interest rate equal to the principal amounts and the interest rates of the Notes held by such holder and having similar ranking to the Notes, and satisfactory to the Required Holders. Upon the occurrence of any Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Note referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Note with the same effect as if such Successor Entity had been named as the Company herein. The provisions of this Section shall apply similarly and equally to successive Fundamental Transactions.

 

5.   NONCIRCUMVENTION . The Company hereby covenants and agrees that the Company will not, by amendment of its Certificate of Incorporation (as defined in the Note Purchase Agreement), Bylaws (as defined in the Note Purchase Agreement) or through any reorganization, transfer of assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Note, and will at all times in good faith carry out all of the provisions of this Note and take all action as may be required to protect the rights of the Holder of this Note.

 

  5  

 

 

6.   REDEMPTIONS AT THE COMPANY’S ELECTION .

 

(a)   Company Optional Redemption . At any time prior to the Maturity Date, so long as no Event of Default has occurred or is continuing the Company shall have the right to redeem all, but not less than all, of the Outstanding Amount then remaining under this Note (the “ Company Optional Redemption Amount ”) on the Company Optional Redemption Date (each as defined below) (a “ Company Optional Redemption ”). The portion of this Note subject to redemption pursuant to this Section 6(a) shall be redeemed by the Company in cash at a price (the “ Company Optional Redemption Price ”) equal to 105% of the Outstanding Amount being redeemed as of the Company Optional Redemption Date. The Company may exercise its right to require redemption under this Section 6(a) by delivering a written notice thereof by facsimile or electronic mail and overnight courier to all, but not less than all, of the holders of Notes (the “ Company Optional Redemption Notice ” and the date all of the holders of Notes received such notice is referred to as the “ Company Optional Redemption Notice Date ”). The Company may deliver only one Company Optional Redemption Notice hereunder and such Company Optional Redemption Notice shall be irrevocable. The Company Optional Redemption Notice shall (x) state the date on which the Company Optional Redemption shall occur (the “ Company Optional Redemption Date ”) which date shall not be less than five (5) Trading Days nor more than twenty (20) Trading Days following the Company Optional Redemption Notice Date, (y) certify that no Event of Default has occurred or is continuing and (z) state the aggregate Outstanding Amount of the Notes which is being redeemed in such Company Optional Redemption from the Holder and all of the other holders of the Notes pursuant to this Section 6(a) (and analogous provisions under the Other Notes) on the Company Optional Redemption Date. Notwithstanding anything herein to the contrary, (i) if no Event of Default has occurred as of the Company Optional Redemption Notice Date but an Event of Default occurs at any time prior to the Company Optional Redemption Date, (A) the Company shall provide the Holder a subsequent notice to that effect and (B) unless the Holder waives the Event of Default, the Company Optional Redemption shall be cancelled and the applicable Company Optional Redemption Notice shall be null and void. In the event of the Company’s redemption of any portion of this Note under this Section 6(a), the Holder’s damages would be uncertain and difficult to estimate because of the parties’ inability to predict future interest rates and the uncertainty of the availability of a suitable substitute investment opportunity for the Holder. Accordingly, any redemption premium due under this Section 6(a) is intended by the parties to be, and shall be deemed, a reasonable estimate of the Holder’s actual loss of its investment opportunity and not as a penalty.

 

(b)   Pro Rata Redemption Requirement . If the Company elects to cause a Company Optional Redemption of this Note pursuant to Section 6(a), then it must simultaneously take the same action with respect to all of the Other Notes.

  

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7.   REDEMPTIONS .

 

(a)   Mechanics . The Company shall deliver the applicable Event of Default Redemption Price to the Holder in cash within five (5) Business Days after the Company’s receipt of the Holder’s Event of Default Redemption Notice. The Company shall deliver the applicable Company Optional Redemption Price to the Holder in cash on the applicable Company Optional Date. Notwithstanding anything herein to the contrary, in connection with any redemption hereunder at a time the Holder is entitled to receive a cash payment under any of the other Transaction Documents, at the option of the Holder delivered in writing to the Company, the applicable Redemption Price hereunder shall be increased by the amount of such cash payment owed to the Holder under such other Transaction Document and, upon payment in full in accordance herewith, shall satisfy the Company’s payment obligation under such other Transaction Document. In the event of a redemption of less than all of the Outstanding Amount of this Note, the Company shall promptly cause to be issued and delivered to the Holder a new Note (in accordance with Section 13(d)) representing the outstanding Principal which has not been redeemed. In the event that the Company does not pay the applicable Redemption Price to the Holder within the time period required, at any time thereafter and until the Company pays such unpaid Redemption Price in full, the Holder shall have the option, in lieu of redemption, to require the Company to promptly return to the Holder all or any portion of this Note representing the Outstanding Amount that was submitted for redemption and for which the applicable Redemption Price (together with any Late Charges thereon) has not been paid. Upon the Company’s receipt of such notice, (x) the applicable Redemption Notice shall be null and void with respect to such Outstanding Amount, and (y) the Company shall immediately return this Note, or issue a new Note (in accordance with Section 13(d)), to the Holder, and in each case the principal amount of this Note or such new Note (as the case may be) shall be increased by an amount equal to the difference between (1) the applicable Redemption Price (as the case may be, and as adjusted pursuant to this Section 6, if applicable) minus (2) the Principal portion of the Outstanding Amount submitted for redemption. The Holder’s delivery of a notice voiding a Redemption Notice and exercise of its rights following such notice shall not affect the Company’s obligations to make any payments of Late Charges which have accrued prior to the date of such notice with respect to the Outstanding Amount subject to such notice.

 

(b)   Redemption by Other Holders . Upon the Company’s receipt of notice from any of the holders of the Other Notes for redemption or repayment as a result of an event or occurrence substantially similar to the events or occurrences described in Section 3(c) or Section 4 (each, an “ Other Redemption Notice ”), the Company shall immediately, but no later than one (1) Business Day of its receipt thereof, forward to the Holder by facsimile or electronic mail a copy of such notice. If the Company receives a Redemption Notice and one or more Other Redemption Notices, during the seven (7) Business Day period beginning on and including the date which is two (2) Business Days prior to the Company’s receipt of the Holder’s applicable Redemption Notice and ending on and including the date which is two (2) Business Days after the Company’s receipt of the Holder’s applicable Redemption Notice and the Company is unable to redeem all principal, interest and other amounts designated in such Redemption Notice and such Other Redemption Notices received during such seven (7) Business Day period, then the Company shall redeem a pro rata amount from each holder of the Notes (including the Holder) based on the principal amount of the Notes submitted for redemption pursuant to such Redemption Notice and such Other Redemption Notices received by the Company during such seven (7) Business Day period.

 

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8.   VOTING RIGHTS . The Holder shall have no voting rights as the holder of this Note, except as required by law (including, without limitation, the Delaware General Corporation Law) and as expressly provided in this Note.

 

9.   COVENANTS . Until all of the Notes have been prepaid, redeemed or otherwise satisfied in accordance with their terms:

 

(a)   Rank . All payments due under this Note (a) shall rank pari passu with all Other Notes and (b) shall be senior to all other Indebtedness of the Company and its Subsidiaries (other than Permitted Senior Indebtedness solely with respect to Permitted Senior Indebtedness Collateral).

 

(b)   Incurrence of Indebtedness . The Company shall not, and the Company shall cause each of its Subsidiaries to not, directly or indirectly, incur or guarantee, assume or suffer to exist any Indebtedness (other than (i) the Indebtedness evidenced by this Note and the Other Notes and (ii) other Permitted Indebtedness).

 

(c)   Existence of Liens . The Company shall not, and the Company shall cause each of its Subsidiaries to not, directly or indirectly, allow or suffer to exist any mortgage, lien, pledge, charge, security interest or other encumbrance upon or in any property or assets (including accounts and contract rights) owned by the Company or any of its Subsidiaries (collectively, “ Liens ”) other than Permitted Liens.

 

(d)   Restricted Payments . The Company shall not, and the Company shall cause each of its Subsidiaries to not, directly or indirectly, redeem, defease, repurchase, repay or make any payments in respect of, by the payment of cash or cash equivalents (in whole or in part, whether by way of open market purchases, tender offers, private transactions or otherwise), all or any portion of any Indebtedness (other than the Notes) whether by way of payment in respect of principal of (or premium, if any) or interest on, such Indebtedness if at the time such payment is due or is otherwise made or, after giving effect to such payment, (i) an event constituting an Event of Default has occurred and is continuing or (ii) an event that with the passage of time and without being cured would constitute an Event of Default has occurred and is continuing.

 

(e)   Restriction on Redemption and Cash Dividends . The Company shall not, and the Company shall cause each of its Subsidiaries to not, directly or indirectly, redeem, repurchase or declare or pay any cash dividend or distribution on any of its capital stock.

 

(f)   Restriction on Transfer of Assets . The Company shall not, and the Company shall cause each of its Subsidiaries to not, directly or indirectly, sell, lease, license, assign, transfer, spin-off, split-off, close, convey or otherwise dispose of any assets or rights of the Company or any Subsidiary owned or hereafter acquired whether in a single transaction or a series of related transactions, other than (i) sales, leases, licenses, assignments, transfers, conveyances and other dispositions of such assets or rights by the Company and its Subsidiaries in the ordinary course of business consistent with its past practice and (ii) sales of inventory and product in the ordinary course of business.

 

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(g)   Maturity of Indebtedness . The Company shall not, and the Company shall cause each of its Subsidiaries to not, directly or indirectly, permit any Indebtedness of the Company or any of its Subsidiaries to mature or accelerate prior to the Maturity Date.

 

(h)   Change in Nature of Business . The Company shall not, and the Company shall cause each of its Subsidiaries to not, directly or indirectly, engage in any material line of business substantially different from those lines of business conducted by or publicly contemplated to be conducted by the Company and each of its Subsidiaries on the Subscription Date or any business substantially related or incidental thereto. The Company shall not, and the Company shall cause each of its Subsidiaries to not, directly or indirectly, modify its or their corporate structure or purpose.

 

(i)   Preservation of Existence, Etc. The Company shall maintain and preserve, and cause each of its Subsidiaries to maintain and preserve, its existence, rights and privileges, and become or remain, and cause each of its Subsidiaries to become or remain, duly qualified and in good standing in each jurisdiction in which the character of the properties owned or leased by it or in which the transaction of its business makes such qualification necessary.

 

(j)   Maintenance of Properties, Etc. The Company shall maintain and preserve, and cause each of its Subsidiaries to maintain and preserve, all of its properties which are necessary or useful in the proper conduct of its business in good working order and condition, ordinary wear and tear excepted, and comply, and cause each of its Subsidiaries to comply, at all times with the provisions of all leases to which it is a party as lessee or under which it occupies property, so as to prevent any loss or forfeiture thereof or thereunder.

 

(k)   Maintenance of Intellectual Property . The Company will, and will cause each of its Subsidiaries to, take all action necessary or advisable to maintain all of the Intellectual Property Rights (as defined in the Note Purchase Agreement) of the Company and/or any of its Subsidiaries that are necessary or material to the conduct of its business in full force and effect.

 

(l)   Maintenance of Insurance . The Company shall maintain, and cause each of its Subsidiaries to maintain, insurance with responsible and reputable insurance companies or associations (including, without limitation, comprehensive general liability, hazard, rent and business interruption insurance) with respect to its properties (including all real properties leased or owned by it) and business, in such amounts and covering such risks as is required by any governmental authority having jurisdiction with respect thereto or as is carried generally in accordance with sound business practice by companies in similar businesses similarly situated.

 

(m)   Transactions with Affiliates . The Company shall not, nor shall it permit any of its Subsidiaries to, enter into, renew, extend or be a party to, any transaction or series of related transactions (including, without limitation, the purchase, sale, lease, transfer or exchange of property or assets of any kind or the rendering of services of any kind) with any affiliate, except in the ordinary course of business in a manner and to an extent consistent with past practice and necessary or desirable for the prudent operation of its business, for fair consideration and on terms no less favorable to it or its Subsidiaries than would be obtainable in a comparable arm’s length transaction with a Person that is not an affiliate thereof.

 

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(n)   Restricted Issuances . The Company shall not, directly or indirectly, without the prior written consent of the holders of a majority in aggregate principal amount of the Notes then outstanding, (i) issue any Notes (other than as contemplated by the Note Purchase Agreement and the Notes) or (ii) issue any other securities that would cause a breach or default under the Notes.

 

(o)   Independent Investigation . At the request of the Holder either (x) at any time when an Event of Default has occurred and is continuing, (y) upon the occurrence of an event that with the passage of time or giving of notice would constitute an Event of Default or (z) at any time the Holder reasonably believes an Event of Default may have occurred or be continuing, the Company shall hire an independent, reputable investment bank selected by the Company and approved by the Holder to investigate as to whether any breach of this Note has occurred (the “ Independent Investigator ”). If the Independent Investigator determines that such breach of this Note has occurred, the Independent Investigator shall notify the Company of such breach and the Company shall deliver written notice to each holder of a Note of such breach. In connection with such investigation, the Independent Investigator may, during normal business hours, inspect all contracts, books, records, personnel, offices and other facilities and properties of the Company and its Subsidiaries and, to the extent available to the Company after the Company uses reasonable efforts to obtain them, the records of its legal advisors and accountants (including the accountants’ work papers) and any books of account, records, reports and other papers not contractually required of the Company to be confidential or secret, or subject to attorney-client or other evidentiary privilege, and the Independent Investigator may make such copies and inspections thereof as the Independent Investigator may reasonably request. The Company shall furnish the Independent Investigator with such financial and operating data and other information with respect to the business and properties of the Company as the Independent Investigator may reasonably request. The Company shall permit the Independent Investigator to discuss the affairs, finances and accounts of the Company with, and to make proposals and furnish advice with respect thereto to, the Company’s officers, directors, key employees and independent public accountants or any of them (and by this provision the Company authorizes said accountants to discuss with such Independent Investigator the finances and affairs of the Company and any Subsidiaries), all at such reasonable times, upon reasonable notice, and as often as may be reasonably requested.

 

10.  [Intentionally Omitted]

 

11.   AMENDING THE TERMS OF THIS NOTE . The prior written consent of the Holder shall be required for any change, waiver or amendment to this Note.

 

12.   TRANSFER . This Note may be offered, sold, assigned or transferred by the Holder without the consent of the Company, subject only to the applicable provisions of the Note Purchase Agreement.

 

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13.   REISSUANCE OF THIS NOTE .

 

(a)   Transfer . If this Note is to be transferred, the Holder shall surrender this Note to the Company, whereupon the Company will forthwith issue and deliver upon the order of the Holder a new Note (in accordance with Section 13(d)), registered as the Holder may request, representing the outstanding Principal being transferred by the Holder and, if less than the entire outstanding Principal is being transferred, a new Note (in accordance with Section 13(d)) to the Holder representing the outstanding Principal not being transferred.

 

(b)   Lost, Stolen or Mutilated Note . Upon receipt by the Company of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Note (as to which a written certification and the indemnification contemplated below shall suffice as such evidence), and, in the case of loss, theft or destruction, of any indemnification undertaking by the Holder to the Company in customary and reasonable form and, in the case of mutilation, upon surrender and cancellation of this Note, the Company shall execute and deliver to the Holder a new Note (in accordance with Section 13(d)) representing the outstanding Principal.

 

(c)   Note Exchangeable for Different Denominations . This Note is exchangeable, upon the surrender hereof by the Holder at the principal office of the Company, for a new Note or Notes (in accordance with Section 13(d) and in principal amounts of at least $1,000) representing in the aggregate the outstanding Principal of this Note, and each such new Note will represent such portion of such outstanding Principal as is designated by the Holder at the time of such surrender.

 

(d)   Issuance of New Notes . Whenever the Company is required to issue a new Note pursuant to the terms of this Note, such new Note (i) shall be of like tenor with this Note, (ii) shall represent, as indicated on the face of such new Note, the Principal remaining outstanding (or in the case of a new Note being issued pursuant to Section 13(a) or Section 13(c), the Principal designated by the Holder which, when added to the principal represented by the other new Notes issued in connection with such issuance, does not exceed the Principal remaining outstanding under this Note immediately prior to such issuance of new Notes), (iii) shall have an issuance date, as indicated on the face of such new Note, which is the same as the Issuance Date of this Note, (iv) shall have the same rights and conditions as this Note, and (v) shall represent accrued and unpaid Interest and Late Charges on the Principal and Interest of this Note, from the Issuance Date.

 

14.   REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF . The remedies provided in this Note shall be cumulative and in addition to all other remedies available under this Note and any of the other Transaction Documents at law or in equity (including a decree of specific performance and/or other injunctive relief), and nothing herein shall limit the Holder’s right to pursue actual and consequential damages for any failure by the Company to comply with the terms of this Note. The Company covenants to the Holder that there shall be no characterization concerning this instrument other than as expressly provided herein. Amounts set forth or provided for herein with respect to payments, redemptions and the like (and the computation thereof) shall be the amounts to be received by the Holder and shall not, except as expressly provided herein, be subject to any other obligation of the Company (or the performance thereof). The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder and that the remedy at law for any such breach may be inadequate. The Company therefore agrees that, in the event of any such breach or threatened breach, the Holder shall be entitled, in addition to all other available remedies, to specific performance and/or temporary, preliminary and permanent injunctive or other equitable relief from any court of competent jurisdiction in any such case without the necessity of proving actual damages and without posting a bond or other security. The Company shall provide all information and documentation to the Holder that is requested by the Holder to enable the Holder to confirm the Company’s compliance with the terms and conditions of this Note.

 

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15.   PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS . If (a) this Note is placed in the hands of an attorney for collection or enforcement or is collected or enforced through any legal proceeding or the Holder otherwise takes action to collect amounts due under this Note or to enforce the provisions of this Note or (b) there occurs any bankruptcy, reorganization, receivership of the Company or other proceedings affecting Company creditors’ rights and involving a claim under this Note, then the Company shall pay the costs incurred by the Holder for such collection, enforcement or action or in connection with such bankruptcy, reorganization, receivership or other proceeding, including, without limitation, attorneys’ fees and disbursements. The Company expressly acknowledges and agrees that no amounts due under this Note shall be affected, or limited, by the fact that the purchase price paid for this Note was less than the original Principal amount hereof.

 

16.   CONSTRUCTION; HEADINGS . This Note shall be deemed to be jointly drafted by the Company and the initial Holder and shall not be construed against any such Person as the drafter hereof. The headings of this Note are for convenience of reference and shall not form part of, or affect the interpretation of, this Note. Unless the context clearly indicates otherwise, each pronoun herein shall be deemed to include the masculine, feminine, neuter, singular and plural forms thereof. The terms “including,” “includes,” “include” and words of like import shall be construed broadly as if followed by the words “without limitation.” The terms “herein,” “hereunder,” “hereof” and words of like import refer to this entire Note instead of just the provision in which they are found. Unless expressly indicated otherwise, all section references are to sections of this Note. Terms used in this Note and not otherwise defined herein, but defined in the other Transaction Documents, shall have the meanings ascribed to such terms on the Closing Date in such other Transaction Documents unless otherwise consented to in writing by the Holder.

 

17.   FAILURE OR INDULGENCE NOT WAIVER . No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. No waiver shall be effective unless it is in writing and signed by an authorized representative of the waiving party.

 

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18.   NOTICES; CURRENCY; PAYMENTS .

 

(a)   Notices . Whenever notice is required to be given under this Note, unless otherwise provided herein, such notice shall be given in accordance with Section 9(f) of the Note Purchase Agreement. The Company shall provide the Holder with prompt written notice of all actions taken pursuant to this Note, including in reasonable detail a description of such action and the reason therefore.

 

(b)   Currency . All dollar amounts referred to in this Note are in United States Dollars (“ U.S. Dollars ”), and all amounts owing under this Note shall be paid in U.S. Dollars. All amounts denominated in other currencies (if any) shall be converted into the U.S. Dollar equivalent amount in accordance with the Exchange Rate on the date of calculation. “ Exchange Rate ” means, in relation to any amount of currency to be converted into U.S. Dollars pursuant to this Note, the U.S. Dollar exchange rate as published in the Wall Street Journal on the relevant date of calculation (it being understood and agreed that where an amount is calculated with reference to, or over, a period of time, the date of calculation shall be the final date of such period of time).

 

(c)   Payments . Whenever any payment of cash is to be made by the Company to any Person pursuant to this Note, unless otherwise expressly set forth herein, such payment shall be made in lawful money of the United States of America by a certified check drawn on the account of the Company and sent via overnight courier service to such Person at such address as previously provided to the Company in writing (which address, in the case of each of the Buyers, shall initially be as set forth on the Schedule of Buyers attached to the Note Purchase Agreement), provided that the Holder may elect to receive a payment of cash via wire transfer of immediately available funds by providing the Company with prior written notice setting out such request and the Holder’s wire transfer instructions. Whenever any amount expressed to be due by the terms of this Note is due on any day which is not a Business Day, the same shall instead be due on the next succeeding day which is a Business Day. Any amount of Principal or other amounts due under the Transaction Documents which is not paid when due shall result in a late charge being incurred and payable by the Company in an amount equal to interest on such amount at the rate of eighteen percent (18%) per annum from the date such amount was due until the same is paid in full (“ Late Charge ”).

 

19.   CANCELLATION . After all Principal, accrued Interest, Late Charges and other amounts at any time owed on this Note have been paid in full, this Note shall automatically be deemed canceled, shall be surrendered to the Company for cancellation and shall not be reissued.

 

20.   WAIVER OF NOTICE . To the extent permitted by law, the Company hereby irrevocably waives demand, notice, presentment, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note and the Note Purchase Agreement.

 

21.   GOVERNING LAW . This Note shall be construed and enforced in accordance with, and all questions concerning the construction, validity, interpretation and performance of this Note shall be governed by, the internal laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of New York. The Company hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, Borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Nothing contained herein (i) shall be deemed or operate to preclude the Holder from bringing suit or taking other legal action against the Company in any other jurisdiction to collect on the Company’s obligations to the Holder, to realize on any collateral or any other security for such obligations, or to enforce a judgment or other court ruling in favor of the Holder. THE COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY.

 

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22.   JUDGMENT CURRENCY .

 

(a)  If for the purpose of obtaining or enforcing judgment against the Company in any court in any jurisdiction it becomes necessary to convert into any other currency (such other currency being hereinafter in this Section 22 referred to as the “ Judgment Currency ”) an amount due in U.S. dollars under this Note, the conversion shall be made at the Exchange Rate prevailing on the Business Day immediately preceding:

 

(i)  the date actual payment of the amount due, in the case of any proceeding in the courts of New York or in the courts of any other jurisdiction that will give effect to such conversion being made on such date: or

 

(ii)  the date on which the foreign court determines, in the case of any proceeding in the courts of any other jurisdiction (the date as of which such conversion is made pursuant to this Section 22(a)(ii) being hereinafter referred to as the “ Judgment Conversion Date ”).

 

(b)  If in the case of any proceeding in the court of any jurisdiction referred to in Section 22(a)(ii) above, there is a change in the Exchange Rate prevailing between the Judgment Conversion Date and the date of actual payment of the amount due, the applicable party shall pay such adjusted amount as may be necessary to ensure that the amount paid in the Judgment Currency, when converted at the Exchange Rate prevailing on the date of payment, will produce the amount of US dollars which could have been purchased with the amount of Judgment Currency stipulated in the judgment or judicial order at the Exchange Rate prevailing on the Judgment Conversion Date.

 

(c)  Any amount due from the Company under this provision shall be due as a separate debt and shall not be affected by judgment being obtained for any other amounts due under or in respect of this Note.

 

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23.   SEVERABILITY . If any provision of this Note is prohibited by law or otherwise determined to be invalid or unenforceable by a court of competent jurisdiction, the provision that would otherwise be prohibited, invalid or unenforceable shall be deemed amended to apply to the broadest extent that it would be valid and enforceable, and the invalidity or unenforceability of such provision shall not affect the validity of the remaining provisions of this Note so long as this Note as so modified continues to express, without material change, the original intentions of the parties as to the subject matter hereof and the prohibited nature, invalidity or unenforceability of the provision(s) in question does not substantially impair the respective expectations or reciprocal obligations of the parties or the practical realization of the benefits that would otherwise be conferred upon the parties. The parties will endeavor in good faith negotiations to replace the prohibited, invalid or unenforceable provision(s) with a valid provision(s), the effect of which comes as close as possible to that of the prohibited, invalid or unenforceable provision(s).

 

24.   MAXIMUM PAYMENTS . Without limiting Section 9(d) of the Note Purchase Agreement, nothing contained herein shall be deemed to establish or require the payment of a rate of interest or other charges in excess of the maximum permitted by applicable law. In the event that the rate of interest required to be paid or other charges hereunder exceed the maximum permitted by such law, any payments in excess of such maximum shall be credited against amounts owed by the Company to the Holder and thus refunded to the Company.

 

25.   CERTAIN DEFINITIONS . For purposes of this Note, the following terms shall have the following meanings:

 

(a)  “ 1934 Act ” means the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder.

 

(b)  “ Affiliate ” means, with respect to any Person, any other Person that directly or indirectly controls, is controlled by, or is under common control with, such Person, it being understood for purposes of this definition that “control” of a Person means the power directly or indirectly either to vote 10% or more of the stock having ordinary voting power for the election of directors of such Person or direct or cause the direction of the management and policies of such Person whether by contract or otherwise.

 

(c)  “ Business Day ” means any day other than Saturday, Sunday or other day on which commercial banks in the City of New York are authorized or required by law to remain closed.

 

(d)  “ Change of Control ” means any Fundamental Transaction other than (i) any merger of the Company or any of its, direct or indirect, wholly-owned Subsidiaries with or into any of the foregoing Persons, (ii) any reorganization, recapitalization or reclassification of the shares of Common Stock in which holders of the Company’s voting power immediately prior to such reorganization, recapitalization or reclassification continue after such reorganization, recapitalization or reclassification to hold publicly traded securities and, directly or indirectly, are, in all material respects, the holders of the voting power of the surviving entity (or entities with the authority or voting power to elect the members of the board of directors (or their equivalent if other than a corporation) of such entity or entities) after such reorganization, recapitalization or reclassification, or (iii) pursuant to a migratory merger effected solely for the purpose of changing the jurisdiction of incorporation of the Company or any of its Subsidiaries.

 

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(e)  “ Closing Date ” shall have the meaning set forth in the Note Purchase Agreement, which date is the date the Company initially issued Notes pursuant to the terms of the Note Purchase Agreement.

 

(f)  “ Common Stock ” means (i) the Company’s shares of common stock, par value $0.001 per share, and (ii) any capital stock into which such common stock shall have been changed or any share capital resulting from a reclassification of such common stock.

 

(g)  “ Fundamental Transaction ” means (A) that the Company shall, directly or indirectly, including through subsidiaries, Affiliates or otherwise, in one or more related transactions, (i) consolidate or merge with or into (whether or not the Company is the surviving corporation) another Subject Entity, or (ii) sell, assign, transfer, convey or otherwise dispose of all or substantially all of the properties or assets of the Company or any of its “significant subsidiaries” (as defined in Rule 1-02 of Regulation S-X) to one or more Subject Entities, or (iii) make, or allow one or more Subject Entities to make, or allow the Company to be subject to or have its Common Stock be subject to or party to one or more Subject Entities making, a purchase, tender or exchange offer that is accepted by the holders of at least either (x) 50% of the outstanding shares of Common Stock, (y) 50% of the outstanding shares of Common Stock calculated as if any shares of Common Stock held by all Subject Entities making or party to, or Affiliated with any Subject Entities making or party to, such purchase, tender or exchange offer were not outstanding; or (z) such number of shares of Common Stock such that all Subject Entities making or party to, or Affiliated with any Subject Entity making or party to, such purchase, tender or exchange offer, become collectively the beneficial owners (as defined in Rule 13d-3 under the 1934 Act) of at least 50% of the outstanding shares of Common Stock, or (iv) consummate a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with one or more Subject Entities whereby all such Subject Entities, individually or in the aggregate, acquire, either (x) at least 50% of the outstanding shares of Common Stock, (y) at least 50% of the outstanding shares of Common Stock calculated as if any shares of Common Stock held by all the Subject Entities making or party to, or Affiliated with any Subject Entity making or party to, such stock purchase agreement or other business combination were not outstanding; or (z) such number of shares of Common Stock such that the Subject Entities become collectively the beneficial owners (as defined in Rule 13d-3 under the 1934 Act) of at least 50% of the outstanding shares of Common Stock, or (v) reorganize, recapitalize or reclassify its Common Stock, (B) that the Company shall, directly or indirectly, including through subsidiaries, Affiliates or otherwise, in one or more related transactions, allow any Subject Entity individually or the Subject Entities in the aggregate to be or become the “beneficial owner” (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, whether through acquisition, purchase, assignment, conveyance, tender, tender offer, exchange, reduction in outstanding shares of Common Stock, merger, consolidation, business combination, reorganization, recapitalization, spin-off, scheme of arrangement, reorganization, recapitalization or reclassification or otherwise in any manner whatsoever, of either (x) at least 50% of the aggregate ordinary voting power represented by issued and outstanding Common Stock, (y) at least 50% of the aggregate ordinary voting power represented by issued and outstanding Common Stock not held by all such Subject Entities as of the date of this Note calculated as if any shares of Common Stock held by all such Subject Entities were not outstanding, or (z) a percentage of the aggregate ordinary voting power represented by issued and outstanding shares of Common Stock or other equity securities of the Company sufficient to allow such Subject Entities to effect a statutory short form merger or other transaction requiring other shareholders of the Company to surrender their shares of Common Stock without approval of the shareholders of the Company or (C) directly or indirectly, including through subsidiaries, Affiliates or otherwise, in one or more related transactions, the issuance of or the entering into any other instrument or transaction structured in a manner to circumvent, or that circumvents, the intent of this definition in which case this definition shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this definition to the extent necessary to correct this definition or any portion of this definition which may be defective or inconsistent with the intended treatment of such instrument or transaction.

 

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(h)  “ GAAP ” means United States generally accepted accounting principles, consistently applied.

 

(i)  “ Group ” means a “group” as that term is used in Section 13(d) of the 1934 Act and as defined in Rule 13d-5 thereunder.

 

(j)  “ Indebtedness ” shall have the meaning ascribed to such term in the Note Purchase Agreement.

 

(k)  “ Interest Date ” means, with respect to any given calendar quarter, the last Business Day of such calendar quarter.

 

(l)  “ Interest Rate ” means twelve and a half percent (12.5%) per annum, as may be adjusted from time to time in accordance with Section 2.

 

(m)  “ Make-Whole Amount ” means as to any Outstanding Amount on any date of determination, and as to any redemption hereunder, the amount of any Interest that, but for such redemption hereunder, would have accrued with respect to the Outstanding Amount being redeemed under this Note at the Interest Rate for the period from the applicable redemption date through January 29, 2019. The Company hereby acknowledges and agrees that the Make-Whole Amount is intended by the parties to be, and shall be deemed, a reasonable estimate of the Holder’s actual loss of its investment opportunity as a result of a redemption of this Note prior to the Maturity Date and not as a penalty.

 

(n)  “ Maturity Date ” shall mean September 30, 2018; provided, however, the Maturity Date may be extended at the option of the Holder (i) in the event that, and for so long as, an Event of Default shall have occurred and be continuing or any event shall have occurred and be continuing that with the passage of time and the failure to cure would result in an Event of Default or (ii) through the date that is twenty (20) Business Days after the consummation of a Fundamental Transaction in the event that a Fundamental Transaction is publicly announced prior to the Maturity Date.

 

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(o)  “ Merger ” means the transaction whereby a wholly owned subsidiary (“ Merger Sub ”) of Monster Digital, Inc., a Delaware corporation (“ Monster ”), will merge with and into the Company, with the Company surviving the merger as a wholly owned subsidiary of Monster, and pursuant to which all of the outstanding shares of the Company’s capital stock will be exchanged for shares of the common stock, $0.001 par value per share, of Monster in accordance with the terms and conditions set forth in the Agreement and Plan of Merger and Reorganization by and among the Company, Monster, and Merger Sub dated as of July 3, 2017, as amended.

 

(p)  “ Outstanding Amount ” means the sum of (A) the portion of the Principal to be redeemed or otherwise with respect to which this determination is being made, (B) accrued and unpaid Interest with respect to such Principal and (C) accrued and unpaid Late Charges with respect to such Principal and Interest and (D) the Make-Whole Amount.

 

(q)   “ Parent Entity ” of a Person means an entity that, directly or indirectly, controls the applicable Person and whose common stock or equivalent equity security is quoted or listed on an NMS stock exchange, or, if there is more than one such Person or Parent Entity, the Person or Parent Entity with the largest public market capitalization as of the date of consummation of the Fundamental Transaction.

 

(r)  “ Permitted Indebtedness ” means (i) Indebtedness evidenced by this Note and the Other Notes, (ii) Indebtedness set forth on Schedule 24(q) attached hereto, as in effect as of the Subscription Date; (iii) Indebtedness secured by Permitted Liens or unsecured but as described in clauses (iv) and (v) of the definition of Permitted Liens; (iv) indebtedness incurred for the purchase of goods or services on normal trade credit; (v) other unsecured indebtedness in an amount not exceeding $100,000 outstanding at any time; and (vi) Permitted Senior Indebtedness secured by Permitted Senior Collateral.

 

(s)  “ Permitted Liens ” means (i) any Lien for taxes not yet due or delinquent or being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with GAAP, (ii) any statutory Lien arising in the ordinary course of business by operation of law with respect to a liability that is not yet due or delinquent, (iii) any Lien created by operation of law, such as materialmen’s liens, mechanics’ liens and other similar liens, arising in the ordinary course of business with respect to a liability that is not yet due or delinquent or that are being contested in good faith by appropriate proceedings, (iv) Liens (A) upon or in any equipment acquired or held by the Company or any of its Subsidiaries to secure the purchase price of such equipment or Indebtedness incurred solely for the purpose of financing the acquisition or lease of such equipment, or (B) existing on such equipment at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment, in either case, with respect to Indebtedness in an aggregate amount not to exceed $100,000, (v) Liens incurred in connection with the extension, renewal or refinancing of the Indebtedness secured by Liens of the type described in clause (iv) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the Indebtedness being extended, renewed or refinanced does not increase, (vi) Liens in favor of customs and revenue authorities arising as a matter of law to secure payments of custom duties in connection with the importation of goods, and (vii) Liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default under Section 3(a)(vi).

 

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(t)  “ Permitted Senior Indebtedness ” means outstanding convertible promissory notes issued by the Company in an aggregate principal and accrued interest amount of $9,469,836.88 (which notes will be converted into shares of common stock of the Company immediately prior to the closing of the Merger).

 

(u)  “ Permitted Senior Indebtedness Collateral ” means the Company’s assets secured under the Permitted Senior Indebtedness.

 

(v)  “ Person ” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization, any other entity or a government or any department or agency thereof.

 

(w)  “ Redemption Notices ” means, collectively, the Event of Default Redemption Notices and the Company Optional Redemption Notices, and each of the foregoing, individually, a “ Redemption Notice .”

 

(x)  “ Redemption Premium ” means 105%.

 

(y)  “ Redemption Prices ” means, collectively, Event of Default Redemption Prices, and the Company Optional Redemption Prices, and each of the foregoing, individually, a “ Redemption Price .”

 

(z)   “ Note Purchase Agreement ” means that certain note purchase agreement, dated as of the Subscription Date, by and among the Company and the initial holders of the Notes pursuant to which the Company issued the Notes, as may be amended from time to time.

 

(aa)  “ Subject Entity ” means any Person, Persons or Group or any Affiliate or associate of any such Person, Persons or Group.

 

(bb)  “ Subsidiaries ” shall have the meaning as set forth in the Note Purchase Agreement.

 

(cc)  “ Successor Entity ” means the Person (or, if so elected by the Holder, the Parent Entity) formed by, resulting from or surviving any Fundamental Transaction or the Person (or, if so elected by the Holder, the Parent Entity) with which such Fundamental Transaction shall have been entered into.

 

  19  

 

 

26.   DISCLOSURE . At any time from and after the Public Company Date (as defined in the Note Purchase Agreement), upon receipt or delivery by the Company of any notice in accordance with the terms of this Note, unless the Company has in good faith determined that the matters relating to such notice do not constitute material, non-public information relating to the Company or any of its Subsidiaries, the Company shall within one (1) Business Day after any such receipt or delivery publicly disclose such material, non-public information on a Current Report on Form 8-K or otherwise. In the event that the Company believes that a notice contains material, non-public information relating to the Company or any of its Subsidiaries, the Company so shall indicate to the Holder contemporaneously with delivery of such notice, and in the absence of any such indication, the Holder shall be allowed to presume that all matters relating to such notice do not constitute material, non-public information relating to the Company or any of its Subsidiaries. If the Company or any of its Subsidiaries provides material non-public information to the Holder that is not simultaneously filed in a Current Report on Form 8-K and the Holder has not agreed to receive such material non-public information, the Company hereby covenants and agrees that the Holder shall not have any duty of confidentiality to the Company, any of its Subsidiaries or any of their respective officers, directors, employees, affiliates or agents with respect to, or a duty to any of the foregoing not to trade on the basis of, such material non-public information. Nothing contained in this Section 26 shall limit any obligations of the Company, or any rights of the Holder, under the Note Purchase Agreement.

 

[ signature page follows ]

 

  20  

 

 

IN WITNESS WHEREOF, the Company has caused this Note to be duly executed as of the Issuance Date set out above.

 

 

 

INNOVATE BIOPHARMACEUTICALS INC.

 

 

 

  By:  /s/ Christopher Prior, Ph.D.             
     Name: Christopher Prior, Ph.D.
     Title: Chief Executive Officer

 

 

 

 

Exhibit 10.1

 

SUBSCRIPTION AGREEMENT

 

This SUBSCRIPTION AGREEMENT (this “ Agreement ”) is dated as of January 29, 2018 by and among Innovate Biopharmaceuticals, Inc., a Delaware corporation (the “ Company ”), and each purchaser listed on Annex A hereto (each, including its successors and permitted assigns, a “ Purchaser ” and collectively, the “ Purchasers ”).

 

RECITALS

 

A.            The Company and each Purchaser party hereto are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by Section 4(a)(2) of the Securities Act of 1933, as amended (the “ Securities Act ”) and Rule 506 of Regulation D (“ Regulation D ”) as promulgated by the United States Securities and Exchange Commission (the “ Commission ”) under the Securities Act.

 

B.            Each Purchaser, severally and not jointly, wishes to purchase, and the Company wishes to sell, upon the terms and conditions stated in this Agreement, (i) that aggregate number of shares of the Company’s common stock, par value $0.001 per share (the “ Common Stock ” or the “ Shares ”), and (ii) a warrant, substantially in the form attached hereto as Exhibit G , to purchase an aggregate number of Shares (the “ Warrants ”) of the Company equal to the product obtained by multiplying (x) 20% by (y) the number of Shares purchased for cash by such Purchaser, rounded down to the nearest whole share (excluding all Shares issued in respect of the conversion of Convertible Notes and any Shares issued or issuable pursuant to any Warrant), and with a per share exercise price equal to 125% of the Purchase Price, determined as set forth in Section 2.1(a) below (which aggregate amount of Shares and Warrants for all Purchasers shall collectively be referred to herein as the “ Securities ”).

 

C.            Certain of the Purchasers listed on Annex A-1 are holders of convertible debt instruments (the “ Convertible Notes ”) issued by the Company (each such holder, a “ Converting Holder ” and collectively, the “ Converting Holders ”) and have agreed to convert their indebtedness into Securities subject to the conversion terms therein and otherwise in accordance with the terms and conditions of this Agreement.

 

NOW, THEREFORE , in consideration of the mutual covenants contained in this Agreement, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and each Purchaser hereby agree as follows:

 

Article 1

 

Definitions

 

1.1            Definitions . In addition to the terms defined elsewhere in this Agreement, for all purposes of this Agreement, the following terms shall have the meanings indicated in this Section 1.1 :

 

Actual Cash Subscription Amount ” with respect to a Purchaser (other than a Converting Holder) shall mean the amount set forth opposite such Purchaser’s name under the column “Actual Cash Subscription Amount” on Annex A .

 

Affiliate ” means, with respect to any Person, any other Person that, directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such Person, as such terms are used in and construed under Rule 144. With respect to a Purchaser, any investment fund or managed account that is managed on a discretionary basis by the same investment manager as such Purchaser will be deemed to be an Affiliate of such Purchaser.

 

     

 

 

Business Day ” means a day, other than a Saturday or Sunday, on which banks in New York City are open for the general transaction of business.

 

Closing ” means the closing of sale by the Company of Shares to such Purchasers pursuant to this Agreement on the Closing Date as provided in Section 2.1(a) hereof.

 

Closing Date ” means January 29, 2018 or such earlier or later date as the parties hereto shall mutually agree.

 

Common Stock ” has the meaning set forth in the Recitals.

 

Company Counsel ” means Wilson Sonsini Goodrich & Rosati, P.C.

 

Company Deliverables ” has the meaning set forth in Section 2.2(a) .

 

Company’s Knowledge ” means with respect to any statement made to the knowledge of the Company, that the statement is based upon the actual knowledge of Christopher Prior and Steve Laumas or any of the foregoing individuals would reasonably be expected to know such fact in the ordinary course of the performance of such individual’s employment capacity.

 

Compliance Certificate ” has the meaning set forth in Section 2.2(a)(vii) .

 

Disclosure Schedules ” has the meaning set forth in Section 3.1 .

 

Disqualification Event ” has the meaning set forth in Section 3.1(j) .

 

Encumbrance ” means any lien, pledge, hypothecation, charge, mortgage, security interest, encumbrance, claim, infringement, interference, option, right of first refusal, preemptive right, community property interest or restriction of any nature (including any restriction on the voting of any security, any restriction on the transfer of any security or other asset, any restriction on the receipt of any income derived from any asset, any restriction on the use of any asset and any restriction on the possession, exercise or transfer of any other attribute of ownership of any asset).

 

Escrow Account ” means the escrow account established by the Company with Delaware Trust Company, Delaware Trust Company serving as escrow agent, which escrow (as more particularly described in Section 2.2(c) hereof) shall be conducted pursuant to the terms of an escrow agreement entered into by the Company, the escrow agent and the Placement Agents.

 

GAAP ” means U.S. generally accepted accounting principles, as applied by the Company.

 

Governmental Authority ” means any court or tribunal, governmental, quasi-governmental or regulatory body, administrative agency or bureau, commission or authority or other body exercising similar powers or authority.

 

     

 

 

Governmental Body ” means any: (a) nation, state, commonwealth, province, territory, county, municipality, district or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign or other government; (c) governmental or quasi-governmental body of any nature (including any governmental division, department, agency, commission, instrumentality, official, ministry, fund, foundation, center, organization, unit, body or entity and any court or other tribunal, and for the avoidance of doubt, any Tax authority); or (d) self-regulatory organization (including NASDAQ and the Financial Industry Regulatory Authority).

 

Legal Proceeding ” means any action, suit, litigation, arbitration, proceeding (including any civil, criminal, administrative, investigative or appellate proceeding), hearing, inquiry, audit, examination or investigation commenced, brought, conducted or heard by or before, or otherwise involving, any court or other Governmental Body or any arbitrator or arbitration panel.

 

Legal Requirement ” means any federal, state, foreign, material local or municipal or other law, statute, constitution, principle of common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling or requirement issued, enacted, adopted, promulgated, implemented or otherwise put into effect by or under the authority of any Governmental Body.

 

Material Adverse Effect ” means any effect that, considered together with all other effects that have occurred prior to the date of determination of the occurrence of the Material Adverse Effect, is or would reasonably be expected to be materially adverse to, or has or would reasonably be expected to have or result in a material adverse effect on: (a) the business, condition (financial or otherwise), capitalization, assets, operations or financial performance of the Company and its Subsidiaries taken as a whole; or (b) the ability of the Company to consummate the Merger or any transactions contemplated by this Agreement or the Merger Agreement or to perform any of its covenants or obligations under this Agreement or the Merger Agreement in all material respects; provided , however , that effects from the following shall not be deemed to constitute (nor shall effects from any of the following be taken into account in determining whether there has occurred) a Material Adverse Effect: (i) any rejection by a Governmental Body of a registration or filing by the Company relating to the IP Rights; (ii) any change in the cash position of the Company which results from operations in the ordinary course of business; (iii) conditions generally affecting the industries in which the Company and its Subsidiaries participate or the United States or global economy or capital markets as a whole, to the extent that such conditions do not have a disproportionate impact on the Company and its Subsidiaries taken as a whole; (iv) any failure by the Company or any of its Subsidiaries to meet internal projections or forecasts on or after the date of this Agreement (it being understood, however, that any effect causing or contributing to any such failure to meet projections or forecasts may constitute a Material Adverse Effect and may be taken into account in determining whether a Material Adverse Effect has occurred); (v) the execution, delivery, announcement or performance of the obligations under this Agreement or the Merger Agreement or the announcement, pendency or anticipated consummation of the Merger or the consummation of the transactions contemplated by this Agreement; (vi) any natural disaster or any acts of terrorism, sabotage, military action or war or any escalation or worsening thereof; or (vii) any changes (after the date of this Agreement) in GAAP or applicable Legal Requirements.

 

Merger ” means the transaction whereby a wholly owned subsidiary (“ Merger Sub ”) of Monster Digital, Inc., a Delaware corporation (“ Monster ”), will merge with and into the Company, with the Company surviving the merger as a wholly owned subsidiary of Monster, and pursuant to which all of the outstanding shares of the Company’s capital stock will be exchanged for shares of the common stock, $0.001 par value per share, of Monster (“ Monster Common Stock ”) in accordance with the terms and conditions set forth in the Agreement and Plan of Merger and Reorganization by and among the Company, Monster, and Merger Sub dated as of July 3, 2017, as amended (the “ Merger Agreement ”).

 

Minimum Offering Amount ” means an amount equal to at least $17,000,000 minus an amount equal to the Company’s unrestricted cash as of the Closing Date.

 

     

 

 

Person ” means an individual, corporation, partnership, limited liability company, trust, business trust, association, joint stock company, joint venture, sole proprietorship, unincorporated organization, Governmental Authority or any other form of entity not specifically listed herein.

 

Purchase Price ” means $0.9609 per share of Common Stock.

 

Purchaser Deliverables ” has the meaning set forth in Section 2.2(b) .

 

Required Approvals ” has the meaning set forth in Section 3.1(c) .

 

Rule 144 ” means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.

 

Secretary’s Certificate ” has the meaning set forth in Section 2.2(a)(vi) .

 

Stock Certificates ” has the meaning set forth in Section 2.2(a)(i) .

 

Tax ” means any federal, state, local, foreign or other tax, including any income tax, franchise tax, capital gains tax, gross receipts tax, value-added tax, surtax, estimated tax, unemployment tax, national health insurance tax, excise tax, ad valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax, business tax, withholding tax, payroll tax, customs duty, alternative or add-on minimum or other tax of any kind whatsoever, and including any fine, penalty, addition to tax or interest, whether disputed or not.

 

Transaction Documents ” means this Agreement, the Investor Questionnaire attached as Exhibit A-1 hereto, the Stock Certificate Questionnaire attached as Exhibit A-2 hereto, the Placement Agent Questionnaire attached as Exhibit B hereto, the Secretary’s Certificate and the Compliance Certificate.

 

Transfer Agent ” means the transfer agent for the Company, any successor transfer agent for the Company, or the Company, if the Company functions as its transfer agent.

 

Article 2

 

Purchase and Sale

 

2.1            Closing .

 

(a)           Cash Purchasers. Subject to the terms and conditions set forth in this Agreement, at the Closing, the Company shall issue and sell to each Purchaser (other than the Converting Holders) listed on Annex A hereto, as it may be amended, and each Purchaser listed on Annex A hereto, as it may be amended, shall, severally and not jointly, purchase from the Company, such number of Shares equal to the quotient resulting from dividing (i) the Actual Cash Subscription Amount for such Purchaser, as indicated opposite such Purchaser’s name on Annex A hereto, by (ii) the Purchase Price, which Share amount shall be rounded down to the nearest whole share.

 

     

 

 

(b)           Converting Noteholders. Subject to the terms and conditions set forth in this Agreement, at the Closing the Company shall issue and sell to each Purchaser that constitutes a Converting Holder listed on Annex A-1 hereto, and each such Converting Holder listed on Annex A-1 hereto, shall, severally and not jointly, acquire from the Company, by converting such Convertible Note(s) held by such Converting Holder, such number of Shares as indicated opposite such Converting Holder’s name on Annex A hereto (the “ Note Conversion ”). At the Closing, the Company shall issue to each Purchaser a Warrant, substantially in the form attached hereto as Exhibit G , to purchase an aggregate number of Shares equal to the product obtained by multiplying (x) 20% by (y) the number of Shares purchased for cash by such Purchaser (excluding all Shares issued in respect of the conversion of Convertible Notes and any Shares issued or issuable pursuant to any Warrant), with a per share exercise price equal to 125% of the Purchase Price, rounded down to the nearest whole share.

 

(c)           Closing Time and Place. The Closing of the purchase and sale of the Shares and Warrants shall take place at the offices of Company Counsel, 12235 El Camino Real, San Diego, California 92130, on the Closing Date or at such other locations or remotely by facsimile transmission or other electronic means as the parties may mutually agree.

 

2.2            Closing Deliveries .

 

(a)          On or prior to each Closing, the Company shall issue, deliver or cause to be delivered to each Purchaser (other than the Converting Holders with respect to Section 2.2(a)(ii) (iv) ) the following (the “ Company Deliverables ”):

 

(i)           book entry evidence of the Shares or a copy of the stock certificates, free and clear of all restrictive and other legends except as provided in Section 4.1(b) hereof, evidencing the Shares subscribed for by the Purchasers hereunder to be registered in the names provided by the Purchasers as set forth on the Stock Certificate Questionnaire attached as Exhibit A-2 hereto (the “ Stock Certificates ”), with the original Stock Certificates, if the Shares will be represented by stock certificates instead of book entry evidence, to be delivered to the addresses provided by the Purchasers on such Stock Certificate Questionnaires within five Business Days following the Closing. Upon closing of the Merger, the Shares purchased pursuant to this Agreement will be treated as Innovate Common Stock (as defined in the Merger Agreement), which will be converted into Monster Common Stock in accordance with the terms of the Merger Agreement;

 

(ii)          this Agreement duly executed by the Company;

 

(iii)         a Warrant registered in the name of such Purchaser to purchase up to a number of shares of Common Stock equal to 20% of the number of Shares purchased for cash by such Purchaser, pursuant to this Agreement (excluding all Shares issued in respect of the conversion of Convertible Notes and any Shares issued or issuable pursuant to any Warrant), such Warrant having a per share exercise price equal to $1.2011 per Share, subject to adjustment therein (such Warrant may be delivered within three Trading Days of the applicable Closing Date). The Warrants issued pursuant to this Agreement will constitute Innovate Warrants (as defined in the Merger Agreement), and will be converted into warrants to purchase Monster Common Stock in accordance with the terms of the Merger Agreement;

 

(iv)         90–day Lock-Up Agreements executed by each of the officers and directors of the Company;

 

(v)          the Declaration of Registration Rights Agreement substantially in the form attached hereto as Exhibit E duly executed by the Company;

 

(vi)         a certificate of the Company’s Secretary (the “ Secretary’s Certificate ”), dated as of the Closing Date, (A) certifying the resolutions adopted by the Company’s Board of Directors or a duly authorized committee thereof approving the transactions contemplated by this Agreement and the other Transaction Documents and the issuance of the Shares, (B) certifying the current versions of the Company’s certificate of incorporation and bylaws (as the same may have been amended between the date hereof and the Closing Date) and (C) certifying as to the signatures and authority of persons signing the Transaction Documents and related documents on behalf of the Company, in the form attached hereto as Exhibit C ;

 

     

 

 

(vii)        a certificate (the “ Compliance Certificate ”), dated as of the Closing Date and signed by an authorized officer of the Company, certifying to the fulfillment of the conditions specified in Sections 5.1(a) and 5.1(b) in the form attached hereto as Exhibit D ; and

 

(viii)       a certificate evidencing the good standing of the Company issued by the Secretary of State of the State of Delaware, as of a date within five days of the Closing Date.

 

(b)          On or prior to the applicable Closing, each Purchaser (other than Converting Holders) shall deliver or cause to be delivered to the Company (the “ Purchaser Deliverables ”), a fully completed and duly executed Investor Questionnaire and Stock Certificate Questionnaire in the forms attached hereto as Exhibits A-1 and A-2 , respectively.

 

(c)          At least 2 days before each Closing Date, each Purchaser (other than Converting Holders) shall deliver its Actual Cash Subscription Amount in United States dollars and in immediately available funds by wire transfer to the following Escrow Account:

 

PNC Bank

300 Delaware Avenue

Wilmington, DE 19899

ABA #: 031100089

Account Number: 5605012373

Account Name: Delaware Trust Company

FFC: Innovate Biopharmaceuticals, Inc. Acct #: 79-3232

(MUST INCLUDE SUBSCRIBER’S NAME)

 

provided that if the Closing or Merger is not consummated by 5:00 p.m., New York City time, on the Outside Date, as defined in the Merger Agreement, upon request by a Purchaser (other than Converting Holders), the Company shall, within three (3) Business days thereof, return, or cause to be returned, the Actual Cash Subscription Amount (in United States dollars and in immediately available funds by wire transfer) paid by such Purchaser to an account specified by such Purchaser.

 

(d)          On or prior to the Closing, each Placement Agent shall deliver or cause to be delivered to the Company, a fully completed and duly executed Placement Agent Questionnaire in the form attached hereto as Exhibit B .

 

2.3            Note Conversion. Notwithstanding any provision in the Convertible Notes, each Converting Holder listed on Annex A-1 hereby acknowledges and agrees that: (a) the Convertible Notes are hereby automatically exchanged for the number of shares of Common Stock listed opposite such Converting Holder’s name on the Schedule of Purchasers; (b) all rights, title and interest arising under each such Convertible Note held by such Converting Holder is hereby canceled, released, extinguished and of no further force and effect; (c) upon the Closing, the Company will be forever released from any and all of its obligations and liabilities under the Convertible Notes and such Convertible Notes shall be extinguished and cancelled; (d) no fractional Shares shall be issued upon conversion of the Convertible Notes and the right to receive cash in lieu of any fractional Share shall be waived; and (e) each Converting Holder hereby waives in connection with such conversion any notices required by the terms of such Convertible Notes. For the avoidance of doubt, each Converting Holder hereby acknowledges that no Warrants will be issued to Converting Holder for Shares issued in respect of the conversion of the Convertible Notes.

 

     

 

 

Article 3

 

Representations and Warranties

 

3.1            Representations and Warranties of the Company. The Company represents and warrants to each of the Purchasers as follows, except as set forth in the disclosure schedules delivered by the Company to the Purchasers at the applicable Closing (the “ Disclosure Schedules ”) (it being understood that the representations and warranties in this Article 3 are qualified by: (x) any exceptions and disclosures set forth in the section or subsection of the Disclosure Schedules corresponding to the particular section or subsection in this Article 3 in which such representation and warranty appears; (y) any exceptions or disclosures explicitly cross-referenced in such section or subsection of the Disclosure Schedules by reference to another section or subsection of the Disclosure Schedules; and (z) any exceptions or disclosures set forth in any other section or subsection of the Disclosure Schedules to the extent it is reasonably apparent from the wording of such exception or disclosure that such exception or disclosure qualifies such representation and warranty). The inclusion of any information in the Disclosure Schedules shall not be deemed to be an admission or acknowledgement, in and of itself, that such information is required by the terms hereof to be disclosed, is material, has resulted in or would result in a Material Adverse Effect, or is outside the ordinary course of business.

 

(a)           Authorization; Enforcement; Validity. The Company has the requisite corporate power to enter into and to consummate the transactions contemplated by each of the Transaction Documents to which it is a party and otherwise to carry out its obligations hereunder and thereunder. The execution and delivery of each of the Transaction Documents to which it is a party by the Company and the consummation by it of the transactions contemplated hereby and thereby (including, but not limited to, the sale and delivery of the Shares) have been, or will be prior to the Closing, duly authorized by all necessary corporate action on the part of the Company, and no further corporate action is required by the Company, its Board of Directors or its stockholders in connection therewith other than in connection with the Required Approvals. Each of the Transaction Documents to which it is a party has been (or upon delivery will have been) duly executed by the Company and is, or when delivered in accordance with the terms hereof, will, constitute the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of, creditors’ rights and remedies or by other equitable principles of general application or insofar as indemnification and contribution provisions may be limited by applicable Legal Requirements. There are no shareholder agreements, voting agreements, or other similar arrangements with respect to the Company’s capital stock to which the Company is a party.

 

(b)           No Conflicts. The Company is not in violation or default of any term of its charter documents, each as amended, or of any provision of any mortgage, indenture, contract, lease, agreement, instrument or contract to which it is party or by which it is bound or of any judgment, decree, order or writ, other than any such violation that would not have a Material Adverse Effect. The execution, delivery, and performance of and compliance with the Transaction Documents and the issuance and sale of the Shares and Warrants pursuant to this Agreement will not, with or without the passage of time or giving of notice, result in any such violation, or be in conflict with or constitute a material default under any such term or provision, or result in the creation of any Encumbrance upon any of the properties or assets of the Company or the suspension, revocation, impairment, forfeiture or nonrenewal of any permit, license, authorization or approval applicable to the Company, its business or operations or any of its assets or properties.

 

     

 

 

(c)           Filings, Consents and Approvals. The Company is not required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any Governmental Authority or other Person in connection with the execution, delivery and performance by the Company of the Transaction Documents (including the issuance of the Shares and Warrants), other than (i) filings required by applicable state securities laws, (ii) the filing of a Notice of Sale of Shares on Form D with the Commission under Regulation D and (iii) those that have been made or obtained prior to the date of this Agreement (collectively, the “ Required Approvals ”).

 

(d)           Issuance of the Shares and Warrants. The Shares and Warrants have been duly authorized and, when issued and paid for in accordance with the terms of the Transaction Documents, will be duly and validly issued, fully paid and nonassessable and free and clear of all Encumbrances imposed or permitted by the Company, other than restrictions on transfer provided for in the Transaction Documents or imposed by applicable securities laws, and shall not be subject to preemptive or similar rights. Assuming the accuracy of the representations and warranties of the Purchasers in this Agreement, the Shares and Warrants will be issued in compliance with all applicable federal and state securities laws. The Company has reserved from its duly authorized capital stock the maximum number of shares of Common Stock issuable pursuant to this Agreement and the Warrants.

 

(e)           Additional Representations and Warranties. The Company’s representations and warranties set forth in the Merger Agreement in Section 2.1 (Due Organization; Organizational Documents), 2.4 (Capitalization), 2.5 (Financial Statements), Section 2.6 (Absence of Changes), Section 2.7 (Title to Assets), Section 2.8 (Real Property; Leaseholds), 2.9 (Intellectual Property), Section 2.10 (Material Contracts), Section 2.11 (Undisclosed Liabilities), Section 2.12 (Compliance; Permits; Restrictions), Section 2.13 (Tax Matters), Section 2.14 (Employee and Labor Matters; Benefit Plans), Section 2.15 (Insurance), Section 2.16 (Legal Proceedings; Orders) and Section 2.18 (No Financial Advisor) are hereby incorporated by reference and are qualified by the disclosures in the Innovate Disclosure Schedules (as defined in the Merger Agreement), provided that for purposes of this Agreement any representation as to the making available or delivery of documents to Monster shall mean the making available or delivery of documents to each Purchaser and all such representations and warranties are made as of the date of this Agreement (and not as of the date of the Merger Agreement) except for those representations and warranties that speak as of a different specified date (which representations and warranties shall be made as of such different specified date).

 

(f)           Certain Fees. Other than GP Nurmenkari Inc., and H.C. Wainwright & Co., LLC (each a “ Placement Agent ” and together the “ Placement Agents ”) in each of their capacities as placement agent, no Person will have, as a result of the Company’s issuance of the Shares and Warrants pursuant to the terms of this Agreement, any valid right, interest or claim against or upon the Company or a Purchaser for any commission, fee or other compensation pursuant to any agreement, arrangement or understanding entered into by or on behalf of the Company. The Company shall indemnify, pay, and hold each Purchaser harmless against, any liability, loss or expense (including, without limitation, attorneys’ fees and out-of-pocket expenses) arising in connection with any such right, interest or claim.

 

     

 

 

(g)           Private Placement. Assuming the accuracy of the representations and warranties of Purchasers contained in Section 3.2 hereof, the accuracy of the information disclosed by each Purchaser in the Investor Questionnaires delivered pursuant to Section 2.2(b) and Section 5.2(d) and the accuracy of the information disclosed by Placement Agents in the Placement Agent Questionnaire delivered pursuant to Section 2.2(d) and Section 5.2(h) , the offer, sale and issuance of the Shares and Warrants will be exempt from the registration requirements of the Securities Act, and will have been registered or qualified (or are exempt from registration and qualification) under the registration, permit or qualification requirements of all applicable state securities laws. Neither the Company nor any agent on its behalf has solicited or will solicit any offers to sell or has offered to sell or will offer to sell all or any part of the Shares or Warrants to any person or persons so as to bring the sale of such Shares and Warrants by the Company within the registration provisions of the Securities Act or any state securities laws. Assuming the accuracy of the Purchasers’ representations and warranties set forth in Section 3.2 (without giving effect to any materiality qualifiers therein), neither the Company nor any Person acting on its behalf has, directly or indirectly, at any time within the past six months, made any offers or sales of any Company security or solicited any offers to buy any security under circumstances that would eliminate the availability of the exemption from registration under Regulation D in connection with the offer and sale by the Company of the Shares and Warrants as contemplated hereby.

 

(h)           Investment Company. The Company is not required to be registered as, and is not an Affiliate of, and immediately following the Closing and the Merger will not be required to register as, an “investment company” within the meaning of the Investment Company Act of 1940, as amended.

 

(i)           Foreign Corrupt Practices. Neither the Company, nor to the Company’s Knowledge, any agent or other person acting on behalf of the Company, has: (i) directly or indirectly, used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign or domestic political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to any foreign or domestic political parties or campaigns from corporate funds, (iii) failed to disclose fully any contribution made by the Company (or made by any person acting on its behalf of which the Company is aware) which is in violation of law or (iv) violated in any material respect any provision of the Foreign Corrupt Practices Act of 1977, as amended.

 

(j)           No Disqualification Events. The Company has exercised reasonable care, in accordance with Commission rules and guidance, to determine whether any Covered Person (as defined below) is subject to any of the “bad actor” disqualifications described in Rule 506(d)(1)(i) through (viii) under the Securities Act (“ Disqualification Events ”). To the Company’s Knowledge, no Covered Person is subject to a Disqualification Event, except for a Disqualification Event covered by Rule 506(d)(2) or (d)(3) under the Securities Act. The Company has complied, to the extent applicable, with any disclosure obligations under Rule 506(e) under the Securities Act. “ Covered Persons ” are those persons specified in Rule 506(d)(1) under the Securities Act, including the Company; any predecessor or Affiliate of the Company; any director, executive officer, other officer participating in the offering, general partner or managing member of the Company; any beneficial owner of 20% or more of the Company’s outstanding voting equity securities, calculated on the basis of voting power; any promoter (as defined in Rule 405 under the Securities Act) connected with the Company in any capacity at the time of the sale of the Shares; and any person that has been or will be paid (directly or indirectly) remuneration for solicitation of purchasers in connection with the sale of the Shares (a “ Solicitor ”), any general partner or managing member of any Solicitor, and any director, executive officer or other officer participating in the offering of any Solicitor or general partner or managing member of any Solicitor.

 

(k)           Merger Agreement. Except for that certain Amendment to Agreement and Plan of Merger and Reorganization, dated January 3, 2018, by and among the Company, Monster, and Merger Sub, the Merger Agreement has not been amended or modified. The Merger Agreement is in full force and effect and represents a valid, binding and enforceable obligation of the Company and, to the Company’s Knowledge, of each party thereto, subject to the qualification that such enforceability may be limited by bankruptcy, insolvency, reorganization or other laws of general application relating to or affecting rights of creditors.

 

     

 

 

(l)           Shell Company Status . Monster is not an issuer identified in Rule 144(i)(1) or of the Securities Act or a shell company as defined in Rule 12b-2 of the Exchange Act (as defined in the Merger Agreement).

 

(m)           FDA. As to each product subject to the jurisdiction of the U.S. Food and Drug Administration (“ FDA ”) under the Federal Food, Drug and Cosmetic Act, as amended, and the regulations thereunder (“ FDCA ”) that is manufactured, packaged, labeled, tested, distributed, sold, and/or marketed by the Company, Monster or any of their subsidiaries (each such product, a “ Pharmaceutical Product ”), such Pharmaceutical Product is being manufactured, packaged, labeled, tested, distributed, sold and/or marketed by the Company or Monster, as applicable, in compliance with all applicable requirements under FDCA and similar laws, rules and regulations relating to registration, investigational use, premarket clearance, licensure, or application approval, good manufacturing practices, good laboratory practices, good clinical practices, product listing, quotas, labeling, advertising, record keeping and filing of reports, except where the failure to be in compliance could not have a Material Adverse Effect. There is no pending, completed or, to the Company's knowledge, threatened, action (including any lawsuit, arbitration, or legal or administrative or regulatory proceeding, charge, complaint, or investigation) against the Company, Monster or any of their Subsidiaries, and none of the Company, Monster or any of their subsidiaries has received any notice, warning letter or other communication from the FDA or any other governmental entity, which (i) contests the premarket clearance, licensure, registration, or approval of, the uses of, the distribution of, the manufacturing or packaging of, the testing of, the sale of, or the labeling and promotion of any Pharmaceutical Product, (ii) withdraws its approval of, requests the recall, suspension, or seizure of, or withdraws or orders the withdrawal of advertising or sales promotional materials relating to, any Pharmaceutical Product, (iii) imposes a clinical hold on any clinical investigation by the Company, Monster or any of their subsidiaries, (iv) enjoins production at any facility of the Company, Monster or any of their subsidiaries, (v) enters or proposes to enter into a consent decree of permanent injunction with the Company, Monster or any of their subsidiaries, or (vi) otherwise alleges any violation of any laws, rules or regulations by the Company, Monster or any of their subsidiaries, and which, either individually or in the aggregate, could have a Material Adverse Effect. The properties, business and operations of the Company, and Monster have been and are being conducted in all material respects in accordance with all applicable laws, rules and regulations of the FDA.  Neither the Company nor Monster has been informed by the FDA that the FDA will prohibit the marketing, sale, license or use in the United States of any product proposed to be developed, produced or marketed by the Company or Monster nor has the FDA expressed any concern as to approving or clearing for marketing any product being developed or proposed to be developed by the Company or Monster.

 

(n)           Form S-3 Eligibility. Following the Merger, Monster will be eligible to register the resale of the Securities for resale by the Purchasers on Form S-3 promulgated under the Securities Act.

 

3.2            Representations and Warranties of the Purchasers. Each Purchaser hereby represents and warrants severally and not jointly to the Company as follows:

 

(a)           Requisite Power and Authority. Such Purchaser has all necessary power and authority to execute and deliver the Transaction Documents to which such Purchaser is a party and to carry out their provisions. All action on such Purchaser’s part required for the lawful execution and delivery of the Transaction Documents to which such Purchaser is a party has been taken. Upon their execution and delivery, the Transaction Documents will be valid and binding obligations of such Purchaser, enforceable against such Purchaser in accordance with their respective terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors’ rights, (b) as limited by general principles of equity that restrict the availability of equitable remedies, and (c) to the extent that the enforceability of the indemnification provisions may be limited by applicable Legal Requirements.

 

     

 

 

(b)           Investment Representations. Such Purchaser understands that the Securities have not been registered under the Securities Act. Such Purchaser also understands that the Securities are being offered and sold pursuant to an exemption from registration contained in the Securities Act based in part upon such Purchaser’s representations contained in the Agreement and in such Purchaser’s Investor Questionnaire. Such Purchaser hereby represents and warrants as follows:

 

(i)           Purchaser Bears Economic Risk. Such Purchaser has substantial experience in evaluating and investing in private placement transactions of securities in companies similar to the Company so that such Purchaser is capable of evaluating the merits and risks of such Purchaser’s investment in the Company and has the capacity to protect such Purchaser’s own interests. Such Purchaser must bear the economic risk of this investment indefinitely unless the Shares and the shares underlying the Warrants (the “ Warrant Shares ”) are registered pursuant to the Securities Act, or an exemption from registration is available. Such Purchaser also understands that there is no assurance that any exemption from registration under the Securities Act will be available and that, even if available, such exemption may not allow such Purchaser to transfer all or any portion of the Shares, Warrants or Warrant Shares under the circumstances, in the amounts or at the times such Purchaser might propose.

 

(ii)          Acquisition for Own Account. Such Purchaser is acquiring the Shares and Warrants for Purchaser’s own account for investment only, and not with a view towards their distribution.

 

(iii)         Purchaser Can Protect Its Interest. Such Purchaser represents that by reason of such Purchaser’s, or of such Purchaser’s management’s, business or financial experience, such Purchaser has the capacity to protect such Purchaser’s own interests in connection with the transactions contemplated in the Transaction Documents. Further, such Purchaser is aware of no publication of any advertisement in connection with the transactions contemplated in the Agreement.

 

(iv)         Accredited Investor. Such Purchaser represents that such Purchaser is an accredited investor within the meaning of Regulation D under the Securities Act.

 

(v)          Company Information. Such Purchaser has received and read the applicable financial statements of the Company and has had an opportunity to discuss the Company’s business, management and financial affairs with directors, officers and management of the Company and has had the opportunity to review the Company’s operations and facilities. Such Purchaser has also had the opportunity to ask questions of and receive answers from, the Company and its management regarding the terms and conditions of this investment.

 

(vi)         Rule 144. Such Purchaser acknowledges and agrees that the Shares, Warrants and Warrant Shares are “restricted securities” as defined in Rule 144 promulgated under the Securities Act as in effect from time to time and must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. Such Purchaser has been advised or is aware of the provisions of Rule 144, which permits limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions, including, among other things: the availability of certain current public information about the Company, the resale occurring following the required holding period under Rule 144 and the number of shares being sold during any three-month period not exceeding specified limitations.

 

     

 

 

(vii)        “Bad Actor” Matters. Such Purchaser hereby represents that no Disqualification Events are applicable to such Purchaser or any of such Purchaser’s Rule 506(d) Related Parties (as defined below), except, if applicable, for a Disqualification Event as to which Rule 506(d)(2)(ii) or (iii) or (d)(3) is applicable. Such Purchaser hereby agrees that such Purchaser shall notify the Company promptly in writing in the event a Disqualification Event becomes applicable to such Purchaser or any of such Purchaser’s Rule 506(d) Related Parties, except, if applicable, for a Disqualification Event as to which Rule 506(d)(2)(ii) or (iii) or (d)(3) is applicable. For purposes of this Section 3.2(b) , “ Rule 506(d) Related Party ” shall mean a Person that is a beneficial owner of Purchaser’s securities for purposes of Rule 506(d) of the Securities Act.

 

(viii)       Residence. If such Purchaser is an individual, then such Purchaser resides in the state or province identified in the address of such Purchaser set forth on Annex A ; if such Purchaser is a partnership, corporation, limited liability company or other entity, then the office or offices of such Purchaser in which such Purchaser’s investment decision was made is located at the address or addresses of such Purchaser set forth on Annex A .

 

(ix)          Foreign Investors. If such Purchaser is not a United States person (as defined by Section 7701(a)(30) of the Internal Revenue Code of 1986, as amended, or if such Purchaser is a U.S. subsidiary or Affiliate of a foreign parent company, “ Foreign Purchaser ”), such Purchaser hereby represents that such Purchaser has satisfied itself as to the full observance of the laws of such Purchaser’s jurisdiction in connection with any invitation to subscribe for the Shares or any use of this Agreement, including (i) the legal requirements within such Purchaser’s jurisdiction for the purchase of the Shares and Warrants, (ii) any foreign exchange restrictions applicable to such purchase, (iii) any government or other consents that may need to be obtained, and (iv) the Tax consequences, if any, that may be relevant to the purchase, holding, redemption, sale or transfer of the Shares, Warrants and Warrant Shares. Each Foreign Purchaser further represents that either (x) such Purchaser does not now, nor will such Purchaser after any Closing, hold 10% or greater, directly or indirectly, of the voting interest in the Company or (y) if such Purchaser does or will, such Foreign Purchaser shall notify the Company and shall provide such information as the Company may request to comply with state, federal, or local regulations. The Company’s offer and sale and such Foreign Purchaser’s subscription and payment for and continued beneficial ownership of the Shares, Warrants and Warrant Shares will not violate any applicable securities or other laws of such Foreign Purchaser’s jurisdiction.

 

(c)           Brokers and Finders. No Person will have, as a result of the transactions contemplated by this Agreement, any valid right, interest or claim against or upon the Company or any Purchaser for any commission, fee or other compensation pursuant to any agreement, arrangement or understanding entered into by or on behalf of such Purchaser.

 

(d)           Independent Investment Decision. Such Purchaser has independently evaluated the merits of such Purchaser’s decision to purchase Shares and Warrants pursuant to the Transaction Documents, and such Purchaser confirms that such Purchaser has not relied on the advice of any other Purchaser’s business and/or legal counsel in making such decision. Such Purchaser understands that nothing in this Agreement or any other materials presented by or on behalf of the Company to such Purchaser in connection with the purchase of the Shares and Warrants constitutes legal, tax or investment advice. Such Purchaser has consulted such legal, tax and investment advisors as such Purchaser, in such Purchaser’s sole discretion, has deemed necessary or appropriate in connection with such Purchaser’s purchase of the Shares and Warrants. Neither such inquiries nor any other investigation conducted by or on behalf of such Purchaser or such Purchaser’s representatives or counsel shall modify, amend or affect such Purchaser’s right to rely on the truth, accuracy and completeness of the Company’s representations and warranties contained in the Transaction Documents (as qualified by the Disclosure Schedules).

 

     

 

 

(e)           Reliance on Exemptions. Such Purchaser understands that the Shares are being offered and sold to such Purchaser in reliance on specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying in part upon the truth and accuracy of, and such Purchaser’s compliance with, the representations, warranties, agreements, acknowledgements and understandings of such Purchaser set forth herein in order to determine the availability of such exemptions and the eligibility of such Purchaser to acquire the Shares and Warrants.

 

(f)           No Governmental Review. Such Purchaser understands that no Governmental Authority has passed on or made any recommendation or endorsement of the Shares and Warrants or the fairness or suitability of the investment in the Shares and Warrants nor has any such authority passed upon or endorsed the merits of the offering of the Shares and Warrants.

 

(g)           Acknowledgment . Such Purchaser acknowledges that such Purchaser is entering into this Agreement without any representation or warranty, express or implied, by the Company or Monster or any of their respective Affiliates, except as expressly set forth Section 3.2 or in any certificate or other document or instrument to be delivered to such Purchaser pursuant to this Agreement. Such Purchaser is not relying, nor has such Purchaser relied, on any representation or warranty (or the accuracy or completeness thereof), express or implied, with respect to the Company or Monster or any of their respective Affiliates, except as expressly set forth Section 3.2 or in any certificate or other document or instrument to be delivered to such Purchaser pursuant to this Agreement.

 

(h)           Risk Factors . Such Purchaser recognizes that the purchase of the Common Stock and Warrants involves a high degree of risk including, but not limited to, those risks set forth in the Statement of Risk Factors annexed hereto as Annex C.

 

The Company and each of the Purchasers acknowledge and agree that no party to this Agreement has made or makes any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in this Article 3 and the Transaction Documents.

 

Article 4

 

Other Agreements of the Parties

 

4.1            Transfer Restrictions .

 

(a)           Compliance with Laws. Notwithstanding any other provision of the Transaction Documents, until the Shares are converted into shares of Monster Common Stock (as defined in the Merger Agreement) and the Warrants are converted into warrants to purchase shares of Monster Common Stock in accordance with the terms of the Merger Agreement, each Purchaser covenants that the Shares and Warrants may be disposed of only pursuant to an effective registration statement under, and in compliance with the requirements of, the Securities Act, or pursuant to an available exemption from, or in a transaction not subject to, the registration requirements of the Securities Act, and in compliance with any applicable state and federal securities laws. In connection with any transfer of the Shares or Warrants other than (i) pursuant to an effective registration statement or (ii) to the Company, the Company may require the transferor thereof to provide to the Company an opinion of counsel selected by the transferor and reasonably acceptable to the Company, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred Shares or Warrants under the Securities Act. As a condition of transfer, any such transferee shall agree in writing to be bound by the terms of this Agreement and shall have the rights of a Purchaser under this Agreement.

 

     

 

 

(b)           Legends. Stock Certificates evidencing the Shares, Warrants and Warrant Shares shall bear any legend as required by the “Blue Sky” laws of any state and a restrictive legend in substantially the following form until such time as they are not required under Section 4.1(c) (and a stock transfer order may be placed against transfer of the Stock Certificates for the Shares):

 

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “ ACT ”) AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.

 

THE S ECURITIES REPRESENTED BY THIS CERTIFICATE, AND THE TRANSFER THEREOF, ARE SUBJECT TO THE RESTRICTIONS ON TRANSFER PROVISIONS OF THE BYLAWS OF THE COMPANY, INCLUDING A RIGHT OF FIRST REFUSAL IN FAVOR OF THE COMPANY AND/OR ITS ASSIGNEE(S), A COPY OF WHICH IS ON FILE IN, AND MAY BE EXAMINED AT, THE PRINCIPAL OFFICE OF THE COMPANY.

 

In addition, if any Purchaser is an Affiliate of the Company, Stock Certificates evidencing the Shares or Warrant Shares issued to such Purchaser shall bear a customary “affiliates” legend.

 

(c)           Removal of Legends. Subject to the Company’s right to request an opinion of counsel as set forth in Section 4.1(a) , the legend set forth in Section 4.1(b) above shall be removable and the Company shall issue or cause to be issued a Stock Certificate without such legend or any other legend (except for any “affiliates” legend as set forth in Section 4.1(b) ) to the holder of the applicable Shares upon which it is stamped, if (i) such Shares or Warrant Shares are registered for resale and resold pursuant to an effective registration statement under the Securities Act, (ii) such Shares or Warrant Shares are sold or transferred in compliance with Rule 144 (if the transferor is not an Affiliate of the Company), including without limitation in compliance with the current public information requirements of Rule 144 if applicable to the Company at the time of such sale or transfer, and the holder and its broker have delivered customary documents reasonably requested by counsel to the Company in connection with such sale or transfer, or (iii) such Shares or Warrant Shares are eligible for sale under Rule 144 without the requirement that the Company be in compliance with the current public information requirements of Rule 144 and without other restriction and counsel to the Company has provided written confirmation of such eligibility to the Company. Any fees (with respect to the counsel to the Company or otherwise) associated with the removal of such legend shall be borne by the Company.

 

4.2            Form D and Blue Sky. The Company agrees to timely file a Form D with respect to the Shares as required under Regulation D and to provide a copy thereof to each Purchaser who requests a copy in writing promptly after such filing. The Company shall take such action as the Company shall reasonably determine is necessary in order to qualify the Shares for sale to the Purchasers at the Closing pursuant to this Agreement under applicable securities or “Blue Sky” laws of the states of the United States (or to obtain an exemption from such qualification), which, subject to the accuracy of the Company’s and the Purchaser’s representations and warranties set forth herein, shall consist of the submission of all filings and reports relating to the offer and sale of the Shares pursuant to Rule 506 of Regulation D required under applicable securities or “Blue Sky” laws of the states of the United States following the Closing Date, and shall provide evidence of any such action so taken to the Purchasers who request in writing such evidence.

 

     

 

 

4.3            No Integration. The Company shall not, and shall use its commercially reasonable efforts to ensure that Monster and the Affiliates of the Company and the Affiliates of Monster, shall not, sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that will be integrated with the offer or sale of the Shares and Warrants in a manner that would require the registration under the Securities Act of the sale of the Shares and Warrants to the Purchasers.

 

4.4            Use of Proceeds. The Company intends to use the net proceeds from the sale of the Shares and Warrants hereunder for general working capital.

 

4.5            Declaration of Registration Rights. At, or promptly following, the Closing, the Company will cause Monster to execute and deliver to the Purchasers the declaration of registration rights in substantially the form attached hereto as Exhibit E .

 

4.6            Listing of Monster Common Stock. Following the Merger, the Company hereby agrees to use commercially reasonable efforts to maintain the listing or quotation of common stock of Monster (the “ Monster Common Stock ”) on the trading market on which Monster is currently listed. In connection with the closing of the Merger, the Company shall use commercially reasonable efforts to apply to list or quote all of the Shares and Warrant Shares on such trading market and promptly secure the listing of all of the Shares and Warrant Shares on such trading market. The Company further agrees, if the Company applies to have the Monster Common Stock traded on any other trading market, it will then include in such application all of the Shares and Warrant Shares, and will take such other action as is necessary to cause all of the Shares and Warrant Shares to be listed or quoted on such other trading market as promptly as possible. The Company will then take all action reasonably necessary to continue the listing or quotation and trading of the Monster Common Stock on a trading market and will comply in all respects with the Company’s reporting, filing and other obligations under the bylaws or rules of the trading market. The Company agrees to maintain the eligibility of the Monster Common Stock for electronic transfer through the Depository Trust Company or another established clearing corporation, including, without limitation, by timely payment of fees to the Depository Trust Company or such other established clearing corporation in connection with such electronic transfer.

 

4.7            Furnishing of Information; Public Information. Following the closing of the Merger and until the earliest of the time that (i) no Purchaser owns Securities or (ii) the Warrants have expired, the Company covenants to cause Monster to maintain the registration of the Monster Common Stock under Section 12(b) or 12(g) of the Exchange Act and to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by Monster after the date hereof pursuant to the Exchange Act. As long as any Purchaser owns Securities, if the Company is not required to file reports pursuant to the Exchange Act, it will prepare and furnish to the Purchasers and make publicly available in accordance with Rule 144(c) such information as is required for the Purchasers to sell the Securities, including without limitation, under Rule 144. The Company further covenants that it will take such further action as any holder of Securities may reasonably request, to the extent required from time to time to enable such Person to sell such Securities without registration under the Securities Act, including without limitation, within the requirements of the exemption provided by Rule 144.

 

Article 5

 

Conditions Precedent to Closing

 

5.1            Conditions Precedent to the Obligations of the Purchasers (other than Converting Holders) to Purchase Shares and Warrants at Closing. The obligation of each Purchaser (other than Converting Holders) to acquire Shares and Warrants at the Closing is subject to the fulfillment, on or prior to the applicable Closing Date, of each of the following conditions, any of which may be waived by such Purchaser (as to itself only):

 

     

 

 

(a)           Representations and Warranties. The representations and warranties of the Company are true and correct in all respects as of the date of this Agreement and are true and correct in all respects on and as of the applicable Closing Date with the same force and effect as if made on the Closing Date, except (i) for those representations and warranties which address matters only as of a particular date (which representations were so true and correct as of such particular date); and (ii) where the failure of those representations and warranties would not have a Material Adverse Effect (disregarding all materiality qualifiers included in such representations and warranties).

 

(b)           Performance. The Company shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by it on or prior to the Closing Date.

 

(c)           No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any Governmental Authority of competent jurisdiction that prohibits the consummation of the sale of the Shares.

 

(d)           Consents. The Company shall have obtained any and all consents, permits, approvals, registrations and waivers necessary for consummation of the purchase and sale of the Shares at the Closing (except for the Required Approvals that may be obtained after the Closing), all of which shall be and remain so long as necessary in full force and effect.

 

(e)           Company Deliverables. The Company shall have delivered the Company Deliverables in accordance with Section 2.2(a) .

 

(f)           Merger. Each of the conditions to the consummation of the Merger set forth in the Merger Agreement shall have been satisfied or waived and the parties to the Merger Agreement shall be ready, willing and able to consummate the Merger immediately after the Closing on the terms and conditions set forth therein.

 

(g)           Termination. This Agreement shall not have been terminated as to such Purchaser in accordance with Section 6.16 .

 

(h)           Aggregate Actual Cash Subscription Amounts . At the Closing, the aggregate Actual Cash Subscription Amounts from all Purchasers shall be no less than the Minimum Offering Amount, and no more than $30,000,000 (the “ Maximum Offering Amount ”).

 

(i)           Funding. The Actual Cash Subscription Amount with respect to each Purchaser (other than Converting Holders) shall have been received by the Company (or its agent or other designee) in accordance with Section 2.2(c).

 

5.2            Conditions Precedent to the Obligations of the Company to sell Shares and Warrants at each Closing. The Company’s obligation to sell and issue the Shares and Warrants to each Purchaser (other than Converting Holders) at a Closing is subject to the fulfillment on or prior to the applicable Closing Date of the following conditions, any of which may be waived by the Company:

 

(a)           Representations and Warranties. The representations and warranties made by such Purchaser in Section 3.2 hereof shall be true and correct in all material respects (except for those representations and warranties which are qualified as to materiality, in which case such representations and warranties shall be true and correct in all respects) as of the date of this Agreement, and as of the applicable Closing Date as though made on and as of such date, except for representations and warranties that speak as of a different specified date (which representations shall have been so true and correct as of such specified date).

 

     

 

 

(b)           Performance. Such Purchaser shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by such Purchaser on or prior to the applicable Closing Date.

 

(c)           No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any Governmental Authority of competent jurisdiction that prohibits the consummation of the sale of the Shares or Warrants.

 

(d)           Purchaser Deliverables. Such Purchaser shall have delivered its Purchaser Deliverables in accordance with Section 2.2(b) .

 

(e)           Merger. Each of the conditions to the consummation of the Merger set forth in the Merger Agreement shall have been satisfied or waived and the parties to the Merger Agreement shall be ready, willing and able to consummate the Merger immediately after the Closing, on the terms and conditions set forth therein.

 

(f)           Termination. This Agreement shall not have been terminated as to such Purchaser in accordance with Section 6.16 .

 

(g)           Receipt of Funds. The Actual Cash Subscription Amount with respect to each Purchaser (other than Converting Holders) shall have been received by the Company (or its agent or other designee) in accordance with Section 2.2(c).

 

(h)           Placement Agent Questionnaire. Each Placement Agent shall have delivered the Placement Agent Questionnaire in accordance with Section 2.2(d) .

 

Article 6

 

Miscellaneous

 

6.1            Fees and Expenses. The Company and the Purchasers shall each pay the fees and expenses of their respective advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party in connection with the negotiation, preparation, execution, delivery and performance of this Agreement.

 

6.2            Entire Agreement. The Transaction Documents, together with the exhibits and schedules thereto, contain the entire understanding of the parties with respect to the subject matter thereof and supersede all prior agreements, understandings, discussions and representations, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules. At or after the Closing, and without further consideration, the Company and the Purchasers will execute and deliver to the other such further documents as may be reasonably requested in order to give practical effect to the intention of the parties under the Transaction Documents.

     

 

 

 

6.3            Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (a) the date of transmission, if such notice or communication is delivered via facsimile (provided the sender receives a machine-generated confirmation of successful transmission) or e-mail delivery of a .PDF format data file at the facsimile number or e-mail address, as applicable, specified in this Section 6.3 during the recipient’s normal business hours on a Business Day, (b) the next Business Day after the date of transmission, if such notice or communication is delivered via facsimile (provided the sender receives a machine-generated confirmation of successful transmission) or e-mail delivery of a .PDF format data file at the facsimile number or e-mail address, as applicable, specified in this Section 6.3 on a day that is not a Business Day or not during the recipient’s normal business hours on any Business Day, (c) the Business Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service with next day delivery specified, (d) two Business Days after deposit with an internationally recognized expedited delivery services company, freight prepaid for delivery to a non-U.S. address, specifying next available Business Day delivery, with written verification of receipt, or (e) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as follows:

 

If to the Company: Innovate Biopharmaceuticals Inc.
  8480 Honeycutt Road
  Suite 120
  Raleigh, NC 27615
  Telephone No.: (919) 275-1933
  E-Mail:corplegal@innovatebiopharma.com
  Attention: Christopher Prior
   
With a copy to: Wilson Sonsini Goodrich & Rosati, P.C.:
  12235 El Camino Real
  San Diego, CA 92130
  Attention:  Martin J. Waters
  Facsimile No. :  (858) 350-2399
  Email : mwaters@wsgr.com
   
If to a Purchaser: To the address set forth under such Purchaser’s name on its signature page hereof or such other address as may be designated in writing hereafter, in the same manner, by such Person.

 

6.4            Amendments; Waivers; No Additional Consideration. No provision of this Agreement may be waived or amended except in a written instrument signed by the Company and the Purchasers holding at least a majority of the then outstanding Shares sold pursuant to this Agreement, provided, however , that additional Purchasers may become parties to this Agreement without any amendment of this Agreement pursuant to this paragraph or any consent or approval of any other Purchasers. Any such amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any securities purchased under this Agreement at the time outstanding (including securities into which such securities have been converted or exchanged or for which such securities have been exercised) and each future holder of all such securities. Each Purchaser acknowledges that by the operation of this paragraph, the Purchasers holding at least a majority of the Shares issued pursuant to this Agreement will have the right and power to diminish or eliminate all rights of such Purchaser under this Agreement. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right. No consideration shall be offered or paid to any Purchaser to amend or consent to a waiver or modification of any provision of any Transaction Document unless the same consideration is also offered to all Purchasers who then hold Shares, Warrants or Warrant Shares.

 

     

 

 

6.5            Construction. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.

 

6.6            Successors and Assigns. The provisions of this Agreement shall inure to the benefit of and be binding upon the parties and their successors and permitted assigns. This Agreement, or any rights or obligations hereunder, may not be assigned by the Company without the prior written consent of the Purchasers (other than by merger or consolidation or to an entity which acquires the Company, including by way of acquiring all or substantially all of the Company’s assets). Any Purchaser may assign its rights hereunder in whole or in part to any Person to whom such Purchaser assigns or transfers any Shares, Warrants or Warrant Shares in compliance with the Transaction Documents and applicable Legal Requirements, provided such transferee shall agree in writing to be bound, with respect to the transferred Shares, by the terms and conditions of this Agreement that apply to the Purchasers.

 

6.7            Third-Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns and, except as provided in the immediately preceding Section 6.6 and the immediately succeeding sentence, is not for the benefit of, nor may any provision hereof be enforced by, any other Person. Notwithstanding the foregoing, the parties acknowledge and agree that Monster shall be an express and intended third party beneficiary under this Agreement, with the right of enforcement of the terms and conditions of this Agreement.

 

6.8            Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware, without regard to the principles of conflicts of law thereof. Each party agrees that all Legal Proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement and any other Transaction Documents (whether brought against a party hereto or its respective Affiliates, employees or agents) shall be commenced exclusively in the state and federal courts located in the State of Delaware. Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts located in the State of Delaware for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any Legal Proceeding, any claim that it is not personally subject to the jurisdiction of the state or federal courts located in the State of Delaware, or that such Legal Proceeding has been commenced in an improper or inconvenient forum. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such Legal Proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

 

6.9            Survival. The representations and warranties contained herein shall terminate at the Closing and only the agreements and covenants contained herein that by their terms survive the Closing shall survive the applicable Closing in accordance with their terms.

 

     

 

 

6.10          Execution. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that the parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission, or by e-mail delivery of a .PDF format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or .PDF signature page were an original thereof.

 

6.11          Severability. If any provision of this Agreement is held to be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision that is a reasonable substitute therefor and achieves that same or substantially the same effect or result, and upon so agreeing, shall incorporate such substitute provision in this Agreement.

 

6.12          Replacement of Shares, Warrants and Warrant Shares. If any Stock Certificate, Warrant or other instrument evidencing any Shares, Warrants or Warrant Shares is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation thereof, or in lieu of and substitution therefor, a new Stock Certificate, Warrant or other instrument, but only upon receipt of evidence reasonably satisfactory to the Company and the Transfer Agent, if other than the Company, of such loss, theft or destruction and the execution by the holder thereof of a customary lost certificate affidavit of that fact and an agreement to indemnify and hold harmless the Company and the Transfer Agent, if other than the Company, for any losses in connection therewith or, if required by the Transfer Agent, a bond in such form and amount as is required by the Transfer Agent. The applicants for a new Stock Certificate, Warrant or other instrument under such circumstances shall also pay any reasonable third-party costs associated with the issuance of such replacement Shares or Warrants. If a replacement Stock Certificate, Warrant or other instrument evidencing any Shares or Warrants is requested due to a mutilation thereof, the Company may require delivery of such mutilated Stock Certificate, Warrant or other instrument as a condition precedent to any issuance of a replacement.

 

6.13          Remedies. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, each of the Purchasers and the Company will be entitled to specific performance under the Transaction Documents. The parties agree that irreparable damage may occur in the event that any of the provisions of the Transaction Documents were not performed in accordance with their specific terms or were otherwise breached and that monetary damages may not be adequate compensation for any loss incurred by the Purchasers, the Company by reason of any breach of any such provisions.

 

6.14          Adjustments in Share Numbers and Prices. In the event of any stock split, subdivision, dividend or distribution payable in shares of Common Stock (or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly shares of Common Stock), combination, recapitalization, merger, consolidation or other reorganization or similar event occurring after the date hereof, each reference in any Transaction Document to the Shares, Warrants or Warrant Shares, a number of shares, a price per share or the class or type of securities with respect to the Shares or Warrant Shares shall be deemed to be amended to appropriately account for such event.

 

     

 

 

6.15          Independent Nature of the Purchasers’ Obligations and Rights. The obligations of each Purchaser under any Transaction Document are several and not joint with the obligations of any other Purchaser, and no Purchaser shall be responsible in any way for the performance of the obligations of any other Purchaser under any Transaction Document. The decision of each Purchaser to purchase Shares and Warrants pursuant to the Transaction Documents has been made by such Purchaser independently of any other Purchaser and independently of any information, materials, statements or opinions as to the business, affairs, operations, assets, properties, liabilities, results of operations, condition (financial or otherwise) or prospects of the Company which may have been made or given by any other Purchaser or by any agent or employee of any other Purchaser, and no Purchaser and any of its agents or employees shall have any liability to any other Purchaser (or any other Person) relating to or arising from any such information, materials, statement or opinions. Nothing contained herein or in any other Transaction Document, and no action taken by any Purchaser pursuant hereto or thereto, shall be deemed to constitute the Purchasers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Purchasers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Documents. Each Purchaser acknowledges that no other Purchaser has acted as agent for such Purchaser in connection with making its investment hereunder and that no Purchaser will be acting as agent of such Purchaser in connection with monitoring its investment in the Shares or enforcing its rights under the Transaction Documents. Each Purchaser shall be entitled to independently protect and enforce its rights, including without limitation the rights arising out of this Agreement or out of the other Transaction Documents, and it shall not be necessary for any other Purchaser to be joined as an additional party in any Proceeding for such purpose. The Company acknowledges that each of the Purchasers has been provided with the same Transaction Documents for the purpose of closing a transaction with multiple Purchasers and not because it was required or requested to do so by any Purchaser. The Company’s obligations to each Purchaser under this Agreement and the other Transaction Documents are identical to its obligations to each other Purchaser other than such differences resulting solely from the number of Shares and Warrants purchased by such Purchaser.

 

6.16          Termination. This Agreement may be terminated and the sale and purchase of the Shares and Warrants abandoned (a) with respect to a particular Purchaser, at any time prior to the Closing, by mutual written consent of the Company and such Purchaser; (b) if the Closing has not been consummated on or prior to 5:00 p.m., New York City time, on the Outside Date, as defined in the Merger Agreement, by any Purchaser (with respect to itself only), upon written notice to the Company; (c) if the Merger has not been consummated on or prior to 5:00 p.m., New York City time, on the Outside Date, as defined in the Merger Agreement, by any Purchaser (with respect to itself only), or (d) by either the Company or any Purchaser (with respect to such Purchaser only) upon written notice to the other if consummation of the transactions contemplated hereby would violate any nonappealable order, degree or judgment of any Governmental Authority having competent jurisdiction; provided, however, that the right to terminate this Agreement under this Section 6.16 shall not be available to any Person whose failure to comply with its obligations under this Agreement has been the cause of or resulted in the failure of the Closing to occur on or before such time. Nothing in this Section 6.16 shall be deemed to release any party from any liability for any breach by such party of the terms and provisions of this Agreement or the other Transaction Documents or to impair the right of any party to compel specific performance by any other party of its obligations under this Agreement or the other Transaction Documents. In the event of a termination pursuant to this Section 6.16 , the Company shall promptly notify all non-terminating Purchasers. Upon a termination in accordance with this Section 6.16 , the Company and the terminating Purchaser(s) shall not have any further obligation or liability (including arising from such termination) to the other, and no Purchaser will have any liability to any other Purchaser under the Transaction Documents as a result therefrom.

 

6.17          Waiver of Conflicts. Each Purchaser acknowledges that: (a) it has read this Agreement; (b) it has been represented in the preparation, negotiation and execution of this Agreement by legal counsel of its own choice or has voluntarily declined to seek such counsel; and (c) it understands the terms and consequences of this Agreement and is fully aware of the legal and binding effect of this Agreement. Each Purchaser understands that the Company has been represented in the preparation, negotiation and execution of this Agreement by Company Counsel and that Company Counsel now or may in the future represent one or more Purchasers or their Affiliates in matters unrelated to the transactions contemplated by this Agreement, including the representation of such Purchasers or their Affiliates in matters of a nature similar to those contemplated by this Agreement. The Company and each Purchaser hereby acknowledge that they have had an opportunity to ask for and have obtained information relevant to such representation, including disclosure of the reasonably foreseeable adverse consequences of such representation, and hereby waives any conflict arising out of such representation solely with respect to the matters contemplated by this Agreement.

 

[Signature Pages Follow]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  INNOVATE BIOPHARMACEUTICALS, INC.
     
  By: /s/ Jay Madan
  Name: Jay Madan
  Title: President

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Adolfo & Donna Carmona
     
  By: /s/Adolfo & Donna Carmona
  Name: Adolfo & Donna Carmona
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Alan Mcintyre
     
  By: /s/Alan McIntyre
  Name: Alan McIntyre
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Alexander J. Brown Trust
     
  By: /s/ Robin L. Brown
  Name: Robin L. Brown
  Title: Trustee

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Alexandra Koeppel
     
  By: /s/ Alexandra Koeppel
  Name: Alexandra Koeppel
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Andrew and Melissa Fisher
     
  By: /s/ Andrew and Melissa Fisher
  Name: Andrew and Melissa Fisher
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Argjent Mena & Lara Sabani
     
  By: /s/ Argjent Mena & Lara Sabani
  Name: Argjent Mena & Lara Sabani
  Title:  

  

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Barry Shemaria
     
  By: /s/ Barry Shemaria
  Name: Barry Shemaria
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Basil Palmeri
     
  By: /s/ Basil Palmeri
  Name: Basil Palmeri
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Bozarth LLC
     
  By: /s/ Donna Bozarth
  Name: Donna Bozarth
  Title: Manager

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Brenda & Dave Rickey Family Foundation
     
  By: /s/David M. Rickey
  Name: David M. Rickey
  Title: Trustee

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Brian & Andrea Fischhoff
     
  By: /s/ Brian & Andrea Fischhoff
  Name: Brian & Andrea Fischhoff
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Bruce & Mitsie Levy
     
  By: /s/ Bruce & Mitsie Levy
  Name: Bruce & Mitsie Levy
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Carl J. Domino
     
  By: /s/ Carl J. Domino
  Name: Carl J. Domino
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Casimir S. Skrzypczak
     
  By: /s/ Casimir S. Skrzypczak
  Name: Casimir S. Skrzypczak
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Christopher Washburn
     
  By: /s/ Christopher Washburn
  Name: Christopher Washburn
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Clay Lebhar
     
  By: /s/ Clay Lebhar
  Name: Clay Lebhar
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Dennis R. DeLoach, Jr. & Faye M. DeLoach
     
  By: /s/ Dennis R. DeLoach, Jr. & Faye M. DeLoach
  Name: Dennis R. DeLoach, Jr. & Faye M. DeLoach
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Donald Sesterhenn
     
  By: /s/ Donald Sesterhenn
  Name: Donald Sesterhenn
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Douglas Rivers
     
  By: /s/ Douglas Rivers
  Name: Douglas Rivers
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Dyke Rogers
     
  By: /s/ Dyke Rogers
  Name: Dyke Rogers
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Edward O'Connell
     
  By: /s/ Edward O'Connell
  Name: Edward O'Connell
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Edward P. Swyer LLC
     
  By: /s/ Edward P. Swyer LLC
  Name: Edward P. Swyer LLC
  Title: Manager

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Foster Family Trust
     
  By: /s/ Michael L. Foster
  Name: Michael L. Foster
  Title: Trustee

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  FourJr Investments LTD
     
  By: /s/ Robert Burke
  Name: Robert Burke
  Title: Manager

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Frederick B. Epstein
     
  By: /s/ Frederick B. Epstein
  Name: Frederick B. Epstein
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Gubbay Investments, LLC
     
  By: /s/ David Gubay
  Name: David Gubay
  Title: Manager

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Gwen Swenson-Hale
     
  By: /s/ Gwen Swenson-Hale
  Name: Gwen Swenson-Hale
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Howard & Susan Kalka
     
  By: /s/ Howard & Susan Kalka
  Name: Howard & Susan Kalka
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Howard Stringer
     
  By: /s/ Howard Stringer
  Name: Howard Stringer
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Irwin Gruverman
     
  By: /s/ Irwin Gruverman
  Name: Irwin Gruverman
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  James H. Wiesenberg
     
  By: /s/ James H. Wiesenberg
  Name: James H. Wiesenberg
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Jan Arnett
     
  By: /s/ Jan Arnett
  Name: Jan Arnett
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  James J. Watson
     
  By: /s/ James J. Watson
  Name: James J. Watson
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  James L. Dritz
     
  By: /s/ James L. Dritz
  Name: James L. Dritz
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Jimmy R. Hasley
     
  By: /s/ Jimmy R. Hasley
  Name: Jimmy R. Hasley
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Jay M. Haft
     
  By: /s/ Jay M. Haft
  Name: Jay M. Haft
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Joan L Bonanno TTE U/A DTD 12/05/2002 By Joan L Bonanno
     
  By: /s/ Joan L Bonanno
  Name: Joan L Bonanno
  Title: Trustee

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  John Q Joubert & Terri L Joubert
     
  By: /s/ John Q Joubert & Terri L Joubert
  Name: John Q Joubert & Terri L Joubert
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  John E. Kyees
     
  By: /s/ John E. Kyees
  Name: John E. Kyees
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  John V. Wagner, Jr.
     
  By: /s/ John V. Wagner, Jr.
  Name: John V. Wagner, Jr.
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Juli-Ann Cialone
     
  By: /s/ Juli-Ann Cialone
  Name: Juli-Ann Cialone
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Kara Lynn Hart
     
  By: /s/ Kara Lynn Hart
  Name: Kara Lynn Hart
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Keith J. Gelles
     
  By: /s/ Keith J. Gelles
  Name: Keith J. Gelles
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Lars Bader
     
  By: /s/ Lars Bader
  Name: Lars Bader
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Lee J. Seidler Revocable Trust DTD 4/12/1990
     
  By: /s/ Lee J. Seidler
  Name: Lee J. Seidler
  Title: Trustee

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Mackie Klingbeil
     
  By: /s/ Mackie Klingbeil
  Name: Mackie Klingbeil
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Meryle Evans Family Trust
     
  By: /s/ Steven Evans
  Name: Steven Evans
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Michael J. Pierce
     
  By: /s/ Michael J. Pierce
  Name: Michael J. Pierce
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Michael M. Mainero
     
  By: /s/ Michael M. Mainero
  Name: Michael M. Mainero
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Michael Stark
     
  By: /s/ Michael Stark
  Name: Michael Stark
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  N. Michael Wolsonovich, Jr.
     
  By: /s/ N. Michael Wolsonovich, Jr.
  Name: N. Michael Wolsonovich, Jr.
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Northlea Partners LLLP
     
  By: /s/ John Abeles
  Name: John Abeles
  Title: Manager of General Partner

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  OHB Family Trust
     
  By: /s/ Lisa O’Connell
  Name: Lisa O’Connell
  Title: Trustee

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Pamela M. Baker & Russell S. Baker
     
  By: /s/ Pamela M. Baker & Russell S. Baker
  Name: Pamela M. Baker & Russell S. Baker
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  The Peierls Bypass Trust
  UD E.F. Peierls for Brian E. Peierls
  UD E.F. Peierls for E. Jeffrey Peierls
  UD J.N. Peierls for Brian Eliot Peierls
  UD J.N. Peierls for E. Jeffrey Peierls
  UW J.N. Peierls for Brian E. Peierls
  UW J.N. Peierls for E. Jeffrey Peierls
  UD Ethel F. Peierls Charitable Lead Trust
  UD E.S. Peierls for E.F. Peierls et al
  UW E.S. Peierls for Brian E. Peierls - Accumulation
  UW E.S. Peierls for E. Jeffrey Peierls - Accumulation
     
  By: /s/ Deserae B. Smith
  Name: Deserae B. Smith
  Title: Vice President, The Northern Trust Company of Delaware, As Trustee

  

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Peter S. Kastner
     
  By: /s/ Peter S. Kastner
  Name: Peter S. Kastner
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Provident Trust Group LLC FBO Universal Technology Inc. 401K Plan FBO Robert G. Curtin
     
  By: /s/ Robert G. Curtin
  Name: Robert G. Curtin
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Raphael Tshibangu
     
  By: /s/ Raphael Tshibangu
  Name: Raphael Tshibangu
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Raymond J Bonanno TTE U/A DTD 12/05/2002 By Raymond J Bonanno
     
  By: /s/ Raymond J Bonanno
  Name: Raymond J Bonanno
  Title: Trustee

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Renald J. & Catherine C. Anelle
     
  By: /s/ Renald J. & Catherine C. Anelle
  Name: Renald J. & Catherine C. Anelle
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Richard A Brown Trust
     
  By: /s/ Richard A Brown Trust
  Name: Richard A Brown Trust
  Title: Trustee

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Rickey Family Trust dtd 3/22/16
     
  By: /s/ David M Rickey
  Name: David M. Ricket
  Title: Trustee

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Richard David
     
  By: /s/ Richard David
  Name: Richard David
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Robert Caione
     
  By: /s/ Robert Caione
  Name: Robert Caione
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Robert G. Curtin
     
  By: /s/ Robert G. Curtin
  Name: Robert G. Curtin
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Robert Harrigan
     
  By: /s/ Robert Harrigan
  Name: Robert Harrigan
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  RS & VS LTD
     
  By: /s/ Rodney Schorlemmer
  Name: Rodney Schorlemmer
  Title: Manager

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Russell S. Dritz
     
  By: /s/ Russell S. Dritz
  Name: Russell S. Dritz
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Sal DeStefano
     
  By: /s/ Sal DeStefano
  Name: Sal DeStefano
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Satterfield Vintage Investments, LP
     
  By: /s/ Thomas A. Satterfield
  Name: Thomas A. Satterfield
  Title: Managing Partner

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  SDL Ventures, LLC
     
  By: /s/ Donald R. Scifres
  Name: Donald R. Scifres
  Title: Managing Director

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Stephen A. Dichiara
     
  By: /s/ Stephen A. Dichiara
  Name: Stephen A. Dichiara
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Steven M. Cohen
     
  By: /s/ Steven M. Cohen
  Name: Steven M. Cohen
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Suresh Patel
     
  By: /s/ Suresh Patel
  Name: Suresh Patel
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  The Fourys Co. LTD
     
  By: /s/ Alan Yanowitz
  Name: Alan Yanowitz
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Walter G. Gans
     
  By: /s/ Walter G. Gans
  Name: Walter G. Gans
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Yisroel Brauner & Chana Brauner
     
  By: /s/ Yisroel Brauner & Chana Brauner
  Name: Yisroel Brauner & Chana Brauner
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  B3 Group LLC
     
  By: /s/Stephen Saft
  Name: Stephen Saft
  Title: Manager

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Nomis Bay LTD
     
  By: /s/ Peter Poole
  Name: Peter Poole
  Title: Director

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  MITZ ZHU YAN,LP
     
  By: /s/Stephen Saft
  Name: Stephen Saft
  Title: President of the General Partner

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Charmi Vijapura
     
  By: /s/ Charmi Vijapura
  Name: Charmi Vijapura
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  GSB Holdings, Inc.
     
  By: /s/ David H. Clarke
  Name: David H. Clarke
  Title: Vice President

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Jai V. Desai
     
  By: /s/ Jai V. Desai
  Name: Jai V. Desai
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Jayesh K. Patel & Bela J. Patel
     
  By: /s/ Jayesh K. Patel & Bela J. Patel
  Name: Jayesh K. Patel & Bela J. Patel
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Jesal Kothari
     
  By: /s/ Jesal Kothari
  Name: Jesal Kothari
  Title: Individual

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Mahendra Doobay
     
  By: /s/ Mahendra Doobay
  Name: Mahendra Doobay
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Rameshchandra Dabhi
     
  By: /s/ Rameshchandra Dabhi
  Name: Rameshchandra Dabhi
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Saha Living LLC
     
  By: /s/ C.K. Singla
  Name: C.K. Singla
  Title: General Partner

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  UKR Partners LLC
     
  By: /s/Irene Mazue
  Name: Irene Mazue
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  RS Irrevocable Trust
     
  By: /s/ RS Irrevocable Trust
  Name: RS Irrevocable Trust
  Title: Trustee

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Valley Forge Investments LLC
     
  By: /s/ Valley Forge Investments LLC
  Name: Valley Forge Investments LLC
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  V.M. Patel and Tejal Patel
     
  By: /s/ V.M. Patel and Tejal Patel
  Name: V.M. Patel and Tejal Patel
  Title: MA

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Sphera Global Healthcare Master Fund
     
  By: /s/Doran Breen
  Name: Doran Breen
  Title: Director

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Intracoastal Capital, LLC
     
  By: /s/ Keith A. Goodman
  Name: Keith A. Goodman
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Iroquois Capital Investment Group LLC
     
  By: /s/ Richard Abbe
  Name: Richard Abbe
  Title: Managing Member

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Iroquois Master Fund Ltd
     
  By: /s/ Kim Page
  Name: Kim Page
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Amit Patel
     
  By: /s/ Amit Patel
  Name: Amit Patel
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Anthony Barrett
     
  By: /s/ Anthony Barrett
  Name: Anthony Barrett
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Ashit Vijapura
     
  By: /s/ Ashit Vijapura
  Name: Ashit Vijapura
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Atul and Namrata Wadhwa
     
  By: /s/ Atul and Namrata Wadhwa
  Name: Atul and Namrata Wadhwa
  Title: Investors

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Atul Wadhwa
     
  By: /s/ Atul Wadhwa
  Name: Atul Wadhwa
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Bearing Circle Capital LLC
     
  By: /s/ Bearing Circle Capital LLC
  Name: Bearing Circle Capital LLC
  Title: Member

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Bhavesh Patel
     
  By: /s/ Bhavesh Patel
  Name: Bhavesh Patel
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Bijal Patel
     
  By: /s/ Bijal Patel
  Name: Bijal Patel
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Bhikabhai Nayi
     
  By: /s/ Bhikabhai Nayi
  Name: Bhikabhai Nayi
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Bindu Sangani
     
  By: /s/ Bindu Sangani
  Name: Bindu Sangani
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Charles Mosseri-Marlio
     
  By: /s/ Charles Mosseri-Marlio
  Name: Charles Mosseri-Marlio
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  David Cassimus
     
  By: /s/ David Cassimus
  Name: David Cassimus
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  David Purdy
     
  By: /s/ David Purdy
  Name: David Purdy
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Deepen R. Patel
     
  By: /s/ Deepen R. Patel
  Name: Deepen R. Patel
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Himanshu M. Patel
     
  By: /s/ Himanshu M. Patel
  Name: Himanshu M. Patel
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Hiren K. Patel
     
  By: /s/ Hiren K. Patel
  Name: Hiren K. Patel
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Howard Yee
     
  By: /s/ Howard Yee
  Name: Howard Yee
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Hygient Corporation
     
  By: /s/ Hygient Corporation
  Name: Hygient Corporation
  Title: President

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Janet League Katzin
     
  By: /s/ Janet League Katzin
  Name: Janet League Katzin
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Jay Madan
     
  By: /s/ Jay Madan
  Name: Jay Madan
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Jigar J. Patel
     
  By: /s/ Jigar J. Patel
  Name: Jigar J. Patel
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Jonathan Barrett
     
  By: /s/ Jonathan Barrett
  Name: Jonathan Barrett
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  JRK Inc.
     
  By: /s/ JRK Inc.
  Name: JRK Inc.
  Title: President

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Justin Prior
     
  By: /s/ Justin Prior
  Name: Justin Prior
  Title: Mechanical Engineer

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Karl Pinto
     
  By: /s/ Karl Pinto
  Name: Karl Pinto
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Kumar Patel
     
  By: /s/ Kumar Patel
  Name: Kumar Patel
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Malika Sangani
     
  By: /s/ Malika Sangani
  Name: Malika Sangani
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Malur R. Balaji
     
  By: /s/ Malur R. Balaji
  Name: Malur R. Balaji
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Marilyn Hemani
     
  By: /s/ Marilyn Hemani
  Name: Marilyn Hemani
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Mary Cheeran
     
  By: /s/ Mary Cheeran
  Name: Mary Cheeran
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Michael Mindlin
     
  By: /s/ Michael Mindlin
  Name: Michael Mindlin
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Nalini Krishnankutty
     
  By: /s/ Nalini Krishnankutty
  Name: Nalini Krishnankutty
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Niranjana Patel
     
  By: /s/ Niranjana Patel
  Name: Niranjana Patel
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  ONE by NP
     
  By: /s/ ONE by NP
  Name: ONE by NP
  Title: Member

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Parul T. Patel
     
  By: /s/ Parul T. Patel
  Name: Parul T. Patel
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Piyush Patel
     
  By: /s/ Piyush Patel
  Name: Piyush Patel
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Praful Patel
     
  By: /s/ Praful Patel
  Name: Praful Patel
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Prentice Lending II LLC
     
  By: /s/ Prentice Lending II LLC
  Name: Prentice Lending II LLC
  Title: Mark Hossein, CFO

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Raj S. Shah
     
  By: /s/ Raj S. Shah
  Name: Raj S. Shah
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Rajesh and Suny Patel
     
  By: /s/ Rajesh and Suny Patel
  Name: Rajesh and Suny Patel
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Rajesh Patel
     
  By: /s/ Rajesh Patel
  Name: Rajesh Patel
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Rakesh Shah
     
  By: /s/ Rakesh Shah
  Name: Rakesh Shah
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Ramesh Donthamsetty
     
  By: /s/ Ramesh Donthamsetty
  Name: Ramesh Donthamsetty
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Rathin Patel
     
  By: /s/ Rathin Patel
  Name: Rathin Patel
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Saurabh Shah
     
  By: /s/ Saurabh Shah
  Name: Saurabh Shah
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  SDS Capital Partners II, LLC
     
  By: /s/ SDS Capital Partners II, LLC
  Name: SDS Capital Partners II, LLC
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Sebastian Prior
     
  By: /s/ Sebastian Prior
  Name: Sebastian Prior
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Sireesh Appajosyula
     
  By: /s/ Sireesh Appajosyula
  Name: Sireesh Appajosyula
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Subhashini Chandran
     
  By: /s/ Subhashini Chandran
  Name: Subhashini Chandran
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Suchin Bajaj
     
  By: /s/ Suchin Bajaj
  Name: Suchin Bajaj
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Sujata Shah
     
  By: /s/ Sujata Shah
  Name: Sujata Shah
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Sunil Kumar S. Reddy
     
  By: /s/ Sunil Kumar S. Reddy
  Name: Sunil Kumar S. Reddy
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Todd Gallinek
     
  By: /s/ Todd Gallinek
  Name: Todd Gallinek
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Vijay Taunk
     
  By: /s/ Vijay Taunk
  Name: Vijay Taunk
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Vikram Patel
     
  By: /s/ Vikram Patel
  Name: Vikram Patel
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Subscription Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  PURCHASER:
   
  Wallace R. Nelms
     
  By: /s/ Wallace R. Nelms
  Name: Wallace R. Nelms
  Title:  

 

[ Signature Page to Subscription Agreement ]

 

     

 

 

ANNEX A: - Schedule of Purchasers
ANNEX A-1: - Schedule of Converting Holders
ANNEX B: - Agreement and Plan of Merger and Reorganization
ANNEX C: - Statement of Risk Factors

 

EXHIBITS:

 

A-1: - Investor Questionnaire
     
A-2: - Stock Certificate Questionnaire
     
B: - Placement Agent Questionnaire
     
C: - Form of Secretary’s Certificate
     
D: - Form of Compliance Certificate
     
E: - Form of Declaration of Registration Rights
     
F: - Form of Lock-Up Agreement
     
G: - Form of Warrant

 

     

 

 

ANNEX A

 

SCHEDULE OF PURCHASERS

 

     

 

 

ANNEX A-1

 

SCHEDULE OF CONVERTING HOLDERS

 

     

 

 

ANNEX B

 

AGREEMENT AND PLAN OF MERGER AND REORGANIZATION

 

     

 

 

ANNEX C

 

RISK FACTORS

 

     

 

   

STATEMENT OF RISK FACTORS

 

You should carefully consider the following risk factors. If any of the following risks and uncertainties develops into actual events, these events could have a material adverse effect on Innovate’s businesses, financial conditions or results of operations. In addition, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.

 

We believe that Monster will likely be delisted from NASDAQ prior to the closing of this offering. , The delisting could adversely affect the market liquidity of Monster’s common stock, impair the value of your investment, adversely affect our ability to raise needed funds (following the closing of the anticipated Merger) and subject us (following the closing of the anticipated Merger) to additional trading restrictions and regulations.

 

Companies listed on The NASDAQ Stock Market, or NASDAQ, are subject to delisting for, among other things, failure to maintain a minimum stockholders’ equity of $2.5 million. On April 17, 2017, Monster received a deficiency notice from NASDAQ notifying Monster that, based on Monster’s Form 10-K for the year ended December 31, 2016, NASDAQ determined that Monster’s stockholders’ equity does not comply with the minimum $2.5 million stockholders’ equity requirement for continued listing on the NASDAQ Capital Market. NASDAQ provided Monster with 45 calendar days, or until June 1, 2017, to submit a plan to regain compliance with the minimum stockholders’ equity standard. The plan to regain compliance was accepted and NASDAQ granted an extension until October 14, 2017 to provide evidence of compliance. By letter dated October 19, 2017, NASDAQ informed Monster that based upon Monsters’s continued non-compliance with the minimum $2.5 million stockholders equity requirement for continued listing on the Nasdaq Capital Market, Monster’s common stock would be subject to delisting from NASDAQ unless Monster timely requests a hearing before the NASDAQ Hearings Panel (the “Panel”).

 

On October 24, 2017, Monster requested a hearing before the Panel, which request would stay any delisting action by the NASDAQ at least pending the issuance of the Panel’s decision following the hearing and the expiration of any extension period that may be granted by the Panel. By letter dated October 25, 2017, the request for a hearing before the Panel was granted, and such hearing was held on December 7, 2017. At the hearing, NASDAQ provided Monster until January 3, 2017 to regain compliance with the minimum stockholders’ equity standard.

 

On June 15, 2017, Monster received a letter from NASDAQ notifying Monster that it is not in compliance with NASDAQ Listing Rule 5810(b) that requires Monster to maintain a minimum bid price of One Dollar ($1.00) per share. This determination was based upon the closing bid price of Monster’s common stock for the preceding thirty (30) consecutive business days. NASDAQ provided Monster with 180 calendar days, or until December 12, 2017, to regain compliance by maintaining a closing bid price of One Dollar ($1.00) for at least ten (10) consecutive business days.

 

As of January 3, 2017, Monster has failed to regain compliance with the minimum stockholders’ equity standard and a minimum bid price of One Dollar ($1.00) per share. Monster requested an additional extension period to regain compliance, which is under consideration by NASDAQ. We believe that is unlikely that NASDAQ will grant this extension and, as such, we believe Monster’s common stock will delisted from The Nasdaq Capital Market prior to the closing of this offering and the merger with Monster (the “Merger”). Therefore, at the closing of the Merger, Monster common stock shares that will be issued in respect of the Innovate common stock shares will likely not be traded on NASDAQ.

 

     

 

 

Monster’s common stock is currently traded on the NASDAQ Capital Market under the trading symbol “MSDI.” Monster has filed an application and is taking the steps necessary to have its common stock quoted for trading in the OTCQB US Market (“OTCQB”), operated by OTC Markets, Inc., under the same trading symbol of “MSDI.” Monster expects to hear back from the Panel during the week of January 8, 2017, but cannot give any assurance that a decision will be reached by then. If the Panel does not grant an extension and Monster’s common stock is delisted from the NASDAQ Capital Market, trading will commence on the OTCQB the next trading day. To the extent that Monster’s common stock is delisted and following commencement of trading of its common stock on the OTCQB, Monster’s common stock will continue to be registered under the Exchange Act and Monster will continue to file financial reports that will be available on the SEC’s website, www.sec.gov.

 

If Monster’s shares are delisted from the NASDAQ Capital Market and then traded on the OTCQB, investors that purchase Innovate common stock shares in this offering will receive Monster’s common stock shares that are trading on the OTCQB. Trading Monster common stock shares on the OTCQB may be difficult because smaller quantities of shares would likely be bought and sold, transactions could be delayed, and any security analysts’ coverage may be reduced. In addition, in the event Monster common stock is delisted, broker-dealers have certain regulatory burdens imposed upon them, which may discourage broker-dealers from effecting transactions in such common stock, further limiting the liquidity. These factors could result in lower prices and larger spreads in the bid and ask prices for Monster common stock. Such delisting from the NASDAQ Capital Market and continued or further declines in Monster’s share price could also greatly impair Monster ability to raise additional necessary capital through equity or debt financing and could significantly increase the ownership dilution to shareholders caused by our issuing equity in a financing or other transactions.

 

Risks Related to Innovate’s Capital Requirements and Financial Condition

 

Innovate has a limited operating history and has incurred significant losses since inception, and expects that it will continue to incur losses for the foreseeable future, which makes it difficult to assess Innovate’s future viability.

 

Innovate is a clinical development-stage biopharmaceutical company with a limited operating history upon which to evaluate its business and prospects. Innovate has not been profitable since it commenced operations in 2012, and may never achieve or sustain profitability. In addition, Innovate has limited history as an organization and has not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the biopharmaceutical industry. Drug development is a highly speculative undertaking and involves a substantial degree of risk. Innovate has not yet obtained any regulatory approvals for any of its product candidates, commercialized any of its product candidates, or generated any revenue from sales of products. Innovate has devoted significant resources to research and development and other expenses related to its ongoing clinical trials and operations, in addition to acquiring product candidates.

 

Since inception, most of Innovate’s resources have been dedicated to the acquisition and development of its product candidates, INN-202 (Larazotide Acetate), INN-108 and INN-329 (Secretin). Innovate will require significant additional capital to continue operations and to execute on its current business strategy to develop INN-202 through to regulatory approval and further develop INN-108 and INN-329 for eventually seeking regulatory approval. Innovate cannot estimate with reasonable certainty the actual amounts necessary to successfully complete the development and commercialization of its product candidates and there is no certainty that Innovate will be able to raise the necessary capital on reasonable terms or at all.

 

     

 

 

Innovate’s auditor has expressed substantial doubt about its ability to continue as a going concern.

 

The audit report on Innovate’s financial statements for the years ended December 31, 2016 and 2015 includes an explanatory paragraph related to Innovate’s recurring losses from operations and dependence on additional financing to continue as a going concern. Innovate has incurred net losses for the years ended December 31, 2016 and 2015, and had an accumulated deficit of $7.7 million as of December 31, 2016.  In view of these matters, Innovate’s ability to continue as a going concern is dependent upon its ability to raise additional debt or equity financing or enter into strategic partnerships. Since its inception, Innovate has financed its operations through convertible debt financings. Innovate intends to continue to finance its operations through debt or equity financing and/or strategic partnerships.  The failure to obtain sufficient financing or strategic partnerships could adversely affect Innovate’s ability to achieve its business objectives and continue as a going concern.

 

Innovate will require substantial additional financing to obtain regulatory approval for INN-202 for celiac disease, and for further development of INN-108 (for ulcerative colitis) and INN-329 (for magnetic resonance cholangiopancreatography or MRCP), and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force Innovate to delay, limit, reduce or terminate Innovate’s product development efforts or other operations.

 

For the year ended December 31, 2016, and the nine months ended September 30, 2017, Innovate incurred losses from operations of $5.4 million and $8.9 million, respectively, and net cash used in operating activities was $2.2 million and $3.2 million, respectively. At September 30, 2017, Innovate had an accumulated deficit of $17 million, its cash, cash equivalents and investment securities were $1.5 million, and its working capital deficit was $11.1 million. Innovate expects to continue to incur substantial operating losses for the next several years as it advances its product candidates through clinical development, US and other regional regulatory approvals, and commercialization. No revenue from operations will likely be available until, and unless, one of its product candidates is approved by the FDA or another regulatory agency and successfully marketed, or Innovate enters into an arrangement that provides for licensing revenue or other partnering-related funding, outcomes which Innovate may not achieve on a timely basis, or at all.

 

Innovate’s capital requirements for the foreseeable future will depend in large part on, and could increase significantly as a result of, its expenditures on its development programs. Future expenditures on its development programs are subject to many uncertainties, and will depend on, and could increase significantly as a result of, many factors, including:

 

· the number, size, complexity, results and timing of its drug development programs;

 

· the number of clinical and nonclinical studies necessary to demonstrate acceptable evidence of the safety and efficacy of its product candidates;

 

· the terms of any collaborative or other strategic arrangement that Innovate may establish;

 

· changes in standards of care which could increase the size and complexity of clinical studies;

 

· the ability to locate patients to participate in a study given the limited number of patients available for orphan or ultra-orphan indications;

 

· the number of patients who participate, the rate of enrollment, and the ratio of randomized to evaluable patients in each clinical study;

 

     

 

 

· the number and location of sites and the rate of site initiation in each study;

 

· the duration of patient treatment and follow-up;

 

· the potential for additional safety monitoring or other post-marketing studies that may be requested by regulatory agencies;

 

· the time and cost to manufacture clinical trial material and commercial product, including process development and scale-up activities, and to conduct stability studies, which can last several years;

 

· the degree of difficulty and cost involved in securing alternate manufacturers or suppliers of drug product, components or delivery devices, as necessary to meet FDA requirements and/or commercial demand;

 

· the costs, requirements, timing of, and the ability to, secure regulatory approvals;

 

· the extent to which Innovate increases its workforce and the costs involved in recruiting, training and incentivizing new employees;

 

· the costs related to developing, acquiring and/or contracting for sales, marketing and distribution capabilities, supply chain management capabilities, and regulatory compliance capabilities, if Innovate obtains regulatory approval for a product candidate and commercializes it without a partner;

 

· the costs involved in evaluating competing technologies and market developments or the loss in sales in case of such competition; and

 

· the costs involved in establishing, enforcing or defending patent claims and other proprietary rights.

 

Additional capital may not be available when Innovate needs it, on terms that are acceptable to it or at all. If adequate funds are not available to Innovate on a timely basis, it will be required to delay, limit, reduce or terminate its establishment of sales and marketing, manufacturing or distribution capabilities, development activities or other activities that may be necessary to commercialize its product candidates, conduct preclinical or clinical studies, or other development activities.

 

If Innovate raises additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, it may have to relinquish certain valuable rights to its product candidates, technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable. If Innovate raises additional capital through public or private equity offerings, the ownership interest of its stockholders will be diluted and the terms of any new equity securities may have preferential rights over its common stock. If Innovate raises additional capital through debt financing, it may be subject to covenants limiting or restricting its ability to take specific actions, such as incurring additional debt or making capital expenditures, or subject to specified financial ratios, any of which could restrict its ability to develop and commercialize its product candidates or operate as a business.

 

     

 

 

Innovate has not generated any revenue from product sales and may never be profitable.

 

Innovate has no products approved for commercialization and has never generated any revenue from product sales. Innovate’s ability to generate revenue and achieve profitability depends on its ability, alone or with strategic collaboration partners, to successfully complete the development of, and obtain the requisite regulatory approvals necessary to commercialize, one or more of its product candidates.

 

Innovate has not paid cash dividends in the past and does not expect to pay dividends in the future. Any return on investment may be limited to the value of its common stock.

 

Innovate has never paid cash dividends on our common stock and does not anticipate paying cash dividends in the near future. The payment of dividends on its common stock will depend on earnings, financial condition and other business and economic factors affecting Innovate at such time as the board of directors may consider relevant. If Innovate does not pay dividends, its common stock may be less valuable because a return on your investment will only occur if its stock price appreciates.

 

Risks Related to Innovate’s Business Strategy and Operations

 

Innovate does not have any products that are approved for commercial sale.

 

Innovate currently does not have any therapeutic products approved for commercial sale. Innovate has not received, and may not receive within the next several years, if at all, any revenues from the commercialization of its product candidates if approved.

 

Innovate is substantially dependent upon the clinical, regulatory and commercial success of its three product candidates, INN-202, INN-108 and INN-329. Clinical drug development involves a lengthy and expensive process with an uncertain outcome, results of earlier studies and trials may not be predictive of future trial results, and Innovate’s clinical trials may fail to adequately demonstrate to the satisfaction of regulatory authorities the safety and efficacy of its three product candidates.

 

The success of Innovate’s business is dependent on its ability to advance the clinical development of INN-202 for the treatment of celiac disease, INN-108 for the treatment of mild to moderate ulcerative colitis, and INN-329 for MRCP. INN-202 has had successful completion of Phase 2 trials and Phase 3 pivotal studies and long-term safety studies remain to be conducted. INN-108 will be entering into Phase 2 efficacy trials for mild to moderate ulcerative colitis. INN-329 requires some additional studies to be performed for completion of Phase 3 trials.

 

Clinical testing is expensive and can take many years to complete. The outcome of this testing is inherently uncertain. A failure of one or more of Innovate’s clinical trials can occur at any time during the clinical trial process. The results of preclinical studies and early clinical trials of Innovate’s product candidates may not necessarily be predictive of the results of later-stage clinical trials. There is a high failure rate for drugs proceeding through clinical trials, and product candidates in later stages of clinical trials may fail to show the required safety and efficacy despite having progressed through preclinical studies and initial clinical trials. Many companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier clinical trials, and Innovate cannot be certain that it will not face similar setbacks. Even if Innovate’s clinical trials are completed, the results may not be sufficient to obtain regulatory approval for its product candidates.

 

     

 

 

Because of the developmental nature of Innovate’s product candidates, Innovate is subject to risks associated with initiating, completing and achieving positive outcomes from its current and future clinical trials, including:

 

· inability to enroll enough patients in the clinical trials;

 

· slow implementation, enrollment and completion of the clinical trials;

 

· low patient compliance and adherence to dosing and reporting requirements, such as incomplete reporting of patient reported outcomes in the clinical trials or missed doses;

 

· lack of safety and efficacy in the clinical trials;

 

· delays in the manufacture of supplies for drug components due to delays in formulation, process development, or manufacturing activities;

 

· requirements for additional nonclinical or clinical studies based on changes to formulation and/or changes to regulatory requirements;

 

· requirements for additional clinical studies based on inconclusive clinical results or changes in market, standard of care, and/or regulatory requirements;

 

If Innovate successfully completes the necessary clinical trials for its product candidates, its success will be subject to the risks associated with obtaining regulatory approvals, product launch, and commercialization, including:

 

· delays during regulatory review and/or requirements for additional CMC, nonclinical, or clinical studies, resulting in increased costs and/or delays in marketing approval and subsequent commercialization of the product candidates in the United States and other markets;

 

· FDA rejection of Innovate’s New Drug Application (“NDA”) submissions for its product candidates;

 

· regulatory rejection in the EU, Japan, and other markets;

 

· inability to consistently manufacture commercial supplies of drug and delivery devices resulting in slowed market development and lower revenue;

 

· poor commercial sales due to:

 

o the ability of Innovate’s future sales organization or its potential commercialization partners to effectively sell the product candidates;

 

o Innovate’s lack of success in educating physicians and patients about the benefits, administration, and use of its product candidates;

 

o low patient demand for the product candidates;

 

o the availability, perceived advantages, relative cost, relative safety and relative efficacy of other products or treatments for the targeted indications of the product candidates;

 

     

 

 

o poor prescription coverage and inadequate reimbursement for its product candidates;

 

· Innovate’s inability to enforce its intellectual property rights in and to its product candidates; and

 

· reduction in the safety profile of its product candidates following approval.

 

Many of these clinical, regulatory and commercial matters are beyond Innovate’s control and are subject to other risks described elsewhere in this “Risk Factors” annex. Accordingly, Innovate cannot assure that it will be able to advance its product candidates further through final clinical development, or obtain regulatory approval of, commercialize or generate significant revenue from them. If Innovate cannot do so, or is significantly delayed in doing so, its business will be materially harmed.

 

If Innovate fails to attract and retain senior management and key scientific personnel, it may be unable to successfully develop and commercialize its product candidates.

 

Innovate has historically operated with a limited number of employees. As of July 31, 2017, Innovate had four full-time employees, including one employee engaged in research and development. Therefore, institutional knowledge is concentrated within a small number of employees. Innovate’s success depends in part on its continued ability to attract, retain and motivate highly qualified management, clinical and scientific personnel. Innovate’s future success is highly dependent upon the contributions of its senior management team. The loss of services of any of these individuals could delay or prevent the successful development of its product pipeline, completion of its planned clinical trials or the commercialization of its product candidates.

 

There may be intense competition from other companies and organizations for qualified personnel. Other companies and organizations with which Innovate competes for personnel may have greater financial and other resources and different risk profiles than Innovate, and a history of successful development and commercialization of its product candidates. Replacing key employees may be difficult and costly; and Innovate may not have other personnel with the capacity to assume all the responsibilities of a key employee upon his/her departure. If Innovate cannot attract and retain skilled personnel, as needed, Innovate may not achieve its development and other goals.

 

In addition, the success of Innovate’s business will depend on its ability to develop and maintain relationships with respected service providers and industry-leading consultants and advisers. If Innovate cannot develop and maintain such relationships, as needed, the rate and success at which Innovate can develop and commercialize product candidates may be limited. In addition, its outsourcing strategy, which has included engaging consultants to manage key functional areas, may subject Innovate to scrutiny under labor laws and regulations, which may divert management time and attention and have an adverse effect on its business and financial condition.

 

     

 

 

Innovate has identified a material weakness in its internal control over financial reporting and may identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal control, which may impair its ability to produce accurate financial statements or prevent fraud.

 

Currently, Innovate is a private company and has limited resources to address its internal controls and procedures and relies on part-time consultants to assist Innovate with its financial accounting and compliance obligations. In connection with the preparation of Innovate’s audited financial statements for the year ended December 31, 2016, Innovate’s independent auditors advised management that a material weakness existed in internal controls over financial reporting due to Innovate’s inability to adequately segregate duties as a result of Innovate’s limited number of accounting personnel. 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 the subject company’s annual or interim financial statements will not be prevented or detected on a timely basis. Although Innovate is committed to continuing to improve its internal control processes and intends to implement a plan to remediate this material weakness, Innovate cannot be certain of the effectiveness of such plan or that, in the future, additional material weaknesses or significant deficiencies will not exist or otherwise be discovered. If Innovate is unable to maintain proper and effective internal controls, it may not be able to produce timely and accurate financial statements and prevent fraud.

 

Innovate’s employees, independent contractors and consultants, principal investigators, CROs, CMOs and other vendors, and any future commercial partners may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could cause significant liability for Innovate and harm its reputation.

 

Innovate is exposed to the risk that its employees, independent contractors and consultants, principal investigators, clinical research organizations (CROs), contract manufacturing organizations (CMOs) and other vendors, and any future commercial partners may engage in fraudulent conduct or other misconduct. This type of misconduct may include intentional failures to comply with FDA regulations or similar regulations of comparable foreign regulatory authorities, to provide accurate information to the FDA or comparable foreign regulatory authorities, to comply with manufacturing standards required by cGMP or Innovate standards, to comply with federal and state healthcare fraud and abuse laws and regulations and similar laws and regulations established and enforced by comparable foreign regulatory authorities, and to report financial information or data accurately or disclose unauthorized activities to them. The misconduct of its employees and other Innovate service providers could involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to its reputation. Innovate intends to adopt a code of business ethics and conduct, but it is not always possible to identify and deter such misconduct, and the precautions Innovate takes to detect and prevent this activity, such as the implementation of a quality system which entails vendor audits by quality experts, may not be effective in controlling unknown or unmanaged risks or losses or in protecting Innovate from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against them, and Innovate is not successful in defending itself or asserting its rights, those actions could have a significant impact on its business and results of operations, including the imposition of significant fines or other sanctions.

 

Innovate does not have, and does not have plans to establish manufacturing facilities. Innovate completely relies on third parties for the manufacture and supply of its clinical trial drug and delivery device supplies and, if approved, commercial product materials. The loss of any of these vendors or a vendor’s failure to provide Innovate with an adequate supply of clinical trial or commercial product material in a timely manner and on commercially acceptable terms, or at all, could harm its business.

 

Innovate outsources the manufacture of its product candidates and does not plan to establish its own manufacturing facilities. To manufacture Innovate’s product candidates, Innovate has made numerous custom modifications at CMOs, making Innovate highly dependent on these CMOs. For clinical and commercial supplies, if approved, Innovate has supply agreements with third party CMOs for drug substance and finished drug product. While Innovate has secured long-term commercial supply agreements with many of the third party CMOs, Innovate would need to negotiate agreements for commercial supply with several important CMOs, and Innovate may not be able to reach agreement on acceptable terms. In addition, Innovate relies on these third parties to conduct or assist Innovate in key manufacturing development activities, including qualification of equipment, developing and validating methods, defining critical process parameters, releasing component materials and conducting stability testing, among other things. If these third parties are unable to perform their tasks successfully in a timely manner, whether for technical, financial or other reasons, Innovate may be unable to secure clinical trial material, or commercial supply material if approved, which likely would delay the initiation, conduct or completion of its clinical studies or prevent Innovate from having enough commercial supply material for sale, which would have a material and adverse effect on its business.

 

     

 

 

Currently, Innovate does not have alternative vendors to back up its primary vendors of clinical trial material or, if approved, commercial supply material. Identification of and discussions with other vendors may be protracted and/or unsuccessful, or these new vendors may be unsuccessful in producing the same results as the current primary vendors producing the material. Therefore, if its primary vendors become unable or unwilling to perform their required activities, Innovate could experience protracted delays or interruptions in the supply of clinical trial material and, ultimately, product for commercial sale, which would materially and adversely affect its development programs, commercial activities, operating results and financial condition. In addition, the FDA or regulatory authorities outside of the United States may require Innovate to have an alternate manufacturer of a drug product before approving it for marketing and sale in the United States or abroad and securing such alternate manufacturer before approval of an NDA could result in considerable additional time and cost prior to NDA approval.

 

Any new manufacturer or supplier of finished drug product or its component materials, including drug substance and delivery devices, would be required to qualify under applicable regulatory requirements and would need to have sufficient rights under applicable intellectual property laws to the method of manufacturing of such product or ingredients required by Innovate. The FDA or foreign regulatory agency may require Innovate to conduct additional clinical studies, collect stability data and provide additional information concerning any new supplier, or change in a validated manufacturing process, including scaling-up production, before Innovate could distribute products from that manufacturer or supplier or revised process. For example, if Innovate were to engage a third party other than its current CMOs to supply the drug substance or drug product for future clinical trial, or commercial product, the FDA or regulatory authorities outside of the United States may require Innovate to conduct additional clinical and nonclinical studies to ensure comparability of the drug substance or drug product manufactured by its current CMOs to that manufactured by the new supplier.

 

The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production, particularly in scaling-up initial production. These problems include difficulties with production costs and yields, quality control, including stability of the product candidate and quality assurance testing, and shortages of qualified personnel. Innovate’s product candidates have not been manufactured at the scale Innovate believes will be necessary to maximize its commercial value and, accordingly, Innovate may encounter difficulties in attempting to scale-up production and may not succeed in that effort on a timely basis or at all. In addition, the FDA or other regulatory authorities may impose additional requirements as Innovate scales-up initial production capabilities, which may delay its scale-up activities and/or add expense.

 

All manufacturers of Innovate’s clinical trial material and, if approved, commercial product, including drug substance manufacturers, must comply with cGMP requirements enforced by the FDA through its facilities inspection program and applicable requirements of foreign regulatory authorities. These requirements include quality control, quality assurance and the maintenance of records and documentation. Manufacturers of Innovate’s clinical trial material may be unable to comply with these cGMP requirements and with other FDA, state and foreign regulatory requirements. While Innovate or its representatives generally monitor and audit its manufacturers’ systems, Innovate does not have full control over their ongoing compliance with these regulations. And while the responsibility to maintain cGMP compliance is shared between Innovate and the third-party manufacturer, Innovate bears ultimate responsibility for its supply chain and compliance with regulatory standards. Failure to comply with these requirements may result in fines and civil penalties, suspension of production, suspension or delay or failure to obtain product approval, product seizure or recall, or withdrawal of product approval.

 

     

 

 

If Innovate’s manufacturers encounter any of the aforementioned difficulties or otherwise fail to comply with their contractual obligations or there are delays entering commercial supply agreements due to capital constraints, Innovate may have insufficient quantities of material to support ongoing and/or planned clinical studies or to meet commercial demand, if approved. In addition, any delay or interruption in the supply of materials necessary or useful to manufacture its product candidates could delay the completion of its clinical studies, increase the costs associated with its development programs and, depending upon the period of delay, require Innovate to commence new clinical studies at significant additional expense or terminate the studies completely. Delays or interruptions in the supply of commercial product could result in increased cost of goods sold and lost sales. Innovate cannot provide assurance that manufacturing or quality control problems will not arise in connection with the manufacture of its clinical trial material or commercial product, if approved, or that third-party manufacturers will be able to maintain the necessary governmental licenses and approvals to continue manufacturing such clinical trial material or commercial product, as applicable. In addition, if Innovate products are manufactured entirely or partially outside the United States, Innovate may experience interruptions in supply due to shipping or customs difficulties or regional instability. Furthermore, changes in currency fluctuations, shipping costs, or import tariffs could adversely affect cost of goods sold. Any of the above factors could cause Innovate to delay or suspend anticipated or ongoing trials, regulatory submissions or commercialization of its product candidates, entail higher costs or result in Innovate being unable to effectively commercialize its products. Innovate’s dependence upon third parties for the manufacture of its clinical trial material may adversely affect its future costs and its ability to develop and commercialize its product candidates on a timely and competitive basis.

 

Innovate currently relies significantly on third parties to conduct its nonclinical testing and clinical studies and other aspects of its development programs and if those third parties do not satisfactorily perform their contractual obligations or meet anticipated deadlines, the development of its product candidates could be adversely affected.

 

Innovate does not currently employ personnel or possess the facilities necessary to conduct many of the activities associated with its programs. Innovate engages consultants, advisors, clinical research organizations (CROs), and others to assist in the design and conduct of nonclinical and clinical studies of its product candidates, with interpretation of the results of those studies and with regulatory activities, and Innovate expects to continue to outsource all or a significant amount of such activities. As a result, many important aspects of its development programs are and will continue to be outside its direct control, and its third-party service providers may not perform their activities as required or expected including the maintenance of GCP, GLP and GMP compliance, which are ultimately Innovate’s responsibility to ensure. Further, such third parties may not be as committed to the success of Innovate’s programs as Innovate’s own employees and, therefore, may not devote the same time, thoughtfulness or creativity to completing projects or problem-solving as Innovate’s own employees would. To the extent Innovate is unable to successfully manage the performance of third-party service providers, its business may be adversely affected.

 

     

 

 

The CROs that Innovate may engage to execute its clinical studies play a significant role in the conduct of the studies, including the collection and analysis of study data, and Innovate likely will depend on CROs and clinical investigators to conduct future clinical studies and to assist in analyzing data from completed studies and developing regulatory strategies for its product candidates. Individuals working at the CROs with which it will contract, as well as investigators at the sites at which its studies are conducted, are not Innovate’s employees, and Innovate has limited control over the amount or timing of resources that they devote to their programs. If Innovate’s CROs, study investigators, and/or third-party sponsors fail to devote sufficient time and resources to studies of its product candidates, if Innovate and/or its CROs do not comply with all GLP and GCP regulatory and contractual requirements, or if their performance is substandard, it may delay commencement and/or completion of these studies, submission of applications for regulatory approval, regulatory approval, and commercialization of its product candidates. Failure of CROs to meet their obligations to Innovate could adversely affect development of its product candidates.

 

In addition, CROs Innovate engages may have relationships with other commercial entities, some of which may compete with Innovate. Through intentional or unintentional means, Innovate’s competitors may benefit from lessons learned on the Innovate project that could ultimately harm Innovate’s competitive position. Moreover, if a CRO fails to properly, or at all, perform its activities during a clinical study, Innovate may not be able to enter into arrangements with alternative CROs on acceptable terms or in a timely manner, or at all. Switching CROs may increase costs and divert management time and attention. In addition, there likely would be a transition period before a new CRO commences work. These challenges could result in delays in the commencement or completion of Innovate’s clinical studies, which could materially impact its ability to meet its desired and/or announced development timelines and have a material adverse impact on its business and financial condition.

 

Innovate may not achieve its projected development goals within the time frames that Innovate has announced.

 

Innovate has set goals for accomplishing certain objectives material to the successful development of its product candidates. The actual timing of these events may vary due to many factors, including delays or failures in its nonclinical testing, clinical studies and manufacturing and regulatory activities and the uncertainties inherent in the regulatory approval process. From time to time, Innovate creates estimates for the completion of enrollment of or announcement of data from clinical studies of its product candidates. However, predicting the rate of enrollment or the time from completion of enrollment to announcement of data for any clinical study requires Innovate to make significant assumptions that may prove to be incorrect. As discussed in other risk factors above, its estimated enrollment rates and the actual rates may differ materially and the time required to complete enrollment of any clinical study may be considerably longer than Innovate estimates. Such delays may adversely affect its financial condition and results of operations.

 

Even if Innovate completes a clinical study with successful results, Innovate may not achieve its projected development goals within the periods Innovate initially anticipates or announces. If a development plan for a product candidate becomes more extensive and costly than anticipated, Innovate may determine that the associated time and cost are not financially justifiable and, as a result, may discontinue development in a particular indication or of the product candidate as a whole. In addition, even if a study did complete with successful results, changes may occur in regulatory requirements or policy during the period of product development and/or regulatory review of an NDA that relate to the data required to be included in NDAs which may require additional studies that may be costly and time consuming. Any of these actions may be viewed negatively, which could adversely impact its financial condition.

 

Further, throughout development, Innovate must provide adequate assurance to the FDA and other regulatory authorities that Innovate can consistently develop and produce its product candidates in conformance with GLP, GCP, cGMP, and other regulatory standards. As discussed above, Innovate relies on CMOs for the manufacture of clinical, and future commercial, quantities of its product candidates. If future FDA or other regulatory authority inspections identify cGMP compliance deficiencies at these third-party facilities, production of its clinical trial material or, in the future, commercial product, could be disrupted, causing potentially substantial delay in or failure of development or commercialization of its product candidates.

 

     

 

 

Innovate currently has limited marketing capabilities and no sales organization. If Innovate is unable to establish sales and marketing capabilities on its own or through third parties, it will be unable to successfully commercialize its products, if approved, or generate product revenue.

 

To commercialize Innovate’s products, if approved, in the United States and other jurisdictions it seeks to enter, Innovate must build its marketing, sales, managerial and other non-technical capabilities or make arrangements with third parties to perform these services, and it may not be successful in doing so. If Innovate’s products receive regulatory approval, it expects to market such products in the United States through a focused, specialized sales force, which will be costly and time consuming. Innovate has no prior experience in the marketing and sale of pharmaceutical products and there are significant risks involved in building and managing a sales organization, including its ability to hire, retain and incentivize qualified individuals, generate sufficient sales leads, provide adequate training to sales and marketing personnel and effectively manage a geographically dispersed sales and marketing team. Outside of the United States, Innovate may consider collaboration arrangements. If Innovate is unable to enter into such arrangements on acceptable terms or at all, it may not be able to successfully commercialize its products in certain markets. Any failure or delay in the development of its internal sales, marketing and distribution capabilities would adversely impact the commercialization of its products. If Innovate is not successful in commercializing its products, either on its own or through collaborations with one or more third parties, its future product revenue will suffer and it would incur significant additional losses.

 

To establish a sales and marketing infrastructure and expand its manufacturing capabilities, Innovate will need to increase the size of its organization, and Innovate may experience difficulties in managing this growth.

 

As of July 31, 2017, Innovate had four full-time employees, including one employee engaged in research and development. As Innovate advances its product candidates through the development process and to commercialization, it will need to continue to expand its development, regulatory, quality, managerial, sales and marketing, operational, finance and other resources to manage its operations and clinical trials, continue its development activities and commercialize its product candidates, if approved. As its operations expand, Innovate expects that it will need to manage additional relationships with various manufacturers and collaborative partners, suppliers and other organizations.

 

Due to Innovate’s limited financial resources and its limited experience in managing a company with such anticipated growth, Innovate may not be able to effectively manage the expansion of its operations or recruit and train additional qualified personnel. In addition, the physical expansion of its operations may lead to significant costs and may divert its management and resources. Any inability to manage growth could delay the execution of its development and strategic objectives, or disrupt its operations, which could materially impact its business, revenue and operating results.

 

     

 

 

Innovate’s product candidates may cause undesirable side effects or adverse events, or have other properties that could delay or prevent its clinical development, regulatory approval or commercialization.

 

As with many pharmaceutical products, undesirable side effects or adverse events caused by Innovate’s product candidates could interrupt, delay or halt clinical studies and could result in the denial of regulatory approval by the FDA or other regulatory authorities for any or all indications, and in turn prevent Innovate from commercializing its product candidates. A significant challenge in clinical development is that the patient population in early studies, where small numbers of patients are required, is different from the patient population observed in later stage studies, where larger groups of patients are required. For example, patients in earlier stage studies may be sicker, more compliant, or otherwise motivated than patients in larger studies.

 

If undesirable side effects occur, they could possibly prevent approval, which would have a material and adverse effect on its business.

 

If any of its product candidates receive marketing approval and Innovate or others later identify undesirable side effects caused by the product:

 

· regulatory authorities may require the addition of labeling statements, such as a “black box” warning or a contraindication;

 

· Innovate may be required to change the way the product is administered, conduct additional clinical studies or change the labeling of the product; and

 

· regulatory authorities may withdraw approval of the product;

 

· its reputation may suffer.

 

Any of these events could prevent Innovate from achieving or maintaining market acceptance of the affected product or could substantially increase the costs and expenses of commercializing the product, which in turn could delay or prevent Innovate from generating significant revenue from its sale.

 

Innovate’s business and operations would suffer in the event of third-party computer system failures, cyber-attacks on third-party systems or deficiency in its cyber security.

 

Innovate relies on information technology systems, including third-party “cloud based” service providers, to keep financial records, maintain laboratory data, clinical data and corporate records, to communicate with staff and external parties, and to operate other critical functions. This includes critical systems such as email, other communication tools, electronic document repositories, and archives. If any of these third-party information technology (IT) providers are compromised due to computer viruses, unauthorized access, malware, natural disasters, fire, terrorism, war and telecommunication failures, electrical failures, cyber-attacks or cyber-intrusions over the internet, then sensitive emails or documents could be exposed or deleted. Similarly, Innovate could incur business disruption if its access to the internet is compromised and Innovate is unable to connect with third-party IT providers. The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. In addition, Innovate relies on those third parties to safeguard important confidential personal data regarding its employees and patients enrolled in its clinical trials. If a disruption event were to occur and cause interruptions in a third-party IT provider’s operations, it could result in a disruption of its drug development programs. For example, the loss of clinical trial data from completed, ongoing or planned clinical trials could result in delays in its regulatory approval efforts and significantly increase its costs to recover or reproduce the data. To the extent that any disruption or security breach results in a loss of or damage to its data or applications, or inappropriate disclosure of confidential or proprietary information, Innovate could incur liability and development of its product candidates could be delayed, or could fail.

 

     

 

 

Risks Related to Drug Development and Commercialization

 

Innovate depends on the successful completion of clinical studies of its product candidates, and any positive results in prior clinical studies do not ensure that ongoing or future clinical studies will be successful.

 

Pharmaceutical products are subject to stringent regulatory requirements covering quality, safety, and efficacy. The burden of proof is on the manufacturer, such as Innovate, to show with substantial clinical data that the risk/benefit profile for any new drug is favorable. Only after successfully completing extensive pharmaceutical development, nonclinical testing, and clinical studies may a product be considered for regulatory approval.

 

If Innovate licenses rights to develop its product candidates to independent third parties or otherwise permit such third parties to evaluate its product candidates in clinical studies, Innovate may have limited control over those clinical studies. Any safety or efficacy concern identified in a third-party sponsored study could adversely affect its or another licensee’s development of its product candidate and prospects for its regulatory approval, even if the data from that study are subject to varying interpretations and analyses.

 

There is significant risk that ongoing and future clinical studies of its product candidates are unsuccessful. Negative or inconclusive results could cause the FDA and other regulatory authorities to require Innovate to repeat or conduct additional clinical studies, which could significantly increase the time and expense associated with development of that product candidate or cause Innovate to elect to discontinue one or more clinical programs. Failure to complete a clinical study of a product candidate or an unsuccessful result of a clinical study could have a material adverse effect on its business.

 

Clinical drug development involves a lengthy and expensive process, with an uncertain outcome. We may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our drug candidates.

 

Clinical studies are expensive, difficult to design and implement, may take many years to complete, and outcomes are inherently uncertain. A drug product may fail to demonstrate positive results at any stage of testing despite having progressed satisfactorily through nonclinical testing and initial clinical studies. There is significant risk in clinical development where later stage clinical studies are designed and powered based on the analysis of data from earlier studies, with these earlier studies involving a smaller number of patients, and the results of the earlier studies being driven primarily by a subset of responsive patients. In addition, interim results of a clinical study do not necessarily predict final results. Further, clinical study data frequently are susceptible to varying interpretations. Medical professionals and/or regulatory authorities may analyze or weigh study data differently than the sponsor company, resulting in delay or failure to obtain marketing approval for a product candidate. Additionally, the possible lack of standardization across multiple investigative sites may induce variability in the results, which can interfere with the evaluation of treatment effects.

 

Delays in commencement and completion of clinical studies are common and have many causes. Delays in clinical studies of Innovate’s product candidates could increase overall development costs and jeopardize its ability to obtain regulatory approval and successfully commercialize any approved products.

 

Clinical studies may not commence on time or be completed on schedule, if at all. The commencement and completion of clinical studies can be delayed for a variety of reasons, including:

 

     

 

 

· inability to raise sufficient funding to initiate or to continue a clinical study;

 

· delays in obtaining regulatory approval to commence a clinical study;

 

· delays in identifying and reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical study sites and investigators, which agreements can be subject to extensive negotiation and may vary significantly among study sites;

 

· delays in obtaining regulatory approval in a prospective country;

 

· delays in obtaining ethic committee approval to conduct a clinical study at a prospective site;

 

· delays in reaching agreements on acceptable terms with prospective contract manufacturing organizations, or CMOs, or other vendors for the production and supply of clinical trial material and, if necessary, drug administration devices, which agreements can be subject to extensive negotiation;

 

· delays in the production or delivery of sufficient quantities of clinical trial material from its CMOs and other vendors to initiate or continue a clinical study;

 

· delays due to product candidate recalls as a result of stability failure, excessive product complaints or other failures of the product candidate during its use or testing;

 

· invalidation of clinical data caused by premature unblinding or integrity issues;

 

· invalidation of clinical data caused by mixing up of the active drug and placebo through randomization or manufacturing errors;

 

· delays on the part of its CROs, CMOs, and other third-party contractors in developing procedures and protocols or otherwise conducting activities in accordance with applicable policies and procedures and in accordance with agreed upon timelines;

 

· delays in identifying and hiring or engaging, as applicable, additional employees or consultants to assist in managing clinical study-related activities;

 

· delays in recruiting and enrolling individuals to participate in a clinical study, which historically can be challenging in orphan diseases;

 

· delays caused by patients dropping out of a clinical study due to side effects, concurrent disorders, difficulties in adhering to the study protocol, unknown issues related to different patient profiles than in previous studies, or otherwise;

 

· delays in having patients complete participation in a clinical study, including returning for post-treatment follow-up;

 

· delays resulting from study sites dropping out of a trial, providing inadequate staff support for the study, problems with shipment of study supplies to clinical sites, or focusing its staff’s efforts on enrolling studies that compete for the same patient population;

 

     

 

 

· suspension of enrollment at a study site or the imposition of a clinical hold by the FDA or other regulatory authority following an inspection of clinical study operations at study sites or finding of a drug-related serious adverse event; and

 

· delays in quality control/quality assurance procedures necessary for study database lock and analysis of unblinded data.

 

Innovate may experience difficulties in the enrollment of patients in its clinical trials, which may delay or prevent Innovate from obtaining regulatory approval.

 

Innovate may not be able to continue clinical trials for its product candidates if Innovate is unable to locate and enroll a sufficient number of eligible patients to participate in these trials as required by the FDA or similar regulatory authorities outside the United States. In particular, because Innovate is focused on diseases in genomically defined patient populations, our ability to enroll eligible patients may be limited or may result in slower enrollment than we anticipate. In addition, some of our competitors have ongoing clinical trials for drug candidates that treat the same indications as our drug candidates, and patients who would otherwise be eligible for our clinical trials may instead enroll in clinical trials of our competitors’ drug candidates.

 

Patient enrollment, a critical component to successful completion of a clinical study, is affected by many factors, including:

 

· the size of the target patient population;

 

· other ongoing studies competing for the same patient population;

 

· the eligibility criteria for the clinical trial;

 

· the design of the clinical study;

 

· the perceived risks and benefits of the product candidate under study;

 

· the efforts to facilitate timely enrollment in clinical trials;

 

· the proximity and availability of clinical trial sites for prospective patients; and

 

· the ability to monitor patients adequately during and after treatment.

 

Clinical studies may not begin on time or be completed in the time frames Innovate anticipates. The length of time necessary to successfully complete clinical studies varies significantly and is difficult to predict accurately. Innovate may make statements regarding anticipated timing for completion of enrollment in and/or availability of results from its clinical studies, but such predictions are subject to a number of significant assumptions and actual timing may differ materially for a variety of reasons, including patient enrollment rates, length of time needed to prepare raw study data for analysis and then to review and analyze it, and other factors described above. If Innovate experiences delays in the completion of a clinical study, if a clinical study is terminated, or if failure to conduct a study in accordance with regulatory requirements or the study’s protocol leads to deficient safety and/or efficacy data, the regulatory approval and/or commercial prospects for its product candidates may be harmed and its ability to generate product revenue will be delayed. In addition, any delays in completing its clinical studies likely will increase its development costs. Further, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical studies may ultimately lead to the denial of regulatory approval of a product candidate. Even if Innovate ultimately commercializes its product candidates, the standard of care may have changed or other therapies for the same indications may have been introduced to the market in the interim and may establish a competitive threat to Innovate or may diminish the need for Innovate’s products.

 

     

 

 

Clinical studies are very expensive, difficult to design and implement, often take many years to complete, and the outcome is inherently uncertain.

 

Clinical development of pharmaceutical products for humans is generally very expensive, takes many years to complete and failures can occur at any stage of clinical testing. Innovate estimates that clinical development of its product candidates will take several additional years to complete, but because of the variety of factors that can affect the design, timing, and outcome of clinical studies, Innovate is unable to estimate the exact funds required to complete research and development, to obtain regulatory approval and to commercialize all of its product candidates. Innovate will need significant additional capital to continue to advance its products as per current business plans.

 

Failure at any stage of clinical testing is not uncommon and Innovate may encounter problems that would require additional, unplanned studies or cause Innovate to abandon a clinical development program.

 

In addition, a clinical study may be suspended or terminated by Innovate, an IRB, a data safety monitoring board, the FDA or other regulatory authorities due to a number of factors, including:

 

· lack of adequate funding to continue the study;

 

· failure to conduct the study in accordance with regulatory requirements or the study’s protocol;

 

· inspection of clinical study operations or sites by the FDA or other regulatory authorities resulting in the imposition of a clinical hold;

 

· unforeseen safety issues, including adverse side effects; or

 

· changes in governmental regulations or administrative actions.

 

Changes in governmental regulations and guidance relating to clinical studies may occur and Innovate may need to amend study protocols to reflect these changes, or Innovate may amend study protocols for other reasons. Amendments may require Innovate to resubmit protocols to IRBs for reexamination and approval or renegotiate terms with CROs, study sites and investigators, all of which may adversely impact the costs or timing of or its ability to successfully complete a trial.

 

There is significant uncertainty regarding the regulatory approval process for any investigational new drug, substantial further testing and validation of its product candidates and related manufacturing processes may be required, and regulatory approval may be conditioned, delayed or denied, any of which could delay or prevent Innovate from successfully marketing its product candidates and substantially harm its business.

 

Pharmaceutical products generally are subject to rigorous nonclinical testing and clinical studies and other approval procedures mandated by the FDA and foreign regulatory authorities. Various federal and foreign statutes and regulations also govern or materially influence the manufacturing, safety, labeling, storage, record keeping and marketing of pharmaceutical products. The process of obtaining these approvals and the subsequent compliance with appropriate U.S. and foreign statutes and regulations is time-consuming and requires the expenditure of substantial resources.

 

     

 

 

Innovate is preparing INN-202, larazotide acetate, for a Phase 3 clinical trial, the success of which will be needed for FDA approval to market INN-202 in the United States to treat celiac disease in patients with persistent symptoms while adhering to a gluten free diet. While significant communication with the FDA on the Phase 3 study design has occurred, even if the Phase 3 clinical study meets all of its statistical goals and protocol end points, the FDA may not view the results as robust and convincing. They may require additional clinical studies and/or other costly studies, which could require Innovate to expend substantial additional resources and could significantly extend the timeline for clinical development prior to market approval. Additionally, Innovate is required by the FDA to conduct a long-term safety study. The results of this study will not be known until a short time prior to potential submission of an NDA for INN-202. If the safety study cannot be completed for technical or other reasons, or provides results that the FDA determines to be concerning, this may cause a delay or failure in obtaining approval for INN-202.

 

INN-108 plans to initiate Phase 2 clinical trials for mild to moderate ulcerative colitis. Concurrently, Innovate plans to make formulation changes to INN-108 that would simplify the composition for use in pediatric patients. While this change is expected by Innovate to reduce studies and/or other documentation requirements, the regulatory agencies may require additional clinical or nonclinical studies prior to approval, even if current clinical studies are deemed successful, which could require Innovate to expend substantial additional resources and significantly extend the timeline for clinical development of INN-108.

 

Innovate is preparing INN-329, secretin, for additional testing in its Phase 3 clinical trial, the success of which will be needed for FDA approval to market INN-329 in the United States for MRCP procedures. While significant communication with the FDA on the Phase 3 study design has occurred in the past, Innovate will be required to initiate communication with the FDA to finalize the study design and to seek their approval for the additional Phase 3 trial design. Even if the Phase 3 clinical study meets all of its statistical goals and protocol end points, the FDA may not view the results as robust and convincing. The FDA may require additional clinical studies and/or other costly studies, which could require Innovate to expend substantial additional resources and could significantly extend the timeline for clinical development prior to market approval. Additionally, Innovate is required by the FDA to conduct a long term safety study. The results of this study will not be known until a short time prior to potential submission of an NDA for INN-329. If the safety study cannot be completed for technical or other reasons, or provides results that the FDA determines to be concerning, this may cause a delay or failure in obtaining approval for INN-329.

 

Significant uncertainty exists with respect to the regulatory approval process for any investigational new drug, including INN-202, INN-108 and INN-329. Regardless of any guidance the FDA or foreign regulatory agencies may provide a drug’s sponsor during its development, the FDA or foreign regulatory agencies retain complete discretion in deciding whether to accept an NDA or the equivalent foreign regulatory approval submission for filing or, if accepted, approve an NDA. There are many components to an NDA or marketing authorization application submission in addition to clinical study data. For example, the FDA or foreign regulatory agencies will review the sponsor’s internal systems and processes, as well as those of its CROs, CMOs and other vendors, related to development of its product candidates, including those pertaining to its clinical studies and manufacturing processes. Before accepting an NDA for review or before approving the NDA, the FDA or foreign regulatory agencies may request that Innovate provide additional information that may require significant resources and time to generate and there is no guarantee that its product candidates will be approved for any indication for which Innovate may apply. The FDA or foreign regulatory agencies may choose not to approve an NDA for any of a variety of reasons, including a decision related to the safety or efficacy data, manufacturing controls or systems, or for any other issues that the agency may identify related to the development of its product candidates. Even if one or more Phase 3 clinical studies are successful in providing statistically significant evidence of the efficacy and safety of the investigational drug, the FDA or foreign regulatory agencies may not consider efficacy and safety data from the submitted studies adequate scientific support for a conclusion of effectiveness and/or safety and may require one or more additional Phase 3 or other studies prior to granting marketing approval. If this were to occur, the overall development cost for the product candidate would be substantially greater and its competitors may bring products to market before Innovate, which could impair its ability to generate revenues from the product candidates, or even seek approval, if blocked by a competitor’s Orphan Drug exclusivity, which would have a material adverse effect on Innovate’s business, financial condition and results of operations.

 

     

 

 

Further, development of Innovate’s product candidates and/or regulatory approval may be delayed for reasons beyond its control. For example, U.S. federal government shut-down or budget sequestration, such as one that occurred during 2013, may result in significant reductions to the FDA’s budget, employees and operations, which may lead to slower response times and longer review periods, potentially affecting Innovate’s ability to progress development of its product candidates or obtain regulatory approval for its product candidates.

 

Even if the FDA or foreign regulatory agencies grant approvals for Innovate’s product candidates, the conditions or scope of the approval(s) may limit successful commercialization of the product candidates and impair Innovate’s ability to generate substantial sales revenue. The FDA or foreign regulatory agencies may also only grant marketing approval contingent on the performance of costly post-approval nonclinical or clinical studies, or subject to warnings or contraindications that limit commercialization. Additionally, even after granting approval, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion and recordkeeping for its products will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration, and continued compliance with current good manufacturing processes, or cGMP, good clinical practices, international conference on harmonization regulations and good laboratory practices, which are regulations and guidelines that are enforced by the FDA or foreign regulatory agencies for all of its clinical development and for any clinical studies that Innovate conducts post-approval. The FDA or foreign regulatory agencies may decide to withdraw approval, add warnings or narrow the approved indications in the product label, or establish risk management programs that could restrict distribution of its products. These actions could result from, among other things, safety concerns, including unexpected side effects or drug-drug interaction problems, or concerns over misuse of a product. If any of these actions were to occur following approval, Innovate may have to discontinue commercialization of the product, limit its sales and marketing efforts, implement risk minimization procedures, and/or conduct post-approval studies, which in turn could result in significant expense and delay or limit its ability to generate sales revenues.

 

Regulations may be changed prior to submission of an NDA that require higher hurdles than currently anticipated. These may occur as a result of drug scandals, recalls, or a political environment unrelated to Innovate’s products.

 

     

 

 

Even if Innovate receives regulatory approval for a product candidate, Innovate may face regulatory difficulties that could materially and adversely affect its business, financial condition and results of operations.

 

Even if initial regulatory approval is obtained, as a condition to the initial approval the FDA or a foreign regulatory agency may impose significant restrictions on a product’s indicated uses or marketing or impose ongoing requirements for potentially costly post-approval studies or marketing surveillance programs, any of which would limit the commercial potential of the product. Its product candidates also will be subject to ongoing FDA requirements related to the manufacturing processes, labeling, packaging, storage, distribution, advertising, promotion, record-keeping and submission of safety and other post-market information regarding the product. For instance, the FDA may require changes to approved drug labels, require post-approval clinical studies and impose distribution and use restrictions on certain drug products. In addition, approved products, manufacturers and manufacturers’ facilities are subject to continuing regulatory review and periodic inspections. If previously unknown problems with a product are discovered, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, the FDA may impose restrictions on that product or Innovate, including requiring withdrawal of the product from the market. If Innovate or a CMO of Innovate’s fails to comply with applicable regulatory requirements, a regulatory agency may:

 

· issue warning letters or untitled letters;

 

· impose civil or criminal penalties;

 

· suspend or terminate any ongoing clinical studies;

 

· close the facilities of a CMO;

 

· refuse to approve pending applications or supplements to approved applications;

 

· suspend or withdraw regulatory approval;

 

· exclude its product from reimbursement under government healthcare programs, including Medicaid or Medicare;

 

· impose restrictions or affirmative obligations on Innovate’s or its CMO’s operations, including costly new manufacturing requirements; or

 

· seize or detain products or require a product recall.

 

If any of Innovate’s product candidates for which Innovate receives regulatory approval fails to achieve significant market acceptance among the medical community, patients or third-party payers, the revenue Innovate generates from its sales will be limited and its business may not be profitable.

 

Innovate’s success will depend in substantial part on the extent to which its product candidates, if approved, are accepted by the medical community and patients and reimbursed by third-party payers, including government payers. Innovate cannot predict with reasonable accuracy whether physicians, patients, healthcare insurers or health maintenance organizations, or the medical community in general, will accept or utilize any of its products, if approved. If its product candidates are approved but do not achieve an adequate level of acceptance by these parties, Innovate may not generate sufficient revenue to become or to remain profitable. In addition, its efforts to educate the medical community and third-party payers regarding benefits of its products may require significant resources and may never be successful.

 

The degree of market acceptance with respect to each of its approved products, if any, will depend upon a number of factors, including:

 

· the safety and efficacy of its products as demonstrated in clinical studies;

 

     

 

 

· acceptance in the medical and patient communities of its products as a safe and effective treatment;

 

· the perceived advantages of its product over alternative treatments, including with respect to the incidence and severity of any adverse side effects and the cost of treatment;

 

· the indications for which its product is approved;

 

· claims or other information (including limitations or warnings) in its product’s approved labeling;

 

· reimbursement and coverage policies of government and other third-party payers;

 

· smaller than expected market size due to lack of disease awareness of a rare disease, or the patient population with a specific rare disease being smaller than anticipated;

 

· availability of alternative treatments;

 

· pricing and cost-effectiveness of its product relative to alternative treatments;

 

· inappropriate diagnostic efforts due to limited knowledge and/or resources among clinicians;

 

· the prevalence of off-label substitution of chemically equivalent products or alternative treatments; and

 

· the resources Innovate devotes to marketing its product and restrictions on promotional claims Innovate can make with respect to the product.

 

If Innovate determines that a product candidate may not achieve adequate market acceptance or that the potential market size does not justify additional expenditure on the program, Innovate may reduce its expenditures on the development and/or the process of seeking regulatory approval of the product candidate while Innovate evaluates whether and on what timeline to move the program forward.

 

Even if Innovate receives regulatory approval to market one or more of its product candidates in the United States, Innovate may never receive approval or commercialize its products outside of the United States, which would limit its ability to realize the full commercial potential of its product candidates.

 

In order to market products outside of the United States, Innovate must establish and comply with the numerous and varying regulatory requirements of other countries regarding safety and efficacy. Approval procedures vary among countries and can involve additional product testing and validation and additional administrative review periods. The time required to obtain approval in other countries generally differs from that required to obtain FDA approval. The regulatory approval process in other countries may include all of the risks detailed above regarding FDA approval in the United States, as well as other risks. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others. Failure to obtain regulatory approval in other countries or any delay or setback in obtaining such approval could have the same adverse effects detailed above regarding FDA approval in the United States. As described above, such effects include the risks that its product candidates may not be approved for all indications requested, which could limit the uses of its product candidates and have an adverse effect on product sales, and that such approval may be subject to limitations on the indicated uses for which the product may be marketed or require costly, post-marketing follow-up studies.

 

     

 

 

Conversely, if the product candidates do receive approval outside the US in the future, Innovate may not meet the FDA requirements in the United States for approval.

 

Innovate must comply with the U.S. Foreign Corrupt Practices Act and similar foreign anti-corruption laws.

 

The U.S. Foreign Corrupt Practices Act, to which Innovate is subject, prohibits corporations and individuals from engaging in certain activities to obtain or retain business or to influence a person working in an official capacity. It is illegal to pay, to offer to pay or to authorize the payment of anything of value to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity. Other countries, such as the U.K., have similar laws with which Innovate must comply. Innovate faces the risk that an employee or agent could be accused of violating one or more of these laws, particularly in geographies where significant overlap exists between local government and healthcare industries. Such an accusation, even if unwarranted, could prove disruptive to Innovate’s developmental and commercialization efforts.

 

Risks Related to Innovate’s Intellectual Property

 

Innovate’s success will depend in part on obtaining and maintaining effective patent and other intellectual property protection for its product candidates and proprietary technology.

 

Innovate relies on patents and other intellectual property to maintain exclusivity for its product candidates. INN-202 and INN-108 are covered by several issued patents in the U.S. as well as patents outside the U.S., with patent applications pending in several jurisdictions. INN-329 is not protected by patents. Further, the INN-202 primary end point is a proprietary Patient Report Outcome measure (CeD PRO) that is protected by copyright. Intellectual property relating to the INN-202 program is exclusively licensed from Alba Therapeutics Corp. Intellectual property relating to INN-108 program is exclusively licensed from Seachaid Pharmaceuticals Inc. Innovate’s success will depend in part on its ability to:

 

· obtain and maintain patents and other exclusivity with respect to its products;

 

· prevent third parties from infringing upon its proprietary rights;

 

· maintain proprietary know-how and trade secrets;

 

· operate without infringing upon the patents and proprietary rights of others; and

 

· obtain and maintain appropriate licenses to patents or proprietary rights held by third parties if infringement would otherwise occur or if necessary to secure exclusive rights to them, both in the United States and in foreign countries.

 

The patent and intellectual property positions of biopharmaceutical companies generally are highly uncertain, involve complex legal and factual questions, and have been and continue to be the subject of much litigation. There is no guarantee that Innovate has or will develop or obtain the rights to products or processes that are patentable, that patents will issue from any pending applications or that claims issued will be sufficient to protect the technology Innovate develops or has developed or that is used by Innovate, its CMOs or its other service providers. In addition, any patents that are issued and/or licensed to Innovate may be limited in scope or challenged, invalidated, infringed or circumvented, including by its competitors, and any rights Innovate has under issued and/or licensed patents may not provide competitive advantages to Innovate. If competitors can develop and commercialize technology and products similar to Innovate’s, its ability to successfully commercialize its technology and products may be impaired.

 

     

 

 

Patent applications in the United States are confidential for a period of time until they are published, and publication of discoveries in scientific or patent literature typically lags actual discoveries by several months. As a result, Innovate cannot be certain that the inventors listed in any patent or patent application owned or licensed by Innovate were the first to conceive of the inventions covered by such patents and patent applications (for U.S. patent applications filed before March 16, 2013), or that such inventors were the first to file patent applications for such inventions outside the United States and, after March 15, 2013, in the United States. In addition, changes in or different interpretations of patent laws in the United States and foreign countries may affect Innovate’s patent rights and limit the patents Innovate can obtain, which could permit others to use its discoveries or to develop and to commercialize Innovate’s technology and products without any compensation to Innovate.

 

Innovate also relies on unpatented know-how and trade secrets and continuing technological innovation to develop and maintain its competitive position, which Innovate seeks to protect, in part, through confidentiality agreements with employees, consultants, collaborators and others. Innovate also has invention or patent assignment agreements with its employees and certain consultants. The steps Innovate has taken to protect its proprietary rights, however, may not be adequate to preclude misappropriation of or otherwise protect its proprietary information or prevent infringement of its intellectual property rights, and Innovate may not have adequate remedies for any such misappropriation or infringement. In addition, it is possible that inventions relevant to Innovate’s business could be developed by a person not bound by an invention assignment agreement with Innovate or independently discovered by a competitor.

 

Innovate also intends to rely on regulatory exclusivity for protection of its product candidates, if approved for commercial sale. Implementation and enforcement of regulatory exclusivity, which may consist of regulatory data protection and market protection, varies widely from country to country. Failure to qualify for regulatory exclusivity, or failure to obtain or to maintain the extent or duration of such protections that Innovate expects for its product candidates, if approved, could affect its decision on whether to market the products in a particular country or countries or could otherwise have an adverse impact on its revenue or results of operations.

 

Innovate may rely on trademarks, trade names and brand names to distinguish its products, if approved for commercial sale, from the products of its competitors. However, Innovate’s trademark applications may not be approved. Third parties may also oppose Innovate’s trademark applications or otherwise challenge its use of the trademarks in which case Innovate may expend substantial resources to defend its proposed or approved trademarks and may enter into agreements with third parties that may limit Innovate’s use of its trademarks. In the event that Innovate’s trademarks are successfully challenged, Innovate could be forced to rebrand its products, which could result in loss of brand recognition and could require Innovate to devote significant resources to advertising and marketing these new brands. Further, Innovate’s competitors may infringe its trademarks or Innovate may not have adequate resources to enforce its trademarks.

 

     

 

 

Innovate’s success depends on its ability to prevent competitors from duplicating or developing and commercializing equivalent versions of its product candidates, and intellectual property protection may not be sufficient or effective to exclude this competition.

 

Innovate has patent protection in the United States and other countries to cover the composition of matter, formulation and method of use for INN-202 and INN-108. However, these patents may not provide Innovate with significant competitive advantages, because the validity, scope, term, or enforceability of the patents may be challenged and, if instituted, one or more of the challenges may be successful. Patents may be challenged in the United States under post-grant review proceedings, inter partes reexamination, ex parte re-examination, or challenged in district court. Any patents issued in foreign jurisdictions may be subjected to comparable proceedings lodged in various foreign patent offices, or courts. These proceedings could result in either loss of the patent or loss or reduction in the scope of one or more of the claims of the patent. Even if a patent issues, and is held valid and enforceable, competitors may be able to design around Innovate’s patent rights, such as by using pre-existing or newly developed technology, in which case competitors may not infringe Innovate’s issued claims and may be able to market and sell products that compete directly with Innovate’s before and after its patents expire.

 

Further, the INN-202 primary end point is a proprietary Patient Report Outcome measure (CeD PRO) that is protected by copyright. However, copyright protection may not be sufficient to exclude others from developing products that compete with INN-202.

 

The patent prosecution process is expensive and time-consuming. Innovate and any future licensors and licensees may not apply for or prosecute patents on certain aspects of its product candidates at a reasonable cost, in a timely fashion, or at all. Innovate may not have the right to control the preparation, filing and prosecution of some patent applications related to its product candidates or technologies. As a result, these patents and patent applications may not be prosecuted and enforced in a manner consistent with the best interests of Innovate. It is also possible that Innovate or any future or present licensors or licensees will fail to identify patentable aspects of inventions made in the course of development and commercialization activities before it is too late to obtain patent protection on them. Further, it is possible that defects of form in the preparation or filing of Innovate’s patent applications may exist, or may arise in the future, such as with respect to proper priority claims, inventorship, assignment, term or claim scope. If there are material defects in the form or preparation of its patents or patent applications, such patents or applications may be invalid or unenforceable. In addition, one or more parties may independently develop similar technologies or methods, duplicate its technologies or methods, or design around the patented aspects of its products, technologies or methods. Any of these circumstances could impair Innovate’s ability to protect its products, if approved, in ways which may have an adverse impact on Innovate’s business, financial condition and operating results.

 

Furthermore, the issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and Innovate’s owned and licensed patents may be challenged in the courts or patent offices in and outside of the United States. Such challenges may result in loss of exclusivity or freedom to operate or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit Innovate’s ability to use its patents to stop others from using or commercializing similar or identical products or technology, or to limit the duration of the patent protection of its technology and drugs. Given the amount of time required for the development, testing and regulatory review of new drug candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, Innovate’s owned and licensed patent portfolio may not provide Innovate with sufficient rights to exclude others from commercializing drugs similar to or identical to those of Innovate.

 

Enforcement of intellectual property rights in certain countries outside the United States, including China in particular, has been limited or non-existent. Future enforcement of patents and proprietary rights in many other countries will likely be problematic or unpredictable. Moreover, the issuance of a patent in one country does not assure the issuance of a similar patent in another country. Claim interpretation and infringement laws vary by nation, so the extent of any patent protection is uncertain and may vary in different jurisdictions.

 

     

 

 

Obtaining and maintaining patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and Innovate’s patent protection could be reduced or eliminated for non-compliance with these requirements.

 

Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and applications are required to be paid to the United States Patent and Trademark Office, or USPTO, and various governmental patent agencies outside of the United States in several stages over the lifetime of the patents and applications. The USPTO and various non-U.S. governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process and after a patent has issued. There are situations in which non-compliance can result in decreased patent term or in abandonment or lapse of the patent or patent application, leading to partial or complete loss of patent rights in the relevant jurisdiction.

 

Third parties may claim that Innovate’s products, if approved, infringe on their proprietary rights and may challenge the approved use or uses of a product or its patent rights through litigation or administrative proceedings, and defending such actions may be costly and time consuming, divert management attention away from Innovate’s business, and result in an unfavorable outcome that could have an adverse effect on Innovate’s business.

 

Innovate’s commercial success depends on its ability and the ability of its CMOs and component suppliers to develop, manufacture, market and sell its products and product candidates and use its proprietary technologies without infringing the proprietary rights of third parties. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which Innovate is or may be developing products. Because patent applications can take many years to publish and issue, there currently may be pending applications, unknown to Innovate, that may later result in issued patents that its products, product candidates or technologies infringe, or that the process of manufacturing its products or any of its respective component materials, or the component materials themselves, infringe, or that the use of its products, product candidates or technologies infringe.

 

Innovate or its CMOs or component material suppliers may be exposed to, or threatened with, litigation by third parties alleging that Innovate’s products, product candidates and/or technologies infringe its patents and/or other intellectual property rights, or that one or more of the processes for manufacturing its products or any of its respective component materials, or the component materials themselves, or the use of its products, product candidates or technologies, infringe its patents and/or other intellectual property rights. If a third-party patent or other intellectual property right is found to cover its products, product candidates, technologies or its uses, or any of the underlying manufacturing processes or components, Innovate could be required to pay damages and could be unable to commercialize its products or to use its technologies or methods unless Innovate is able to obtain a license to the patent or intellectual property right. A license may not be available to Innovate in a timely manner or on acceptable terms, or at all. In addition, during litigation, the third-party alleging infringement could obtain a preliminary injunction or other equitable remedy that could prohibit Innovate from making, using, selling or importing its products, technologies or methods.

 

There generally is a substantial amount of litigation involving patent and other intellectual property rights in the industries in which Innovate operates and the cost of such litigation may be considerable. Innovate can provide no assurance that its product candidates or technologies will not infringe patents or rights owned by others, licenses to which might not be available to Innovate in a timely manner or on acceptable terms, or at all. If a third party claims that Innovate or its CMOs or component material suppliers infringe its intellectual property rights, Innovate may face a number of issues, including, but not limited to:

 

     

 

 

· infringement and other intellectual property claims which, with or without merit, may be expensive and time consuming to litigate and may divert management’s time and attention from Innovate’s core business;

 

· substantial damages for infringement, including the potential for treble damages and attorneys’ fees, which Innovate may have to pay if it is determined that the product and/or its use at issue infringes or violates the third party’s rights;

 

· a court prohibiting Innovate from selling or licensing the product unless the third-party licenses its intellectual property rights to Innovate, which it may not be required to do;

 

· if a license is available from the third party, Innovate may have to pay substantial royalties, fees and/or grant cross-licenses to the third party; and

 

· redesigning Innovate’s products or processes so they do not infringe, which may not be possible or may require substantial expense and time.

 

No assurance can be given that patents do not exist, have not been filed, or could not be filed or issued, which contain claims covering Innovate’s products, product candidates or technology or those of its CMOs or component material suppliers or the use of its products, product candidates or technologies. Because of the large number of patents issued and patent applications filed in the industries in which Innovate operates, there is a risk that third parties may allege they have patent rights encompassing Innovate’s products, product candidates or technologies, or those of its CMOs or component material suppliers, or uses of its products, product candidates or technologies.

 

In the future, it may be necessary for Innovate to enforce its proprietary rights, or to determine the scope, validity and unenforceability of other parties’ proprietary rights, through litigation or other dispute proceedings, which may be costly, and to the extent Innovate is unsuccessful, adversely affect its rights. In these proceedings, a court or administrative body could determine that its claims, including those related to enforcing patent rights, are not valid or that an alleged infringer has not infringed its rights. The uncertainty resulting from the mere institution and continuation of any patent- or other proprietary rights-related litigation or interference proceeding could have a material and adverse effect on its business prospects, operating results and financial condition.

 

Risks Related to Innovate’s Industry

 

Innovate is subject to uncertainty relating to healthcare reform measures and reimbursement policies that, if not favorable to its products, could hinder or prevent its products’ commercial successes, if any of its product candidates are approved.

 

The unavailability or inadequacy of third-party payer coverage and reimbursement could negatively affect the market acceptance of its product candidates and the future revenues Innovate may expect to receive from those products. The commercial success of its product candidates, if approved, will depend in part on the extent to which the costs of such products will be covered by third-party payers, such as government health programs, commercial insurance and other organizations. Third-party payers are increasingly challenging the prices and examining the medical necessity and cost-effectiveness of medical products and services, in addition to their safety and efficacy. If these third-party payers do not consider its products to be cost-effective compared to other therapies, Innovate may not obtain coverage for its products after approval as a benefit under the third-party payers’ plans or, even if Innovate does, the level of coverage or payment may not be sufficient to allow Innovate to sell its products on a profitable basis.

 

     

 

 

Significant uncertainty exists as to the reimbursement status for newly approved drug products, including coding, coverage and payment. There is no uniform policy requirement for coverage and reimbursement for drug products among third-party payers in the United States, therefore coverage and reimbursement for drug products can differ significantly from payer to payer. The coverage determination process is often a time-consuming and costly process that will require Innovate to provide scientific and clinical support for the use of its products to each payer separately, with no assurance that coverage and adequate payment will be applied consistently or obtained. The process for determining whether a payer will cover and how much it will reimburse a product may be separate from the process of seeking approval of the product or for setting the price of the product. Even if reimbursement is provided, market acceptance of its products may be adversely affected if the amount of payment for its products proves to be unprofitable for healthcare providers or less profitable than alternative treatments or if administrative burdens make its products less desirable to use. Third-party payer reimbursement to providers of its products, if approved, may be subject to a bundled payment that also includes the procedure of administering its products or third-party payers may require providers to perform additional patient testing to justify the use of its products. To the extent there is no separate payment for its product(s), there may be further uncertainty as to the adequacy of reimbursement amounts.

 

The continuing efforts of governments, private insurance companies, and other organizations to contain or to reduce costs of healthcare may adversely affect:

 

· Innovate’s ability to set an appropriate price for its products;

 

· the rate and scope of adoption of its products by healthcare providers;

 

· its ability to generate revenue or achieve or maintain profitability;

 

· the future revenue and profitability of its potential customers, suppliers and collaborators; and

 

· its access to additional capital.

 

Innovate’s ability to successfully commercialize its products will depend in part on the extent to which governmental authorities, private health insurers and other organizations establish what Innovate believes are appropriate coverage and reimbursement for its products. The containment of healthcare costs has become a priority of federal and state governments worldwide and the prices of drug products have been a focus in this effort. For example, there have been several recent U.S. Congressional inquiries and proposed bills designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs, and the new U.S. President has stated that reducing drug pricing is a priority for his administration. Innovate expects that federal, state and local governments in the United States, as well as in other countries, will continue to consider legislation directed at lowering the total cost of healthcare. In addition, in certain foreign markets, the pricing of drug products is subject to government control and reimbursement may in some cases be unavailable or insufficient. It is uncertain whether and how future legislation, whether domestic or abroad, could affect prospects for its product candidates or what actions federal, state, or private payers for healthcare treatment and services may take in response to any such healthcare reform proposals or legislation. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures reforms may prevent or limit its ability to generate revenue, attain profitability or commercialize its product candidates, especially in light of Innovate’s plans to price its product candidates at a high level.

 

     

 

 

Furthermore, Innovate expects that Congress will again attempt to pass reform measures that may be adopted in the future, including the possible repeal and replacement of the Affordable Care Act, which the Trump administration has stated is a priority. These potential courses of action are unpredictable; and the potential impact of new legislation on Innovate’s operations and financial position is uncertain, but may result in more rigorous coverage criteria, lower reimbursement, and additional downward pressure on the price Innovate may receive for an approved product. Any reduction in reimbursement from Medicare or other government-funded programs may result in a similar reduction in payments from private payers. The implementation of cost containment measures or other healthcare reforms may prevent Innovate from being able to generate revenue, attain profitability or commercialize its products, if approved.

 

Innovate expects competition in the marketplace for its product candidates, should any of them receive regulatory approval.

 

Larazotide Acetate has issued patents for composition of matter, method of use and its formulation in the United States, Innovate’s primary market. INN-202 has either been issued patents or is prosecuting patent applications in numerous countries outside the United States. The barrier to entry for any company developing larazotide acetate for celiac disease is very high. Innovate believes that INN-202 is the first drug entering into Phase 3 clinical trials for celiac disease. Additionally, if Innovate has the first drug approved for celiac disease, any competitor bringing any other molecule into market for celiac disease may need to license or to seek approval from Innovate for the usage of its CeD-PRO as an endpoint.

 

Innovate has applied for Orphan Drug Designation from the FDA for INN-108. Orphan Drug Designation will provide market exclusivity in the U.S. for seven years, but only if (1) INN-108 receives market approval before a competitor using the same active compound for the same indication, (2) Innovate is able to produce sufficient supply to meet demand in the marketplace, and (3) another product with the same active ingredient(s) is not deemed clinically superior.

 

INN-329, secretin, has received Orphan Drug Designation from the FDA. Orphan Drug Designation will provide market exclusivity in the U.S. for seven years, but only if (1) INN-329 receives market approval before a competitor using the similar peptide for the same indication, (2) Innovate is able produce sufficient supply to meet demand in the marketplace, and (3) another product with the same active ingredient is not deemed clinically superior.

 

The industries in which Innovate operates (biopharmaceutical, specialty pharmaceutical, biotechnology and pharmaceutical) are highly competitive and subject to rapid and significant change. Developments by others may render potential application of any of its product candidates in a particular indication obsolete or noncompetitive, even prior to completion of its development and approval for that indication.

 

If successfully developed and approved, Innovate expects its product candidates will face competition. Innovate may not be able to compete successfully against organizations with competitive products, particularly large pharmaceutical companies. Many of its potential competitors have significantly greater financial, technical and human resources than Innovate, and may be better equipped to develop, manufacture, market and distribute products. Many of these companies operate large, well-funded research, development and commercialization programs, have extensive experience in nonclinical and clinical studies, obtaining FDA and other regulatory approvals and manufacturing and marketing products, and have multiple products that have been approved or are in late-stage development. These advantages may enable them to receive approval from the FDA or any foreign regulatory agency before Innovate and prevent Innovate from competing due to their orphan drug protections. Smaller companies may also prove to be significant competitors, particularly through collaborative arrangements with large pharmaceutical and biotechnology companies. Furthermore, heightened awareness on the part of academic institutions, government agencies and other public and private research organizations of the potential commercial value of their inventions have led them to actively seek to commercialize the technologies they develop, which increases competition for investment in Innovate’s programs. Competitive products may be more effective, easier to dose, or more effectively marketed and sold, than theirs, which would have a material adverse effect on Innovate’s ability to generate revenue.

 

     

 

 

Innovate faces potential product liability exposure and, if successful claims are brought against it, Innovate may incur substantial liability for a product or product candidate and may have to limit its commercialization. In the future, Innovate anticipates that it will need to obtain additional or increased product liability insurance coverage and it is uncertain whether such increased or additional insurance coverage can be obtained on commercially reasonable terms, if at all.

 

Innovate’s business (in particular, the use of its product candidates in clinical studies and the sale of any products for which it obtains marketing approval) will expose Innovate to product liability risks. Product liability claims might be brought against Innovate by patients, healthcare providers, pharmaceutical companies or others selling or involved in the use of its products. If Innovate cannot successfully defend itself against any such claims, Innovate will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

· significant costs of related litigation;

 

· decreased demand for its products and loss of revenue;

 

· impairment of its business reputation;

 

· a “clinical hold,” suspension or termination of a clinical study or amendments to a study design;

 

· delays in enrolling patients to participate in its clinical studies;

 

· withdrawal of clinical study participants;

 

· substantial monetary awards to patients or other claimants; and

 

· the inability to commercialize its products and product candidates.

 

Innovate maintains limited product liability insurance for its clinical studies, but its insurance coverage may not reimburse Innovate or may not be sufficient to reimburse Innovate for all expenses or losses it may suffer. Moreover, insurance coverage is becoming increasingly expensive and, in the future, Innovate may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect itself against losses.

 

Innovate expects that it will expand its insurance coverage to include the sale of commercial products if it obtains marketing approval for any of its product candidates, but Innovate may be unable to obtain product liability insurance on commercially acceptable terms or may not be able to maintain such insurance at a reasonable cost or in sufficient amounts to protect Innovate against potential losses. Large judgments have been awarded in class action lawsuits based on drug products that had unanticipated side effects. A successful product liability claim or series of claims brought against Innovate, if judgments exceed its insurance coverage, could decrease its cash and adversely affect its business.

 

     

 

 

Risks Related to this Offering and Our Common Stock

 

An active trading market for Monster common stock that you would receive upon the closing of the Merger may not develop.

 

The offering price for our common stock was determined through negotiations with investors and may bear no relationship to the price at which the Monster common stock that you would receive upon the closing of the Merger will trade following the closing of the Merger. An active trading market for the Monster common stock that you would receive upon the closing of the Merger may never develop or be sustained. If an active market for such shares does not develop, it may be difficult for you to sell the Monster common stock that you would receive upon the closing of the Merger without depressing the market price for such common stock or to sell your shares at all.

 

The market price of the Monster common stock you would receive upon the closing of the Merger is likely to be volatile, and you may not be able to sell such shares at or above the effective price per share that you receive them.

 

The offering price of our common stock will not necessarily reflect the price at which investors in the public market will be willing to buy and sell the shares of Monster common stock that you would receive in connection with the closing of the Merger. The stock market in general and the market for pharmaceutical companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. A certain degree of market price volatility may also occur as a result of the completion of the Merger and listing of the shares of the combined company following this offering. As a result of this volatility, investors may not be able to sell their common stock at or above the effective price per share that you receive them . The market price of the Monster common stock following the closing of the Merger may be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control, including:

 

· regulatory or legal developments in the United States and foreign countries;

 

· results from or delays in clinical trials of our product candidates;

 

· announcements of regulatory approval or disapproval of INN-202 (for celiac disease), INN-108 (for ulcerative colitis), INN-329 (for magnetic resonance cholangiopancreatography or MRCP) or any future product candidates;

 

· commercialization of our product candidates;

 

· FDA or other U.S. or foreign regulatory actions affecting us or our industry;

 

· introductions and announcements of new products by us, any commercialization partners or our competitors, and the timing of these introductions and announcements;

 

· variations in our financial results or those of companies that are perceived to be similar to us;

 

· changes in the structure of healthcare payment systems;

 

· announcements by us or our competitors of significant acquisitions, licenses, strategic partnerships, joint ventures or capital commitments;

 

     

 

 

· market conditions in the pharmaceutical and biopharmaceutical sectors and issuance of securities analysts’ reports or recommendations;

 

· actual or anticipated quarterly variations in our results of operations or those of our future competitors;

 

· changes in financial estimates or guidance, including our ability to meet our future revenue and operating profit or loss estimates or guidance;

 

· sales of substantial amounts of our stock by insiders and large stockholders, or the expectation that such sales might occur;

 

· general economic, industry and market conditions;

 

· additions or departures of key personnel;

 

· intellectual property, product liability or other litigation against us;

 

· expiration or termination of our potential relationships with strategic partners; and

 

· the other factors described in this “Risk Factors” annex.

 

If securities or industry analysts do not publish research or publish unfavorable research about our business, the Monster common stock stock price and trading volume could decline.

 

Equity research analysts do not currently provide research coverage of the Monster common stock, and we cannot assure you that any equity research analysts will provide research coverage of the Monster common stock after the closing of the Merger. In particular, as a smaller company, it may be difficult for us to attract the interest of equity research analysts. A lack of research coverage may adversely affect the liquidity of and market price of the Monster common stock. To the extent we obtain equity research analyst coverage, we will not have any control of the analysts or the content and opinions included in their reports. The market price of the Monster stock could decline if one or more equity research analysts downgrade the Monster common stock or issue other unfavorable commentary or research. If one or more equity research analysts ceases coverage of our company, or fails to publish reports on us regularly, demand for the Monster common stock could decrease, which in turn could cause the market price of the Monster common stock or trading volume to decline.

 

Sales of substantial amounts of the Monster common stock in the public markets, or the perception that such sales might occur, could cause the market price of the Monster common stock to drop significantly, even if our business is doing well.

 

Sales of a substantial number of shares of Monster common stock following the Merger in the public market could occur at any time. If our stockholders sell, or the market perceives that our stockholders intend to sell, substantial amounts of the Monster common stock in the public market following the closing of the Merger, the market price of the Monster common stock could decline significantly.

 

     

 

 

Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us.

 

Our certificate of incorporation and restated bylaws following as they will be in effect following this offering and Merger provide that we will indemnify our directors and officers, in each case to the fullest extent permitted by Delaware law.

 

To the extent that a claim for indemnification is brought by any of our directors or officers, it would reduce the amount of funds available for use in our business.

 

If you purchase our common stock in this offering, because the offering price of our common stock will be substantially higher than our pro forma as adjusted net tangible book value per share following this offering, you will incur immediate and substantial dilution in the book value of your shares.

 

Investors purchasing common stock in this offering will pay a price per share that substantially exceeds the net tangible book value per share. Net tangible book value is our tangible assets after subtracting our liabilities. As a result, investors purchasing common stock in this offering will incur immediate dilution, based on the difference between the initial public offering price and the pro forma as adjusted net tangible book value per share of our outstanding common stock as.

 

This dilution is due to our investors who purchased shares prior to this offering having paid substantially less than the price offered to the public in this offering when they purchased their shares. In addition, options to purchase shares of our common stock and warrants to purchase shares of our common stock were outstanding. The exercise of any of these options would result in additional dilution. As a result of the dilution to investors purchasing shares in this offering, investors may receive significantly less than the purchase price paid in this offering, if anything, in the event of our liquidation. Further, because we will need to raise additional capital to fund our clinical development programs, we may in the future sell substantial amounts of common stock or securities convertible into or exchangeable for common stock.

 

These future issuances of common stock or common stock-related securities, together with the exercise of outstanding options and any additional shares issued in connection with acquisitions, if any, may result in further dilution.

 

If Monster sells shares of Monster common stock in future financings, stockholders may experience immediate dilution and, as a result, the market price of Monster common stock may decline.

 

Monster may from time to time issue additional shares of its common stock at a discount from the current trading price of its common stock or the effective price at which you would receive shares of Monster common stock in connection with the closing of the Merger. As a result, our stockholders would experience immediate dilution upon the purchase of any shares of such common stock sold at such discount. In addition, as opportunities present themselves, Monster may enter into financing or similar arrangements in the future, including the issuance of debt securities, preferred stock or common stock. If Monster issue common stock or securities convertible into common stock, our common stockholders would experience additional dilution and, as a result, the market price of Monster common stock may decline.

 

     

 

 

Concentration of ownership of our common stock among our existing principal stockholders after this offering may effectively limit the voting power of other stockholders, including purchasers in this offering.

 

Upon the closing of this offering, our executive officers, directors and current beneficial owners of 5% or more of our common stock will, in aggregate, beneficially own approximately 12.5% of our outstanding common stock, assuming exercise of the underwriters’ option to purchase additional shares. Accordingly, these stockholders, acting together, will continue to be able to significantly influence all matters requiring stockholder approval, including the election and removal of directors and any merger or other significant corporate transactions. These stockholders may therefore delay or prevent a change of control of us, even if such a change of control would benefit our other stockholders. The significant concentration of stock ownership may adversely affect the market price of our common stock due to investors’ perception that conflicts of interest may exist or arise.

 

Anti-takeover provisions in our corporate charter documents and under Delaware law could make an acquisition of us more difficult, which could discourage takeover attempts and lead to management entrenchment, and the market price of our common stock may be lower as a result.

 

Certain provisions in our certificate of incorporation and bylaws that will be in effect upon the closing of this offering may make it difficult for a third party to acquire, or attempt to acquire, control of our company, even if a change in control was considered favorable by you and other stockholders. For example, our board of directors will have the authority to issue up to 10,000,000 shares of preferred stock. Our board of directors can fix the price, rights, preferences, privileges, and restrictions of the preferred stock without any further vote or action by our stockholders. The issuance of shares of preferred stock may delay or prevent a change in control transaction. As a result, the market price of our common stock and the voting and other rights of our stockholders may be adversely affected. An issuance of shares of preferred stock may result in the loss of voting control to other stockholders.

 

Our charter documents will also contain other provisions that could have an anti-takeover effect, including provisions that:

 

· establish that our board of directors is divided into three classes, Class I, Class II and Class III, with each class serving staggered three year terms;

 

· provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum;

 

· provide that our directors may only be removed for cause;

 

· eliminate cumulative voting in the election of directors;

 

· authorize our board of directors to issues shares of preferred stock and determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval;

 

· provide our board of directors with the exclusive right to elect a director to fill a vacancy or newly created directorship;

 

· permit stockholders to only take actions at a duly called annual or special meeting and not by written consent;

 

· prohibit stockholders from calling a special meeting of stockholders;

 

· require that stockholders give advance notice to nominate directors or submit proposals for consideration at stockholder meetings;

 

· authorize our board of directors, by a majority vote, to amend the bylaws; and

 

     

 

 

· require the affirmative vote of at least 66 2/3% or more of the outstanding common stock to amend many of the provisions described above.

 

In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us. Finally, our amended and restated certificate of incorporation will also provide that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders. These provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. They could also have the effect of discouraging others from making tender offers for our common stock, including transactions that may be in your best interests. These provisions may also prevent changes in our management or limit the price that certain investors are willing to pay for our stock.

 

We will have broad discretion in the use of proceeds from this offering and may invest or spend the proceeds in ways with which you do not agree and in ways that may not yield a return.

 

We will have broad discretion in the application of the net proceeds from this offering. You may not agree with our decisions, and our use of the proceeds may not improve our results of operation or enhance the value of our common stock. We intend to use the net proceeds from this offering to fund our ongoing and planned clinical development and commercialization of INN-202, to fund the costs of the clinical development of INN-108, to fund the costs of the clinical development of INN-329, and the remainder of the net proceeds for the research and development of other product candidates, working capital, capital expenditures and other general corporate purposes. We may also use a portion of our net proceeds to acquire and invest in complementary products or businesses; however, we currently have no agreements or commitments to complete any such transaction. You will not have the opportunity to influence our management’s decisions on how to use the net proceeds from this offering. Our failure to apply the net proceeds of this offering effectively could result in financial losses that could materially impair our ability to pursue our growth strategy, cause the market price of our common stock to decline, delay development of our product candidates or require us to raise additional capital.

 

We may be subject to securities litigation, which is expensive and could divert management attention.

 

The market price of our common stock may be volatile, and in the past companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

 

Because we do not anticipate paying any cash dividends on our common stock in the foreseeable future, capital appreciation, if any, will be your sole source of gains.

 

We have not declared or paid cash dividends on our common stock to date. We currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, our loan and security agreement with Square 1 contains a negative covenant which prohibits us from paying cash dividends without the prior written consent of Square 1. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

 

     

 

 

Our ability to use our net operating loss carryforwards and certain other tax attributes to offset future taxable income may be subject to certain limitations.

 

As of December 31, 2017 we had U.S. federal and California net operating loss carryforwards, or NOLs, which expire in various years if not utilized. As of December 31, 2017, we had federal and California research and development credit carryforwards. The federal research and development credit carryforwards expire in various years if not utilized. The California research and development credit will carry forward indefinitely. Under Sections 382 and 383 of Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOLs and other pre-change tax attributes, such as research tax credits, to offset its future post-change income and taxes may be limited. In general, an “ownership change” occurs if there is a cumulative change in our ownership by “5% shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. We believe we have experienced certain ownership changes in the past and have reduced our deferred tax assets related to NOLs and research and development tax credit carryovers accordingly. In the event that it is determined that we have in the past experienced additional ownership changes, or if we experience one or more ownership changes as a result of this offering or future transactions in our stock, then we may be further limited in our ability to use our NOLs and other tax assets to reduce taxes owed on the net taxable income that we earn in the event that we attain profitability. Any such limitations on the ability to use our NOLs and other tax assets could adversely impact our business, financial condition and operating results in the event that we attain profitability.

 

We will incur costs as a result of operating as a public company and our management will be required to devote substantial time to new compliance initiatives and corporate governance practices, including maintaining an effective system of internal control over financial reporting.

 

As a public company listed in the United States, and increasingly after we are no longer an “emerging growth company,” we will incur significant additional legal, accounting and other expenses that we did not incur as a private company. In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act and regulations implemented by the SEC and the exchange on which the shares of our Common Stock may trade, may increase legal and financial compliance costs and make some activities more time consuming. These laws, regulations and standards are subject to varying interpretations and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If notwithstanding our efforts to comply with new laws, regulations and standards, we fail to comply, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

 

As a public company in the United States, we will be required, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. We will need to disclose any material weaknesses identified by our management in our internal control over financial reporting, and, when we are no longer an “emerging growth company,” we will need to provide a statement that our independent registered public accounting firm has issued an opinion on our internal control over financial reporting. We expect that our first report on compliance with Section 404 will be furnished in connection with our financial statements for the year ending December 31, 2018.

 

The controls and other procedures are designed to ensure that information required to be disclosed by us in the reports that we file with the Securities and Exchange Commission, or SEC, is disclosed accurately and is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. We are in the early stages of conforming our internal control procedures to the requirements of Section 404 and we may not be able to complete our evaluation, testing and any required remediation needed to comply with Section 404 in a timely fashion. Our independent registered public accounting firm was not engaged to perform an audit of our internal control over financial reporting for the year ended December 31, 2017 or for any other period. Accordingly, no such opinion was expressed.

 

     

 

 

Even after we develop these new procedures, these new controls may become inadequate because of changes in conditions or the degree of compliance with these policies or procedures may deteriorate and material weaknesses in our internal control over financial reporting may be discovered. We may err in the design or operation of our controls, and all internal control systems, no matter how well designed and operated, can provide only reasonable assurance that the objectives of the control system are met. Because there are inherent limitations in all control systems, there can be no absolute assurance that all control issues have been or will be detected. If we are unable, or are perceived as unable, to produce reliable financial reports due to internal control deficiencies, investors could lose confidence in our reported financial information and operating results, which could result in a negative market reaction.

 

To fully comply with Section 404, we will need to retain additional employees to supplement our current finance staff, and we may not be able to do so in a timely manner, or at all. In addition, in the process of evaluating our internal control over financial reporting, we expect that certain of our internal control practices will need to be updated to comply with the requirements of Section 404 and the regulations promulgated thereunder, and we may not be able to do so on a timely basis, or at all. In the event that we are not able to demonstrate compliance with Section 404 in a timely manner, or are unable to produce timely or accurate financial statements, we may be subject to sanctions or investigations by regulatory authorities, such as the SEC or the stock exchange on which our stock is listed, and investors may lose confidence in our operating results and the price of our common stock could decline. Furthermore, if we are unable to certify that our internal control over financial reporting is effective and in compliance with Section 404, we may be subject to sanctions or investigations by regulatory authorities, such as the SEC or stock exchanges, and we could lose investor confidence in the accuracy and completeness of our financial reports, which could hurt our business, the price of our common stock and our ability to access the capital markets.

 

We also expect that being a public company will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on committees of our board of directors or as members of senior management.

 

We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies could make our common stock could be less attractive to investors.

 

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups, or JOBS, Act enacted in April 2012, and may remain an “emerging growth company” for up to five years following the completion of this offering, although, if we have more than $1.0 billion in annual revenue, the market value of our common stock that is held by non-affiliates exceeds $700 million as of June 30 of any year, or we issue more than $1.0 billion of non-convertible debt over a three-year period before the end of that five-year period, we would cease to be an “emerging growth company” as of the following December 31. For as long as we remain an “emerging growth company,” we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not “emerging growth companies.” These exemptions include:

 

     

 

 

· being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s discussion and analysis of financial condition and results of operations” disclosure;

 

· not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting;

 

· not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;

 

· reduced disclosure obligations regarding executive compensation; and

 

· exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

 

In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards, delaying the adoption of these accounting standards until they would apply to private companies. We have irrevocably elected not to avail ourselves of this exemption and, as a result, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies. We cannot predict whether investors will find our common stock less attractive as a result of our reliance on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and the market price of our common stock may be reduced or more volatile.

 

Risks Related to the Merger

 

The market price of Monster common stock following the Merger may decline as a result of the merger.

 

The market price of Monster common stock may decline as a result of the Merger for a number of reasons including if:

 

· investors react negatively to the prospects of the combined organization’s business and prospects from the Merger;

 

· the effect of the Merger on the combined organization’s business and prospects is not consistent with the expectations of financial or industry analysts; or

 

· the combined organization does not achieve the perceived benefits of the Merger as rapidly or to the extent anticipated by financial or industry analysts.

 

Monster and Innovate stockholders may not realize a benefit from the Merger commensurate with the ownership dilution they will experience in connection with the Merger.

 

If the combined organization is unable to realize the full strategic and financial benefits currently anticipated from the Merger, Monster and Innovate stockholders will have experienced substantial dilution of their ownership interests in their respective companies without receiving any commensurate benefit, or only receiving part of the commensurate benefit to the extent the combined organization is able to realize only part of the strategic and financial benefits currently anticipated from the Merger.

 

     

 

 

Because the lack of a public market for Innovate shares makes it difficult to evaluate the fairness of the Merger, the stockholders of Innovate may receive consideration in the Merger that is less than the fair market value of the Innovate shares.

 

The outstanding capital stock of Innovate is privately held and is not traded in any public market. The lack of a public market makes it extremely difficult to determine the fair market value of Innovate. Because the percentage of Monster equity to be issued to Innovate stockholders was determined based on negotiations between the parties, it is possible that the value of Monster common stock to be received by Innovate stockholders in the Merger will be less than the fair market value of Innovate.

 

     

 

 

EXHIBIT A-1

 

Investor Questionnaire

 

  2  

 

 

EXHIBIT A-2

 

Stock Certificate Questionnaire

 

  3  

 

 

EXHIBIT B

 

Placement Agent Questionnaire

 

  4  

 

 

EXHIBIT C

 

Form of Secretary’s Certificate

 

  5  

 

 

EXHIBIT D

 

Form of Compliance Certificate

 

  6  

 

 

EXHIBIT E

 

MONSTER DIGITAL, INC.

 

DECLARATION OF REGISTRATION RIGHTS

 

This Declaration of Registration Rights (this “ Declaration ”) is provided by Monster Digital, Inc., a Delaware corporation (the “ Company ”) on January 29, 2018 in connection with the Subscription Agreement (the “ Subscription Agreement ”), dated as of January 29, 2018 by and among Innovate Biopharmaceuticals Inc., a Delaware corporation (“ Innovate ”) and each purchaser listed on Annex A set forth on Schedule A thereto (each a “ Stockholder ,” and collectively, the “ Stockholders ”). Unless otherwise defined herein, capitalized terms used in this Agreement have the meanings ascribed to them in the Subscription Agreement. This Declaration is provided for the benefit of each of the Stockholders identified on Schedule 1 attached hereto and entitled to receive Common Stock pursuant to the terms set forth in the Subscription Agreement.

 

RECITALS

 

Whereas , pursuant to the Subscription Agreement, each Stockholder will, at the applicable Closing, receive that number of shares of Common Stock as set forth opposite such Stockholder’s name on Schedule 1 hereto; and

 

Whereas , in connection with the execution and delivery of the Subscription Agreement and the consummation of the transactions contemplated thereby, the Company has agreed to grant the Stockholders certain registration rights as set forth below.

 

Now, Therefore , in consideration of the mutual promises and covenants herein contained, and other consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows:

 

Article I.

Definitions

 

1.1            Definitions . As used in this Declaration, the following terms shall have the meanings set forth below:

 

(a)           Additional Shares ” means any shares of Common Stock issued to the Stockholders pursuant to a stock split, stock dividend or other distribution with respect to, or in exchange or in replacement of, the Shares.

 

(b)           Affiliate ” means, with respect to any specified Person, any other Person who or which, directly or indirectly, controls, is controlled by, or is under common control with such specified Person, including, without limitation, any general partner, limited partner, member, officer, director or manager of such Person and any venture capital or private equity fund now or hereafter existing that is controlled by one or more general partners or managing members of, or shares the same management company with, such Person. For purposes of this definition, the terms “ controls ,” “ controlled by ,” or “ under common control with ” means the possession, direct or indirect, of power to direct or cause the direction of management or policies (whether through ownership of voting securities, by contract or otherwise).

 

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(c)           Business Day ” means a weekday on which banks are open for general banking business in San Diego, California.

 

(d)           Entity ” means any corporation (including any nonprofit corporation), general partnership, limited partnership, limited liability partnership, joint venture, estate, trust, company (including any limited liability company or joint stock company), firm or other enterprise, association, organization or entity.

 

(e)           Exchange Act ” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder, as the same may be amended from time to time.

 

(f)          “ Governmental Body means any domestic or foreign multinational, federal, state, provincial, municipal or local government (or any political subdivision thereof) or any domestic or foreign governmental, regulatory or administrative authority or any department, commission, board, agency, court, tribunal, judicial body or instrumentality thereof, or any other body exercising, or entitled to exercise, any administrative, executive, judicial, legislative, police, regulatory or taxing authority or power of any nature (including any arbitral body).

 

(g)           Holder ” (collectively, “ Holders ”) means any Stockholder and any transferee permitted under Section 3.1, in each case, to the extent holding Registrable Securities.

 

(h)           Person ” means any individual, Entity, trust, Governmental Body or other organization.

 

(i)           register ,” “ registered ” and “ registration ” refer to a registration effected by filing with the SEC a registration statement in compliance with the Securities Act, and the declaration or ordering by the SEC of the effectiveness of such registration statement.

 

(j)           Registrable Securities ” means: (i) the Shares, and (ii) any Additional Shares; provided , however , that Shares or Additional Shares shall cease to be treated as Registrable Securities (and the Company shall not be required to maintain the effectiveness of any, or file another, Registration Statement hereunder with respect thereto) for so long as (a) a Registration Statement with respect to the sale of such Registrable Securities is declared effective by the SEC under the Securities Act and such Registrable Securities have been disposed of by the Holder in accordance with such effective Registration Statement, (b) such Registrable Securities have been previously sold in accordance with Rule 144, or (c) such securities become eligible for resale without volume or manner-of-sale restrictions and without current public information pursuant to Rule 144 as set forth in a written opinion letter to such effect, addressed, delivered and acceptable to the Transfer Agent and the affected Holders (assuming that such securities and any securities issuable upon exercise, conversion or exchange of which, or as a dividend upon which, such securities were issued or are issuable, were at no time held by any Affiliate of the Company), as reasonably determined by the Company, upon the advice of counsel to the Company.

 

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(k)           Registration Expenses ” means any and all expenses incident to the performance of or compliance with this Declaration, including without limitation: (i) all registration and filing fees; (ii) all fees and expenses associated with a required listing of the Registrable Securities on any securities exchange; (iii) fees and expenses with respect to filings required to be made with an exchange or any securities industry self-regulatory body; (iv) fees and expenses of compliance with securities or “blue sky” laws (including reasonable fees and disbursements of counsel for the underwriters or holders of securities in connection with blue sky qualifications of the securities and determination of their eligibility for investment under the laws of such jurisdictions); (v) printing, messenger, telephone and delivery expenses of the Company; (vi) fees and disbursements of counsel for the Company and customary fees and expenses for independent certified public accountants retained by the Company (including the expenses of any comfort letters, or costs associated with the delivery by independent certified public accountants of a comfort letter or comfort letters, if such comfort letter or comfort letters is required by the managing underwriter); (vii) securities acts liability insurance, if the Company so desires; (viii) all internal expenses of the Company (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties); (ix) the expense of any annual audit; and (x) the fees and expenses of any Person, including special experts, retained by the Company; provided , however that “ Registration Expenses ” shall not include underwriting fees, discounts or commissions attributable to the sale of such Registrable Securities or any legal fees and expenses of counsel to the Holders .

 

(l)           Rule 144 ” means Rule 144 under the Securities Act.

 

(m)          SEC ” means the Securities and Exchange Commission.

 

(n)           Securities Act ” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder, as the same may be amended from time to time.

 

(o)           Shares ” means, collectively, (i) any and all shares of Common Stock issuable pursuant to the Subscription Agreement, (ii) any and all shares of Common Stock issuable pursuant to the Warrants (as defined in the Subscription Agreement), and (iii) any and all shares of Common Stock issuable pursuant to the warrants to purchase Common Stock issued by the Company to GP Nurmenkari Inc. and H.C. Wainwright & Co., LLC in connection with their services provided to the Company with respect to shares sold pursuant to the Subscription Agreement.

 

Article II.

Registration Rights

 

2.1            Resale Registration Statement . Within 45 days following the date of the Final Closing, the Company shall (a) file with the SEC, or (b) have filed with the SEC, a Resale Registration Statement (the “ Resale Registration Statement ”) pursuant to Rule 415 under the Securities Act pursuant to which all of the Registrable Securities shall be included (on the initial filing or by supplement thereto) to enable the public resale on a delayed or continuous basis of the Registrable Securities by the Holders. The Company shall file the Resale Registration Statement on such form as the Company may then utilize under the rules of the SEC and use its commercially reasonable efforts to have the Resale Registration Statement declared effective under the Securities Act as soon as practicable, but in no event more than 90 days following the initial filing of the Registration Statement. In the event the Company is notified by the SEC that the Resale Registration Statement will not be reviewed or is no longer subject to further review and comments, the Company shall use its commercially reasonable efforts to have the Resale Registration Statement declared effective by the 5 th trading day following the date on which the Company is so notified if such date precedes the dates otherwise required above. The Company agrees to use its commercially reasonable efforts to maintain the effectiveness of the Resale Registration Statement, including by filing any necessary post-effective amendments and prospectus supplements, or, alternatively, by filing new registration statements relating to the Registrable Securities as required by Rule 415 under the Securities Act, continuously until the date (the “ Resale Registration Expiration Date ”) that is the earlier of (i) three (3) years following the date of effectiveness of the Resale Registration Statement, or (ii) the date on which the Holders no longer hold any Registrable Securities covered by such Resale Registration Statement .

 

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2.2            Provisions Relating to Registration .

 

(a)           If the Company fails to comply with its obligations in Section 2.1, the Stockholders shall be entitled to a payment from the Company, as liquidated damages and not as a penalty, in the amount per month equal to a half of a percent (0.5%) of the purchase price of the Shares, from (i) the date the Company was required to file the Registration Statement until it is actually filed and pro-rated for any partial month, and (ii) from the date the Registration Statement was required to be declared effective until it is actually declared effective and pro-rated for any partial month. The maximum penalty payable by the Company for all such failures shall not exceed five percent (5%) of the purchase price of the Shares in the aggregate. If the Company fails to pay any partial liquidated damages pursuant to this Section in full within seven (7) days after the date payable, the Company will pay interest thereon at a rate of 12% per annum (or such lesser maximum amount that is permitted to be paid by applicable law) to the Holder, accruing daily from the date such partial liquidated damages are due until such amounts, plus all such interest thereon, are paid in full.

 

(b)           Notwithstanding any other provisions of this Declaration to the contrary, the Company shall cause (i) the Resale Registration Statement (as of the effective date of the Resale Registration Statement), any amendment thereof (as of the effective date thereof) or supplement thereto (as of its date), (A) to comply in all material respects with the applicable requirements of the Securities Act and the rules and regulations of the SEC, and (B) not to contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, and (ii) any related prospectus, preliminary prospectus and any amendment thereof or supplement thereto, as of its date, (A) to comply in all material respects with the applicable requirements of the Securities Act and the rules and regulations of the SEC, and (B) not to contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided , however , the Company shall have no such obligations or liabilities with respect to any written information pertaining to a Holder and furnished to the Company by or on behalf of such Holder specifically for inclusion therein.

 

(c)          The Company shall notify the Holders: (i) when the Resale Registration Statement or any amendment thereto has been filed with the SEC and when the Resale Registration Statement or any post-effective amendment thereto has become effective; (ii) of any request by the SEC for amendments or supplements to the Resale Registration Statement or the prospectus included therein or for additional information; (iii) of the issuance by the SEC of any stop order suspending the effectiveness of the Resale Registration Statement or the initiation of any proceedings for that purpose and of any other action, event or failure to act that would cause the Resale Registration Statement not to remain effective; and (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any Registrable Securities for sale in any jurisdiction or the initiation of any proceeding for such purpose.

 

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(d)          As promptly as practicable after becoming aware of such event, the Company shall notify the Holders of the happening of any event (a “ Suspension Event ”), of which the Company has knowledge, as a result of which the prospectus included in the Resale Registration Statement as then in effect, includes an untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and use its best efforts promptly to prepare a supplement or amendment to the Resale Registration Statement to correct such untrue statement or omission, and deliver such number of copies of such supplement or amendment to the Holders as the Holders may reasonably request; provided , however , that, for not more than 45 consecutive trading days (or a total of not more than 90 trading days in any twelve (12) month period), the Company may delay the disclosure of material non-public information concerning the Company (as well as prospectus or Resale Registration Statement updating), the disclosure of which at the time is not, in the good faith opinion of the Company, in the best interests of the Company; provided , further , that, if the Resale Registration Statement was not filed on Form S-3, such number of days shall not include the fifteen (15) calendar days following the filing of any Current Report on Form 8-K, Quarterly Report on Form 10-Q or Annual Report on Form 10-K, or other comparable form, for purposes of filing a post-effective amendment to the Resale Registration Statement.

 

(e)          Upon a Suspension Event, the Company shall give written notice (a ” Suspension Notice ”) to the Holders to suspend sales of the Registrable Securities, and such notice shall state that such suspension shall continue only for so long as the Suspension Event or its effect is continuing and the Company is pursuing with reasonable diligence the completion of the matter giving rise to the Suspension Event or otherwise taking all reasonable steps to terminate suspension of the effectiveness or use of the Resale Registration Statement. In no event shall the Company, without the prior written consent of the Holders, disclose to the Holders any of the facts or circumstances giving rise to the Suspension Event. The Holders shall not effect any sales of the Registrable Securities pursuant to such Resale Registration Statement (or such filings), at any time after it has received a Suspension Notice and prior to receipt of an End of Suspension Notice. The Holders may resume effecting sales of the Registrable Securities under the Resale Registration Statement (or such filings), following further notice to such effect (an “ End of Suspension Notice ”) from the Company. This End of Suspension Notice shall be given by the Company to the Holders in the manner described above promptly following the conclusion of any Suspension Event and its effect.

 

(f)          Notwithstanding any provision herein to the contrary, if the Company gives a Suspension Notice pursuant to this Section 2.2 with respect to the Resale Registration Statement, the Company shall extend the period during which such Resale Registration Statement shall be maintained effective under this Declaration by the number of days during the period from the date of the giving of the Suspension Notice to and including the date when the Holders shall have received the End of Suspension Notice and copies of the supplemented or amended prospectus necessary to resume sales.

 

(g)          If Form S-3 is not available for the registration of the resale of Registrable Securities hereunder, the Company shall (i) register the resale of the Registrable Securities on another appropriate form, and (ii) undertake to register the Registrable Securities on Form S-3 as soon as such form is available, provided that the Company shall maintain the effectiveness of the Registration Statement then in effect until such time as a Registration Statement on Form S-3 covering the Registrable Securities has been declared effective by the SEC.

 

(h)          Notwithstanding anything to the contrary contained herein, in no event shall the Company be permitted to name any Holder or affiliate of a Holder as any Underwriter without the prior written consent of such Holder unless such Holder indicates in writing that it is a registered broker-dealer or affiliated with a registered broker-dealer and therefore may be named as a “statutory underwriter” in the Registration Statement.

 

(i)          The Company shall bear all Registration Expenses incurred by the Company in connection with the registration of the Registrable Securities pursuant to this Declaration.

 

(j)           Notwithstanding anything to the contrary contained in this Declaration, the Company shall not be required to include Registrable Securities in the Resale Registration Statement unless the Holder owning such shares furnishes to the Company, at least 10 Business Days prior to the scheduled filing date of such Resale Registration Statement, an executed stockholder questionnaire in the form attached hereto as Exhibit A .

 

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2.3            Indemnification.

 

(a)           In the event of the offer and sale of the Registrable Securities held by the Holders under the Securities Act, the Company agrees to indemnify and hold harmless each Holder and its directors, officers, employees, Affiliates and agents and each Person who controls such Holder within the meaning of the Securities Act or the Exchange Act (collectively, the “ Holder Indemnified Parties ”) from and against any losses, claims, damages or liabilities, joint or several, or any actions in respect thereof to which each Holder Indemnified Party may become subject under the Securities Act or the Exchange Act, insofar as such losses, claims, damages, liabilities or actions arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Resale Registration Statement or in any amendment thereof, in each case at the time such became effective under the Securities Act, or in any the preliminary prospectus or other information that is deemed, under Rule 159 promulgated under the Securities Act to have been conveyed to purchasers of securities at the time of sale of such securities (“ Disclosure Package ”), prospectus or in any amendment thereof or supplement thereto, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of a Disclosure Package or any prospectus, in the light of the circumstances under which they were made) not misleading, and shall reimburse, as incurred, the Holder Indemnified Parties for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action in respect thereof; provided , however , that the Company shall not be liable in any such case to the extent that such loss, claim, damage or liability arises out of or is based upon any untrue statement or omission made in the Resale Registration Statement, the Disclosure Package, any prospectus or in any amendment thereof or supplement thereto in reliance upon and in conformity with written information pertaining to a Holder and furnished to the Company by or on behalf of such Holder Indemnified Party specifically for inclusion therein; provided further, however , that the Company shall not be liable in any such case to the extent that such loss, claim, damage or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in the Disclosure Package, where (A) such statement or omission had been eliminated or remedied in any subsequently filed amended prospectus or prospectus supplement (the Disclosure Package, together with such updated documents, the “ Updated Disclosure Package ”), the filing of which such Holder had been notified in accordance with the terms of this Declaration, (B) such Updated Disclosure Package was available at the time such Holder sold Registrable Securities under the Resale Registration Statement, (C) such Updated Disclosure Package was not furnished by such Holder to the Entity asserting the loss, liability, claim, damage or liability, or an underwriter involved in the distribution of such Securities, at or prior to the time such furnishing is required by the Securities Act, and (D) the Updated Disclosure Package would have cured the defect giving rise to such loss, liability, claim, damage or action; and provided further , however , that this indemnity agreement will be in addition to any liability that the Company may otherwise have to such Holder Indemnified Party. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of any Holder Indemnified Parties and shall survive the transfer of the Registrable Securities by any Holder .

 

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(b)           As a condition to including any Registrable Securities to be offered by a Holder in any registration statement filed pursuant to this Declaration, such Holder agrees to indemnify and hold harmless the Company, each of its directors, each of its officers who signs the Resale Registration Statement, as well as any officers, employees, Affiliates and agents of the Company, and each Person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act (a “ Company Indemnified Party ”) from and against any losses, claims, damages or liabilities or any actions in respect thereof, to which a Company Indemnified Party may become subject under the Securities Act or the Exchange Act, insofar as such losses, claims, damages, liabilities or actions arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Resale Registration Statement or in any amendment thereof, in each case at the time such became effective under the Securities Act, or in any Disclosure Package, prospectus or in any amendment thereof or supplement thereto, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of the Disclosure Package or any prospectus, in the light of the circumstances under which they were made) not misleading, but in each case only to the extent that the untrue statement or omission or alleged untrue statement or omission was made in reliance upon and in conformity with written information pertaining to such Holder and furnished to the Company by or on behalf of the such Holder specifically for inclusion therein; and, subject to the limitation immediately preceding this clause, shall reimburse, as incurred, the Company Indemnified Parties for any legal or other expenses reasonably incurred by them in connection with investigating or defending any loss, claim, damage, liability or action in respect thereof. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Holder, or any such director, officer, employees, Affiliates and agents and shall survive the transfer of such Registrable Securities by such Holder, and such Holder shall reimburse the Company, and each such director, officer, employees, Affiliates and agents for any legal or other expenses reasonably incurred by them in connection with investigating, defending, or settling and such loss, claim, damage, liability, action, or proceeding; provided, however , that the indemnity agreement contained in this Section 2.3 shall in no event exceed the gross proceeds from the offering received by such Holder. Such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of the Company or any such director, officer, employees, Affiliates and agents and shall survive the transfer by a Holder of such Registrable Securities.

 

(c)           Promptly after receipt by a Holder Indemnified Party or a Company Indemnified Party (each, an “ Indemnified Party ”) of notice of the commencement of any action or proceeding (including a governmental investigation), such Indemnified Party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 2.3, notify the indemnifying party of the commencement thereof; but the omission to so notify the indemnifying party will not relieve the indemnifying party from liability under Sections 2.3(a) or 2.3(b)  unless and to the extent it did not otherwise learn of such action and the indemnifying party has been materially prejudiced by such failure. In case any such action is brought against any Indemnified Party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such Indemnified Party (who shall not, except with the consent of the Indemnified Party, be counsel to the indemnifying party), and after notice from the indemnifying party to such Indemnified Party of its election so to assume the defense thereof the indemnifying party will not be liable to such Indemnified Party under this Section 2.3 for any legal or other expenses, other than reasonable costs of investigation, subsequently incurred by such Indemnified Party in connection with the defense thereof; provided , however , if such Indemnified Party shall have been advised by counsel that there are one or more defenses available to it that are in conflict with those available to the indemnifying party (in which case the indemnifying party shall not have the right to direct the defense of such action on behalf of the Indemnified Party), the reasonable fees and expenses of such Indemnified Party’s counsel shall be borne by the indemnifying party. In no event shall the indemnifying party be liable for the fees and expenses of more than one counsel (together with appropriate local counsel) at any time for any Indemnified Party in connection with any one action or separate but substantially similar or related actions arising in the same jurisdiction out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the Indemnified Party (not to be unreasonably withheld or delayed), effect any settlement of any pending or threatened action in respect of which any Indemnified Party is or could have been a party and indemnity could have been sought hereunder by such Indemnified Party unless such settlement (i) includes an unconditional release of such Indemnified Party from all liability on any claims that are the subject matter of such action and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any Indemnified Party. If the indemnification provided for in this Section 2.3 is unavailable or insufficient to hold harmless an Indemnified Party under Sections 2.3(a) or 2.3(b), then each indemnifying party shall contribute to the amount paid or payable by such Indemnified Party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to in Sections 2.3(a) or 2.3(b) in such proportion as is appropriate to reflect the relative fault of the indemnifying party or parties on the one hand and the Indemnified Party on the other in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof) as well as any other relevant equitable considerations. The relative fault of the parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or a Holder or Holder Indemnified Party, as the case may be, on the other, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid by an Indemnified Party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this Section 2.3 shall be deemed to include any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any action or claim that is the subject of this Section 2.3(c). The parties agree that it would not be just and equitable if contributions were determined by pro rata allocation (even if a Holder was treated as one Entity for such purpose) or any other method of allocation that does not take account of the equitable considerations referred to above. Notwithstanding any other provision of this Section 2.3(c), no Holder shall be required to contribute any amount in excess of the amount by which the net proceeds received by such Holder from the sale of the Registrable Securities pursuant to the Resale Registration Statement exceeds the amount of damages that such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.

 

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(d)           The agreements contained in this Section 2.3 shall survive the sale of the Registrable Securities pursuant to the Resale Registration Statement and shall remain in full force and effect, regardless of any termination or cancellation of this Declaration or any investigation made by or on behalf of any Indemnified Party.

 

Article III.

Miscellaneous .

 

3.1            Governing Law . This Declaration shall be governed by, and construed in accordance with, the laws of the State of California, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws.

 

3.2            Titles and Subtitles . The titles and subtitles used in this Declaration are for convenience only and are not to be considered in construing or interpreting this Declaration.

 

3.3            Notices . All notices, requests, claims, demands, consents, waivers and other communications required or permitted by this Declaration shall be in writing and shall be deemed given to a party to this Declaration when (a) delivered to the appropriate address by hand or by nationally recognized overnight courier service (costs prepaid), or (b) sent e-mail with confirmation of transmission by the transmitting equipment confirmed with a copy delivered as provided in clause (a), (i) in the case of the Company, to Chris Prior, Chief Executive Officer, with a copy (which shall not constitute notice) to Wilson Sonsini Goodrich & Rosati, P.C., Attention: Martin J. Waters, Email: mwaters@wsgr.com; and (ii) in the case of a Holder, to the address or e-mail address and marked to the attention of such Holder (by name or title) as set forth on Schedule 1 hereto (or to such other address or e-mail address as such party shall have specified in a written notice given to the other parties hereto).

 

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3.4            Amendments and Waivers . This registration rights granted hereunder may only be amended or terminated and the observance of any term hereof may be waived (either generally or in a particular instance, and either retroactively or prospectively) only by a written instrument executed by the Company and the holders of a majority of the Registrable Securities then outstanding.

 

3.5            Severability . In case any one or more of the provisions contained in this Declaration is for any reason held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision of this Declaration, and such invalid, illegal, or unenforceable provision shall be reformed and construed so that it will be valid, legal, and enforceable to the maximum extent permitted by law.

 

3.6            Termination . This Declaration shall terminate on the date when there are no longer any remaining Registrable Securities or upon the dissolution of liquidation of the Company; provided that Section 2.3 of this Declaration shall survive such termination.

 

3.7            Parties in Interest . None of the provisions of this Declaration are intended to provide any rights or remedies to any Person other than the parties to this Declaration and their respective successors and assigns (if any).

 

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IN WITNESS WHEREOF , the parties hereto have duly executed this Registration Rights Agreement as of the date first written above.

 

  THE COMPANY:
   
  Monster Digital, Inc.,
  a Delaware corporation
     
  By:  
    Name:
    Title:

 

[ Signature Page to Registration Rights Agreement ]

 

     

 

 

EXHIBIT F

 

Form of Lock-up Agreement

 

__________, 2018

 

RE: Innovate Biopharmaceuticals, Inc. (the “ Company ”)

 

Ladies & Gentlemen:

 

 

The undersigned is an owner of shares of common stock, par value $0.001 per share, of the Company (“ Shares ”) or of securities convertible into or exchangeable or exercisable for Shares. The Company proposes to conduct an offering of Shares pursuant to a proposed Subscription Agreement (the “ Subscription Agreement ”) by and among the Company and the Purchasers (as defined in the Subscription Agreement) (the “ Offering ”). The undersigned recognizes that the Offering will benefit each of the Company and the undersigned. The undersigned acknowledges that the Purchasers are relying on the representations and agreements of the undersigned contained in this letter agreement (this “ Agreement ”) in conducting the Offering.

 

Annex A sets forth definitions for capitalized terms used in this Agreement that are not defined in the body of this Agreement. Those definitions are a part of this Agreement.

 

In consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned hereby agrees that, during the Lock-up Period, the undersigned will not (and will cause any Family Member or Affiliate not to):

 

· Sell or Offer to Sell any Shares or Related Securities currently or hereafter owned either of record or beneficially (as defined in Rule 13d-3 under the Exchange Act) by the undersigned or such Family Member or Affiliate,

 

· enter into any Swap,

 

· make any demand for, or exercise any right with respect to, the registration under the Securities Act of the offer and sale of any Shares or Related Securities, or cause to be filed a registration statement, prospectus or prospectus supplement (or an amendment or supplement thereto) with respect to any such registration, in each case other than the Resale Registration Statement (as defined in the Declaration of Registration Rights Agreement attached as Exhibit E to the Subscription Agreement), or

 

· publicly announce any intention to do any of the foregoing.

 

     

 

 

The foregoing will not apply to the registration of the offer and sale of the Shares as contemplated by the Subscription Agreement. In addition, notwithstanding the foregoing, the undersigned may transfer any of the Shares or Related Securities (i) as a bona fide gift or gifts or charitable contribution(s), (ii) to any trust for the direct or indirect benefit of the undersigned or the immediate family member of the undersigned, (iii) if the undersigned is a corporation, partnership, limited liability company, trust or other business entity (1) to another corporation, partnership, limited liability company, trust or other business entity that is a direct or indirect affiliate (as defined in Rule 405 promulgated under the Securities Act) of the undersigned or (2) as distributions of Shares or Related Securities to limited partners, limited liability company members or stockholders of the undersigned or holders of similar equity interests in the undersigned, (iv) if the undersigned is a trust, to the beneficiary of such trust, (v) by testate succession or intestate succession, (vi) to any immediate family member, any investment fund, family partnership, family limited liability company or other entity controlled or managed by the undersigned, (vii) to a nominee or custodian of a person or entity to whom a disposition or transfer would be permissible under clauses (i) through (vi), (viii) to the Company in a transaction exempt from Section 16(b) of the Exchange Act upon a vesting event of the Shares or Related Securities or upon the exercise of options or warrants to purchase Shares on a “cashless” or “net exercise” basis or to cover tax withholding obligations of the undersigned in connection with such vesting or exercise (but for the avoidance of doubt, excluding all manners of exercise that would involve a sale in the open market of any securities relating to such options or warrants, whether to cover the applicable aggregate exercise price, withholding tax obligations or otherwise), (ix) acquired by the undersigned in open market transactions after the date hereof, (x) pursuant to a bona fide third party tender offer, merger, consolidation or other similar transaction made to all holders of the Company’s capital stock involving a Change of Control of the Company, provided that in the event that such tender offer, merger, consolidation or other such transaction is not completed, the Shares or Related Securities shall remain subject to the restrictions contained in this Agreement, or (xi) by operation of law, such as pursuant to a qualified domestic order or in connection with a divorce settlement or any other court order; provided, in the case of clauses (i)-(vii), that (A) such transfer shall not involve a disposition for value and (B) the transferee agrees in writing with the Company to be bound by the terms of this Agreement.

 

In addition, the foregoing restrictions shall not apply to (i) the exercise of stock options granted pursuant to the Company’s equity incentive plans (but for the avoidance of doubt, excluding all manners of exercise that would involve a sale in the open market of any securities relating to such options, whether to cover the applicable aggregate exercise price, withholding tax obligations or otherwise); provided that the foregoing restrictions shall apply to any of the securities issued upon such exercise, (ii) conversion or exercise of warrants into Shares or into any other security convertible into or exercisable for Shares that are outstanding as of the date hereof (but for the avoidance of doubt, excluding all manners of conversion or exercise that would involve a sale in the open market of any securities relating to such warrants, whether to cover the applicable aggregate exercise price, withholding tax obligations or otherwise); provided that the foregoing restrictions shall apply to any of the Securities issued upon such conversion or exercise, or (iii) the establishment of any contract, instruction or plan (a “ Plan ”) that satisfies all of the requirements of Rule 10b5-1(c)(1)(i)(B) under the Exchange Act; provided that no sales of the Securities shall be made pursuant to such a Plan prior to the expiration of the applicable Lock-Up Period, and such a Plan may only be established if no public announcement of the establishment or existence thereof and no filing with the Securities and Exchange Commission or other regulatory authority in respect thereof or transactions thereunder or contemplated thereby, by the undersigned, the Company or any other person, shall be required, and no such announcement or filing is made voluntarily, by the undersigned, the Company or any other person, prior to the expiration of the applicable Lock-Up Period.

 

The undersigned also agrees and consents to the entry of stop transfer instructions with the Company’s transfer agent and registrar against the transfer of Shares or Related Securities held by the undersigned and the undersigned's Family Members or Affiliates, if any, except in compliance with the foregoing restrictions.

 

The undersigned confirms that the undersigned has not, and has no knowledge that any Family Member or Affiliate has, directly or indirectly, taken any action designed to cause or result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale of the Shares. The undersigned will not, and will cause any Family Member or Affiliate not to take any such action.

 

     

 

 

Whether or not the Offering occurs as currently contemplated or at all depends on market conditions and other factors. The Offering will only be made pursuant to the Subscription Agreement, the terms of which are subject to negotiation between the Company and the Purchasers.

 

The undersigned hereby represents and warrants that the undersigned has full power, capacity and authority to enter into this Agreement. This Agreement is irrevocable and will be binding on the undersigned and the successors, heirs, personal representatives and assigns of the undersigned. This Agreement will automatically terminate upon the earliest to occur, if any, of (a) the date the Company advises the Purchasers in writing, prior to the execution of the Subscription Agreement, that it has determined not to proceed with the Offering, (b) the date of the termination of the Subscription Agreement if prior to the closing of the Offering and (c) January 26, 2018 if the Subscription Agreement has not been executed and delivered by the Company by such date.

 

This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware.

 

     

 

 

  Very truly yours,
   
   
  Name of Security Holder (Print exact name )
     
  By:  
    Signature

 

     

 

 

EXHIBIT G

 

Form of WARRANT

 

     

 

 

Exhibit 10.2

 

EXECUTION COPY

 

NOTE PURCHASE AGREEMENT

 

This NOTE PURCHASE AGREEMENT (the “ Agreement ”), dated as of January 29 2018, is by and among Innovate Biopharmaceuticals Inc., a Delaware corporation with offices located at 8480 Honeycutt Rd, Suite 120, Raleigh, NC 27615 (the “ Company ”), and each of the investors listed on the Schedule of Buyers attached hereto (individually, a “ Buyer ” and collectively, the “ Buyers ”).

 

RECITALS

 

A.       The Company and each Buyer is executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by Section 4(a)(2) of the Securities Act of 1933, as amended (the “ 1933 Act ”), and Rule 506(b) of Regulation D (“ Regulation D ”) as promulgated by the United States Securities and Exchange Commission (the “ SEC ”) under the 1933 Act.

 

B.       The Company has authorized a new series of senior notes of the Company, in the aggregate original principal amount of $4,800,000, substantially in the form attached hereto as Exhibit A (the “ Notes ”).

 

C.       Each Buyer wishes to purchase, and the Company wishes to sell, upon the terms and conditions stated in this Agreement, a Note in the aggregate original principal amount set forth opposite such Buyer’s name in column (3) on the Schedule of Buyers.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and each Buyer hereby agree as follows:

 

1.       PURCHASE AND SALE OF NOTES.

 

(a)        Purchase of Notes . Subject to the satisfaction (or waiver) of the conditions set forth in Sections 6 and 7 below, the Company shall issue and sell to each Buyer, and each Buyer severally, but not jointly, agrees to purchase from the Company on the Closing Date (as defined below) a Note in the original principal amount as is set forth opposite such Buyer’s name in column (3) on the Schedule of Buyers.

 

(b)        Closing . The closing (the “ Closing ”) of the purchase of the Notes by the Buyers shall occur at the offices of Kelley Drye & Warren LLP, 101 Park Avenue, New York, NY 10178. The date and time of the Closing (the “ Closing Date ”) shall be 10:00 a.m., New York time, on the first (1st) Business Day on which the conditions to the Closing set forth in Sections 6 and 7 below are satisfied or waived (or such other date as is mutually agreed to by the Company and each Buyer). As used herein “ Business Day ” means any day other than a Saturday, Sunday or other day on which commercial banks in New York, New York are authorized or required by law to remain closed.

 

 

 

 

(c)        Purchase Price . The aggregate purchase price for the Notes to be purchased by each Buyer (the “ Purchase Price ”) shall be the amount set forth opposite such Buyer’s name in column (4) on the Schedule of Buyers.

 

(d)        Form of Payment . On the Closing Date, (i) each Buyer shall pay its respective Purchase Price (less, in the case of any Buyer, the amounts withheld pursuant to Section 4(f)) to the Company for the Notes to be issued and sold to such Buyer at the Closing, by wire transfer of immediately available funds in accordance with the by wire transfer of immediately available funds in accordance with the Flow of Funds Letter (as defined below) and (ii) the Company shall deliver to each Buyer a Note in the aggregate original principal amount as is set forth opposite such Buyer’s name in column (3) of the Schedule of Buyers duly executed on behalf of the Company and registered in the name of such Buyer or its designee.

 

(e)        Residency . Such Buyer is a resident of that jurisdiction specified below its address of the Schedule of Buyers.

 

2.       BUYER’S REPRESENTATIONS AND WARRANTIES.

 

Each Buyer, severally and not jointly, represents and warrants to the Company with respect to only itself that, as of the date hereof and as of the Closing Date:

 

(a)        Organization; Authority . Such Buyer is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization with the requisite power and authority to enter into and to consummate the transactions contemplated by the Transaction Documents (as defined below) to which it is a party and otherwise to carry out its obligations hereunder and thereunder.

 

(b)        No Public Sale or Distribution . Such Buyer is acquiring its Note for its own account and not with a view towards, or for resale in connection with, the public sale or distribution thereof in violation of applicable securities laws, except pursuant to sales registered or exempted under the 1933 Act; provided, however, by making the representations herein, such Buyer does not agree, or make any representation or warranty, to hold any of the Notes for any minimum or other specific term and reserves the right to dispose of the Notes at any time in accordance with or pursuant to a registration statement or an exemption from registration under the 1933 Act. Such Buyer does not presently have any agreement or understanding, directly or indirectly, with any Person to distribute any of the Notes in violation of applicable securities laws. For purposes of this Agreement, “ Person ” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization, any other entity and any Governmental Entity or any department or agency thereof.

 

(c)        Accredited Investor Status . Such Buyer is an “accredited investor” as that term is defined in Rule 501(a) of Regulation D.

 

(d)        Reliance on Exemptions . Such Buyer understands that the Notes are being offered and sold to it in reliance on specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying in part upon the truth and accuracy of, and such Buyer’s compliance with, the representations, warranties, agreements, acknowledgments and understandings of such Buyer set forth herein in order to determine the availability of such exemptions and the eligibility of such Buyer to acquire the Notes.

 

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(e)        Information . Such Buyer and its advisors, if any, have been furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Notes that have been requested by such Buyer. Such Buyer and its advisors, if any, have been afforded the opportunity to ask questions of the Company. Neither such inquiries nor any other due diligence investigations conducted by such Buyer or its advisors, if any, or its representatives shall modify, amend or affect such Buyer's right to rely on the Company's representations and warranties contained herein. Such Buyer understands that its investment in the Notes involves a high degree of risk. Such Buyer has sought such accounting, legal and tax advice as it has considered necessary to make an informed investment decision with respect to its acquisition of the Notes.

 

(f)        No Governmental Review . Such Buyer understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Notes or the fairness or suitability of the investment in the Notes nor have such authorities passed upon or endorsed the merits of the offering of the Notes.

 

(g)        Transfer or Resale . Such Buyer understands that, except as may be contemplated in connection with a Public Company Date (as defined below): (i) the Notes have not been and are not being registered under the 1933 Act or any state securities laws, and may not be offered for sale, sold, assigned or transferred unless (A) subsequently registered thereunder, (B) such Buyer shall have delivered to the Company (if requested by the Company) an opinion of counsel, in a form reasonably acceptable to the Company, to the effect that such Notes to be sold, assigned or transferred may be sold, assigned or transferred pursuant to an exemption from such registration, or (C) such Buyer provides the Company with reasonable assurance that such Notes can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A promulgated under the 1933 Act (or a successor rule thereto) (collectively, “ Rule 144 ”); (ii) any sale of the Notes made in reliance on Rule 144 may be made only in accordance with the terms of Rule 144, and further, if Rule 144 is not applicable, any resale of the Notes under circumstances in which the seller (or the Person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the 1933 Act) may require compliance with some other exemption under the 1933 Act or the rules and regulations of the SEC promulgated thereunder; and (iii) neither the Company nor any other Person is under any obligation to register the Notes under the 1933 Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder. Notwithstanding the foregoing, the Notes may be pledged in connection with a bona fide margin account or other loan or financing arrangement secured by the Notes and such pledge of Notes shall not be deemed to be a transfer, sale or assignment of the Notes hereunder, and no Buyer effecting a pledge of Notes shall be required to provide the Company with any notice thereof or otherwise make any delivery to the Company pursuant to this Agreement or any other Transaction Document (as defined in Section 3(b)), including, without limitation, this Section 2(g).

 

(h)        Validity; Enforcement . This Agreement has been duly and validly authorized, executed and delivered on behalf of such Buyer and shall constitute the legal, valid and binding obligations of such Buyer enforceable against such Buyer in accordance with their respective terms, except as such enforceability may be limited by general principles of equity or to applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and other similar laws relating to, or affecting generally, the enforcement of applicable creditors’ rights and remedies.

 

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(i)        No Conflicts . The execution, delivery and performance by such Buyer of this Agreement and the consummation by such Buyer of the transactions contemplated hereby and thereby will not (i) result in a violation of the organizational documents of such Buyer, 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, indenture or instrument to which such Buyer is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws) applicable to such Buyer, except in the case of clauses (ii) and (iii) above, for such conflicts, defaults, rights or violations which could not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the ability of such Buyer to perform its obligations hereunder.

 

3.       REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

 

The Company represents and warrants to each of the Buyers that, as of the date hereof and as of the Closing Date.

 

(a)        Organization and Qualification . Each of the Company and each of its Subsidiaries are entities duly organized and validly existing and in good standing under the laws of the jurisdiction in which they are formed, and have the requisite power and authority to own their properties and to carry on their business as now being conducted and as presently proposed to be conducted. Each of the Company and each of its Subsidiaries is duly qualified as a foreign entity to do business and is in good standing in every jurisdiction in which its ownership of property or the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not reasonably be expected to have a Material Adverse Effect (as defined below). As used in this Agreement, “ Material Adverse Effect ” means any material adverse effect on (i) the business, properties, assets, liabilities, operations (including results thereof), condition (financial or otherwise) or prospects of the Company or any Subsidiary, individually or taken as a whole, (ii) the transactions contemplated hereby or in any of the other Transaction Documents or any other agreements or instruments to be entered into in connection herewith or therewith or (iii) the authority or ability of the Company to perform its obligations under any of the Transaction Documents (as defined below). Other than the Persons (as defined below) set forth on Schedule 3(a), the Company has no Subsidiaries. “ Subsidiaries ” means any Person in which the Company, directly or indirectly, (I) owns any of the outstanding capital stock or holds any equity or similar interest of such Person or (II) controls or operates all or any part of the business, operations or administration of such Person, and each of the foregoing, is individually referred to herein as a “ Subsidiary .”

 

(b)        Authorization; Enforcement; Validity . The Company has the requisite power and authority to enter into and perform its obligations under this Agreement and the other Transaction Documents and to issue the Notes in accordance with the terms hereof and thereof. The execution and delivery of this Agreement and the other Transaction Documents by the Company, and the consummation by the Company of the transactions contemplated hereby and thereby (including, without limitation, the issuance of the Notes) have been duly authorized by the Company’s board of directors or other governing body, as applicable, and (other than the filing of a Form D with the SEC and the filing(s) required by applicable state “blue sky” securities laws, rules and regulations (together the “ Securities Filings ”)) no further filing, consent or authorization is required by the Company, its Subsidiaries, their respective boards of directors or their stockholders or other governing body. This Agreement has been, and the other Transaction Documents to which it is a party will be prior to the Closing, duly executed and delivered by the Company, and each constitutes the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with its respective terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of applicable creditors’ rights and remedies and except as rights to indemnification and to contribution may be limited by federal or state securities law. “ Transaction Documents ” means, collectively, this Agreement, the Notes, and each of the other agreements and instruments entered into or delivered by any of the parties hereto in connection with the transactions contemplated hereby and thereby, as may be amended from time to time.

 

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(c)        Issuance of Securities . The issuance of the Notes are duly authorized and upon issuance in accordance with the terms of the Transaction Documents shall be validly issued, fully paid and non-assessable and free from all preemptive or similar rights, mortgages, defects, claims, liens, pledges, charges, taxes, rights of first refusal, encumbrances, security interests and other encumbrances (collectively “ Liens ”) with respect to the issuance thereof. Subject to the accuracy of the representations and warranties of the Buyers in this Agreement, the offer and issuance by the Company of the Notes is exempt from registration under the 1933 Act.

 

(d)        No Conflicts . The execution, delivery and performance of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated hereby and thereby (including, without limitation, the issuance of the Notes) will not (i) result in a violation of the Certificate of Incorporation (as defined below) (including, without limitation, any certificate of designation contained therein), Bylaws (as defined below), certificate of formation, memorandum of association, articles of association, bylaws or other organizational documents of the Company or any of its Subsidiaries, or any capital stock or other securities of the Company or any of its Subsidiaries, (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) in any respect under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its Subsidiaries is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including, without limitation, foreign, federal and state securities laws and regulations) applicable to the Company or any of its Subsidiaries or by which any property or asset of the Company or any of its Subsidiaries is bound or affected.

 

(e)        Consents . Neither the Company nor any Subsidiary is required to obtain any consent from, authorization or order of, or make any filing or registration with (other than the Securities Filings), any Governmental Entity (as defined below) or any regulatory or self-regulatory agency or any other Person in order for it to execute, deliver or perform any of its respective obligations under or contemplated by the Transaction Documents, in each case, in accordance with the terms hereof or thereof. All consents, authorizations, orders, filings and registrations which the Company or any Subsidiary is required to obtain pursuant to the preceding sentence have been or will be obtained or effected on or prior to the Closing Date, and neither the Company nor any of its Subsidiaries are aware of any facts or circumstances which might prevent the Company or any of its Subsidiaries from obtaining or effecting any of the registration, application or filings contemplated by the Transaction Documents. “ Governmental Entity ” means any nation, state, county, city, town, village, district, or other political jurisdiction of any nature, federal, state, local, municipal, foreign, or other government, governmental or quasi-governmental authority of any nature (including any governmental agency, branch, department, official, or entity and any court or other tribunal), multi-national organization or body; or body exercising, or entitled to exercise, any administrative, executive, judicial, legislative, police, regulatory, or taxing authority or power of any nature or instrumentality of any of the foregoing, including any entity or enterprise owned or controlled by a government or a public international organization or any of the foregoing.

 

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(f)        Acknowledgment Regarding Buyer’s Purchase of Notes . The Company acknowledges and agrees that each Buyer is acting solely in the capacity of an arm’s length purchaser with respect to the Transaction Documents and the transactions contemplated hereby and thereby and that no Buyer is (i) an officer or director of the Company or any of its Subsidiaries, (ii) an “affiliate” (as defined in Rule 144) of the Company or any of its Subsidiaries or (iii) to its knowledge, a “beneficial owner” of more than 10% of the shares of Common Stock (as defined for purposes of Rule 13d-3 of the Securities Exchange Act of 1934, as amended (the “ 1934 Act ”)). The Company further acknowledges that no Buyer is acting as a financial advisor or fiduciary of the Company or any of its Subsidiaries (or in any similar capacity) with respect to the Transaction Documents and the transactions contemplated hereby and thereby, and any advice given by a Buyer or any of its representatives or agents in connection with the Transaction Documents and the transactions contemplated hereby and thereby is merely incidental to such Buyer’s purchase of the Notes. The Company further represents to each Buyer that the Company’s and each Subsidiary’s decision to enter into the Transaction Documents to which it is a party has been based solely on the independent evaluation by the Company, each Subsidiary and their respective representatives.

 

(g)        No General Solicitation; Placement Agent’s Fees . Neither the Company, nor any of its Subsidiaries or affiliates, nor any Person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with the offer or sale of the Notes. The Company shall be responsible for the payment of any placement agent’s fees, financial advisory fees, or brokers’ commissions (other than for Persons engaged by any Buyer or its investment advisor) relating to or arising out of the transactions contemplated hereby. The Company shall pay, and hold each Buyer harmless against, any liability, loss or expense (including, without limitation, attorney's fees and out-of-pocket expenses) arising in connection with any such claim. Neither the Company nor any of its Subsidiaries has engaged any placement agent or other agent in connection with the offer or sale of the Notes.

 

(h)        No Integrated Offering . None of the Company, its Subsidiaries or any of their affiliates, nor any Person acting on their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would require registration of any of the Notes under the 1933 Act, whether through integration with prior offerings or otherwise, or cause this offering of the Notes to require approval of stockholders of the Company for purposes of the 1933 Act or under any applicable stockholder approval provisions, including, without limitation, under the rules and regulations of any exchange or automated quotation system on which any of the Notes of the Company are listed or designated for quotation. None of the Company, its Subsidiaries, their affiliates nor any Person acting on their behalf will take any action or steps that would require registration of any of the Notes under the 1933 Act or cause the offering of any of the Notes to be integrated with other offerings of securities of the Company.

 

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(i)        Transactions With Affiliates . No current or former employee, partner, director, officer or stockholder (direct or indirect) of the Company or its Subsidiaries, or any associate, or, to the knowledge of the Company, any affiliate of any thereof, or any relative with a relationship no more remote than first cousin of any of the foregoing, is presently, or has ever been, (i) a party to any transaction with the Company or its Subsidiaries (including any contract, agreement or other arrangement providing for the furnishing of services by, or rental of real or personal property from, or otherwise requiring payments to, any such director, officer or stockholder or such associate or affiliate or relative Subsidiaries (other than for ordinary course services as employees, officers or directors of the Company or any of its Subsidiaries)) or (ii) the direct or indirect owner of an interest in any corporation, firm, association or business organization which is a competitor, supplier or customer of the Company or its Subsidiaries (except for a passive investment (direct or indirect) in less than 5% of the common stock of a company whose securities are traded on or quoted through a NMS stock exchange), nor does any such Person receive income from any source other than the Company or its Subsidiaries which relates to the business of the Company or its Subsidiaries or should properly accrue to the Company or its Subsidiaries. No employee, officer, stockholder or director of the Company or any of its Subsidiaries or member of his or her immediate family is indebted to the Company or its Subsidiaries, as the case may be, nor is the Company or any of its Subsidiaries indebted (or committed to make loans or extend or guarantee credit) to any of them, other than (i) for payment of salary for services rendered, (ii) reimbursement for reasonable expenses incurred on behalf of the Company, (iii) for other standard employee benefits made generally available to all employees or executives (including stock option agreements outstanding under any stock option plan approved by the Board of Directors of the Company); and (iv) other than convertible promissory notes issued by the Company to affiliates of the Company’s directors and officers.

 

(j) Environmental Laws . (i) The Company and its Subsidiaries (A) are in compliance with any and all Environmental Laws (as defined below), (B) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (C) are in compliance with all terms and conditions of any such permit, license or approval where, in each of the foregoing clauses (A), (B) and (C), the failure to so comply could be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect. The term “ Environmental Laws ” means all federal, state, local or foreign laws relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata), including, without limitation, laws relating to emissions, discharges, releases or threatened releases of chemicals, pollutants, contaminants, or toxic or hazardous substances or wastes (collectively, “ Hazardous Materials ”) into the environment, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials, as well as all authorizations, codes, decrees, demands or demand letters, injunctions, judgments, licenses, notices or notice letters, orders, permits, plans or regulations issued, entered, promulgated or approved thereunder.

 

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(ii)        No Hazardous Materials :

 

(A)       have been disposed of or otherwise released from any Property of the Company or any of its Subsidiaries in violation of any Environmental Laws; or

 

(B)       are present on, over, beneath, in or upon a Property or any portion thereof in quantities that would constitute a violation of any Environmental Laws. No prior use by the Company or any of its Subsidiaries of any Property has occurred that violates any Environmental Laws, which violation would have a material adverse effect on the business of the Company or any of its Subsidiaries.

 

(iii)       Neither the Company nor any of its Subsidiaries knows of any other person who or entity which has stored, treated, recycled, disposed of or otherwise located on any Property any Hazardous Materials, including, without limitation, such substances as asbestos and polychlorinated biphenyls.

 

(iv)       None of the Properties are on any federal or state “Superfund” list or Liability Information System (“ CERCLIS ”) list or any state environmental agency list of sites under consideration for CERCLIS, nor subject to any environmental related Liens.

 

(k)        U.S. Real Property Holding Corporation . Neither the Company nor any of its Subsidiaries is, or has ever been, and so long as any of the Notes are held by any of the Buyers, shall become, a U.S. real property holding corporation within the meaning of Section 897 of the Code, and the Company and each Subsidiary shall so certify upon any Buyer’s request.

 

(l)        Transfer Taxes . On the Closing Date, all stock transfer or other taxes (other than income or similar taxes) which are required to be paid in connection with the issuance, sale and transfer of the Notes to be sold to each Buyer hereunder will be, or will have been, fully paid or provided for by the Company, and all laws imposing such taxes will be or will have been complied with.

 

(m)        Bank Holding Company Act . Neither the Company nor any of its Subsidiaries is subject to the Bank Holding Company Act of 1956, as amended (the “ BHCA ”) and to regulation by the Board of Governors of the Federal Reserve System (the “ Federal Reserve ”). Neither the Company nor any of its Subsidiaries or affiliates owns or controls, directly or indirectly, five percent (5%) or more of the outstanding shares of any class of voting securities or twenty-five percent (25%) or more of the total equity of a bank or any entity that is subject to the BHCA and to regulation by the Federal Reserve. Neither the Company nor any of its Subsidiaries or affiliates exercises a controlling influence over the management or policies of a bank or any entity that is subject to the BHCA and to regulation by the Federal Reserve.

 

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(n)        Illegal or Unauthorized Payments; Political Contributions . Neither the Company nor any of its Subsidiaries nor, to the best of the Company’s knowledge (after reasonable inquiry of its officers and directors), any of the officers, directors, employees, agents or other representatives of the Company or any of its Subsidiaries or any other business entity or enterprise with which the Company or any Subsidiary is or has been affiliated or associated, has, directly or indirectly, made or authorized any payment, contribution or gift of money, property, or services, whether or not in contravention of applicable law, (i) as a kickback or bribe to any Person or (ii) to any political organization, or the holder of or any aspirant to any elective or appointive public office except for personal political contributions not involving the direct or indirect use of funds of the Company or any of its Subsidiaries.

 

(o)        Money Laundering . The Company and its Subsidiaries are in compliance with, and have not previously violated, the USA Patriot Act of 2001 and all other applicable U.S. and non-U.S. anti-money laundering laws and regulations, including, without limitation, the laws, regulations and Executive Orders and sanctions programs administered by the U.S. Office of Foreign Assets Control, including, but not limited, to (i) Executive Order 13224 of September 23, 2001 entitled, “Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism” (66 Fed. Reg. 49079 (2001)); and (ii) any regulations contained in 31 CFR, Subtitle B, Chapter V.

 

(p)        Acknowledgement Regarding Buyers' Trading Activity . It is understood and acknowledged by the Company (a) (i) that none of the Buyers have been asked by the Company or its Subsidiaries to agree, nor has any Buyer agreed with the Company or its Subsidiaries, to desist from purchasing or selling, long and/or short, securities of the Company, or “derivative” securities based on securities issued by the Company or to hold the Notes for any specified term; and (ii) that each Buyer shall not be deemed to have any affiliation with or control over any arm's length counter party in any “derivative” transaction. The Company further understands and acknowledges that following the public disclosure of the transactions contemplated by the Transaction Documents pursuant to the Press Release (as defined below) one or more Buyers may engage in hedging and/or trading activities at various times during the period that the Notes are outstanding, and such hedging and/or trading activities, if any, can reduce the value of the existing stockholders’ equity interest in the Company both at and after the time the hedging and/or trading activities are being conducted. The Company acknowledges that such aforementioned hedging and/or trading activities do not constitute a breach of this Agreement, the Notes or any other Transaction Document or any of the documents executed in connection herewith or therewith.

 

(q)        Management . Except as set forth in Schedule 3(q) hereto, during the past five year period, no current officer or director of the Company or any of its Subsidiaries has been the subject of:

 

(i)       a petition under bankruptcy laws or any other insolvency or moratorium law or the appointment by a court of a receiver, fiscal agent or similar officer for such Person, or any partnership in which such person was a general partner at or within two years before the filing of such petition or such appointment, or any corporation or business association of which such person was an executive officer at or within two years before the time of the filing of such petition or such appointment;

 

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(ii)       a conviction in a criminal proceeding or a named subject of a pending criminal proceeding (excluding traffic violations that do not relate to driving while intoxicated or driving under the influence);

 

(iii)       any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining any such person from, or otherwise limiting, the following activities:

 

(1)       Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the United States Commodity Futures Trading Commission or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;

 

(2)       Engaging in any particular type of business practice; or

 

(3)       Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of securities laws or commodities laws;

 

(iv)       any order, judgment or decree, not subsequently reversed, suspended or vacated, of any authority barring, suspending or otherwise limiting for more than sixty (60) days the right of any such person to engage in any activity described in the preceding sub paragraph, or to be associated with persons engaged in any such activity;

 

(v)       a finding by a court of competent jurisdiction in a civil action or by the SEC or other authority to have violated any securities law, regulation or decree and the judgment in such civil action or finding by the SEC or any other authority has not been subsequently reversed, suspended or vacated; or

 

(vi)       a finding by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any federal commodities law, and the judgment in such civil action or finding has not been subsequently reversed, suspended or vacated.

 

(r) No Disqualification Events . With respect to Notes to be offered and sold hereunder in reliance on Rule 506(b) under the 1933 Act (“ Regulation D Securities ”), none of the Company, any of its predecessors, any affiliated issuer, any director, executive officer, other officer of the Company participating in the offering contemplated hereby, any beneficial owner of 20% or more of the Company's outstanding voting equity securities, calculated on the basis of voting power, nor any promoter (as that term is defined in Rule 405 under the 1933 Act) connected with the Company in any capacity at the time of sale (each, an “ Issuer Covered Person ” and, together, “ Issuer Covered Persons ”) is subject to any of the “Bad Actor” disqualifications described in Rule 506(d)(1)(i) to (viii) under the 1933 Act (a “ Disqualification Event ”), except for a Disqualification Event covered by Rule 506(d)(2) or (d)(3). The Company has exercised reasonable care to determine whether any Issuer Covered Person is subject to a Disqualification Event. The Company has complied, to the extent applicable, with its disclosure obligations under Rule 506(e), and has furnished to the Buyers a copy of any disclosures provided thereunder.

 

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(s)        Other Covered Persons(b) . The Company is not aware of any Person that has been or will be paid (directly or indirectly) remuneration for solicitation of Buyers or potential purchasers in connection with the sale of any Regulation D Securities.

 

(t)        Public Utility Holding Act . None of the Company nor any of its Subsidiaries is a “holding company,” or an “affiliate” of a “holding company,” as such terms are defined in the Public Utility Holding Act of 2005.

 

(u)        Federal Power Act . None of the Company nor any of its Subsidiaries is subject to regulation as a “public utility” under the Federal Power Act, as amended.

 

(v)        Ranking of Notes . Except for Permitted Senior Indebtedness (as defined in the Notes), no Indebtedness of the Company, at the Closing, will be senior to, or pari passu with, the Notes in right of payment, whether with respect to payment or redemptions, interest, damages, upon liquidation or dissolution or otherwise.

 

(w)        Disclosure . No statement made by the Company in this Agreement, any other Transaction Document or the exhibits and schedules attached hereto or in any certificate or schedule furnished or to be furnished by or on behalf of the Company to the Investors or any of their representatives in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading. The due diligence materials previously provided by or on behalf of the Company to each Buyer (the “ Due Diligence Materials ”), have been prepared in a good faith effort by the Company to describe the Company's present and proposed products, and projected growth of the Company and do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading, except that with respect to assumptions, projections and expressions of opinion or predictions contained in the Due Diligence Materials, the Company represents only that such assumptions, projections, expressions of opinion and predictions were made in good faith and that the Company believes there is a reasonable basis therefor. The Company acknowledges and agrees that no Buyer makes or has made any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in Section 2.

 

(x)        Additional Representations and Warranties . The Company hereby makes, as of the date hereof, to each Buyer the representations and warranties of the Company set forth in Section 3.1(e), and Sections 3.1(h) through 3.1(m) of that certain Subscription Agreement by and among the Company and each of the purchasers listed on Annex A attached thereto and dated as of the date of this Agreement (the “ Subscription Agreement ”), subject in all respect to the disclosures of the Company set forth on the Company’s Disclosure Schedules (as defined in the Subscription Agreement), which representations, warranties and disclosure are hereby incorporated by reference in this Agreement, mutatis mutandis .

 

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4.       COVENANTS.

 

(a)        Reasonable Best Efforts . Each Buyer shall use its reasonable best efforts to timely satisfy each of the covenants hereunder and conditions to be satisfied by it as provided in Section 6 of this Agreement. The Company shall use its reasonable best efforts to timely satisfy each of the covenants hereunder and conditions to be satisfied by it as provided in Section 7 of this Agreement.

 

(b)        Form D and Blue Sky . The Company shall file a Form D with respect to the Notes as required under Regulation D and to provide a copy thereof to each Buyer promptly after such filing. The Company shall, on or before the Closing Date, take such action as the Company shall reasonably determine is necessary in order to obtain an exemption for, or to, qualify the Notes for sale to the Buyers at the Closing pursuant to this Agreement under applicable securities or “Blue Sky” laws of the states of the United States (or to obtain an exemption from such qualification), and shall provide evidence of any such action so taken to the Buyers on or prior to the Closing Date. Without limiting any other obligation of the Company under this Agreement, the Company shall timely make all filings and reports relating to the offer and sale of the Notes required under all applicable securities laws (including, without limitation, all applicable federal securities laws and all applicable “Blue Sky” laws), and the Company shall comply with all applicable foreign, federal, state and local laws, statutes, rules, regulations and the like relating to the offering and sale of the Notes to the Buyers.

 

(c)        Reporting Status . Immediately following the date the Common Stock of the Company is initially registered (or is exchanged into a class of securities registered) under the 1934 Act (whether by registration, merger or otherwise) (the “ Public Company Date ”) and until the date on which a Buyer or any transferee or assignee thereof to which a Buyer assigns its rights as a holder of Notes under this Agreement (each an “ Investor ,” and collectively, the “ Investors ”) no longer holds any Notes (the “ Reporting Period ”), the Company shall timely file all reports required to be filed with the SEC pursuant to the 1934 Act.

 

(d)        Use of Proceeds . The Company will use the proceeds from the sale of the Notes for general corporate purposes, but not, directly or indirectly, for (i) except as set forth on Schedule 4(d), the satisfaction of any indebtedness of the Company or any of its Subsidiaries, (ii) the redemption or repurchase of any securities of the Company or any of its Subsidiaries, or (iii) the settlement of any outstanding litigation.

 

(e)        Financial Information . From and after the Public Company Date, the Company agrees to send the following to each Investor during the Reporting Period (i) unless the following are filed with the SEC through EDGAR and are available to the public through the EDGAR system, within one (1) Business Day after the filing thereof with the SEC, a copy of its Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q, any interim reports or any consolidated balance sheets, income statements, stockholders’ equity statements and/or cash flow statements for any period other than annual, any Current Reports on Form 8-K and any registration statements (other than on Form S-8) or amendments filed pursuant to the 1933 Act, (ii) unless the following are either filed with the SEC through EDGAR or are otherwise widely disseminated via a recognized news release service (such as PR Newswire), on the same day as the release thereof, facsimile copies of all press releases issued by the Company or any of its Subsidiaries and (iii) unless the following are filed with the SEC through EDGAR, copies of any notices and other information made available or given to the stockholders of the Company generally, contemporaneously with the making available or giving thereof to the stockholders.

 

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(f)        Fees . The Company shall reimburse the lead Buyer for all costs and expenses not to exceed $20,000.00 incurred by it or its affiliates in connection with the structuring, documentation, negotiation and closing of the transactions contemplated by the Transaction Documents (including, without limitation, as applicable, all reasonable legal fees of outside counsel and disbursements of Kelley Drye & Warren LLP, counsel to the lead Buyer, any other reasonable fees and expenses in connection with the structuring, documentation, negotiation and closing of the transactions contemplated by the Transaction Documents and due diligence and regulatory filings in connection therewith) (the “ Transaction Expenses ”) and shall be withheld by the lead Buyer from its Purchase Price at the Closing; provided, that the Company shall promptly reimburse Kelley Drye & Warren LLP on demand for all Transaction Expenses not so reimbursed through such withholding at the Closing. The Company shall be responsible for the payment of any placement agent’s fees or financial advisory fees relating to or arising out of the transactions contemplated hereby. The Company shall pay, and hold each Buyer harmless against, any liability, loss or expense (including, without limitation, reasonable attorneys’ fees and out-of-pocket expenses) arising in connection with any claim relating to any such payment. Except as otherwise set forth in the Transaction Documents, each party to this Agreement shall bear its own expenses in connection with the sale of the Notes to the Buyers.

 

(g)        Pledge of Notes . Notwithstanding anything to the contrary contained in this Agreement, the Company acknowledges and agrees that the Notes may be pledged by an Investor in connection with a bona fide margin agreement or other loan or financing arrangement that is secured by the Notes. The pledge of Notes shall not be deemed to be a transfer, sale or assignment of the Notes hereunder, and no Investor effecting a pledge of Notes shall be required to provide the Company with any notice thereof or otherwise make any delivery to the Company pursuant to this Agreement or any other Transaction Document, including, without limitation, Section 2(g) hereof; provided that an Investor and its pledgee shall be required to comply with the provisions of Section 2(g) hereof in order to effect a sale, transfer or assignment of Notes to such pledgee. The Company hereby agrees to execute and deliver such documentation as a pledgee of the Notes may reasonably request in connection with a pledge of the Notes to such pledgee by a Buyer.

 

(h)        Disclosure of Transactions and Other Material Information .

 

(i)        Disclosure of Transaction . The Company shall, on or before the fourth (4th) Business Day after the date of this Agreement, file a Current Report on Form 8-K describing all the material terms of the transactions contemplated by the Transaction Documents in the form required by the 1934 Act and attaching all the material Transaction Documents (including, without limitation, this Agreement (and all schedules to this Agreement), the form of Notes and the form of the Warrants) (including all attachments, the “ 8-K Filing ”). From and after the filing of the 8-K Filing, the Company shall have disclosed all material, non-public information (if any) provided to any of the Buyers by the Company or any of its Subsidiaries or any of their respective officers, directors, employees or agents in connection with the transactions contemplated by the Transaction Documents. In addition, effective upon the filing of the 8-K Filing, the Company acknowledges and agrees that any and all confidentiality or similar obligations under any agreement, whether written or oral, between the Company, any of its Subsidiaries or any of their respective officers, directors, affiliates, employees or agents, on the one hand, and any of the Buyers or any of their affiliates, on the other hand, shall terminate.

 

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(ii)        Limitations on Disclosure . The Company shall not, and the Company shall cause each of its Subsidiaries and each of its and their respective officers, directors, employees and agents not to, provide any Buyer with any material, non-public information regarding the Company or any of its Subsidiaries from and after the date hereof without the express prior written consent of such Buyer (which may be granted or withheld in such Buyer’s sole discretion). In the event of a breach of any of the foregoing covenants, or any of the covenants or agreements contained in any other Transaction Document, by the Company, any of its Subsidiaries, or any of its or their respective officers, directors, employees and agents (as determined in the reasonable good faith judgment of such Buyer), in addition to any other remedy provided herein or in the Transaction Documents, such Buyer shall have the right to make a public disclosure, in the form of a press release, public advertisement or otherwise, of such breach or such material, non-public information, as applicable, without the prior approval by the Company, any of its Subsidiaries, or any of its or their respective officers, directors, employees or agents. No Buyer shall have any liability to the Company, any of its Subsidiaries, or any of its or their respective officers, directors, employees, affiliates, stockholders or agents, for any such disclosure. To the extent that the Company delivers any material, non-public information to a Buyer without such Buyer's consent, the Company hereby covenants and agrees that such Buyer shall not have any duty of confidentiality with respect to, or a duty not to trade on the basis of, such material, non-public information. Subject to the foregoing, neither the Company, its Subsidiaries nor any Buyer shall issue any press releases or any other public statements with respect to the transactions contemplated hereby; provided, however, the Company shall be entitled, without the prior approval of any Buyer, to make the Press Release and any press release or other public disclosure with respect to such transactions (i) in substantial conformity with the 8-K Filing and contemporaneously therewith and (ii) as is required by applicable law and regulations (provided that in the case of clause (i) each Buyer shall be consulted by the Company in connection with any such press release or other public disclosure prior to its release). Without the prior written consent of the applicable Buyer (which may be granted or withheld in such Buyer’s sole discretion), the Company shall not (and shall cause each of its Subsidiaries and affiliates to not) disclose the name of such Buyer in any filing, announcement, release or otherwise. Notwithstanding anything contained in this Agreement to the contrary and without implication that the contrary would otherwise be true, the Company expressly acknowledges and agrees that no Buyer shall have (unless expressly agreed to by a particular Buyer after the date hereof in a written definitive and binding agreement executed by the Company and such particular Buyer (it being understood and agreed that no Buyer may bind any other Buyer with respect thereto)), any duty of confidentiality with respect to, or a duty not to trade on the basis of, any material, non-public information regarding the Company or any of its Subsidiaries.

 

(i)        Conduct of Business . The business of the Company and its Subsidiaries shall not be conducted in violation of any law, ordinance or regulation of any Governmental Entity, except where such violations would not reasonably be expected to result, either individually or in the aggregate, in a Material Adverse Effect.

 

(j)        Passive Foreign Investment Company . The Company shall conduct its business, and shall cause its Subsidiaries to conduct their respective businesses, in such a manner as will ensure that the Company will not be deemed to constitute a passive foreign investment company within the meaning of Section 1297 of the Code.

 

(k)        Restriction on Redemption and Cash Dividends . So long as any Notes are outstanding, the Company shall not, directly or indirectly, redeem, or declare or pay any cash dividend or distribution on, any securities of the Company without the prior express written consent of the Buyers, except for the repurchase of common stock from employees, directors, consultants, and advisor in connection with termination of services to the Company.

 

(l)        Corporate Existence . So long as any Buyer beneficially owns any Notes, the Company shall not be party to any Fundamental Transaction (as defined in the Notes) unless the Company is in compliance with the applicable provisions governing Fundamental Transactions set forth in the Notes.

 

(m)       General Solicitation . None of the Company, any of its affiliates (as defined in Rule 501(b) under the 1933 Act) or any person acting on behalf of the Company or such affiliate will solicit any offer to buy or offer or sell the Notes by means of any form of general solicitation or general advertising within the meaning of Regulation D, including: (i) any advertisement, article, notice or other communication published in any newspaper, magazine or similar medium or broadcast over television or radio; and (ii) any seminar or meeting whose attendees have been invited by any general solicitation or general advertising, unless otherwise permitted by applicable law.

 

(n)       Notice of Disqualification Events . The Company will notify the Buyers in writing, prior to the Closing Date of (i) any Disqualification Event relating to any Issuer Covered Person and (ii) any event that would, with the passage of time, become a Disqualification Event relating to any Issuer Covered Person.

 

(o)       Books and Records (b) . The Company will keep proper books of record and account, in which full and correct entries shall be made of all financial transactions and the asset and business of the Company and its Subsidiaries in accordance with GAAP.

 

(p)       Confidentiality, Non-Compete, Non-Solicit and Assignment of Inventions Agreements . The Company shall cause every employee and consultant to be hired by the Company after the date hereof to enter into a Confidentiality, Non-Compete, Non-Solicit and Assignment of Inventions Agreement prior to being hired. The Company shall not amend, waive or terminate any material provision of any Confidentiality, Non-Compete, Non-Solicit and Assignment of Inventions Agreement and shall enforce the provisions of each the Confidentiality, Non-Compete, Non-Solicit and Assignment of Inventions Agreements in accordance with its terms. If any party to a Confidentiality, Non-Compete, Non-Solicit and Assignment of Inventions Agreement breaches any material provision of a Confidentiality, Non-Compete, Non-Solicit and Assignment of Inventions Agreement, the Company shall promptly use its best efforts to specific performance of the terms of such Confidentiality, Non-Compete, Non-Solicit and Assignment of Inventions Agreement.

 

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(q)       Financial Statements and Inspection .

 

(i)       The Company shall deliver to each Buyer (unless any such Buyer has elected by written notice to the Company that it does not want to receive any or all of the following):

 

(1)       as soon as practicable following the end of each fiscal quarter (other than the fourth fiscal quarter of each fiscal year), but in no event later than fifteen (15) days after the end of such fiscal quarter, the Company's consolidated unaudited balance sheet, income statement, a statement of stockholder's equity and a statement of cash flows for such quarter, such quarter-end financial reports to be in reasonable detail, prepared in accordance with GAAP (except that such financial statements may (A) be subject to normal year-end audit adjustments and (B) not contain all notes thereto that may be required in accordance with GAAP);

 

(2)       as soon as practicable following the end of each fiscal year, but in no event later than ninety (90) days following the end of such fiscal year, the Company's audited consolidated balance sheet, income statement, a statement of stockholder's equity and a statement of cash flows for such year and, if applicable, the immediately preceding fiscal year, such year-end financial reports to be in reasonable detail, prepared in accordance with GAAP, and audited by independent public accountants of nationally recognized standing selected by the Company and reasonably acceptable to the Required Holders;

 

(3)       as soon as practicable, all material communications with stockholders or the financial community, including press releases, but in no event later than three (3) days after the date of each such communication;

 

(4)       as soon as practicable, (x) all material reports prepared for the Company by outside consultants, and (y) all reports prepared for the Company by outside legal counsel and auditors, but in no event later than three (3) days after receipt thereof by the Company, provided that the Company shall have no obligation to deliver to any Investor any report prepared by outside legal counsel to the extent such report is privileged communication and is subject to the attorney/client privilege, in the reasonable opinion of such legal counsel;

 

(5)       as soon as practicable (but in no event later than two (2) Business Days after any such communication), all material communications with and from United States federal or state or foreign regulatory agencies or other governmental or quasi-governmental authorities of any kind;

 

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(6)       as soon as practicable, notice of any material events, including any pending or threatened litigation and/or events that is reasonably likely to materially delay the advancement of the business objectives of the Company or any of its Subsidiaries, but in no event later than five (5) Business Days after the occurrence thereof; and

 

(7)       notice of any Material Adverse Effect as soon as practicable after upon the occurrence thereof, but in no event later than five (5) Business Days thereafter.

 

(ii)       The Company shall notify the Buyers in writing of (i) any default under any of the Company's agreements governing its Indebtedness and (ii) the receipt by the Company of any default notices in connection therewith, in each case promptly and in no event later than five (5) Business Days after the occurrence of any such default or the receipt of any such default notice.

 

(iii)       The Company shall permit each Buyer to visit and inspect the Company's properties, to examine its books of account, records, contracts and agreements and to discuss the Company's affairs, finances and accounts with its Chief Executive Officer or Chief Financial Officer, all at such times as may be reasonably requested by the Investor.

 

(iv)       The covenants set forth in this Section 4(q) shall terminate as to Buyers and be of no further force or effect upon the earlier of the Public Company Date and the time when no Notes are outstanding.

 

(r)        Closing Documents . On or prior to fourteen (14) calendar days after the Closing Date, the Company agrees to deliver, or cause to be delivered, to each Buyer and Kelley Drye & Warren LLP a complete closing set of the executed Transaction Documents, Notes and any other document required to be delivered to any party pursuant to Section 7 hereof or otherwise.

 

5.       REGISTER; LEGEND.

 

(a)        Register . The Company shall maintain at its principal executive offices (or such other office or agency of the Company as it may designate by notice to each holder of Notes), a register for the Notes in which the Company shall record the name and address of the Person in whose name the Notes have been issued (including the name and address of each transferee) and the principal amount of the Notes held by such Person. The Company shall keep the register open and available at all times during business hours for inspection of any Buyer or its legal representatives.

 

(b)        Legends . Each Buyer understands that the Notes have been issued pursuant to an exemption from registration or qualification under the 1933 Act and applicable state securities laws, and except as set forth below, the Notes shall bear any legend as required by the “blue sky” laws of any state and a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of such stock certificates):

 

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THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL TO THE HOLDER (IF REQUESTED BY THE COMPANY), IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD OR ELIGIBLE TO BE SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

 

6.       CONDITIONS TO THE COMPANY’S OBLIGATION TO SELL.

 

(a)       The obligation of the Company hereunder to issue and sell the Notes to each Buyer at the Closing is subject to the satisfaction, at or before the Closing Date, of each of the following conditions, provided that these conditions are for the Company’s sole benefit and may be waived by the Company at any time in its sole discretion by providing each Buyer with prior written notice thereof: 

 

(i)       Such Buyer shall have executed each of the other Transaction Documents to which it is a party and delivered the same to the Company.

 

(ii)       Such Buyer and each other Buyer shall have delivered to the Company the Purchase Price (less, in the case of any Buyer, the amounts withheld pursuant to Section 4(f)) for the Note being purchased by such Buyer at the Closing by wire transfer of immediately available funds in accordance with the Flow of Funds Letter.

 

(iii)       The representations and warranties of such Buyer shall be true and correct in all material respects as of the date when made and as of the Closing Date as though originally made at that time (except for representations and warranties that speak as of a specific date, which shall be true and correct as of such specific date), and such Buyer shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by such Buyer at or prior to the Closing Date.

 

7.       CONDITIONS TO EACH BUYER’S OBLIGATION TO PURCHASE.

 

(a)       The obligation of each Buyer hereunder to purchase its Note at the Closing is subject to the satisfaction, at or before the Closing Date, of each of the following conditions, provided that these conditions are for each Buyer’s sole benefit and may be waived by such Buyer at any time in its sole discretion by providing the Company with prior written notice thereof: 

 

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(i)       The Company and each Subsidiary (as the case may be) shall have duly executed and delivered to such Buyer each of the Transaction Documents to which it is a party and the Company shall have duly executed and delivered to such Buyer the Note (in such original principal amount as is set forth across from such Buyer’s name in column (3) of the Schedule of Buyers) being purchased by such Buyer at the Closing pursuant to this Agreement.

 

(ii)       The Company shall have delivered to such Buyer a certificate evidencing the formation and good standing of the Company in such entity’s jurisdiction of formation issued by the Secretary of State (or comparable office) of such jurisdiction of formation as of a date within ten (10) days of the Closing Date.

 

(iii)       The Company shall have delivered to such Buyer a certificate, in the form acceptable to such Buyer, executed by the Secretary of the Company and dated as of the Closing Date, as to (i) the resolutions consistent with Section 3(b) as adopted by the Company’s board of directors in a form reasonably acceptable to such Buyer, (ii) the Certificate of Incorporation of the Company and (iii) the Bylaws of the Company, each as in effect at the Closing.

 

(iv)       Each and every representation and warranty of the Company shall be true and correct as of the date when made and as of the Closing Date as though originally made at that time (except for representations and warranties that speak as of a specific date, which shall be true and correct as of such specific date) and the Company shall have performed, satisfied and complied in all respects with the covenants, agreements and conditions required to be performed, satisfied or complied with by the Company at or prior to the Closing Date. Such Buyer shall have received a certificate, duly executed by the Chief Executive Officer of the Company, dated as of the Closing Date, to the foregoing effect and as to such other matters as may be reasonably requested by such Buyer in the form acceptable to such Buyer.

 

(v)       The Company shall have obtained all governmental, regulatory or third party consents and approvals, if any, necessary for the sale of the Notes.

 

(vi)       No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or Governmental Entity of competent jurisdiction that prohibits the consummation of any of the transactions contemplated by the Transaction Documents.

 

(vii)       Since the date of execution of this Agreement, no event or series of events shall have occurred that reasonably would have or result in a Material Adverse Effect.

 

(viii)       Such Buyer shall have received a letter or other correspondence setting forth the wire amounts of each Buyer and the wire transfer instructions of the Company (the “ Flow of Funds Letter ”).

 

(ix)       The Company and its Subsidiaries shall have delivered to such Buyer such other documents, instruments or certificates relating to the transactions contemplated by this Agreement as such Buyer or its counsel may reasonably request.

 

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8.       TERMINATION.

 

In the event that the Closing shall not have occurred with respect to a Buyer within five (5) days of the date hereof, then such Buyer shall have the right to terminate its obligations under this Agreement with respect to itself at any time on or after the close of business on such date without liability of such Buyer to any other party; provided, however, (i) the right to terminate this Agreement under this Section 8 shall not be available to such Buyer if the failure of the transactions contemplated by this Agreement to have been consummated by such date is the result of such Buyer’s breach of this Agreement and (ii) the abandonment of the sale and purchase of the Notes shall be applicable only to such Buyer providing such written notice, provided further that no such termination shall affect any obligation of the Company under this Agreement to reimburse such Buyer for the expenses described in Section 4(f) above. Nothing contained in this Section 8 shall be deemed to release any party from any liability for any breach by such party of the terms and provisions of this Agreement or the other Transaction Documents or to impair the right of any party to compel specific performance by any other party of its obligations under this Agreement or the other Transaction Documents.

 

9.       MISCELLANEOUS.

 

(a)        Governing Law; Jurisdiction; Jury Trial . All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by the internal laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of New York. The Company hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in The City of New York, Borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or under any of the other Transaction Documents or with any transaction contemplated hereby or thereby, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Nothing contained herein shall be deemed or operate to preclude any Buyer from bringing suit or taking other legal action against the Company in any other jurisdiction to collect on the Company’s obligations to such Buyer or to enforce a judgment or other court ruling in favor of such Buyer. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR UNDER ANY OTHER TRANSACTION DOCUMENT OR IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT, ANY OTHER TRANSACTION DOCUMENT OR ANY TRANSACTION CONTEMPLATED HEREBY OR THEREBY.

 

(b)        Counterparts . This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. In the event that any signature is delivered by facsimile transmission or by an e-mail which contains a portable document format (.pdf) file of an executed signature page, such signature page shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such signature page were an original thereof.

 

(c)        Headings; Gender . The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. Unless the context clearly indicates otherwise, each pronoun herein shall be deemed to include the masculine, feminine, neuter, singular and plural forms thereof. The terms “including,” “includes,” “include” and words of like import shall be construed broadly as if followed by the words “without limitation.” The terms “herein,” “hereunder,” “hereof” and words of like import refer to this entire Agreement instead of just the provision in which they are found.

 

(d)        Severability; Maximum Payment Amounts . If any provision of this Agreement is prohibited by law or otherwise determined to be invalid or unenforceable by a court of competent jurisdiction, the provision that would otherwise be prohibited, invalid or unenforceable shall be deemed amended to apply to the broadest extent that it would be valid and enforceable, and the invalidity or unenforceability of such provision shall not affect the validity of the remaining provisions of this Agreement so long as this Agreement as so modified continues to express, without material change, the original intentions of the parties as to the subject matter hereof and the prohibited nature, invalidity or unenforceability of the provision(s) in question does not substantially impair the respective expectations or reciprocal obligations of the parties or the practical realization of the benefits that would otherwise be conferred upon the parties. The parties will endeavor in good faith negotiations to replace the prohibited, invalid or unenforceable provision(s) with a valid provision(s), the effect of which comes as close as possible to that of the prohibited, invalid or unenforceable provision(s). Notwithstanding anything to the contrary contained in this Agreement or any other Transaction Document (and without implication that the following is required or applicable), it is the intention of the parties that in no event shall amounts and value paid by the Company and/or any of its Subsidiaries (as the case may be), or payable to or received by any of the Buyers, under the Transaction Documents (including without limitation, any amounts that would be characterized as “interest” under applicable law) exceed amounts permitted under any applicable law. Accordingly, if any obligation to pay, payment made to any Buyer, or collection by any Buyer pursuant the Transaction Documents is finally judicially determined to be contrary to any such applicable law, such obligation to pay, payment or collection shall be deemed to have been made by mutual mistake of such Buyer, the Company and its Subsidiaries and such amount shall be deemed to have been adjusted with retroactive effect to the maximum amount or rate of interest, as the case may be, as would not be so prohibited by the applicable law. Such adjustment shall be effected, to the extent necessary, by reducing or refunding, at the option of such Buyer, the amount of interest or any other amounts which would constitute unlawful amounts required to be paid or actually paid to such Buyer under the Transaction Documents. For greater certainty, to the extent that any interest, charges, fees, expenses or other amounts required to be paid to or received by such Buyer under any of the Transaction Documents or related thereto are held to be within the meaning of “interest” or another applicable term to otherwise be violative of applicable law, such amounts shall be pro-rated over the period of time to which they relate.

 

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(e)        Entire Agreement; Amendments . This Agreement, the other Transaction Documents and the schedules and exhibits attached hereto and thereto and the instruments referenced herein and therein supersede all other prior oral or written agreements between the Buyers, the Company, its Subsidiaries, their affiliates and Persons acting on their behalf, including, without limitation, any transactions by any Buyer with respect to Common Stock or the Notes, and the other matters contained herein and therein, and this Agreement, the other Transaction Documents, the schedules and exhibits attached hereto and thereto and the instruments referenced herein and therein contain the entire understanding of the parties solely with respect to the matters covered herein and therein; provided, however, nothing contained in this Agreement or any other Transaction Document shall (or shall be deemed to) (i) have any effect on any agreements any Buyer has entered into with, or any instruments any Buyer has received from, the Company or any of its Subsidiaries prior to the date hereof with respect to any prior investment made by such Buyer in the Company or (ii) waive, alter, modify or amend in any respect any obligations of the Company or any of its Subsidiaries, or any rights of or benefits to any Buyer or any other Person, in any agreement entered into prior to the date hereof between or among the Company and/or any of its Subsidiaries and any Buyer, or any instruments any Buyer received from the Company and/or any of its Subsidiaries prior to the date hereof, and all such agreements and instruments shall continue in full force and effect. Except as specifically set forth herein or therein, neither the Company nor any Buyer makes any representation, warranty, covenant or undertaking with respect to such matters. For clarification purposes, the Recitals are part of this Agreement. No provision of this Agreement may be amended other than by an instrument in writing signed by the Company and the Required Holders (as defined below), and any amendment to any provision of this Agreement made in conformity with the provisions of this Section 9(e) shall be binding on all Buyers and holders of Notes; provided that no such amendment shall be effective to the extent that it (A) applies to less than all of the holders of the Notes then outstanding or (B) imposes any obligation or liability on any Buyer without such Buyer’s prior written consent (which may be granted or withheld in such Buyer’s sole discretion). No waiver shall be effective unless it is in writing and signed by an authorized representative of the waiving party, provided that the Required Holders may waive any provision of this Agreement, and any waiver of any provision of this Agreement made in conformity with the provisions of this Section 9(e) shall be binding on all Buyers and holders of Notes, provided that no such waiver shall be effective to the extent that it (1) applies to less than all of the holders of the Notes then outstanding (unless a party gives a waiver as to itself only) or (2) imposes any obligation or liability on any Buyer without such Buyer’s prior written consent (which may be granted or withheld in such Buyer’s sole discretion). No consideration (other than reimbursement of legal fees) shall be offered or paid to any Person to amend or consent to a waiver or modification of any provision of any of the Transaction Documents unless the same consideration also is offered to all of the parties to the Transaction Documents, all holders of the Notes. From the date hereof and while any Notes are outstanding, the Company shall not be permitted to receive any consideration from a Buyer or a holder of Notes that is not otherwise contemplated by the Transaction Documents in order to, directly or indirectly, induce the Company or any Subsidiary (i) to treat such Buyer or holder of Notes in a manner that is more favorable than to other similarly situated Buyers or holders of Notes, or (ii) to treat any Buyer(s) or holder(s) of Notes in a manner that is less favorable than the Buyer or holder of Notes that is paying such consideration; provided, however, that the determination of whether a Buyer has been treated more or less favorably than another Buyer shall disregard any securities of the Company purchased or sold by any Buyer. The Company has not, directly or indirectly, made any agreements with any Buyers relating to the terms or conditions of the transactions contemplated by the Transaction Documents except as set forth in the Transaction Documents. Without limiting the foregoing, the Company confirms that, except as set forth in this Agreement, no Buyer has made any commitment or promise or has any other obligation to provide any financing to the Company, any Subsidiary or otherwise. As a material inducement for each Buyer to enter into this Agreement, the Company expressly acknowledges and agrees that (x) no due diligence or other investigation or inquiry conducted by a Buyer, any of its advisors or any of its representatives shall affect such Buyer’s right to rely on, or shall modify or qualify in any manner or be an exception to any of, the Company’s representations and warranties contained in this Agreement or any other Transaction Document and (y) nothing contained in any of the Due Diligence Materials shall affect such Buyer’s right to rely on, or shall modify or qualify in any manner or be an exception to any of, the Company’s representations and warranties contained in this Agreement or any other Transaction Document. “ Required Holders ” means (I) prior to the Closing Date, each Buyer entitled to purchase Notes at the Closing and (II) on or after the Closing Date, holders of a majority of the aggregate principal amount of Notes then outstanding.

 

(f)        Notices . Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party) or electronic mail (provided that such sent email is kept on file (whether electronically or otherwise) by the sending party and the sending party does not receive an automatically generated message from the recipient's email server that such e-mail could not be delivered to such recipient); or (iii) one (1) Business Day after deposit with an overnight courier service with next day delivery specified, in each case, properly addressed to the party to receive the same. The addresses, facsimile numbers and e-mail addresses for such communications shall be:

 

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If to the Company:

 

Innovate Biopharmaceuticals Inc.
8480 Honeycutt Rd, Suite 120
Raleigh, NC 27615
Telephone: (919) 275-1933
Attention: President
E-Mail: corplegal@innovatebiopharma.com

 

With a copy (for informational purposes only) to:

 

Wilson Sonsini Goodrich & Rosati, P.C.:
12235 El Camino Real
San Diego, CA 92130
Telephone: (858) 350-2308
Facsimile: (858) 350-2399
Attention: Martin J. Waters
E-Mail: mwaters@wsgr.com

 

If to a Buyer, to its address, e-mail address and facsimile number set forth on the Schedule of Buyers, with copies to such Buyer’s representatives as set forth on the Schedule of Buyers,

 

with a copy (for informational purposes only) to:

 

Kelley Drye & Warren LLP
101 Park Avenue
New York, NY 10178
Telephone: (212) 808-7540
Facsimile: (212) 808-7897
Attention: Michael A. Adelstein, Esq.
E-mail: madelstein@kelleydrye.com

 

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or to such other address, e-mail address and/or facsimile number and/or to the attention of such other Person as the recipient party has specified by written notice given to each other party five (5) days prior to the effectiveness of such change, provided that Kelley Drye & Warren LLP shall only be provided copies of notices sent to the lead Buyer. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically generated by the sender’s facsimile machine or e-mail containing the time, date, recipient facsimile number and, with respect to each facsimile transmission, an image of the first page of such transmission or (C) provided by an overnight courier service shall be rebuttable evidence of personal service, receipt by facsimile or receipt from an overnight courier service in accordance with clause (i), (ii) or (iii) above, respectively.

 

(g)        Successors and Assigns . This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns, including any purchasers of any of the Notes. The Company shall not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Required Holders, including, without limitation, by way of a Fundamental Transaction (as defined in the Notes) (unless the Company is in compliance with the applicable provisions governing Fundamental Transactions set forth in the Notes). A Buyer may assign some or all of its rights hereunder in connection with any transfer of any of its Notes without the consent of the Company, in which event such assignee shall be deemed to be a Buyer hereunder with respect to such assigned rights.

 

(h)        No Third Party Beneficiaries . This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other Person, other than the Indemnitees referred to in Section 9(k).

 

(i)        Survival . The representations, warranties, agreements and covenants shall survive the Closing. Each Buyer shall be responsible only for its own representations, warranties, agreements and covenants hereunder.

 

(j)        Further Assurances . Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as any other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

 

(k)        Indemnification .

 

(i)       In consideration of each Buyer’s execution and delivery of the Transaction Documents and acquiring the Notes thereunder and in addition to all of the Company’s other obligations under the Transaction Documents, the Company shall defend, protect, indemnify and hold harmless each Buyer and each holder of any Notes and all of their stockholders, partners, members, officers, directors, employees and direct or indirect investors and any of the foregoing Persons’ agents or other representatives (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the “ Indemnitees ”) from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective of whether any such Indemnitee is a party to the action for which indemnification hereunder is sought), and including reasonable attorneys’ fees and disbursements (the “ Indemnified Liabilities ”), incurred by any Indemnitee as a result of, or arising out of, or relating to (i) any misrepresentation or breach of any representation or warranty made by the Company or any Subsidiary in any of the Transaction Documents, (ii) any breach of any covenant, agreement or obligation of the Company or any Subsidiary contained in any of the Transaction Documents or (iii) any cause of action, suit, proceeding or claim brought or made against such Indemnitee by a third party (including for these purposes a derivative action brought on behalf of the Company or any Subsidiary) or which otherwise involves such Indemnitee that arises out of or results from (A) the execution, delivery, performance or enforcement of any of the Transaction Documents, (B) any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of the issuance of the Notes, (C) any disclosure properly made by such Buyer pursuant to Section 4(h), or (D) the status of such Buyer or holder of the Notes either as an investor in the Company pursuant to the transactions contemplated by the Transaction Documents or as a party to this Agreement (including, without limitation, as a party in interest or otherwise in any action or proceeding for injunctive or other equitable relief). To the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law.

 

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(ii)       Promptly after receipt by an Indemnitee under this Section 9(k) of notice of the commencement of any action or proceeding (including any governmental action or proceeding) involving an Indemnified Liability, such Indemnitee shall, if a claim in respect thereof is to be made against the Company under this Section 9(k), deliver to the Company a written notice of the commencement thereof, and the Company shall have the right to participate in, and, to the extent the Company so desires, to assume control of the defense thereof with counsel mutually satisfactory to the Company and the Indemnitee; provided, however, that an Indemnitee shall have the right to retain its own counsel with the fees and expenses of such counsel to be paid by the Company if: (A) the Company has agreed in writing to pay such fees and expenses; (B) the Company shall have failed promptly to assume the defense of such Indemnified Liability and to employ counsel reasonably satisfactory to such Indemnitee in any such Indemnified Liability; or (C) the named parties to any such Indemnified Liability (including any impleaded parties) include both such Indemnitee and the Company, and such Indemnitee shall have been advised by counsel that a conflict of interest is likely to exist if the same counsel were to represent such Indemnitee and the Company (in which case, if such Indemnitee notifies the Company in writing that it elects to employ separate counsel at the expense of the Company, then the Company shall not have the right to assume the defense thereof and such counsel shall be at the expense of the Company), provided further, that in the case of clause (C) above the Company shall not be responsible for the reasonable fees and expenses of more than one (1) separate legal counsel for the Indemnitees. The Indemnitee shall reasonably cooperate with the Company in connection with any negotiation or defense of any such action or Indemnified Liability by the Company and shall furnish to the Company all information reasonably available to the Indemnitee which relates to such action or Indemnified Liability. The Company shall keep the Indemnitee reasonably apprised at all times as to the status of the defense or any settlement negotiations with respect thereto. The Company shall not be liable for any settlement of any action, claim or proceeding effected without its prior written consent, provided, however, that the Company shall not unreasonably withhold, delay or condition its consent. The Company shall not, without the prior written consent of the Indemnitee, consent to entry of any judgment or enter into any settlement or other compromise which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnitee of a release from all liability in respect to such Indemnified Liability or litigation, and such settlement shall not include any admission as to fault on the part of the Indemnitee. Following indemnification as provided for hereunder, the Company shall be subrogated to all rights of the Indemnitee with respect to all third parties, firms or corporations relating to the matter for which indemnification has been made. The failure to deliver written notice to the Company within a reasonable time of the commencement of any such action shall not relieve the Company of any liability to the Indemnitee under this Section 9(k), except to the extent that the Company is materially and adversely prejudiced in its ability to defend such action.

 

(iii)       The indemnification required by this Section 9(k) shall be made by periodic payments of the amount thereof during the course of the investigation or defense, within ten (10) days after bills are received or Indemnified Liabilities are incurred.

 

(iv)       The indemnity agreement contained herein shall be in addition to (A) any cause of action or similar right of the Indemnitee against the Company or others, and (B) any liabilities the Company may be subject to pursuant to the law.

 

(l)        Construction . The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. No specific representation or warranty shall limit the generality or applicability of a more general representation or warranty. Each and every reference to share prices, shares of Common Stock and any other numbers in this Agreement that relate to the Common Stock shall be automatically adjusted for any stock splits, stock dividends, stock combinations, recapitalizations or other similar transactions that occur with respect to the Common Stock after the date of this Agreement. It is expressly understood and agreed that for all purposes of this Agreement, and without implication that the contrary would otherwise be true, neither transactions nor purchases nor sales shall include the location and/or reservation of borrowable shares of Common Stock.

 

(m)        Remedies . Each Buyer and in the event of assignment by Buyer of its rights and obligations hereunder, each holder of Notes, shall have all rights and remedies set forth in the Transaction Documents and all rights and remedies which such holders have been granted at any time under any other agreement or contract and all of the rights which such holders have under any law. Any Person having any rights under any provision of this Agreement shall be entitled to enforce such rights specifically (without posting a bond or other security), to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law. Furthermore, the Company recognizes that in the event that it or any Subsidiary fails to perform, observe, or discharge any or all of its or such Subsidiary’s (as the case may be) obligations under the Transaction Documents, any remedy at law would inadequate relief to the Buyers. The Company therefore agrees that the Buyers shall be entitled to specific performance and/or temporary, preliminary and permanent injunctive or other equitable relief from any court of competent jurisdiction in any such case without the necessity of proving actual damages and without posting a bond or other security. The remedies provided in this Agreement and the other Transaction Documents shall be cumulative and in addition to all other remedies available under this Agreement and the other Transaction Documents, at law or in equity (including a decree of specific performance and/or other injunctive relief).

 

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(n)        Withdrawal Right . Notwithstanding anything to the contrary contained in (and without limiting any similar provisions of) the Transaction Documents, whenever any Buyer exercises a right, election, demand or option under a Transaction Document and the Company or any Subsidiary does not timely perform its related obligations within the periods therein provided, then such Buyer may rescind or withdraw, in its sole discretion from time to time upon written notice to the Company or such Subsidiary (as the case may be), any relevant notice, demand or election in whole or in part without prejudice to its future actions and rights.

 

(o)        Payment Set Aside; Currency . To the extent that the Company makes a payment or payments to any Buyer hereunder or pursuant to any of the other Transaction Documents or any of the Buyers enforce or exercise their rights hereunder or thereunder, and such payment or payments or the proceeds of such enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to the Company, a trustee, receiver or any other Person under any law (including, without limitation, any bankruptcy law, foreign, state or federal law, common law or equitable cause of action), then to the extent of any such restoration the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred. Unless otherwise expressly indicated, all dollar amounts referred to in this Agreement and the other Transaction Documents are in United States Dollars (“ U.S. Dollars ”), and all amounts owing under this Agreement and all other Transaction Documents shall be paid in U.S. Dollars. All amounts denominated in other currencies (if any) shall be converted into the U.S. Dollar equivalent amount in accordance with the Exchange Rate on the date of calculation. “ Exchange Rate ” means, in relation to any amount of currency to be converted into U.S. Dollars pursuant to this Agreement, the U.S. Dollar exchange rate as published in the Wall Street Journal on the relevant date of calculation.

 

(p)        Judgment Currency .

 

(i)       If for the purpose of obtaining or enforcing judgment against the Company in connection with this Agreement or any other Transaction Document in any court in any jurisdiction it becomes necessary to convert into any other currency (such other currency being hereinafter in this Section 9(p) referred to as the “ Judgment Currency ”) an amount due in US Dollars under this Agreement, the conversion shall be made at the Exchange Rate prevailing on the Business Day immediately preceding:

 

(1)       the date actual payment of the amount due, in the case of any proceeding in the courts of New York or in the courts of any other jurisdiction that will give effect to such conversion being made on such date: or

 

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(2)       the date on which the foreign court determines, in the case of any proceeding in the courts of any other jurisdiction (the date as of which such conversion is made pursuant to this Section 9(p)(i)(2) being hereinafter referred to as the “ Judgment Conversion Date ”).

 

(ii)       If in the case of any proceeding in the court of any jurisdiction referred to in Section 9(p)(i)(2) above, there is a change in the Exchange Rate prevailing between the Judgment Conversion Date and the date of actual payment of the amount due, the applicable party shall pay such adjusted amount as may be necessary to ensure that the amount paid in the Judgment Currency, when converted at the Exchange Rate prevailing on the date of payment, will produce the amount of US Dollars which could have been purchased with the amount of Judgment Currency stipulated in the judgment or judicial order at the Exchange Rate prevailing on the Judgment Conversion Date.

 

(iii)       Any amount due from the Company under this provision shall be due as a separate debt and shall not be affected by judgment being obtained for any other amounts due under or in respect of this Agreement or any other Transaction Document.

 

(q)        Independent Nature of Buyers’ Obligations and Rights . The obligations of each Buyer under the Transaction Documents are several and not joint with the obligations of any other Buyer, and no Buyer shall be responsible in any way for the performance of the obligations of any other Buyer under any Transaction Document. Nothing contained herein or in any other Transaction Document, and no action taken by any Buyer pursuant hereto or thereto, shall be deemed to constitute the Buyers as, and the Company acknowledges that the Buyers do not so constitute, a partnership, an association, a joint venture or any other kind of group or entity, or create a presumption that the Buyers are in any way acting in concert or as a group or entity, and the Company shall not assert any such claim with respect to such obligations or the transactions contemplated by the Transaction Documents or any matters, and the Company acknowledges that the Buyers are not acting in concert or as a group, and the Company shall not assert any such claim, with respect to such obligations or the transactions contemplated by the Transaction Documents. The decision of each Buyer to purchase Notes pursuant to the Transaction Documents has been made by such Buyer independently of any other Buyer. Each Buyer acknowledges that no other Buyer has acted as agent for such Buyer in connection with such Buyer making its investment hereunder and that no other Buyer will be acting as agent of such Buyer in connection with monitoring such Buyer’s investment in the Notes or enforcing its rights under the Transaction Documents. The Company and each Buyer confirms that each Buyer has independently participated with the Company and its Subsidiaries in the negotiation of the transaction contemplated hereby with the advice of its own counsel and advisors. Each Buyer shall be entitled to independently protect and enforce its rights, including, without limitation, the rights arising out of this Agreement or out of any other Transaction Documents, and it shall not be necessary for any other Buyer to be joined as an additional party in any proceeding for such purpose. The use of a single agreement to effectuate the purchase and sale of the Notes contemplated hereby was solely in the control of the Company, not the action or decision of any Buyer, and was done solely for the convenience of the Company and its Subsidiaries and not because it was required or requested to do so by any Buyer. It is expressly understood and agreed that each provision contained in this Agreement and in each other Transaction Document is between the Company, each Subsidiary and a Buyer, solely, and not between the Company, its Subsidiaries and the Buyers collectively and not between and among the Buyers.

 

[ signature pages follow ]

 

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IN WITNESS WHEREOF, each Buyer and the Company have caused their respective signature page to this Agreement to be duly executed as of the date first written above.

 

  COMPANY:
     
  INNOVATE BIOPHARMACEUTICALS INC.
     
     
  By: /s/ Christopher Prior, Ph.D.
    Name: Christopher Prior, Ph.D.
    Title: Chief Executive Officer

 

 

 

 

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective signature page to this Agreement to be duly executed as of the date first written above.

 

  BUYER:
     
  Gustavia capital partners llc
     
     
     
  By: /s/ Eli Hassett
    Name:
    Title:

 

 

 

 

SCHEDULE OF BUYERS

 

(1)   (2)   (3)   (4)   (5)
                 
Buyer   Address and Facsimile Number   Original
Principal
Amount of Notes
  Purchase Price   Legal Representative’s
Address and Facsimile Number
                 
Gustavia Capital Partners LLC   123 Grove Avenue
Suite 101
Cedarhurst, New York 11516
  $4,800,000   $3,000,000   Kelley Drye & Warren LLP
101 Park Avenue
New York, NY 10178
Telephone: (212) 808-7540
Facsimile: (212) 808-7897
Attention: Michael A. Adelstein, Esq.

 

 

 

Exhibit 10.3

 

FORM OF

INNOVATE BIOPHARMACEUTICALS, INC.

DIRECTOR INDEMNIFICATION AGREEMENT

 

This Director Indemnification Agreement (this “ Agreement ”) is entered into effective as of _______________ __, 2018 by and between Innovate Biopharmaceuticals, Inc., a Delaware corporation (the “ Company ”), and the director of the Company identified on the signature page hereto (the “ Director ” and collectively with such Director’s Affiliated Persons, as defined below, the “ Indemnitees ”).

 

RECITALS

 

A.           The Company and Director recognize the continued difficulty in obtaining liability insurance for its directors, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance.

 

B.           The Company and Director further recognize the substantial increase in corporate litigation in general, subjecting directors to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited.

 

C.           The current protection available to directors may not be adequate under the present circumstances, and directors, including the Director, may not be willing to continue to serve or be associated with the Company in such capacities without additional protection for themselves and their Affiliated Persons.

 

D.           The Company (i) desires to attract and retain the involvement of highly qualified persons, such as Indemnitees, to serve and be associated with the Company, and (ii) accordingly, wishes to provide for the indemnification and advancement of expenses to the Director and the Director’s Affiliated Persons as provided herein.

 

     

 

 

AGREEMENT

 

NOW, THEREFORE, the Company and the Director hereby agree as follows:

 

1.            Indemnification .

 

(a)           Indemnification of Expenses . The Company shall indemnify and hold harmless the Director and all of the Director’s Affiliated Persons (as defined below) to the fullest extent permitted by law if any such Indemnitee was or is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, any threatened, pending or completed action, suit, proceeding or alternative dispute resolution mechanism, or any hearing, inquiry or investigation that such Indemnitee in good faith believes might lead to the institution of any such action, suit, proceeding or alternative dispute resolution mechanism, whether civil, criminal, administrative, investigative or other (hereinafter a “ Claim ”) by reason of (or arising in part out of) any event or occurrence related to the fact that Director is or was (or is alleged to be or to have been) a director, controlling person, fiduciary or other agent or affiliate of the Company, or any subsidiary of the Company, or is or was (or is alleged to be or to have been) serving at the request of the Company as a director, officer, employee, fiduciary or other agent or affiliate of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action or inaction on the part of such Indemnitee while serving (or allegedly serving) in such capacity, including, without limitation, any such Claim under the Securities Act of 1933, as amended (the “ Securities Act ”), the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”), or any other federal or state statutory law or regulation, or any such Claim, at common law or otherwise, that relates directly or indirectly (i) to the registration, purchase, sale or ownership of any securities of the Company or (ii) to any fiduciary obligation owed with respect to the Company and its stockholders (hereinafter an “ Indemnification Event ”), against any and all losses, claims, damages, expenses and liabilities, joint or several, incurred in connection with such Claim (including any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) any such Claim and against any and all expenses, including attorneys’ fees and all other costs, expenses and obligations incurred in connection with investigating, defending a witness in or participating in (including on appeal), or preparing to defend, be a witness in or participate in, any action, suit, proceeding, alternative dispute resolution mechanism, hearing, inquiry or investigation related to such Claim), judgments, fines, penalties and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) of such Claim and any federal, state, local or foreign taxes imposed on Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement (collectively, hereinafter “ Expenses ”), including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses. The Company shall make such payment of Expenses as soon as practicable but in any event no later than ten (10) days after written demand by the Indemnitee therefor is presented to the Company.

 

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(b)           Reviewing Party . Notwithstanding the foregoing, (i) the obligations of the Company under Section 1(a) shall be subject to the condition that the Reviewing Party (as defined in Section 10(e) hereof) shall not have determined (in a written opinion, in any case in which the Independent Legal Counsel referred to in Section 10(d) hereof is involved) that Indemnitee would not be permitted to be indemnified under applicable law, and (ii) the obligation of the Company to make an advance payment of Expenses to Indemnitee pursuant to Section 2(a) (an “Expense Advance” ) shall be subject to the condition that, if, when and to the extent that the Reviewing Party determines that Indemnitee would not be permitted to be so indemnified under applicable law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid; provided , however , that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law or hereunder, any determination made by the Reviewing Party that Indemnitee would not be permitted to be indemnified under applicable law or hereunder shall not be binding and Indemnitee shall not be required to reimburse the Company for any Expense Advance until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). Indemnitees’ obligation to reimburse the Company for any Expense Advance shall be unsecured and no interest shall be charged thereon. If there has not been a Change in Control (as defined in Section 10(c) hereof), the Reviewing Party shall be selected by the Board of Directors with the approval of the Indemnitee (which approval shall not be unreasonably withheld), and if there has been such a Change in Control (other than a Change in Control (i) which has been approved by a majority of the Company’s Board of Directors prior to such Change in Control or (ii) following which a majority of the Board of Directors of the Company (or the ultimate parent entity thereof) is comprised of directors who were directors of the Company immediately prior to the Change in Control), the Reviewing Party shall be the Independent Legal Counsel referred to in Section 10(d) hereof subject to the approval of the Indemnitee (which approval shall not be unreasonably withheld). Such counsel, among other things, shall render its written opinion to the Company and Indemnitees as to whether and to what extent Indemnitees would be permitted to be indemnified under applicable law. The Company agrees to pay the reasonable fees of the Independent Legal Counsel referred to above and to fully indemnify such counsel against any and all expenses (including attorneys’ fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. If there has been no determination by the Reviewing Party or if the Reviewing Party determines that Indemnitee substantively would not be permitted to be indemnified in whole or in part under applicable law, Indemnitee shall have the right to commence litigation seeking an initial determination by the court or challenging any such determination by the Reviewing Party or any aspect thereof, including the legal or factual bases therefor, and the Company hereby consents to service of process and to appear in any such proceeding. Any determination by the Reviewing Party otherwise (e.g., the court in the case of litigation by Indemnitee) shall be conclusive and binding on the Company and Indemnitee.

 

(c)           Contribution . If the indemnification provided for in Section 1(a) above for any reason is held by a court of competent jurisdiction to be unavailable to an Indemnitee in respect of any Claims referred to therein, then the Company, in lieu of indemnifying such Indemnitee thereunder, shall contribute to the amount paid or payable by such Indemnitee as a result of such losses, claims, damages, expenses or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Indemnitees, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Indemnitee in connection with the action or inaction which resulted in such losses, claims, damages, expenses or liabilities, as well as any other relevant equitable considerations. In connection with the registration of the Company’s securities, the relative benefits received by the Company and any Indemnitee shall be deemed to be in the same respective proportions that the net proceeds from the offering (before deducting expenses) received by the Company and the Indemnitee, in each case as set forth in the table on the cover page of the applicable prospectus, bear to the aggregate public offering price of the securities so offered. The relative fault of the Company and any Indemnitee shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Indemnitee and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.

 

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The Company and each Indemnitee agree that it would not be just and equitable if contribution pursuant to this Section 1(c) were determined by pro rata or per capita allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. In connection with the registration of the Company’s securities, in no event shall an Indemnitee be required to contribute any amount under this Section 1(c) in excess of the lesser of (i) that proportion of the total of such losses, claims, damages or liabilities indemnified against equal to the proportion of the total securities sold under such registration statement which is being sold by such Indemnitee, or (ii) the net proceeds received by such Indemnitee from its sale of securities under such registration statement. No person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not found guilty of such fraudulent misrepresentation.

 

(d)           Survival Regardless of Investigation . The indemnification and contribution provided for in this Section 1 will remain in full force and effect regardless of any investigation made by or on behalf of the Indemnitees or any officer, director, employee, agent or controlling person of the Indemnitees.

 

(e)           Mandatory Payment of Expenses . Notwithstanding any other provision of this Agreement, to the extent that an Indemnitee has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in the defense of any action, suit, proceeding, inquiry or investigation referred to in Section (1)(a) hereof or in the defense of any claim, issue or matter therein, such Indemnitee shall be indemnified against all Expenses incurred by such Indemnitee in connection therewith.

 

2.            Expenses; Indemnification Procedure .

 

(a)           Advancement of Expenses . The Company shall advance all Expenses incurred by any Indemnitee. The advances to be made hereunder shall be paid by the Company to the Indemnitee as soon as practicable but in any event no later than ten (10) days after written demand by such Indemnitee therefor to the Company.

 

(b)           Notice/Cooperation by Indemnitees . Each Indemnitee shall, as a condition precedent to Indemnitee’s right to be indemnified under this Agreement, give the Company notice in writing as soon as practicable of any Claim made against Indemnitee for which indemnification will or could be sought under this Agreement. In addition, each Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee’s power.

 

(c)           No Presumptions; Burden of Proof . For purposes of this Agreement, the termination of any Claim by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere , or its equivalent, shall not create a presumption that any Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law. In addition, neither the failure of the Reviewing Party to have made a determination as to whether an Indemnitee has met any particular standard of conduct or had any particular belief, nor an actual determination by the Reviewing Party that the Indemnitee has not met such standard of conduct or did not have such belief, prior to the commencement of legal proceedings by Indemnitee to secure a judicial determination that the Indemnitee should be indemnified under applicable law, shall be a defense to the Indemnitee’s claim or create a presumption that the Indemnitee has not met any particular standard of conduct or did not have any particular belief. In connection with any determination by the Reviewing Party or otherwise as to whether the Indemnitee is entitled to be indemnified hereunder, the burden of proof shall be on the Company to establish that the Indemnitee is not so entitled.

 

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(d)           Notice to Insurers . If, at the time of the receipt by the Company of a notice of a Claim pursuant to Section 2(b) hereof, the Company has liability insurance in effect which may cover such Claim, the Company shall give prompt notice of the commencement of such Claim to the insurers in accordance with the procedures set forth in the respective policies. If the Company has not paid such amounts directly, the Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of each Indemnitee, all amounts payable as a result of such action, suit, proceeding, inquiry or investigation in accordance with the terms of such policies.

 

(e)           Selection of Counsel . In the event the Company shall be obligated hereunder to pay the Expenses of any Claim, the Company shall be entitled to assume the defense of such Claim, with counsel approved by the applicable Indemnitee, which approval shall not be unreasonably withheld, upon the delivery to such Indemnitee of written notice of its election to do so. After delivery of such notice, approval of such counsel by the Indemnitee and the retention of such counsel by the Company, the Company will not be liable to such Indemnitee under this Agreement for any fees of counsel subsequently incurred by such Indemnitee with respect to the same Claim; provided that, (i) the Indemnitee shall have the right to employ such Indemnitee’s counsel in any such Claim at the Indemnitee’s expense and (ii) if (A) the employment of counsel by the Indemnitee has been previously authorized by the Company, (B) such Indemnitee shall have reasonably concluded that there is an actual or potential conflict of interest between the Company and such Indemnitee in the conduct of any such defense, or (C) the Company shall not continue to retain such counsel to defend such Claim, then the fees and expenses of the Indemnitee’s counsel shall be at the expense of the Company. As long as the Company has otherwise complied with the terms hereof, the Company shall have the right to conduct such defense as it sees fit in its sole discretion, including the right to settle any claim, action or proceeding against any Indemnitee without the consent of such Indemnitee, provided such settlement includes a full release of the Indemnitee by the claimant from all liabilities or potential liabilities under such claim.

 

3.            Additional Indemnification Rights; Nonexclusivity .

 

(a)           Scope . The Company hereby agrees to indemnify each Indemnitee to the fullest extent permitted by law and in accordance with the terms hereof, notwithstanding that such indemnification may not be specifically authorized by the Company’s Articles of Incorporation, the Company’s Bylaws or by statute. In the event of any change after the date of this Agreement in any applicable law, statute or rule which expands the right of a Delaware corporation to indemnify a member of its Board of Directors, it is the intent of the parties hereto that each Indemnitee shall enjoy by this Agreement the greater benefits afforded by such change. In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its Board of Directors or agent or fiduciary, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties’ rights and obligations hereunder except as set forth in Section 8(a) hereof.

 

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(b)           Nonexclusivity . The indemnification provided by this Agreement shall be in addition to any rights to which any Indemnitee may be entitled under the Company’s Certificate of Incorporation, its Bylaws, any agreement, any vote of stockholders or disinterested directors, the Delaware Corporations Code, or otherwise. The indemnification provided under this Agreement shall continue as to each Indemnitee for any action such Indemnitee took or did not take while serving in an indemnified capacity even though the Indemnitee may have ceased to serve in such capacity.

 

4.            No Duplication of Payments . The Company shall not be liable under this Agreement to make any payment in connection with any Claim made against any Indemnitee to the extent such Indemnitee has otherwise actually received payment (under any insurance policy, Articles of Incorporation, the Bylaws or otherwise) of the amounts otherwise indemnifiable hereunder.

 

5.            Partial Indemnification . If any Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for any portion of Expenses incurred in connection with any Claim, but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such Expenses to which such Indemnitee is entitled.

 

6.            Mutual Acknowledgment . The Company and each Indemnitee acknowledge that in certain instances, Federal law or applicable public policy may prohibit the Company from indemnifying its directors, controlling persons, fiduciaries or other agents or affiliates under this Agreement or otherwise. Each Indemnitee understands, acknowledges and agrees that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company’s rights under public policy to indemnify the Indemnitees, notwithstanding any provision hereof to the contrary.

 

7.            Liability Insurance . To the extent the Company maintains liability insurance applicable to directors, officers, employees, control persons, fiduciaries or other agents and affiliates, the Indemnitee shall be covered by such policies in such a manner as to provide to the Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company’s directors, if such Indemnitee is a director, or of the Company’s officers, if such Indemnitee is not a director of the Company but is an officer; or of the Company’s controlling persons, fiduciaries or other agents or affiliates, if such Indemnitee is not an Officer or director but is a control person, fiduciary, agent or affiliate.

 

8.            Exceptions . Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement:

 

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(a)           Excluded Action or Omissions . To indemnify any Indemnitee for any intentional malfeasance by the Indemnitee or any act undertaken by the Indemnitee where the Indemnitee did not in good faith believe the Indemnitee was acting in the best interests of the Company, or for any other acts, omissions or transactions from which the Indemnitee may not be relieved of liability under applicable law;

 

(b)           Claims Initiated by Indemnitee . To indemnify or advance expenses to any Indemnitee with respect to Claims initiated or brought voluntarily by such Indemnitee and not by way of defense, except (i) with respect to actions or proceedings to establish or enforce a right to indemnify under this Agreement or any other agreement or insurance policy or under the Company’s Certificate of Incorporation or Bylaws now or hereafter in effect relating to Claims for Indemnification Events, (ii) in specific cases if the Board of Directors has approved the initiation or bringing of such Claim, or (iii) as otherwise required under the Delaware Corporations Code, regardless of whether such Indemnitee ultimately is determined to be entitled to such indemnification, advance expense payment or insurance recovery, as the case may be;

 

(c)           Lack of Good Faith . To indemnify any Indemnitee for any expenses incurred by such Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous; or

 

(d)           Claims Under Section 16(b) . To indemnify any Indemnitee for expenses and the payment of profits arising from the purchase and sale by such Indemnitee of securities in violation of Section 16(b) of the Exchange Act or any similar successor statute.

 

9.           [Intentionally Omitted.]

 

10.          Construction of Certain Phrases .

 

(a)          For the purposes of this Agreement, an " Affiliated Person " of an Indemnitee shall include any director, officer, employee, controlling person (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act), agent or fiduciary of the Indemnitee, any stockholder of the Company for whom Indemnitee serves as a director, officer, employee, controlling person, agent or fiduciary, and any partnership, corporation, limited liability company, association, joint stock company, trust or joint venture controlling, controlled by or under common control with such a stockholder. For these purposes, “ control” means the possession, directly or indirectly, of the power to direct management and policies of a person or entity, whether through the ownership of voting securities, contract or otherwise.

 

(b)          For purposes of this Agreement, references to the “ Company ” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, agents, fiduciaries and other Affiliated Persons, so that if Indemnitee is or was a director, officer, employee, agent, control person, fiduciary or an Affiliated Person of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, control person, agent or fiduciary or another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, such Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as such Indemnitee would have with respect to such constituent corporation if its separate existence had continued.

 

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(c)          For purposes of this Agreement a “ Change in Control ” shall be deemed to have occurred if after the date of this Agreement (i) any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, (A) becomes the beneficial owner, directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s then outstanding Voting Securities, or (B) becomes the “beneficial owner” (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing more than 50% of the total voting power represented by the Company’s then outstanding Voting Securities, (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors 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 period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 60% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of (in one transaction or a series of transactions) all or substantially all of the Company’s assets.

 

(d)          For purposes of this Agreement, “ Independent Legal Counsel ” shall mean an attorney or firm of attorneys, selected in accordance with the provisions of Section 1(b) hereof, who shall not have otherwise performed services for the Company or any Indemnitee within the last three years (other than with respect to matters concerning the right of any Indemnitee under this Agreement, or of other indemnitees under similar indemnity agreements).

 

(e)          For purposes of this Agreement, a “ Reviewing Party ” shall mean any appropriate person or body consisting of a member or members of the Company’s Board of Directors or any other person or body appointed by the Board of Directors who is not a party to the particular Claim for which an Indemnitee is seeking indemnification, or Independent Legal Counsel.

 

(f)          For purposes of this Agreement, “ Voting Securities ” shall mean any securities of the Company that vote generally in the election of directors.

 

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11.          Company as Primary Indemnitor . Notwithstanding anything to the contrary in this Agreement, the Company hereby acknowledges that an Indemnitee may have certain rights to indemnification, advancement of expenses and/or insurance provided by other sources. The Company hereby agrees with respect to any Indemnification Event (i) that it (or, to the extent applicable, its insurance provider) is the indemnitor of first resort (i.e., its obligations to an Indemnitee are primary and any obligation of such other sources to advance expenses or to provide indemnification for the same expenses or liabilities incurred by such Indemnitee are secondary) and (ii) that it shall be required to advance the full amount of Expenses incurred by an Indemnitee and shall be liable for the full amount of all Expenses to the extent legally permitted and as required by the terms of this Agreement without regard to any rights an Indemnitee may have against such other sources. The Company further agrees that no advancement or payment by such other sources on behalf of an Indemnitee with respect to any Claim for which such Indemnitee has sought indemnification from the Company shall affect the foregoing, and such other sources shall have a right of contribution and/or be subrogated to the extent of such advancement or payment to all of the rights of recovery of such Indemnitee against the Company with respect to the Indemnification Event.

 

12.          Counterparts . This Agreement may be executed in one or more counterparts, each of which shall constitute an original.

 

13.          Binding Effect; Successors and Assigns . This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns, including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Company (and the Company may assign its rights and obligations under this Agreement in connection with any such transaction without the consent of any Indemnitee), spouses, heirs, and personal and legal representatives. The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all, substantially all, or a substantial part, of the business and/or assets of the Company, by written agreement in form and substance satisfactory to each Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. This Agreement shall continue in effect with respect to Claims relating to Indemnification Events regardless of whether any Indemnitee continues to serve as a director, officer, employee, agent, controlling person, or fiduciary of the Company or of any other enterprise at the Company’s request.

 

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14.          Attorneys’ Fees . Subject to the other provisions of this Agreement, in the event that any action is instituted by an Indemnitee under this Agreement or under any liability insurance policies maintained by the Company to enforce or interpret any of the terms hereof or thereof, any Indemnitee shall be entitled to be paid all expenses (including attorneys’ fees and all other costs, expenses and obligations incurred in connection with investigating, defending a witness in or participating in (including on appeal), or preparing to defend, be a witness in or participate in, any such action) incurred by such Indemnitee with respect to such action, regardless of whether such Indemnitee is ultimately successful in such action, and unless, as part of such action, a court of competent jurisdiction determines that each of the material assertions made by Indemnitee as a basis for such action were not made in good faith or were frivolous. In connection with such action, Indemnitee shall be entitled to the advancement of expenses (including attorneys’ fees and all other costs, expenses and obligations incurred in connection investigating, defending a witness in or participating in (including on appeal), or preparing to defend, be a witness in or participate in, any such action) with respect to such action, unless, as a part of such action, a court of competent jurisdiction over such action determines that each of the material assertions made by such Indemnitee as a basis for such action was not made in good faith or was frivolous. In the event of an action instituted by or in the name of the Company under this Agreement to enforce or interpret any of the terms of this Agreement, the Indemnitee shall be entitled to be paid all expenses (including attorneys’ fees and all other costs, expenses and obligations incurred in connection investigating, defending a witness in or participating in (including on appeal), or preparing to defend, be a witness in or participate in, any such action) incurred by such Indemnitee in defense of such action (including costs and expenses incurred with respect to Indemnitee counterclaims and cross-claims made in such action), and shall be entitled to the advancement of expenses (including attorneys’ fees and all other costs, expenses and obligations incurred in connection investigating, defending a witness in or participating in (including on appeal), or preparing to defend, be a witness in or participate in, any such action) with respect to such action, unless, as a part of such action, a court having jurisdiction over such action determines that each of such Indemnitee’s material defenses to such action was made in bad faith or was frivolous.

 

15.          Notice . All notices and other communications required or permitted hereunder shall be in writing and shall be effective upon the earlier of receipt or (a) five (5) days after deposit with the U.S. Postal Service or other applicable postal service, if delivered by first class mail, postage prepaid, (b) upon delivery, if delivered by hand, (c) one business day after the business day of deposit with Federal Express or similar overnight courier, freight prepaid, or (d) one business day after the day of delivery by facsimile transmission, if deliverable by facsimile transmission, with copy by first class mail, postage prepaid, and shall be addressed if to an Indemnitee at the Indemnitee’s address as set forth beneath the Indemnitee’s signature to this Agreement, and if to the Company at the address of its principal corporate offices (attention: Chief Executive Officer) or at such other address as such party may designate by ten days’ advance written notice to the other party hereto.

 

16.          Consent to Jurisdiction . The Company and each Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be commenced, prosecuted and continued only in courts located in Wilmington, Delaware, which shall be the exclusive and only proper forum for adjudicating such a claim.

 

17.          Severability . The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. Furthermore, to the fullest extent possible, the provisions of this Agreement (including, without limitations, each portion of this Agreement containing any provision held to be invalid, void or otherwise unenforceable, that is not itself invalid, void or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable.

 

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18.          Choice of Law . This Agreement shall be governed by and its provisions construed and enforced in accordance with the laws of the State of Delaware, without regard to the conflict of laws principles thereof.

 

19.          Subrogation . In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of each Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suite to enforce such rights.

 

20.          Third Party Beneficiaries . Each Indemnitee is an intended third party beneficiary of this Agreement.

 

21.          Amendment and Termination . No amendment, modification, termination or cancellation of this Agreement shall be effective unless it is in writing signed by the Company and the Director, whereupon all Indemnitees shall be bound. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.

 

22.          Integration and Entire Agreement . This Agreement sets forth the entire understanding between the parties hereto and supersedes and merges all previous written and oral negotiations, commitments, understandings and agreements relating to the subject matter hereof between the parties hereto, including, but not limited to, any Indemnification Agreement executed by the parties hereto prior to the date hereof.

 

[Signature page follows.]

 

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

 

COMPANY INNOVATE BIOPHARMACEUTICALS, INC. ,
  a Delaware corporation

 

  By:   

 

DIRECTOR  
  Signature

  

  Name:  

 

  Address:  

 

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Exhibit 99.1

 

 

CORRECTING and REPLACING -- Innovate Biopharmaceuticals Announces Successful Merger Completion

 

RALEIGH, N.C., Jan. 30, 2018 (GLOBE NEWSWIRE) -- In a release issued under the same headline earlier today by Innovate Biopharmaceuticals, Inc. (Nasdaq:INNT) please note that the stock symbol for Monster Digital, Inc. has been added to the end of the first bullet point. The corrected release follows:

 

Innovate Biopharmaceuticals Announces Successful Merger Completion

 

· Completion of Merger with Monster Digital, Inc. (Nasdaq:MSDI)

· Shares of combined company will begin trading on Nasdaq with new ticker INNT and will reflect a 1 for 10 reverse split on Wednesday, January 31, 2018

· Concurrent financing of more than $21 million

· Phase 3 clinical trials for larazotide acetate (INN-202) for celiac disease expected to commence Q2-2018

 

Innovate Biopharmaceuticals, Inc. (Nasdaq:INNT) a clinical stage biotechnology company focused on developing novel autoimmune and inflammation therapeutics, announced the completion of its merger (the “Merger”) with Monster Digital, Inc. today. In connection with the completed Merger, Monster Digital, Inc. was renamed Innovate Biopharmaceuticals, Inc. Innovate’s rich, late-stage clinical pipeline focuses on addressing unmet needs in diseases such as celiac disease, inflammatory bowel disease (IBD) and nonalcoholic steatohepatitis (NASH). Innovate Biopharmaceuticals shares will continue to trade under Monster Digital’s ticker MSDI on Tuesday, January 30, 2018, and, during such time, Nasdaq share numbers will not reflect the 1 for 10 reverse split that occurred on January 30, 2018. Innovate Biopharmaceuticals shares will commence trading on Nasdaq with the new ticker INNT and will reflect the 1 for 10 reverse split in trading on Wednesday, January 31, 2018.

 

Commenting on the Merger, Innovate’s CEO, Christopher Prior, Ph.D., stated: “We intend to use the proceeds from the concurrent financing to advance our celiac disease drug candidate into Phase 3 clinical trials with the goal of bringing a much-needed therapy to market for a disease that affects approximately 1% of the population. In addition, we believe that as a public entity we will be able to engage a wider range of investors, which will allow us to advance our mild-to-moderate ulcerative colitis combination therapy into Phase 2 trials and to expand our pipeline.”

 

Jay Madan, founder and president, of Innovate remarked, “It’s an exciting transition for Innovate as we strive to become a leader in autoimmune and inflammatory drug development for diseases with unmet medical needs. With the continued support from our existing investors, and now with access to the capital markets, our main focus will be rapidly progressing our clinical assets.”

 

H.C. Wainwright & Co. acted as lead placement agent and GP Nurmenkari, Inc. acted as co-lead placement agent in connection with the concurrent financing. Intuitive Venture Partners acted as exclusive financial advisor for the concurrent financing transaction. Piper Jaffray acted as Innovate’s exclusive financial advisor for the merger, and Wilson Sonsini Goodrich & Rosati, P.C. acted as Innovate’s legal counsel. The Benchmark Company LLC acted as Monster Digital’s financial advisor for the transaction and Manatt, Phelps & Phillips, LLP acted as Monster Digital’s legal counsel.

 

About the Transaction:

 

Under the terms of the definitive merger agreement, Innovate shareholders, including investors in a financing that closed concurrently with the Merger, will receive newly issued shares of Monster in exchange for Innovate stock. In connection with and prior to the closing of the Merger, Monster Digital effected a 1-for-10 reverse stock split of its common stock.

 

As previously disclosed, immediately prior to the effective date of the Merger, Monster completed a spin-off transaction (the “Spin-Off”). As a result of the Spin-Off, all of the business, assets and certain of the liabilities of Monster that were not assumed by Innovate in connection with the Merger were transferred into a private wholly-owned subsidiary of Monster, MD Holding Co., Inc. Further to the Spin-Off, holders of record of Monster’s common stock as of the close of business on January 29, 2018, will receive a pro rata distribution of one share of MD Holding Co., Inc. common stock for each share of Monster common stock held as immediately prior to the Spin-Off.

 

 

 

 

About Innovate Biopharmaceuticals, Inc.:

 

Innovate is a clinical stage biotechnology company focused on developing novel autoimmune and inflammation therapeutic drugs.

 

Innovate’s lead drug candidate, larazotide acetate (INN-202), has successfully met its primary endpoint in a phase 2b efficacy clinical trial for celiac

 

disease. Larazotide successfully completed the End of Phase 2 Meeting with the FDA last year to prepare for expected Phase 3 clinical trials for larazotide in celiac disease in Q2 2018. In clinical studies in more than 800 patients, larazotide demonstrated a favorable safety profile comparable to placebo, due to what Innovate believes is its lack of systemic absorption from the small bowel. Larazotide has also received Fast Track designation from the FDA.

 

Larazotide, an oral peptide formulated into a capsule, has a unique mechanism of action which decreases intestinal permeability and regulates tight junctions by reducing antigen trafficking across intestinal epithelial cells. Innovate believes that larazotide is the only drug in the clinic with this mechanism of action of reducing intestinal permeability. Increased intestinal permeability, sometimes referred to as “leaky gut,” has been widely recognized in the literature as a gateway to multiple autoimmune diseases, including celiac disease, irritable bowel syndrome (IBS), inflammatory bowel diseases (IBD, Crohn’s and ulcerative colitis), type 1 diabetes mellitus (T1DM), nonalcoholic steatohepatitis (NASH), chronic kidney disease (CKD) and others.

 

Innovate's second drug candidate, INN-108, is entering Phase 2 clinical trials for the treatment of mild to moderate ulcerative colitis. INN-108 is a novel small molecule comprised of two active parts with anti- inflammatory and immunodulatory properties coupled through an azo bond. To date Innovate has no reason to believe that INN-108 has any detectable systemic absorption when orally administered until it reaches the colon where the active components are released locally to reduce inflammation.

 

For more information, please visit http://www.innovatebiopharma.com /

  

Forward Looking Statements

 

Some of the statements in this release are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995, which involve risks and uncertainties. These statements relate to future events, future expectations, plans and prospects. Although Innovate believes that the expectations reflected in such forward-looking statements are reasonable as of the date made, expectations may prove to have been materially different from the results expressed or implied by such forward-looking statements. Innovate has attempted to identify forward-looking statements by terminology including "possible," "may," "believe" or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements include, among others, statements regarding the proposed reverse-merger transaction with Innovate and the mechanism of action and therapeutic effects of larazotide acetate. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors, including those discussed under the heading "Risk Factors" in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2017, in our Quarterly Report on Form 10-K filed with the Securities and Exchange Commission on May 19, 2017, in our Definitive Proxy Statement filed with the Securities and Exchange Commission on October 12, 2017, and in other documents filed by us from time to time with the Securities and Exchange Commission. Any forward-looking statements contained in this release speak only as of its date. We undertake no obligation to update any forward-looking statements contained in this release to reflect events or circumstances occurring after its date or to reflect the occurrence of unanticipated events.

 

Innovate Biopharmaceuticals, Inc.

Kendyle Woodard

Tel: 919-275-1933

Email: investor.relations@innovatebiopharma.co m www.innovatebiopharma.com

 

 

 

 

 

 

 

 

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