The accompanying notes are an integral part
of these financial statements.
The accompanying notes are an integral part
of these financial statements.
The accompanying notes are an integral part
of these financial statements.
The accompanying notes are an integral part
of these financial statements.
NOTES TO FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description
Innovate Biopharmaceuticals Inc. (the “Company”) is
a clinical-stage biopharmaceutical company developing novel medicines for autoimmune and inflammatory diseases with unmet needs.
The Company’s pipeline includes drug candidates for celiac disease, NASH, Crohn's, and ulcerative colitis. The Company was
originally incorporated in the state of North Carolina on January 12, 2012 as GI Therapeutics, Inc.
On April 10, 2014 the Company changed its name from GI Therapeutics,
Inc. to Innovate Biopharmaceuticals, Inc. and reincorporated in Delaware on June 23, 2014.
On January 29, 2018 the Company completed a Merger, as defined in
Note 11, accounted for as a reverse recapitalization, and completed an equity financing (the “Equity Issuance”) and
a debt financing. See Note 11 regarding significant Company events that occurred subsequent to December 31, 2017.
Business Risks
The Company faces risks associated with companies whose products
are in the early stage of development. These risks include, among others, the Company’s need for additional financing to
achieve key development milestones, the need to defend intellectual property rights, and the dependence on key members of management.
Basis of Presentation
The accompanying financial statements have been prepared on the
accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”).
Use of Estimates
The preparation of financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures
made in the accompanying notes to the financial statements. Areas of the financial statements where estimates may have the most
significant effect include accrued expenses, share-based compensation, deferred compensation, valuation allowance for income tax
assets and management’s assessment of the Company’s ability to continue as a going concern. Changes in the facts or
circumstances underlying these estimates could result in material changes and actual results could differ from these estimates.
Concentration of Credit Risk
Cash consists of checking accounts. While cash held by financial
institutions may at times exceed federally insured limits, management believes that no material credit or market risk exposure
exists due to the high quality of the financial institutions. The Company has not experienced any losses on such accounts.
Property and Equipment
The Company records property and equipment at cost. Improvements
and betterments that add new functionality or extend the useful life of the asset are capitalized, while general repairs and maintenance
are expensed as incurred. The Company depreciates its property and equipment over the estimated useful lives of the assets, typically
three years, using the straight-line method. Leasehold improvements are amortized over the lesser of their estimated useful lives
or the lives of the underlying leases, whichever is shorter. Both depreciation and amortization expense for leasehold improvements
has been included in general and administrative expenses in the accompanying statements of operations and comprehensive loss.
INNOVATE BIOPHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (continued)
Accrued Expenses
The Company incurs periodic expenses such as research and development,
salaries, and professional fees. An adjusting entry to accrue expenses is necessary when expenses have been incurred by the Company
prior to them being invoiced. When a vendor’s invoice is not received, the Company is required to estimate its accrued expenses.
This process involves reviewing quotations and contracts, identifying services that have been performed on the Company’s
behalf and estimating the level of service performed and the associated cost incurred for the service when the Company has not
yet been invoiced or otherwise notified of the actual cost. The majority of the Company’s service providers invoice monthly
in arrears for services performed or when contractual milestones are met. The Company estimates accrued expenses as of each balance
sheet date based on facts and circumstances known at that time.
Accrued expenses consisted of the following as of December 31:
|
|
2017
|
|
|
2016
|
|
Compensation and benefits
|
|
$
|
1,065,225
|
|
|
$
|
1,682,900
|
|
Other
|
|
|
115,000
|
|
|
|
40,325
|
|
Total
|
|
$
|
1,180,225
|
|
|
$
|
1,723,225
|
|
Research and Development
Research and development expenses consist of costs incurred to further
the Company’s research and development activities and include salaries and related employee benefits, manufacturing of pharmaceutical
active ingredients and drug products, costs associated with clinical trials, nonclinical activities, regulatory activities, research-related
overhead expenses and fees paid to expert consultants, external service providers and contract research organizations which conduct
certain research and development activities on behalf of the Company. Costs incurred in the research and development of products
are charged to research and development expense as incurred.
Costs for preclinical studies and clinical
trial activities are recognized based on an evaluation of vendors’ progress towards completion of specific tasks, using data
such as patient enrollment, clinical site activations or information provided by vendors regarding their actual costs incurred.
Payments for these activities are based on the terms of individual contracts and payment timing may differ significantly from the
period in which the services were performed. The Company determines accrual estimates through reports from and discussions with
applicable personnel and outside service providers as to the progress or state of completion of trials, or the services completed.
The estimates of accrued expenses as of each balance sheet date are based on the facts and circumstances known at the time.
Nonrefundable advance payments for goods and services that will
be used in future research and development activities are expensed when the activity is performed or when the goods have been received,
rather than when payment is made.
Share-Based Compensation
The Company measures compensation cost for share-based payment awards
granted to employees and non-employee directors at fair value using the Black-Scholes-Merton option-pricing model. Compensation
expense is recognized on a straight-line basis over the service period for awards expected to vest. Stock-based compensation cost
related to share-based payment awards granted to non-employees is adjusted each reporting period for changes in the fair value
of the Company’s stock until the measurement date. The measurement date is generally considered to be the date when all services
have been rendered or the date that options are fully vested.
INNOVATE BIOPHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (continued)
Income Taxes
The Company accounts for income taxes under the asset and liability
method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based
on the differences between the financial statements and the tax basis of assets and liabilities using the enacted tax rates in
effect for the year in which the differences are expected to reverse.
Net deferred tax assets are recognized to the extent the Company’s
management believes these assets will more likely than not be realized. In making such determination, management considers all
positive and negative evidence, including reversals of existing temporary differences, projected future taxable income, tax planning
strategies and recent financial operations. A valuation allowance is recorded to reduce the deferred tax assets reported if, based
on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Management periodically reviews its deferred tax assets for recoverability and its estimates and judgments in assessing the need
for a valuation allowance.
The Company recognizes a tax benefit from uncertain positions when
it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or
litigation processes, based on the technical merits of the position. Income tax positions must meet a more-likely-than-not recognition
threshold to be recognized.
Fair Value Measurements
Fair value is defined as the price that would be received for sale
of an asset or paid for transfer of a liability, in an orderly transaction between market participants at the measurement date.
U.S. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements)
and the lowest priority to unobservable inputs (level 3 measurements).
These tiers include:
|
•
|
Level 1 — defined as observable inputs such as quoted prices for identical instruments in active markets;
|
|
•
|
Level 2 — defined as inputs other than quoted prices in active markets that are either directly or indirectly
observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments
in markets that are not active; and
|
|
•
|
Level 3 — defined as unobservable inputs in which little or no market data exists, therefore requiring an entity
to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or
significant value drivers are unobservable.
|
Fair Value of Financial Instruments
ASC 820,
Fair Value Measurement and Disclosures
, requires
all entities to disclose the fair value of financial instruments, both assets and liabilities, for which it is practicable to estimate
fair value, and defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties. As of December 31, 2017, and 2016, the recorded values of cash, accounts payable, accrued
expenses, and convertible notes approximate their fair values due to the short-term nature of the instruments.
INNOVATE BIOPHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (continued)
Deferred Offering Costs
Deferred offering costs consist principally of legal, accounting
and underwriters’ fees incurred as of December 31, 2017 that are related to the Equity Issuance. Following the completion
of the Equity Issuance on January 29, 2018, these costs will be charged to additional paid-in capital. See Note 11 regarding significant
Company events that occurred subsequent to December 31, 2017.
Patent Costs
Costs associated with the submission of patent applications are
expensed as incurred given the uncertainty of the future economic benefits of the patents. Patent and patent related legal and
administrative costs included in general and administrative expenses were approximately $409,000 and $295,000 for the years ended
December 31, 2017 and 2016, respectively.
Net Loss Per Share
The Company calculates net loss per share as a measurement of
the Company’s performance while giving effect to all dilutive potential common shares that were outstanding during the
reporting period. As the Company had a net loss for all periods presented; accordingly, the inclusion of common stock options
or other similar instruments would be anti-dilutive. Therefore, the weighted average shares used to calculate both basic and
diluted earnings per share are the same. For the years ended December 31, 2017 and 2016, 4,971,914 and 2,852,074 potentially
dilutive securities related to stock options issued and outstanding have been excluded from the computation of diluted
weighted shares outstanding because the effect would be anti-dilutive.
Comprehensive Loss
Comprehensive income (loss) is defined as the change in equity during
a period from transactions and other events and circumstances from non-owner sources. The Company is required to record all components
of comprehensive loss in the financial statements in the period in which they are recognized. Net loss and other comprehensive
loss, including foreign currency translation adjustments and unrealized gains and losses on investments are reported, net of their
related tax effect, to arrive at a comprehensive loss. For the years ended December 31, 2017 and 2016, comprehensive loss was equal
to the net loss.
Segments
Operating segments are defined as components of an enterprise engaging
in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision
maker in deciding how to allocate resources and in assessing performance. The Company operates and manages its business as one
operating segment and all of the Company’s operations are in North America.
Reclassification
A reclassification of prior year “Convertible promissory notes,
net” to “Convertible promissory notes, related party, net” was made to conform to current year presentation.
This reclassification had no effect on the reported results of operations or on the reported amount of cash flows for the prior
year.
INNOVATE BIOPHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (continued)
Recent Accounting Pronouncements
In May 2017, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) 2017-09, Compensation—Stock Compensation (Topic 718): Scope of
Modification Accounting. This guidance is intended to provide clarity and reduce diversity in practice as to when changes to the
terms or conditions of share-based payments are accounted for as modifications. Under this new guidance, entities will apply modification
accounting if the fair value, vesting conditions or classification of the award changes. This guidance will be effective for annual
reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods, and early
adoption is permitted. The guidance per ASU 2017-09 is to be adopted prospectively to an award modified on or after the adoption
date. The Company does not anticipate a material impact to the Company’s financial statements as a result of the adoption
of this guidance.
In August 2016, the FASB issued ASU No. 2016-15, Statement
of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The FASB issued ASU 2016-09 to improve U.S.
GAAP by providing guidance on the cash flow statement classification of eight specific areas where there is existing diversity
in practice. The FASB expects that the guidance in this ASU will reduce the current and potential future diversity in practice
in such areas. This ASU is effective for annual and interim periods beginning after December 15, 2017, with early adoption
permitted. The Company is currently evaluating the impact of the adoption of this ASU on the Company’s financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases
(Topic 842). This guidance revises the accounting related to leases by requiring lessees to recognize a lease liability and a right-of-use
asset for all leases. The new lease guidance also simplifies the accounting for sale and leaseback transactions. This ASU is effective
for annual reporting periods beginning after December 15, 2018 and early adoption is permitted. The Company is currently evaluating
the impact of the adoption of this ASU on the Company’s financial statements.
NOTE 2: LIQUIDITY AND GOING CONCERN
The accompanying financial statements have been prepared on a basis
which assumes that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction
of liabilities and commitments in the normal course of business. There is substantial doubt that the Company will continue as a
going concern for at least 12 months following the date these financial statements are issued without additional financing, based
on the Company’s limited operating history and recurring operating losses. Management’s plans with regard to these
matters include seeking additional debt or equity financing arrangements
or
entering into strategic partnerships. The failure to obtain sufficient financing or strategic partnerships could adversely
affect the Company’s ability to achieve its business objectives and continue as a going concern.
The accompanying
financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going
concern.
On January 29, 2018 the Company completed a Merger, as defined in
Note 11, accounted for as a reverse recapitalization, and completed the Equity Issuance and a debt financing. See Note 11 regarding
significant Company events that occurred subsequent to December 31, 2017.
INNOVATE BIOPHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of December 31, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
Furniture and fixtures
|
|
$
|
9,382
|
|
|
$
|
-
|
|
Computer equipment
|
|
|
12,971
|
|
|
|
8,573
|
|
Leasehold improvements
|
|
|
24,947
|
|
|
|
-
|
|
Property and equipment
|
|
$
|
47,300
|
|
|
$
|
8,573
|
|
Accumulated depreciation
|
|
|
(6,593
|
)
|
|
|
(806
|
)
|
Property and equipment, net
|
|
$
|
40,707
|
|
|
$
|
7,767
|
|
Depreciation expenses relating to property and equipment were
approximately $6,000 and $1,000 for the years ended December 31, 2017 and 2016, respectively.
NOTE 4: RELATED PARTY TRANSACTIONS
Certain owners of the Company were hired as executive employees
(“Executives”) of the Company during 2016. In prior years, these Executives paid certain expenses on behalf of the
Company and provided certain consulting services through companies owned by the Executives (“Executive Companies”).
During 2016 there were no consulting expenses incurred to the Executives or Executive Companies and there were no expenses paid
by the Executives. During 2016, approximately $28,000 of the amount due to related parties was paid to the Executives with the
remaining $36,000 converted to convertible promissory notes. In addition, during 2016, approximately $14,000 of accrued interest
was converted to convertible promissory notes.
During 2015 and 2016, certain Executives and the CEO of the Company
provided services to the Company in management roles for which they had not been paid for. The Company has recorded the value of
the services performed based on the expected amounts to be paid in the future for the services performed. Management believes that
the amount of expense accrued represents the fair value for the services performed by these executives. Certain executives are
also stockholders of the Company. During 2017 and 2016, the Company recorded approximately $524,000 in salary expense and $1,332,000
in compensation expense, including deferred bonus and milestone payments, of which approximately $1,114,000 and $109,000 was paid
during the years ended December 31, 2017 and 2016, respectively. Included in accrued expenses as of December 31, 2017 and 2016
was approximately $1,065,000 and $1,683,000 of deferred compensation expense, respectively (See Note 10).
During 2015 certain relatives of the CEO acquired $50,000 of the
Company’s convertible promissory notes, which are included in the amount outstanding as of December 31, 2017 and 2016.
As of December 31, 2017 and 2016, there was approximately $195,000
of convertible promissory notes and approximately $25,000 and $12,000 of accrued interest owed to certain Executives, respectively.
During 2016, the Company advanced payments to Executive Companies
under short-term note receivable arrangements. As of December 31, 2017 and 2016, there was $75,000 included in due from related
party for a note receivable owed to the Company. See Note 11 regarding full repayment of this note subsequent to December 31, 2017.
The Company obtains legal services from a law firm that owns a minority
portion of the Company’s common stock. During 2017 and 2016, the Company incurred expenses with this law firm of approximately
$143,000 and $63,000, respectively. As of December 31, 2017 and 2016, approximately $143,000 and $113,000 was owed to this law
firm and recorded in accounts payable, respectively.
INNOVATE BIOPHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 5: CONVERTIBLE PROMISSORY NOTES
During 2013, the Company entered into a convertible
note purchase agreement (the “2013 Notes”) and issued $120,025 in convertible notes which were to convert at 80% of
the price paid per share in the next equity financing of $2,500,000 or more. The 2013 Notes bore interest at 5% annually and the
outstanding principal and accrued interest were due and payable on December 31, 2015.
During 2015, the Company entered into convertible
note purchase agreements (the “2015 Notes”) and issued $650,000 in convertible notes which were to convert at 80.00%
of the price paid per share in the next equity financing of $2,500,000 or more. The 2015 Notes bore interest at 5% annually and
the outstanding principal and accrued interest were due and payable on December 31, 2015, for certain notes issued and December
31, 2017, for other notes issued, provided no conversion had occurred on or prior to such date.
The 2013 Notes and 2015 Notes included a redemption
provision that required the Company, unless the note was converted, if there was a liquidity event, as defined in the agreement,
to redeem the note in the amount equal to 150% of the principal balance, plus accrued and unpaid interest. The Company evaluated
this redemption feature under the provisions of ASC 405,
Accounting for Contingencies
, and determined that the likelihood
of the Company being required to redeem the note at 150% of its principal balance was not probable.
During January 2016, the Company issued an
additional $150,000 of 2015 Notes. On January 22, 2016, the 2013 Notes and 2015 Notes and accrued interest totaling approximately
$949,000 were exchanged for new convertible promissory notes (the “2016 Notes”) bearing an interest rate of 7% annually
with a maturity date for the outstanding principal and accrued interest of January 22, 2018. The 2016 Notes convert at 75% of the
price paid per share in the next equity financing of $7,500,000 or more. The redemption provision from the 2015 Notes and 2013
Notes was eliminated upon the issuance of the 2016 Notes.
The Company examined the terms of the exchange
of the 2015 Notes and 2013 Notes and determined that the exchange did not result in a debt extinguishment under the guidance of
ASC 470-50,
Debt Modifications and Extinguishments
. There was a change in the fair value of the embedded conversion option
from changing the conversion rate from 80% to 75% immediately before and after the modification, which resulted in an increase
to the fair value of the embedded conversion feature. In accordance with ASC 470-50, the carrying amount of the debt instrument
must be adjusted for an increase in the fair value of the embedded conversion option resulting from the modification.
The estimated fair value of the change in the
embedded conversion option approximated $80,000 and was recorded as a debt discount and additional paid-in-capital at the modification
date of January 22, 2016. The estimated fair value of the embedded conversion option was calculated as the difference in the conversion
amount of the original conversion option of 80% versus the new conversion option of 75% at the exchange date, certain future dates
and the maturity date of the 2016 Notes based on a probability-weighted scenario, discounted using the effective interest rate
of the 2013 and 2015 Notes. Debt discount amortized to interest expense using the effective interest method was approximately $40,000
and $37,000 during the years ended December 31, 2017 and 2016.
After the conversion of the 2015 Notes and
2013 Notes, the Company issued approximately $2,499,000 of additional 2016 Notes in 2016, and $2,680,000 of additional 2016 Notes
during the year ended December 31, 2017.
In April 2017 the Company issued new convertible
promissory notes (the “April 2017 Notes”) bearing an interest rate of 7% annually with a maturity date for the outstanding
principal and accrued interest of June 30, 2018. The April 2017 Notes convert at 75% of the price paid per share in the next equity
financing of $20,000,000 or more. For the year ended December 31, 2017, the Company issued $1,000,000 in April 2017 Notes.
In September 2017, the Company issued new convertible
promissory notes (the “September 2017 Notes”) bearing an interest rate of 7% annually with a maturity date for the
outstanding principal and accrued interest of June 30, 2018. The September 2017 Notes convert at 75% of the price paid per share
in the next equity financing of $7,500,000 or more. For the year ended December 31, 2017 the Company issued $1,400,000 in September
2017 Notes (Note 10).
The 2016 Notes, April 2017 Notes and September
2017 Notes are secured by all assets of the Company.
The conversion discount embedded in the 2016
Notes, April 2017 Notes and September 2017 Notes creates a contingent beneficial conversion feature which will be recorded as a
charge to interest expense when the contingency occurs.
INNOVATE BIOPHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 5:
CONVERTIBLE PROMISSORY NOTES (continued)
The convertible promissory notes consist of
the following as of December 31, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Convertible promissory notes
|
|
$
|
8,331,937
|
|
|
$
|
3,201,937
|
|
Less debt discount
|
|
|
(2,892
|
)
|
|
|
(35,800
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,329,045
|
|
|
$
|
3,166,137
|
|
The convertible promissory notes, related party
consist of the following as of December 31, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Convertible promissory notes, related party
|
|
$
|
245,399
|
|
|
$
|
245,399
|
|
Less debt discount
|
|
|
(583
|
)
|
|
|
(7,200
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
244,816
|
|
|
$
|
238,199
|
|
See Note 11 regarding the conversion of convertible
promissory notes subsequent to December 31, 2017.
NOTE 6: LICENSE AGREEMENTS
During 2015, the Company entered into an Option Agreement (the “Alba
Option”) with Alba Therapeutics Corporation (“Alba”). The Alba Option provided the Company with a period of time
to evaluate Alba’s intellectual property and enter into a license agreement with Alba. In January 2016, the Company paid
the remaining $25,000 option fee and exercised its rights under the Alba Option and in February 2016 entered into another agreement
with Alba (the “Alba License”) to obtain the rights to certain intellectual property relating to Larazotide acetate
and related compounds. The Company’s initial area of focus for these assets relates to the treatment of Celiac Disease. These
assets are now referred to as INN-202 by the Company.
Upon execution of the Alba License, the Company paid Alba a non-refundable
license fee of $500,000. In addition, the Company is required to make milestone payments to Alba upon the achievement of certain
clinical and regulatory milestones totaling up to $1,500,000 and payments upon regulatory approval and commercial sales of a licensed
product totaling up to $150,000,000, which is based on sales ranging from $100,000,000 to $1,500,000,000. The Company recorded
$0 and $525,000 in research and development expenses from the Alba License in 2017 and 2016, respectively.
Upon the Company paying Alba $2,500,000 for the first commercial
sale of a licensed product, the Alba License becomes perpetual and irrevocable. Upon the achievement of net sales in a year exceeding
$1,500,000,000, the Alba License also becomes milestone fee free. The Alba License provides Alba with certain termination rights;
including failure of the Company to use Commercially Reasonable Efforts to develop the licensed products.
During 2013, the Company entered into an exclusive license agreement
with Seachaid Pharmaceuticals, Inc. (the “Seachaid Agreement”) to further develop and commercialize the licensed product,
the compound known as APAZA. This product is now referred to as INN-108 by the Company. The agreement shall continue in effect
on a country-by-country basis, unless terminated sooner in accordance with the termination provisions of the agreement, until the
expiration of the royalty term for such product and such country. The royalty term for each such product and such country shall
continue until the earlier of the expiration of certain patent rights (as defined in the agreement) or the date that the sales
for one or more generic equivalents makes up a certain percentage of sales in an applicable country during a calendar year.
During 2015, the Company entered into amendments to the Seachaid
Agreement to modify the payment terms and paid $0 and $100,000 in 2017 and 2016, respectively.
INNOVATE BIOPHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6: LICENSE AGREEMENTS – (continued)
The Company was required to make an initial, non-refundable payment
under the Seachaid Agreement in the amount of $200,000. The agreement also calls for milestone payments totaling up to $6,000,000
to be paid when certain clinical and regulatory milestones are met. There are also commercialization milestone payments ranging
from $1,000,000 to $2,500,000 depending on net sales of the products in a single calendar year, followed by royalty payments in
the single digits based on net product sales.
During 2014, the Company entered into an Asset Purchase Agreement
with Repligen Corporation (“Repligen”) to acquire Repligen’s RG-1068 program for the development of Secretin
for the Pancreatic Imaging Market and Magnetic Resonance Cholangiopancreatography. This program is now referred to as INN-329 by
the Company. As consideration for the Asset Purchase Agreement, the Company agreed to make a non-refundable cash payment on the date of the agreement and future royalty payments consisting of a low teens percentage of annual net sales, with the royalty
payment percentage increasing as annual net sales increase. The royalty payments are made on a product-by-product and country-by-country
basis and the obligation to make the payments expires with respect to each country upon the later of (i) the expiration of regulatory
exclusivity for the product in that country or (ii) ten years after the first commercial sale in that country. The royalty amount
is subject to reduction in certain situations, such as the entry of generic competition in the market.
NOTE 7: STOCKHOLDERS’ DEFICIT
Pursuant to the Articles of Incorporation and Bylaws approved in
January 2012, as amended in February 2014, September 2015, and August 2016, the Company is authorized to issue 250,000,000 shares
of common stock at a par value of $0.001. The Company recorded a reclassification in 2016 to increase the amount recorded for common
stock to equal its par value as of December 31, 2016. This reclassification had no effect on the results of operations or the total
amount of stockholders’ deficit. Share amounts for all periods presented are shown at post-split amounts.
NOTE 8: SHARE-BASED COMPENSATION
During 2015, the Company’s board of directors adopted the
2015 Stock Incentive Plan (the “Stock Plan”), which was approved by the Company’s stockholders. During 2017,
the number of shares of common stock reserved for issuance to officers, directors, employees and consultants of the Company in
accordance with the terms of the Stock Plan was increased from 15,000,000 to 20,000,000.
During 2015, the Company committed to grant 5,400,000 stock options
to an executive at an exercise price that was to be based on a future equity financing event. During 2016, the option agreement
was modified such that an exercise price for these options was determined by the board of directors after obtaining an external
valuation of the Company’s common stock and a measurement date was established in July 2016. The options were granted with
exercise prices of $0.11 per share, which was less than the deemed fair value of $0.30 per share in July 2016, resulting in an
intrinsic value of $0.19 per share. The weighted average fair value at the date of grant for these options was $0.23.
As of December 31, 2017, there were approximately 1,841,000 shares
available for future stock option grants under the Stock Plan. The terms of the agreements are determined by the Company’s
board of directors. The Company’s awards vest based on the terms in the agreements with some awards vesting immediately and
others vesting typically over a period of three to four years with a term of ten years.
The Company utilizes the Black-Scholes option pricing model to value
awards under the Stock Plan. Key valuation assumptions include:
|
•
|
Expected dividend yield.
The expected dividend is assumed to be zero as the Company has never paid dividends
and has no current plans to pay any dividends on the Company’s common stock.
|
|
•
|
Expected stock-price volatility.
As the Company’s common stock is not publicly traded, the expected
volatility is derived from the average historical volatilities of publicly traded companies within the Company’s industry
that the Company considers to be comparable to the Company’s business over a period approximately equal to the expected term.
|
INNOVATE BIOPHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 8: SHARE-BASED COMPENSATION – (continued)
|
•
|
Risk-free interest rate.
The risk-free interest rate is based on the U.S. Treasury yield in effect at the
time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the expected term.
|
|
•
|
Expected term.
The expected term represents the period that the stock-based awards are expected to be outstanding.
The Company’s historical share option exercise experience does not provide a reasonable basis upon which to estimate an expected
term for executive employees because of a lack of sufficient data. Therefore, the Company estimates the expected term by using
the simplified method provided by the Securities and Exchange Commission. The simplified method calculates the expected term as
the average of the time-to-vesting and the contractual life of the options. The expected term for non-executive employees is the
contractual life of the option.
|
The material factors incorporated in the Black-Scholes model in
estimating the fair value of the options granted for the periods presented were as follows:
|
|
Years Ended December 31
|
|
|
|
2017
|
|
|
2016
|
|
Expected dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
Expected stock-price volatility
|
|
|
73% – 76%
|
|
|
|
69%-71
%
|
|
Risk-free interest rate
|
|
|
1.33% – 2.43%
|
|
|
|
1.0%-1.2
%
|
|
Term of options
|
|
|
5.0 – 10.0
|
|
|
|
5.0-5.8
|
|
The following table summarizes stock option activity under the Stock
Plan for the years ended December 31, 2017 and 2016:
|
|
Number of
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Weighted-
Average
Remaining
Contractual
Life
(in years)
|
|
Outstanding at December 31, 2015
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
Options granted
|
|
|
5,400,000
|
|
|
|
0.11
|
|
|
|
—
|
|
|
|
—
|
|
Options forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Options exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at December 31, 2016
|
|
|
5,400,000
|
|
|
|
0.11
|
|
|
|
3,618,000
|
|
|
|
8.84
|
|
Options granted
|
|
|
12,758,575
|
|
|
|
0.79
|
|
|
|
—
|
|
|
|
—
|
|
Options forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Options exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at December 31, 2017
|
|
|
18,158,575
|
|
|
|
0.59
|
|
|
|
6,617,433
|
|
|
|
9.04
|
|
Exercisable at December 31, 2017
|
|
|
13,853,868
|
|
|
|
0.55
|
|
|
|
5,668,164
|
|
|
|
8.98
|
|
Vested and expected to vest at December 31, 2017
|
|
|
17,853,507
|
|
|
$
|
0.59
|
|
|
$
|
6,563,294
|
|
|
|
9.03
|
|
The weighted average grant date fair value of options granted was
$0.60 and $0.23 during the years ended December 31, 2017 and 2016, respectively.
INNOVATE BIOPHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 8: SHARE-BASED COMPENSATION – (continued)
The Company recognized non-cash share-based compensation expense
for services of approximately $3,931,000 and $1,049,000 within general and administrative expense and approximately $2,088,000
and $0 within research and development expense in the accompanying statements of operations for the years ended December 31, 2017
and 2016, respectively. As of December 31, 2017, there was approximately $2,608,000 of total unrecognized compensation cost related
to unvested stock-based compensation arrangements. This cost is expected to be recognized over a weighted average period of 3.0
years.
The Stock Plan provides for accelerated vesting under certain
change-of-control transactions.
NOTE 9: INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company’s deferred tax assets and deferred tax liabilities are as follows as of December 31:
|
|
2017
|
|
|
2016
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Tax loss and contribution carryforwards
|
|
$
|
865,600
|
|
|
$
|
536,000
|
|
Deferred compensation
|
|
|
—
|
|
|
|
605,500
|
|
Stock compensation
|
|
|
1,396,300
|
|
|
|
—
|
|
Intangible assets
|
|
|
1,588,700
|
|
|
|
1,165,900
|
|
Other
|
|
|
1,400
|
|
|
|
300
|
|
Valuation allowance
|
|
|
(3,852,000
|
)
|
|
|
(2,307,700
|
)
|
Total deferred tax assets, noncurrent
|
|
$
|
—
|
|
|
$
|
—
|
|
The Company has established a valuation allowance against its deferred
tax assets due to the uncertainty surrounding the realization of such assets. During 2017 and 2016, the valuation allowance increased
by $1,544,300 and $1,561,200, respectively.
The reasons for the difference between actual income tax expense
(benefit) for the years ended December 31, 2017 and 2016, and the amount computed by applying the statutory federal income tax
rate to losses before income tax (benefit) are as follows:
|
|
2017
|
|
|
2016
|
|
|
Amount
|
|
|
% of Pretax
Earnings
|
|
Amount
|
|
|
% of Pretax
Earnings
|
Income tax benefit at statutory rate
|
|
$
|
(3,946,000
|
)
|
|
|
(34.0
|
)%
|
|
$
|
(1,910,800
|
)
|
|
|
(34.0
|
)%
|
State income taxes, net of federal tax benefit
|
|
|
(157,700
|
)
|
|
|
(1.4
|
)%
|
|
|
(111,300
|
)
|
|
|
(2.0
|
)%
|
Non-deductible expenses
|
|
|
342,400
|
|
|
|
3.0
|
%
|
|
|
454,200
|
|
|
|
8.1
|
%
|
Change in federal tax rate
|
|
|
2,234,800
|
|
|
|
19.3
|
%
|
|
|
—
|
|
|
|
—
|
|
Change in state tax rate
|
|
|
83,200
|
|
|
|
0.7
|
%
|
|
|
13,600
|
|
|
|
0.2
|
%
|
Other
|
|
|
(101,000
|
)
|
|
|
(0.9
|
)%
|
|
|
(6,900
|
)
|
|
|
(0.1
|
)%
|
Change in valuation allowance
|
|
|
1,544,300
|
|
|
|
13.3
|
%
|
|
|
1,561,200
|
|
|
|
27.8
|
%
|
Income tax benefit
|
|
$
|
—
|
|
|
|
0.0
|
%
|
|
$
|
—
|
|
|
|
0.0
|
%
|
On December 22, 2017, the Tax Cuts and Jobs Act was enacted into
law, which reduced the federal corporation income tax rate to 21% for tax years beginning after December 31, 2017. As a result
of the new enacted tax rate, the Company adjusted its deferred tax assets as of December 31, 2017 by applying the new 21% rate,
which resulted in a decrease to the deferred tax assets and a corresponding decrease to the valuation allowance of approximately
$2.3 million.
As of December 31, 2017, and 2016, the Company had no unrecognized
tax benefits.
INNOVATE BIOPHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 9: INCOME TAXES – (continued)
The Company is subject to United States federal income tax and income
tax in multiple state jurisdictions. The Company has analyzed its filing positions in all federal and state jurisdictions where
it is required to file income tax returns, as well as open tax years in these jurisdictions. The Company is subject to United States
federal, state, and local tax examinations by tax authorities for all years of operation. No income tax returns are under examination
by taxing authorities at this time.
The Company’s policy for recording interest and penalties
is to record them as a component of interest expense and general and administrative expenses. During December 31, 2017 and 2016,
the Company did not record any expense to the income statement or balance sheet for interest and penalties.
As of December 31, 2017, the Company has net operating loss carryforwards
for federal and state income tax purposes of approximately $3,823,300 and $3,063,400 respectively, which begin to expire in 2034
and 2029. As of December 31, 2017, the Company has contribution carryforwards of approximately $10,500, which begin to expire in
2020.
NOTE 10: COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company has employment agreements with certain executives of
the Company (the “Executive Agreements”). Under the terms of the Executive Agreements, the Company has agreed to pay
the executives certain payments upon the achievement of financial milestone events. These milestone events were based on total
debt or equity funding received by the Company. During the year ended December 31, 2017, the initial funding milestone was reached
and the executives in the aggregate were paid $145,000 in accordance with the terms of the Executive Agreements. The executives
are eligible to receive up to $1,595,000 in additional milestone payments upon the achievement of a financing event with gross
proceeds of at least $45,000,000 by March 15, 2018. As of December 31, 2017, and 2016, there was approximately $1,065,000 and
$1,683,000 of deferred compensation payments included in accrued expenses, respectively (see Note 4).
INNOVATE BIOPHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 10: COMMITMENTS AND CONTINGENCIES – (continued)
Office Lease
In October 2017, the Company entered into a new three-year lease
for office space that expires on September 30, 2020. Base annual rent is $60,000, or $5,000 per month. The first two months of
rent were paid in advance upon lease signing and the next ten months of rent were paid in advance on November 30, 2017. Beginning
with month thirteen, monthly payments of $5,000 will be paid in advance of the first day of each month of the remaining term. A
security deposit of $5,000 was paid in October 2017. The lease contains a two-year renewal option.
Legal
The Company is not currently involved in any legal matters arising
in the normal course of business. From time to time, the Company could become involved in disputes and various litigation matters
that arise in the normal course of business. These may include disputes and lawsuits related to intellectual property, licensing,
contract law and employee relations matters. Periodically, the Company reviews the status of significant matters, if any exist,
and assesses its potential financial exposure. If the potential loss from any claim or legal claim is considered probable and the
amount can be estimated, the Company accrues a liability for the estimated loss. Legal proceedings are subject to uncertainties,
and the outcomes are difficult to predict; therefore, accruals are based on the best information available at the time. As additional
information becomes available, the Company reassesses the potential liability related to pending claims and litigation.
NOTE 11: SUBSEQUENT EVENTS
On January 29, 2018, the Company and Monster Digital,
Inc. (“Monster”) completed a merger in accordance with the terms of the Agreement and Plan of Merger
and Reorganization, dated July 3, 2017, as amended, (the “Merger Agreement”), by and among Monster, Monster
Merger Sub, Inc. (“Merger Sub”) and the Company, which changed its name in connection with the transaction to IB
Pharmaceuticals Inc. (“IB Pharmaceuticals”). Pursuant to the Merger Agreement, Merger Sub merged with and into IB
Pharmaceuticals, with IB Pharmaceuticals surviving as the wholly owned subsidiary of Monster (the “Merger”).
Immediately following the Merger, Monster changed its name to Innovate Biopharmaceuticals, Inc. (“Innovate”). The
Merger was accounted for as a reverse recapitalization.
In connection with the Merger, the Company assumed approximately
$1.0 million in liabilities from Monster for tail insurance coverage for its directors and officers and certain transaction costs.
Immediately prior to the closing of the Merger,
accredited investors purchased shares of common stock of the Company in a private placement for gross proceeds of
approximately $18.1 million, or $16.5 million, net of approximately $1.5 million in placement agent fees and $80,000
in non-accountable expense costs (the “Equity Issuance”). Additionally, the Company 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 after giving effect to the exchange ratio. The Company also issued 349,555 five-year warrants
with an exercise price of $2.54 and 279,862 five-year warrants with an exercise price of $3.18 to the respective placement
agents and their affiliates.
The Company incurred approximately $1.7 million in
advisory and legal expenses in connection with the Merger, of which approximately $1.2 million was incurred and recorded
subsequent to December 31, 2017.
In January 2018, preceding the Equity Issuance, the Company issued
additional 2016 Notes in the aggregate amount of $270,000 to third-party investors and repaid certain third-party investors $200,000
in outstanding principal and approximately $26,000 in accrued interest Note 5.
Concurrently with the Equity Issuance, convertible promissory notes
issued by the Company in the aggregate principal amount of approximately $8.6 million plus accrued interest of $582,000 were converted
into shares of Company common stock at a price per share of $0.72 (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 will be recorded as a charge to interest expense
and a credit to additional paid-in capital.
INNOVATE BIOPHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 11: SUBSEQUENT EVENTS – (continued)
On January 29, 2018, the Company entered into a Note Purchase Agreement
and Senior Note Payable (“Note”) with a lender. The principal amount of the Note is $4.8 million (“Principal”).
The Note was issued at a discount of $1.8 million and net of $20,000 for financing costs, for total proceeds of $2.98 million.
The Note matures on September 30, 2018 (“Maturity Date”); however, the Maturity Date may be extended at the
option of the lender under certain circumstances as outlined in the Note. Interest on the Note accrues starting on the Closing
Date at a rate of 12.5% per annum and payments of interest only are due beginning on March 30, 2018 and compound quarterly.
Upon the Maturity Date of the Note, the Company is required to pay the lender an amount representing 105% of all outstanding Principal,
accrued and unpaid interest, and any unpaid late charges, if applicable. The Note contains redemption features and certain
non-financial covenants and penalties to the Company in the case of certain events of default, as defined in the Note.
As of December 31, 2017 and 2016, there was $75,000 included in
due from related party for a note receivable owed to the Company by an Executive. This note was repaid in full in February 2018.
In February 2018, approximately $1.1 million of deferred compensation
was paid to Executives due to their achievement of certain financial milestones pursuant to their employment agreements (see Notes
4 and 10).
In March 2018, the Company entered into
amended and restated executive employment agreements with each of the Executives.
Subsequent events have been evaluated through
March 13, 2018, the date at which the financial statements were available to be issued.
|
(b)
|
Pro Forma Financial Information.
|
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2017
On January 29, 2018, Monster Digital, Inc. (“Monster”)
and privately held Innovate Biopharmaceuticals Inc. (“Private Innovate”) completed a reverse recapitalization in accordance
with the terms of the Agreement and Plan of Merger and Reorganization, dated July 3, 2017, as amended (the “Merger Agreement”),
by and among Monster, Monster Merger Sub, Inc. (“Merger Sub”) and Private Innovate, which changed its name in connection
with the transaction to IB Pharmaceuticals Inc. (“IB Pharmaceuticals”). Pursuant to the Merger Agreement, Merger
Sub merged with and into IB Pharmaceuticals with IB Pharmaceuticals surviving as the wholly owned subsidiary of Monster (the
“Merger”). Prior to the completion of the Merger, Monster transferred all of its businesses and assets, including
all shares of SDJ Technologies, Inc., and those liabilities of the Company not assumed by Innovate further to the Merger, to MD
Holding Co. Inc., a wholly owned subsidiary (the “Spin-Co”). The shares of the Spin-Co were subsequently spun off pro
rata to holders of Monster’s common stock immediately prior to the Merger (the “Spin-Off”).
Immediately following the Merger, Monster changed its name to Innovate
Biopharmaceuticals, Inc. (“Innovate”). In connection with the closing of the Merger, Innovate’s common stock
began trading on the Nasdaq Capital Market under the ticker symbol “INNT” on February 1, 2018. Prior to the Merger,
Monster was incorporated in Delaware under the name “Monster Digital, Inc.”
The following unaudited pro forma condensed combined financial information
presents the pro forma financial position and results of operations of (1) Monster based on the historical consolidated financial
statements of Monster, after giving effect to the Spin-Off and (2) Private Innovate, based on the historical consolidated financial
statements of Monster and Private Innovate, after giving effect to the Spin-Off and the Merger. For clarity, the pro forma financial
statements with respect to the Spin-Off and the pro forma financial statements with respect to the Merger are presented separately
below.
Each unaudited pro forma condensed combined balance sheet as of
December 31, 2017 set forth below gives effect to the Spin-Off or the Merger, as applicable, as if each transaction took place
on December 31, 2017. Each unaudited pro forma combined statement of operations for the year ended December 31, 2017 gives effect
to the Spin-Off and the Merger, as applicable, as if they took place on January 1, 2017.
The unaudited pro forma condensed combined
financial information, including the notes thereto, should be read in conjunction with the separate historical financial
statements of Monster and Private Innovate and the section of this Current Report on Form 8-K entitled
“
Management’s Discussion and Analysis of Financial Condition and Results of Operations
.”
Monster’s historical consolidated financial statements as of and for the years ended December 31, 2017 and 2016 are
included in the Innovate Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on March 13,
2018. Innovate’s historical financial statements for the years ended December 31, 2017 and 2016 are included elsewhere
in this Current Report on Form 8-K.
Unaudited Pro Forma Financial Information for Spin-Co Adjustment
The following selected unaudited pro forma financial information
presents the pro forma financial position and results of operations of Monster based on the historical consolidated financial statements
of Monster, after giving effect to the Spin-Off.
Because the unaudited pro forma condensed combined balance sheet
reflects the consolidated financial information of Monster as of December 31, 2017, it does not reflect any changes to Monster’s
assets or liabilities which have occurred since December 31, 2017 or which may occur following the date of this Current Report
on Form 8-K.
Unaudited Pro Forma Condensed Combined Balance
Sheet
December 31, 2017
(in thousands)
|
|
Historical
Monster
|
|
|
Spin-Co
Adjustments
(Note 2)
|
|
|
Monster
Merger
Sub
|
|
|
Pro Forma
Adjustments
|
|
|
Note 3
|
|
Adjusted
Historical
Monster
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
426
|
|
|
$
|
(426
|
)
|
|
|
—
|
|
|
|
—
|
|
|
(a)
|
|
$
|
—
|
|
Accounts receivable
|
|
|
90
|
|
|
|
(90
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Inventory
|
|
|
101
|
|
|
|
(101
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Prepaids & other
|
|
|
46
|
|
|
|
(46
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Total current assets
|
|
|
663
|
|
|
|
(663
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Deposits
|
|
|
14
|
|
|
|
(14
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
—
|
|
Total
|
|
$
|
677
|
|
|
$
|
(677
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
441
|
|
|
|
(100
|
)
|
|
|
341
|
|
|
|
—
|
|
|
|
|
|
341
|
|
Accrued expenses
|
|
|
692
|
|
|
|
(33
|
)
|
|
|
659
|
|
|
|
—
|
|
|
|
|
|
659
|
|
Customer deposits
|
|
|
125
|
|
|
|
(125
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Due to related parties
|
|
|
33
|
|
|
|
(33
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Notes payable
|
|
|
1,359
|
|
|
|
(38
|
)
|
|
|
1,321
|
|
|
|
(1,321
|
)
|
|
(b)
|
|
|
—
|
|
Total current liabilities
|
|
|
2,650
|
|
|
|
(329
|
)
|
|
|
2,321
|
|
|
|
(1,321
|
)
|
|
|
|
|
1,000
|
|
Stockholders’ (deficit) equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
1
|
|
|
|
(1)
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Additional paid-in capital
|
|
|
38,039
|
|
|
|
1
|
|
|
|
38,040
|
|
|
|
396
|
|
|
(a)
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,321
|
|
|
(b)
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(39,995
|
)
|
|
(c)
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
238
|
|
|
(d)
|
|
|
—
|
|
Accumulated deficit
|
|
|
(40,013
|
)
|
|
|
(348
|
)
|
|
|
(40,361
|
)
|
|
|
(396
|
)
|
|
(a)
|
|
|
(1,000
|
)
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
39,995
|
|
|
(c)
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(238
|
)
|
|
(d)
|
|
|
—
|
|
Total stockholders’ (deficit) equity
|
|
|
(1,973
|
)
|
|
|
(348
|
)
|
|
|
(2,321
|
)
|
|
|
1,321
|
|
|
|
|
|
(1,000
|
)
|
Total
|
|
$
|
677
|
|
|
$
|
(677
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
$
|
—
|
|
The accompanying notes are an integral part
of this unaudited condensed combined
pro forma financial information.
Unaudited Pro Forma Condensed Combined Statement
of Operations
For the Year Ended December 31, 2017
(in thousands, except per share data)
|
|
Historical
Monster
|
|
|
Spin-Co
Adjustments
(Note 2)
|
|
|
Monster
Merger
Sub,
Inc.
|
|
|
Pro Forma
Adjustments
|
|
|
Note 3
|
|
Adjusted
Historical
Monster
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,883
|
|
|
$
|
(1,883
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
$
|
—
|
|
Cost of sales
|
|
|
(1,947
|
)
|
|
|
1,947
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Gross profit
|
|
|
(64
|
)
|
|
|
64
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
190
|
|
|
|
(190
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Sales and marketing
|
|
|
1,428
|
|
|
|
(1,428
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
General and administrative
|
|
|
4,984
|
|
|
|
(3,226
|
)
|
|
|
1,758
|
|
|
|
396
|
|
|
(a)
|
|
|
2,154
|
|
Trademark impairment
|
|
|
2,286
|
|
|
|
(2,286
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Total operating expenses
|
|
|
8,888
|
|
|
|
(7,130
|
)
|
|
|
1,758
|
|
|
|
396
|
|
|
|
|
|
2,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(8,952
|
)
|
|
|
7,194
|
|
|
|
(1,758
|
)
|
|
|
(396
|
)
|
|
|
|
|
(2,154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
93
|
|
|
|
(93
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Gain on extinguishment of debt
|
|
|
(200
|
)
|
|
|
200
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Gain on settlement of customer refund
|
|
|
(920
|
)
|
|
|
920
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Income tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Total other (income) expense, net
|
|
|
(1,027
|
)
|
|
|
1,027
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Net income (loss)
|
|
$
|
(7,925
|
)
|
|
$
|
6,167
|
|
|
|
(1,758
|
)
|
|
|
(396
|
)
|
|
|
|
$
|
(2,154
|
)
|
Net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(8.41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of this unaudited condensed combined
pro forma financial information.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL INFORMATION
The unaudited pro forma condensed combined financial information
was prepared in accordance with U.S. GAAP and pursuant to the rules and regulations of SEC Regulation S-X. The historical
consolidated financial statements of Monster have been adjusted in the unaudited pro forma condensed combined financial information
to give effect to pro forma events that are (i) directly attributable to the transaction, (ii) factually supportable, and (iii)
with respect to the unaudited pro forma condensed combined statements of operations, expected to have a continuing impact on the
results of operations of Innovate. Such adjustments do not contemplate the consumption of cash resources to fund continuing operating
costs of Monster for the period subsequent to December 31, 2017.
The unaudited pro forma condensed combined financial information
is based on the audited financial statements of Monster as of December 31, 2017. As such, the financial information set forth below
is not a prediction or estimate of the amounts that would be reflected in Monster’s balance sheet as of the day of closing
of the transactions. Other than as disclosed in the footnotes thereto, the unaudited pro forma condensed combined financial information
does not reflect any additional liabilities, off-balance sheet commitments or other obligations that may become payable after the
date of such financial information.
The unaudited pro forma condensed combined financial information
has been prepared for illustrative purposes only and is not necessarily indicative of the financial position or results of operations
in future periods or the results that actually would have been realized had Monster completed the Spin-Off as of or during the
specified periods.
Spin-Co is the action sports camera business operated by Monster
Digital, Inc. For the December 31, 2017 pro forma balance sheet presentation, other than certain liabilities of approximately $1.0
million that were assumed by Innovate, all assets and liabilities of Spin-Co are eliminated as Spin-Co adjustments with net assets
distributed to the stockholders of Monster Digital, Inc. For the December 31, 2017 pro forma statement of operations, the revenue
and cost of sales related to the camera business and the expenses associated with the generation of those revenues are eliminated
as Spin-Co adjustments.
These adjustments reflect the Spin-Out that occurred on the effective
date of the Merger, whereby all of the business and assets and certain of the liabilities of Monster not assumed by Innovate further
to the Merger were acquired by Spin-Co. The remaining general and administrative expenses shown in the Adjusted Historical Monster
column consist of public company operating expenses including legal fees, insurance, and certain executive salaries associated
with operating a public company.
The pro forma adjustments are based on preliminary estimates
and assumptions that are subject to change. The following adjustments have been reflected in the unaudited pro forma condensed
combined financial information:
|
a)
|
Represents exercise of warrants into shares of Monster common stock issued in January 2018. The proceeds of the exercise funded
the operations of Monster.
|
|
b)
|
Represents the full conversion of convertible debt at the consummation of the Merger.
|
|
c)
|
Represents the elimination of Monster’s historical accumulated deficit.
|
|
d)
|
Represents unamortized, non-cash, stock-based compensation related to the issuance of restricted common stock and options of
Monster.
|
Unaudited Pro Forma Financial Information for Merger
The following unaudited pro forma condensed combined financial information
presents the pro forma financial position and results of operations of Innovate based on the historical consolidated financial
statements of Monster and Private Innovate, after giving effect to the Spin-Off and the Merger.
The unaudited pro forma condensed combined balance sheet and unaudited
condensed combined statement of operations gives effect to the Equity Issuance and the Conversion at a $60.0 million pre-Merger
valuation amount (the “Valuation”).
Unaudited Pro Forma Condensed Combined Balance
Sheet
December 31, 2017
(in thousands)
|
|
Historical
Private
Innovate
|
|
|
Pro Forma
Adjustments
|
|
|
|
Adjusted
Historical
Monster
|
|
|
Adjusted
Proforma
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
356
|
|
|
$
|
16,532
|
|
(a)
|
|
$
|
-
|
|
|
$
|
19,642
|
|
|
|
|
|
|
|
|
2,980
|
|
(a)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
(226
|
)
|
(b)
|
|
|
-
|
|
|
|
-
|
|
Deferred offering costs
|
|
|
160
|
|
|
|
(160
|
)
|
(a)
|
|
|
-
|
|
|
|
-
|
|
Prepaid expenses and other
|
|
|
237
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
237
|
|
Total current assets
|
|
|
753
|
|
|
|
19,126
|
|
|
|
|
-
|
|
|
|
19,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
41
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
41
|
|
Other assets
|
|
|
6
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
6
|
|
Total assets
|
|
$
|
800
|
|
|
$
|
19,126
|
|
|
|
$
|
-
|
|
|
$
|
19,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,659
|
|
|
$
|
(270
|
)
|
(b)
|
|
$
|
341
|
(f)
|
|
$
|
2,730
|
|
Accrued expenses including interest
|
|
|
1,741
|
|
|
|
(560
|
)
|
(b)
|
|
|
659
|
(f)
|
|
|
3,410
|
|
|
|
|
-
|
|
|
|
1,570
|
|
(d)
|
|
|
-
|
|
|
|
-
|
|
Debt
|
|
|
-
|
|
|
|
4,800
|
|
(a)
|
|
|
-
|
|
|
|
4,800
|
|
Debt discount
|
|
|
-
|
|
|
|
(1,820
|
)
|
(a)
|
|
|
-
|
|
|
|
(1,820
|
)
|
Convertible promissory notes, net
|
|
|
8,344
|
|
|
|
(8,344
|
)
|
(b)
|
|
|
-
|
|
|
|
-
|
|
Convertible promissory notes, related party, net
|
|
|
230
|
|
|
|
(230
|
)
|
(b)
|
|
|
-
|
|
|
|
-
|
|
Total current liabilities
|
|
$
|
12,974
|
|
|
$
|
(4,854
|
)
|
|
|
$
|
1,000
|
|
|
$
|
9,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
12,974
|
|
|
$
|
(4,854
|
)
|
|
|
$
|
1,000
|
|
|
$
|
9,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
$
|
32
|
|
|
|
(29
|
)
|
(e)
|
|
|
-
|
|
|
$
|
3
|
|
Additional paid-in-capital
|
|
|
7,148
|
|
|
|
16,532
|
|
(a)
|
|
|
-
|
|
|
|
34,856
|
|
|
|
|
-
|
|
|
|
(160
|
)
|
(a)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
9,230
|
|
(b)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
3,077
|
|
(c)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
29
|
|
(e)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
(1,000
|
)
|
(f)
|
|
|
-
|
|
|
|
-
|
|
Accumulated deficit
|
|
|
(19,354
|
)
|
|
|
(52
|
)
|
(b)
|
|
|
-
|
|
|
|
(24,053
|
)
|
|
|
|
-
|
|
|
|
(3,077
|
)
|
(c)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
(1,570
|
)
|
(d)
|
|
|
-
|
|
|
|
-
|
|
Total stockholders’ (deficit) equity
|
|
$
|
(12,174
|
)
|
|
$
|
23,980
|
|
|
|
$
|
(1,000
|
)
|
|
$
|
10,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ (deficit) equity
|
|
$
|
800
|
|
|
$
|
19,126
|
|
|
|
$
|
-
|
|
|
$
|
19,926
|
|
|
(1)
|
See the Spin-Co adjustments in the
“Unaudited
Pro Forma Financial Information for Spin-Co Adjustment”
for the Adjusted Historical Monster adjustments.
|
The accompanying notes are an integral part
of this unaudited condensed
combined pro forma financial information.
Unaudited Pro Forma Condensed Combined Statement
of Operations
For the Year Ended December 31, 2017
(in thousands, except per share data)
|
|
Historical
Private
Innovate
|
|
|
Adjusted
Historical
Monster
(1)
|
|
|
Pro Forma
Adjustments
|
|
|
|
|
Pro Forma
Combined
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
Cost of sales
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Gross profit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
4,008
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
4,008
|
|
Sales and marketing
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
General and administrative
|
|
|
7,162
|
|
|
|
2,154
|
|
|
|
(557
|
)
|
|
(g)
|
|
|
8,759
|
|
Total operating expenses
|
|
|
11,170
|
|
|
|
2,154
|
|
|
|
(557
|
)
|
|
|
|
|
12,767
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
436
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
436
|
|
Gain on settlement of debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Income tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Total other expense, net
|
|
|
436
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
436
|
|
Net income (loss)
|
|
$
|
(11,606
|
)
|
|
$
|
(2,154
|
)
|
|
$
|
557
|
|
|
|
|
$
|
(13,203
|
)
|
Net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.98
|
)
|
|
$
|
(1.15
|
)
|
|
$
|
0.05
|
|
|
|
|
$
|
(0.51
|
)
|
Weighted-average common shares outstanding (h):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
11,888
|
|
|
|
1,865
|
|
|
|
11,939
|
|
|
|
|
|
25,692
|
|
|
(1)
|
See the Spin-Co adjustments in the
“Unaudited
Pro Forma Financial Information for Spin-Co Adjustment”
for the Adjusted Historical Monster adjustments.
|
The accompanying notes are an integral part
of this unaudited condensed
combined pro forma financial information.
Notes to the Unaudited Pro Forma Condensed
Combined Financial Information
The unaudited pro forma condensed combined financial information
was prepared in accordance with U.S. GAAP and pursuant to the rules and regulations of SEC Regulation S-X. The historical financial
statements of Private Innovate and the historical consolidated financial statements of Monster have been adjusted in the unaudited
pro forma condensed combined financial information to give effect to pro forma events that are (i) directly attributable to the
transaction, (ii) factually supportable, and (iii) with respect to the unaudited pro forma condensed combined statements of operations,
expected to have a continuing impact on the results of operations of Innovate.
The Merger has been accounted for as a capital transaction rather
than as a business combination as the business of Monster was spun off prior to the Merger.
In
accordance with U.S. GAAP, the Merger has been accounted for as a reverse recapitalization, equivalent to the issuance of common
shares by Innovate for the net monetary assets of Monster accompanied by a recapitalization. The accounting is similar to that
resulting from a reverse acquisition, except that no goodwill or other intangible assets are recorded. Monster was the legal acquirer,
but for accounting purposes, Innovate was treated as the accounting acquirer. Innovate recorded Monster’s liabilities assumed
upon the consummation of the Merger at fair value. Effective with the
consummation of the Merger, the historical financial
statements of Innovate became the historical financial statements of the combined company.
The unaudited pro forma condensed combined financial information
assumes that the Merger occurred on December 31, 2017 and does not provide a reasonable estimate of the assets or liabilities of
Innovate on or following the date of the Merger. In particular, the unaudited pro forma condensed combined financial information
does not reflect the reduction in either Monster’s or Innovate’s cash resulting from the operations of such entities since
December 31, 2017 or since the date of this Current Report on Form 8-K. Other than as disclosed in the footnotes thereto, the unaudited
pro forma condensed combined financial information does not reflect any additional liabilities, off-balance sheet commitments or
other obligations that may become payable after the date of such financial information.
The unaudited pro forma condensed combined financial information
has been prepared for illustrative purposes only and is not necessarily indicative of the financial position or results of operations
in future periods or the results that actually would have been realized had Monster and Innovate been a consolidated company during
the specified periods.
The pro forma adjustments are based on
preliminary estimates and assumptions that are subject to change. The following adjustments have been reflected in the unaudited
pro forma condensed combined financial information (in thousands):
|
(a)
|
Represents the net proceeds of $16,532 from the sale of $18,112 of Innovate common stock (the Equity Issuance), net of $1,580
of offering costs, plus the $2,980 in proceeds from a $4,800 debt financing, net of a $1,800 debt discount and $20 in debt legal
costs. Deferred offering costs of $160 reverse to additional paid-in-capital upon closing of the Equity Issuance.
|
|
(b)
|
Represents convertible promissory notes of $8,374 as of December 31, 2017, plus amortized debt discount of $3, and
additional proceeds from promissory notes received through January 29, 2018 of $270, in addition to related
accrued interest
of $534 as of December 31, 2017 plus additional accrued interest of $49 through
January 29,
2018 that converted
concurrent with the
consummation of the Merger at
a discount to equity securities issued
by Innovate pursuant to
the Equity Issuance. These adjustments also include $200 in
convertible promissory notes and $26 in accrued interest
which matured on January
22, 2018 for which the holders chose to redeem for cash instead of converting. Promissory notes in the amount of $270
entered into subsequent to December 31, 2017 were used for
general operating purposes.
|
|
(c)
|
The conversion described in (b) creates a beneficial conversion feature, which is recorded as additional interest expense and
additional paid-in capital. This pro forma adjustment is not reflected in the unaudited pro forma condensed combined statements
of operations as this amount is not expected to have a continuing effect on the operating results of the Company.
|
|
(d)
|
Represents accrued investment banker and legal fees directly related to the Merger. This pro forma adjustment is not reflected
in the unaudited pro forma condensed combined statements of operations as this amount is not expected to have a continuing effect
on the operating results of the Company.
|
|
(e)
|
Adjusts outstanding common shares to their par value.
|
|
(f)
|
Represents liabilities assumed by Innovate from Monster.
|
|
(g)
|
Represents transaction costs incurred during the year ended December 31, 2017. This pro forma adjustment is not reflected in
the unaudited pro forma combined statements of operations as this amount is not expected to have a continuing effect on the operating
results of the Company.
|
|
(h)
|
The basic and diluted weighted-average common shares outstanding on a pro forma combined basis were calculated based on
the shares issued for the Conversion and Equity Issuance of Innovate and the common share exchange using an exchange ratio of
0.37686605 upon Merger close. The pro forma combined fully diluted shares outstanding is calculated as follows:
|
Description
|
|
|
|
Innovate common shares
|
|
|
11,888
|
|
Innovate equity issuance and convertible debt and accrued interest on common shares
|
|
|
11,939
|
|
Monster common shares
|
|
|
1,865
|
|
Total common shares used in basic and diluted EPS
|
|
|
25,692
|
|
Innovate warrants
|
|
|
2,052
|
|
Innovate options
|
|
|
6,843
|
|
Monster warrants
|
|
|
154
|
|
Monster options
|
|
|
2
|
|
Total pro forma fully diluted shares outstanding
|
|
|
34,743
|
|
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017
On January 29, 2018, Monster Digital, Inc. (“Monster”)
and privately held Innovate Biopharmaceuticals Inc. (“Private Innovate”) completed a reverse recapitalization in accordance
with the terms of the Agreement and Plan of Merger and Reorganization, dated July 3, 2017, as amended (the “Merger Agreement”),
by and among Monster, Monster Merger Sub, Inc. (“Merger Sub”) and Private Innovate, which changed its name in connection
with the transaction to IB Pharmaceuticals Inc. (“IB Pharmaceuticals”). Pursuant to the Merger Agreement, Merger
Sub merged with and into IB Pharmaceuticals with IB Pharmaceuticals surviving as the wholly owned subsidiary of Monster (the
“Merger”). Prior to the completion of the Merger, Monster transferred all of its businesses and assets, including
all shares of SDJ Technologies, Inc., and those liabilities of the Company not assumed by Innovate further to the Merger, to MD
Holding Co. Inc., a wholly owned subsidiary (the “Spin-Co”). The shares of the Spin-Co were subsequently spun off pro
rata to holders of Monster’s common stock immediately prior to the Merger (the “Spin-Off”).
Immediately following the Merger, Monster changed its name to Innovate
Biopharmaceuticals, Inc. (“Innovate”). In connection with the closing of the Merger, Innovate’s common stock
began trading on the Nasdaq Capital Market under the ticker symbol “INNT” on February 1, 2018. Prior to the Merger,
Monster was incorporated in Delaware under the name “Monster Digital, Inc.”
The following unaudited pro forma condensed combined financial information
presents the pro forma financial position and results of operations of (1) Monster based on the historical consolidated financial
statements of Monster, after giving effect to the Spin-Off and (2) Private Innovate, based on the historical consolidated financial
statements of Monster and Private Innovate, after giving effect to the Spin-Off and the Merger. For clarity, the pro forma financial
statements with respect to the Spin-Off and the pro forma financial statements with respect to the Merger are presented separately
below.
Each unaudited pro forma condensed combined balance sheet as of
September 30, 2017 set forth below gives effect to the Spin-Off or the Merger, as applicable, as if each transaction took place
on September 30, 2017. Each unaudited pro forma combined statement of operations for the period ended September 30, 2017 gives
effect to the Spin-Off and the Merger, as applicable, as if they took place on January 1, 2017.
The unaudited pro forma condensed
combined financial information, including the notes thereto, should be read in conjunction with the separate historical
financial statements of Monster and Private Innovate and the section of this Current Report on Form 8-K statement entitled
“
Management’s Discussion and Analysis of Financial Condition and Results of Operations
.”
Monster’s historical consolidated financial statements as of and for the periods ended September 30, 2017 and 2016 are
included in Monster’s Quarterly Report on Form 10-Q for the nine months ended September 30, 2017, filed with the SEC on
November 8, 2017. Innovate’s historical financial statements for the nine months ended September 30, 2017 and 2016 are
included in Innovate’s Current Report on Form 8-K filed with the SEC on February 2, 2018.
Unaudited Pro Forma Financial Information for Spin-Co Adjustment
The following selected unaudited pro forma financial information
presents the pro forma financial position and results of operations of Monster based on the historical consolidated financial statements
of Monster, after giving effect to the Spin-Off.
Because the unaudited pro forma condensed combined balance sheet
reflects the consolidated financial information of Monster as of September 30, 2017, it does not reflect any changes to Monster’s
assets or liabilities which have occurred since September 30, 2017 or which may occur following the date of this Current Report
on Form 8-K.
Unaudited Pro Forma Condensed Combined Balance
Sheet
September 30, 2017
(in thousands)
|
|
Historical
Monster
|
|
|
Spin-Co
Adjustments
(Note 2)
|
|
|
Monster
Merger Sub
|
|
|
Pro Forma
Adjustments
|
|
|
Note 3
|
|
Adjusted
Historical
Monster
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
174
|
|
|
$
|
(174
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
(a) (c)
|
|
$
|
—
|
|
Accounts receivable
|
|
|
127
|
|
|
|
(127
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Inventory
|
|
|
498
|
|
|
|
(498
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Prepaids & other
|
|
|
257
|
|
|
|
(257
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Total current assets
|
|
|
1,056
|
|
|
|
(1,056
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Trademark
|
|
|
2,319
|
|
|
|
(2,319
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Deposits
|
|
|
14
|
|
|
|
(14
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Total
|
|
$
|
3,389
|
|
|
$
|
(3,389
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
624
|
|
|
|
(351
|
)
|
|
|
273
|
|
|
|
—
|
|
|
|
|
|
273
|
|
Accrued expenses
|
|
|
1,506
|
|
|
|
(779
|
)
|
|
|
727
|
|
|
|
—
|
|
|
|
|
|
727
|
|
Customer deposits
|
|
|
1,336
|
|
|
|
(736
|
)
|
|
|
600
|
|
|
|
(600
|
)
|
|
(b)
|
|
|
—
|
|
Line of credit
|
|
|
107
|
|
|
|
(107
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Due to related parties
|
|
|
34
|
|
|
|
(34
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Notes payable
|
|
|
1,270
|
|
|
|
(38
|
)
|
|
|
1,232
|
|
|
|
(1,232
|
)
|
|
(d)
|
|
|
—
|
|
Total current liabilities
|
|
|
4,877
|
|
|
|
(2,045
|
)
|
|
|
2,832
|
|
|
|
(1,832
|
)
|
|
|
|
|
1,000
|
|
Stockholders’ (deficit) equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Additional paid-in capital
|
|
|
35,986
|
|
|
|
1
|
|
|
|
35,987
|
|
|
|
1,189
|
|
|
(a)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
600
|
|
|
(b)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
396
|
|
|
(c)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,232
|
|
|
(d)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,788
|
)
|
|
(e)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
384
|
|
|
(f)
|
|
|
—
|
|
Accumulated deficit
|
|
|
(37,475
|
)
|
|
|
(1,344
|
)
|
|
|
(38,819
|
)
|
|
|
(1,189
|
)
|
|
(a)
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(396
|
)
|
|
(c)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,788
|
|
|
(e)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(384
|
)
|
|
(f)
|
|
|
—
|
|
Total stockholders’ (deficit) equity
|
|
|
(1,488
|
)
|
|
|
(1,344
|
)
|
|
|
(2,832
|
)
|
|
|
1,832
|
|
|
|
|
|
(1,000
|
)
|
Total
|
|
$
|
3,389
|
|
|
$
|
(3,389
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
The accompanying notes are an integral part
of this unaudited condensed combined
pro forma financial information.
Unaudited Pro Forma Condensed Combined Statement
of Operations
For the Period Ended September 30, 2017
(in thousands, except per share data)
|
|
Historical
Monster
|
|
|
Spin-Co
Adjustments
(Note 2)
|
|
|
Monster
Merger
Sub,
Inc.
|
|
|
Pro Forma
Adjustments
|
|
|
Note 3
|
|
Adjusted
Historical
Monster
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,277
|
|
|
$
|
(1,277
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
$
|
—
|
|
Cost of sales
|
|
|
(1,432
|
)
|
|
|
1,432
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Gross profit
|
|
|
(155
|
)
|
|
|
155
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
170
|
|
|
|
(170
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Sales and marketing
|
|
|
1,286
|
|
|
|
(1,286
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
General and administrative
|
|
|
3,807
|
|
|
|
(2,456
|
)
|
|
|
1,351
|
|
|
|
1,189
|
|
|
(a)
|
|
|
2,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
396
|
|
|
(c)
|
|
|
|
|
Total operating expenses
|
|
|
5,263
|
|
|
|
(3,912
|
)
|
|
|
1,351
|
|
|
|
1,585
|
|
|
|
|
|
2,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (loss)
|
|
|
(5,418
|
)
|
|
|
4,067
|
|
|
|
(1,351
|
)
|
|
|
(1,585
|
)
|
|
|
|
|
(2,936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
37
|
|
|
|
(1
|
)
|
|
|
36
|
|
|
|
—
|
|
|
|
|
|
36
|
|
Gain on extinguishment of debt
|
|
|
(68
|
)
|
|
|
68
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Income tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Net income (loss)
|
|
$
|
(5,387
|
)
|
|
$
|
4,000
|
|
|
|
(1,387
|
)
|
|
|
(1,585
|
)
|
|
|
|
$
|
(2,972
|
)
|
Net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(6.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of this unaudited condensed combined
pro forma financial information.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL INFORMATION
The unaudited pro forma condensed combined financial information
was prepared in accordance with U.S. GAAP and pursuant to the rules and regulations of SEC Regulation S-X. The historical
consolidated financial statements of Monster have been adjusted in the unaudited pro forma condensed combined financial information
to give effect to pro forma events that are (i) directly attributable to the transaction, (ii) factually supportable, and (iii)
with respect to the unaudited pro forma condensed combined statements of operations, expected to have a continuing impact on the
results of operations of Innovate. Such adjustments do not contemplate the consumption of cash resources to fund continuing operating
costs of Monster for the period subsequent to September 30, 2017.
The unaudited pro forma condensed combined financial information
is based on the audited financial statements of Monster as of September 30, 2017. As such, the financial information set forth
below is not a prediction or estimate of the amounts that would be reflected in Monster’s balance sheet as of the day of
closing of the transactions. Other than as disclosed in the footnotes thereto, the unaudited pro forma condensed combined financial
information does not reflect any additional liabilities, off-balance sheet commitments or other obligations that may become payable
after the date of such financial information.
The unaudited pro forma condensed combined financial information
has been prepared for illustrative purposes only and is not necessarily indicative of the financial position or results of operations
in future periods or the results that actually would have been realized had Monster completed the Spin-Off as of or during the
specified periods.
Spin-Co is the action sports camera business operated by Monster
Digital, Inc. For the September 30, 2017 pro forma balance sheet presentation, other than certain liabilities of approximately
$1.0 million that were assumed by Innovate, all assets and liabilities of Spin-Co are eliminated as Spin-Co adjustments with net
assets distributed to the stockholders of Monster Digital, Inc. For the September 30, 2017 pro forma statement of operations, the
revenue and cost of sales related to the camera business and the expenses associated with the generation of those revenues are
eliminated as Spin-Co adjustments.
These adjustments reflect the Spin-Out that occurred on the effective
date of the Merger, whereby all of the business and assets and certain of the liabilities of Monster not assumed by Innovate further
to the Merger were acquired by Spin-Co. The remaining general and administrative expenses shown in the Adjusted Historical Monster
column consist of public company operating expenses including legal fees, insurance, and certain executive salaries associated
with operating a public company.
The pro forma adjustments are based on preliminary estimates
and assumptions that are subject to change. The following adjustments have been reflected in the unaudited pro forma condensed
combined financial information:
|
a)
|
Represents the exercise of warrants that occurred in November 2017. The proceeds of the warrant exercise were used to fund
the operations of Monster.
|
|
b)
|
Represents a conversion of debt to equity that occurred in November 2017
|
|
c)
|
Represents shares of Monster common stock issued in January 2018. The proceeds of the exercise funded the operations of Monster.
|
|
d)
|
Represents the full conversion of convertible debt at the consummation of the reverse merger
|
|
e)
|
Represents the elimination of Monster’s historical accumulated deficit.
|
|
f)
|
Represents unamortized, non-cash, stock-based compensation related to the issuance of restricted common stock and options of
Monster.
|
Unaudited Pro Forma Financial Information for Merger
The following unaudited pro forma condensed combined financial information
presents the pro forma financial position and results of operations of Innovate based on the historical consolidated financial
statements of Monster and Private Innovate, after giving effect to the Spin-Off and the Merger.
The unaudited pro forma condensed combined balance sheet and unaudited
condensed combined statement of operations gives effect to the Equity Issuance and the Conversion at a $60.0 million pre-Merger
valuation amount (the “Valuation”).
Unaudited Pro Forma Condensed Combined Balance
Sheet
September 30, 2017
(in thousands, except share and per share data)
|
|
Historical
Private
Innovate
|
|
|
Pro Forma
Adjustments
|
|
|
|
Adjusted
Historical
Monster
|
|
|
Adjusted
Proforma
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,479
|
|
|
$
|
16,532
|
|
(a)
|
|
$
|
-
|
|
|
$
|
20,765
|
|
|
|
|
|
|
|
|
2,980
|
|
(a)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
(226
|
)
|
(b)
|
|
|
-
|
|
|
|
-
|
|
Prepaid expenses and other
|
|
|
128
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
128
|
|
Total current assets
|
|
|
1,607
|
|
|
|
19,286
|
|
|
|
|
-
|
|
|
|
20,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
7
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
7
|
|
Total assets
|
|
$
|
1,614
|
|
|
$
|
19,286
|
|
|
|
$
|
-
|
|
|
$
|
20,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,819
|
|
|
$
|
(1,116
|
)
|
(b)
|
|
$
|
273
|
(f)
|
|
$
|
1,976
|
|
Accrued expenses including interest
|
|
|
2,143
|
|
|
|
(416
|
)
|
(b)
|
|
|
727
|
(f)
|
|
|
4,072
|
|
|
|
|
-
|
|
|
|
1,618
|
|
(d)
|
|
|
-
|
|
|
|
-
|
|
Debt
|
|
|
-
|
|
|
|
4,800
|
|
(a)
|
|
|
-
|
|
|
|
4,800
|
|
Debt Discount
|
|
|
-
|
|
|
|
(1,820
|
)
|
(a)
|
|
|
-
|
|
|
|
(1,820
|
)
|
Convertible promissory notes, net
|
|
|
7,490
|
|
|
|
(7,490
|
)
|
(b)
|
|
|
-
|
|
|
|
-
|
|
Convertible promissory notes, related party, net
|
|
|
228
|
|
|
|
(228
|
)
|
(b)
|
|
|
-
|
|
|
|
-
|
|
Total current liabilities
|
|
$
|
12,680
|
|
|
$
|
(4,652
|
)
|
|
|
$
|
1,000
|
|
|
$
|
9,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
12,680
|
|
|
$
|
(4,652
|
)
|
|
|
$
|
1,000
|
|
|
$
|
9,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
$
|
32
|
|
|
|
(29
|
)
|
(e)
|
|
|
-
|
|
|
$
|
3
|
|
Additional paid-in-capital
|
|
|
5,879
|
|
|
|
16,532
|
|
(a)
|
|
|
-
|
|
|
|
34,249
|
|
|
|
|
-
|
|
|
|
9,230
|
|
(b)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
3,077
|
|
(c)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
29
|
|
(e)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
(1,000
|
)
|
(f)
|
|
|
-
|
|
|
|
-
|
|
Accumulated deficit
|
|
|
(16,977
|
)
|
|
|
(206
|
)
|
(b)
|
|
|
-
|
|
|
|
(22,380
|
)
|
|
|
|
-
|
|
|
|
(3,077
|
)
|
(c)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
(1,618
|
)
|
(d)
|
|
|
-
|
|
|
|
-
|
|
Total stockholders’ (deficit) equity
|
|
$
|
(11,066
|
)
|
|
$
|
23,938
|
|
|
|
$
|
(1,000
|
)
|
|
$
|
11,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ (deficit) equity
|
|
$
|
1,614
|
|
|
$
|
19,286
|
|
|
|
$
|
-
|
|
|
$
|
20,900
|
|
|
(1)
|
See the Spin-Co adjustments in the
“Unaudited
Pro Forma Financial Information for Spin-Co Adjustment”
for the Adjusted Historical Monster adjustments.
|
The accompanying notes are an integral part
of this unaudited condensed
combined pro forma financial information.
Unaudited Pro Forma Condensed Combined Statement
of Operations
For the Period Ended September 30, 2017
(in thousands, except per share data)
|
|
Historical
Private
Innovate
|
|
|
Adjusted
Historical
Monster
(1)
|
|
|
Pro Forma
Adjustments
|
|
|
|
|
Pro Forma
Combined
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
Cost of sales
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Gross profit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
2,833
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
2,833
|
|
Sales and marketing
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
General and administrative
|
|
|
6,115
|
|
|
|
2,936
|
|
|
|
(258
|
)
|
|
(g)
|
|
|
8,793
|
|
Total operating expenses
|
|
|
8,948
|
|
|
|
2,936
|
|
|
|
(258
|
)
|
|
|
|
|
11,626
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
282
|
|
|
|
36
|
|
|
|
—
|
|
|
|
|
|
318
|
|
Gain on settlement of debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Income tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Total other expense, net
|
|
|
282
|
|
|
|
36
|
|
|
|
—
|
|
|
|
|
|
318
|
|
Net income (loss)
|
|
$
|
(9,230
|
)
|
|
$
|
(2,972
|
)
|
|
$
|
258
|
|
|
|
|
$
|
(11,944
|
)
|
Net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.78
|
)
|
|
$
|
(1.59
|
)
|
|
$
|
0.02
|
|
|
|
|
$
|
(0.46
|
)
|
Weighted-average common shares outstanding (h):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
11,888
|
|
|
|
1,865
|
|
|
|
11,939
|
|
|
|
|
|
25,692
|
|
|
(1)
|
See the Spin-Co adjustments in the
“Unaudited
Pro Forma Financial Information for Spin-Co Adjustment”
for the Adjusted Historical Monster adjustments.
|
The accompanying notes are an integral part
of this unaudited condensed
combined pro forma financial information.
Notes to the Unaudited Pro Forma Condensed
Combined Financial Information
The unaudited pro forma condensed combined financial information
was prepared in accordance with U.S. GAAP and pursuant to the rules and regulations of SEC Regulation S-X. The historical financial
statements of Private Innovate and the historical consolidated financial statements of Monster have been adjusted in the unaudited
pro forma condensed combined financial information to give effect to pro forma events that are (i) directly attributable to the
transaction, (ii) factually supportable, and (iii) with respect to the unaudited pro forma condensed combined statements of operations,
expected to have a continuing impact on the results of operations of Innovate.
The Merger has been accounted for as a capital transaction rather
than as a business combination as the business of Monster was spun off prior to the Merger.
In
accordance with U.S. GAAP, the Merger has been accounted for as a reverse recapitalization, equivalent to the issuance of common
shares by Innovate for the net monetary assets of Monster accompanied by a recapitalization. The accounting is similar to that
resulting from a reverse acquisition, except that no goodwill or other intangible assets are recorded. Monster was the legal acquirer,
but for accounting purposes, Innovate was treated as the accounting acquirer. Innovate recorded Monster’s liabilities assumed
upon the consummation of the Merger at fair value. Effective with the
consummation of the Merger, the historical financial
statements of Innovate became the historical financial statements of the combined company.
The unaudited pro forma condensed combined financial
information assumes that the Merger occurred on September 30, 2017 and does not provide a reasonable estimate of the assets or
liabilities of Innovate on or following the date of the Merger. In particular, the unaudited pro forma condensed combined
financial information does not reflect the reduction in either Monster’s or Innovate’s cash resulting from the
operations of such entities since September 30, 2017 or since the date of this Current Report on Form 8-K. Other than as
disclosed in the footnotes thereto, the unaudited pro forma condensed combined financial information does not reflect any
additional liabilities, off-balance sheet commitments or other obligations that may become payable after the date of such
financial information.
The unaudited pro forma condensed combined financial information
has been prepared for illustrative purposes only and is not necessarily indicative of the financial position or results of operations
in future periods or the results that actually would have been realized had Monster and Innovate been a consolidated company during
the specified periods.
The pro forma adjustments are based on
preliminary estimates and assumptions that are subject to change. The following adjustments have been reflected in the unaudited
pro forma condensed combined financial information (in thousands):
|
(a)
|
Represents the net proceeds of $16,532 from the sale of $18,112 of Innovate common stock (the Equity Issuance), net of $1,580
of offering costs, plus the $2,980 in proceeds from a $4,800 debt financing, net of a $1,800 debt discount and $20 in debt legal
costs.
|
|
(b)
|
Represents convertible promissory notes of $7,518 as of September 30, 2017, plus amortized debt discount of $13, and
additional proceeds from promissory notes received through January 29, 2018 of $1,116, in addition to related
accrued interest
of $416 as of September 30, plus additional accrued interest of $167 through
January 29,
2018 that
converted concurrent
with the consummation of the Merger at
a discount to equity securities issued
by Innovate pursuant to
the Equity Issuance. These adjustments also include $200 in convertible promissory notes and $26 in accrued interest which
matured on
January 22,
2018 for which the holders chose to redeem for cash
instead of converting. Promissory notes in the amount of $1,116 entered
into subsequent to September 30, 2017 were used for
general operating purposes.
|
|
(c)
|
The conversion described in (b) creates a beneficial conversion feature, which is recorded as additional interest expense and
additional paid-in capital. This pro forma adjustment is not reflected in the unaudited pro forma condensed combined statements
of operations as this amount is not expected to have a continuing effect on the operating results of the Company.
|
|
(d)
|
Represents accrued investment banker and legal fees directly related to the Merger. This pro forma adjustment is not reflected
in the unaudited pro forma condensed combined statements of operations as this amount is not expected to have a continuing effect
on the operating results of the Company.
|
|
(e)
|
Adjusts outstanding common shares to their par value.
|
|
(f)
|
Represents liabilities assumed by Innovate from Monster.
|
|
(g)
|
Represents transaction costs incurred during the period ended September 30, 2017. This pro forma adjustment is not reflected
in the unaudited pro forma combined statements of operations as this amount is not expected to have a continuing effect on the
operating results of the Company.
|
|
(h)
|
The basic and diluted weighted-average common shares outstanding on a pro forma combined basis were calculated based on
the shares issued for the Conversion and Equity Issuance of Innovate and the common share exchange using an exchange ratio of
0.37686605 upon Merger close. The pro forma combined fully diluted shares outstanding is calculated as follows:
|
Description
|
|
|
|
Innovate common shares
|
|
|
11,888
|
|
Innovate equity issuance and convertible debt and accrued interest on common shares
|
|
|
11,939
|
|
Monster common shares
|
|
|
1,865
|
|
Total common shares used in basic and diluted EPS
|
|
|
25,692
|
|
Innovate warrants
|
|
|
2,052
|
|
Innovate options
|
|
|
6,843
|
|
Monster warrants
|
|
|
154
|
|
Monster options
|
|
|
2
|
|
Total pro forma fully diluted shares outstanding
|
|
|
34,743
|
|
(d) Exhibits.