As filed with the Securities and Exchange Commission on January 14, 2020

Registration No. 333-235779

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 1

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Avadim Health, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		2844		46-3578411
(State or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification No.)

81 Thompson Street

Asheville, NC 28803

(828) 251-7111

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Stephen Woody

Chief Executive Officer

Avadim Health, Inc.

81 Thompson Street

Asheville, NC 28803

(828) 251-7111

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Yvan-Claude Pierre Brian F. Leaf Divakar Gupta Alison Haggerty Cooley LLP 55 Hudson Yards New York, New York 10001 (212) 479-6000		Arthur D. Robinson Jonathan R. Ozner Simpson Thacher & Bartlett LLP 425 Lexington Avenue New York, New York 10017 (212) 455-2000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement is declared effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

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

 

Large accelerated filer		☐		Accelerated filer		☐
Non-accelerated filer		☒		Smaller reporting company		☒
				Emerging growth company		☒

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 7(a)(2)(B) of the Securities Act.  ☐

 

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED JANUARY 14, 2020

PRELIMINARY PROSPECTUS

            Shares

 

 

Common Stock

 

 

We are offering                  shares of our common stock. This is our initial public offering and no public market currently exists for our common stock. We anticipate that the initial public offering price will be between $            and $            per share. We have applied to list our common stock on the Nasdaq Global Market under the symbol “AHI.”

We are an “emerging growth company” as defined under the U.S. federal securities laws and, as such, may elect to comply with reduced public company reporting requirements for this and future filings. See “Prospectus Summary—Implications of Being an Emerging Growth Company.”

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 18.

 

 

 

		PER SHARE				TOTAL
Initial public offering price		$				$
Underwriting discounts and commissions (1)		$				$
Proceeds, before expenses, to us		$				$

 

(1)	See “Underwriting” for a description of all compensation payable to the underwriters.

 

 

We have granted the underwriters an option for a period of 30 days after the date of this prospectus to purchase up to             additional shares of common stock.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock on or about                     , 2020.

 

 

 

RAYMOND JAMES		SUNTRUST ROBINSON HUMPHREY

		OPPENHEIMER & CO.

MAXIM GROUP LLC

The date of this prospectus                     , 2020.

TABLE OF CONTENTS

 

		PAGE
Prospectus Summary			1
The Offering			14
Summary Consolidated Financial Data			16
Risk Factors			18
Special Note Regarding Forward-Looking Statements			69
Industry and Other Data			71
Dividend Policy			72
Use of Proceeds			73
Capitalization			74
Dilution			76
Selected Consolidated Financial Data			79
Management’s Discussion and Analysis of Financial Condition and Results of Operations			81
Business			106
Management			138
Executive Compensation			148
Certain Relationships and Related Party Transactions			162
Principal Stockholders			165
Description of Capital Stock			168
Shares Eligible for Future Sale			175
Material U.S. Federal Income Tax Considerations for Non-U.S. Holders			178
Underwriting			183
Legal Matters			191
Experts			191
Where You Can Find More Information			191
Index to Consolidated Financial Statements			F-1

 

 

We and the underwriters have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may provide you. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus or the dates otherwise specified herein, regardless of the time of delivery of this prospectus or of any sale of the common stock.

For investors outside the United States: Neither we nor the underwriters have done anything that would permit this offering or the possession or distribution of this prospectus in any jurisdiction where action for those purposes is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, this offering of common stock and the distribution of this prospectus outside the United States.

Until             , 2020 (25 days after the date of this prospectus), all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risks and uncertainties, together with all of the other information contained in this prospectus, including our consolidated financial statements and related notes included elsewhere in this prospectus, before making an investment decision. The risks described below are not the only ones facing us. The occurrence of any of the following risks, or of additional risks and uncertainties not presently known to us or that we currently believe to be immaterial, could materially and adversely affect our business, financial condition or results of operations. In such case, the trading price of our common stock could decline, and you may lose part or all of your investment.

Risks Related to Business, Financial Position and Industry

We have incurred significant losses since inception, and we may never achieve or maintain profitability.

Since our inception, we have incurred significant operating losses and negative cash flows from operations. Our net losses were $29.2 million and $49.5 million for the years ended December 31, 2017 and 2018, respectively, and $31.8 million for the nine months ended September 30, 2019. As of December 31, 2018 and September 30, 2019, we had an accumulated deficit of $113.4 million and $145.2 million, respectively. We began selling our first product in 2013. Prior to that, we generated revenue primarily from customers who hired us to conduct clinical evaluations and contract manufacturing. A large portion of our expenses are fixed, including expenses related to our facilities, equipment, contractual commitments and personnel.

Our ability to continue to generate revenue and become profitable depends upon our ability to successfully manufacture and market our products efficiently and at sufficient scale. We expect to continue to incur significant expenses as we seek to grow our business. Our expenses will increase substantially as we grow and operate as a public company and add clinical, scientific, operational, financial and management information systems and personnel, including personnel to support our continued product research and development and commercialization efforts, as well as to support our transition to a public reporting company. As a result, we expect to continue to incur net losses and negative cash flows from operations for the foreseeable future. These net losses and negative cash flows from operations have had, and will continue to have, an adverse effect on our stockholders’ equity and working capital. There can be no assurance that we will achieve profitability and, even if we do achieve profitability, we may not be able to sustain or increase profitability. If we are unable to achieve and then maintain profitability, the value of our equity securities may be adversely affected.

Without obtaining adequate capital funding or improving our financial performance, we may not be able to continue as a going concern.

Our management has concluded that our cash levels, rate of cash burn and need for additional funding raises substantial doubt about our ability to continue as a going concern. In addition, as described in their audit report, our independent registered public accounting firm has included an explanatory paragraph that states we have incurred recurring losses and negative cash flows from operations and expect to continue to do so for the foreseeable future, all of which raises substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. If we cannot continue as a viable entity, our stockholders may lose some or all of their investment in us. We have devoted the majority of our financial resources to expansion of our sales channel and research and development. We have financed our operations primarily through the sale of equity

 

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and equity-linked securities and more recently, through our debt facility. The results of our operations will depend, in part, on the rate of future expenditures and our ability to obtain funding through additional equity or debt financings, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements or other sources. We anticipate our expenses will increase substantially as we continue to grow our sales team, increase our advertising spend and continue our research and development efforts.

Our ability to continue as a going concern will be determined by our ability to complete this offering, enabling us to fund our expansion plans and realize our business objectives. In addition, we have incurred net losses and negative cash flows from operations since our inception and expect to incur losses in future periods as we continue to increase our expenses in order to position our business to grow. If we are unable to obtain adequate funding from this proposed offering or in the future, or if we are unable to grow our revenue substantially and manage our expenses to achieve and sustain profitability, we may not be able to continue as a going concern.

In connection with our preparation of our consolidated financial statements as of and for the year ended December 31, 2018, we and our independent registered public accounting firm identified two material weaknesses in our internal control over financial reporting. Any failure to maintain effective internal control over financial reporting could materially and adversely impact our business, financial condition or results of operations.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements in accordance with GAAP. In connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2018, we and our independent registered public accounting firm identified material weaknesses in our internal controls. Under standards established by the United States Public Company Accounting Oversight Board, or PCAOB, a material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim consolidated financial statements will not be prevented or detected and corrected on a timely basis.

In particular, management determined that we did not have an adequate complement of accounting resources with sufficient knowledge of and training in the application of GAAP, in particular to account for and prepare relevant disclosures related to non-routine transactions, such as certain share-based compensation issuances and certain debt and equity related transactions, which led to a material misstatement that was corrected in our 2018 consolidated financial statements. In addition, we had insufficient controls over sales cut off and journal entries. Management believes that such material weaknesses were largely the result of challenges in managing the rapid scaling of our operations. Each of the material weaknesses described above or any newly identified material weakness could result in a misstatement of our consolidated financial statements or disclosures that would result in a material misstatement of our annual or quarterly consolidated financial statements that is not prevented or detected.

We have taken steps to remediate these weaknesses, including hiring additional staff and implementing new processes and internal control procedures, such as review and approvals of reconciliations and sales cut off testing. However, we cannot assure you that the measures we have taken will remediate these material weaknesses or that we will not suffer from other material weaknesses in the future. In addition, these remediation measures may be time-consuming, costly, and might place significant demands on our financial and operational resources.

 

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If (1) we fail to effectively remediate material weaknesses in internal control over financial reporting; (2) we identify additional material weaknesses in our internal control over financial reporting; (3) we are unable to assert that our internal control over financial reporting is effective; or (4) when required in the future, our independent registered public accounting firm is unable to express an unqualified opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our common stock could be adversely affected or we could become subject to litigation or investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities and we could be delayed in delivering consolidated financial statements, which could require additional financial and management resources and have a material adverse effect on our business, financial condition and results of operations.

We have only recently begun to rapidly scale our operations, which makes it difficult to forecast our future results of operations.

We have only recently begun to rapidly scale our operations, with the launch of our first retail pharmacy/consumer product, Theraworx Relief, in 2017. As a result, our ability to accurately forecast our future results of operations is limited and subject to a number of uncertainties, including our ability to plan for and model future growth. Our historical results of operations and recent revenue growth should not necessarily be considered indicative of our future performance. Further, in future periods, our revenue growth could slow or our revenue could decline for a number of reasons, including among others slowing demand for our products, increasing competition, changes to technology, regulatory actions, a decrease in the growth of our overall market, or our failure, for any reason, to continue to take advantage of opportunities or deliver on our operational plan. We have also encountered, and will continue to encounter, risks and uncertainties frequently experienced by companies in our industry, such as the risks and uncertainties described in this prospectus. If our assumptions regarding these risks and uncertainties and our future revenue growth are incorrect or change, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations, and our business, financial condition or results of operations could be materially and adversely affected.

In addition, as we continue to build our business, we expect our financial condition and operating results may fluctuate significantly from quarter to quarter and year to year due to a variety of factors, many of which are beyond our control. Accordingly, you should not rely upon the results of any particular quarterly or annual period as indications of future operating performance.

We will require additional capital to fund our operations, which may not be available on acceptable terms, if at all.

We expect to spend substantial amounts to continue to develop, manufacture and market our products. We may require additional capital beyond the proceeds of this offering, which we may raise through equity or debt financings, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements or other sources to enable us to execute on our business strategy. Furthermore, upon the closing of this offering, we expect to incur additional costs associated with operating as a public company. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative effect on our financial condition and our ability to pursue our business strategy. In addition, attempting to secure additional financing may divert the time and attention of our management from day-to-day activities and harm our development and commercialization efforts. If we are unable to raise capital when needed or on acceptable terms,

 

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we may be forced to implement cost-cutting or other measures that could delay, reduce or eliminate our ability to pursue certain of our strategic goals.

Our operations have consumed significant amounts of cash since inception. As of September 30, 2019, our cash was $7.2 million. Based on our planned use of the net proceeds of this offering, our current cash and expected future sales, we estimate that such funds will be sufficient to enable us to fund our operating expenses and capital expenditure requirements through                 . This estimate is based on a number of assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Changing circumstances could cause us to consume capital significantly faster than we currently anticipate, and we may need to spend more than currently expected because of circumstances beyond our control. Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:

 

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the costs associated with combating the marketing strength of other, larger, better funded, competitors, including those that do not compete directly, but have market share selling products that we may be displacing;

 

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the cost of defending any adverse claims brought against us by customers, competitors, regulators or others;

 

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the cost of researching and developing new products or enhancing existing products;

 

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the costs of future clinical evaluations;

 

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the cost of expanding our sales, marketing and distribution infrastructure;

 

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the costs of regulatory evaluation, compliance and defending against any regulatory action;

 

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the cost of expanding and protecting our intellectual property portfolio, including filing, prosecuting, defending and enforcing our patent claims and other intellectual property rights;

 

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the cost of defending potential intellectual property disputes, including patent infringement actions brought by third parties against us or any of our products or future potential products;

 

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the costs of technological maintenance and improvements and cyber-security;

 

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the cost and effectiveness of scaling our supply chain and manufacturing facilities and processes;

 

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the in-licensing or acquiring other products and technologies; and

 

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our commercialization efforts.

To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that could adversely affect your rights as a holder of common stock. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or other investments or declaring dividends. If we

 

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raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may be required to relinquish valuable rights to our technologies, products, future revenue streams or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce or terminate our development or commercialization efforts or grant rights to develop and market products or potential future products that we would otherwise prefer to develop and market ourselves.

If our products are unable to achieve an adequate level of acceptance or we fail to attract new customers and retain existing customers, our business, financial condition and results of operations could be adversely affected.

To increase our revenue, we must continue to attract new customers while retaining existing customers. Our success will depend on the level of adoption of our products and the execution of our growth strategies. If we are unable to achieve widespread adoption of our products and execute on our growth strategies, our business, financial condition and results of operations may be adversely affected.

In order to attract new customers and retain existing customers, we must achieve market acceptance by consumers, healthcare providers and others in the medical healthcare community. If our products do not achieve an adequate level of acceptance, we may not generate significant product revenues or become profitable. The degree of market acceptance of our products depends on a number of factors, including but not limited to:

 

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the potential advantages compared to alternatives;

 

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effectiveness of our sales and marketing efforts;

 

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our ability to offer our products for sale at competitive prices;

 

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the convenience and ease of use of our products;

 

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the strength of our marketing and distribution support;

 

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the timing of market introduction of competitive products;

 

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the future availability of coverage and adequate reimbursement from third-party payors; and

 

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individuals’ willingness to pay out-of-pocket in the absence of coverage or adequate reimbursement.

If our products do not achieve an adequate level of acceptance and we are unable to continue attracting new clients or retaining existing clients, our business, financial condition and results of operations may be adversely affected.

Failure to effectively develop and expand our sales and marketing capabilities could harm our ability to increase our customer base and achieve broader market acceptance of our products.

Our ability to successfully increase our customer base and achieve broader market acceptance of our products is dependent on our ability to effectively develop and expand our sales, marketing and distribution capabilities, including our ability to hire, retain and appropriately incentivize

 

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qualified individuals, provide adequate training to sales and marketing personnel and effectively manage a geographically dispersed sales and marketing team. Any failure or delay in the development and expansion of our sales, marketing and distribution capabilities, our ability to attract partners or our ability to access the desired channels into key markets, could impact sales of our existing products or delay any new product launch or expansion of existing products, which may adversely affect our business, financial condition and results of operations.

We intend to continue to grow our existing relationships and establish new relationships with third-party sales and channel organizations. In addition, we intend to continue to grow our in-house, dedicated sales team. These efforts will require us to invest significant financial and other resources. Our business, financial condition and results of operations could be adversely affected if our sales and marketing efforts do not generate significant increases in revenue or result in increases in revenue that are smaller than anticipated. We may not achieve anticipated revenue growth from expanding our sales team if we are unable to hire, develop, integrate and retain talented and effective sales personnel, if our new and existing sales personnel, on the whole, are unable to achieve desired productivity levels in a reasonable period of time, or if our sales and marketing programs are not effective.

We are subject to unpredictable and, in some cases, lengthy sales cycles for our institutional- care customers.

Due to the nature of the healthcare industry, potential institutional-care customers, such as hospitals and other institutional facilities, typically need to commit significant resources to evaluate our products. It is not uncommon for these evaluations to take an extended period of time, which can be as long as 90 to 180 days. Our existing and potential customers may be unwilling or unable to commit the time and resources necessary to evaluate our products, or such customers may choose not to purchase our products after undertaking such evaluations. In addition, revenues generated from product sales to institutional care customers may fluctuate due to changes in our customers’ trial programs. As a result, it is difficult to accurately predict our revenues and other operating results. Further, our results may fluctuate on a quarterly basis or over other measurement periods. This difficulty predicting our results can lead to significant resource misallocation, which may materially and adversely affect our business, financial condition and results of operations.

We may not be successful in our efforts to develop or introduce new products or product extensions to market.

Part of our strategy involves driving growth through continuous product innovation, including through product extensions and new products under our existing brands, as well as discovering and developing products to address new market opportunities for topical immune health, neuromuscular health and skin barrier health. We may fail to identify, develop or successfully commercialize new products or product extensions for any number of reasons, including those discussed in these risk factors and also:

 

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we may find that the effects of future products, once in development or after, is not what we had expected;

 

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we may not be able to assemble sufficient resources to develop product extensions or discover potential new products;

 

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any product extensions or potential new products that we develop may not be accepted by the market;

 

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competitors may develop alternatives that render our product extensions or potential new products obsolete or less attractive;

 

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potential new products we develop may nevertheless be covered by third parties’ patents or other exclusive rights; or

 

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product extensions or potential new products may not be capable of being produced in commercial quantities at an acceptable cost, or at all or may encounter regulatory roadblocks.

The failure to launch a new product or product extension successfully can give rise to inventory write-offs and other costs and can affect consumer perception of our other products. In addition, launching new products or product extensions can result in cannibalization of sales of our existing products if consumers purchase the new product in place of our existing products. Focusing on the development and commercialization of new products and product extensions may also divert attention and resources away from our existing products. If we are unable to successfully identify, develop and commercialize new products or product extensions, this could adversely impact our business, financial condition, results of operations and share price.

We may expend our limited resources to pursue a particular future potential product or opportunity and fail to capitalize on future potential products or opportunities that may be more profitable or for which there is a greater likelihood of success.

Because we have limited financial and managerial resources, we focus on future potential products that we identify for specific opportunities. For example, we are currently targeting six potential future products. See “Prospectus Summary—Industry Landscape” and “Business—Our Pipeline.” As a result, we may forego or delay pursuit of other potential products or other opportunities that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities in a timely manner, if at all. Our spending on current and future research and development programs and future potential products may not yield any commercially viable products within the timeframes we expect as disclosed herein, if at all. If we do not accurately evaluate the commercial potential or target market for a particular future potential product, we may not capitalize on such potential or relinquish valuable rights to that future potential product through collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such potential product. Such resource allocation failures could materially and adversely affect our business, financial condition and results of operations.

Our credit agreement contains restrictive covenants that may restrict our ability to pursue our business strategies.

In October 2018, we entered into a credit agreement, among our company, the lenders from time to time party thereto, and Hayfin Services LLP, or Hayfin, as administrative agent and collateral agent for the lenders. The credit agreement, as amended, contains financial and operational covenants, including requirements to achieve specified net revenues, profitability and liquidity levels. The credit agreement also contains covenants restricting our ability to grant liens, incur debt, make investments, consummate acquisitions or dispositions of assets, make restricted payments and to enter into transactions with affiliates. Our performance under the credit agreement is secured by a senior lien on all of our assets (including our intellectually property, such as patents and trademarks) and a stock pledge on the equity interests of our subsidiaries, each of which also gave a guarantee. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness” for more information.

 

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In connection with the credit agreement, we also issued Hayfin a warrant to purchase shares of our super-voting Series W preferred stock, which is exercisable only if there is an event of default under the credit agreement and Hayfin accelerates the maturity of the term loan pursuant to such event of default. If exercised, the Series W preferred stock would provide Hayfin the right to vote a majority of all shares entitled to vote on any matter presented to our stockholders, including the election of directors. There are currently no Series W preferred shares outstanding, and the warrant issued to Hayfin will expire upon the completion of this offering, assuming the receipt of gross proceeds of at least $50 million, or the repayment of the loan in full.

As a result of the going concern explanatory paragraph expressed in the audit report in our 2018 consolidated financial statements, included elsewhere in this registration statement, we were in breach of the covenants, and thus in default, under our credit agreement; however, such default has been waived by Hayfin. If we default under our credit agreement again, such as due to the inclusion of a going concern in our future audit reports, and if such default is not cured or waived, the lenders could terminate their commitments to lend to us and cause any amounts outstanding to be payable immediately. Such a default could also result in cross defaults under other debt instruments. Moreover, any such default would significantly limit our ability to obtain additional financing, which may have an adverse effect on our cash flow and liquidity. In addition, if we default under our credit agreement prior to the completion of this offering and Hayfin accelerates the loan, then the Series W warrants for our super-voting Series W preferred stock will become exercisable and Hayfin will have the power to take control of our board of directors. If Hayfin appoints new directors, those directors will have the power to direct our business, including taking such measures as the board of directors determines are necessary to repay Hayfin and the lenders, which could include a sale of our assets or pursuing other interests adverse to our other stockholders.

We face significant competition from various health, wellness and self-care companies, and our operating results will suffer if we fail to compete effectively.

Our industry is highly competitive. We do not compete with any single competitor across all of our product lines, however, we have various competitors of varying sizes, including personal care companies, branded consumer healthcare companies and private label manufacturers. Certain of our distributors are also our competitors for certain of our products. The following is a summary of our principal competitors across our various product lines:

 

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Theraworx Relief. Theraworx Relief for Muscle Cramps and Spasms competes with well-known brands, such as Bengay, Icy Hot, Hylands, Biofreeze, Aspercreme, Blue Emu and Salon Pas. Theraworx Relief for Joint Discomfort and Inflammation also competes with most of these brands, as well as topical Voltaren, oral analgesics and NSAIDs and various hand and knee braces.

 

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Theraworx Protect for Immune Health. We believe our most direct competitors for Theraworks Protect for Immune Health are Medline and Sage Products, makers of Chlorhexidine, or CHG, Bathing System and Sage M-Wipes, Bard Provon Wipes, Purell and the makers of other alcohol hand cleansers, as well as Betadine and Hibiclens.

 

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Theraworx Protect U-Pak for Urinary Health. Theraworx Protect U-Pak for Urinary Health primarily competes with other OTC brands, such as AZO, Uquora, Summers Eve and Vagisil Cleansing Solutions.

 

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Combat One. This product competes with various baby wipe brands, as well as Sage and Medline hospital wipes.

 

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PHUEL. This product competes with well-known and readily available brands, such as Tiger Balm, oral analgesics and NSAIDs, Icy Hot and Biofreeze.

We compete with these products on the basis of numerous factors, including brand awareness and loyalty, ease of use, product effectiveness, product quality, reputation, product variety, product features, package design, shelf space, price, advertising, promotion, customer service and the ability to identify and satisfy consumer demand.

We compete for consumer acceptance and limited shelf space based upon these factors as well as creative marketing, promotion and distribution strategies, and new product and product extension introductions. Our retail customers, most of which promote their own private label products, control the shelf space allocations within their stores. As a result, they may allocate more shelf space to their private label products or to our branded competitors’ products in accordance with their respective promotional strategies. Decreases in shelf space allocated to our products, increases in competitor promotional activity, aggressive marketing strategies by competitors or other factors may require us to reduce our prices or invest greater amounts in marketing, advertising and promotion of our products to ensure our products remain competitive.

In addition, as our products gain visibility in the marketplace, other potential competitors not currently offering competitive products may expand their product offerings to compete with us. Significant new competitors or increased competition from existing competitors, including specifically private label brands, may adversely affect our business, financial condition and results of our operations.

Many of our existing or potential competitors have substantially greater financial, technical and human resources than we do and significantly greater experience with development and commercialization of products. Established healthcare and wellness companies may invest heavily to accelerate discovery and development of novel compounds or to in-license novel products that could make our products less competitive. In addition, mergers and acquisitions in the healthcare and wellness industry could result in even more resources being concentrated among a small number of our competitors. The availability of our competitors’ products could limit the demand, and the price we are able to charge, for our products. The inability to compete with existing or subsequently introduced products would have an adverse impact on our business, financial condition and results of operations.

We may face competition from customers developing competing products internally or externally.

Certain customers for our products have substantial manufacturing capabilities and financial resources to develop and market their own competing products. The future prospects for our products are dependent upon our customers’ acceptance of our products as an alternative to their internally developed products. Future sales prospects also are dependent upon acceptance by our customers of third-party sourcing for products as an alternative to in-house development. Customers may in the future continue to use internal products, or develop or acquire products that are similar to, or that may be substituted for, our products. If our customers fail to accept our products as an alternative, if they develop similar products internally rather than purchase our products, or if we are otherwise unable to develop or maintain strong relationships with them, our business, financial condition and results of operations could be materially and adversely affected.

We may face competition from manufacturers of similar products.

Competition from manufacturers of products similar to our existing and future branded products could be a major challenge for our branded products, and the loss or expiration of

 

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intellectual property rights can have a significant adverse effect on our revenues. The date at which competition commences may be different from the date that patent exclusivity expires. However, upon the loss or expiration of patent protection for one of our products, or upon the “at-risk” launch (despite pending patent infringement litigation against the competitive product) by a manufacturer of a similar version of one of our patented products, we could lose a major portion of revenues for that product in a very short period of time, which could adversely affect our business, financial condition and results of operations.

The market for our products may develop slowly or be smaller than we expect.

The total addressable market opportunity for our products will ultimately depend upon a number of factors, including the acceptance by the medical community, pharmacists, healthcare providers and customers, product pricing and reimbursement. In addition, estimates for the incidence and prevalence of the healthcare issues our products address are frequently based on information and assumptions that are not exact and may not be appropriate, and the methodology is forward-looking and speculative. Accordingly, the incidence and prevalence estimates included in this prospectus should be viewed with caution. Further, the data and statistical information used in this prospectus, including estimates derived from them, may differ from information and estimates of our competitors or from current or future studies conducted by independent sources.

The use of such data involves risks and uncertainties and is subject to change based on various factors. Our estimates may prove to be incorrect and new studies may change the estimated incidence or prevalence of the conditions we seek to address. The number of individuals that could benefit from the use of our products may be lower than expected or may not be otherwise amenable to using our products, which may adversely affect our business, financial condition and results of operations.

We depend on a limited number of customers for a substantial majority of our revenue. If we fail to retain these customers, our revenue could decline significantly.

We derive a substantial majority of our revenue from sales through a limited number of retail chains, group purchasing organizations, or GPOs, and distributors. For the year ended December 31, 2018, Owens & Minor and Walgreens each accounted for greater than 10% of net revenue. For the nine months ended September 30, 2019, Walmart and Walgreens each accounted for greater than 10% of net revenue. As a result of this customer concentration, our revenue could fluctuate materially and could be materially and disproportionately impacted by purchasing decisions of these customers or any other significant customer. In the future, any of our significant customers may decide to purchase less than they have in the past, may alter their purchasing patterns at any time with limited notice, or may decide not to continue to purchase our products at all, any of which could cause our revenue to decline and adversely affect our financial condition and results of operations. If we do not diversify our customer base, we will continue to be susceptible to risks associated with customer concentration.

Customers’ strategic business plans may negatively influence the distribution of our products to consumers.

Changes in or inconsistent application of our retail and distribution customers strategic business plans including, but not limited to; (i) expansions, mergers or consolidations; (ii) retail shelf space allocations for products within each outlet and in particular the OTC homeopathic, cosmetic and healthcare categories in which we compete; (iii) changes in their private label assortment; and (iv) product selections, distribution allocation, merchandising programs, commercial terms and retail pricing of our products as well as competitive products could affect

 

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sales of our products and result in a material adverse effect to our business, financial condition and results of operations.

We have limited internal manufacturing resources and limited experience forecasting our manufacturing needs at a scale we aim to achieve. If our operations are interrupted or we are unable to provide an adequate supply of our products, our business, financial condition, results of operations could be materially adversely affected.

Most manufacturing processes for our products occur within our own facilities. This increases the risk that, in the event of an interruption in our operations, whether due to a natural catastrophe, labor dispute, a change in processes required as a result of a change in suppliers, regulatory requirements or other changes, or otherwise we would not be able to develop an alternate source for our products without incurring material additional costs and substantial delays. In addition, as sales of our products grow, we expect we will need to increase, or “scale up,” the production process for our components and products. While we have taken steps in anticipation of growth, manufacturers often encounter difficulties in scaling up production, such as challenges involving yield, quality control and assurance and qualified personnel. If our scaled-up production process is not efficient or produces a product that does not meet quality and other standards, we may be unable to meet market demand and our business, financial condition, results of operations and prospects would be adversely affected.

In addition, because we have only recently launched our first pharmacy product, combined with and due to our recent rapid growth, we have limited experience forecasting our manufacturing needs at this scale. Failure to accurately forecast our needs may result in manufacturing delays or increased costs. Our ability to accurately forecast or handle our anticipated increased scale could be affected by many factors, including changes in customer demand for our products, changes in demand for the products of our competitors, unanticipated changes in consumer preferences, changes in the healthcare market, among others. If we fail to accurately forecast demand, we may experience a shortage or excess of products available for sale, which could adversely affect our business, financial condition and results of operations.

If a significant number of pharmacies claim refunds or credit for unsold inventory of our products under contractual chargeback or similar provisions, it could have an adverse impact on our business, financial condition and results of operations.

Our products are stocked in over 47,000 pharmacies. However, a number of pharmacy chains have certain chargeback rights and other provisions in their agreements with us that may entitle them to return for credit or refund unsold, expired or damaged inventory of our products. If a significant number of pharmacies claim refunds or credit for unsold inventory of our products, this could have an adverse effect on our business, financial condition and results of operations.

We are subject to changing consumer preferences and if we do not correctly anticipate such changes, our sales may decline.

There are a number of trends in consumer preferences, which have an impact on us and the healthcare and wellness industry as a whole. These include, among others, preferences for affordable, convenient, value-added, healthy, lower-risk and self-care products. Consumer preferences are also shaped by concern over the health related impact of products. The success of our business depends on both the continued appeal of our products and, given the varied backgrounds of our customer base, our ability to offer a sufficient range of products to satisfy a broad spectrum of preferences. Any shift in consumer preferences in the United States or any other material market in which we plan to operate could have a material adverse effect on our business,

 

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financial condition and results of operations. Our competitiveness also depends on our ability to predict and quickly adapt to consumer trends, exploiting profitable opportunities for product development without alienating our existing consumer base or focusing excessive resources or attention on unprofitable or short-lived trends. If we are unable to respond on a timely and appropriate basis to changes in demand or consumer preferences, our business, financial condition and results of operations may be adversely affected.

Unfavorable publicity or consumer acceptance of our products generally could reduce our sales.

We are dependent upon consumer acceptance of the safety and quality of our products. Consumer acceptance of products can be significantly influenced by scientific research or findings, national media attention and other publicity about product use and our company generally. A product may initially be received favorably, resulting in high sales that may not be sustainable as consumer preferences change. Alternatively, skepticism of claims made by companies in the healthcare and wellness industry may limit the number of individuals that believe our consumer products are effective, which may negatively affect our ability to generate significant sales from our products.

Most of our products face competition from long-standing options. For example, for neuromuscular health conditions, consumers typically turn to anecdotal remedies, such as stretching and warm baths, or readily available OTC products, such as acetaminophen or NSAIDs. To successfully market our products, we will need to educate consumers, often in a restricted regulatory environment, that these options, alone, are sometimes insufficient. Changing consumer behavior patterns may take months or years to accomplish and there is no guarantee that we will be successful in doing so. There is no guarantee that consumers will be willing to use our products. If consumers are not willing to purchase our products, our ability to generate significant revenue from the sale of our consumer product may be limited and our business, financial condition and results of operations may be adversely affected.

In addition, scientific research or publicity could be unfavorable to the healthcare and wellness industry or any of our particular products. Any research or publicity that is perceived by our consumers as less than favorable or that questions earlier favorable research or publicity, could have a material adverse effect on our ability to generate revenue. Adverse publicity in the form of published scientific research, statements by regulatory authorities, competitors or otherwise, whether or not accurate, that associates use of our products or any other similar products with adverse events, that questions the benefits of our or similar products, that claims that such products are ineffective or that alleges our labeling or promotional statements and materials do not comply with applicable laws, regulations or policies could have a material adverse effect on our reputation, business, financial condition or results of operations.

We may be subject to enforcement action if we or our sales representatives engage in improper marketing or promotion of our products.

Our promotional materials, product packaging, websites and promotional practices must comply with applicable laws, rules and regulations, including with respect to the prohibition of the promotion of misbranded or unapproved new drugs. The FDA may take enforcement action against us or our products if the FDA determines that our claims for our cosmetics are drug claims, that our claims for our OTC homeopathic drug products are not consistent with homeopathic usage or that one or more of our products are not intended solely for self-limiting diseases or conditions amenable to self-diagnosis and treatment by consumers themselves. If the FDA determines that our products are in violation of relevant laws or regulations or are inconsistent with applicable

 

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guidance regarding products for nocturnal leg cramps, we could be subject to regulatory or enforcement actions, including the issuance of a warning or untitled letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our promotional statements and materials, labeling, product packaging, websites or promotional practices to constitute improper promotion of a cosmetic or OTC homeopathic drug products, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement. If any of these events occur, our reputation could be damaged and adoption of our products could be impaired and our business, financial condition and results of operations may be materially and adversely affected.

We have in the past received, and may in the future receive, communications from competitors alleging that our promotional materials do not comply with applicable laws and regulations. We cannot predict the impact any future allegations could have on us, including whether such allegations will be made to the FDA or other regulatory authorities and what actions, if any, the FDA or such regulatory authorities will take as a result.

We also face the risk that our sales representatives engage in aggressive or improper marketing or promotion of our products, outside the confines of our promotional materials or training programs. While we have agreements governing our relationship with them, we can control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our sales representatives acts in accordance with applicable laws. Our reliance on these individuals does not relieve us of our regulatory responsibilities. Any failure by our sales representatives to comply with applicable laws could lead to regulatory action, could damage our reputation and could materially and adversely affect our business, financial condition and results of operations.

Potential product liability or false marketing claims against us could cause us to incur substantial liabilities.

We face the risk of product liability or false marketing claims, which could adversely affect our business, financial condition and results of operations. Product liability or false marketing claims might be brought against us by regulators, consumers, healthcare providers, pharmaceutical companies or others selling or otherwise coming into contact with our products. Our marketing and sale of products will expose us to product liability and false marketing risks that are inherent in the testing, manufacturing and marketing of such products. Failure to maintain policies and procedures, obtain or maintain sufficient product liability insurance or otherwise protect or successfully defend, against product liability or false marketing claims could prevent or delay the commercialization or marketing of our products or future potential products or expose us to substantial liabilities and diversions of resources, all of which may materially and adversely affect our business, financial condition and results of operations. Regardless of the merit or eventual outcome, product liability or false marketing claims may result in:

 

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impairment of our business reputation and significant negative media attention;

 

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withdrawal of participants from our clinical evaluations;

 

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significant costs to defend any related regulatory actions or litigation;

 

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distraction of management’s attention from our primary business;

 

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substantial monetary penalties or awards to regulators, consumers or other claimants;

 

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•

inability to commercialize our potential products or products that we have in development;

 

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inability to market our existing products;

 

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product recalls, withdrawals or labeling, marketing or promotional restrictions;

 

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decreased demand for our products; and

 

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loss of revenue.

Product contamination or tampering or issues or concerns with respect to product quality, safety and integrity could adversely affect our reputation, business, financial condition or results of operations.

Product contamination or tampering, the failure to maintain high standards for product quality, safety and integrity, including with respect to raw materials and ingredients obtained from suppliers, or allegations of product quality issues, mislabeling, misbranding, spoilage, allergens, adulteration or contamination with respect to our products may reduce demand for such products, and cause production and delivery disruptions or increase costs, each of which could adversely affect our reputation, business, financial condition or results of operations.

If any of our products are mislabeled or become unfit for use or cause injury, illness or death, or if appropriate resources are not devoted to product quality and safety or to comply with changing safety requirements, we could decide to, or be required to, recall products or withdraw from the marketplace and we may be subject to liability or government action, which could result in payment of damages or fines, cause certain of our products to be unavailable for a period of time, result in destruction of product inventory or result in adverse publicity, which could reduce consumer demand and brand equity. Moreover, even if allegations of product contamination or tampering or suggestions that our products were not fit for use are meritless, the negative publicity surrounding such assertions against us or our products or processes could adversely affect our reputation or brands. Our business could also be adversely affected if consumers lose confidence in product quality, safety and integrity generally, even if such loss of confidence is unrelated to our products. Any of the foregoing could adversely affect our reputation, business, financial condition or results of operations. In addition, if we do not have adequate insurance, if we do not have enforceable indemnification from suppliers, distributors or other third parties or if indemnification is not available, the liability relating to such product claims or disruption could materially adversely affect our business, financial condition or results of operations.

Consumers’ ability to successfully file a complaint against us and our products may be greater due to the status of our products as cosmetic or OTC homeopathic drug products.

We market products that we classify as cosmetics and OTC homeopathic drug products. Cosmetics are not subject to premarket review by the FDA while homeopathic drug products are marketed as unapproved drugs and are subject to the FDA’s risk-based enforcement approach. In recent years, state courts have concluded that, because OTC homeopathic drug products have not been approved and are not marketed pursuant to an FDA regulation, claims against a manufacturer of an OTC homeopathic drug product are not preempted by the Federal Food, Drug, and Cosmetic Act, or FDC Act. Similarly, claims against cosmetics are not preempted. Consequently, plaintiffs’ actions under state consumer protection laws for lack of substantiation for claims for cosmetics as well as OTC homeopathic drug products have been allowed to proceed. Ignoring the unique character of OTC homeopathic drug products, plaintiffs’ claims in these actions have been based on the evidence standard applied to conventional (allopathic) drugs.

 

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Generally, consumer actions involve claims for significant monetary damages, as well as injunctions. If any such claim were brought against us, it could adversely affect our reputation, business, financial condition and results of operations.

Positive results obtained in clinical evaluations may not necessarily be indicative of the efficacy of our products and the results in future clinical evaluations or other studies, and failure to replicate positive results from early studies may inhibit our ability to support and market our products or any future potential products or product extensions.

Results from previous clinical evaluations are not necessarily predictive of the efficacy of our products, and the results of future clinical evaluations, and interim results, are not necessarily indicative of final results. Our products and any future potential products may fail to show the desired safety and efficacy despite positive results in previous clinical evaluations. Frequently, future potential products that have shown promising results in early clinical evaluations have subsequently suffered significant setbacks in later clinical evaluations. In addition, the design of a clinical evaluation can determine whether its results will support marketing of a product and flaws in the design of a clinical evaluation may not become apparent until the evaluation is well advanced. There is a high failure rate for products in evaluations, and many companies have suffered significant setbacks even after achieving promising results in earlier evaluations, as a result of later safety or efficacy observations. Any failure to replicate positive results from early studies may inhibit our ability to support and market our products or any future products. Such failure could damage customer acceptance of our product, our reputation, business, financial condition and results of operations.

It is also possible that, even if one or more of our products has a beneficial effect, that effect will not be detected or properly analyzed during clinical evaluation as a result of one or more of a variety of factors, including the size, duration, design, measurements, conduct or analysis of our clinical studies. Moreover, if there is a flaw in a clinical study, it may not become apparent until the study is well advanced or potentially until well after it is complete. There are inherent limitations in the structure, design and execution of studies; in particular, our studies (i) may be funded in full or in part by us, which could create the appearance of a conflict of interest, (ii) may be conducted by doctors or medical professionals who are compensated by us for advisory or other services, (iii) can involve a limited number of participants or (iv) can be subject to limited diagnostic or outcome assessment tools.

If we are unable to achieve or maintain coverage and adequate levels of reimbursement for our products, their commercial success may be hindered.

For any of our current or future products, our success will depend, in part, on the availability of coverage and adequate reimbursement from third-party payors. Many individuals rely on third-party payors to reimburse all or part of the costs associated with their purchases. The availability of coverage and adequate reimbursement from healthcare programs, such as Medicare and Medicaid, and private third-party payors can be important for new product acceptance. Coverage decisions may depend upon clinical and economic standards that disfavor new products when more established or lower cost alternatives are already available or subsequently become available. If any of our products do not demonstrate attractive efficacy profiles, they may not qualify for coverage and reimbursement. Once a product is approved for coverage by Medicare, Medicaid or a private third-party payor, there is no guarantee such coverage will be maintained. Patients may be unlikely to use our products unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our products.

Third-party payors, whether foreign or domestic, or governmental or commercial, are developing increasingly sophisticated methods of controlling healthcare costs. In addition, in the

 

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United States, although private third-party payors tend to follow Medicare, no uniform policy of coverage and reimbursement for products exists among third-party payors. Therefore, coverage and reimbursement for products can differ significantly from payor to payor. As a result, the coverage determination process is often a time-consuming and costly process that will require us to provide scientific and clinical support for the use of our future potential products to each payor separately, with no assurance that coverage and adequate reimbursement will be obtained. Any failure to obtain such coverage could have a material adverse effect on our business, financial condition and results of operations.

In addition, because our products are covered by Medicare, Medicaid or a private third-party payor, such payors may exert pricing pressure on us or our customers with respect to our products, which pricing pressure could impact our margins and have a material adverse effect on our business, financial condition and results of operations.

Our products are and any future potential products may be subject to extensive federal and state regulations, and the FDA, FTC or other regulatory authorities could restrict the sales and marketing of our products, take other enforcement action or could cause us to incur significant costs to address any concerns that may arise.

Our cosmetics and OTC homeopathic drug products are subject to extensive regulation by the FDA and the FTC as well as various other federal, state, local and foreign regulatory authorities. Additional future potential products will also be subject to such regulation. These laws, regulations and compliance policies principally relate to the ingredients, safety, manufacturing, packaging, proper labeling, advertising, marketing, shipment and disposal of such products. Although the FDA has the authority to evaluate the substantiation of written advertising and promotional materials, it generally examines advertising and promotional materials to determine the intended use of a product. The FTC is specifically authorized to regulate advertising of OTC products to prevent unfair or deceptive acts or practices in such advertising. Pursuant to a memorandum of understanding between the FDA and the FTC, the FDA has primary responsibility for preventing misbranding of cosmetics and OTC homeopathic drug products by label review, whereas the FTC exercises primary jurisdiction over all matters regulating the truth or falsity of advertising of cosmetics and OTC homeopathic drug products. Accordingly, we must comply with the FDA’s requirements in determining the intended use of cosmetics and OTC homeopathic drug products and the basis for lawfully marketing such products, as well as labeling requirements, while we must also comply with the FTC’s requirements regarding substantiation of the claims we make for our cosmetics and homeopathic drug products in advertising and promotion.

In recent years, the FDA has issued warning or untitled letters to several cosmetic companies alleging improper claims regarding their cosmetic products. If the FDA determines that any of our Theraworx Protect products intended to be sold as cosmetics should be classified and regulated as drug products, the FDA may issue a warning or untitled letter to us or take other enforcement action. If we are unable to comply with applicable drug requirements, including the requirement to obtain approval of a new drug application, or NDA, for our products we may be unable to continue to market those products. Any inquiry into the regulatory status of our cosmetics and any related interruption in the marketing and sale of these products could harm our business, financial condition and results of operations. In addition, plaintiffs’ lawyers have filed class action lawsuits against cosmetic companies after publication of these types of FDA warning letters. There can be no assurance that we will not be subject to state and federal government actions or class action lawsuits, which could harm our business, financial condition and results of operations.

Homeopathic drug products require premarket approval from the FDA. We market our homeopathic drug products without such approval. For decades, the FDA has not taken action

 

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against the marketing of unapproved homeopathic drug products provided they were marketed consistent with the FDA’s compliance policy guide. However, recently, the FDA withdrew the compliance policy guide and the FDA is in the process of changing its enforcement policy regarding unapproved homeopathic drug products to a risk-based approach. If the FDA were to change its policy or were to take action against our products due to a lack of the required premarket approval, or because our homeopathic drug products are unsafe or do not qualify as homeopathic drug products, we may be required to reformulate our products, stop making claims relating to such products or stop selling our products until we are able to obtain costly and time-consuming FDA approvals, if such approvals could be obtained at all. Any inquiry into the regulatory status of our OTC homeopathic drug products and any related interruption in the marketing and sale of these products could adversely affect our business, financial condition and results of operations.

Further, we have positioned our products as OTC products. If, for example, our OTC homeopathic drug product labeling does not contain at least one major OTC indication for use that is likely to be understood by lay people, FDA may determine that the product is subject to regulation as a prescription drug. If this were to occur, it would significantly limit our marketing options, which could adversely affect our business, financial condition and results of operations.

Our manufacturing facilities are registered with FDA, and our Theraworx Relief products are listed with FDA as homeopathic drugs. In addition, we have voluntarily registered our Theraworx Protect products with the FDA as cosmetics. Although voluntary registration is one of the few ways the FDA can become aware of the existence of a cosmetic establishment (and thus helps FDA identify facilities for inspection), registering or being assigned a registration number does not denote approval of the establishment or its products by the FDA. The FDA may inspect our facilities periodically to determine if we are complying with provisions of the FDC Act and FDA regulations. Manufacturers of OTC homeopathic drug products must comply with FDA’s current good manufacturing practices for drugs, or cGMPs, that require us to maintain, among other things, good manufacturing processes, including stringent vendor qualifications, ingredient identification, manufacturing controls and record keeping. As a contract manufacturer of medical devices for third parties, and, if our 510(k) submission is cleared or our de novo request is granted, as a device manufacturer we are also required to comply with the quality system regulation, or QSR, for devices. Similarly, as a manufacturer of cosmetics, if we are found to operate our manufacturing facilities under unsanitary conditions, the FDA could take action against us. Our operations could be harmed if regulatory authorities determine that we are not in compliance with these regulations. If the FDA finds a violation of cGMPs or QSR, it may enjoin our operations, seize product and impose administrative, civil or criminal penalties. If we fail to comply with applicable regulatory requirements, we could be required to take costly corrective actions, including suspending manufacturing operations, changing product formulations, suspending sales or initiating product recalls. In addition, compliance with these regulations has increased and may further increase the cost of manufacturing certain of our products as we work with our vendors to assure they are qualified and in compliance. Any of these outcomes could have a material adverse effect on our business, financial condition and results of operations.

The FTC requires substantiation by competent and reliable scientific data or evidence for performance claims. If we do not meet the standard for substantiation or if there is evidence available through us or third parties that our products do not perform as we anticipate, we may need to change the way we market, or cease marketing, our current or future products. The FTC has in the past several years instituted enforcement actions against several pharmaceutical, cosmetic and dietary supplement companies and others for false and misleading advertising of products to consumers. Enforcement actions often have resulted in consent decrees and monetary

 

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payments by the companies involved. Although we make every reasonable effort to ensure that ample foundation exists for our marketing claims, we cannot be certain that the FTC will not question our advertising or other activities in the future. Pursuant to its Guides Concerning the Use of Endorsements and Testimonials in Advertising, or Guides, the FTC interprets Section 5 of the Federal Trade Commission Act, or FTC Act, prohibition on unfair or deceptive acts or practices to regulate claims made by endorsers and influencers of products. Under the current Guides, advertisements that feature a consumer and convey his or her atypical experience with a product or service are required to clearly disclose the results that consumers can generally expect. The Guides also add new examples to illustrate the long-standing principle that “material connections” between advertisers and endorsers (such as payments or free products), that consumers might not expect, must be disclosed. We have revised our marketing materials to be compliant with the current Guides. However, it is possible that our use of testimonials in the advertising and promotion of our products will be significantly impacted by the Guides or other FTC regulation or action, which might negatively impact our sales.

Our products are also subject to state laws and regulations, such as state consumer protection laws and the California Safe Drinking Water and Toxic Enforcement Act, and failure to comply with such laws may also result in lawsuits by consumers and the state attorneys general and regulatory enforcement that could have a material adverse effect on our business, financial condition and results of operations.

Government regulation substantially increases the cost and risk of researching, developing, manufacturing, and selling our products. Our failure to comply with these regulations could result in, by way of example, significant fines, criminal and civil liability, product seizures, recalls, withdrawals and exclusion and debarment from government programs. Any of these actions, including the inability of our products to obtain and maintain regulatory approval or clearance, if such approval or clearance is required, or avoid regulatory action, could have a materially adverse effect on our business, financial condition and results of operations.

Clearances and authorizations for our medical devices may be denied or significantly delayed.

Under FDA regulations, unless exempt, a new medical device may only be commercially distributed after it has received a 510(k) clearance, is authorized through the de novo classification process, or is the subject of a pre-market approval, or PMA. In the 510(k) clearance process, the FDA must determine that a proposed device is “substantially equivalent” to a legally marketed “predicate” device in order for the product to be cleared for marketing. To be substantially equivalent, the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics or if it has different technological characteristics as the predicate device, the proposed device must be as safe and effective as and not raise different questions of safety or effectiveness than the predicate device. Clinical data is sometimes required to support substantial equivalence. For lower-risk devices that would otherwise automatically be placed into Class III (and require a PMA) because no predicate device is available and the devices do not fall within an existing 510(k)-exempt classification, an applicant may submit a de novo request to down classify the device into Class II or Class I. In the de novo process, the FDA must determine that general controls or general and special controls are sufficient to provide reasonable assurance of the safety and effectiveness of a device for its intended use, which is low to moderate risk and has no predicate (in other words, the applicant must justify the down classification to Class I or II for a new product type that would otherwise automatically be placed into Class III but is lower risk). Clinical data may be required. The 510(k) and de novo processes can be expensive and lengthy and require the payment of significant fees, unless an exemption applies. The FDA’s 510(k) clearance pathway usually takes from three to 12 months from submission, but it can take longer, particularly for a novel type of product. The FDA’s de novo classification pathway usually

 

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takes from six to 12 months, but for many applicants can take even longer, up to 18 months or more.

The FDA medical device rules currently contain product classifications based on the intended use of the product. Because we intend for Theraworx Protect for skin and wound cleansing to be designed for the removal of dirt, debris and foreign materials from wounds via mechanical action, this product would require a 510(k) clearance before commercializing. We intend to seek clearance of Theraworx Protect for use as a skin and wound cleanser pursuant to a 510(k) notification. We also intend to seek de novo classification of Theraworx Protect for pre- and post-operative surgical site staging. There are numerous FDA personnel assigned to review different aspects of marketing submissions, and uncertainties can be presented by their ability to exercise judgment and discretion during the review process. During the course of review, the FDA may request or require additional data and information, and the development and provision of this data and information may be time consuming and expensive. For example, if the FDA were to determine that our ingredients are drug ingredients, that our products do not otherwise meet the definition of a medical device, for example due to the indications for use or mode of action, or that our data, including clinical data, are insufficient, our 510(k) or de novo classification request may be delayed or denied. The process of obtaining regulatory clearances or authorizations to market a medical device can be costly and time-consuming, and we may not be able to obtain these clearances or authorizations on a timely basis, or at all for our proposed products. If de novo classification is denied for our product for pre- and post-operative surgical site staging, we would need to seek approval of a PMA to market the product, which is a lengthier and more expensive process that we may not be willing to undertake. Delay or denial of clearance of a 510(k) or authorization of a de novo classification could have a material adverse effect on our business, financial condition and results of operations.

Any modification to a 510(k)-cleared or de novo authorized device that significantly affects its safety or effectiveness, or that constitutes a major change in its intended use, requires a new 510(k) clearance or, possibly, de novo authorization or approval or a PMA depending on the nature of the change. The FDA requires every manufacturer to make this determination in the first instance, but the FDA may review any manufacturer’s decision. The FDA may not agree with our decisions regarding whether new clearances or authorizations are necessary.

If our medical devices are cleared or authorized, our medical device operations will be subject to pervasive and continuing FDA regulatory requirements.

Even after clearance or authorization, the FDA continues to regulate medical devices through post-market regulatory requirements. Complying with these regulations is costly, time consuming, complex and uncertain. FDA regulations are wide-ranging and include, among other things, oversight of:

 

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product design, development, manufacture (including suppliers) and testing;

 

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pre-clinical and clinical studies;

 

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product safety and effectiveness;

 

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product labeling;

 

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product storage and shipping;

 

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record keeping;

 

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pre-market clearance, authorization or approval;

 

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marketing, advertising and promotion;

 

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•

product sales and distribution;

 

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product changes;

 

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product recalls; and

 

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post-market surveillance and reporting of deaths or serious injuries and certain malfunctions.

Medical devices regulated by the FDA are subject to general controls, which include: registration with the FDA; listing commercially distributed products with the FDA; complying with cGMPs under the QSR; filing reports with the FDA of, and record keeping relative to, certain types of adverse events associated with devices under the medical device reporting regulation; assuring that device labeling complies with device labeling requirements; reporting certain device field removals and corrections to the FDA; and obtaining premarket notification 510(k) clearance for devices prior to marketing. In addition to the general controls, some Class II medical devices are also subject to special controls, including adherence to a particular guidance document and compliance with the performance standard.

Advertising for certain devices and labeling, including promotional labeling, for all devices must comply with FDA requirements. In addition, device advertising and promotion may also be subject to other federal and state laws. For example, FDA shares jurisdiction over the regulation of device advertising with the FTC. Advertising for devices characterized as restricted by FDA is subject to specified FDA requirements, while advertising for non-restricted devices is regulated by the FTC.

If we fail to comply with applicable regulatory requirements following clearance or authorization of any of our products, a regulatory agency may:

 

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initiate an inspection of our facilities;

 

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issue an untitled or warning letter asserting that we are in violation of law;

 

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seek an injunction or impose civil or criminal penalties or monetary fines;

 

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suspend or withdraw regulatory clearance, authorization or approval;

 

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suspend any ongoing clinical studies;

 

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delay or refuse clearance, authorization or approval of a pending regulatory submissions or supplements;

 

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impose restrictions on our cleared or authorized products;

 

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seize or recall our products;

 

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partially suspend or totally shutdown our manufacturing operations;

 

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issue advisories or other field actions;

 

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impose operating restrictions; or

 

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refer matters to the Department of Justice or other enforcement or regulatory bodies.

Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. The occurrence of any event or penalty described above may inhibit our ability to commercialize any cleared or authorized products and generate revenues.

 

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If we experience product recalls, we may incur significant and unexpected costs and damage to our reputation, which in turn could have a material adverse effect on our business, financial condition or results of operations.

We may be subject to product recalls, withdrawals or seizures if any of the products we sell are believed to cause injury, not safe or cause an adverse effect or if we are alleged to have violated governmental regulations in the production, labeling, promotion, sale or distribution of our products. A recall, withdrawal or seizure of any of our products could materially and adversely affect consumer confidence in our brands and lead to decreased demand for our products. In addition, a recall, withdrawal or seizure of any of our products would require significant management attention, would likely result in substantial and unexpected expenditures and could materially adversely affect our business, financial condition or results of operations.

Our relationships with third-party payors, healthcare professionals and customers in the United States and elsewhere may be subject, directly or indirectly, to applicable healthcare laws, which could expose us to significant penalties.

Our current and future business operations may be subject to healthcare regulation and enforcement by the Centers for Medicare & Medicaid Services, or CMS, other divisions of the U.S. Department of Health and Human Services, or HHS, including its Office of Inspector General, the U.S. Department of Justice, the Departments of Defense and Veterans Affairs, to the extent our products are paid for directly or indirectly by those departments, state and local governments, and their respective foreign equivalents. The healthcare laws that may affect our ability to operate include:

 

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The federal Anti-Kickback Statute, which prohibits any person or entity from, among other things, knowingly and willfully soliciting, receiving, offering or paying any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of an item or service reimbursable, in whole or in part, under a federal healthcare program, such as the Medicare and Medicaid programs. The term “remuneration” has been broadly interpreted to include anything of value.

 

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Federal civil and criminal false claims laws, such as the False Claims Act, or FCA, which can be enforced by private citizens through civil qui tam actions, and civil monetary penalty laws prohibit individuals or entities from, among other things, knowingly presenting, or causing to be presented, false, fictitious or fraudulent claims for payment of federal funds, and knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent claim to avoid, decrease or conceal an obligation to pay money to the federal government.

 

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The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, among other things, imposes criminal liability for executing or attempting to execute a scheme to defraud any healthcare benefit program, including private third-party payors, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and creates federal criminal laws that prohibit knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement or representation, or making or using any false writing or document knowing the same to contain any materially false, fictitious or fraudulent statement or entry in connection with the delivery of or payment for healthcare benefits, items or services.

 

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HIPAA, as amended by Health Information Technology for Economic and Clinical Health Act of 2009, and their implementing regulations, which impose privacy, security and breach reporting obligations with respect to individually identifiable health information upon entities subject to the law, such as health plans, healthcare clearinghouses and certain healthcare providers, known as covered entities, and their respective business associates that perform services for them that involve individually identifiable health information.

 

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The federal transparency requirements under the Physician Payments Sunshine Act, which requires, among other things, certain manufacturers of drugs, devices, biologics and medical supplies reimbursed under Medicare, Medicaid or the Children’s Health Insurance Program to report annually to CMS information related to payments and other transfers of value provided to physicians and teaching hospitals and physician ownership and investment interests, including such ownership and investment interests held by a physician’s immediate family members.

Many states have similar laws and regulations that may differ from each other and federal law in significant ways, thus complicating compliance efforts. For example, states have anti-kickback and false claims laws that may be broader in scope than analogous federal laws and may apply regardless of payor. In addition, state data privacy laws that protect the security of health information may differ from each other and may not be preempted by federal law. Moreover, several states have enacted legislation requiring certain manufacturers to, among other things, establish marketing compliance programs, file periodic reports with the state, make periodic public disclosures on sales and marketing activities, report information related to pricing, require the registration of sales representatives and prohibit certain other sales and marketing practices. These laws may adversely affect our sales, marketing and other activities with respect to any product for which we receive approval, clearance or authorization to market in the United States by imposing administrative and compliance burdens on us.

Because of the breadth of these laws and the narrowness of available statutory exceptions and regulatory safe harbors, it is possible that some of our business activities could be subject to legal challenge and enforcement actions. Ensuring that our current and future internal operations and business arrangements with third parties comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices do not comply with current or future statutes, regulations, agency guidance, or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of the federal and state laws described above or any other governmental regulations that apply to us, we may be subject to significant civil, criminal and administrative penalties, including, without limitation, damages, fines, imprisonment, disgorgement, exclusion from participation in government healthcare programs, additional reporting obligations and oversight if we become subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with these laws, and the curtailment or restructuring of our operations, any of which could adversely affect our business, financial condition and results of operations. Defending against such actions can be costly and time consuming and may require significant personnel resources. Therefore, even if we are successful defending against any such actions that may be brought against us, our business may be impaired.

Healthcare reform measures could hinder or prevent the commercial success of our products and future potential products.

In the United States and some foreign jurisdictions there have been, and continue to be, several legislative and regulatory changes and proposed reforms of the healthcare system to contain costs, improve quality and expand access to care. In the United States, there have been and

 

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continue to be a number of healthcare-related legislative initiatives that have significantly affected the healthcare industry. For example, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively, the ACA, was passed in March 2010, and substantially changed the way healthcare is financed by both governmental and private insurers, and continues to significantly impact the U.S. healthcare industry. Among the ACA’s provisions of importance are that it created a new Medicare Part D coverage gap discount program, in which manufacturers must now agree to offer 70% point-of-sale discounts off negotiated prices of applicable brand products to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient products to be covered under Medicare Part D.

Some of the provisions of the ACA have yet to be implemented, and there have been judicial and Congressional challenges to certain aspects of the ACA, as well as recent efforts by the Trump administration to repeal or replace certain aspects of the ACA. Since January 2017, President Trump has signed two Executive Orders and other directives designed to delay the implementation of certain provisions of the ACA. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or part of the ACA. While Congress has not passed comprehensive repeal legislation, it has enacted laws that modify certain provisions of the ACA, such as removing penalties, starting January 1, 2019, for not complying with the ACA’s individual mandate to carry health insurance. On December 18, 2019, the U.S. Court of Appeals for the Fifth Circuit ruled that the ACA’s individual mandate is unconstitutional because the Tax Cuts and Jobs Act of 2017, or Tax Act, modified the individual mandate so that it could no longer constitute a tax and remanded the case to a U.S. district court in Texas to determine if the remainder of the ACA is severable from the individual mandate. It is unclear how this decision, future decisions, subsequent appeals, and other efforts to repeal and replace the ACA will impact the ACA and our business.

In addition, there has been heightened governmental scrutiny in the United States of healthcare pricing practices in light of rising costs. Such scrutiny has resulted in several recent congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for products. At the federal level, the Trump administration’s budget proposals for fiscal years 2019 and 2020 contain further drug price control measures that could be enacted during the budget process or in other future legislation. Further, the Trump administration released a “Blueprint” to lower overall drug prices and reduce out-of-pocket costs of drugs paid by consumers, which also contains additional proposals to increase drug manufacturer competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their products. At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. Not all of these initiatives are applicable to us, however. For example, drug importation programs permit individuals to import prescription drugs from Canada, where the prescription drugs typically cost less than in the United States. We believe it is unlikely that consumers will be importing our OTC products from Canada because if the products are sold OTC in Canada, the price is likely similar to the price in the United States.

Any such legislative, judicial or other regulatory changes and pricing scrutiny could adversely affect business, financial condition and results of operations.

 

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We are subject to certain U.S. and foreign anti-corruption, anti-money laundering, export control, sanctions, and other trade laws and regulations. We can face serious consequences for violations.

U.S. and foreign anti-corruption, anti-money laundering, export control, sanctions and other trade laws and regulations, or collectively, Trade Laws, prohibit, among other things, companies and their employees, agents, clinical research organizations, legal counsel, accountants, consultants, contractors and other partners from authorizing, promising, offering, providing, soliciting or receiving directly or indirectly, corrupt or improper payments or anything else of value to or from recipients in the public or private sector. Violations of Trade Laws can result in substantial criminal fines and civil penalties, imprisonment, the loss of trade privileges, debarment, tax reassessments, breach of contract and fraud litigation, reputational harm and other consequences. We have direct or indirect interactions with officials and employees of government agencies or government-affiliated hospitals, universities and other organizations. We also expect our non-U.S. activities to increase over time. We expect to rely on third parties for research, clinical evaluations and to obtain necessary permits, licenses, patent registrations and other marketing approvals. We can be held liable for the corrupt or other illegal activities of our personnel, agents or partners, even if we do not authorize or have prior knowledge of such activities.

We are subject to environmental, health and safety laws and regulations, and we may become exposed to liability and substantial expenses in connection with environmental compliance or remediation activities.

Our operations, including our development, testing and manufacturing activities, are subject to numerous environmental, health and safety laws and regulations. These laws and regulations govern, among other things, the controlled use, handling, release and disposal of and the maintenance of a registry for, hazardous materials and biological materials, such as chemical solvents, human cells, carcinogenic compounds, mutagenic compounds and compounds that have a toxic effect on reproduction, laboratory procedures and exposure to blood-borne pathogens. If we fail to comply with such laws and regulations, we could be subject to fines or other sanctions.

As with other companies engaged in activities similar to ours, we face a risk of environmental liability inherent in our current and historical activities, including liability relating to releases of or exposure to hazardous or biological materials. Environmental, health and safety laws and regulations are becoming more stringent. We may be required to incur substantial expenses in connection with future environmental compliance or remediation activities, in which case, development or manufacturing efforts may be interrupted or delayed.

If significant tariffs or other restrictions are placed on imports from countries from which we source our supplies or any related counter-measures are taken by such countries, our revenue, profit margins, business, financial condition and results of operations may be materially harmed.

The Trump Administration has announced that it is altering trade agreements and terms between the United States and several countries, including China, where some of our suppliers operate. The measures have included the imposition of tariffs on certain U.S. imports. A few of the imported materials on which we rely for our manufacturing operations are currently subject to additional tariffs. The materials subject to these tariffs are expected to impact our raw material costs, and we believe we are not in a position to pass these costs on to our customers if we are to remain competitive. Although we have not yet been able to quantify the full impact of these measures, we expect our margin performance to decline due in large part to the anticipated impact

 

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of import tariffs. If further tariffs are imposed on a broader range of our imports, or if further retaliatory trade measures are taken by other countries in response to additional tariffs, our business, financial condition and results of operations may be adversely affected.

If we commercialize any products outside of the United States, a variety of risks associated with international operations could adversely affect our business.

If we seek to commercialize any of our products outside of the United States, we may choose to enter into agreements with third parties to market them in certain jurisdictions outside the United States. We expect that we would be subject to additional risks related to international operations, including:

 

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different regulatory requirements for approvals and rules governing commercialization in foreign countries;

 

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reduced protection and ability to enforce intellectual property rights;

 

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reduced protection and security for intellectual property rights;

 

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foreign reimbursement, pricing or insurance regimes;

 

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unexpected changes in tariffs, trade barriers or regulatory requirements;

 

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economic weakness, including inflation, or political instability in particular foreign economies and markets;

 

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failure to attract or keep an effective partner;

 

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foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, and other obligations incident to doing business in another country;

 

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business interruptions resulting from geopolitical actions, including war and terrorism or natural disasters, including earthquakes, typhoons, floods and fires or from economic or political instability;

 

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greater difficulty with enforcing our contracts;

 

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noncompliance with the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act 2010 and similar anti-bribery and anticorruption laws in other jurisdictions;

 

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data and healthcare privacy and other similar laws; and

 

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production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad.

We have no prior experience in these areas. In addition, there are complex regulatory, tax, labor, privacy and other legal requirements imposed by individual countries in Europe and elsewhere with which we will need to comply. If we are unable to successfully manage the challenges of international expansion and operations, our business, financial condition and operating results could be harmed.

 

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Our insurance policies are expensive and protect us only from some business risks, which leaves us exposed to significant uninsured liabilities.

We do not carry insurance for all categories of risk that our business may encounter. Some of the policies we currently maintain include general liability, product liability, employment practices liability, property, auto, workers’ compensation, umbrella and directors’ and officers’ liability insurance.

Our insurance coverage may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive and in the future we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. We may be unable to continue to obtain product liability insurance on commercially reasonable terms or in adequate amounts. A successful product liability claim or series of claims brought against us could cause our share price to decline and, if judgments exceed our insurance coverage, could adversely affect our business, financial condition and results of operations, including preventing or limiting the commercialization of our products. We do not carry specific biological or hazardous waste insurance coverage, and our property, casualty and general liability insurance policies specifically exclude coverage for damages and fines arising from biological or hazardous waste exposure or contamination. Accordingly, in the event of contamination or injury, we could be held liable for damages or be penalized with fines in an amount exceeding our resources, and our operations could be suspended.

We also expect that operating as a public company will make it more difficult and more expensive for us to obtain directors’ and officers’ liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees or as executive officers. We do not know, however, if we will be able to maintain existing insurance with adequate levels of coverage. Any significant uninsured liability may require us to pay substantial amounts, which would adversely affect our cash position, business, financial condition and results of operations.

Our business and operations would suffer in the event of system failures.

Our computer systems, as well as those of our contractors and consultants, may be vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, hacking war and telecommunication and electrical failures. If such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our development and commercialization activities. To the extent that any disruption or security breach were to result in a loss of or damage to our data or applications, or inappropriate disclosure of personal, confidential or proprietary information, we could incur liability.

In the ordinary course of our business, we collect and store sensitive data, including clinical study data, proprietary business information, personal data and personally identifiable information, in our data centers and on our networks. The secure processing, maintenance and transmission of this information is critical to our operations. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or internal bad actors, or breached due to employee error, a technical vulnerability, malfeasance or other disruptions. Although, to our knowledge, we have not experienced any such material security breach to date, any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, significant regulatory penalties, and such an event could disrupt

 

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our operations, damage our reputation and cause a loss of confidence in us and cause a material adverse effect on our business, financial condition and results of operations.

Risks Related to Our Dependence on Third Parties

We are dependent on third parties to produce additional supportive clinical data.

Our growth strategy is dependent, in part, on our clinical data program, which is designed to help produce additional supportive clinical data for our products. This program depends on our ability to work with key opinion leaders and hospital department chairs in order to: (a) convert these key influencers into supporters for our brand; (b) accelerate IRB approval and academic center prioritization; (c) increase cost sharing; and (d) improve the likelihood and speed of study presentation or publication. To the extent we are unable to maintain relationships with key opinion leaders and hospital department chairs as part of our program, our business, financial condition and results of operations may be adversely affected.

If we are unable to maintain or enter into new contractual relationships with distributors or supply chain organizations, our business, financial condition and results of operations could be adversely affected.

Our success is dependent on maintaining our relationships with distributors and supply chain organizations. We have entered into contractual relationships with each of the following four national distributors and all are currently purchasing our Theraworx products for distribution to their customers: Cardinal Health, Owens & Minor, Medline Industries and McKesson. We also have distribution agreements with the nation’s three largest retail pharmaceutical and OTC product distributors: AmerisourceBergen, Cardinal Health and McKesson. In addition, we have retail distribution and similar contracts with Amazon, and pharmacies, such as CVS, Rite Aid, Walgreens and Walmart, which are among the four largest chain drug stores in the United States. We have also entered into contracts with GPOs, such as Vizient and Premier, in the institutional care channel, providing our brands with supply chain access. We may not be able to maintain existing contracts or enter into new contracts, or we may be excluded from future contracts with distributors or GPOs on terms acceptable to us, if at all, and in each such case our business, financial condition and results of operations could be adversely affected.

Our reliance on single-source suppliers could inhibit our ability to meet demand for our products in a timely manner or within budget.

Some of the components for our products are provided to us by single-source suppliers. We expect to purchase components through purchase orders, rather than long-term supply agreements and generally will not maintain large volumes of input inventory. While we believe alternatives for some components exist and will be identified, the disruption or termination of the supply of components could cause a significant increase in component costs or shortage of availability, both which could adversely affect our business, financial condition and operating results.

Our anticipated dependence on a limited number of third-party sterilization providers may also create delays or disruptions in our manufacturing process. Available capacity for sterilization services across the United States that we can use for our processes are currently limited and, to our knowledge, no additional facilities are expected to be added.

The dependence on both third-party sterilization and single-source suppliers involve several risks, including limited control over pricing, availability, quality and delivery schedules. It is possible that our suppliers may not have capacity to scale production to our anticipated needs.

 

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Any disruption could also result in our inability to meet demand for our products, which could harm our ability to generate revenues, lead to customer dissatisfaction and damage our reputation. Furthermore, if we are required to change a supplier of key components or sterilization services, we may be also be required to verify the new supplier(s) maintains facilities and procedures that comply with quality standards and with all applicable regulations and guidelines. The delays associated with the verification of a new sterilization supplier could delay our ability to manufacture our products in a timely manner or within budget and could adversely affect our business, financial condition and results of operations.

We have relied, and we expect to continue to rely on third parties to conduct, supervise and monitor our clinical evaluations, and if these third parties perform in an unsatisfactory manner or are unable to perform in a timely manner, our business, financial condition and results of operations could be adversely affected.

We have relied, and we expect to continue to rely, on hospitals, universities and contract research organizations to ensure our clinical evaluations are conducted properly and on time. We may also engage third parties, such as clinical data management organizations, medical institutions or clinical investigators, to conduct or assist in clinical evaluations or other development work. While we will have agreements governing their activities, we will have limited influence over their actual performance. We control only certain aspects of our third-party service providers’ activities. Nevertheless, we are responsible for ensuring that each of our clinical studies is conducted in accordance with applicable protocols and legal, regulatory and scientific standards. Our reliance on these third parties does not relieve us of our regulatory responsibilities.

Our third-party service providers are not our employees, and we are therefore unable to directly monitor whether or not they devote sufficient time and resources to our clinical evaluations. These third-party service providers may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical evaluations or other drug development activities that could harm our competitive position. If our third-party service providers do not successfully carry out their contractual duties or obligations, fail to meet expected deadlines or fail to comply with applicable regulatory requirements, or if the quality or accuracy of the clinical data they obtain is compromised, due to the failure to adhere to our clinical protocols or regulatory requirements or for any other reasons, our clinical evaluations may be extended, delayed or terminated, and we may not be able to obtain clinical support for, or successfully commercialize, our products. As a result, our costs could increase and our ability to generate revenues could be delayed and our business, financial condition and results of operations could be adversely affected.

Risks Related to Intellectual Property

Trade secrets and confidential and unpatented know-how are important to our business, and such information is difficult to protect.

We consider proprietary trade secrets and confidential and unpatented know-how to be important to our business. We may rely on trade secrets and confidential know-how to protect our technology, especially where patent protection is believed by us to be of limited value. Therefore, our success depends, in part, on our ability to keep competitors from reverse engineering our products, methods or know-how and maintain trade secrecy and operate without infringing on the proprietary rights of third parties. However, trade secrets and confidential know-how are difficult to protect, and we have incomplete control over the protection of such intellectual property used by employees and third parties.

 

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To protect this type of information against disclosure or misappropriation by competitors, our policy is to require our employees, consultants, contractors and advisors to enter into intellectual property assignment and confidentiality agreements and, if applicable, material transfer agreements, consulting agreements or other similar agreements with us. These agreements aim to limit the rights of the third parties to use or disclose our confidential information, including our trade secrets. However, current or former employees, consultants, contractors and advisers may unintentionally or willfully disclose our confidential information to competitors, and confidentiality agreements may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, these agreements typically restrict the ability of our advisors, employees, third-party contractors and consultants to publish data potentially relating to our trade secrets, although our agreements may contain certain limited publication rights. The need to share trade secrets and other confidential information increases the risk that such trade secrets become known by our competitors, are inadvertently incorporated into the technology of others or are disclosed or used in violation of these agreements. Despite our efforts to protect our trade secrets, our competitors may discover our trade secrets, either through breach of our agreements, independent development or publication of information by any of our stakeholders. We cannot assure you that these agreements will not be, or have not already been, breached. Further, we may in the future, face claims that employees, consultants, contractors and advisors have rights to our intellectual property, demanding royalties and other remuneration. Moreover, as our products gain visibility in the marketplace, the frequency of these claims could increase.

Enforcing a claim that a third party illegally obtained, and is using, our trade secrets and/or confidential know-how is expensive, time consuming and unpredictable, and the enforceability of confidentiality agreements may vary from jurisdiction to jurisdiction. Further, courts outside the United States are sometimes less willing to protect proprietary information, technology and know-how. Given that our competitive position is based, in part, on our know-how and trade secrets, a competitor’s discovery of our trade secrets or other unauthorized use or disclosure would impair our competitive position and could have an adverse effect on our business, financial condition and results of operations.

If we are unable to obtain and maintain patent protection for our technology and products or if the scope of the patent protection obtained is not sufficiently broad, we may not be able to compete effectively in our markets.

We rely, and will continue to rely, upon a combination of patents and patent applications, trade secret protection and confidentiality agreements to protect the intellectual property related to our proprietary technologies, product candidate development programs and future potential products. Our success depends in large part on our ability to secure and maintain patent protection in the United States and other countries with respect to our current products and any future potential products we may develop. We seek to protect our proprietary position by filing, or collaborating with our licensors to file, patent applications in the United States and abroad related to our proprietary technologies, development programs and products. The patent prosecution process is expensive and time-consuming, and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Moreover, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain.

In addition, it is possible that we have failed, or will fail, to identify patentable aspects of our research and development output before it is too late to obtain patent protection. We may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain

 

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the rights to patents licensed to third parties. Therefore, these patents and patent applications may not be prosecuted or enforced in a manner consistent with the best interests of our business. The patent applications that we own or in-license may fail to result in issued patents with claims that cover our proprietary products and technology, including current products and any future potential products we may develop in the United States or in foreign countries, in whole or in part. Alternately, our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from using our technology or from developing competing products and technologies. There is no assurance that all potentially relevant prior art relating to our patents and patent applications has been found, which can prevent a patent from issuing from a pending patent application or later invalidate or narrow the scope of an issued patent. For example, publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing or, in some cases, not at all. Therefore, we cannot know with certainty whether we were the first to make the inventions claimed in our patents or pending patent applications, or that we were the first to file for patent protection for such inventions. Even if patents do successfully issue and even if such patents cover our current products and any future potential products that we may develop, third parties may challenge their validity, ownership, enforceability or the scope thereof, which may result in such patents being narrowed, invalidated or held unenforceable or circumvented. Any successful challenge to these patents or any other patents owned by or licensed to us could deprive us of rights necessary for the successful commercialization of any of our products. In addition, the issuance of a patent does not give us the right to produce the patented invention. Third parties may have blocking patents that could prevent us from marketing our products or producing our own patented technology. Our competitors may be able to circumvent our patents by developing similar or alternative future potential products in a non-infringing manner. If any of our patents expire or are challenged, invalidated, circumvented or otherwise limited by third parties prior to the commercialization of any of our future potential products, or if we do not own or have exclusive rights to other enforceable patents protecting our existing products, future potential products or technologies, competitors and other third parties could market products and use processes that are substantially similar, or superior, to ours and our business, financial condition and results of operation could be adversely affected.

If the patent applications we hold with respect to our products fail to issue, if their validity, breadth or strength of protection is threatened, or if they fail to provide meaningful exclusivity for any of our current products or future potential products or technology, it could dissuade companies from collaborating with us, encourage competitors to develop competing products or technologies and threaten our ability to commercialize our products or any future potential products. Any such outcome could adversely affect our business, financial condition and results of operations.

Our U.S. patent relating to the base formulation for Theraworx and its related solutions, including Theraworx Relief, U.S. Patent Number US 6,358,516 B1, expired on August 21, 2018. At that time, the subject matter disclosed and claimed in such patent entered the public domain and our right to exclude others from the subject matter disclosed and claimed under the patent expired. The products disclosed and claimed in the expired patent can now be brought to the market without risk of infringement of that expired patent. If we fail to develop alternative patentable technologies or sufficient brand recognition for our products to establish sustainable markets for our products, competitors may more easily undermine and adversely affect our competitive position. We have developed and filed patent applications on new methods of using the Theraworx and related formulations, and have begun to obtain issued patents that provide a right to exclude others from using these formulations in the patented methods, and have taken efforts to establish and maintain our brands, each of which come with associated risks.

 

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The patent position of healthcare and wellness companies is generally highly uncertain, involves complex legal, scientific and factual questions, and is characterized by the existence of large numbers of patents and frequent litigation based on allegations of patent or other intellectual property infringement or violation. The standards that the U.S. Patent and Trademarks Office, or the USPTO, and its foreign counterparts use to grant patents are not always applied predictably or uniformly. In addition, the laws of jurisdictions outside the United States may not protect our rights to the same extent as the laws of the United States, and many companies have encountered significant problems in protecting and defending such rights in foreign jurisdictions. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection. Since patent applications in the United States and other jurisdictions are confidential for a period of time after filing, we cannot be certain that we were the first to file for patents covering our inventions. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain. Our pending and future patent applications may not result in the issuance of patents, or may result in the issuance of patents that fail to protect our technology or products, in whole or in part, or which fail to effectively prevent others from commercializing competitive technologies and products.

The issuance of a patent is not conclusive as to its inventorship, ownership, scope, validity or enforceability, and our owned and licensed patents may be challenged in the courts or patent offices in the United States and abroad. Such challenges may result in loss of exclusivity or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and products. We may become involved in opposition, derivation, reexamination, inter partes review, post-grant review or interference proceedings challenging our current or any future patent rights. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third parties to commercialize our technology or products and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patent rights. Thus, even if our patent applications issue as patents, they may not issue in a form that will provide us with meaningful protection, prevent competitors from competing with us or otherwise provide us with any competitive advantage. Moreover, patents have a limited lifespan. In the United States, the natural expiration of a patent is generally 20 years after it is filed. Various extensions may be available; however the life of a patent, and the protection it affords, is limited. Without patent protection, we may be open to competition from generic versions of such products. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.

Third parties may assert claims against us alleging infringement of their patents and proprietary rights, or we may need to become involved in lawsuits to defend or enforce our patents, either of which could result in substantial costs or loss of productivity, prohibit our use of proprietary technology or sale of products or put our patents and other proprietary rights at risk.

Our commercial success depends, in part, upon our ability to manufacture, market and sell our products and any future potential products without alleged or actual infringement, misappropriation or other violation of the patents and proprietary rights of third parties. However, our development and commercialization activities may be subject to claims that we infringe or otherwise violate patents or other intellectual property rights owned or controlled by third parties. Litigation relating to infringement or misappropriation of patent and other intellectual property rights in the healthcare and wellness industry is common, including patent infringement lawsuits,

 

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interferences, derivation and administrative law proceedings, inter partes review and post-grant review before the USPTO, as well as oppositions and similar processes in foreign jurisdictions. The various markets in which we plan to operate are subject to frequent and extensive litigation regarding patents and other intellectual property rights. Our competitors in both the United States and abroad, many of which have substantially greater resources and have made substantial investments in patent portfolios and competing technologies, may have applied for or obtained or may in the future apply for or obtain, patents that will prevent, limit or otherwise interfere with our ability to make, use and sell our products. In addition, many companies in intellectual property-dependent industries like ours have employed intellectual property litigation as a means to gain an advantage over their competitors. Numerous U.S., EU and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we operate, and as we gain greater visibility and market exposure, in particular as a public company, the risk increases that our products may be subject to claims of infringement of the intellectual property rights of third parties. Some claimants may have substantially greater resources than we do and may be able to sustain the costs of complex intellectual property litigation to a greater degree and for longer periods of time than we could. In addition, patent holding companies that focus solely on extracting royalties and settlements by enforcing patent rights may target us.

We may be subject to third-party claims including infringement, interference or derivation proceedings, post-grant review and inter partes review before the USPTO or similar adversarial proceedings or litigation in other jurisdictions. Even if such claims are without merit, a court of competent jurisdiction could hold that these third-party patents are valid, enforceable and infringed, and the holders of any such patents may be able to block our ability to commercialize the applicable product unless we obtained a license under the applicable patents, or until such patents expire or are finally determined to be invalid or unenforceable. There may be third-party patents or patent applications with claims to compositions, formulations, or methods of treatment, prevention use, or manufacture of our products, methods or technologies. Because patent applications can take many years to issue, there may be currently pending patent applications, which may later result in issued patents that our products may infringe. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon these patents. If any third-party patents were held by a court of competent jurisdiction to cover aspects of our compositions, formulations, or methods of treatment, prevention or use, the holders of any such patents may be able to prohibit our use of those compositions, formulations, methods of treatment, prevention or use or other technologies, effectively blocking our ability to progress the development of or commercialize the applicable product until such patent expires or is finally determined to be invalid or unenforceable or unless we obtained a license.

In addition, defending such claims would cause us to incur substantial expenses and, if successful, could cause us to pay substantial damages if we are found to be infringing a third party’s patent rights. These damages potentially include increased damages (possibly treble damages) and attorneys’ fees if we are found to have infringed such rights willfully. Further, if a patent infringement suit is brought against us or our third-party service providers, our development, manufacturing or sales activities relating to the product or product candidate that is the subject of the suit may be delayed or terminated, as parties making claims against us may obtain injunctive or other equitable relief. As a result of patent infringement claims, or in order to avoid potential infringement claims, we may choose to seek, or be required to seek, a license from the third party, which may require payment of substantial royalties or fees, or require us to grant a cross-license under our intellectual property rights. These licenses may not be available on reasonable terms or at all. Even if a license can be obtained on reasonable terms, the rights may be nonexclusive, which would give our competitors access to the same intellectual property rights. If we are unable to enter into a license on acceptable terms, we could be prevented from commercializing one or more of our future potential products, or forced to modify such future

 

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potential products, or to cease some aspect of our business operations, which could harm our business significantly. We might also be forced to redesign or modify our products or future potential products so that we no longer infringe the third-party intellectual property rights, which may result in significant cost or delay to us, or which redesign or modification could be impossible or technically infeasible. Even if we were ultimately to prevail, any of these events could require us to divert substantial financial and management resources that we would otherwise be able to devote to our business. Intellectual property litigation, regardless of its outcome, may cause negative publicity, adversely impact customers, cause product shipment delays, or prohibit us from manufacturing, marketing or otherwise commercializing our products, services and technology. In addition, if the breadth or strength of protection provided by the patents and patent applications we own or in-license is threatened, it could dissuade companies from collaborating with us to license or commercialize products.

Competitors may infringe our patents or other intellectual property.

If we or one of our licensors were to initiate legal proceedings against a third party to enforce a patent covering one of our products or future potential products, the defendant could counterclaim that our patent is invalid or unenforceable. In patent litigation in the United States and in Europe, defendant counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, for example, lack of novelty, obviousness lack of written description, or non-enablement. Third parties might allege unenforceability of our patents because during prosecution of the patent an individual connected with such prosecution withheld relevant information, or made a misleading statement. Interference or derivation proceedings provoked by third parties or brought by us or declared by the USPTO may be necessary to determine the priority of inventions with respect to our patents or patent applications. The outcome of proceedings involving assertions of invalidity and unenforceability during patent litigation is unpredictable. With respect to the validity of patents, for example, we cannot be certain that there is no invalidating prior art of which we and the patent examiner were unaware during prosecution, but that an adverse third party may identify and submit in support of such assertions of invalidity. If a defendant were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our products. Our patents and other intellectual property rights also will not protect our technology if competitors design around our protected technology without infringing our patents or other intellectual property rights.

Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses and could distract our technical and management personnel from their normal responsibilities. In addition, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors view these announcements in a negative light, the price of our common stock could be adversely affected. Such litigation or proceedings could substantially increase our operating losses and reduce our resources available for development activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have an adverse effect on our ability to compete in the marketplace.

 

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We may not identify relevant third-party patents or may incorrectly interpret the relevance, scope or expiration of a third-party patent, which might adversely affect our ability to develop, manufacture and market our products.

We cannot guarantee that any of our patent searches or analyses, including but not limited to the identification of relevant patents, analysis of the scope of relevant patent claims or determination of the expiration of relevant patents, are complete or thorough, nor can we be certain that we have identified each and every third-party patent and pending application in the United States, Europe and elsewhere that is relevant to or necessary for the commercialization of our products in any jurisdiction. For example, in the United States, applications filed before November 29, 2000 and certain applications filed after that date, that will not be filed outside the United States, remain confidential until patents issue. Patent applications in the United States, the European Union and elsewhere are published approximately 18 months after the earliest filing for which priority is claimed, with such earliest filing date being commonly referred to as the priority date. Therefore, patent applications covering our products could be filed by others without our knowledge. Additionally, pending patent applications that have been published can, subject to certain limitations, be later amended in a manner that could cover our products. After issuance, the scope of patent claims remains subject to construction as determined by an interpretation of the law, the written disclosure in a patent and the patent’s prosecution history. Our interpretation of the relevance or the scope of a patent or a pending application may be incorrect, which may negatively impact our ability to market our products. We may incorrectly determine that our products are not covered by a third-party patent, may incorrectly predict whether a third party’s pending application will issue with claims of relevant scope, or may incorrectly determine the expiration date of a patent. Our failure to identify and correctly interpret relevant patents may negatively impact our ability to develop and market our products.

If we fail to identify or correctly interpret relevant patents, we may be subject to infringement claims. We cannot guarantee that we will be able to successfully settle or otherwise resolve such infringement claims. If we fail in any such dispute, in addition to being forced to pay monetary damages, we may be temporarily or permanently prohibited from commercializing our products. We might, if possible, also be forced to redesign our products in a manner that no longer infringes third-party intellectual property rights. Any of these events, even if we were ultimately to prevail, could require us to divert substantial financial and management resources that we would otherwise be able to devote to our business.

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

The USPTO, European and other patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. In addition, periodic maintenance and annuity fees on any issued patent are due to be paid to the USPTO, European and other patent agencies over the lifetime of the patent. While an inadvertent failure to make payment of such fees or to comply with such provisions can in many cases be cured by additional payment of a late fee or by other means in accordance with the applicable rules, there are situations in which non-compliance with such provisions will result in the abandonment or lapse of the patent or patent application, and the partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents within prescribed time limits. If we or our licensors fail to maintain the patents and

 

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patent applications covering our products or if we or our licensors otherwise allow our patents or patent applications to be abandoned or lapse, it can create opportunities for competitors to enter the market, which would hurt our competitive position and could impair our ability to successfully progress clinical development or commercialization of products.

We enjoy only limited geographical protection with respect to certain patents and we may not be able to protect our intellectual property rights throughout the world.

Filing, prosecuting and defending patents covering our products in all countries throughout the world would be prohibitively expensive, and even in countries where we have sought protection for our intellectual property, such protection can be less extensive than those in the United States. The requirements for patentability may differ in certain countries, particularly developing countries, and the breadth of patent claims allowed can be inconsistent. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. In-licensing patents covering our products in all countries throughout the world may similarly be prohibitively expensive, if such opportunities are available at all. And in-licensing or filing, prosecuting and defending patents even in only those jurisdictions in which we develop or commercialize our products may be prohibitively expensive or impractical. Competitors may use our and our licensors’ technologies in jurisdictions where we have not obtained patent protection or licensed patents to develop their own products and, further, may export otherwise infringing products to territories where we and our licensors have patent protection, but where enforcement is not as strong as that in the United States or the European Union. These products may compete with our products, and our or our licensors’ patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

In addition, we may decide to abandon national and regional patent applications while they are still pending. The grant proceeding of each national or regional patent is an independent proceeding that may lead to situations in which applications may be rejected by the relevant patent office, while substantively similar applications are granted by others. Furthermore, generic drug manufacturers or other competitors may challenge the scope, validity or enforceability of our or our licensors’ patents, requiring us or our licensors to engage in complex, lengthy and costly litigation or other proceedings. Generic drug manufacturers may develop, seek approval for and launch generic versions of our products. It is also quite common that depending on the country, the scope of patent protection may vary for the same products or technology.

The laws of some jurisdictions do not protect intellectual property rights to the same extent as the laws or regulations in the United States and the European Union, and many companies have encountered significant difficulties in protecting and defending proprietary rights in such jurisdictions. Moreover, the legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets or other forms of intellectual property, particularly those relating to healthcare products, which could make it difficult for us to prevent competitors in some jurisdictions from marketing competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions, whether or not successful, are likely to result in substantial costs and divert our efforts and attention from other aspects of our business, and additionally could put at risk our or our licensors’ patents of being invalidated or interpreted narrowly, could increase the risk of our or our licensors’ patent applications not issuing, or could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate, while damages or other remedies may be awarded to the adverse party, which may be commercially significant. If we prevail, damages or other remedies awarded to us, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

 

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Furthermore, while we intend to protect our intellectual property rights in our expected significant markets, we cannot ensure that we will be able to initiate or maintain similar efforts in all jurisdictions in which we may wish to market our products. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate, which may have an adverse effect on our ability to successfully commercialize our products in all of our expected significant foreign markets. If we or our licensors encounter difficulties in protecting, or are otherwise precluded from effectively protecting, the intellectual property rights important for our business in such jurisdictions, the value of these rights may be diminished and we may face additional competition in those jurisdictions.

In some jurisdictions, including European Union countries, compulsory licensing laws compel patent owners to grant licenses to third parties. In addition, some countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of such patent. If we or any of our licensors are forced to grant a license to third parties under patents relevant to our business, or if we or our licensors are prevented from enforcing patent rights against third parties, our competitive position may be substantially impaired in such jurisdictions.

Patent terms may be inadequate to protect our competitive position on our products or future potential products for an adequate amount of time.

The term of any individual patent depends on applicable law in the country where the patent is granted. In the United States, provided all maintenance fees are timely paid, a patent generally has a term of 20 years from its application filing date or earliest claimed non-provisional filing date. Extensions may be available under certain circumstances, but the life of a patent and, correspondingly, the protection it affords is limited. Even if we or our licensors obtain patents covering our products or future potential products, when the terms of all patents covering a product expire, our business may become subject to competition from competitive products, including generics. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.

Our proprietary rights may not adequately protect our technologies and products, and do not necessarily address all potential threats to our competitive advantage.

The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and may not adequately protect our business, or permit us to maintain our competitive advantage. The following examples are illustrative:

 

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others may be able to make products that are the same as or similar to our products but that are not covered by the claims of the patents that we own;

 

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others, including inventors or developers of our owned or in-licensed patented technologies who may become involved with competitors, may independently develop similar technologies that function as alternatives or replacements for any of our technologies without infringing our intellectual property rights;

 

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we may not have been the first to conceive and reduce to practice the inventions covered by the patents or patent applications that we own, license or will own or license;

 

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we may not have been the first to file patent applications covering certain of the patents or patent applications that we or they own or have obtained a license, or will own or will have obtained a license;

 

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•

we or our licensors may fail to meet obligations to the U.S. government with respect to in-licensed patents and patent applications funded by U.S. government grants, leading to the loss of patent rights;

 

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it is possible that our pending patent applications will not result in issued patents;

 

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it is possible that there are prior public disclosures that could invalidate our or our licensors’ patents;

 

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issued patents that we own or exclusively license may not provide us with any competitive advantage, or may be held invalid or unenforceable, as a result of legal challenges by our competitors;

 

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our competitors might conduct research and development activities in countries where we do not have patent rights, or in countries where research and development safe harbor laws exist, and then use the information learned from such activities to develop competitive products for sale in our major commercial markets;

 

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ownership, validity or enforceability of our or our licensors’ patents or patent applications may be challenged by third parties; and

 

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the patents of third parties or pending or future applications of third parties, if issued, may have an adverse effect on our business.

We may be unable to protect our manufacturing know-how effectively from reverse engineering or misappropriation or use by others, including current and potential competitors.

Our success and ability to compete may depend, at least in part, on our being first in the market for our products. Additionally, we depend on our manufacturing know-how to produce our Theraworx brand and related formulations, which know-how is not believed by our management to be generally known and consequently may provide us with a competitive advantage at the present time. We enter into nondisclosure agreements with those who have access to our confidential information (including manufacturing know-how), including our employees, consultants, scientific advisors, contractors, business partners and other third parties. We also seek to preserve the integrity and confidentiality of our proprietary technology and processes by maintaining physical security of our premises and physical and electronic security of our information technology systems. These protections may be breached, and we may not have adequate remedies for any breach. In addition, our proprietary technology and processes may be independently discovered by competitors, duplicated, or subject to competitive developments or other circumstances outside of our control. As our sole issued patent covering the base formulation of Theraworx and its related solutions has expired, competitors may attempt to reverse engineer our manufacturing know-how without recourse. Although we anticipate that our manufacturing know-how may be difficult for others to duplicate, we cannot assure prospective investors that others will not be able to produce at least competitive products to the Theraworx brand that could have a material adverse effect on our business, financial condition, and operations. In addition, previously confidential information can become publicly available by means other than reverse engineering, whether by breach of an employment agreement or other confidentiality obligation.

If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected.

If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected. We

 

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may not be able to protect our rights to these trademarks and trade names, which we need to build name recognition among potential partners or customers in our markets of interest. At times, competitors may adopt trademarks or trade names similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trademark or trade name infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of our unregistered trademarks or trade names. Over the long term, if we are unable to successfully register our trademarks and trade names and establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected. Our efforts to enforce or protect our proprietary rights related to trademarks, trade secrets, domain names, copyrights or other intellectual property may be ineffective and could result in substantial costs and diversion of resources and could adversely impact our business, financial condition or results of operations.

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of their former employers or other third parties.

We do and may employ individuals who were previously employed at universities or other healthcare and wellness companies, including our existing and potential competitors. Although we seek to protect our ownership of intellectual property rights by ensuring that our agreements with our employees, consultants, scientific advisors, collaborators, independent contractors and other third parties with whom we do business, include provisions requiring such parties to assign rights in inventions to us and to not use the know-how or confidential information of their former employer or other third parties, we may be subject to claims that we or our employees, consultants, scientific advisors, independent contractors or other third parties have inadvertently or otherwise used or disclosed know-how or confidential information of their former employers or other third parties. We may also be subject to claims that former employers or other third parties have an ownership interest in our patents. Litigation may be necessary to defend against these claims. There is no guarantee of success in defending these claims, and if we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable personnel or intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property, which could result in customers seeking other sources for the technology, or in ceasing from doing business with us. Such intellectual property rights could be awarded to a third party, and we could be required to obtain a license from such third party to develop or commercialize our products or any future product candidate. Such a license may not be available on commercially reasonable terms or at all. Even if we are successful, litigation could result in substantial cost and reputational loss and be a distraction to our management and other employees. Moreover, any such litigation or the threat thereof may adversely affect our reputation, our ability to form strategic alliances or sublicense our rights to collaborators, engage with scientific advisors or hire employees or consultants, each of which would have an adverse effect on our business, financial condition and results of operations.

Risks Related to Employee Matters and Managing Growth

We will need to expand our organization, and we may experience difficulties in managing this growth, which could disrupt our operations.

The growth in size and complexity of our business and our customer base has been and will continue to be a challenge to our management and operations. Additional growth will place significant demands on our management, infrastructure and other resources. To manage further growth effectively, we must identify, recruit, maintain, motivate and integrate additional employees, consultants and contractors to manage our expanded operations. Many of the

 

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companies that we compete against for qualified personnel, consultants and contractors have greater financial and other resources, different risk profiles and a longer history in the industry than we do. If we are unable to continue to attract and retain high-quality personnel, consultants and contractors, the rate and success at which we can expand our commercialization efforts, develop new future potential products and operate our business will be limited. As part of our growth strategy, we also plan to implement new or enhanced automated systems. If we fail to implement these systems in a cost-effective manner our business, financial condition and results of operations could be adversely affected.

Our management may need to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. We may not be able to effectively manage the expansion of our operations, which may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. Our expected growth could require significant capital expenditures and may divert financial resources away from other projects. If our management is unable to effectively manage our growth, our expenses may increase more than expected, our ability to generate and/or grow revenues could be reduced, we may not be able to implement our business strategy, and our business, financial condition and results of operations could be adversely affected.

Our future success depends on our ability to retain our key personnel and to attract, retain and motivate qualified personnel.

Companies in our industry have experienced a high rate of turnover of management personnel in recent years. We are highly dependent on the commercialization and business development expertise of our executive management team, as well as our sales, scientific and clinical teams. Although we have formal employment agreements with our executive officers, these agreements do not prevent them from terminating their employment with us at any time. We do not maintain any life insurance or key person insurance on any of our senior management or key employees.

If we lose one or more of our executive officers or key employees, our ability to implement our business strategy successfully could be seriously harmed. Furthermore, replacing executive officers and key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to continue to develop and commercialize our products successfully. To pursue our business strategy, we will need to hire or otherwise engage qualified sales personnel and personnel with expertise in clinical evaluations, government regulation, manufacturing, marketing and other areas. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these additional key personnel on acceptable terms given the competition among numerous healthcare and wellness companies for similar personnel. In addition, we rely on consultants and advisors. Our consultants and advisors may be engaged by entities other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us. If we are unable to continue to attract and retain high quality personnel, our ability to execute on our business plan will be limited.

Our employees and independent contractors, including consultants, vendors, and any third parties we may engage in connection with development and commercialization, may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could harm our business.

Misconduct by our employees and independent contractors, including consultants, vendors, and any third parties we may engage in connection with development and commercialization,

 

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could include intentional, reckless or negligent conduct or unauthorized activities that violate: (1) the laws and regulations of relevant regulatory authorities; (2) manufacturing standards; (3) data privacy, security, fraud and abuse and other healthcare laws and regulations; or (4) other laws that require the reporting of true, complete and accurate financial information and data. Specifically, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to, among other things, prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Activities subject to these laws could also involve, for example, the improper use or misrepresentation of information which could result in regulatory sanctions and cause serious harm to our reputation. It is not always possible to identify and deter misconduct by employees and other third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with such laws or regulations. Additionally, we are subject to the risk that a person or government could allege such fraud or other misconduct, even if none occurred. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, financial condition and results of operations, including the imposition of significant civil, criminal and administrative penalties, damages, monetary fines, disgorgements, possible exclusion from participation in Medicare, Medicaid, other U.S. federal healthcare programs or healthcare programs in other jurisdictions, integrity oversight and reporting obligations to resolve allegations of non-compliance, imprisonment, other sanctions, contractual damages, reputational harm, diminished profits and future earnings and curtailment of our operations.

We may engage in acquisitions, joint ventures, strategic alliances or other arrangements that could disrupt our business, cause dilution to our stockholders or reduce our financial resources.

In the future, we may enter into transactions to acquire other businesses, products, licenses or technologies or joint ventures, strategic alliances or other arrangements. If we do identify suitable candidates, we may not be able to make such acquisitions or enter into such arrangements on favorable terms, or at all. Any acquisitions we make or arrangements we enter into may not strengthen our competitive position, and these transactions may be viewed negatively by consumers, customers or investors. We may decide to incur debt in connection with an acquisition or other transaction or issue our common stock or other equity securities to the stockholders of the acquired company, which would reduce the percentage ownership of our existing stockholders. We could incur losses resulting from undiscovered liabilities of the acquired business or strategic partner that are not covered by the indemnification we may obtain from the seller or counterparty. In addition, we may not be able to successfully integrate the acquired personnel, technologies and operations into our existing business in an effective, timely and non-disruptive manner. Acquisitions, joint ventures, strategic alliances or other arrangements may also divert management attention from day-to-day responsibilities, increase our expenses and reduce our cash available for operations and other uses. We cannot predict the number, timing or size of future acquisitions, joint ventures, strategic alliances or other arrangements or the effect that any such transactions might have on our business, financial condition on results of operations.

Risks Related to Our Common Stock and This Offering

An active trading market for our common stock may not develop.

Prior to this offering, there has been no public market for our common stock, and an active trading market for our shares may never develop or be sustained following this offering. Any delay

 

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in the commencement of trading of our common stock on the Nasdaq Global Market, or Nasdaq, would impair the liquidity of the market for our common stock and make it more difficult for holders to sell their shares. The initial public offering price for our common stock will be determined through negotiations between the underwriters and us and may vary from the market price of our common stock following this offering. If an active market for our common stock does not develop, or it is not sustained, it may be difficult for you to sell your shares without depressing the market price for our common stock, or at all.

The market price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for purchasers of our common stock in this offering.

Our share price is likely to be volatile. The stock market in general and the market for smaller healthcare and wellness companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, you may not be able to sell your common stock at or above the initial public offering price. The market price for our common stock may be influenced by many factors, including:

 

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the success of existing or new competitive products or technologies;

 

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development of new products that may address our markets and make our products less attractive;

 

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failure or discontinuation of any of our product development programs;

 

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changes in the level of expenses related to any of our development or commercialization efforts;

 

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the recruitment or departure of key personnel;

 

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regulatory or legal developments or proceedings in the United States and other countries;

 

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

 

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the results of our efforts to discover, develop, acquire or in-license additional products;

 

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developments or disputes concerning patent applications, issued patents or other proprietary rights;

 

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failure to meet or exceed financial estimates and projections of the investment community or that we provide to the public;

 

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actual or expected changes in estimates as to financial results, development timelines or recommendations by securities analysts;

 

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announcement or expectation of additional financing efforts;

 

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sales of common stock by us, our executive officers, directors or principal stockholders, or others;

 

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

 

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•

market conditions in the healthcare and wellness sector;

 

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general economic, industry and market conditions;

 

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changes in accounting principles; and

 

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the other factors described in this “Risk Factors” section and elsewhere in this prospectus.

In addition, the stock market in general, and Nasdaq and healthcare and wellness companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance. Further, a decline in the financial markets and related factors beyond our control may cause the price of our common stock to decline rapidly and unexpectedly. If the market price of our common stock after the completion of this offering does not exceed the initial public offering price, you may not realize any return on, or you may lose some or all of your investment in us.

If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our common stock, our share price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business or industry. We do not currently have, and may never obtain, research coverage by securities and industry analysts. If no or few securities or industry analysts commence coverage of us, the trading price for our shares could be negatively impacted. In the event we obtain securities or industry analyst coverage, if any of the analysts who cover us issue an adverse or misleading opinion regarding us, our business model, our intellectual property or our share performance and our operating results fail to meet the expectations of analysts, our stock price would likely decline. If one or more of these analysts ceases coverage of us, or fails to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

After this offering, our executive officers, directors and principal stockholders, if they choose to act together, will continue to have the ability to control or significantly influence all matters submitted to stockholders for approval.

Upon the closing of this offering, based on the number of shares of common stock outstanding as of September 30, 2019, our executive officers, directors and stockholders who owned more than 5% of our outstanding common stock before this offering and their respective affiliates will, in the aggregate, hold common stock representing approximately     % of our outstanding common stock. As a result, if these stockholders choose to act together, they would be able to control or significantly influence all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons, if they choose to act together, would control or significantly influence the election of directors, the composition of our management and approval of any merger, consolidation, sale of all or substantially all of our assets or other business combination that other stockholders may desire. Any of these actions could adversely affect the market price of our common stock.

Certain of our directors, key employees or consultants may be subject to conflicts of interest.

Certain of our key employees or consultants also work for other entities and therefore may be subject to conflicts of interest. In addition, certain of our directors serve as executive officers and/

 

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or directors of other companies. Each may devote part of his or her working time to other business endeavors, including consulting relationships with other entities, and may have responsibilities to these other entities. Such conflicts may include deciding how much time to devote to our affairs, as well as which business opportunities should be presented to us.

We expect that all decisions made by our executive officers and directors will be made in accordance with their duties and obligations to deal fairly and in good faith and to act in the best interests of us and our stockholders.

In addition, prior to the closing of this offering, we expect to adopt a related person transaction policy pursuant to which all material transactions in which there is an actual, or in some cases, perceived, conflict of interest, will be subject to prior review and approval by our audit committee, or, if more appropriate, another independent body of our board of directors, who will determine whether such transactions or proposals are in, or not inconsistent with, our best interests and those of our stockholders. In addition, under our Amended and Restated Code of Business Conduct and Ethics, or the Code of Conduct, which we intend to adopt in connection with this offering, our employees and directors have an affirmative responsibility to disclose any transaction or relationship that reasonably could be expected to give rise to a conflict of interest. See the sections titled “Certain Relationships and Related Party Transactions—Related Person Transaction Policy” for additional information regarding this policy. However, there can be no assurance that such fiduciary duties or our policies and procedures will be adequate to protect our stockholders from all conflicts of interest.

We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. We expect that we will use the net proceeds of this offering as set forth in the section titled “Use of Proceeds.” However, our use of these proceeds may differ substantially from our current plans. The failure by our management to apply these funds effectively could result in financial losses that could have a negative impact on our business, cause the price of our common stock to decline and delay our commercialization efforts. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

If you purchase common stock in this offering, you will suffer immediate and substantial dilution of your investment.

The initial public offering price of our common stock will be substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase our common stock in this offering, you will pay a price per share that substantially exceeds our net tangible book value per share after this offering. Based on an assumed initial public offering price of $        per share, which is the midpoint of the price range set forth on the cover page of this prospectus, you will experience immediate dilution of $        per share as of September 30, 2019, representing the difference between our pro forma as adjusted net tangible book value per share, after giving effect to this offering, and the assumed initial public offering price. See the section titled “Dilution” for additional information.

 

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Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans, could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.

We will need additional capital in the future to continue our planned operations. To the extent we raise additional capital by issuing equity securities or convertible securities, our stockholders may experience substantial dilution. We may sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner, we determine from time to time. If we sell common stock, convertible securities or other equity securities in more than one transaction, investors may be materially diluted by subsequent sales. These sales may also result in material dilution to our existing stockholders, and new investors could gain rights superior to our existing stockholders.

In addition, our management is authorized to grant stock options and other equity-based awards to our employees, directors and consultants under the 2020 EIP. The number of shares of our common stock reserved for issuance under the 2020 EIP will automatically increase on January 1 of each calendar year, starting on January 1, 2021 through January 1, 2030, in an amount equal to 5% of the total number of shares of our common stock outstanding on the last day of the calendar month before the date of each automatic increase, or a lesser number of shares determined by our board of directors prior to the applicable January 1st. If our board of directors elects to increase the number of shares available for future grant by the maximum amount each year, our stockholders may experience additional dilution, which could cause our stock price to fall.

A significant portion of our total outstanding shares are eligible to be sold into the market in the near future, which could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market, or the perception in the market that the holders of a large number of stockholders intend to sell shares of our common stock, could reduce the market price of our common stock. After this offering, we will have                  shares of common stock outstanding, based on 67,761,515 shares of our common stock outstanding as of September 30, 2019. This includes the shares that we are selling in this offering, which may be resold in the public market immediately without restriction, unless purchased by our affiliates. Substantially all of the remaining 67,761,515 shares of common stock initially will be restricted as a result of securities laws, market standoff provisions or lock-up agreements, but will become eligible to be sold after this offering as described in the section titled “Shares Eligible for Future Sale.”

We also intend to register all shares of common stock subject to equity awards issued or reserved for future issuance under our equity compensation plans on a registration statement on Form S-8. Once we register these shares, they can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates under Rule 144 under the Securities Act and the market standoff provisions and lock-up agreements described above. Any sales of securities by these stockholders could have a negative impact on the trading price of our common stock.

We are an emerging growth company and a smaller reporting company and the reduced disclosure requirements applicable to emerging growth companies and smaller reporting companies may make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and may remain an emerging growth company until the last day of the fiscal year following the fifth anniversary of the

 

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closing of this offering. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” if our annual gross revenues exceed $1.07 billion or if we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period. For so 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:

 

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being permitted to provide only two years of audited consolidated financial statements, in addition to any required unaudited interim consolidated financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure in this prospectus;

 

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

 

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

 

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reduced disclosure obligations regarding executive compensation; and

 

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

As a result, the information we provide to stockholders will be different than the information that is available with respect to other public companies that are not emerging growth companies. For example, in this prospectus we have only included two years of audited consolidated financial statements and have not included all of the executive compensation-related information that would be required if we were not an emerging growth company. We cannot predict whether this will cause investors to find our common stock less attractive. 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 our share price may be reduced or more volatile.

Even following the termination of our status as an emerging growth company, we may be able to take advantage of the reduced disclosure requirements applicable to “smaller reporting companies,” as that term is defined in Rule 12b-2 of the Exchange Act of 1934, as amended, or the Exchange Act, and, in particular, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. To the extent that we are no longer eligible to use exemptions from various reporting requirements, we may be unable to realize our anticipated cost savings from these exemptions, which could have a material adverse impact on our business, financial condition or results of operations.

We will incur increased 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.

As a public company, and particularly after we are no longer an emerging growth company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Nasdaq listing requirements and other applicable securities rules and

 

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regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect that these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, which in turn could make it more difficult for us to attract and retain qualified members of our board of directors.

We are evaluating these rules and regulations, and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.

While we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants, adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing whether such controls are functioning as documented, and implement a continuous reporting and improvement process for internal control over financial reporting. In addition, if we identify one or more material weaknesses or significant deficiencies as a result of this implementation and evaluation process, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our consolidated financial statements.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which could adversely affect our business, financial condition, results of operations and the trading price of our common stock.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, beginning with our second filing of an Annual Report on Form 10-K with the SEC after we become a public company, management will assess and report annually on the effectiveness of our internal control over financial reporting and identify any material weaknesses in our internal control over financial reporting. Although Section 404(b) of the Sarbanes-Oxley Act, or Section 404(b), requires our independent registered public accounting firm to issue an annual report that addresses the effectiveness of our internal control over financial reporting, we have opted to rely on the exemptions provided in the JOBS Act, and consequently will not be required to comply with SEC rules that implement Section 404(b) until such time as we are no longer an emerging growth company.

Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404, or any subsequent testing by

 

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our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our consolidated financial statements or identify other areas for further attention or improvement. Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.

Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.

Upon the completion of this offering, we will become subject to the periodic reporting requirements of the Exchange Act. We designed our disclosure controls and procedures to reasonably assure that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

These inherent limitations include that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. For example, our directors or executive officers could inadvertently fail to disclose a new relationship or arrangement causing us to fail to make any related-party transaction disclosures. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.

Future changes in financial accounting standards or practices may cause adverse and unexpected revenue fluctuations and adversely affect our reported financial condition and results of operations.

Future changes in financial accounting standards may cause adverse, unexpected revenue fluctuations and affect our reported financial position or results of operations. Financial accounting standards in the United States are constantly under review and new pronouncements and varying interpretations of pronouncements have occurred with frequency in the past and are expected to occur again in the future. As a result, we may be required to make changes in our accounting policies. Those changes could affect our financial condition and results of operations or the way in which such financial condition and results of operations are reported. Compliance with new accounting standards may also result in additional expenses. As a result, we intend to invest all reasonably necessary resources to comply with evolving standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from business activities to compliance activities. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Accounting Pronouncements.” As an emerging growth company, the JOBS Act allows us to delay adoption of new or revised accounting standards applicable to public companies until such pronouncements are made applicable to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we may not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies, which may make comparison of our consolidated financial statements to those of other public companies more difficult.

 

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Because we do not anticipate paying any cash dividends on our common stock in the foreseeable future, capital appreciation, if any, would be your sole source of gain.

We have never declared or paid any cash dividends on our common stock. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Additionally, our credit facility limits our ability to pay dividends. As a result, capital appreciation, if any, of our common stock would be your sole source of gain on an investment in our common stock for the foreseeable future. See the section titled “Dividend Policy” for additional information.

We could be subject to securities class action litigation.

In the past, when the market price of a security has been volatile, holders of that security have sometimes instituted securities class action litigation against the issuer. This risk is especially relevant for us because companies in the healthcare and wellness industry have experienced significant stock price volatility in recent years. If any of the holders of our common stock were to bring such a lawsuit against us, we could incur substantial costs defending the lawsuit and the attention of our senior management would be diverted from the operation of our business. Any adverse determination in litigation could also subject us to significant liabilities.

We have significant net operating losses that we may not be able to realize or that may be restricted following any future change of control. We also benefit from certain tax incentive regimes, such as research and development tax credits, in the jurisdictions in which we operate and any adverse change to these regimes, the application thereof or challenges to the tax position we have adopted under these regimes could adversely affect our business, results of operations and financial condition.

As of December 31, 2018, we had $69.7 million of U.S. federal and $44.0 million of state net operating loss, or NOL, carryforwards. Our U.S. federal NOL carryforwards generated prior to 2018 will expire if not utilized prior to 2033. Under the Tax Act, federal NOLs incurred in tax years beginning after December 31, 2017 may be carried forward indefinitely, but the deductibility of federal NOLs generated in tax years beginning after December 31, 2017 is limited.

Our NOL carryforwards are subject to review and possible adjustment by the U.S. and state tax authorities. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change NOL carryforwards and research and development credits to offset its post-change income or tax liabilities may be limited. This could limit the amount of NOLs or research and development credit carryforwards that we can utilize annually to offset future taxable income or tax liabilities. Subsequent ownership changes and changes to the U.S. tax rules in respect of the utilization of NOLs and research and development credits carried forward may further affect the limitation in future years. In addition, at the state level, there may be periods during which the use of NOLs is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.

Additionally, we have not undertaken a study on our determination of our U.S. research and development credits. Consequently, our U.S. research and development credits may change, and in any event are subject to review and adjustment by the tax authorities.

 

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Changes in tax laws or regulations that are applied adversely to us or our customers may have a material adverse effect on our business, financial condition or results of operations.

New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, which could affect the tax treatment of our domestic or future foreign earnings. Any new taxes could adversely affect our domestic and international business operations, and our business and financial performance. Further, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us. For example, on December 22, 2017, President Trump signed into law the Tax Act, which significantly revises the Code. The Tax Act, 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 taxable income (except for certain small businesses), limitation of the deduction for NOLs carried forward from taxable years beginning after December 31, 2017 to 80% of current year taxable income and elimination of carrybacks of NOLs arising in taxable years ending after December 31, 2017, 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. We do not expect changes under the Tax Act to have a material impact on our tax liabilities in the near future. However, we continue to examine the impact that the Tax Act may have on our business in the longer term. Accordingly, notwithstanding the reduction in the U.S. federal corporate income tax rate, the overall impact of the Tax Act is uncertain and our business and financial condition could be adversely affected by the Tax Act. The Tax Act may also have an impact on holders of our common stock. We urge prospective investors to consult with their legal and tax advisors with respect to the Tax Act and the potential tax consequences of investing in or holding our common stock.

Delaware law and provisions in our amended and restated certificate of incorporation and amended and restated bylaws that will be in effect at the completion of this offering could make a merger, tender offer or proxy contest difficult, thereby depressing the trading price of our common stock.

Following the completion of this offering, our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law, or DGCL, may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our amended and restated certificate of incorporation and amended and restated bylaws that will be in effect at the completion of this offering will contain provisions that may make the acquisition of our company more difficult, including the following:

 

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a classified board of directors with three-year staggered terms, which could delay the ability of stockholders to change the membership of a majority of our board of directors;

 

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the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;

 

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the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;

 

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a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;

 

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the requirement that a special meeting of stockholders may be called only by a majority vote of our entire board of directors, the chairman of our board of directors or our chief executive officer, which could delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors;

 

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the requirement for the affirmative vote of holders of at least 66 2/3% of the voting power of all of the then-outstanding shares of the voting stock, voting together as a single class, to amend the provisions of our amended and restated certificate of incorporation relating to the management of our business or our amended and restated bylaws, which may inhibit the ability of an acquirer to affect such amendments to facilitate an unsolicited takeover attempt; and

 

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advance notice procedures with which stockholders must comply to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.

In addition, as a Delaware corporation, we are subject to Section 203 of the DGCL. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a certain period of time. A Delaware corporation may opt-out of this provision by express provision in its original certificate of incorporation or by amendment to its certificate of incorporation or bylaws approved by its stockholders. However, we have not opted out of this provision.

These and other provisions in our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law could make it more difficult for stockholders or potential acquirors to obtain control of our board of directors or initiate actions that are opposed by our then-current board of directors, including delay or impede a merger, tender offer or proxy contest involving our company. The existence of these provisions could negatively affect the price of our common stock and limit opportunities for you to realize value in a corporate transaction.

For information regarding these and other provisions, see the section titled “Description of Capital Stock.”

Our amended and restated certificate of incorporation that will become effective upon the closing of this offering designates the state courts in the State of Delaware or, if no state court located within the State of Delaware has jurisdiction, the federal courts for the District of Delaware, as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could discourage lawsuits against our company and our directors, officers and employees.

Our amended and restated certificate of incorporation that will become effective upon the closing of this offering provides that, to the fullest extent permitted by law, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, any state court located within the State of Delaware, or if all such state courts lack jurisdiction, the federal district court for the District of Delaware) will be the sole and exclusive forum for the following types of actions or proceedings under Delaware statutory or common law: (1) any derivative action or proceeding brought on our

 

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behalf; (2) any action or proceeding asserting a claim of breach of fiduciary duty owed by any current or former director, officer or other employee, to us or our stockholders; (3) any action or proceeding asserting a claim against us or any of our current or former directors, officers or other employees, arising out of or pursuant to any provision of the DGCL, our certificate of incorporation or our bylaws; (4) any action or proceeding to interpret, apply, enforce or determine the validity of our certificate of incorporation or our bylaws; (5) any action or proceeding as to which the DGCL confers jurisdiction on the Court of Chancery of the State of Delaware; or (6) any action asserting a claim against us, or any of our directors, officers or other employees, that is governed by the internal affairs doctrine, in all cases to the fullest extent permitted by law and subject to the court’s having personal jurisdiction over the indispensable parties named as defendants. For the avoidance of doubt, these choice of forum provisions will not apply to suits brought to enforce a duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction.

These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees and may discourage these types of lawsuits. Furthermore, if a court were to find the choice of forum provisions contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus are forward-looking statements, including statements about:

 

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the potential benefits of our existing and potential future products;

 

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the market opportunities for our existing and potential future products and our ability to maximize those opportunities;

 

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our business strategies and goals;

 

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estimates of our expenses, capital requirements and need for additional financing;

 

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our expectations regarding our manufacturing capabilities;

 

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the performance of our third-party suppliers and manufacturers;

 

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our expectations regarding our ability to obtain and maintain intellectual property protection for our products and our ability to operate our business without infringing on the intellectual property rights of others;

 

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our expectations regarding the regulatory classification of our existing and potential future products, as well as the regulatory response to the marketing and promotion of our existing and potential future products;

 

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our expectations regarding developments and projections relating to our competitors and any competing therapies that are or become available;

 

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our ability to identify, recruit and retain key personnel; and

 

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our expectations regarding the uses of the net proceeds from this offering and the sufficiency of such net proceeds together with our existing cash and cash equivalents to fund our operations and capital expenditures.

In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “continue” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target” or “will” or the negative of these terms or other similar expressions intended to identify statements about the future. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

 

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You should read the section titled “Risk Factors” for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. As a result of these factors, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

 

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INDUSTRY AND OTHER DATA

We obtained the industry, statistical and market data in this prospectus from our own internal estimates and research as well as from industry and general publications and research, surveys and studies conducted by third parties. All of the market data used in this prospectus involves a number of assumptions and limitations. While we believe that each of these studies and publications is reliable, the industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of important factors, including those described in the section titled “Risk Factors.” These and other factors could cause results to differ materially from those expressed in the estimates made by third parties and by us.

 

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DIVIDEND POLICY

We have never declared or paid any cash dividends on our common stock. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. Any future determination related to our dividend policy will be made at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements, contractual restrictions, business prospects and other factors our board of directors may deem relevant. In addition, the terms of our senior secured credit facility prohibit us from paying dividends on our common stock without Hayfin’s prior consent.

 

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USE OF PROCEEDS

We estimate that the net proceeds from this offering will be approximately $        million (or $        million if the underwriters exercise their option to purchase additional shares in full), assuming an initial public offering price of $        per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Each $1.00 increase or decrease in the assumed initial public offering price of $        per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease the net proceeds to us from this offering by approximately $        million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions. We may also increase or decrease the number of shares we are offering. A 1,000,000 share increase or decrease in the number of shares offered by us would increase or decrease the net proceeds to us from this offering by approximately $        million, assuming that the assumed initial public offering price, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions. We do not expect that a change in the initial public offering price or the number of shares by these amounts would have a material effect on the uses of the proceeds from this offering, although a decrease in such price or number of shares may accelerate the time at which we will need to seek additional capital in the future.

We intend to use the net proceeds from this offering as follows:

 

•

approximately $         million for sales and marketing activities, including the expansion of our sales team;

 

•

approximately $         million for research and development of potential future products;

 

•

approximately $         million for expansion of our manufacturing capabilities; and

 

•

the remainder for working capital and other general corporate purposes.

Based on our planned use of the net proceeds of this offering, our current cash and expected future sales, we estimate that such funds will be sufficient to enable us to fund our operating expenses and capital expenditure requirements through                 . We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we expect.

We may also use a portion of the net proceeds from this offering to opportunistically in-license, acquire, or invest in complementary businesses, technologies, products or assets. However, we have no current plans, commitments or obligations to do so.

This expected use of existing cash and our net proceeds from this offering represent our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve.

Our management will have broad discretion in the application of the net proceeds from this offering, and investors will be relying on the judgment of our management regarding the application of those net proceeds. The timing and amount of our actual expenditures will be based on many factors, including cash flows from operations and the anticipated growth of our business. Pending these uses, we plan to invest these net proceeds in short-term, interest bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the United States.

 

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CAPITALIZATION

The following table sets forth our cash and capitalization as of September 30, 2019:

 

•

on an actual basis;

 

•

on a pro forma basis to give effect to our issuance of the convertible notes in the aggregate principal amount of $6.4 million on January 10, 2020 and the automatic conversion of all outstanding obligations under the convertible notes upon the closing of this offering into an aggregate of                shares of our common stock at the assumed initial offering price of $        per share, the midpoint of the price range set forth on the cover page of this prospectus; and

 

•

on an as adjusted basis to further reflect our sale of                  shares of common stock in this offering at an assumed initial public offering price of $        per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

You should read the information in this table together with our consolidated financial statements and related notes included elsewhere in this prospectus and the sections titled “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

		As of September 30, 2019
		Actual				Pro Forma				Pro Forma As Adjusted (1)
		(in thousands, except share data)
Cash		$	7,194			$				$
Term loan			55,408
Convertible promissory notes			—
Series A redeemable preferred stock, par value $0.001 per share; 2,000,000 shares authorized, no shares issued or outstanding, actual or pro forma; no shares authorized, issued or outstanding, pro forma as adjusted			—
Series W redeemable preferred stock, par value $0.001 per share; 100 shares authorized, no shares issued or outstanding, actual or pro forma; no shares authorized, issued or outstanding, pro forma as adjusted			—
Stockholders’ equity (deficit):
Preferred stock, par value $0.001 per share; no shares authorized, issued or outstanding, actual or pro forma;                  shares authorized, no shares issued or outstanding, pro forma as adjusted			—
Common stock, par value $0.001 per share; 200,000,000 shares authorized, 67,761,515 shares issued and outstanding, actual; 200,000,000 shares authorized,                  shares issued and outstanding, pro forma;                  shares authorized,                  shares issued and outstanding, pro forma as adjusted			68
Additional paid-in capital			93,860
Accumulated deficit			(145,151	)
Total stockholders’ equity (deficit)			(51,223	)
Total capitalization		$	4,185							$

 

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(1)

The pro forma as adjusted information set forth above is illustrative only and will change based on the actual initial public offering price and number of shares issued in this offering, each determined at pricing. Each $1.00 increase or decrease in the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease pro forma as adjusted cash, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. A 1,000,000 share increase or decrease in the number of shares offered by us would increase or decrease pro forma as adjusted cash, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $         million, assuming that the assumed initial public offering price, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The pro forma and pro forma as adjusted numbers of shares of our common stock in the table above are based on:

 

•

67,761,515 shares of our common stock outstanding as of September 30, 2019;

 

•

466,000 shares of common stock issued on January 1, 2020 upon the settlement of RSUs that were outstanding as of September 30, 2019; and

 

•

the automatic conversion of all outstanding obligations under our outstanding convertible notes upon the closing of this offering into an aggregate of                  shares of common stock at the assumed initial offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus.

The actual, pro forma and pro forma as adjusted numbers of shares of common stock in the table above exclude:

 

•

7,106,566 shares of common stock issuable upon the exercise of options outstanding as of September 30, 2019 and granted under the 2014 Plan, the 2015 Plan, the 2016 Plan and the 2019 Incentive Plan, with a weighted-average exercise price of $2.64 per share;

 

•

10,183,911 shares of common stock issuable upon the exercise of warrants outstanding as of September 30, 2019, with a weighted-average exercise price of $2.29 per share;

 

•

8,000,000 shares of common stock reserved for future issuance pursuant to the 2020 EIP, which will become effective on the date of execution of the underwriting agreement for this offering, which initial number of shares reserved for issuance includes shares reserved for issuance pursuant to the 2019 Incentive Plan that are not granted as of the effective date of the 2020 EIP, as well as any automatic increases in the number of common shares reserved for future issuance under the 2020 EIP; and

 

•

2,032,845 shares of common stock reserved for future issuance pursuant to our ESPP, as well as any automatic increases in the number of common shares reserved for future issuance under the ESPP.

 

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