Document


 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. _)

 
 
Filed by the Registrant
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Filed by a Party other than the Registrant
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Check the appropriate box:
 
 
 
 
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Preliminary Proxy Statement
 
 
 
 
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Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
 
 
 
 
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Definitive Proxy Statement
 
 
 
 
 
 
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Definitive Additional Materials
 
 
 
 
 
¨
Soliciting Material Pursuant to § 240.14a-12
 
Innovate Biopharmaceuticals, Inc.
(Name of Registrant as Specified In Its Charter)
 

(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box)
 
 
 
 
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No fee required.
 
 
 
 
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Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
 
 
 
1.
Title of each class of securities to which transaction applies:
 


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2.
Aggregate number of securities to which transaction applies:

 
 
3.
Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined):

 
 
4.
Proposed maximum aggregate value of transaction:

 
 
5.
Total fee paid:

 
 
 
¨
Fee paid previously with preliminary materials.
 
 
 
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Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
 
 
 
 
6.
Amount Previously Paid:
 
 

 
 
7.
Form, Schedule or Registration Statement No.:

 
 
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Filing Party:

 
 
9.
Date Filed:

 

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INNOVATE BIOPHARMACEUTICALS, INC.
8480 Honeycutt Road, Suite 120
Raleigh, NC 27615
(919) 275-1933
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON [_____], 2020
Dear Stockholder:
You are cordially invited to attend the Special Meeting of Stockholders of Innovate Biopharmaceuticals, Inc., a Delaware corporation (the “Company”). The meeting will be held on [______], 2020, at 11:00 a.m. Eastern Time at the offices of Sheppard, Mullin, Richter & Hampton LLP, 30 Rockefeller Plaza, New York, NY 10112, to consider and vote upon the following matters and to transact such other business as may be properly brought before the meeting or adjournment or postponement thereof:
 
 
1.
To authorize, for purposes of complying with Nasdaq Listing Rule 5635, the issuance of shares of our common stock, pursuant to the terms of that certain Agreement and Plan of Merger and Reorganization, dated October 6, 2019, by and among the Company, RDD Pharma Ltd and the other parties thereto, as amended by Amendment No. 1, dated December 17, 2019, in an amount in excess of 20% of our common stock outstanding before the issuance of such common stock (the “Merger Consideration Proposal”).
2.
To approve the potential issuance of 20% or more of the Company’s issued and outstanding common stock pursuant to a proposed reduction in the exercise price of outstanding warrants (including an exchange of warrants for shares of common stock) (the “Warrants Proposal”).
3.
To approve an amendment to the amended and restated certificate of incorporation to effect a reverse stock split of the Company’s common stock (the “Reverse Stock Split Proposal”).
These items of business are more fully described in the Proxy Statement. The Board of Directors unanimously recommends that you vote “FOR” the Merger Consideration Proposal, “FOR” the Warrants Proposal and “FOR” the Reverse Stock Split Proposal.
The record date for the Special Meeting of Stockholders is December 20, 2019. Only stockholders of record at the close of business on that date may vote at the meeting or any adjournment thereof. Whether or not you expect to attend the Special Meeting, it is important that your shares be represented and voted. Please complete, date, sign and return the proxy card enclosed with these materials, or vote over the Internet as instructed in these materials, as promptly as possible in order to ensure your representation at the meeting. Even if you have voted by proxy, you may still vote in person if you attend the meeting. Only stockholders and authorized guests of the Company may attend the meeting, and all attendees will be required to show a valid form of ID (such as a government-issued form of photo identification). Please note, however, that, if your shares are held of record by a broker, bank or other nominee and you wish to vote at the meeting, you must obtain a proxy issued in your name from that record holder. Instructions on how to vote are found in the section entitled “How Do I Vote” starting on page [__] of the Proxy Statement.
 

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Important Notice Regarding the Availability of Proxy Materials for the Special Meeting of Stockholders to Be Held on
[_____], 2020, at 11:00 a.m. Eastern Time at
30 Rockefeller Plaza, New York, NY 10112, 39th Floor
Whether or not you attend the meeting in person, please vote by internet, or, if you receive a paper copy of the proxy materials, please sign, date and promptly mail the enclosed proxy card or use the internet voting procedures described on the proxy card.

 
 
 
By Order of the Board of Directors
 
/s/ Sandeep Laumas, M.D.
Sandeep Laumas, M.D.
Executive Chairman and Chief Executive Officer
Raleigh, North Carolina
[______], 2020
 


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INNOVATE BIOPHARMACEUTICALS, INC.
PROXY STATEMENT FOR SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON [_______], 2020
 
QUESTIONS AND ANSWERS ABOUT THESE PROXY MATERIALS AND VOTING

Why am I receiving these materials?
The Board of Directors (the “Board” or the “Board of Directors”) of Innovate Biopharmaceuticals, Inc. is soliciting your proxy to vote at the Special Meeting of Stockholders (the “Special Meeting”), including at any adjournments or postponements of the Special Meeting. On or about [______], 2020, we will mail the proxy materials to all stockholders entitled to vote at the Special Meeting. You are invited to attend the Special Meeting to vote on the three proposals described in this proxy statement. However, you do not need to attend the Special Meeting to vote your shares. Instead, you may simply complete, sign and return a proxy card, or follow the instructions below to submit your proxy over the Internet. Additional information on how you may vote can be found below under “How do I vote?”
How do I attend the Special Meeting?
The Special Meeting will be held on [____], 2020, at 11:00 a.m. Eastern Time at the offices of Sheppard, Mullin, Richter & Hampton LLP, 30 Rockefeller Plaza, New York, NY 10112. Information regarding directions to the Special Meeting may be found at the end of this proxy statement. Information on how to vote in person at the Special Meeting is provided below. Only stockholders and authorized guests of the Company may attend the meeting, and all attendees will be required to show a valid form of ID (such as a government-issued form of photo identification). If you hold your shares in street name (i.e., through a bank or broker), you must also provide proof of share ownership, such as a letter from your bank or broker or a recent brokerage statement.
Who can vote at the Special Meeting?
Only stockholders of record at the close of business on December 20, 2019, will be entitled to vote at the Special Meeting. On this record date, there were [__________] shares of our common stock outstanding and entitled to vote.
Stockholder of Record: Shares Registered in Your Name
If on December 20, 2019, your shares were registered directly in your name with Innovate’s transfer agent, Corporate Stock Transfer, Inc., then you are a stockholder of record. As a stockholder of record, you may vote in person at the Special Meeting or vote by proxy. Whether or not you plan to attend the Special Meeting, we urge you to fill out and return the enclosed proxy card, or vote by proxy over the Internet as instructed below to ensure your vote is counted.
Beneficial Owner: Shares Registered in the Name of a Broker or Bank
If on December 20, 2019, your shares were not held in your name, but rather in an account at a brokerage firm, bank, dealer or other similar organization, then you are the beneficial owner of shares held in “street name,” and these materials are being forwarded to you by that organization. The organization holding your account is considered to be the stockholder of record for purposes of voting at the Special Meeting. As a beneficial owner, you have the right to direct your broker or other agent regarding how to vote the shares in your account. You are also invited to attend the Special

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Meeting in person. However, since you are not the stockholder of record, you may not vote your shares in person at the Special Meeting unless you request and obtain a valid proxy from your broker or other agent.

What am I voting on?
There are three matters scheduled for a vote:
 
1.
To authorize, for purposes of complying with Nasdaq Listing Rule 5635, the issuance of shares of our common stock, pursuant to the terms of that certain Agreement and Plan of Merger and Reorganization, dated October 6, 2019, by and among the Company, RDD Pharma Ltd (“RDD”) and the other parties thereto, as amended by Amendment No. 1, dated December 17, 2019 (the “Merger Agreement”), in an amount in excess of 20% of our common stock outstanding before the issuance of such common stock (the “Merger Consideration Proposal”).
 
 
2.
To approve the potential issuance of 20% or more of the Company’s issued and outstanding common stock pursuant to a proposed reduction in the exercise price of outstanding warrants (including an exchange of warrants for shares of common stock) (the “Warrants Proposal”).
 
 
3.
To approve an amendment to the amended and restated certificate of incorporation to effect a reverse stock split of the Company’s common stock (the “Reverse Stock Split Proposal”).

What if another matter is properly brought before the Special Meeting?
Our Board of Directors knows of no other matters that will be presented for consideration at the Special Meeting. If any other matters are properly brought before the meeting, it is the intention of the persons named in the accompanying proxy to vote on those matters in accordance with their best judgment.
How do I vote?
You may vote “For” or “Against” or “Abstain”, by checking the related box. The procedures for voting are as follows:
Stockholder of Record: Shares Registered in Your Name
If you are a stockholder of record, you may vote in person at the Special Meeting, vote by proxy using the proxy card enclosed with your mailed proxy materials or vote over the Internet. Whether or not you plan to attend the Special Meeting, we urge you to vote by proxy to ensure your vote is counted. You may still attend the Special Meeting and vote in person even if you have already voted by proxy.
 
 
To vote in person, come to the Special Meeting with proper ID, and we will give you a ballot when you arrive.
 
 
To vote using the proxy card, simply complete, sign and date the proxy card (which is enclosed in your mailed proxy materials), and return it promptly in the envelope provided. If you return your signed proxy card to us before the Special Meeting, we will vote your shares as you direct.
 
 
To vote over the Internet, go to http://[_________] to complete an electronic proxy card. You will be asked to provide the control number enclosed with your proxy materials. Your Internet vote must be received by 11:59 p.m. Eastern Time on [_____], 2020, to be counted.
Beneficial Owner: Shares Registered in the Name of Broker or Bank
If you are a beneficial owner of shares registered in the name of your broker, bank or other agent, you should have received a voting instruction form with your proxy materials containing voting instructions from that organization rather

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than from Innovate. Simply complete and mail the voting instruction form or follow the voting instructions in the proxy materials to ensure that your vote is counted. Alternatively, you may vote over the Internet as instructed by your broker or bank. To vote in person at the Special Meeting, you must obtain a valid proxy from your broker, bank or other agent. Follow the instructions from your broker or bank included with your mailed proxy materials, or contact your broker or bank, to request a proxy form.
We provide Internet proxy voting to allow you to vote your shares with procedures designed to ensure the authenticity and correctness of your proxy vote instructions. However, please be aware that you must bear any costs associated with your use of the Internet, such as usage charges from Internet providers.

How many votes do I have?
On the matter to be voted upon, you have one vote for each share of common stock you own as of [_______], 2019.
 
What happens if I do not vote?
Stockholder of Record: Shares Registered in Your Name
If you are a stockholder of record and do not vote by completing your proxy card, over the Internet or in person at the Special Meeting, your shares will not be voted.
Beneficial Owner: Shares Registered in the Name of Broker or Bank
Under the applicable New York Stock Exchange (“NYSE”) rule, brokers, banks and nominees are not permitted to vote shares held for a customer on “non-routine” matters without specific instructions from the customer. Proposals 1 and 2 are considered to be “non-routine” matters and therefore, brokers, banks and other nominees do not have discretionary voting power on these matters and such entity will only vote your shares of common stock if you provide instructions on how to vote by complying with the voter instruction form sent to you by your broker, bank or other nominee with the proxy materials.
In any event, to be sure that your vote will be received in time, please cast your vote by your choice of available means at your earliest convenience.
Who is paying for this proxy solicitation?
We will pay for the entire cost of soliciting proxies. In addition to these proxy materials, our directors and employees may also solicit proxies in person, over the telephone or by other means of communication. Directors and employees will not be paid any additional compensation for soliciting proxies. We also will reimburse brokerage firms, banks, nominees and other persons holding shares for others for the cost of forwarding proxy materials to beneficial owners and obtaining their proxies.

What does it mean if I receive more than one set of proxy materials?
If you receive more than one set of proxy materials, your shares may be registered in more than one name or in different accounts. Please follow the voting instructions to ensure that all of your shares are voted.
Can I change my vote after submitting my proxy?
Stockholder of Record: Shares Registered in Your Name
Yes. You can revoke your proxy at any time before the final vote at the Special Meeting. If you are the record holder of your shares, you may revoke your proxy in any one of the following ways:

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You may submit another properly completed proxy card with a later date.
 
 
You may send a timely written notice that you are revoking your proxy to Innovate’s Corporate Secretary at Innovate Biopharmaceuticals, Inc., Attn: Corporate Secretary, 8480 Honeycutt Road, Suite 120, Raleigh, NC 27615. A revocation must be received no later than the beginning of voting at the Special Meeting.
 
 
You may attend the Special Meeting and vote in person. Simply attending the meeting will not, by itself, revoke your proxy.
Your most current proxy card or Internet proxy received before the beginning of voting is the one that is counted.
 
Beneficial Owner: Shares Registered in the Name of Broker or Bank
If your shares are held by your broker or bank as a nominee or agent, you should follow the instructions provided by your broker or bank.
What are “broker non-votes”?
As discussed above, when a beneficial owner of shares held in “street name” does not give instructions to the broker, bank, custodian or other nominee holding the shares as to how to vote on matters deemed by the NYSE to be “non-routine,” the broker or nominee cannot vote the shares. These un-voted shares are counted as “broker non-votes.”
What is the quorum requirement?
A quorum of stockholders is necessary to hold a valid meeting. Under our Bylaws, a quorum will be present if stockholders holding at least a majority of the outstanding shares entitled to vote are present at the meeting in person or represented by proxy. Abstentions and broker non-votes will also be considered present for purposes of determining the existence of a quorum. On the record date, there were [_______] shares outstanding and entitled to vote. Thus, the holders of [_______] shares must be present in person or represented by proxy at the meeting to have a quorum.
How many votes are needed to approve each proposal?
Votes will be counted by the inspector of elections appointed for the Special Meeting, who will separately count votes “For,” “Against,” and “Abstain” and, if applicable, broker non-votes.
The following table describes the voting requirements for Proposals 1, 2 and 3, including the vote required to approve the proposal and the effect that abstentions will have on the outcome of the proposal:
 

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Proposal
Number
 
Proposal Description
 
Vote Required for Approval
 
Effect of
Abstentions
1
 
Merger Consideration Proposal
 
“For” votes from the holders of a majority of the votes cast at the meeting
 
None
2
 
Warrants Proposal
 
“For” votes from the holders of a majority of the votes cast at the meeting
 
None
3
 
Reverse Stock Split Proposal
 
“For” votes from the holders of a majority of outstanding shares of common stock entitled to vote at the meeting
 
the same effect as a vote “AGAINST” the Reverse Stock Split Proposal.
Your shares will be counted towards the quorum only if you are present and entitled to vote in person at the meeting or you properly submitted a proxy card. If you are present in person or by proxy at the special meeting, but withhold your vote or abstain from voting on any or all proposals, your shares are also still counted as present and entitled to vote. If there is no quorum, the holders of a majority of shares present at the meeting in person or represented by proxy may adjourn the meeting to another date.
How can I find out the results of the voting at the Special Meeting?
Preliminary voting results will be announced at the Special Meeting. In addition, final voting results will be published in a current report on Form 8-K that we expect to file within four business days after the Special Meeting. If final voting results are not available to us in time to file a Form 8-K within four business days after the Special Meeting, we intend to file a Form 8-K to publish preliminary results and, within four business days after the final results are known to us, file an amended Form 8-K to publish the final results.
 
Where can I find more information about Innovate?
We file periodic reports with the SEC pursuant to the Securities Exchange Act of 1934. Our SEC filings are available from the SEC’s Internet site at http://www.sec.gov, which contains reports and other information regarding issuers that file electronically. Our filings with the SEC are also available without charge on our website (http://www.innovatebiopharma.com) as soon as reasonably practicable after filing. The contents of the Company’s Internet site are not incorporated by reference herein and are not deemed to be part of this proxy statement.
Who should I contact if I have questions or need assistance voting?
If you have any questions or need assistance with voting, please contact our Corporate Secretary at Innovate Biopharmaceuticals, Inc. Attn: Corporate Secretary, 8480 Honeycutt Road, Suite 120, Raleigh, NC 27615, or contact us at (919) 275-1933.


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QUESTIONS AND ANSWERS ABOUT THE MERGER, THE MERGER CONSIDERATION PROPOSAL AND THE REVERSE STOCK SPLIT
 
 
What follows are questions that you, as a stockholder of the Company, may have regarding the Merger, and the answers to those questions. Additional important information is contained in the annexes to this proxy statement and our Annual Report on Form 10-K which accompanies this proxy statement.

Background: On October 6, 2019, we entered into an Agreement and Plan of Merger and Reorganization (as amended on December 17, 2019, the “Merger Agreement”) with INNT Merger Sub 1 Ltd., a company organized under the laws of Israel and a direct, wholly-owned subsidiary of the Company (“Merger Sub”), RDD Pharma Ltd., a company organized under the laws of Israel (“RDD”) and Orbimed Israel Partners, Limited Partnership, as the Shareholder Representative.    
 
Q:
 
What is the effect of the proposed Merger?
 
A:
 
The Merger Agreement provides that, upon the terms and subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will be merged with and into RDD (the “Merger”), with RDD continuing as the surviving corporation and a direct wholly-owned subsidiary of the Company.
At the effective time of the Merger (the “Effective Time”), and if the Merger Consideration Proposal is approved, all outstanding ordinary and preferred shares of RDD, nominal value of NIS 0.01 each, will be converted into the right to receive such number of validly issued, fully paid and non-assessable shares of common stock of the Company (“Company Common Shares”) as defined in the Merger Agreement (the “Consideration Allocation”).
Additionally, each outstanding RDD stock option will be converted into and become an option exercisable for Company Shares with the number and exercise price adjusted in a manner consistent with the Consideration Allocation. Each outstanding RDD warrant will be exercised or cancelled prior to the Effective Time. Following completion of the Merger and on an as-converted basis, the Innovate stockholders will own up to approximately 62.0% of the combined company’s capital stock and the former RDD stockholders will own approximately 38.0% of the combined company’s capital stock, each on a fully diluted basis (the “RDD Ownership Ratio”). The Merger Agreement also includes, as a closing condition, a minimum funding requirement of $10,000,000 (the “Financing”), which will dilute the Innovate stockholders and former RDD shareholders pro rata.
If the Merger Consideration Proposal is not approved, we will issue to the RDD shareholders (a) Company Common Shares representing approximately 19.5% (or such amount as permitted pursuant to the restrictions of Nasdaq Listing Rule 5635(d)) of Innovate’s issued and outstanding shares of common stock (calculated prior to the issuance of those new shares of common stock) and (b) validly issued, fully paid and non-assessable shares of a newly created non-voting convertible preferred stock (“Company Preferred Shares”, and collectively with the Company Common Shares, the “Company Shares”) that will be convertible into Company Common Shares if approved by the Company’s stockholders at a later date.
 
 
 
See the sections entitled “The Merger” and “Merger Agreement” in this proxy statement for a detailed explanation of the terms and conditions of the Merger, the Merger Agreement, and the transactions and agreements contemplated by the Merger Agreement, and the section entitled “Information About RDD” for detailed information about RDD.
 
Q:
 
Why are the Company’s stockholders being asked to approve the Merger Consideration Proposal?
 

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A:
 
Because the Company’s common stock is listed on the Nasdaq Capital Market (“Nasdaq”), we are subject to Nasdaq listing rules (the “Nasdaq Listing Rules”). We are required under Nasdaq Listing Rules 5635(a)(1) and 5635(d) to seek stockholder approval of the proposed issuance of the Company Common Shares at the closing of the Merger and in the transactions contemplated by the Merger Agreement. If the Merger Consideration Proposal is not approved, we anticipate that the Merger will still be consummated and we will instead issue to the RDD shareholders a mix of Company Common Shares and Company Preferred Shares as Merger consideration.
 
Q:
 
What if the Company’s stockholders fail to approve the Merger Consideration Proposal?
 
A:
 
If the Merger Consideration Proposal is not approved, we anticipate that the Merger will still be consummated and we will instead issue to the RDD shareholders (a) Company Common Shares representing approximately 19.5% (or such amount as permitted pursuant to the restrictions of Nasdaq Listing Rule 5635(d)) of Innovate’s issued and outstanding shares of common stock (calculated prior to the issuance of those new shares of common stock) and (b) validly issued, fully paid Company Preferred Shares that will be convertible into Company Common Shares if approved by the Company’s stockholders at a later date.

Q:
 
When do you expect the Merger to be completed?
 
A:
 
It is currently anticipated that the Merger will close as soon as possible after all requisite approvals are obtained and all conditions have been satisfied, or where not prohibited by applicable law, waived. Either the Company or RDD may terminate the Merger Agreement if the Merger is not completed by April 6, 2020, subject to certain exceptions, including if the terminating party has breached the Merger Agreement.
 
 
 
The Company’s Board of Directors reserves the right to cancel, subject to payment of the break-up fee in certain circumstances, or defer the timing of the Merger, even if the other conditions to completion of the Merger are satisfied or waived, if the Board of Directors determines that the Merger is no longer advisable and in the best interests of the Company and its stockholders.
 
Q:
 
Is completion of the Merger subject to any other conditions?
 
A:
 
Yes. The Merger Agreement contains customary covenants and conditions precedent, including the approval by Nasdaq of the listing of the shares of the Company’s common stock issuable in connection with the Merger.
The Merger Agreement also includes, as a closing condition, a minimum Financing of $10,000,000. A Financing in the amount of $10,000,000 will dilute the Innovate stockholders and former RDD shareholders pro rata.
 
Q:
 
Are there risks I should consider in deciding whether to vote for the proposals?
 
A:
 
Yes. Risk factors that you should consider in connection with each of the proposals to be voted on at the Special Meeting, the Merger, and the transactions contemplated by the Merger Agreement are described in the section entitled “Risk Factors” in this proxy statement.
 
 
Q:
 
How many shares of the Company’s common stock will be issued in connection with the Merger and in the transactions contemplated by the Merger Agreement?
 

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A:
 
Following completion of the Merger and on an as-converted basis, the Innovate stockholders will own up to approximately 62.0% of the combined company’s capital stock and the former RDD stockholders will own approximately 38.0% of the combined company’s capital stock, each on a fully diluted basis. The Merger Agreement also includes, as a closing condition, a minimum Financing of $10,000,000, which will dilute the Innovate stockholders and former RDD shareholders pro rata.
 
 
 
The actual number of shares issued and reserved for issuance in connection with the Merger and the transactions contemplated by the Merger Agreement will be impacted by a number of circumstances and variables that the Company cannot predict or control.
 
Q:
 
Are the shares of the Company’s common stock being issued in connection with the Merger and in the transactions completed by the Merger Agreement registered under the Securities Act?
 
A:
 
No. The Company Shares to be issued as consideration for the Merger will be issued in reliance upon an exemption from registration contained in Section 4(a)(2) of the Securities Act, as amended (the “Securities Act”).
 
 
Q:
 
Will the shares of the Company’s common stock issuable in connection with the Merger and in the transactions contemplated by the Merger Agreement be listed on a stock exchange?
 
A:
 
It is a condition to the closing of the Merger that the Company Shares issuable at the closing of the Merger (including Company Common Shares issuable upon conversion of Company Preferred Shares, if applicable) and in the transactions contemplated by the Merger Agreement be approved for listing on the Nasdaq Capital Market or the Nasdaq Global Market. Although we have applied to list the shares of the combined, post-Merger company on Nasdaq, we can provide no assurance that Nasdaq will approve our listing application. If Nasdaq does not approve our listing application, we may be unable to complete the Merger or, even if we are able to complete the Merger, the shares of the combined, post-Merger company may not be approved for listing on Nasdaq, in which case our shares may have limited trading volume and liquidity. See the risk factor entitled “Nasdaq may not approve the Company’s listing application in connection with the Merger.” The trading symbol for the Company’s shares on Nasdaq is “INNT.”
 
Q:
 
What will happen to my ownership percentage and voting power in the Company?
 
A:
 
You will also experience immediate dilution in your economic and voting interest in the Company upon the closing of the Merger.
  
Q:
 
What impact will the Merger have on the Company’s business?
 
A:
 
The Company’s Board of Directors believes that the acquisition of RDD is in the best interests of the Company and its stockholders because the combined company is expected to have enhanced future growth prospects, a stronger balance sheet, and a management team with a proven track record.
 
Q:
 
What impact will the Merger have on the composition of the Company’s Board of Directors and Management?
 

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A:
 
At the closing of the Merger, the Board will consist of six (6) directors and will be comprised of three (3) members designated by RDD and three (3) members designated by the Company. Immediately following the Effective Time, the Board will appoint John Temperato, the Chief Executive Officer of RDD, as the Chief Executive Officer of the Company.
 
Q:
 
Do the Company’s directors support the Merger Consideration Proposals and the Merger?
 
A:
 
The Merger was proposed by and has the support of the Company’s Board of Directors. The Board of Directors unanimously approved the Merger and the Merger Agreement. The Board of Directors recommends that you vote “FOR” the Merger Consideration Proposal.
 
Q:
 
Am I entitled to vote on the Merger?
 
A:
 
Not directly. However, although we are not asking for your vote directly on the Merger, we are asking you to vote to approve the Merger Consideration Proposal, which effects what consideration the RDD shareholders receive at the Effective Time.
 
Q:
 
What happens if the Merger is not completed?
 
A:
 
If the Merger is not completed for any reason, RDD will not become a wholly-owned subsidiary of the Company. Instead, RDD will continue to be independently owned by its shareholders and the Company will remain as a public company and the Company’s common stock will continue to be registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company and RDD are required to pay termination fees in certain circumstances pursuant to the Merger Agreement.
 
Q:
Do I have the right to dissent and obtain the “fair value” for my shares?

A:
No. Under Delaware law, Innovate stockholders are not entitled to appraisal rights or dissenters’ rights in connection with the Merger.

Q:
What is the reverse stock split and why is it necessary?

A:    If approved, our Board will be granted discretion to implement a Reverse Stock Split wherein the outstanding shares of Company common stock will be combined into a lesser number of shares within the range approved pursuant to the Reverse Stock Split Proposal. The Board of Directors believes that a reverse stock split may be desirable for a number of reasons. The Company’s common stock is currently, and will be following the completion of the Merger, listed on Nasdaq. According to applicable Nasdaq Listing Rules, in order for the common stock to continue to be listed on Nasdaq, the combined company must satisfy certain requirements established by Nasdaq. The Board of Directors expects that a reverse stock split of common stock will increase the market price of the common stock so that the combined company is able to maintain compliance with the Minimum Bid Price requirement of the Nasdaq Listing Rules for the foreseeable future.


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SUMMARY
This summary highlights selected information from this proxy statement. It might not contain all of the information that is important to you. You are urged to read carefully the entire proxy statement and the other documents referred to in this proxy statement and our Annual Report on Form 10-K which accompanies this proxy statement in order to fully understand the Merger Agreement, the Merger, and the other matters to be considered and voted upon at the Special Meeting.
The Companies
 
Innovate Biopharmaceuticals, Inc. (See page [__])
 
The Company is a clinical-stage biopharmaceutical company developing novel medicines for autoimmune and inflammatory diseases with unmet medical needs, including drug candidates for celiac disease, nonalcoholic steatohepatitis (NASH), alcoholic steatohepatitis (ASH), Crohn’s disease and ulcerative colitis (UC). The Company started the Phase 3 clinical trial for its lead drug candidate, larazotide acetate or larazotide (INN-202), for the treatment of celiac disease in June 2019.

The Company’s common stock is listed on the Nasdaq Capital Market under the symbol “INNT.” The Company is subject to the reporting requirements of the Exchange Act, and, as such, it files or furnishes reports and other information with the SEC from time to time. See the section of this proxy statement entitled “Where You Can Find Additional Information.” For additional information with respect to the Company, please see the Annual Report on Form 10-K which accompanies this proxy statement.
 
 The Company is a Delaware corporation. The Company’s principal executive offices are located at 8480 Honeycutt Road, Suite 120, Raleigh, NC 27615, and its telephone number is (919) 275-1933. The Company’s Internet website is http://www.innovatebiopharma.com/. The contents of the Company’s Internet site are not incorporated by reference herein and are not deemed to be part of this proxy statement.
 
RDD Pharma LTD. (See page [__])
 
RDD is a privately held specialty pharmaceutical company focused on development and commercialization of orphan and innovative therapies for gastrointestinal disorders. RDD has exclusively developed drug candidates that are new therapeutic entities based on known or approved molecules with established safety and toxicology profiles.
 
RDD’s executive offices are located at 31 Habarzel St., Ramat Hachayal, Tel-Aviv 69710 Israel, and its telephone number is +972-722419061. RDD’s Internet website is http://www.rddpharma.com/. The contents of RDD’s Internet site are not incorporated by reference herein and are not deemed to be part of this proxy statement.
 
Risk Factors (See page [__])
 
Before voting on any of the proposals described in this proxy statement, you should carefully consider all of the information contained in this proxy statement, as well as the specific risk factors under the heading “Risk Factors” in this proxy statement and the accompanying Annual Report on Form 10-K.
 
The Merger (See page [__])
 
The Company and RDD have agreed to consummate the Merger under the terms and subject to the conditions of the Merger Agreement.

 Upon completion of the Merger, RDD will be a wholly-owned subsidiary of the Company. The Merger Agreement, as amended, is attached as Annex B to this proxy statement. We urge you to read the Merger Agreement carefully as it is the legal document that governs the Merger.
 

14


Reasons for the Merger (See page [__])
 
The Board of Directors of the Company believes that the Merger is in the best interests of the Company and its stockholders because, following completion of the Merger, the combined company will have enhanced future growth prospects, a stronger balance sheet, and a management team with a proven track record.
 
Conditions to Completion of the Merger (See page [__])
 
The closing of the Merger is subject to certain conditions, including, among others, (i) that Financing has been completed, (ii) the absence of certain laws, orders, judgments and injunctions that restrain, enjoin or otherwise prohibit the consummation of the Merger, (iii) subject to certain exceptions, the accuracy of representations and warranties with respect to the businesses of the Company and RDD and compliance in all material respects by the Company, RDD and Merger Sub with their respective covenants contained in the Merger Agreement, (iv) the absence of a material adverse effect on the Company’s or RDD’s businesses, (v) the approval by Nasdaq to list the Company Shares to be issued in the Merger, (vi) the expiration of statutory waiting periods required under Israeli law and (vii) the receipt of certain tax rulings from the Israeli Tax Authorities.
 
In addition, the obligation of the Company and RDD to effect the Merger is subject to the satisfaction or waiver, at or prior to the closing of the Merger, of certain additional conditions.
 
Conduct of the Company’s Business and RDD’s Business Prior to Closing (See page [__])

In the Merger Agreement, the Company and RDD have agreed that, between the date of the Merger Agreement and the closing of the proposed Merger, they will continue to carry on their respective businesses in the ordinary course and will work to preserve the attendant goodwill and assets of their respective businesses.
 
Completion of the Merger
 
It is currently anticipated that the Merger will close as soon as possible after all requisite approvals are obtained and all conditions have been satisfied, or where not prohibited by applicable law, waived.
 
The Company’s Board of Directors reserves the right to cancel or defer the timing of the Merger, even if the Company’s stockholders vote to approve the Merger Consideration Proposal and the other conditions to completion of the Merger are satisfied or waived, if the Board of Directors determines that the Merger is no longer advisable and in the best interests of the Company and its stockholders.
 
Effect of the Merger on the Company’s Stockholders (See page [__])
 
Upon the closing of the Merger, the Company’s stockholders would own approximately 62% of the voting power of the Company. A Financing in the amount of $10,000,000 will dilute the Company’s stockholders and former RDD shareholders pro rata.
 
Agreements Entered into in Connection with the Merger (See page [__])
 
The following agreements have been entered into in connection with the Merger or will be entered into at the closing of the Merger:
 
Support Agreements

Certain stockholders of the Company have entered into support agreements with the Company and RDD covering approximately 40% of the outstanding Company Common Shares, as of the date of the Merger Agreement (the “Support Agreements”). The Support Agreements provide, among other things, that each stockholder party to the Support Agreements will vote all of the Company Common Shares held by them in favor of the Merger Consideration Proposal, the Warrants Proposal and the Reverse Stock Split Proposal.


15


Lock-Up Agreements

Prior to closing, certain executive officers and directors of the Company will enter into lock-up agreements (the “Company Lock-Up Agreements”), pursuant to which they have agreed to certain restrictions on transfers of any shares of the Company for the 180-day period following the Effective Time of the Merger, with such restrictions being subject to customary exceptions.

Prior to closing, certain holders of RDD securities, will enter into RDD Lock-Up Agreements, pursuant to which they have agreed to certain restrictions on transfers of any shares of the Company for the 180-day period following the Effective Time of the Merger, with such restrictions being subject to customary exceptions.
 
Composition of the Company’s Board of Directors
 
At the closing of the Merger, the Board will consist of six (6) directors and will be comprised of three (3) members designated by RDD and three (3) members designated by the Company. Immediately following the Effective Time, the Board will appoint John Temperato, the Chief Executive Officer of RDD, as the Chief Executive Officer of the Company.

Mr. Temperato has served as the Chief Executive Officer of RDD since March 2019. Prior to joining RDD, Mr. Temperato held various leadership roles including most notably U.S. President & Chief Operating Officer with Atlantic Healthcare, President & Chief Operating Officer/Chief Commercial Officer with Melinta Therapeutics, and Senior Vice President of Sales and Managed Markets with Salix Pharmaceuticals. Notably, at Salix Pharmaceuticals (Salix), Mr. Temperato played a critical role in the successful commercialization and growth of their broad GI portfolio and executed over ten launches during his tenure at the company driving growth of company revenues from $119 million in 2004 to $2 billion in 2015. Across his career, Mr. Temperato has been instrumental in defining and executing capital efficient go-to-market strategies, business development strategy and overseeing the commercialization and life-cycle management for small molecules, devices, and biologics. Additionally, he has developed strategies for reimbursement and external healthcare policy.

 
Accounting Treatment of the Merger
 
The Merger will be accounted for as an asset acquisition under ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. For the purpose of these unaudited pro forma condensed combined financial statements, management of the Company has estimated a preliminary estimated purchase price. The net tangible and intangible assets acquired, and liabilities assumed in connection with the transaction are recorded at their estimated acquisition date fair values. Any excess of purchase price over fair value of identified assets acquired and liabilities assumed will be expensed as in-process research and development. A final determination of these estimated fair values will be based on the actual net tangible and intangible assets of RDD that exist as of the date of completion of the transaction.
 
Termination of the Merger Agreement (See page [__])
 
The Merger Agreement contains certain customary termination rights by either the Company or RDD, including if the Merger is not consummated by April 6, 2020. The Company and RDD are required to pay termination fees in certain circumstances pursuant to the Merger Agreement.

Financial Statements of RDD (See page F-A-1)
 
For the historical audited financial statements of RDD for its fiscal years ended December 31, 2018 and 2017 and unaudited financial statements for the three and nine months ended September 30, 2019, see “Index to RDD Consolidated Financial Statements” on Page F-A-1.

Financial Statements of Innovate (See page F-B-1)

For the historical audited financial statements of Innovate for its fiscal years ended December 31, 2018 and 2017, please see the Annual Report on Form 10-K which is being mailed together with this proxy statement. For the unaudited financial statements for the three and nine months ended September 30, 2019, see “Index to Innovate Consolidated Financial Statements” on page F-B-1.
 
Pro Forma Financial Statements of the Combined Company (See Annex A)

16


 
For the pro forma financial statements of the combined company that will result from the Merger, see “Unaudited Pro Forma Condensed Combined Financial Statements” in Annex A.
 
Recommendation of the Company Board of Directors
 
The Company’s Board of Directors has unanimously determined that the Merger is in the best interests of the Company and its stockholders and has approved the Merger, the Merger Agreement, and the Merger Consideration Proposal set forth in this proxy statement. The Board of Directors recommends that the Company stockholders vote “FOR” the Merger Consideration Proposal and the other Proposals.
 
Stockholders Entitled to Vote (See page [__])
 
The Board of Directors has fixed the close of business on December 20, 2019 as the record date for the determination of stockholders entitled to receive notice of, and to vote at, the Special Meeting.




17


Selected Historical Financial Data of Innovate
 
You should read the following selected historical financial data in conjunction with the audited financial statements of Innovate as of December 31, 2018 and 2017 and for each of the years in the two year period ended December 31, 2018 and the unaudited condensed financial statements of Innovate as of September 30, 2019 and for the nine months ended September 30, 2019 and 2018. The selected historical statements of operations data for the two-year period ended December 31, 2018 and the selected historical balance sheet data as of December 31, 2018 and 2017 have been derived from the audited financial statements of Innovate, which are included in Innovate’s Annual Report on Form 10-K which accompanies this proxy statement. The selected historical statement of operations data for the nine months ended September 30, 2019 and 2018 and the selected historical balance sheet data as of September 30, 2019 have been derived from the unaudited condensed financial statements of Innovate. See “Index to Innovate Consolidated Financial Statements” on page F-B-1. The unaudited condensed financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, which Innovate considers necessary for a fair presentation of the information set forth therein. The historical results are not necessarily indicative of results to be expected in any future period.

 
 
Year Ended December 31,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2019
 
2018
Operating expenses:
 
 
 
 
 
(unaudited)
Research and development
 
$
7,559,077

 
$
4,007,911

 
$
8,215,079

 
$
5,815,580

General and administrative
 
10,664,991

 
7,161,612

 
8,728,714

 
8,669,455

Total operating expenses
 
18,224,068

 
11,169,523

 
16,943,793

 
14,485,035

 
 
 
 
 
 
 
 
 
Loss from operations
 
(18,224,068
)
 
(11,169,523
)
 
(16,943,793
)
 
(14,485,035
)
 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
Interest income
 
163,832

 

 
156,945

 
127,560

Interest expense
 
(6,152,043
)
 
(436,294
)
 
(1,330,923
)
 
(5,593,751
)
Loss on extinguishment of convertible note payable
 

 

 
(1,049,166
)
 

Change in fair value of derivative liability and extinguishment of derivative liability
 
50,000

 

 
881,000

 

Change in fair value of warrant liabilities
 

 

 
141,700

 

Total other expense, net
 
(5,938,211
)
 
(436,294
)
 
(1,200,444
)
 
(5,466,191
)
 
 
 
 
 
 
 
 
 
Loss before income taxes
 
(24,162,279
)
 
(11,605,817
)
 
(18,144,237
)
 
(19,951,226
)
Benefit from income taxes
 

 

 

 

 
 
 
 
 
 
 
 
 
Net loss
 
$
(24,162,279
)
 
$
(11,605,817
)
 
$
(18,144,237
)
 
$
(19,951,226
)
 
 
 
 
 
 
 
 
 
Net loss per common share, basic and diluted
 
$
(0.98
)
 
$
(0.98
)
 
$
(0.56
)
 
$
(0.82
)
 
 
 
 
 
 
 
 
 
Weighted-average common shares, basic and diluted
 
24,762,151

 
11,888,240

 
32,401,624

 
24,269,266




18


 
 
As of
Balance Sheet Data:
 
September 30, 2019
December 31, 2018
 
 
(unaudited)
 
Cash and cash equivalents
 
$
8,863,796

$
5,728,900

Total assets
 
9,810,209

6,454,188

Warrant liabilities
 
3,188,300


Total liabilities
 
13,125,132

10,113,252

Accumulated deficit
 
(61,660,207
)
(43,515,970
)
Total stockholders’ deficit
 
(3,314,923
)
(3,659,064
)



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RISK FACTORS
 
In addition to the other information contained in this proxy statement (including the risk factors applicable to the Company contained under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, which accompanies this proxy statement), the following factors should be considered carefully when considering risks related to the Merger, the proposals described in this proxy statement, and the combined company. These risks and uncertainties are not the only risks the Company, RDD, and the combined company may face, nor do they include all of the risks and uncertainties associated with the Merger. If any such risks actually occur, the business, prospects, financial condition, cash flows, and operating results of the Company, RDD, and the combined company could be materially adversely affected.

RISKS RELATED TO THE MERGER

The Merger is subject to conditions to closing that could result in the Merger being delayed or not consummated and can be terminated in certain circumstances, each of which could negatively impact the Company’s stock price and future business and operations.
 
The Merger is subject to conditions to closing as set forth in the Merger Agreement. In addition, each of the Company and RDD has the right, in certain circumstances, to terminate the Merger Agreement. If the Merger Agreement is terminated or any of the conditions to the Merger are not satisfied and, where permissible, not waived, the Merger will not be consummated. Failure to consummate the Merger or any delay in the consummation of the Merger or any uncertainty about the consummation of the Merger may adversely affect the Company’s stock price or have an adverse impact on the Company’s future business operations.
 
If the Merger is not completed, the Company’s ongoing business may be adversely affected and, without realizing any of the benefits of having completed the Merger, it would be subject to a number of risks, including the following:
 
 
negative reactions from the financial markets and from persons who have or may be considering business dealings with the Company;
 
 
financial difficulties that the Company may experience;
 
 
the Company will be required to pay certain costs relating to the Merger, whether or not the Merger is completed; and
 
 
the Company has agreed to pay a break-up fee if the Merger Agreement is terminated in certain circumstances.
 
In addition, the Company could be subject to litigation related to any failure to complete the Merger or related to any proceeding commenced against the Company seeking to require the Company to perform its obligations under the Merger Agreement.
 
The Merger will present challenges associated with integrating operations, personnel, and other aspects of the companies and assumption of liabilities that may exist at RDD and which may be known or unknown by the Company.
 
The results of the combined company following the Merger will depend in part upon the Company’s ability to integrate RDD’s business with the Company’s business in an efficient and effective manner. The Company’s attempt to integrate two companies that have previously operated independently may result in significant challenges, and the Company may be unable to accomplish the integration smoothly or successfully. In particular, the necessity of coordinating geographically dispersed organizations and addressing possible differences in corporate cultures and management philosophies may increase the difficulties of integration. The integration may require the dedication of significant management resources, which may temporarily distract management’s attention from the day-to-day operations of the businesses of the combined

20


company. In addition, the combined company may adjust the way in which RDD or the Company has conducted its operations and utilized its assets, which may require retraining and development of new procedures and methodologies. The process of integrating operations and making such adjustments after the Merger could cause an interruption of, or loss of momentum in, the activities of one or more of the combined company’s businesses and the loss of key personnel. Employee uncertainty, lack of focus, or turnover during the integration process may also disrupt the businesses of the combined company. Any inability of management to integrate the operations of the Company and RDD successfully could have a material adverse effect on the business and financial condition of the combined company.
 
In addition, the Merger will subject the Company to contractual or other obligations and liabilities of RDD, some of which may be unknown. Although the Company and its legal and financial advisors have conducted due diligence on RDD and its business, there can be no assurance that the Company is aware of all obligations and liabilities of RDD. These liabilities, and any additional risks and uncertainties related to RDD’s business and to the Merger not currently known to the Company or that the Company may currently be aware of, but that prove to be more significant than assessed or estimated by the Company, could negatively impact the business, financial condition, and results of operations of the combined company following consummation of the Merger.
 
The pro forma financial statements are presented for illustrative purposes only and might not be an indication of the combined company’s financial condition or results of operations following the Merger.
The pro forma financial statements contained in this proxy statement are presented for illustrative purposes only and might not be an indication of the combined company’s financial condition or results of operations following the Merger for several reasons. For example, the pro forma financial statements have been derived from the historical financial statements of the Company and RDD and certain adjustments and assumptions have been made regarding the combined company after giving effect to the Merger. The information upon which these adjustments and assumptions have been made is preliminary, and these kinds of adjustments and assumptions are difficult to make with complete accuracy. Moreover, the pro forma financial statements do not reflect all costs that are expected to be incurred by the combined company in connection with the Merger. For example, the impact of any incremental costs incurred in integrating the Company and RDD is not reflected in the pro forma financial statements. In addition, the assumptions used in preparing the pro forma financial information might not prove to be accurate, and other factors may affect the combined company’s financial condition or results of operations following the Merger. The Company’s stock price may be adversely affected if the actual results of the combined company fall short of the pro forma financial statements contained in this proxy statement. See the Unaudited Pro Forma Condensed Combined Financial Statements attached as Annex A to this proxy statement.
 
Completion of the Merger would result in the issuance of a significant number of additional shares of the Company’s common stock, which would reduce the voting power of the Company’s current stockholders and may depress the trading price of the Company’s common stock.
 
Completion of the Merger would result in the issuance of a significant number of shares of the Company’s common stock. As a result, the Company’s existing stockholders will not exert the same degree of voting power with respect to the combined company that they did before the consummation of the Merger. Further, the issuance of such a significant amount of common stock, and its potential sale in the public market from time to time, could depress the trading price of the Company’s common stock and you may lose all or a part of your investment.

The Company has incurred and will continue to incur significant transaction, combination-related and restructuring costs in connection with the Merger.
 
The Company has incurred and will continue to incur transaction fees and other expenses related to the Merger, including filing fees, legal and accounting fees, soliciting fees, regulatory fees, and printing and mailing costs. The Company also expects to incur significant costs associated with combining the operations of the two companies. It is difficult to predict the amount of these costs before we begin the integration process. The combined company may incur additional unanticipated costs as a consequence of difficulties arising from efforts to integrate the operations of the two companies. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, can offset incremental transaction, combination-related, and restructuring costs over time, we may not be able to achieve this net benefit in the near term, or at all. If the Merger is not completed, the Company would have to recognize these expenses without realizing the expected benefits of the Merger.
 

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RISKS RELATED TO RDD’S BUSINESS

The combined company might not be able to successfully or timely complete its proposed acquisition of Naia, which could materially impact the market price of the combined company’s common stock, financial condition, results of operations and cash flows.

On November 12, 2019, RDD entered into a nonbinding letter of intent with Naia Rare Diseases (“Naia”) to acquire all of the outstanding capital stock of privately-held Naia in exchange for a combination of cash and shares of the combined company, as well as certain earn-out payments (the “Naia Acquisition”). The terms of the Naia Acquisition are subject to further negotiation and the transaction is currently expected to close following the Merger. The Naia Acquisition might not be completed, or might not be completed in the timeframe, on the terms or in the manner currently anticipated. The completion of the Naia Acquisition is subject to further negotiation of a binding agreement. There can be no assurance that the combined company will negotiate the Naia Acquisition on satisfactory terms and enter into a binding agreement, or that other events will not intervene to delay or result in the failure to close the Naia Acquisition. The non-binding letter of intent might be terminated by the parties for any reason prior to the execution of a definitive and binding agreement. If there are delays in negotiating a definitive and binding agreement or delays in closing the transaction, or a failure to close the transaction, the combined company’s ongoing business could be materially adversely affected, including without limitation, as follows:

the combined company might incur significant additional costs in connection with such delay or termination;
the combined company might experience negative reactions from financial markets and the stock price could decline;
the combined company might experience negative reactions from employees, suppliers or other third parties; and
the combined company’s management’s focus would have been diverted from pursuing other valuable opportunities.

Additionally, if the combined company is unable to consummate the transaction with Naia, the combined company will have incurred significant due diligence, legal, accounting and other transaction costs in connection with the transaction without realizing the anticipated benefits.

If the Merger closes, and we are unable to successfully integrate the RDD and Naia portfolio of products into our existing business operations, or if we do not realize the anticipated benefits of the Merger with RDD or Naia, our business could be adversely affected.

We will need to successfully integrate RDD’s pipeline of products, which includes drug candidates for fecal incontinence (RDD-0315), pruritis ani (RDD-1609), radiation colitis (RDD-2007), pediatric short bowel syndrome (NB1001) and short bowel syndrome (NB1002), with our other business operations. Integrating the RDD products with our existing business will be a complex and time-consuming process. There might be substantial difficulties, costs and delays involved in any integration of the RDD products. These might include:

distracting management and key functional areas from day-to-day operations;
difficulties with respect to the timing and results of ongoing and future clinical trials in the RDD products; and
diversion of financial resources that would otherwise be available for the ongoing development or commercialization of our existing programs.

Any one or all of these factors might increase our operating costs and capital needs or lower our anticipated financial performance. Certain of these factors are outside of our control. Achieving the potential benefits underlying our reasons for the merger with RDD will depend on a successful, timely and efficient integration of RDD’s pipeline of products.

Even if the integration of RDD’s portfolio is successful, the Merger might fail to further our business strategy as anticipated or to achieve anticipated benefits and success. We have made assumptions relating to the impact of the RDD pipeline on our financial results relating to numerous matters, including:

transaction and integration costs;
the cost of development and commercialization of RDD products; and
the other financial and strategic risks related to the Merger.

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Further, we might incur higher than expected operating, transaction and integration costs, and we might encounter general economic and business conditions that adversely affect us following the completion of the Merger. If one or more of our assumptions are incorrect, it could have an adverse effect on our business and operating results, and the benefits from the Merger might not be realized or be of the magnitude expected.

RDD does not have any products that are approved for commercial sale and therefore the combined company will remain subject to many of the same risks regarding the clinical, regulatory and commercial success of these product candidates as the Company was subject to prior to the closing of the Merger.

RDD currently does not have any therapeutic products approved for commercial sale. Provided that the anticipated Merger closes, the combined company would have ten product candidates at various phases of clinical drug development and will therefore remain subject to the same risks regarding the clinical, regulatory and commercial success of the combined company’s product candidates as the Company was subject to prior to the closing of the Merger. In addition, the combined company will have to determine how best to allocate limited financial resources between the ten therapeutic products, none of which currently generate revenue. The combined company will incur significant costs related to the clinical trials and regulatory approval of our existing therapeutic products, as well as the therapeutic products in RDD’s pipeline. The combined company might not receive within the next several years, if at all, any revenues from the commercialization of any of our product candidates, even if a product candidate is approved. Additionally, in the event one or more of our product candidates is approved for commercial sale, the combined company will incur significant costs in connection with commercializing any approved product candidate and the combined company might not generate significant revenue from sales of such products, which would impact our ability to become profitable and maintain profitability.

Many of RDD’s products rely on patent and/or regulatory exclusivity and the combined company’s success will depend in part on obtaining and maintaining effective patent and other intellectual property protection for the product candidates and proprietary technology.

As with the Company’s current pipeline of products, the products in the RDD product portfolio rely on patent and regulatory exclusivity. The intellectual property rights protecting the RDD products might not afford the combined company with meaningful protection from third parties infringing on the proprietary rights of RDD. Competitors could also design around any of RDD’s intellectual property or otherwise design competitive products that do not infringe RDD’s intellectual property. If a product is approved for commercial sale and competitors are successful in such designs, it could have an adverse impact on the combined company’s revenue or results of operations.

If RDD or the combined company fails to comply with obligations under any license, collaboration or other agreements, the combined company could lose intellectual property rights that are necessary for developing and commercializing product candidates.

RDD’s intellectual property relating to the nifedipine capository for anal fissure program is licensed from Mor Research Applications Ltd. RDD’s intellectual property relating to the pregabalin for pruritus Ani program is licensed from Dr. Eli D. Ehrenpreis. RDD’s license agreements with Mor Research Applications Ltd. and Dr. Eli D. Ehrenpreis impose, and any future licenses or collaboration agreements the combined company might enter into are likely to impose, various development, commercialization, funding, milestone, royalty, diligence, sublicensing, patent prosecution and enforcement and other obligations. These type of agreements and related obligations are complex and subject to contractual disputes. If RDD (and the combined company following the closing of the Merger) breach any of these imposed obligations, or use the intellectual property licensed to RDD in an unauthorized manner, RDD (and the combined company following the closing of the Merger) might be required to pay damages or the licensor might have the right to terminate the license, which could result in the loss of the intellectual property rights and RDD (and the combined company following the closing of the Merger) being unable to develop, manufacture and sell drugs that are covered by the licensed technology.

Intense competition might render RDD’s GI products noncompetitive or obsolete.

Competition in the GI business is intense and characterized by extensive research efforts and rapid technological progress. Technological developments by competitors, regulatory approval for marketing competitive products, including potential generic or Over The Counter products, or superior marketing resources possessed by competitors could adversely affect the commercial potential of the combined company’s GI products and could have a material

23


adverse effect on the combined company’s future revenue and results of operations. We believe that there are numerous pharmaceutical and biotechnology companies, as well as academic research groups throughout the world, engaged in research and development efforts with respect to pharmaceutical products targeted at GI diseases and conditions addressed by RDD’s product pipeline. In particular, we are aware of products in research or development by competitors that address the diseases being targeted by RDD’s products. Developments by others might render RDD’s product pipeline obsolete or noncompetitive. Competitors might be able to complete the development and regulatory approval process sooner and, therefore, market their GI products earlier than the combined company can.

Many of RDD’s current competitors have significant financial, marketing and personnel resources and development capabilities. For example, many large, well-capitalized companies already offer GI products in the United States and Europe that target the indications for: fecal incontinence including over-the-counter bulking agents such as psyllium or methylcellulose; antidiarrheals such as loperamide, diphenoxylate plus atropine, bismuth subsalicylate or bile acid binders such as cholestyramine; biofeedback involving cognitively retraining pelvic floor and abdominal wall musculature; injectable anal bulking agents such as dextranomer-hyaluronic acid (Solesta®); sacral nerve stimulation and anal sphincteroplasty surgery. For pruritis ani including barrier cream such as those containing zinc oxide in conjunction with or without hydrocortisone cream; antihistamines such as diphenhydramine; topical capsaicin; anal tattooing with intradermal injection of methylene blue; topical formulations containing tacrolimus or other agents involving mechanisms believed to target pruritic mechanisms. For radiation colitis including short chain fatty acid enemas; sucralfate enemas; oral sulfasalazine with or without prednisolone enemas or other mesalamine enemas with or without glucocorticoids; argon plasma coagulation; cryoablation; bipolar electrocoagulation and heater probe; radiofrequency ablation; usage of formalin particularly in colitis with significant bleeding; band ligation; hyperbaric oxygen; hormonal therapy including estrogen with or without progesterone; antioxidants including vitamin E and C; vitamin A or retinoid formulations; stool softeners; metronidazole; pentosan polysulfate; aloe vera; and mesenchymal stem cell therapy. For short bowel syndrome including acid suppressive therapies such as H2 blockers or proton pump inhibitors; antidiarrheals such as loperamide; antibiotics to prevent small intestinal bacterial overgrowth; octrotide for patient with IV fluid requirements greater than 3 L per day; clonidine; GLP-1 analogues including exenatide with or without GLP-2 analogues such as teduglutide (Gattex®); human growth hormone or somatropin analogues (Zorptive®); bile acid binders such as cholestyramine or pancreatic enzymes to aid in digestion of nutrients. In addition, other GI products are in research or development by competitors that address the diseases and diagnostic procedures being targeted by RDD’s product pipeline.



 

24



INFORMATION ABOUT THE COMPANY AND RDD

About the Company
 
The Company is a clinical-stage biopharmaceutical company developing novel medicines for autoimmune and inflammatory diseases with unmet medical needs, including drug candidates for celiac disease, nonalcoholic steatohepatitis (NASH), alcoholic steatohepatitis (ASH), Crohn’s disease and ulcerative colitis (UC). The Company started the Phase 3 clinical trial for its lead drug candidate, larazotide acetate or larazotide (INN-202), for the treatment of celiac disease in June 2019.

The Company’s common stock is listed on the Nasdaq Capital Market under the symbol “INNT.” As of [_____], 2020, the closing price of the Company’s common stock on the Nasdaq Capital Market was $[____] and there was a total of [_____] shares of the Company’s common stock outstanding.
 
The Company is subject to the reporting requirements of the Exchange Act, and, as such, it files or furnishes reports and other information with the SEC from time to time. See the section of this proxy statement entitled “Where You Can Find Additional Information.” For additional information with respect to the Company, please see the Annual Report on Form 10-K which accompanies this proxy statement.
 
The Company is a Delaware corporation. The Company’s principal executive offices are located at 8480 Honeycutt Road, Suite 120, Raleigh, NC 27615, and its telephone number is (919) 275-1933. The Company’s Internet website is http://www.innovatebiopharma.com/. The contents of the Company’s Internet site are not incorporated by reference herein and are not deemed to be part of this proxy statement.

Legal Proceedings
 
There was a claim filed in the Superior Court of the State of Delaware regarding a former consultant of the Company who was compensated in cash and stock options for his services, demanding damages of up to approximately $3.6 million plus punitive damages in connection with a delay in such consultant’s ability and timing to exercise options and sell shares of our common stock related to past consulting services. The Company strongly denies any wrongdoing alleged in the threatened litigation and firmly believes the allegations in the complaint are entirely without merit and intends to defend against them vigorously. On October 15, 2019, the court granted our motion to dismiss and concluded the plaintiff failed to sufficiently assert claims. On November 6, 2019, the plaintiff filed a notice of appeal to the Delaware Supreme Court. We are unable to estimate the amount of a potential loss or range of potential loss, if any.

Other than as described above, the Company is not currently a party to any legal or governmental regulatory proceedings, nor is its management aware of any pending or threatened legal or government regulatory proceedings proposed to be initiated against us that would have a material adverse effect on our business, financial condition or operating results.

Properties
 
The Company’s main office is located in Raleigh, North Carolina, where it leases approximately 2,480 square feet of office space under a lease that expires on September 30, 2020. The lease contains a two-year renewal option.
 
The Company believes that its existing facilities are adequate to support its near-term needs and believes that suitable alternative space would be available if required in the future on commercially reasonable terms.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None.
 
About RDD Pharma LTD.
 
RDD is a privately held specialty pharmaceutical company focused on development and commercialization of orphan and innovative therapies for gastrointestinal disorders. RDD has exclusively developed drug candidates that are new therapeutic entities based on known or approved molecules with established safety and toxicology profiles. By choosing medications

25


that are already approved for other indications and combining them with a proprietary drug-delivery technology, RDD benefits from a short regulatory route while maintaining patent protection.

RDD has three clinical stage products which serve significant unmet needs in the anorectal region. RDD’s pipeline includes drug candidates for fecal incontinence in patients with spinal cord injury (RDD-0315), pruritis ani (RDD-1609), and short bowel syndrome (NB1001). RDD recently completed a successful Phase 2a study in Europe of RDD-0315 in fecal incontinence, which reached the primary endpoint (lowered frequency of incontinence events). Additionally, RDD-0315 has received Orphan Drug status in the E.U. and Fast Track designation in the U.S. There are no approved therapies for this indication. RDD received IRB approval for Phase 2a clinical trials for RDD-1609 and expects the study to be complete in the second half of 2020.

In November 2019, RDD entered into a non-binding letter of intent to acquire Naia Rare Diseases (“Naia”), a privately held biopharmaceutical company developing drugs for Short Bowel Syndrome and other rare gastrointestinal diseases. Closing of the transaction is anticipated to occur after the consummation of the Merger. In exchange, it is anticipated that Naia will receive a combination of cash and shares in the combined company, subject to closing of the Merger.

Through the transaction, the combined company would acquire Naia’s investigational therapeutic, NB-1001, a long-acting glucagon-like peptide-1 (GLP-1) receptor agonist that combines exenatide with a proprietary extended half-life technology for treatment of short bowel syndrome. Long-acting NB-1001 extends the half-life of GLP-1 and allows for up to once-per-month dosing, considerably increasing administration convenience with a potentially improved safety profile versus other GLP-1 agonists secondary to lower overall exposure and dose required. The proposed acquisition includes a glucagon-like peptide 2 (GLP-2) analogue with improved serum half-life compared with short-acting versions, which RDD intends to progress through a clinical and regulatory pathway in an undisclosed orphan and rare gastrointestinal indication.

NB-1001 has demonstrated efficacy and an extended half-life up to 30 days in a 70-patient clinical study and received orphan drug designation by the U.S. Food and Drug Administration. The companies, along with Cedars-Sinai Medical Center, plan to initiate a clinical program in short bowel syndrome in 2020, with the goal of developing a safer, more efficacious and convenient therapy.

RDD Pharma Ltd. was founded in Israel in 2008. RDD has two wholly-owned subsidiaries, RDD Pharma Limited, founded in England in 2015, and RDD Pharma Inc., founded in Delaware in 2013.
 
RDD’s executive offices are located at 31 Habarzel St., Ramat Hachayal, Tel-Aviv 69710 Israel, and its telephone number is +972-722419061. RDD’s Internet website is http://www.rddpharma.com/. The contents of RDD’s Internet site are not incorporated by reference herein and are not deemed to be part of this proxy statement.
Employees
 
As of [_____], 2020, RDD had [___] employees and [___] consultants.

 
Legal Proceedings
 
RDD is not currently a party to any legal proceedings. From time to time, RDD may be involved in legal proceedings or subject to claims incident to the ordinary course of business. Regardless of the outcome, such proceedings or claims can have an adverse impact on RDD because of defense and settlement costs, diversion of resources and other factors, and there can be no assurances that favorable outcomes will be obtained.

26





THE MERGER
General
 
The Company and RDD have agreed to consummate the Merger under the terms and subject to the conditions of the Merger Agreement. The Company’s Board unanimously approved the Merger and the Merger Agreement.

Upon completion of the Merger, RDD will be a wholly-owned subsidiary of the Company. The Merger Agreement, as amended, is attached as Annex B to this proxy statement. We urge you to read the Merger Agreement carefully as it is the legal document that governs the Merger.
 
Background of the Merger
 
In August 2019, RDD and the Company commenced preliminary discussions regarding RDD’s technology and a possible transaction between the companies. Shortly thereafter, the Company began conducting due diligence on RDD. During August 2019 the Company reviewed various scientific, financial and corporate information provided by RDD. Additional calls were held to answer questions on said material. The dates of these calls included, but were not limited to: August 15, August 16 and August 25, 2019.

On August 31, 2019, the Company’s management and Board of Directors met to discuss the status of the RDD due diligence and a potential path forward. At the end of that meeting, the Board of Directors authorized management to commence negotiations with RDD regarding a proposed merger.
 
On September 6, 2019 Dr. Sandeep Laumas, Chief Executive Officer of the Company, and Mr. Edward Sitar, Chief Financial Officer of the Company, met in person in Raleigh, North Carolina with Mr. John Temperato, Chief Executive Officer of RDD and Mr. Mark Sirgo, Chairman of RDD, to advance merger negotiations. On September 8, 2019, members of the Company’s Board of Directors voted to proceed with the Merger and authorized management to finalize terms. On September 10, 2019, the Company’s Board of Directors approved the signing of a term sheet with RDD. Telephonic meetings continued throughout September 2019 and the Company’s Board of Directors met on September 18, 2019 and September 24, 2019 to get updates on the negotiations. At both meetings the Board of Directors instructed management to continue the negotiating process. On October 3, 2019 the Company’s Board of Directors adopted resolutions approving the Merger Agreement.
 
On October 7, 2019, the Company filed a Current Report on Form 8-K to announce the entering into of the Merger Agreement.
 
During October, November and December 2019, the Company and RDD continued discussions to advance the closing of the Merger. On December 17, 2019, the Company filed a Current Report on Form 8-K to announce an amendment to the Merger Agreement. 

Reasons for the Proposed Merger
 
Basis for the Approval of the Company’s Board of Directors
 
The Board of Directors of the Company has unanimously determined that the consideration to be issued pursuant to the Merger Agreement is fair to, and in the best interests of, the Company stockholders. The Board of Directors considered a number of factors, including, among others, the facts discussed in the following paragraphs. Although the foregoing discussion sets forth the material factors considered by the Company Board of Directors in reaching its conclusion, it may not include all the factors considered by the Company Board of Directors. In light of the number and wide variety of factors considered in connection with its evaluation of the acquisition, the Company Board of Directors did not consider it practicable to quantify or otherwise assign relative weights to the specific factors it considered in reaching its determination. The Company Board of Directors viewed its position and determinations as being based on all of the information available and the factors presented to it and considered by it. In addition, individual directors may have given different weight to different factors.
 

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In reaching its decision, the Company Board of Directors consulted with its senior management, financial advisors and outside legal counsel. These consultations included discussions regarding strategic and operational matters, the historical and future price for Company common stock, past and current business operations and financial condition and performance.
 
The decision of the Board of Directors to enter into the Merger Agreement was the result of careful consideration by the Board of Directors of numerous factors, including that the Company will realize synergistic benefits upon the acquisition of RDD along with the benefits of a new investment by an experienced institutional healthcare investor.
 
Interests of Innovate Directors and Executive Officers in the Merger
 
The Company’s directors and executive officers have no interests in the Merger other than their interests as stockholders of the Company generally, except that Drs. Johnson, Laumas and Proujansky are expected to continue to serve on the Company’s Board of Directors following the Merger, for which they would receive cash and equity compensation.
  
Securities to be Issued by the Company in the Proposed Merger
 
At the Effective Time, and if the Merger Consideration Proposal is approved, all outstanding ordinary and preferred shares of RDD, nominal value of NIS 0.01 each, will be converted into the right to receive such number of validly issued, fully paid and non-assessable Company Common Shares as set forth in the Consideration Allocation.
Additionally, each outstanding RDD stock option will be converted into and become an option exercisable for Company Shares with the number and exercise price adjusted in a manner consistent with the Consideration Allocation. Each outstanding RDD warrant will be exercised or cancelled prior to the Effective Time. Following completion of the Merger and on an as-converted basis, the Innovate stockholders will own up to approximately 62.0% of the combined company’s capital stock and the former RDD stockholders will own approximately 38.0% of the combined company’s capital stock, each on a fully diluted basis. The Merger Agreement also includes, as a closing condition, a required Financing of $10,000,000, which will dilute the Innovate stockholders and former RDD stockholders pro rata.
If the Merger Consideration Proposal is not approved, we anticipate that the Merger will still be consummated and we will instead issue to the RDD shareholders (a) Company Common Shares representing approximately 19.5% (or such amount as permitted pursuant to the restrictions of Nasdaq Listing Rule 5635(d)) of the Company’s issued and outstanding shares of common stock (calculated prior to the issuance of those new shares of common stock) and (b) validly issued, fully paid and non-assessable shares of a newly created non-voting convertible Company Preferred Shares that will be convertible into Company Common Shares if approved by the Company’s stockholders at a later date.
 
Israeli Regulatory Matters
 
Registrar of Companies

The consummation of the Merger is subject to the approval and registration of the Merger by the Israeli Registrar of Companies (the “RoC”), which shall be given not earlier than the date which is (i) 50 days from the date of filing of a “Merger Proposal” by the Company and RDD (the parties intend to file the proposal as soon as possible); and (ii) 30 days from the date of approval of the Merger by the sole shareholder of Merger Sub (i.e. the Company) and the shareholders of RDD.

Israel Innovation Authority

Intellectual property of RDD was developed using funding provided by the Israeli National Technological Innovation Authority (the “IIA”) under the provisions of the Israeli Encouragement of Industrial Research, Development and Innovation Law, 5744 - 1984 (together with applicable regulations, rules, procedures and benefit plans the “Innovation Law”). Amongst other things, Innovation Law places constraints on the transfer of know-how and/or production rights with respect to IP that was developed with the support of the IIA.

The Company shall be required to execute a standard form undertaking to the IIA that it will (i) observe and comply with all the requirements of the Innovation Law, particularly those requirements relating to the prohibitions on the

28


transfer of know-how and/or production rights; and (ii) make all reasonable efforts as a shareholder, to ensure that RDD observes and complies with such requirements.

Material U.S. Federal Income Tax Consequences
 
There are no material U.S. federal income tax consequences to the Company’s current stockholders that will result from the Company’s acquisition of RDD or the issuance of Company Shares in connection with the Merger and in the transactions contemplated by the Merger Agreement.
 
Pro Forma Financial Information
 
Pro forma financial information for the Merger is included in Annex A to this proxy statement.
 

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MERGER AGREEMENT
 
On October 6, 2019, the Company entered the Merger Agreement with Merger Sub, RDD and Orbimed Israel Partners, Limited Partnership, as the Shareholder Representative. The Merger Agreement and the Merger have been approved by the Board of Directors of the Company and the Board of Directors of RDD. On December 17, 2019, the parties entered into a First Amendment to the Merger Agreement.

The Merger Agreement provides that, upon the terms and subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will be merged with and into RDD, with RDD continuing as the surviving corporation and a direct wholly-owned subsidiary of the Company following the Merger.

At the Effective Time, and if the Merger Consideration Proposal is approved, all outstanding ordinary and preferred shares of RDD, nominal value of NIS 0.01 each, will be converted into the right to receive such number of validly issued, fully paid and non-assessable Company Common Shares as set forth in the Consideration Allocation.
Additionally, each outstanding RDD stock option will be converted into and become an option exercisable for Company Common Shares with the number and exercise price adjusted in a manner consistent with the Consideration Allocation. Each outstanding RDD warrant will be exercised or cancelled prior to the Effective Time. Following completion of the Merger and on an as-converted basis, the Innovate stockholders will own up to approximately 62.0% of the combined company’s capital stock and the former RDD stockholders will own approximately 38.0% of the combined company’s capital stock, each on a fully diluted basis.

If the Merger Consideration Proposal is not approved, we anticipate that the Merger will still be consummated and we will instead issue to the RDD shareholders (a) Company Common Shares representing approximately 19.5% (or such amount as permitted pursuant to the restrictions of Nasdaq Listing Rule 5635(d)) of Innovate’s issued and outstanding shares of common stock (calculated prior to the issuance of those new shares of common stock) and (b) validly issued, fully paid and non-assessable Company Preferred Shares that will be convertible into Company Common Shares if approved by the Company’s stockholders at a later date.

A certificate of designation creating Company Preferred Shares has been approved by the Board of Directors of Innovate (the “Innovate Board”) and, if necessary, will be filed and be effective as of the time of closing (the “Certificate of Designation”).

Following the Effective Time, the Board will consist of six (6) directors and will be comprised of three (3) members designated by RDD and three (3) members designated by the Company. One of the Company directors will resign upon receipt of approval of the three Proposals described in this proxy statement. Immediately following the Effective Time, the Board will appoint John Temperato, the Chief Executive Officer of RDD, as the Chief Executive Officer of the Company.

At the Effective Time, it is anticipated that the Company will change its name to 9 Meters Biopharma, Inc.

Each of the Company and RDD have made customary representations, warranties and covenants in the Merger Agreement. The Company has made covenants, among others, relating to the conduct of its business prior to the closing of the Merger, including with respect to incurring debt, issuing stock, certain litigation matters, and restrictions on employee compensation.

The Company is not permitted to solicit, initiate, propose, seek or knowingly encourage, facilitate or support any alternative transaction proposals from third parties or to engage in discussions or negotiations with third parties regarding any alternative transaction proposals. Notwithstanding this limitation, prior to the Effective Time, the Company may under certain circumstances provide information to and participate in discussions or negotiations with third parties with respect to an unsolicited alternative transaction proposal that the Board has determined in good faith is or would reasonably be expected to lead to a superior proposal.

Additionally, the Company has agreed, that from and after the date of the Merger Agreement, it will use its
reasonable best efforts to cause all of the outstanding warrants of the Company to be exercised.

The Merger Agreement also contains covenants regarding the Company and RDD using their respective reasonable best efforts to obtain all required governmental and regulatory consents and approvals.

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The Merger Agreement also includes, as a closing condition, a minimum Financing of $10,000,000. A Financing in the amount of $10,000,000 will dilute the Innovate stockholders and former RDD shareholders pro rata.
The closing of the Merger is subject to certain other conditions, including, among others, (i) the absence of certain laws, orders, judgments and injunctions that restrain, enjoin or otherwise prohibit the consummation of the Merger, (ii) subject to certain exceptions, the accuracy of representations and warranties with respect to the businesses of the Company and RDD and compliance in all material respects by the Company, RDD and Merger Sub with their respective covenants contained in the Merger Agreement, (iii) the absence of a material adverse effect on the Company’s or RDD’s businesses, (iv) the approval by Nasdaq to list the Company Shares to be issued in the Merger, (v) the expiration of statutory waiting periods required under Israeli law and (vi) the receipt of certain tax rulings from the Israeli Tax Authorities.

The Merger Agreement contains certain customary termination rights by either the Company or RDD, including if the Merger is not consummated by April 6, 2020.

If the Merger Agreement is terminated under certain circumstances, including termination by the Company to enter into a superior alternative transaction, the Company will be obligated to pay to RDD a termination fee equal to $1,000,000 in cash. RDD is required to pay termination fees in an amount up to $1,000,000 in certain circumstances pursuant to the Merger Agreement.

The RDD shareholders have agreed to indemnify and hold harmless the Company and their respective successors and assigns, but only to the extent of the Indemnity Shares (as defined below), from and against all losses arising out of or resulting from the inaccuracy or breach of any representation or warranty of RDD or the non-fulfillment or breach of any covenant or agreement of RDD contained in the Merger Agreement. The Company has agreed to indemnify and hold harmless RDD and their respective successors and assigns, from and against all losses arising out of or resulting from the inaccuracy or breach of any representation or warranty of, or the non-fulfillment or breach of any covenant or agreement of, the Company or Merger Sub contained in the Merger Agreement. Indemnification claims will be paid by delivery of shares of Company Common Stock.

To provide a fund for satisfaction of the Company’s post-Closing rights to indemnification under the Merger Agreement, an aggregate of 10% of the Company Shares to be issued to RDD (the “Indemnity Shares”) will be placed in escrow, in accordance with an escrow agreement for a period of six (6) months. The RDD shareholders’ right to indemnification will be satisfied through the issuance of additional Company Shares.

Support Agreements

Certain stockholders of the Company have entered into Support Agreements with the Company and RDD covering approximately 40% of the outstanding Company Common Shares, as of the date of the Merger Agreement. The Support Agreements provide, among other things, that each stockholder party to the Company Support Agreement will vote all of the Company Common Shares held by them in favor of the Merger Consideration Proposal, the Warrants Proposal and the Reverse Stock Split Proposal.

Lock-Up Agreements

Prior to closing, certain executive officers and directors of the Company will enter into the Company Lock-Up Agreements, pursuant to which they have agreed to certain restrictions on transfers of any shares of the Company for the 180-day period following the Effective Time, with such restrictions being subject to customary exceptions.

Prior to closing, certain holders of RDD securities, will enter into RDD Lock-Up Agreements, pursuant to which they have agreed to certain restrictions on transfers of the Company Shares for the 180-day period following the Effective Time, with such restrictions being subject to customary exceptions.

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PROPOSAL 1
APPROVAL OF THE ISSUANCE OF OUR COMMON STOCK AS MERGER CONSIDERATION
PURSUANT TO NASDAQ LISTING RULE 5635
 
Background

The Merger Agreement provides that, upon the terms and subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will be merged with and into RDD, with RDD continuing as the surviving corporation and a direct wholly-owned subsidiary of the Company following the Merger.

At the Effective Time, and if this Merger Consideration Proposal is approved, all outstanding ordinary and preferred shares of RDD, nominal value of NIS 0.01 each, will be converted into the right to receive such number of validly issued, fully paid and non-assessable Company Common Shares as set forth in the Consideration Allocation.

Additionally, each outstanding RDD stock option will be converted into and become an option exercisable for Company Common Shares with the number and exercise price adjusted by the Exchange Ratio. Each outstanding RDD warrant will be exercised or cancelled prior to the Effective Time. Following completion of the Merger and on an as-converted basis, the Innovate stockholders will own up to approximately 62.0% of the combined company’s capital stock and the former RDD stockholders will own approximately 38.0% of the combined company’s capital stock, each on a fully diluted basis. A Financing in the amount of $10,000,000 will dilute the Innovate stockholders and former RDD stockholders pro rata.

If the Merger Consideration Proposal is not approved, we anticipate that the Merger will still be consummated and we will instead issue to the RDD Shareholders (a) Company Common Shares representing approximately 19.5% (or such amount as permitted pursuant to the restrictions of NASDAQ Listing Rule 5635(d)) of Innovate’s issued and outstanding shares of common stock (calculated prior to the issuance of those new shares of common stock) and (b) validly issued, fully paid and non-assessable Company Preferred Shares that will be convertible into Company Common Shares if approved by the Company’s stockholders at a later date.
 
See the sections entitled “The Merger” and “Merger Agreement” in this proxy statement for a detailed explanation of the terms and conditions of the Merger, the Merger Agreement, and the transactions and agreements contemplated by the Merger Agreement, and the section entitled “Information About RDD” for detailed information about RDD.
 
Nasdaq Listing Rules
 
The Company’s common stock is listed on the Nasdaq Capital Market and we are subject to the Nasdaq Listing Rules. Although we are not required to obtain stockholder approval in connection with the Merger, we are required under Nasdaq Listing Rules 5635(a)(1) and 5635(d) to seek stockholder approval of the Company’s proposed issuance of Company Common Shares in connection with the Merger and in the transactions contemplated by the Merger Agreement.
 
Nasdaq Listing Rule 5635(a)(1) requires stockholder approval prior to the issuance of securities “in connection with” the acquisition of the stock or assets of another company, where due to the present or potential issuance of common stock (or securities convertible into or exercisable for common stock), other than a public offering for cash, the common stock to be issued (a) constitutes voting power in excess of 20% of the outstanding voting power prior to the issuance or (b) is or will be in excess of 20% of the outstanding common stock prior to the issuance.
 
In addition, under Nasdaq Listing Rule 5635(d), prior stockholder approval is required for the issuance, other than in a public offering, of securities convertible into common stock at a price less than the greater of book or market value of the common stock if the securities are convertible into 20% or more of a company’s common stock. We anticipate that if this Merger Consideration Proposal is approved, we will issue Company Common Shares in an amount equal to at least 38% of the combined company’s capital stock, on a fully-diluted basis. A Financing in the amount of $10,000,000 will dilute the Company’s stockholders and former RDD shareholders pro rata as the result of the issuance of additional Company Common Shares and is expected to reduce the percentage of the combined company’s capital stock, and we would therefor issue Company Common Shares in an amount greater than 38%, but less than 50%, of the combined company’s capital stock, on a fully-diluted basis.
 

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Reasons for Seeking Stockholder Approval
 
We are required under Nasdaq Listing Rules 5635(a)(1) and 5635(d) to seek stockholder approval of the proposed issuance of the Company Common Shares at the closing of the Merger and in the transactions contemplated by the Merger Agreement.
 
Consequences of Not Approving this Proposal
 
If the Merger Consideration Proposal is not approved, we anticipate that the Merger will still be consummated and we will instead issue to the RDD shareholders (a) Company Common Shares representing approximately 19.5% (or such amount as permitted pursuant to the restrictions of Nasdaq Listing Rule 5635(d)) of the Company’s issued and outstanding shares of common stock (calculated prior to the issuance of those new shares of common stock) and (b) validly issued, fully paid and non-assessable Company Preferred Shares that will be convertible into Company Common Shares if approved by the Company’s stockholders at a later date.
 
Interests of Directors and Executive Officers

Our directors and executive officers have no substantial interests, directly or indirectly, in the matters set forth in this proposal except to the extent of their ownership of shares of common stock, except that Drs. Johnson, Laumas and Proujansky are expected to continue to serve on the Company’s Board of Directors following the Merger, for which they would receive cash and equity compensation.

Support Agreements

Following the execution of the Merger Agreement, certain stockholders of the Company, owning an aggregate of approximately 40% of the outstanding shares of Company common stock, entered into Support Agreements with the Company and RDD. The Support Agreements provide, among other things, that each stockholder party to the Support Agreements will vote all of their Company Common Shares in favor of this Proposal 1 and/or any proposal that would reasonably be expected to further implement or carry into effect the purposes and intent of the transactions contemplated by the Merger Agreement. Therefore, [____] shares of our common stock will vote in favor of this Proposal 1 pursuant to the Support Agreements.

Vote Required

If a quorum is present, the approval Proposal 1 requires the affirmative vote of a majority of the votes cast. Abstentions will have no direct effect on the outcome of this proposal.

Recommendation of the Board of Directors
OUR BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE MERGER CONSIDERATION PROPOSAL.

For a more complete description of Innovate’s reasons for the Merger and the recommendation of the Innovate Board of Directors, see “Innovate’s Board of Directors’ Recommendation” beginning on page [__].
 

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PROPOSAL 2
APPROVAL OF THE POTENTIAL ISSUANCE
OF 20% OR MORE OF THE COMPANY’S COMMON STOCK
PURSUANT TO THE EXCHANGE OR REDUCTION IN THE EXERCISE PRICE OF OUTSTANDING WARRANTS

Background of Merger Agreement
Pursuant to the Merger Agreement, the Company has agreed, that from and after the date of the Merger Agreement, it will use its reasonable best efforts to cause all of the outstanding warrants of the Company to be exercised.
Background of Warrants

Pursuant to numerous financing transactions effected by the Company prior to the date of this proxy statement, the Company has issued and outstanding 12,346,631 warrants to purchase shares of common stock at exercise prices ranging from $2.13 to $4.00 per share, as noted in the table below.


Issue Date
Number of Warrants
Exercise Price
Expiration Date
1/29/2018
1,410,364

$3.18

1/29/2023
1/29/2018
349,555

$2.54

1/29/2023
3/18/2019
2,508,634

$2.56

3/18/2024
3/18/2019
4,181,068

$4.00

3/18/2020
5/17/2019
3,897,010

$2.13

5/17/2024


These warrants are together known as the “Warrants.”

The primary purpose of this Proposal 2 is to obtain Nasdaq approval prior to the issuance or potential issuance of common stock equal to 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock. We are obligated under the Merger Agreement to use our reasonable best efforts to cause all of the Warrants to be exercised.

As of the close of the Nasdaq Capital Market on [______], 2020, the price of our common stock was $[____], causing all of the Warrants to be “out of-the-money” and thus extremely unlikely to be exercised.

We plan to extend to holders of record of outstanding Warrants as of December 20, 2019 offers to either amend and exercise Warrants or exchange the Warrants for shares of common stock (together the “Warrant Offer”). Pursuant to the Warrant Offer, the Warrants of such eligible holders who elect to participate in the Warrant Offer will either be (a) exchanged for shares of common stock or will be (b) amended to (i) shorten the exercise period so that they expire concurrently with the expiration of the Warrant Offer at 5:00 p.m. (Eastern Time) on January __, 2020 and (ii) reduce the exercise price to $[___]. This reduced exercise price is known as the “Revised Exercise Price”.

We believe providing this mechanism is necessary to provide an incentive to our holders of Warrants to exercise their Warrants and thereby reduce the overhang on the market for our common stock caused by the Warrants being outstanding.

While not the primary purpose, the exercise of the Warrants could potentially be an additional source of capital for the Company. If all Warrants are exercised in full based on the Revised Exercise Price, the Company would obtain up to $[___] million in additional capital. However, we can provide no assurance that the Warrants will be exercised in whole or in part or that the Warrants will not be exchanged for shares of common stock, upon which we would receive no additional consideration.

The terms of the proposed Warrant Offer are complex and only briefly summarized above. On [_______], 2020, we filed a Schedule TO-I with the SEC in connection with the Warrant Offer.

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Reasons for Requesting Stockholder Approval

Because our common stock is traded on the Nasdaq Capital Market, we are subject to the Nasdaq Listing Rules, including Listing Rule 5635(d). Pursuant to Listing Rule 5635(d), stockholder approval is required prior to the issuance of securities in connection with a transaction (or a series of related transactions) other than a public offering involving the sale, issuance or potential issuance of common stock (or securities convertible into or exercisable for common stock) equal to 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock.

Since the Reduced Exercise Price was below “market” at the time we launched the Warrant Offer, any securities issued for greater than the book or market value of our common stock at the time of the exercise of the Warrants will be included in the calculation of the 20% beneficial ownership limitation cap set forth in Listing Rule 5635(d). Additionally, if we exchange the Warrants for shares of common stock, we will be deemed to have issued such shares below “market.” If our stockholders approve this Proposal 2, the Company will not be subject to the issuance of beneficial ownership limitation cap set forth in Listing Rule 5635(d) and we would be able to adjust the exercise price of the Warrants to the Revised Exercise Price and issue the shares further to the Warrant Offer.

We are seeking stockholder approval to permit adjustments to the exercise price of the Warrants or an exchange of the Warrants and to allow us to make such issuances of our common stock described above in accordance with Nasdaq Listing Rule 5635(d).

If stockholder approval of this Proposal 2 is not obtained, no shares will be issued pursuant to the Warrant Offer and terms of the Warrants will be unaffected.

Support Agreements

Following the execution of the Merger Agreement, certain stockholders of the Company, owning an aggregate of approximately 40% of the outstanding shares of Company common stock, entered into Support Agreements with the Company and RDD. The Support Agreements provide, among other things, that each stockholder party to the Support Agreements will vote all of their Company Common Shares in favor of this Proposal 2 and/or any proposal that would reasonably be expected to further implement or carry into effect the purposes and intent of the transactions contemplated by the Merger Agreement. Therefore, [____] shares of our common stock will vote in favor of this Proposal 2 pursuant to the Support Agreements.

Vote Required

If a quorum is present, the approval Proposal 2 requires the affirmative vote of a majority of the votes cast. Abstentions will have no direct effect on the outcome of this proposal.

Recommendation of the Board of Directors

OUR BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE WARRANTS PROPOSAL.

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PROPOSAL 3
APPROVAL OF THE REVERSE STOCK SPLIT

The Board deems it advisable and in the best interest of the Company that the Board be granted the discretionary authority to amend the Company’s certificate of incorporation to effect a Reverse Stock Split of the Company’s issued and outstanding common stock as described below (the “Reverse Stock Split Amendment”).

The form of Reverse Stock Split Amendment to be filed with the Delaware Secretary of State is set forth in Annex C.

Approval of the proposal would permit (but not require) our Board to effect one or more reverse stock splits of our issued and outstanding common stock by a ratio of not less than one-for-[five] and not more than one-for-[twenty], with the exact ratio to be set at a number within this range as determined by our Board in its sole discretion, provided that the Company effects the Reverse Stock Split no later than one year following the approval of this proposal by stockholders. The Company shall not effect Reverse Stock Splits that, in the aggregate, exceeds one-for-twenty. We believe that enabling our Board to set the ratio within the stated range will provide us with the flexibility to implement the Reverse Stock Split in a manner designed to maximize the anticipated benefits for our stockholders.  In determining a ratio, if any, our Board may consider, among other things, factors such as the effects of the Merger, among other factors.

Our Board reserves the right to elect to abandon the Reverse Stock Split, including any or all proposed reverse stock split ratios, if it determines, in its sole discretion, that the Reverse Stock Split is no longer in the best interests of the Company and its stockholders.

Depending on the ratio for the Reverse Stock Split determined by our Board, no less than five (5) and no more than twenty (20) shares of outstanding common stock, as determined by our Board, will be combined into one share of common stock. The Company shall not effect Reverse Stock Splits that, in the aggregate, exceed one-for-twenty. Our Board will have the discretionary authority to determine whether to arrange for the disposition of fractional interests by holders entitled thereto, to pay in cash the fair value of fractions of a share as of the time when those entitled to receive such fractions are determined, or to entitle holders to receive from the Company’s transfer agent, in lieu of any fractional share, the number of shares rounded up to the next whole number. The amendment to our certificate of incorporation to effect a Reverse Stock Split, if any, will include only the reverse split ratio determined by our Board to be in the best interests of our stockholders and all of the other proposed amendments at different ratios will be abandoned.

Reasons for the Reverse Stock Split; Potential Consequences of the Reverse Stock Split

The Company’s primary reasons for approving and recommending the Reverse Stock Split are to increase the per share price and bid price of our common stock to help the Company regain compliance with the continued listing requirements of Nasdaq.

On December 4, 2019, we received a letter from the Listing Qualifications Department (the “Staff”) of Nasdaq notifying the Company that, for the last 30 consecutive business days, the closing bid price for the Company’s common stock was below the minimum $1.00 per share requirement for continued listing on The Nasdaq Capital Market as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”). The Nasdaq letter had no immediate effect on the listing of the Company’s common stock on the Nasdaq Capital Market.

In accordance with Nasdaq Listing Rules, the Company was provided an initial period of 180 calendar days, or until June 1, 2020, to regain compliance with the Minimum Bid Price Requirement.

If, at any time during this 180-day period, the closing bid price of the Company’s common stock is at least $1.00 for a minimum of 10 consecutive business days, unless the Staff exercises its discretion to extend such 10-day period, the Staff will provide the Company written confirmation of compliance with the Minimum Bid Price Requirement and the matter will be closed.


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Reducing the number of outstanding shares of common stock should, absent other factors, generally increase the per share market price of our common stock. Although the intent of the Reverse Stock Split is to increase the price of our common stock, there can be no assurance, however, that even if the Reverse Stock Split is effected, that the bid price of the Company’s common stock will be sufficient for the Company to regain compliance with Nasdaq’s Minimum Bid Price Requirement.

In addition, on December 4, 2019, the Company was also notified by Nasdaq that for the last 30 consecutive business days, the market value of the Company's listed securities has been below the minimum requirement of $35 million for continued inclusion on the Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(b)(2) and that the Company also does not meet the alternative requirements of Nasdaq Listing Rule 5550(b)(1), which would require the Company to have minimum stockholders' equity of $2.5 million, or Nasdaq Listing Rule 5550(b)(3), which would require the Company to have had net income from continuing operations of at least $500,000 in its latest fiscal year or in two of its last three fiscal years. The Reverse Stock Split will not cure either of the above deficiencies.

In addition, the Company believes the Reverse Stock Split will make its common stock more attractive to a broader range of investors, as it believes that the current market price of its common stock may prevent certain institutional investors, professional investors and other members of the investing public from purchasing stock.  The Company believes that the Reverse Stock Split will make its common stock a more attractive and cost-effective investment for many investors, which in turn would enhance the liquidity of the holders of common stock.

There can be no assurance that the Reverse Stock Splits, if completed, will result in the intended benefits described above, that the market price of our common stock will increase following the Reverse Stock Splits, that as a result of the Reverse Stock Split we will be able to meet or maintain a bid price over the minimum bid price requirement of Nasdaq or that the market price of our common stock will not decrease in the future.

Procedure for Implementing the Reverse Stock Split

The Reverse Stock Split will become effective upon the filing or such later time as specified in the filing (the “Split Effective Time”) of the Reverse Stock Split Amendment with the Delaware Secretary of State. The form of the Reverse Stock Split Amendment is attached hereto as Annex C. The exact timing of the filing of the Reverse Stock Split Amendment and the ratio of the Reverse Stock Split (within the approved range) will be determined by our Board based on its evaluation as to when such action and at what ratio will be the most advantageous to the Company and our stockholders.  In addition, our Board  reserves the right, notwithstanding stockholder approval and without further action by the stockholders, to elect not to proceed with the Reverse Stock Split if, at any time prior to filing the Reverse Stock Split Amendment, our Board, in its sole discretion, determines that it is no longer in our best interest and the best interests of our stockholders to proceed with the Reverse Stock Split.  If the Reverse Stock Split Amendment has not been filed with the Delaware Secretary of State by the date that is one year following the approval of this proposal by our stockholders, our Board will abandon the Reverse Stock Split.

Principal Effects of the Reverse Stock Split

The reverse stock split will be effected simultaneously for all outstanding shares of Company common stock. The reverse stock split will affect all of the Company’s stockholders uniformly and will not affect any stockholder’s percentage ownership interests in the Company, except to the extent that the reverse stock split results in any stockholders owning a fractional share. Common stock issued pursuant to the reverse stock split will remain fully paid and nonassessable. The reverse stock split will not affect the Company’s continuing to be subject to the periodic reporting requirements of the Exchange Act.

As of the Split Effective Time, the Company will adjust and proportionately decrease the number of shares of common stock reserved for issuance upon exercise of, and adjust and proportionately increase the exercise price of, all options and warrants and other rights to acquire shares of common stock. In addition, as of the Split Effective Time, the Company will adjust and proportionately decrease the total number of shares of common stock that may be the subject of the future grants under stock option plans.

As an example, the following table illustrates the effects of a 20-for-1 and a 5-for-1 reverse stock split (without giving effect to the treatment of fractional shares) as of September 30, 2019:



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Prior to
Reverse Stock
Split
After 20-for-1
Reverse Stock
Split
After 5-for-1
Reverse Stock
Split
Common stock outstanding
 
 
 
 
 
 
Common stock issuable pursuant to outstanding equity
awards
 
 
 
 
 
 
Common stock issuable pursuant to outstanding warrants
 
 
 
 
 
 
 
 


Authorized Shares of Common Stock

The Reverse Stock Split will not change the number of authorized shares of the Company’s common stock under the Company’s certificate of incorporation. Because the number of issued and outstanding shares of common stock will decrease, the number of shares of common stock remaining available for issuance will increase. Currently, under our certificate of incorporation, our authorized capital stock consists of 350,000,000 shares of common stock.

Subject to limitations imposed by Nasdaq, the additional shares available for issuance may be issued without stockholder approval at any time, in the sole discretion of our Board. The authorized and unissued shares may be issued for cash, for acquisitions or for any other purpose that is deemed in the best interests of the Company.

Beneficial Holders of Common Stock (i.e. stockholders who hold in street name)

Upon the implementation of the Reverse Stock Split, we intend to treat shares held by stockholders through a bank, broker, custodian or other nominee in the same manner as registered stockholders whose shares are registered in their names.  Banks, brokers, custodians or other nominees will be instructed to effect the Reverse Stock Split for their beneficial holders holding our common stock in street name.  However, these banks, brokers, custodians or other nominees may have different procedures than registered stockholders for processing the Reverse Stock Split.  Stockholders who hold shares of our common stock with a bank, broker, custodian or other nominee and who have any questions in this regard are encouraged to contact their banks, brokers, custodians or other nominees.

Registered “Book-Entry” Holders of Common Stock (i.e. stockholders that are registered on the transfer agent’s books and records but do not hold stock certificates)

Certain of our registered holders of common stock may hold some or all of their shares electronically in book-entry form with the transfer agent.  These stockholders do not have stock certificates evidencing their ownership of the common stock.  They are, however, provided with a statement reflecting the number of shares registered in their accounts.
Stockholders who hold shares electronically in book-entry form with the transfer agent will not need to take action (the exchange will be automatic) to receive whole shares of post-Reverse Stock Split common stock, subject to adjustment for treatment of fractional shares.

Holders of Certificated Shares of Common Stock

Stockholders holding shares of our common stock in certificated form will be sent a transmittal letter by our transfer agent after the Split Effective Time. The letter of transmittal will contain instructions on how a stockholder should surrender his, her or its certificate(s) representing shares of our common stock (the “Old Certificates”) to the transfer agent in exchange for certificates representing the appropriate number of whole shares of post-Reverse Stock Split common stock (the “New Certificates”). No New Certificates will be issued to a stockholder until such stockholder has surrendered all Old Certificates, together with a properly completed and executed letter of transmittal, to the transfer agent. No stockholder will be required to pay a transfer or other fee to exchange his, her or its Old Certificates. Stockholders will then receive a New Certificate(s) representing the number of whole shares of common stock that they are entitled as a result of the Reverse Stock Split, subject to the treatment of fractional shares described below. Until surrendered, we will deem outstanding Old Certificates held by stockholders to represent the number of whole shares of post-Reverse Stock

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Split common stock to which these stockholders are entitled, subject to the treatment of fractional shares.  Any Old Certificates submitted for exchange, whether because of a sale, transfer or other disposition of stock, will automatically be exchanged for New Certificates.  If an Old Certificate has a restrictive legend on the back of the Old Certificate, the New Certificate will be issued with the same restrictive legends that are on the back of the Old Certificate.

The Company expects that our transfer agent will act as exchange agent for purposes of implementing the exchange of stock certificates.  No service charges will be payable by holders of shares of common stock in connection with the exchange of certificates.  All of such expenses will be borne by the Company.

STOCKHOLDERS SHOULD NOT DESTROY ANY STOCK CERTIFICATE(S) AND SHOULD NOT SUBMIT ANY STOCK CERTIFICATE(S) UNTIL REQUESTED TO DO SO.

Fractional Shares

The Board will have the discretionary authority to determine whether to arrange for the disposition of fractional interests by stockholders entitled thereto, to pay in cash the fair value of fractions of a share as of the time when those entitled to receive such fractions are determined, or to entitle stockholders to receive from the Company’s transfer agent, in lieu of any fractional share, the number of shares rounded up to the next whole number.

If the Board determines to arrange for the disposition of fractional interests by stockholders entitled thereto or to pay in cash the fair value of fractions of a share as of the time when those entitled to receive such fractions are determined, stockholders who would otherwise hold fractional shares because the number of shares of common stock they hold before the Reverse Stock Split is not evenly divisible by the ratio ultimately selected by the Board will be entitled to receive cash (without interest or deduction) in lieu of such fractional shares from either: (i) the Company, upon receipt by the transfer agent of a properly completed and duly executed transmittal letter and, where shares are held in certificated form, upon due surrender of any certificate previously representing a fractional share, in an amount equal to such holder’s fractional share based upon the closing sale price of the common stock on the trading day immediately prior to the Split Effective Time as reported on the Nasdaq Capital Market, or other principal market of the common stock, as applicable, as of the date the Reverse Stock Split is effected; or (ii) the transfer agent, upon receipt by the transfer agent of a properly completed and duly executed transmittal letter and, where shares are held in certificated form, the surrender of all old certificate(s), in an amount equal to the proceeds attributable to the sale of such fractional shares following the aggregation and sale by the transfer agent of all fractional shares otherwise issuable. If the Board determines to dispose of fractional interests pursuant to clause (ii) above, the Company expects that the transfer agent would conduct the sale in an orderly fashion at a reasonable pace and that it may take several days to sell all of the aggregated fractional shares of common stock. In this event, such holders would be entitled to an amount equal to their pro rata share of the proceeds of such sale. The Company will be responsible for any brokerage fees or commissions related to the transfer agent’s open market sales of shares that would otherwise be fractional shares.

The ownership of a fractional share interest following the Reverse Stock Split will not give the holder any voting, dividend or other rights, except to receive the cash payment, or, if the Board so determines, to receive the number of shares rounded up to the next whole number, as described above.

Stockholders should be aware that, under the escheat laws of various jurisdictions, sums due for fractional interests that are not timely claimed after the Split Effective Time may be required to be paid to the designated agent for each such jurisdiction, unless correspondence has been received by the Company or the transfer agent concerning ownership of such funds within the time permitted in such jurisdiction. Thereafter, if applicable, stockholders otherwise entitled to receive such funds, but who do not receive them due to, for example, their failure to timely comply with the transfer agent’s instructions, will have to seek to obtain such funds directly from the state to which they were paid.

Effect of the Reverse Stock Split on Employee and Consultant Plans, Options, Restricted Stock Awards and Units, Warrants, and Convertible or Exchangeable Securities


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Based upon the Reverse Stock Split ratio determined by the Board, proportionate adjustments are generally required to be made to the per share exercise price and the number of shares issuable upon the exercise or conversion of all outstanding options, warrants and convertible or exchangeable securities entitling the holders to purchase, exchange for, or convert into, shares of common stock. This would result in approximately the same aggregate price being required to be paid under such options, warrants and convertible or exchangeable securities upon exercise, and approximately the same value of shares of common stock being delivered upon such exercise, exchange or conversion, immediately following the Reverse Stock Split as was the case immediately preceding the Reverse Stock Split.  The number of shares deliverable upon settlement or vesting of restricted stock awards will be similarly adjusted, subject to our treatment of fractional shares. The number of shares reserved for issuance pursuant to these securities will be proportionately based upon the Reverse Stock Split determined by the Board, subject to our treatment of fractional shares.

Accounting Matters

The Reverse Stock Split Amendment will not affect the par value of our Common Stock per share, which will remain $0.001 par value per share.  As a result, as of the Split Effective Time, the stated capital attributable to common stock and the additional paid-in capital account on our balance sheet, in the aggregate, will not change due to the Reverse Stock Split.  Reported per share net income or loss will be higher because there will be fewer shares of common stock outstanding.

Certain Federal Income Tax Consequences of the Reverse Stock Split

The following summary describes certain material U.S. federal income tax consequences of the Reverse Stock Split to holders of our common stock.

Unless otherwise specifically indicated herein, this summary addresses the tax consequences only to a beneficial owner of our common stock that is a citizen or individual resident of the United States, a corporation organized in or under the laws of the United States or any state thereof or the District of Columbia or otherwise subject to U.S. federal income taxation on a net income basis in respect of our common stock (a “U.S. holder”).  A trust may also be a U.S. holder if (1) a U.S. court is able to exercise primary supervision over administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of the trust or (2) it has a valid election in place to be treated as a U.S. person.  An estate whose income is subject to U.S. federal income taxation regardless of its source may also be a U.S. holder.  This summary does not address all of the tax consequences that may be relevant to any particular investor, including tax considerations that arise from rules of general application to all taxpayers or to certain classes of taxpayers or that are generally assumed to be known by investors.  This summary also does not address the tax consequences to (i) persons that may be subject to special treatment under U.S. federal income tax law, such as banks, insurance companies, thrift institutions, regulated investment companies, real estate investment trusts, tax-exempt organizations, U.S. expatriates, persons subject to the alternative minimum tax, traders in securities that elect to mark to market and dealers in securities or currencies, (ii) persons that hold our common stock as part of a position in a “straddle” or as part of a “hedging,” “conversion” or other integrated investment transaction for federal income tax purposes, or (iii) persons that do not hold our common stock as “capital assets” (generally, property held for investment).

If a partnership (or other entity classified as a partnership for U.S. federal income tax purposes) is the beneficial owner of our common stock, the U.S. federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership.  Partnerships that hold our common stock, and partners in such partnerships, should consult their own tax advisors regarding the U.S. federal income tax consequences of the Reverse Stock Split.

This summary is based on the provisions of the Code, U.S. Treasury regulations, administrative rulings and judicial authority, all as in effect as of the date of this information statement.  Subsequent developments in U.S. federal income tax law, including changes in law or differing interpretations, which may be applied retroactively, could have a material effect on the U.S. federal income tax consequences of the Reverse Stock Split.


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PLEASE CONSULT YOUR OWN TAX ADVISOR REGARDING THE U.S. FEDERAL, STATE, LOCAL, AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT IN YOUR PARTICULAR CIRCUMSTANCES UNDER THE INTERNAL REVENUE CODE AND THE LAWS OF ANY OTHER TAXING JURISDICTION.

U.S. Holders

The Reverse Stock Split should be treated as a recapitalization for U.S. federal income tax purposes.  Therefore, a stockholder generally will not recognize gain or loss on the Reverse Stock Split, except to the extent of cash, if any, received in lieu of a fractional share interest in the post-Reverse Stock Split shares. The aggregate tax basis of the post-split shares received will be equal to the aggregate tax basis of the pre-split shares exchanged therefore (excluding any portion of the holder’s basis allocated to fractional shares), and the holding period of the post-split shares received will include the holding period of the pre-split shares exchanged. A holder of the pre-split shares who receives cash will generally recognize gain or loss equal to the difference between the portion of the tax basis of the pre-split shares allocated to the fractional share interest and the cash received. Such gain or loss will be a capital gain or loss and will be short term if the pre-split shares were held for one year or less and long term if held more than one year. No gain or loss will be recognized by us as a result of the Reverse Stock Split.
Support Agreements
Following the execution of the Merger Agreement, certain stockholders of the Company, owning an aggregate of approximately 40% of the outstanding shares of Company common stock, entered into Support Agreements with the Company and RDD. The Support Agreements provide, among other things, that each stockholder party to the Support Agreements will vote all of their Company Common Shares in favor of this Proposal 3 and/or any proposal that would reasonably be expected to further implement or carry into effect the purposes and intent of the transactions contemplated by the Merger Agreement. Therefore, [____] shares of our common stock will vote in favor of this Proposal 3 pursuant to the Support Agreements.

Vote Required

The affirmative vote of holders of a majority of the outstanding shares of our common stock entitled to vote at the Special Meeting is required for approval of Proposal 3. A failure to submit a proxy card or to vote at the Special Meeting, or an abstention for Proposal 3 will have the same effect as a vote against the approval of Proposal 3.

Recommendation of Board of Directors

OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR”
THE REVERSE STOCK SPLIT PROPOSAL.


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EXECUTIVE OFFICERS OF THE COMPANY
Executive Compensation
The following table provides information regarding our named executive officers for the years ended December 31, 2018 and 2017.
Summary Compensation Table 
Name and Principal
 Position
 
Year
 
Salary
($)
 
Bonus(1)
($)
 
Option
Awards
(2)
($)
 
Non-equity Incentive Plan Compensation(3)
($)
 
Other Compensation
($)
 
Total
($)
Sandeep Laumas, M.D.
 
2018
 
256,250

 
96,250

 

 
335,000

 

 
687,500

   Executive Chairman(4)
 
2017
 
137,000

 
172,500

 
282,172

 
25,000

 

 
616,672

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Christopher Prior, Ph.D.
 
2018
 
295,000

 

 

 
310,000

 

 
605,000

   Chief Executive Officer (5)
 
2017
 
172,000

 
40,000

 
248,563

 
60,000

 

 
520,563

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Jay P. Madan, M.S.
 
2018
 
273,333

 
99,750

 

 
315,000

 

 
688,083

   President and Chief
   Business Officer
 
2017
 
170,000

 
160,000

 
269,245

 
30,000

 

 
629,245

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June Almenoff, M.D., Ph.D., FACP
 
2018
 
235,455

 

 
627,681

 

 
320,000

 
1,183,136

   Chief Operating Officer (6)
 
2017
 

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
David Clarke
 
2018
 

 

 

 

 

 

   Chief Executive Officer (7)
 
2017
 

 

 

 

 

 

 
(1)
During March 2019, the Compensation Committee awarded cash bonuses to certain executives and senior employees for 2018 performance (the “2018 Bonus”). The 2018 Bonus was determined as a percentage of the executive’s annual base salary. During 2017, Dr. Laumas, Dr. Prior and Mr. Madan received discretionary bonuses from Private Innovate totaling $172,500, $40,000 and $160,000, respectively. See section entitled “Employment Agreements” below for further details of discretionary bonuses awarded.
(2)
The amounts in the “Option Awards” column reflect the aggregate Black-Scholes grant date fair value of stock options granted during the calendar year computed in accordance with the provisions of Accounting Standards Codification (ASC) 718, Compensation—Stock Compensation. The assumptions that were used to calculate the value of these awards are discussed in Notes 1 and 9 to our financial statements included in our Annual Report on Form 10-K filed with the SEC on March 18, 2019. These amounts do not reflect the actual economic value that will be realized by the named executive officer upon the vesting of the stock options, the exercise of the stock options or the sale of the common stock underlying such stock options. The employment of June Almenoff was terminated in November 2018. As such, the grant date fair value of Dr. Almenoff’s stock options granted during the year does not include the fair value of options forfeited upon termination.
(3)
As described below under the heading “Employment Agreements,” pursuant to the terms of each executive officer’s employment agreement with Private Innovate, further amended upon completion of the Merger, bonus payments would be made if Private Innovate reached specific financial milestones prior to March 15, 2018. Amounts reflected for 2017 represent bonus payments awarded for achievement of milestone 1 related to 2017 performance. Amounts reflected for 2018 represent bonus payments awarded for achievement of milestones 2 and 3 related to 2018 performance.
(4)
Dr. Laumas was appointed as Chief Executive Officer effective February 19, 2019. Dr. Laumas will continue in his role as Executive Chairman, which he also served during 2017 and 2018.
(5)
Dr. Prior resigned as Chief Executive Officer effective February 19, 2019.
(6)
The employment of Dr. Almenoff was terminated in November 2018. The amount reflected under salary consists of annual salary pro-rated for her period of employment of $229,061 and accrued vacation pay-out of $6,394.

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Other compensation represents accrued severance of $320,000 which is being paid in equal installments over a 12-month period from the date of termination.
(7)
Mr. Clarke was Chief Executive Officer and Chairman of the Board of Monster prior to the Merger and is no longer an officer of Innovate upon completion of the Merger, effective January 29, 2018.
Narrative Disclosure to Summary Compensation Table
The primary elements of compensation for our named executive officers consisted of base salary, annual performance bonus, equity-based compensation awards and other compensation such as discretionary bonuses and milestone-based bonuses. Our named executive officers were also able to participate in employee benefit plans and programs that we offer to our other full-time employees on the same basis.
Base Salary
The base salary payable to our named executive officers was intended to provide a fixed component of compensation that reflected the executive’s skill set, experience, role and responsibilities.  
Bonus
Although we did not have a written bonus plan, the board of directors had the authority, in its discretion, to award bonuses to its executive officers on a case-by-case basis. The 2018 awards were granted as a percentage of the executive’s base salaries to reward the executive officers for company and individual success in 2018. The 2017 awards included certain discretionary amounts in addition to amounts determined pursuant to their employment agreements, including amounts approved by the board in January 2018 and subsequently ratified by our Compensation Committee.
Equity Awards
We currently have two equity incentive plans, the 2015 Stock Incentive Plan and the 2012 Omnibus Incentive Plan, as amended. Prior to the Merger, we awarded stock options under the 2015 Stock Incentive Plan to our employees, including certain of the named executive officers. In conjunction with the Merger, we adopted the 2012 Omnibus Incentive Plan, as amended, and will no longer award options under the 2015 Stock Incentive Plan. For information about stock option awards granted to our named executive officers, see the “Outstanding Equity Awards at Year-end” table below. We believe that equity grants provide our executives with a strong link to our long-term performance, create an ownership culture and help to align the interests of our executives and stockholders. In addition, we believe that equity grants with a time-based vesting feature promote executive retention by incentivizing executives to continue employment during the vesting period.
Health, Welfare and Additional Benefits
Each of our named executive officers was eligible to participate in our employee benefit plans and programs, including medical, dental and vision benefits, to the same extent as our other full-time employees, subject to the terms and eligibility requirements of those plans.
2018 Outstanding Equity Awards at Year-End
The following table presents the outstanding equity awards held by our named executive officers as of December 31, 2018 and reflect the conversion and reverse stock split that occurred in connection with the Merger.

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Option Awards
Name
 
Number of
Securities
Underlying
Unexercised
Options
Exercisable
 
 
Number of
Securities
Underlying
Unexercised
Options
Unexercisable
 
 
Option
Exercise
price
 
 
Option
Expiration
date
Sandeep Laumas, M.D.
 
 
64,067

 
 
 
48,992

 
 
$
2.08

 
 
3/20/2027

 
 
 
49,935

 
 
 
49,934

 
 
$
2.34

 
 
8/29/2027

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Christopher Prior, Ph.D.
 
 
1,356,717

 
 
 

 
 
$
0.30

 
 
11/1/2025

 
 
 
678,358

 
 
 

 
 
$
0.30

 
 
11/1/2025

 
 
 
64,067

 
 
 
48,992

 
 
$
2.08

 
 
3/20/2027

 
 
 
37,687

 
 
 
37,686

 
 
$
2.34

 
 
8/29/2027

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Jay P. Madan, M.S.
 
 
64,067

 
 
 
48,992

 
 
$
2.08

 
 
3/20/2027

 
 
 
45,224

 
 
 
45,223

 
 
$
2.34

 
 
8/29/2027

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June Almenoff, M.D., Ph.D., FACP
 
 
174,605

 
 
 

 
 
$
6.02

 
 
9/7/2028

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
David Clarke
 
 

 
 
 

 
 
 

 
 


Employment Agreements
Prior to the Merger, Private Innovate had entered into employment agreements with each of its named executive officers as described below. Each of the agreements described below relates to the information appearing in the tables in this “Executive Compensation” section. 
Sandeep Laumas, M.D.
 Private Innovate entered into an executive employment agreement with Dr. Laumas in October 2015, which was subsequently amended in February 2016, March 2017 and August 2017.
Commencing January 1, 2017, $75,000 of Dr. Laumas’s annual base salary was subjected to deferral, with such deferral and salary accrual continuing until the Minimum Financial Milestone Event occurred, so long as the Minimum Financial Milestone Event occurred on or prior to March 15, 2018. If the Minimum Financial Milestone Event did not occur on or before March 15, 2018, Dr. Laumas agreed to forfeit such 2017 deferred salary for the period of January 1, 2017, through December 31, 2017. As the Minimum Milestone Event was achieved in April 2017, all deferred 2017 annual base salary was paid.
After the occurrence of the Minimum Milestone Event, Dr. Laumas’s annual base salary increased to $150,000 and was not subject to deferral. Upon the occurrence of the Second and Third Financial Milestone Event, which was achieved in conjunction with the Equity Issuance in January 2018, Dr. Laumas’s annual base salary was increased to $160,000 and $175,000, respectively. Upon the occurrence of the Fourth Financial Milestone Event, defined as the sale by Private Innovate of its equity securities in a bona fide equity financing or the sale of assets or entry into out-licensing and/or partnering agreements in which Private Innovate receives gross proceeds of no less than $45,000,000 (including proceeds from the Minimum Financial Milestone Event, the Second Milestone Financial Event and the Third Milestone Financial Event), Dr. Laumas’s annual base salary was to increase to $300,000.
The agreement also provided that Dr. Laumas would be eligible to receive a one-time lump sum cash bonus in the amount of $25,000 upon the occurrence of the Minimum Milestone Event, a one-time lump sum cash bonus in the amount of $110,000 upon the occurrence of the Second Financial Milestone Event, a one-time lump sum cash bonus in the amount of $175,000 upon the occurrence of the Third Milestone Event, and a one-time lump sum cash bonus in the amount of $175,000 upon the occurrence of the Fourth Milestone Event. The Minimum Milestone Event was achieved in April 2017 and paid in 2017. The Second and Third Milestone Events were achieved in January 2018 upon closing of the Equity

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Issuance. The bonus amounts associated with the Second and Third Milestone Events were included in Private Innovate’s accrued liabilities as of December 31, 2017 and paid in 2018.
If a Minimum Financial Milestone Event had not occurred by March 15, 2017, Dr. Laumas was eligible for a discretionary bonus of $75,000, awarded in Private Innovate’s discretion upon the achievement of certain corporate objectives on or before December 31, 2017. Dr. Laumas also received an additional discretionary bonus of $65,000. These discretionary bonuses were earned during 2017; however, the bonus of $65,000 was not paid until 2018. Dr. Laumas also earned a discretionary bonus of $32,500 during 2017 as compensation for his board of director services, which was paid in 2017.
During 2017 and 2018, Dr. Laumas was also eligible to receive periodic stock option awards at the discretion of the board. 
Christopher P. Prior, Ph.D.
Private Innovate entered into an executive employment agreement with Dr. Prior in November 2015, which was subsequently amended in February 2016, twice in March 2017, and in August 2017.
Upon the occurrence of the Minimum Financial Milestone Event, Dr. Prior was entitled to an annual base salary of $240,000. Upon the occurrence of the Second and Third Financial Milestone Events, Dr. Prior’s annual base salary increased to $260,000 and $300,000, respectively. Effective with the consummation of the Equity Issuance in January 2018, the Second and Third Milestone Events were achieved. Upon the occurrence of the Fourth Financial Milestone Event, Dr. Prior’s annual base salary was to increase to $425,000.
The agreement also provided that Dr. Prior will be eligible to receive a one-time lump sum cash bonus in the amount of $60,000 upon the occurrence of the Minimum Financial Milestone Event, a one-time lump sum cash bonus in the amount of $125,000 upon the occurrence of the Second Financial Milestone Event, a one-time lump sum cash bonus in the amount of $175,000 upon the occurrence of the Third Milestone Event, and a one-time lump sum cash bonus in the amount of $175,000 upon the occurrence of the Fourth Milestone Event. The Minimum Milestone Event was achieved and paid in 2017, and the Second and Third Milestone Events were achieved effective with the consummation of the Equity Issuance in January 2018. The bonus amounts associated with the Second and Third Milestone Events were included in Private Innovate’s other accrued liabilities as of December 31, 2017 and paid in 2018.
Dr. Prior was eligible for a discretionary bonus of $40,000 awarded in Private Innovate’s discretion upon achievement of certain corporate objectives on or before December 31, 2017. This discretionary bonus was earned in 2017 and paid in 2018.
The agreement provided that following the completion of the Minimum Financial Milestone Event, Dr. Prior became eligible for an annual grant of restricted stock for each year of service subject to the completion of certain milestones and the approval of the Private Innovate Board. Such grants would vest with respect to 25% of the restricted stock on the one-year anniversary of the date of grant and thereafter with respect to 75% of the stock over the following three years. Upon a change of control, 100% of the unvested shares of restricted stock would vest.
During 2017 and 2018, Dr. Prior was also eligible to receive periodic stock option awards at the discretion of the board. See below for an amendment to Dr. Prior’s employment agreement following the Merger and further information regarding the resignation of Dr. Prior effective February 19, 2019.
Jay P. Madan, M.S.
Private Innovate entered into an executive employment agreement with Mr. Madan in October 2015, which was subsequently amended in February 2016, March 2017 and August 2017.
Commencing January 1, 2017, $90,000 of Mr. Madan’s annual base salary was subjected to deferral, with such deferral and salary accrual continuing until the Minimum Financial Milestone Event occurred. So long as the Minimum Financial Milestone Event did not occur on or before March 15, 2018, Mr. Madan agreed to forfeit such 2017 deferred salary for the period of January 1, 2017 through December 31, 2017. As the First Milestone Event was achieved in April 2017, all deferred 2017 annual base salary was paid.
After the occurrence of the First Milestone Event, Mr. Madan’s annual base salary increased to $180,000 and was not subject to deferral. Upon the occurrence of the Second and Third Financial Milestone Events, Mr. Madan’s annual base salary increased to $210,000 and $250,000, respectively. Effective with the consummation of the Equity Issuance in January 2018, the Second and Third Milestone Events were achieved. Upon the occurrence of the Fourth Financial Milestone Event, Mr. Madan’s annual base salary was to increase to $350,000.

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The agreement also provided that Mr. Madan was eligible to receive a one-time lump sum cash bonus in the amount of $30,000 upon the occurrence of the Minimum Financial Milestone Event, a one-time lump sum cash bonus in the amount of $115,000 upon the occurrence of the Second Financial Milestone Event, a one-time lump sum cash bonus in the amount of $150,000 upon the occurrence of the Third Milestone Event, and a one-time lump sum cash bonus in the amount of $125,000 upon the occurrence of the Fourth Milestone Event. The Minimum Milestone Event was achieved and paid in 2017, and the Second and Third Milestone Events were achieved effective with the consummation of the Equity Issuance in January 2018. The bonus amounts associated with the Second and Third Milestone Events were included in other accrued liabilities as of December 31, 2017 and paid in 2018.
If a Minimum Financial Milestone Event had not occurred by March 15, 2017, Mr. Madan was eligible for a discretionary bonus of $90,000, awarded at Innovate’s discretion upon the achievement of certain corporate objectives on or before December 31, 2017. Mr. Madan also received an additional discretionary bonus of $50,000. These discretionary bonuses were earned in 2017; however, the discretionary bonus of $50,000 was paid in 2018. Mr. Madan also received a discretionary bonus of $20,000 during 2017 as compensation for his board of director services.
 During 2017 and 2018, Mr. Madan was also eligible to receive periodic stock option awards at the discretion of the board.
Amended and Restated Executive Employment Agreements with Drs. Laumas, Dr. Prior and Mr. Madan
On March 11, 2018, we entered into amended and restated executive employment agreements with Dr. Laumas, Dr. Prior and Mr. Madan (the “Executive Agreements”). Under the Executive Agreements, Dr. Laumas, Dr. Prior and Mr. Madan are entitled to receive annual base salaries of $275,000, $300,000 and $285,000, respectively, subject to periodic adjustment as we may determine. They are each generally eligible to participate in employee benefit and bonus programs established by the Company from time to time that may be applicable to our executives.
If we terminate any of the Executive Agreements other than “for cause,” or if Dr. Laumas, Dr. Prior or Mr. Madan terminates his respective agreement for “Good Reason,” the Executive Agreements provide that such executive will receive 12 months of his then-current base salary and up to 12 months of continuation of health insurance benefits, provided that such executive executes and does not revoke a release and settlement agreement in a form satisfactory to us.
On February 18, 2019, Dr. Prior resigned as Chief Executive Officer and as a director, effective February 19, 2019. In connection with Dr. Prior’s resignation, we entered into a Separation and Release Agreement with Dr. Prior pursuant to which Dr. Prior will be entitled to the severance payments set forth in his amended and restated employment agreement, dated March 11, 2018, including an amount equal to 12 months of his current base salary and certain health care reimbursement benefits, and, additionally, continued vesting of his outstanding time-based equity awards for the 12-month period following the separation. On February 19, 2019, we also entered into a Consulting Agreement with Dr. Prior pursuant to which he will provide advisory services as requested by us for a 12-month term at a rate of $350 per hour.
On February 18, 2019, the Board appointed our current Executive Chairman, Dr. Laumas, to the additional position of Chief Executive Officer, effective upon the resignation of Dr. Prior. Dr. Laumas will not be entitled to any additional compensation as a result of his appointment as Chief Executive Officer. In connection with this appointment, we entered into an amendment to the Amended and Restated Executive Employment Agreement, dated March 11, 2018, by and between us and Dr. Laumas to provide that any subsequent cessation of Dr. Laumas’s status as Chief Executive Officer will not constitute “Good Reason” under Dr. Laumas’s Employment Agreement.
2018 Director Compensation
The following table provides compensation information regarding our non-employee directors for the year ended December 31, 2018.

Name
 
Fees Earned or Paid in Cash (1)
($)
 
Option Awards (2)
($)
 
Total
($)
Lorin K. Johnson, Ph.D.
 
64,691

 
37,478

 
102,169

Roy Proujansky, M.D.
 
36,966

 
244,364

 
281,330

Anthony E. Maida III, Ph.D., M.A., M.B.A.
 
73,933

 
37,478

 
111,411

Saira Ramasastry, M.S., M. Phil.
 
38,306

 
245,895

 
284,201

Anna Kazanchyan, M.D. (3)
 
29,691

 

 
29,691


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(1)
Fees earned or paid in cash reflect the pro-rated non-employee director compensation earned during the period each board member served subsequent to the Merger.
(2)
The amounts in the “Option Awards” column reflect the aggregate Black-Scholes grant date fair value of stock options granted during the calendar year computed in accordance with the provisions of ASC 718, Compensation—Stock Compensation. The assumptions that were used to calculate the value of these awards are discussed in Notes 1 and 9 to our financial statements included in our Annual Report on Form 10-K filed with the SEC on March 18, 2019. These amounts do not reflect the actual economic value that will be realized by the directors upon the vesting of the stock options, the exercise of the stock options or the sale of the common stock underlying such stock options.
(3)
Dr. Kazanchyan resigned from the board of directors in June 2018. Fees earned or paid in cash represent the pro rata board compensation Dr. Kazanchyan received during her period of service.

The table below shows the aggregate number of option awards held as of December 31, 2018 by each of our current non-employee directors who was serving as of that date.

Name
Options Outstanding as of December 31, 2018
Lorin K. Johnson, Ph.D.
326,492

Roy Proujansky, M.D.
75,000

Anthony E. Maida III, Ph.D., M.A., M.B.A.
138,059

Saira Ramasastry, M.S., M. Phil.
75,000


Non-Employee Director Compensation Policy

On September 21, 2018, we adopted a policy with respect to compensation of our non-employee directors, the Non-Employee Director Compensation Policy. Each non-employee director is eligible to receive annual cash and equity compensation for his or her service without further action by the board, subject to continued service on our board. Our non-employee directors receive the following annual retainers:

Position
Retainer
Board member
$
40,000

Chairman of the Board
35,000

Audit Committee Chair
25,000

Audit Committee member
7,500

Compensation Committee Chair
15,000

Compensation Committee member
7,500

Nominating and Corporate Governance Chair
15,000

Nominating and Corporate Governance member
7,500


In addition, each non-employee director who serves on the Board as of the date of any annual meeting of our stockholders (the “Annual Meeting”) will automatically be granted on the date of such Annual Meeting, options to purchase 25,000 shares of our common stock. The annual equity awards will vest monthly over a period of three years, subject to continued service on our Board. Except as otherwise determined by the Board, each non-employee director who is initially elected or appointed to the Board on any date other than the date of the Annual Meeting will automatically be granted options to purchase 50,000 shares of our common stock. 10% of the underlying shares will vest immediately on the date of grant, with the remainder of shares vesting over 36 equal monthly installments.

Directors may be reimbursed for travel, food, lodging and other expenses directly related to their service as directors. Directors are also entitled to the protection provided by their indemnification agreements and the indemnification provisions in our certificate of incorporation and by-laws.

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DESCRIPTION OF CAPITAL STOCK

This section summarizes our authorized and outstanding securities and certain of the provisions of our amended and restated certificate of incorporation, or our Certificate of Incorporation, and our amended and restated bylaws, or our Bylaws.

General

The Company’s authorized capital stock consists of 360,000,000 shares of capital stock, par value $0.0001 per share, of which 350,000,000 shares are common stock, par value $0.0001 per share and 10,000,000 are preferred stock, par value $0.0001 per share. As of [____], 2020, the Company had [______] shares of common stock outstanding held by approximately [___] shareholders of record, and no shares of preferred stock outstanding.

Common Stock

The holders of our common stock (i) have equal ratable rights to dividends from funds legally available, therefore, when, as and if declared by our Board; (ii) are entitled to share in all of our assets available for distribution to holders of common stock upon liquidation, dissolution or winding up of our affairs; (iii) do not have preemptive, subscription or conversion rights and no redemption or sinking fund provisions or rights; and (iv) are entitled to one non-cumulative vote per share on all matters on which stockholders may vote. Reference is made to our Certificate of Incorporation, Bylaws, and the applicable statutes of the State of Delaware for a more complete description of the rights and liabilities of holders of our common stock.

Preferred Stock

The Company has authorized 10,000,000 shares of preferred stock. There is no preferred stock outstanding.

Non-cumulative Voting

Holders of shares of our common stock do not have cumulative voting rights, meaning that the holders of 50.1% of our outstanding shares of common stock, voting for the election of directors, can elect all of the directors to be elected, and, in such event, the holders of the remaining shares will not be able to elect any of our directors.

Dividends

We have not paid any cash dividends to stockholders. The declaration of any future cash dividend will be at the discretion of our board of directors and will depend upon our earnings, if any, our capital requirements and financial position, general economic conditions, and other relevant conditions. It is our present intention not to pay any cash dividends in the foreseeable future, but rather to reinvest earnings, if any, in our business operations.

Warrants

As of the date of this registration statement, the Company has warrants outstanding, that entitle their holders to purchase [____] shares of common stock, with exercise prices ranging from $[___] to $[___]. Such warrants contain certain customary exceptions, as well as customary provisions for adjustment in the event of stock splits, subdivision or combination, mergers, and similar business combinations.

Anti-Takeover Effects of Certain Provisions of Delaware Law and Charter and Bylaw Provisions

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


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

provide for a classified board of directors;
provide that vacancies on the board of directors may be filled only by a majority of directors then in office, even though less than a quorum;
eliminate cumulative voting in the election of directors;
prohibit director removal without cause and only allow removal with cause, and allow amendment of certain provisions of our Certificate of Incorporation and our Bylaws, only by the vote of the holders of at least two-thirds of all then-outstanding shares of our common stock;
grant our board of directors the exclusive authority to increase or decrease the size of the board of directors;
permit stockholders to only take actions at a duly called annual or special meeting and not by written consent;
prohibit stockholders from calling a special meeting of stockholders;
require that stockholders give advance notice to nominate directors or submit proposals for consideration at stockholder meetings; and
authorize our board of directors, by a majority vote, to amend the Bylaws.

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

Certain Limitations on Stockholder Actions. Our bylaws also impose some procedural requirements on stockholders who wish to:

make a nomination in the election of directors;
propose that a director be removed;
propose any repeal or change in our bylaws; or
propose any other business to be brought before an annual or special meeting of stockholders.

Under these procedural requirements, in order to bring a proposal before a meeting of stockholders, a stockholder must deliver timely notice of a proposal pertaining to a proper subject for presentation at the meeting to our corporate secretary along with the following:

a description of the business or nomination to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of the stockholder submitting such proposal;
the text of the proposal or business;
the stockholder’s name and address;
any material interest of the stockholder in the proposal;
the number of shares beneficially owned by the stockholder and evidence of such ownership; and
the names and addresses of all persons with whom the stockholder is acting in concert and a description of all arrangements and understandings with those persons, and the number of shares such persons beneficially own.

To be timely, a stockholder must generally deliver notice not less than 90 days nor more than 120 days prior to the anniversary date of the immediately preceding annual meeting of stockholders.

In order to submit a nomination for our board of directors, a stockholder must also submit any information with respect to the nominee that we would be required to include in a proxy statement, as well as certain other information. If a stockholder fails to follow the required procedures, the stockholder’s proposal or nominee will be ineligible and will not be voted on by our stockholders.

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Innovate Management’s Discussion and Analysis of Financial Condition and Results of Operations

Except as otherwise noted or where the context otherwise requires, as used in this report, the words “we,” “us,” “our,” the “Company” and “Innovate” refer to Innovate Biopharmaceuticals, Inc. as of and following the closing of the merger of Monster and Innovate (the “Monster Merger”) on January 29, 2018, and, where applicable, the business of Innovate prior to the Monster Merger. All references to “Monster” refer to Monster Digital, Inc. prior to the closing of the Monster Merger.
 
The following analysis reflects the historical financial results of Innovate prior to the Monster Merger and that of Innovate following the Monster Merger and does not include the historical financial results of Monster. All share and per share disclosures have been retroactively adjusted to reflect the exchange of shares in the Monster Merger.
 
Company Overview
 
We are a clinical-stage biopharmaceutical company developing novel medicines for autoimmune and inflammatory diseases with unmet medical needs, including drug candidates for celiac disease, nonalcoholic steatohepatitis (NASH), alcoholic steatohepatitis (ASH), Crohn’s disease and ulcerative colitis (UC). We started the Phase 3 clinical trial for our lead drug candidate, larazotide acetate or larazotide (INN-202), for the treatment of celiac disease in June 2019. Larazotide has the potential to be the first-to-market therapeutic for celiac disease, an unmet medical need affecting an estimated 1% of the U.S. population or more than 3 million individuals. Celiac patients have no treatment alternative other than a strict lifelong adherence to a gluten-free diet which is difficult to maintain and can be deficient in key nutrients. In celiac disease, larazotide is the only drug which has successfully met its primary endpoint with statistical significance in a Phase 2b efficacy trial, which was comprised of 342 patients. We completed the End of Phase 2 meeting with the FDA for the treatment of celiac disease with larazotide and received Fast Track designation. Larazotide has been shown to be safe and effective after being tested in several clinical trials involving nearly 600 patients, most recently in the Phase 2b trial for celiac disease.

We are also developing larazotide for the treatment of NASH, a type of liver disease stemming from the most common liver disorder in the world, fatty liver disease. NASH is an unmet medical need affecting approximately 5% to 6% of the U.S. adult population, or more than 15 million individuals. We are developing a proprietary formulation of larazotide for NASH for efficient delivery to the intestine. Larazotide has the potential to reduce the transport of bacterial toxins and immunogenic antigens, including lipopolysaccharide (LPS). Larazotide may be the first drug with this novel mechanism to potentially show improvements in validated NASH biomarkers and endpoints. In a 12-week preclinical study of larazotide combined with obeticholic acid (OCA), data demonstrated statistically significant reductions in plasma total cholesterol, absolute and relative liver weights, relative and total liver cholesterol, and relative and absolute liver triglycerides. These data suggest a synergistic effect between larazotide and OCA.
 
Intestinal permeability is compromised in numerous diseases where a disruption of the epithelial barrier that separates the lumen from the host’s immune system may contribute to uncontrolled inflammation. Larazotide is a gut-restricted peptide which has been shown to re-normalize intestinal permeability in various inflammatory and metabolic preclinical models. During 2019, we initiated a research collaboration with Institut Gustave Roussy’s Laurence Zitovogel, MD, Ph.D., Department of Immuno-oncology. Through this collaboration, we seek to understand how the therapeutic effect of immune checkpoint inhibitors, such as antibodies to CTLA-4 and PD-1, are modulated by blocking translocation of certain metabolites and bacterial antigens and toxins from interacting with the host immune system in pre-clinical oncology models. Building on previous research that showed a type of permeability known as “leaky gut” that may cause microbial translocation of toxic products into circulation of the bloodstream, we are expanding our work in liver disease. Initial in vitro data suggests the potential use of larazotide in alcoholic liver diseases. We entered into a research collaboration with Massachusetts General Hospital to explore larazotide in animal models for the treatment of ASH.

INN-108 is a novel oral small molecule therapeutic for UC, which plagues up to 1.4 million individuals in the U.S. alone. With the combination of an immunomodulator, INN-108 could lead to a more efficacious drug than the current 5-ASA/mesalamine formations being used to treat UC. A Phase 1 trial was successfully completed in the U.S. with 24 subjects. We expect to enter Phase 2 trials for mild to moderate UC and an adult orphan indication, subject to the receipt of additional financing.

Financial Overview

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

As of September 30, 2019, we had an accumulated deficit of $61.7 million. We incurred net losses of $9.2 million and $0.8 million for the three months ended September 30, 2019 and 2018, respectively, and $18.1 million and $20.0 million for the nine months ended September 30, 2019 and 2018, respectively. We expect to continue to incur significant expenses and increase our operating losses for the foreseeable future, which may fluctuate significantly between periods. We anticipate that our expenses will increase substantially as and to the extent we:
 
continue research and development, including preclinical and clinical development of our future and existing product candidates, including INN-202;
complete the proposed RDD Merger and advance late-stage drugs in RDD’s current pipeline;
potentially seek regulatory approval for our product candidates;
commercialize any product candidates for which we obtain regulatory approval;
maintain and protect our intellectual property rights;
add operational, financial and management information systems and personnel; and
continue to incur additional legal, accounting, regulatory, tax-related and other expenses required to operate as a public company.

As such, we will need substantial additional funding to support our operating activities. Adequate funding may not be available to us on acceptable terms, or at all. We currently anticipate that we will seek to fund our operations through equity or debt financings, strategic alliances or licensing arrangements, or other sources of financing. Our failure to obtain sufficient funds on acceptable terms could have a material adverse effect on our business, results of operations and financial condition.

Recent Developments

Agreement and Plan of Merger and Reorganization with RDD Pharma, Ltd.

On October 6, 2019, we entered into an Agreement and Plan of Merger and Reorganization (as amended on December 17, 2019, the “Merger Agreement”) with INNT Merger Sub 1 Ltd., a company organized under the laws of Israel and a direct, wholly-owned subsidiary of the Company (“Merger Sub”), RDD Pharma Ltd., a company organized under the laws of Israel (“RDD”) and Orbimed Israel Partners, Limited Partnership, as the Shareholder Representative. See “The Merger Agreement” in this proxy statement for further information regarding the Merger.

Additional Warrant Issuance

On April 25, 2019, we entered into an amendment (the “Amendment”) to the Purchase Agreement dated as of March 17, 2019 between us and each purchaser. The Amendment (i) deleted Section 4.12 of the Purchase Agreement, which generally prohibited us from issuing, entering into agreements to issue, announcing proposed issuances, selling or granting certain securities between the date of the Purchase Agreement and the date that was 45 days following the closing date thereunder and (ii) gave each purchaser the right to purchase, for $0.125 per underlying share, an additional warrant to purchase shares of our common stock having an exercise price per share of $2.13 and otherwise having the terms of the March Long-Term Warrants (collectively, the “New Warrants”) pursuant to a securities purchase agreement (the “New Securities Purchase Agreement”) entered into among us and each purchaser on May 17, 2019.

We issued New Warrants exercisable for an aggregate of 3,897,010 shares of our common stock and the New Warrants are exercisable for five years beginning on the six-month anniversary of the date of issuance. The New Warrants have an initial exercise price equal to $2.13 per share, subject to certain adjustments. If not previously exercised in full, at the expiration of their applicable terms, the New Warrants will be automatically exercised via cashless exercise, in which case the holder would receive upon such exercise the net number of shares, if any, of common stock determined according to the formula set forth in the New Warrant.

April 2019 Offering


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On April 29, 2019, we entered into a Securities Purchase Agreement (the “April Purchase Agreement”) with certain institutional and accredited investors providing for the sale of up to 4,318,272 shares of our common stock at a purchase price of $2.025 per share.

Pursuant to the April Purchase Agreement, we agreed to issue unregistered warrants (the “April Warrants”) to purchase up to 4,318,272 shares of our common stock. Subject to certain ownership limitations, the April Warrants are exercisable beginning on the date of their issuance until the five-and-a-half-year anniversary of their date of issuance at an initial exercise price of $2.13. The exercise price of the April Warrants is subject to adjustment for stock splits, reverse splits, and similar capital transactions as described in the April Warrants. The April Warrants may be exercisable on a “cashless” basis while there is no effective registration statement or current prospectus available for the shares of common stock issuable upon exercise of the April Warrants. A holder will not have the right to exercise any portion of the April Warrant if the holder (together with its affiliates) would beneficially own in excess of 4.99% (or, at the election of the holder, 9.99%) of the number of shares of common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the April Warrants. However, any holder may increase or decrease such percentage to any other percentage not in excess of 9.99% upon notice to us, provided that any increase in such percentage shall not be effective until 61 days after such notice. If not previously exercised in full, at the expiration of their terms, the April Warrants will be automatically exercised via cashless exercise.

The net proceeds from the offering and the private placement are approximately $7.9 million, after deducting commissions and estimated offering costs. We also granted the placement agent warrants to purchase up to 215,914 shares of our common stock (the “Placement Agent Warrants”). The Placement Agent Warrants have substantially the same terms as the April Warrants, except that the Placement Agent Warrants have an exercise price of $2.53 and a term of 5 years from the effective date of the offering. We will also pay the placement agent a reimbursement for non-accountable expenses in the amount of $35,000 and a reimbursement for legal fees and expenses of the placement agent in the amount of $25,000. We refer to the March Long-term Warrants, the New Warrants, the April Warrants and the Placement Agent Warrants collectively as the Long-term Warrants.

Corporate Updates

In June 2019, we expanded our senior management team by appointing Edward J. Sitar, CPA, to Chief Financial Officer. Mr. Sitar has extensive experience in finance and the life sciences industry. Mr. Sitar is responsible for developing and implementing our financial strategy and growth plans.

Senior Convertible Note

On October 4, 2018, we entered into an Amendment and Exchange Agreement and Senior Convertible Note, or Senior Convertible Note. The Senior Convertible Note was convertible into shares of our common stock at certain conversion prices depending on certain factors, which include the volume weighted average price (“VWAP”) of our common stock for a period of time prior to conversion. In addition, the Senior Convertible Note was redeemable by the noteholder or by us under certain qualifying conditions. The principal balance of the Senior Convertible Note was $5.2 million with a stated interest rate of 8.0% per annum and a maturity date of October 4, 2020. In January 2019, the noteholder issued a redemption notice and we repaid the noteholder $1.1 million of principal and accrued interest. During January 2019, we entered into an Option to Purchase Senior Convertible Note, or Option Agreement, with the noteholder. The Option Agreement provided us with the ability to repay the Senior Convertible Note prior to March 31, 2019, which we exercised in March 2019. We paid the noteholder of the Senior Convertible Note approximately $5.3 million, which was the full purchase amount, including interest, of the Senior Convertible Note pursuant to the terms of the Option Agreement. There are no further amounts outstanding under the Senior Convertible Note and the Senior Convertible Note has been canceled.

Unsecured Convertible Promissory Note

On March 8, 2019, we entered into a Securities Purchase Agreement and an unsecured Convertible Promissory Note, or the Unsecured Convertible Note, in the principal amount of $5.5 million. The holder of the Unsecured Convertible Note, or the Convertible Noteholder, may elect to convert all or a portion of the Unsecured Convertible Note at any time and from time to time into our common stock at a conversion price of $3.25 per share, subject to adjustment for stock splits, dividends, combinations and similar events. We may prepay all or a portion of the Unsecured Convertible Note at any time for an amount equal to 115% of then outstanding obligations or the portion of the obligations we are prepaying. The purchase price of the Unsecured Convertible Note was $5.0 million and the Unsecured Convertible Note carries an original issuance discount of $0.5 million, which is included in the principal amount of the Unsecured Convertible Note.

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Research and Development

During the third quarter of 2019, we dosed the first patient in our Phase 3 clinical trial for INN-202, after completing key study start-up activities for the study of adult patients with celiac disease who have persistent abdominal symptoms while on a gluten-free diet. We have initiated over 100 clinical trial sites, and we currently anticipate that our first Phase 3 trial will have approximately 600 subjects, with three treatment groups (0.25 mg of larazotide, 0.5 mg of larazotide and a placebo arm). We currently anticipate a top-line readout from the trial in 2021.

Recent research and development milestones include:

continued research collaboration with Institut Gustave Roussy to study regulation of intestinal permeability and the gut microbiota using larazotide in immuno-oncology checkpoint inhibitor failure preclinical models;
continuation of data analysis from pre-clinical models in NASH after successful initial data from studying larazotide in both ex vivo and animal models;
continued research collaboration with Dr. Anthony Blikslager of North Carolina State University to explore life-cycle extension of our lead molecule larazotide acetate;
initiated research collaboration with Dr. Younggeon Jin of University of Maryland, College Park to understand tight junction biology;
continued research collaboration with Dr. James Nataro of the University of Virginia, Charlottesville to study larazotide’s effect on Environmental Enteric Dysfunction; and
continued research collaboration with Dr. Jay Luther and Dr. Raymond Chung at the Gastroenterology Division at Massachusetts General Hospital in order to research the effects of larazotide on certain forms of alcoholic liver disease, such as ASH.

Critical Accounting Policies and Use of Estimates
 
Use of Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions.

Critical Accounting Policies

Areas of the financial statements where estimates may have the most significant effect include fair value measurements, accrued expenses, share-based compensation, income taxes and management’s assessment of our ability to continue as a going concern. Changes in the facts or circumstances underlying these estimates could result in material changes and actual results could differ from these estimates. Except as noted below, there have been no material changes to our critical accounting policies described in "Critical Accounting Policies and Use of Estimates" of the Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 18, 2019.

The Short-Term Warrants, March Long-Term Warrants, New Warrants, April Warrants and Placement Agent Warrants that we issued during the nine months ended September 30, 2019 are freestanding financial instruments that contain net settlement options and may require the Company to settle these warrants in cash under certain circumstances. We have classified these warrants as liabilities on the accompanying condensed balance sheets. The warrant liabilities are initially recorded at fair value on the date of grant and will be subsequently re-measured to fair value at each balance sheet date until the warrant liabilities are settled. Changes in the fair value of the warrants are recognized as a non-cash component of other income and expense in the accompanying condensed statements of operations and comprehensive loss.


53


Upon a fundamental transaction (as defined in the applicable warrant agreement), each holder of Short-Term Warrants and Long-Term Warrants can elect to require us or a successor entity to purchase such holder’s outstanding, unexercised warrants for a cash payment (or under certain circumstances other consideration) equal to the Black-Scholes value of the warrants on the date of consummation of the fundamental transaction, calculated in accordance with the terms and using the assumptions specified in the applicable warrant agreement. Due to the proposed RDD Merger, management has assumed that warrant holders would elect to receive cash payments under the applicable warrant agreements following the completion of the transaction. As such, the fair value of the warrants as of September 30, 2019, was determined, for financial reporting purposes, through the use of the Black-Scholes model, which resulted in a significant change in the fair value estimate compared to prior periods. The estimates underlying the assumptions used in both the Monte Carlo simulation technique, or MCS, model and Black-Scholes model are subject to risks and uncertainties and may change over time, and the assumptions used in both the MCS model and the Black-Scholes model for financial reporting purposes generally differ from the assumptions that would be applied in determining a payout under the applicable warrant agreements. These valuation techniques involve management’s estimates and judgment based on unobservable inputs and are classified in Level 3.

We adopted ASU No. 2016-02, Leases (Topic 842), as amended, as of January 1, 2019 using the modified retrospective approach at the beginning of the period of adoption. Under this approach, the reporting for comparative periods presented in the financial statements are presented in accordance with the legacy lease standard. In addition, we elected the available practical expedients permitted under the transition guidance within the new lease standard.

Under the new leases standard, we recognize a right-of-use (“ROU”) asset and lease liability upon commencement of a lease. The ROU asset represents our right to use an underlying asset for the lease term and is included in right-of-use asset on the accompanying condensed balance sheets. Lease liabilities represent our obligation to make lease payments arising from the lease and are included in current and non-current lease liability on the accompanying condensed balance sheets. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. In the absence of an implicit rate, we use their incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. All leases with a term of less than 12 months are not recognized on the balance sheet. Adoption of the new leases standard resulted in us recognizing a ROU asset and lease liability of less than $0.1 million as of January 1, 2019. The adoption of ASU 2016-02 did not result in a cumulative adjustment to accumulated deficit.

We adopted ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting effective January 1, 2019. ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. Beginning on the adoption date, we changed our expense recognition for share-based payments to non-employees to an amount determined at the grant or modification date instead of a variable amount to be re-measured each reporting period. We calculated the fair value of our non-employee grants as of the adoption date and determined that there was no impact to our accumulated deficit or other components of equity upon adoption of ASU 2018-07. The unamortized expense for non-employee grants will be recognized on a straight-line basis over the remaining contractual term of the respective non-employee option agreements.
 
Results of Operations
 
Comparison of the Three Months Ended September 30, 2019 and 2018
 
The following table sets forth the key components of our results of operations for the three months ended September 30, 2019 and 2018: 


54


 

Three Months Ended
September 30,

 

 
 

2019

2018

$ Change

% Change
Operating expenses:

(unaudited)

(unaudited)

 


 

Research and development

$
3,943,420


$
(1,785,645
)

$
5,729,065


(321
)%
General and administrative

2,564,508


1,565,992


998,516


64
 %
Total operating expenses

6,507,928


(219,653
)

6,727,581


(3,063
)%













Income (loss) from operations

(6,507,928
)

219,653


(6,727,581
)

3,063
 %
Other income (expense), net

(2,713,304
)

(995,583
)

(1,717,721
)

(173
)%










Net loss

$
(9,221,232
)

$
(775,930
)

$
(8,445,302
)

(1,088
)%
 
Research and Development Expense
 
Research and development expense for the three months ended September 30, 2019, increased approximately $5.7 million, or 321%, as compared to the three months ended September 30, 2018. The increase was driven primarily by progress in our Phase 3 clinical trial in celiac disease during the three months ended September 30, 2019, which represented an increase of approximately $2.2 million. In addition, non-cash share-based compensation expense increased by approximately $3.3 million primarily due to re-measurement of non-employee stock options during the three months ended September 30, 2018, which resulted in a decrease in expense as a result of the decline in the fair value of options vested during the prior period. Research and development license fees increased by approximately $0.3 million during the three months ended September 30, 2019, due to a milestone payment due upon dosing the first patient in our Phase 3 clinical trial in celiac disease.

General and Administrative Expense
 
General and administrative expense for the three months ended September 30, 2019, increased approximately $1.0 million, or 64%, as compared to the three months ended September 30, 2018. The increase was driven primarily by an increase in non-cash share-based compensation expense of approximately $0.8 million. The increase in non-cash share-based compensation expense was due to $0.3 million related to options granted since September 30, 2018, $0.3 million in modification expense related to options extended during the period and an increase of approximately $0.2 million due to re-measurement of non-employee stock options during the three months ended September 30, 2018, which resulted in negative expense due to the decline in fair value of the underlying stock. In addition, business development, patent protection of our intellectual property and other general corporate costs increased approximately $0.2 million.

Other income (expense), net
 
Other income (expense), net for the three months ended September 30, 2019, changed by approximately $1.7 million, or (173)%, as compared to the three months ended September 30, 2018. Other expense increased by approximately $2.5 million due to an unrealized loss from the change in fair value of the warrant liabilities. This increase was offset by a decrease in non-cash interest expense of $0.6 million and an unrealized gain from the change in fair value of the Unsecured Convertible Note derivative liability of $0.2 million.

Comparison of the Nine Months Ended September 30, 2019 and 2018

The following table sets forth the key components of our results of operations for the nine months ended September 30, 2019 and 2018: 

55



 
 
Nine Months Ended September 30,
 
 
 
 
 
 
2019
 
2018
 
$ Change
 
% Change
Operating expenses:
 
(unaudited)
 
(unaudited)
 
 

 
 

Research and development
 
$
8,215,079


$
5,815,580

 
$
2,399,499

 
41
 %
General and administrative
 
8,728,714


8,669,455

 
59,259

 
1
 %
Total operating expenses
 
16,943,793

 
14,485,035

 
2,458,758

 
17
 %
 
 
 
 
 
 
 
 
 
Income (loss) from operations
 
(16,943,793
)
 
(14,485,035
)
 
(2,458,758
)
 
(17
)%
Other income (expense), net
 
(1,200,444
)
 
(5,466,191
)
 
4,265,747

 
78
 %
 
 
 
 
 
 
 
 
 
Net loss
 
$
(18,144,237
)
 
$
(19,951,226
)
 
$
1,806,989

 
9
 %

Research and Development Expense

Research and development expense for the nine months ended September 30, 2019, increased approximately $2.4 million, or 41%, as compared to the nine months ended September 30, 2018. The increase was primarily driven by an increase of approximately $3.5 million associated with the progression of our Phase 3 clinical trial in celiac disease. In addition, research and development license fees increased by approximately $0.3 million due to a milestone payment associated with dosing the first patient in our Phase 3 clinical trial in celiac disease. Compensation costs and personnel benefits also increased approximately $0.3 million due to an increase in research and development personnel. These increases were offset by a decrease of approximately $1.7 million in non-cash share-based compensation expense which is primarily due to a decrease in the options granted and vested during the nine months ended September 30, 2019. Non-cash share-based compensation expense also decreased during the nine months ended September 30, 2019, due to the decrease in fair value of options as a result of the decline in our stock price.

General and Administrative Expense

General and administrative expense for the nine months ended September 30, 2019, increased approximately $0.1 million, or 1%, as compared to the nine months ended September 30, 2018. The increase was driven primarily by increases in (i) general and administrative personnel costs of $0.3 million, which represents severance costs for our former chief executive officer, (ii) costs associated with operating as a public company of approximately $0.8 million, including directors’ and officers’ liability insurance premiums, investor relations and regulatory fees, (iii) business development, patent protection of our intellectual property and other general corporate costs of $0.4 million and (iv) non-cash share-based compensation expense of $0.1 million due to option modifications that extended the exercise periods of certain outstanding options. These increases were offset by a decrease in accounting and legal fees associated with the Monster Merger of approximately $0.5 million and a decrease of $1.0 million in transaction advisory fees associated with the Monster Merger.

Other income (expense), net

Other income (expense), net for the nine months ended September 30, 2019, changed by approximately $4.3 million, or 78%, as compared to the nine months ended September 30, 2018. The change primarily consists of (i) a non-cash charge of $3.1 million for the beneficial conversion feature that was triggered when our convertible debt and accrued interest converted to our common stock at a 25% discount on January 29, 2018, (ii) an unrealized gain from the change in fair value of the warrant liabilities of $0.1 million, (iii) an unrealized gain from the change in fair value of the Unsecured Convertible Note derivative liability of $0.9 million and (iv) non-cash interest expense of $1.2 million. These changes were offset by $1.0 million for the loss on extinguishment of debt in March 2019.

 Comparison of the Years Ended December 31, 2018 and 2017
 
The following table sets forth the key components of our results of operations for the years ended December 31, 2018 and 2017: 

56


 
 
Year Ended December 31,
 
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 

 
 

 
 

 
 

Research and development
 
$
7,559,077

 
$
4,007,911

 
$
3,551,166

 
89
 %
General and administrative
 
10,664,991

 
7,161,612

 
3,503,379

 
49
 %
Total operating expenses
 
18,224,068

 
11,169,523

 
7,054,545

 
63
 %
 
 
 
 
 
 
 
 
 
Loss from operations
 
(18,224,068
)
 
(11,169,523
)
 
(7,054,545
)
 
(63
)%
Total other expense, net
 
(5,938,211
)
 
(436,294
)
 
(5,501,917
)
 
(1,261
)%
 
 
 
 
 
 
 
 
 
Net loss
 
$
(24,162,279
)
 
$
(11,605,817
)
 
$
(12,556,462
)
 
(108
)%

Research and Development Expense
 
Research and development expense for the year ended December 31, 2018 increased approximately $3.6 million, or 89%, as compared to the year ended December 31, 2017. The increase was driven primarily by: (i) an increase of approximately $2.3 million associated with preparation for our Phase 3 clinical trials in INN-202; (ii) an increase of approximately $0.8 million in compensation costs related to an increase in research and development personnel, (iii) an increase of approximately $0.4 million in non-cash share-based compensation expense primarily due to an increase in stock option awards granted to our research and development personnel during the year ended December 31, 2018; and (iv) an increase of approximately $0.1 million related to manufacturing, consulting and further development of our product candidate pipeline.

General and Administrative Expense
 
General and administrative expense for the year ended December 31, 2018 increased approximately $3.5 million, or 49%, as compared to the year ended December 31, 2017. The increase was driven primarily by: (i) an increase of approximately $1.3 million in accounting and legal fees associated with the Merger, SEC filings and outsourced accounting personnel; (ii) an increase of approximately $1.0 million in transaction advisory fees associated with the Merger; (iii) an increase of approximately $1.1 million for increased costs associated with operating as a public company, including directors’ and officers’ liability insurance premiums, investor relations costs and regulatory fees and services associated with maintaining compliance with Nasdaq exchange listing and SEC regulations; (iv) an increase of $1.5 million in compensation costs for our general and administrative personnel, (v) an increase of approximately $0.2 million in board compensation; and (vi) an increase of approximately $1.0 million for market research and business development, patent protection of our intellectual property and other general corporate costs. These increases were offset by a decrease of approximately $2.6 million in non-cash stock compensation expense. The decrease in stock compensation expense is primarily due to the fact that the majority of the stock options granted in 2017 were fully vested as of December 31, 2017, and there was a decrease in the number of stock options granted in 2018.

Other income (expense), net
 
Other expense, net, for the year ended December 31, 2018, increased by approximately $5.5 million, or (1,261)%, as compared to the year ended December 31, 2017. The increase was primarily due to: (i) a non-cash charge of $3.1 million for the beneficial conversion feature that was triggered when our convertible debt and accrued interest were converted to common stock at a 25% discount on January 29, 2018; (ii) non-cash interest expense of approximately $2.5 million for the amortization of debt discount; and (iii) $0.2 million in cash interest expense associated with our Senior Note Payable issued on January 29, 2018. The interest expense increases were offset by an increase of $0.1 million associated with the change in fair value of the derivative liability and an increase of $0.2 million in interest income on our money market account due to an increase in our cash balance as a result of the equity financing in January 2018.

Liquidity and Capital Resources
 
Sources of Liquidity
 

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As of September 30, 2019, we had cash and cash equivalents of approximately $8.9 million, compared to approximately $5.7 million as of December 31, 2018. The increase in cash was primarily due to the net proceeds from the March 2019 Offering and April 2019 Offering, in addition to the issuance of convertible debt, net of expenditures for business operations, research and development and clinical trial preparations, further described below. We expect to incur substantial expenditures in the foreseeable future for the continued development and clinical trials of our product candidates. We will continue to require additional financing to develop our product candidates and fund operations for the foreseeable future. We plan to seek funds through debt or equity financings, strategic alliances and licensing arrangements, and other collaborations or sources of financing, including the RDD Merger Financing. However, there can be no assurance that we will be able to raise the additional capital needed to continue our pipeline of research and development programs on terms acceptable to us, on a timely basis or at all. If we are unable to raise additional funds when needed, our ability to develop our product candidates will be impaired. We may also be required to delay, reduce or terminate some or all of our development programs and clinical trials.
 
March 2019 Offering

On March 17, 2019, we entered into the Purchase Agreement with SDS Capital Partners II, LLC and certain other accredited investors, pursuant to which we sold, on March 18, 2019, 4,181,068 shares of our common stock and issued Short-Term Warrants to purchase up to 4,181,068 shares of our common stock and Long-Term Warrants to purchase up to 2,508,634 shares of common stock. Pursuant to the Purchase Agreement, we issued the shares of common stock and warrants at a purchase price per share of $2.33 for aggregate gross proceeds of approximately $9.7 million.

April 2019 Offering

On April 29, 2019, we entered into the April Purchase Agreement pursuant to which we sold, on May 1, 2019, 4,318,272 shares of our common stock at a purchase price of $2.025 per share for aggregate gross proceeds of approximately $7.9 million, after deducting commissions and estimated offering costs. Pursuant to the April Purchase Agreement, we issued warrants to purchase up to 4,318,272 shares of common stock at an initial exercise price of $2.13. Additionally, we granted the placement agent warrants to purchase up to 215,914 shares of common stock (the “Placement Agent Warrants”). The Placement Agent Warrants have substantially the same terms as the April warrants, except that the Placement Agent Warrants have an exercise price of $2.53 and a term of 5 years from the effective date of the offering.

January 2018 Equity Issuance

Immediately prior to the closing of the Monster Merger, accredited investors purchased shares of Innovate common stock in a private placement for gross proceeds of approximately $18.1 million, or $16.5 million, net of approximately $1.6 million in placement agent fees and $80,000 in non-accountable expense costs (the “Equity Issuance”). Additionally, Innovate issued five-year warrants to each cash purchaser of common stock, or an aggregate of approximately 1.4 million warrants, with an exercise price of $3.18 per share after giving effect to the Exchange Ratio. Innovate also issued 349,555 five-year warrants with an exercise price of $2.54 per share and 279,862 five-year warrants with an exercise price of $3.18 per share (after giving effect of the Exchange Ratio) to the respective placement agents and their affiliates.

Concurrently with the Equity Issuance, convertible promissory notes issued by Innovate in the aggregate principal amount of approximately $8.6 million plus accrued interest of $0.6 million were converted into shares of Innovate common stock at an exercise price per share of $0.72, prior to the Exchange Ratio (the “Conversion”), which reflected a 25% discount relative to the shares issued pursuant to the Equity Issuance (the “Conversion Discount”). The Conversion Discount represented a beneficial conversion feature of approximately $3.1 million which was recorded as a charge to interest expense and a credit to additional paid-in capital.

H.C. Wainwright & Co., LLC (“HCW”) and GP Nurmenkari Inc. (“GPN”) were retained as the placement agents for the Equity Issuance. HCW was paid a flat fee of $0.3 million, a cash fee of $0.3 million (equal to 10% of the gross proceeds of the Equity Issuance up to a certain cap) and non-accountable expense allowance of approximately $30,000. GPN was paid a cash fee of $0.9 million (equal to 10% of the gross proceeds of certain investors in the Equity Issuance) and non-accountable expense allowance of $50,000. IB Pharmaceuticals issued to affiliates of HCW five-year warrants to purchase 209,951 shares of common stock with an exercise price per share equal to $3.18 (after giving effect to the Exchange Ratio). IB Pharmaceuticals issued to GPN five-year warrants to purchase 349,555 shares of common stock with an exercise price per share equal to $2.54 and five-year warrants to purchase 69,911 shares of common stock with an exercise price of $3.18 (after giving effect to Exchange Ratio). Upon the closing of the Monster Merger, the outstanding shares of IB Pharmaceuticals’ common stock were exchanged for shares of common stock of Monster at an exchange ratio of one share

58


of IB Pharmaceuticals common stock to 0.37686604 shares of Monster common stock (the “Exchange Ratio”). Immediately following the closing of the Monster Merger, after giving effect to the Equity Issuance and applying the Exchange Ratio, Monster’s securityholders owned approximately 5.8% of our outstanding common stock on a fully-diluted basis and IB Pharmaceuticals’ securityholders owned approximately 94.2% of our outstanding common stock.

Senior Convertible Note and Exchange Agreement

On January 29, 2018, we entered into a Note Purchase Agreement and Senior Note Payable (the “Note”) with a lender. The principal amount of the Note was $4.8 million. The Note was issued at a discount of $1.8 million and net of financing costs, for total proceeds of $3.0 million. Interest on the Note accrued from January 29, 2018, at a rate of 12.5% per annum and quarterly payments of interest only were due beginning on March 30, 2018 and compounded quarterly. On October 4, 2018, we entered into an Amendment and Exchange Agreement, or Exchange Agreement, with the noteholder exchanging the Note for the Senior Convertible Note.

The principal amount of the Senior Convertible Note was $5.2 million and bore interest at a rate of eight percent (8%) per annum payable quarterly in cash, with a scheduled maturity date of October 4, 2020. The interest rate would automatically increase if there was an event of default to 18% per annum during the default period.

During January 2019, the noteholder issued a redemption notice requiring us to repay the noteholder $1.1 million of principal and accrued interest. On January 7, 2019, we entered into the Option Agreement with the noteholder. We paid the noteholder $0.3 million in consideration for the noteholder entering into the Option Agreement with us, which was recorded as interest expense in our accompanying condensed statements of operations and comprehensive loss. The Option Agreement provided us with the ability to repay (purchase) the outstanding principal and accrued interest of the Senior Convertible Note any time from January 7, 2019 until March 31, 2019, or the Option Period. On March 11, 2019, we exercised our repurchase rights from the Option Agreement and paid the noteholder of the Senior Convertible Note approximately $5.3 million, which was the full purchase amount, including accrued interest, of the Senior Convertible Note pursuant to the terms of the Option Agreement. There are no further amounts outstanding under the Senior Convertible Note and the Senior Convertible Note has been canceled.

Amortization of debt discount for the Note and Senior Convertible Note recorded as interest expense for the Note and the Senior Convertible Note totaled approximately $0.9 million and $2.1 million for the three and nine months ended September 30, 2018. There was no such expense related to the Note and the Senior Convertible Note during the three and nine months ended September 30, 2019.

Unsecured Convertible Promissory Note

On March 8, 2019, we entered into the Note Purchase Agreement with the Convertible Noteholder. Pursuant to the Note Purchase Agreement, we issued the Convertible Noteholder the Unsecured Convertible Note in the principal amount of $5,500,000. The Convertible Noteholder may elect to convert all or a portion of the Unsecured Convertible Note at any time and from time to time into our common stock at a conversion price of $3.25 per share, subject to adjustment for stock splits, dividends, combinations and similar events. We may prepay all or a portion of the Unsecured Convertible Note at any time for an amount equal to 115% of any then outstanding obligations or the portion of the obligations we are prepaying. The purchase price of the Unsecured Convertible Note was $5,000,000, and the Unsecured Convertible Note carries an OID of $500,000, which is included in the principal amount of the Unsecured Convertible Note. In addition, we agreed to pay $20,000 of transaction expenses, which were netted out of the purchase price of the Unsecured Convertible Note. We also incurred additional transactions costs of approximately $37,000, which were recorded as debt issuance costs. As a result of the redemption features of the Unsecured Convertible Note, we are amortizing the debt issuance costs and accreting the OID to interest expense over the estimated redemption period of 15 months, using the effective interest method.

The various conversion and redemption features contained in the Unsecured Convertible Note are embedded derivative instruments, which were recorded as a debt discount and derivative liability at the issuance date at their estimated fair value of $1.3 million. Amortization of debt discount and accretion of the OID for the Unsecured Convertible Note recorded as interest expense was approximately $0.3 million and $0.7 million for the three and nine months ended September 30, 2019.



59


The Unsecured Convertible Note bears interest at the rate of 10% (which will increase to 18% upon and during the continuance of an event of default) per annum, compounding on a daily basis. All principal and accrued interest on the Unsecured Convertible Note is due on the second-year anniversary of the Unsecured Convertible Note’s issuance. During the three and nine months ended September 30, 2019, we made principal payments of $0.5 million under the Unsecured Convertible Note.

At any time after the six-month anniversary of the issuance of the Unsecured Convertible Note, (i) if the average volume weighted average price over twenty trading dates exceeds $10.00 per share, we may generally require that the Unsecured Convertible Note convert into shares of its common stock at the $3.25 (as adjusted) conversion price, and (ii) the Convertible Noteholder may elect to require all or a portion of the Unsecured Convertible Note be redeemed by us. If the Convertible Noteholder requires a redemption, we, at our discretion, may pay the redeemed portion of the Unsecured Convertible Note in cash or in our common stock at a conversion rate equal to the lesser of (i) the $3.25 (as adjusted) conversion rate or (ii) 80% of the average of the five lowest volume weighted average price of our Common Stock over the preceding twenty trading days. The Convertible Noteholder may not redeem more than $500,000 per calendar month during the period between the six-month anniversary of the date of issuance until the first-year anniversary of the date of issuance and $750,000 per calendar month thereafter. The obligation or right of us to deliver our shares upon the conversion or redemption of the Unsecured Convertible Note is subject to a 19.99% cap and subject to a floor price trading price of $3.25 (unless waived by us). Any amounts redeemed or converted once the cap is reached or if the market price is less than the $3.25 floor price must be paid in cash.

If there is an Event of Default under the Unsecured Convertible Note, the Convertible Noteholder may accelerate our obligations or elect to increase the outstanding obligations under the Unsecured Convertible Note. The amount of the increase ranges from 5% to 15% depending on the type of default (as defined in the Unsecured Convertible Note). In addition, the Unsecured Convertible Note obligations will be increased if there are delays in our delivery requirements for the shares or cash issuable upon the conversion or redemption of the Unsecured Convertible Note in certain circumstances.

If we issue convertible debt in the future with any terms, including conversion terms, that are more favorable to the terms of the Unsecured Convertible Note, the Convertible Noteholder may elect to incorporate the more favorable terms into the Unsecured Convertible Note.

At-the-market Offering

On October 26, 2018, we entered into a common stock sales agreement with H.C. Wainwright & Co., LLC and Ladenburg Thalmann & Co. Inc. and filed a prospectus with the SEC related to such offering. We previously filed a Form S-3 that became effective on July 13, 2018 that included the registration of $40 million of our shares of common stock in connection with a potential “at-the-market” offering. Pursuant to the sales agreement, we may issue and sell shares having an aggregate gross sales price of up to $40 million. During the nine months ended September 30, 2019, we sold 705,714 shares under the “at the market” offering for net proceeds of approximately $1.7 million. We voluntarily suspended the ATM facility as of June 24, 2019, and it has remained suspended since that time.

Cash Flows
 
The following table sets forth the primary sources and uses of cash for the nine months ended September 30, 2019 and 2018:

 
 
Nine Months Ended September 30,
 
 
2019
 
2018
Net cash (used in) provided by:
 
 

 
 

Operating activities
 
$
(14,744,311
)
 
$
(12,760,698
)
Investing activities
 
(9,475
)
 
61,057

Financing activities
 
17,888,682

 
20,455,760

Net increase in cash and cash equivalents
 
$
3,134,896

 
$
7,756,119

 
Operating Activities
 

60


For the nine months ended September 30, 2019, our net cash used in operating activities of approximately $14.7 million primarily consisted of a net loss of $18.1 million and a non-cash gain of $1.0 million for the extinguishment of the Senior Convertible Note derivative liability and changes in the fair value of the warrant liabilities and the Unsecured Convertible Note derivative liability. These decreases were offset by adjustments for non-cash share-based compensation of approximately $2.3 million, a non-cash loss of $1.0 million on the extinguishment of debt, non-cash interest expense of approximately $1.0 million and write-off of deferred offering costs associated with the ATM facility of $0.1 million.
 
For the nine months ended September 30, 2018, our net cash used in operating activities of approximately $12.8 million primarily consisted of a net loss of $20.0 million, offset by adjustments for share-based compensation of approximately $3.9 million, non-cash interest expense of approximately $5.3 million and decreases in accounts payable and accrued expenses of approximately $2.0 million.
 
Investing Activities
 
Net cash used in investing activities for the nine months ended September 30, 2019 represents purchases of property and equipment. Net cash provided by investing activities for the nine months ended September 30, 2018 primarily represented loan payments received from a related party of $75,000 offset by the purchase of office furniture and computer equipment of approximately $14,000.
 
Financing Activities
 
For the nine months ended September 30, 2019, net cash provided by financing activities of approximately $17.9 million primarily consisted of the proceeds of $20.7 million received from the sale of our common stock and warrants, including proceeds of $0.5 million from the purchase of additional warrants, and $5.0 million from the issuance of the Unsecured Convertible Note. These increases were offset by approximately $6.7 million in debt repayments, $1.0 million in stock issuance costs and $0.1 million in debt issuance costs.

For the nine months ended September 30, 2018, net cash provided by financing activities of approximately $20.5 million primarily consisted of the proceeds of (i) $18.1 million received from the sale of our common stock and warrants in the Equity Issuance, (ii) $3.3 million from the issuance of a note payable and (iii) $0.9 million from the exercise of warrants. These increases were offset by approximately $1.7 million in stock issuance costs and $0.3 million in debt repayments.
 
The following table sets forth the primary sources and uses of cash for the years ended December 31, 2018 and 2017:

 
 
Year Ended December 31,
 
 
2018
 
2017
Net cash (used in) provided by:
 
 

 
 

Operating activities
 
$
(15,169,330
)
 
$
(5,096,546
)
Investing activities
 
(13,943
)
 
(38,727
)
Financing activities
 
20,556,610

 
5,130,025

Net increase (decrease) in cash and cash equivalents
 
$
5,373,337

 
$
(5,248
)

Operating Activities
 
For the year ended December 31, 2018, net cash used in operating activities of approximately $15.2 million primarily consisted of a net loss of $24.2 million, offset by adjustments for non-cash share-based compensation of approximately $3.8 million, beneficial conversion feature of $3.1 million, non-cash interest expense of approximately $2.8 million offset by the change in fair value of derivative liability of $0.1 million and a net change totaling approximately $0.7 million due to increases in prepaid expense and other current assets and accounts payable and decreases in accrued expenses.
 
For the year ended December 31, 2017, net cash used in operating activities of approximately $5.1 million primarily consisted of a net loss of $11.6 million, offset by adjustments for non-cash share-based compensation of approximately $6.0 million, non-cash interest expense of approximately $0.4 million and a net increase in prepaid expense, accounts payable and accrued expenses of less than $0.1 million.

61


 
Investing Activities
 
For the year ended December 31, 2018, net cash used in investing activities of approximately $14,000 represented the purchase of office furniture and computer equipment of approximately $14,000. In addition, we received loan payments from a related party of $75,000 which was offset by an investment in a certificate of deposit of $75,000. Net cash used in investing activities for the year ended December 31, 2017 represented the purchase of office furniture, computer equipment and leasehold improvements.
 
Financing Activities
 
For the year ended December 31, 2018, net cash provided by financing activities of approximately $20.6 million primarily consisted of: (i) the proceeds of $18.1 million received from the sale of our common stock and warrants in the Equity Issuance; (ii) $3.0 million from the issuance of a note payable; (iii) $0.9 million from the exercise of warrants and (iv) $0.2 million in proceeds from the exercise of stock options. These increases were offset by approximately $1.5 million in stock issuance costs and $0.2 million in payment of deferred offering costs.

For the year ended December 31, 2017, net cash provided by financing activities of approximately $5.1 million primarily consisted of borrowings from convertible debt.

Capital Requirements
 
We have not generated any revenue from product sales or any other activities. We do not expect to generate significant revenue unless and until we obtain regulatory approval of and commercialize, or out-license, one or more of our product candidates and do not know when, or if, these will occur. In addition, we expect our expenses to increase in connection with our ongoing development activities, particularly as we continue the research, development and clinical trials of, and seek regulatory approval for, our product candidates. In addition, subject to obtaining regulatory approval of our product candidates, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. We anticipate that we will need substantial additional funding in connection with our continuing operations, including increased costs associated with being a public company.

Our financial statements have been prepared on a basis which assumes that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. Based on our limited operating history and recurring operating losses, there is substantial doubt that we will continue as a going concern for at least one year following the date of our Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2019, without additional financing. Management’s plans with regard to these matters include entering into strategic partnerships or seeking additional debt or equity financing arrangements or a combination of these activities, including the RDD Merger and RDD Merger Financing. The failure to obtain sufficient financing or strategic partnerships or complete the RDD Merger and RDD Merger Financing could adversely affect our ability to achieve our business objectives and continue as a going concern. The accompanying financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern.



62


SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table and the related notes present information on the beneficial ownership of shares of our capital stock as of December 20, 2019, (except where otherwise indicated) by:
 
 
 
each of our directors;
 
 
 
each of our named executive officers;
 
 
 
all of our current directors and executive officers as a group; and
 
 
 
each person, or group of affiliated persons, who are known by us to beneficially own more than 5% of the outstanding shares of our capital stock on an as converted basis.
Beneficial ownership is determined in accordance with SEC rules and includes voting or investment power with respect to the securities. Shares of common stock that may be acquired by an individual or group within 60 days of December 20, 2019, pursuant to the exercise of options or warrants, are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table.
Except as indicated in the footnotes to this table, we believe that the stockholders named in this table have sole voting and investment power with respect to all shares of common stock shown to be beneficially owned by them, based on information provided to us by such stockholders. Unless otherwise indicated, the address for each stockholder listed is: c/o Innovate Biopharmaceuticals, Inc., 8480 Honeycutt Road, Suite 120, Raleigh, NC 27615.


63


 
 
 
 
 
 
 
 
Name and Address of Beneficial Owner
 
Shares
Beneficially
  
Owned
 
Percent of
Outstanding
(1)
Principal Stockholders:
 
 
 
 
BrynMawr Technology Holdings (2)
 
1,885,440
 
 
5.3
%
Moonstar Family Group (3)
 
2,688,217
 
 
7.5
%
The Sea Island Partnership (4)
 
2,892,298
 
 
8.1
%
Directors and Named Executive Officers:
 
 
 
 
Christopher Prior, Ph.D. (5)
 
2,095,552
 
 
5.5
%
Jay P. Madan, M.S. (6)
 
1,280,859
 
 
3.5
%
Sandeep Laumas, M.D. (7)
 
1,115,684
 
 
3.1
%
Ed Sitar (8)
 
26,250
 
 
*
 
Lorin K. Johnson, Ph.D. (9)
 
292,274
 
 
*
 
Anthony E. Maida III, Ph.D., M.A., M.B.A. (10)
 
103,841
 
 
*
 
Roy Proujansky, M.D. (11)
 
50,428
 
 
*
 
Saira Ramasastry, M.S., M. Phil. (12)
 
44,028
 
 
*
 
All directors and executive officers as a group (7 persons) (13)
 
2,913,364
 
 
7.9
%

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


64


(1)
The percentage of beneficial ownership is based on 35,883,953 shares of common stock outstanding as of December 20, 2019.
 
 
(2)
Consists of 1,885,440 shares of common stock held by BrynMawr Technology Holdings. The manager of BrynMawr Technology Holdings is Mark Costley.
 
 
(3)
Consists of 2,688,217 shares of common stock held by Moonstar Family Group. The managing member of Moonstar Family Group is Chris Durant.
 
 
(4)
Consists of 2,892,298 shares of common stock held by The Sea Island Partnership. The manager of The Sea Island Partnership is Michael Huter.
 
 
(5)
Consists of (i) 7,009 shares of common stock held by Dr. Prior and (ii) options to purchase 2,088,543 shares of common stock held by Dr. Prior that are exercisable within 60 days of December 20, 2019.
 
 
(6)
Consists of (i) 84,131 shares of common stock held by Mr. Madan, (ii) 129,593 shares of common stock held by Madan Global, Inc., (iii) 122,104 shares of common stock held by OM Healthcare Partners LLC, (iv) 122,104 shares of common stock held by OM Healthcare Partners II LLC, (v) 122,104 shares of common stock held by OM Healthcare Partners III LLC, (vi) 450,000 shares of common stock held by MGI Holdings II LLC and (vii) options to purchase 250,823 shares of common stock held by Mr. Madan that are exercisable within 60 days of December 20, 2019, 2019. Mr. Madan is affiliated with Madan Global, Inc., MGI Holdings II LLC and with each of the named OM Healthcare Partners companies, and has voting and investment power over these shares. Mr. Madan disclaims beneficial ownership of the shares of Madan Global, Inc., MGI Holdings II LLC and the OM Healthcare Partners companies except to the extent of his pecuniary interest therein.
 
 
(7)
Consists of (i) 14,000 shares of common stock held by Dr. Laumas, (ii) 758,373 shares held by Bearing Circle Capital LLC and (iii) options to purchase 343,311 shares of common stock held by Dr. Laumas that are exercisable within 60 days of December 20, 2019. Dr. Laumas is affiliated with Bearing Circle Capital and has voting and investment power over the shares held by Bearing Circle Capital. Dr. Laumas disclaims beneficial ownership of the shares held by Bearing Circle Capital LLC except to the extent of his pecuniary interest therein.
 
 
(8)
Consists of options to purchase 26,250 shares of common stock held by Edward J. Sitar that are exercisable within 60 days of December 20, 2019.
 
 
(9)
Consists of options to purchase 292,274 shares of common stock held by Dr. Johnson that are exercisable within 60 days of December 20, 2019.
 
 
(10)
Consists of options to purchase 103,841 shares of common stock held by Dr. Maida that are exercisable within 60 days of December 20, 2019.
 
 
(11)
Consists of (i) 1,400 shares of common stock held by Dr. Proujansky and (ii) options to purchase 49,028 shares of common stock held by Dr. Proujansky that are exercisable within 60 days of December 20, 2019.
 
 
(12)
Consists of options to purchase 44,028 shares of common stock held by Ms. Ramasastry that are exercisable within 60 days of December 20, 2019.
 
 
(13)
Includes 2,913,364 shares owned or issuable upon the exercise of options held by the Company’s current directors and executive officers that are exercisable within 60 days of December 20, 2019.
 
 
 
 

65


CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
 
Related Person Transaction Policy and Procedures
The Company’s board of directors has adopted a written related person transaction policy setting forth the policies and procedures for the review and approval or ratification of related person transactions. This policy covers, with certain exceptions set forth in Item 404 of Regulation S-K, any transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships, in which we were or are to be a participant, in which the amount involved exceeds $120,000 in any fiscal year and a related person had, has or will have a direct or indirect material interest, including without limitation, purchases of goods or services by or from the related person or entities in which the related person has a material interest, indebtedness, guarantees of indebtedness and employment by us of a related person. In reviewing and approving any such transactions, our audit committee is tasked to consider all relevant facts and circumstances, including, but not limited to, whether the transaction is on terms comparable to those that could be obtained in an arm’s length transaction and the extent of the related person’s interest in the transaction. Notwithstanding anything therein to the contrary, the policy is to be interpreted only in such a manner as to comply with Item 404 of Regulation S-K.

Certain Related Person Transactions
Described below are transactions occurring since January 1, 2017, and any currently proposed transactions to which we were a participant and in which:
The amounts involved exceeded or will exceed one percent of the average of our total assets at year-end for the last two completed fiscal years; and

Any director, executive officer, beneficial owner of more than five percent of our outstanding capital stock, or any member of such person’s immediate family that had or will have a direct or indirect material interest, other than compensation, termination and change of control arrangements that are described under the section titled “Executive Compensation.”
Unless otherwise noted below, each of these transactions was approved pursuant to the related transaction policies in place at the time each transaction was approved.
 
Loans:
On June 7, 2017, GSB Holdings, Inc., a family owned company of David Clarke, the then CEO and Chairman of the Board of the Company, loaned the Company $100,000 in the form of a promissory note and issued 10,204 three-year warrants at an exercise price of $20.00 in lieu of interest. On June 23, 2017, the Company issued 17,241 shares of common stock at $5.80 per share in exchange for the promissory note. The issuance price was $0.50 greater than the closing price of our common stock on the issuance date.
 
Restricted Shares:
In March 2017, the Company issued 7,000 shares of restricted common stock to David Clarke, the then Chairman of the Board, at a purchase price of $15.00 per share pursuant to a Private Placement Memorandum. The Company issued 10,000 shares of restricted common stock to the then Chairman of the Board in November 2017, and 2,500 shares of restricted stock in January 2018. 
In November 2017, the Company issued 185,042 shares of restricted common stock to Strategic Planning Assets, LTD, a Hong Kong company, at a purchase price of $6.50 pursuant to a stock purchase agreement dated September 12, 2017. The purchase agreement called for the invested funds to be used to settle a debt owed by the Company below the amount recorded in its financial records. The number of shares to be issued was calculated using the full amount of the debt and at a share price equal to the average closing price of our common stock during the ten-day period prior to the stockholder approval of the transaction as voted on November 9, 2017.
Unless otherwise noted below, each of these transactions was approved pursuant to our Related Person Transaction Policy.
 
Consulting Agreements:

66


In connection with the departure of Chris Prior, former Chief Executive Officer of Innovate, we entered into a consulting agreement with Dr. Prior, pursuant to which he will provide advisory services as requested by us for a 12-month term at a rate of $350 per hour. To date, we have not incurred any consulting fees with Dr. Prior under this agreement.
Equity Financing:
Pursuant to a securities purchase agreement (the “Purchase Agreement”) with SDS Capital Partners II, LLC and certain other accredited investors, in March 2019, we issued an aggregate of 4,181,068 shares of common stock at a price of $2.33 per share. In a concurrent private placement, we issued warrants to purchase 6,689,702 shares of common stock, of which 4,181,068 are exercisable immediately.
Of the shares and warrants issued in March 2019, 50,000 shares of common stock and warrants to purchase 80,000 shares of common stock were issued to GSB Holdings, Inc., a family-owned company of David Clarke, who previously served as Chief Executive Officer and Chairman of the Board of the Company prior to the Monster Merger. The aggregate purchase price of the common stock shares issued to GSB Holdings, Inc. was $116,500. In addition, warrants to purchase 50,000 shares of common stock are exercisable immediately, have an expiration date of March 18, 2020 and have an exercise price of $4.00. Warrants to purchase 30,000 shares of common stock will be exercisable on the six-month anniversary of March 18, 2019, have an expiration date of March 18, 2024 and have an exercise price of $2.56.
In April 2019, we entered into an amendment to the Purchase Agreement, between us and each purchaser, including GSB Holdings, Inc. (the “Amendment”). The Amendment gave each purchaser the right to purchase, for $0.125 per underlying share, an additional warrant to purchase shares of our common stock having an exercise price per share of $2.13 and otherwise having the terms of the long-term warrants issued in the March 2019 transaction (collectively, the “New Warrants”) pursuant to a securities purchase agreement (the “New Securities Purchase Agreement”) entered into among us and each purchaser on May 17, 2019.
We issued New Warrants exercisable for an aggregate of 3,897,010 shares of our common stock and the New Warrants are exercisable for five years beginning on the six-month anniversary of the date of issuance. The New Warrants have an initial exercise price equal to $2.13 per share, subject to certain adjustments. Pursuant to the New Securities Purchase Agreement, GSB Holdings, Inc. received New Warrants to purchase an additional 46,638 shares of our common stock.
 

67




OTHER MATTERS

Other Matters
Our Board does not know of any other matters that are to be presented for action at the Special Meeting. However, if any other matters properly come before the Special Meeting or any adjournment(s) thereof, it is intended that the enclosed proxy will be voted in accordance with the judgment of the persons voting the proxy.
Householding of Proxy Materials
The SEC has adopted rules that permit companies and intermediaries (e.g., brokers) to satisfy the delivery requirements for proxy materials with respect to two or more stockholders sharing the same address by delivering a single set of proxy materials addressed to those stockholders. This process, which is commonly referred to as “householding,” potentially means extra convenience for stockholders and cost savings for companies.
A number of brokers with account holders who are Company stockholders will be householding Company’s proxy materials. A single set of proxy materials will be delivered to multiple stockholders sharing an address, unless contrary instructions have been received from the affected stockholders. Once you have received notice from your broker that they will be householding communications to your address, householding will continue until you are notified otherwise or until you revoke your consent. If, at any time, you no longer wish to participate in householding and would prefer to receive a separate set of proxy materials, please notify your broker or the Company. Direct your written request to our Corporate Secretary at Innovate Biopharmaceuticals, Inc. Attn: Corporate Secretary, 8480 Honeycutt Road, Suite 120, Raleigh, NC 27615, or contact her at (919) 500-0658. Stockholders who currently receive multiple copies of the proxy materials at their addresses and would like to request householding of their communications should contact their brokers.

Availability of Annual Report on Form 10-K
A copy of our Annual Report on Form 10-K is being mailed to you along with this proxy statement. Additionally, copies of our Annual Report (exclusive of exhibits and documents incorporated therein by reference) may be obtained for free by directing written requests to: Corporate Secretary at Innovate Biopharmaceuticals, Inc. Attn: Corporate Secretary, 8480 Honeycutt Road, Suite 120, Raleigh, NC 27615. Copies of exhibits and documents incorporated by reference into the Annual Report will be furnished to stockholders upon written request and payment of a nominal fee in connection with the furnishing of such documents. You may also obtain the Annual Report over the Internet at the SEC’s website, www.sec.gov, or at www.innovatebiopharma.com.

Stockholder Proposals

Pursuant to Rule 14a-8 under the Exchange Act, stockholders may present proper proposals for inclusion in the proxy statement for consideration at our next Annual Meeting of stockholders. To be eligible for inclusion in the 2020 proxy statement, your proposal must be received by us no later than February 2, 2020 and must otherwise comply with Rule 14a-8. While our board will consider stockholder proposals, we reserve the right to omit from the proxy statement stockholder proposals that we are not required to include under the Exchange Act, including Rule 14a-8.

Under our bylaws, in order to nominate a director or bring any other business before the stockholders at the 2020 Annual Meeting of Stockholders that will not be included in our proxy statement, you must notify us in writing, and such notice must be received by us no earlier than February 2, 2020 and no later than March 3, 2020. For proposals not made in accordance with Rule 14a-8, you must comply with specific procedures set forth in our bylaws and the nomination or proposal must contain the specific information required by our bylaws. You may write to our Corporate Secretary at Innovate Biopharmaceuticals, Inc., Attn: Corporate Secretary, 8480 Honeycutt Road, Suite 120, Raleigh, NC 27615, to deliver the notices discussed above and to request a copy of the relevant bylaw provisions regarding the requirements for making stockholder proposals and nominating director candidates pursuant to the bylaws.
List of the Company’s Stockholders

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        A list of our stockholders as of December 20, 2019, the record date, will be available for inspection at our corporate headquarters during normal business hours during the 10-day period prior to the Special Meeting. The list of stockholders will also be available for such examination at the Special Meeting.

Requests for Directions to the Special Meeting of Stockholders
The Special Meeting of Stockholders will be held on [______], 2020, at 11:00 a.m. Eastern Time at the offices of Sheppard, Mullin, Richter & Hampton LLP, 30 Rockefeller Plaza, New York, NY 10112. Requests for directions to the meeting location may be directed to Innovate Biopharmaceuticals, Inc., Attn: Corporate Secretary, 8480 Honeycutt Road, Suite 120, Raleigh, NC 27615.
 




69






RDD PHARMA, LTD.
2018 ANNUAL REPORT



TABLE OF CONTENTS


 
Page
REPORT OF INDEPENDENT AUDITORS
CONSOLIDATED FINANCIAL STATEMENTS - IN U.S. DOLLARS ($):
 
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated statements of changes in capital deficiency
Consolidated statements of cash flows
Notes to consolidated financial statements
 
 


F-A-1


http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13277451&doc=2Report of Independent Auditors

To the board of directors and shareholders of RDD Pharma Ltd.


We have audited the accompanying consolidated financial statements of RDD Pharma Ltd. and its subsidiary, which comprise the consolidated balance sheets as of December 31, 2018 and 2017, and the related consolidated statements of operations, changes in capital deficiency and cash flows for the years then ended.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of RDD Pharma Ltd. and its subsidiary as of December 31, 2018 and 2017, and the results of its operations, changes in capital deficiency and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Emphasis of Matter

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1d to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency and cash outflows from operating

F-A-2


activities, and has stated that substantial doubt exists about the Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 1d. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.

Tel-Aviv, Israel
Kesselman & Kesselman
December 19, 2019
Certified Public Accountants (Isr.)
 
A member firm of PricewaterhouseCoopers International Limited




F-A-3


RDD PHARMA LTD.
CONSOLIDATED BALANCE SHEETS

 
 
December 31
 
Note
2018
2017
 
 
U.S. dollars
in thousands
Assets
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
 
$
2,375

$
3,344

Prepaid expense and other receivable
9a
26

45

TOTAL CURRENT ASSETS
 
2,401

3,389

 
 
 
 
NON-CURRENT ASSETS -
 
 
 
Property and equipment, net
3
49

19

TOTAL ASSETS
 
2,450

3,408

 
 
 
 
Liabilities net of capital deficiency
 
 
CURRENT LIABILITIES -
 
 
 
Accounts payable:
 
 
 
Trade
 
$
107

$
56

Other
9b
223

725

TOTAL CURRENT LIABILITIES
 
330

781

NON-CURRENT LIABILITIES -
 
 
 
Warrants liabilities
6
653

730

Liability for employees rights upon retirement
 
36

36

 
 
689

766

COMMITMENTS AND CONTINGENCIES
5
 
 
TOTAL LIABILITIES
 
1,019

1,547

 
 
 
 
REDEEMABLE CONVERTIBLE PREFERRED SHARES
8
16,656

14,656

 
 
 
 
CAPITAL DEFICIENCY
 
 
 
Ordinary shares, par value NIS 0.01 per share, 615,241 shares authorized; 48,895 shares issued and outstanding at December 31, 2018 and 2017
 
*

*

Additional paid in capital
 
447

396

Accumulated deficit
 
(15,672)

(13,191)

TOTAL CAPITAL DEFICIENCY