As filed with the Securities and Exchange Commission on January 17, 2020

Registration No. 333-235779

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 2

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

Avadim Health, Inc.

(Exact name of registrant as specified in its charter)

Delaware

2844

46-3578411

(State or other jurisdiction of

incorporation or organization)

(Primary Standard Industrial

Classification Code Number)

(I.R.S. Employer

Identification No.)

81 Thompson Street

Asheville, NC 28803

(828) 251-7111

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

Stephen Woody

Chief Executive Officer

Avadim Health, Inc.

81 Thompson Street

Asheville, NC 28803

(828) 251-7111

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

Copies to:

Yvan-Claude Pierre

Brian F. Leaf

Divakar Gupta

Alison Haggerty

Cooley LLP

55 Hudson Yards

New York, New York 10001

(212) 479-6000

Arthur D. Robinson

Jonathan R. Ozner

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, New York 10017

(212) 455-2000

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

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

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

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

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

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


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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

CALCULATION OF REGISTRATION FEE



Title of Each Class of Securities To Be Registered	Proposed Maximum Aggregate Offering Price⁽¹⁾	Amount of Registration Fee⁽²⁾
Common Stock, par value $0.001 per share	$92,000,000	$11,941.60

(1)	Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. Includes the offering price of additional shares that the underwriters have the option to purchase.

(2)	Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price. The registrant previously paid $6,490.00 in connection with a prior filing of this Registration Statement.

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

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

SUBJECT TO COMPLETION, DATED JANUARY 17, 2020

PRELIMINARY PROSPECTUS

5,000,000 Shares

LOGO

Common Stock

We are offering 5,000,000 shares of our common stock. This is our initial public offering and no public market currently exists for our common stock. We anticipate that the initial public offering price will be between $14.00 and $16.00 per share. We have applied to list our common stock on the Nasdaq Global Market under the symbol “AHI.”

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

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 19.


	PER SHARE	TOTAL

Initial public offering price	$	$

Underwriting discounts and commissions (1)	$	$

Proceeds, before expenses, to us	$	$

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

We have granted the underwriters an option for a period of 30 days after the date of this prospectus to purchase up to 750,000 additional shares of common stock.

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

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



RAYMOND JAMES		SUNTRUST ROBINSON HUMPHREY



		OPPENHEIMER & CO.

MAXIM GROUP LLC

The date of this prospectus , 2020.

TABLE OF CONTENTS


	PAGE

Prospectus Summary		1

The Offering		14

Summary Consolidated Financial Data		17

Risk Factors		19

Special Note Regarding Forward-Looking Statements		70

Industry and Other Data		72

Dividend Policy		73

Use of Proceeds		74

Capitalization		75

Dilution		77

Selected Consolidated Financial Data		80

Management’s Discussion and Analysis of Financial Condition and Results of Operations		82

Business		107

Management		139

Executive Compensation		149

Certain Relationships and Related Party Transactions		163

Principal Stockholders		166

Description of Capital Stock		169

Shares Eligible for Future Sale		176

Material U.S. Federal Income Tax Considerations for Non-U.S. Holders		179

Underwriting		184

Legal Matters		192

Experts		192

Where You Can Find More Information		192

Index to Consolidated Financial Statements		F-1

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

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

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

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the section titled “Risk factors” and our consolidated financial statements and the related notes appearing elsewhere in this prospectus, before making an investment decision. As used in this prospectus, unless the context otherwise requires, references to “we,” “us,” “our,” “our Company” and “Avadim” refer to Avadim Health, Inc., a Delaware corporation, and its subsidiaries taken as a whole, unless otherwise noted.

Overview

We are a high-growth, healthcare and wellness company that sells topical products to improve immune health, neuromuscular health and skin barrier health. Using our proprietary platform, which we call our Bionome Engineered Platform, we develop products that target the institutional care and self-care markets. We believe there is significant unmet global demand for non-prescription options, such as our products, as an alternative to drugs that are more expensive or potentially addictive and can have long-term detrimental implications for our health and society. Our mission, “Discovering New Ways to Care,” represents our strong belief that, by harnessing the innate power of the skin’s ecosystem, we can improve the health of individuals with products that address current societal challenges, including access to care, affordability, drug resistance and addiction.

We use an evidence-based approach to develop, test and market our products and are actively compiling a compendium of clinical evidence that includes 40 completed clinical studies to date. The majority of these clinical studies are institutional review board, or IRB, approved, and have resulted in 20 validating peer-reviewed publications or clinical posters. See “Business—Clinical Evidence” for further details. Our clinical evidence contributed to the successful registration of several of our products for Medicare and Medicaid reimbursement in September 2019. Our data also enables our sales teams to serve customers across the full continuum of care, from institutional care to self-care, including in hospitals, long-term care facilities, closed provider pharmacies, physician offices and retail pharmacies.

We have a portfolio of marketed products and future potential products. To date, we have six marketed products, three of which we consider to be cosmetics: Theraworx Protect for Immune Health, Theraworx Protect U-Pak for Urinary Health and Combat One for soldier and first responder readiness; and three of which we consider to be homeopathic drug products: Theraworx Relief for Muscle Cramps and Spasms, Theraworx Relief for Joint Discomfort and Inflammation and PHUEL for topical muscle nutrition. Cosmetics do not require premarket approval from the U.S. Food and Drug Administration, or FDA. Homeopathic drug products require premarket approval from the FDA, and products without approval are subject to a risk-based enforcement approach. We market our homeopathic drug products without such approval. In addition to our currently marketed products, we plan to pursue the development and commercialization of additional topical products to address risks that may lead to skin and surgical conditions. We plan to launch a drug product under an over-the-counter, or OTC, drug monograph in the next year, seek clearance from the FDA for a medical device pursuant to a 510(k) notification in the next two to three years and seek de novo classification from the FDA for a second medical device in the next two to three years.

from $10.8 million to $29.0 million, representing an annual growth rate of 168%. For the nine months ended September 30, 2019 as compared to the same period in 2018, we grew our net revenues from $19.8 million to $34.4 million, an increase of 73%.

We have developed core competencies that we believe have driven our growth to date and that give us confidence we can achieve similar success from new products: in-house research and development, in-house manufacturing operations and a dedicated sales and marketing team with a differentiated approach. We intend to leverage our core competencies to address additional gaps in care in topical immune health, neuromuscular health and skin barrier health. We aim to launch products that address skin care for individuals with diabetes, dermatitis, vaginal health, pre-operative bathing, pre- and post-operative surgical site staging and symptoms of peripheral neuropathy. We are currently evaluating several products in these areas which we plan to launch in the next two to three years.

Our Products

The following table presents a summary of our currently marketed products:

Product Name

Description

Target Market

Launched

LOGO

Theraworx Protect

for Immune Health

Pre-saturated towelettes, foaming, and spray products designed to reduce risks that may lead to infections

Institutional

Care

2013

Theraworx Protect

U-Pak

for Urinary Health

Pre-saturated towelettes and foaming cleanser designed to reduce risks that may lead to urinary tract infections

Retail Pharmacies

Mass Retailers / Club
Online third parties

2019

LOGO

Theraworx Relief

for Muscle Cramps and
Spasms

Foaming and spray products indicated for individuals who suffer from muscle cramps and spasms and symptoms associated with restless leg syndrome

Retail Pharmacies

Mass Retailers / Club
Online third parties

2017

Theraworx Relief

for Joint Discomfort and
Inflammation

Foaming spray products with medical grade compression sleeves to address symptoms suffered by individuals with moderate to severe osteoarthritis

Retail Pharmacies

Mass Retailers / Club
Online third parties

2019

LOGO

Combat One

Pre-saturated towelettes, foaming, and spray products for hygiene management in special situations, primarily for military purposes

US Military

First Responders

2016

LOGO

PHUEL

Pre-saturated towelettes and foaming spray products used before, during and after strenuous activity for recovery

Professional Teams

Athletes

Specialty Retailers

2014

Theraworx Protect

LOGO

Our first product, Theraworx Protect for Immune Health, launched in 2013, is a topical immune health product aimed at improving hygiene by supporting the critical permeability barrier of the skin. In a retrospective study in high-risk intensive care units using Theraworx Protect, the mean reduction in rates of catheter associated urinary tract infections, or CAUTIs, was 53%. Theraworx Protect is used in hospitals, nursing homes and other long-term care facilities to reduce risks that may lead to healthcare associated infections. We estimate the total addressable market for Theraworx Protect for Immune Health to be in excess of $1.5 billion. Our products are distributed by several of the largest distributors in their respective category, including hospital GPOs such as Vizient and Premier; the two largest long-term care GPOs, Forum and Managed Healthcare Associates; and national healthcare distributors such as Cardinal Health, Owens & Minor, Medline Industries and McKesson.

In August 2019, we introduced Theraworx Protect U-Pak for Urinary Health, a product designed to reduce risks that may lead to urinary tract infections, or UTIs, to the institutional care and retail pharmacy/consumer markets. UTIs are one of the most frequent clinical bacterial infections, accounting for nearly 25% of all infections in women. During a 12-month study of 16 nursing homes using Theraworx Protect, the rate of newly diagnosed UTIs fell 61% among a high-risk patient population. Pharmacists make more than one million recommendations per month for products related to UTIs, and we estimate the total addressable market for Theraworx Protect U-Pak to be in excess of $3.0 billion. We initially launched Theraworx Protect U-Pak in over 8,000 Walgreens pharmacy locations, and it is now available in CVS, Rite Aid and Publix pharmacy locations as well.

Theraworx Relief

LOGO

In 2017, we launched Theraworx Relief for Muscle Cramps and Spasms, a topical product for the relief of muscle cramps, spasms and symptoms related to Restless Leg Syndrome, or RLS. We estimate the total addressable market for Theraworx Relief for Muscle Cramps and Spasms to be in excess of $2 billion. In a study of 35 individuals diagnosed with RLS who used Theraworx Relief on a daily basis, these individuals showed a 52% improvement in symptom scores. Our highest revenue product, Theraworx Relief for Muscle Cramps and Spasms is widely distributed in over 47,000 pharmacy locations, including Walgreens, Walmart, CVS, Rite Aid, Sam’s Club, Kroger, Albertsons, Publix and Target.

In May 2019, we launched Theraworx Relief for Joint Discomfort and Inflammation which targets consumers with inflamed and injured joints, a market we estimate at over $3 billion. Theraworx Relief for Joint Discomfort and Inflammation is now available in more than 20,000 pharmacy locations. This product is sold as both a standalone foam or a foam with a medical grade compression glove or sleeve, the first dual modality product on the market. In a study of individuals with hand or knee arthritis using Theraworx Relief for Joint Discomfort and Inflammation combined with medical grade compression, individuals showed a 41% and 55% improvement on the Visual Analog Scale for pain in the hand and knee, respectively. In a pre-launch survey we conducted of more than 300 retail pharmacists, more than 95% said they would recommend this dual compression and topical product before oral nonsteroidal anti-inflammatory drugs, or NSAIDs.

Industry Landscape

We believe that consumers are increasingly adopting self-care routines to keep themselves and their families healthy, prevent disease, manage ailments and maintain control over chronic conditions. To help them with their healthcare decisions, consumers are more frequently turning to their pharmacist as healthcare services are increasingly offered by pharmacy retailers. We believe that a movement towards products that are widely available through the retail pharmacy/consumer channel, like ours, could reduce the number of hospital visits and costs to the healthcare system. In addition, our products are used for symptoms that typically are addressed by prescription drugs, which can have undesirable side effects. We believe the use of our products may spare the use of NSAIDs and addictive and cognitive-impairing medications, such as systemic muscle relaxants and antibiotics, lowering the incidence of harmful drug side effects.

We target three primary market areas: topical immune health, neuromuscular health and skin barrier health.

We target the topical immune health category with our current products Theraworx Protect for Immune Health, Theraworx Protect U-Pak for Urinary Health and Combat One. We are also currently evaluating three potential future products in this category: a pre-operative bathing product, a pre-operative surgical site staging product and a skin and wound cleanser.

We target the neuromuscular health category with our current products Theraworx Relief for Muscle Cramps and Spasms, Theraworx Relief for Joint Discomfort and Inflammation and PHUEL. We are also currently evaluating a potential future product to address skin conditions associated with diabetic neuropathy in this category.

We plan to target the skin barrier health category with a product we are preparing to launch in the next year that is a monographed skin protectant product to address risks associated with radiation dermatitis, moisture-associated dermatitis and incontinence-associated dermatitis. This product will be a reformulation of Theraworx Protect for Immune Health that will include an increase in the amount of allantoin included so that it qualifies as an active ingredient. We are also evaluating a potential future product for skin care of patients suffering with diabetic dermatitis for this category.

Topical Immune Health

The topical immune health category encompasses diseases or conditions that lead to a compromised immune system or response. Common illnesses or conditions associated with poor topical immune health include cancer, asthma, allergies and infections. Infections are a significant problem for patients, society and our healthcare systems. Two trends are exacerbating this issue. The first is the increasing prevalence of antibiotic-resistant pathogens, and the second is the high rate of healthcare-associated infections, or HAIs.

Antibiotic-resistant pathogens: The U.S. Centers for Disease Control and Prevention, or CDC, describes antibiotic resistance as one of the biggest public health challenges of our time and estimates that at least two million people in the United States contract an antibiotic-resistant infection each year and more than 162,000 people die annually from such infections. Although the CDC has warned that we are running out of drugs to treat serious infections, antibiotics remain widely prescribed. The CDC estimates that almost one out of five emergency department visits in the U.S. for adverse drug events are due to antibiotics and that antibiotic resistance adds $20 billion in excess direct healthcare costs annually, with additional costs to society for lost productivity as high as $35 billion a year.

Healthcare-associated infections: The CDC estimates that, on any given day, about one in every 31 hospital patients has an HAI. The Center for Disease Dynamics, Economics and Policy estimates that the top five HAIs in the U.S. by aggregate cost lead to approximately $9.8 billion in expenses annually. Hospitals can no longer charge patients for HAIs; each case of an HAI can cost a hospital from approximately $10,000 for CAUTIs to up to $46,000 for central line associated bloodstream infections, or CLABSIs.

Neuromuscular Health

Neuromuscular health is a broad category that encompasses many diseases and ailments that impair the functioning of the muscles, cause pain or disrupt quality of life. We believe a large portion of the diseases and ailments in the neuromuscular health category have unsatisfactory treatment options or are underserved today. Common issues that arise with poor neuromuscular health include cramps and spasms, symptoms of RLS and arthritic and neuropathic pain.

More than 50 million adults have been diagnosed with arthritis, 24 million of whom had activity limitations attributable to their arthritis and 15 million of whom had severe joint pain due to their arthritis. Another 20 million people in the U.S. suffer from peripheral neuropathy, 60% due to diabetes, according to the National Institute of Neurological Disorders and Stroke.

Cramps and spasms and symptoms associated with RLS: Nocturnal resting cramps and spasms can be symptomatic of a range of health issues and are a common side effect of many prescription drugs. An estimated 6% of the U.S. adult population experiences moderate-to-severe nocturnal cramping more than five times per month, which implies over 19 million sufferers. Frequently recommended treatments for cramps, such as stretching, warm baths, pickle juice or extremity elevation are generally considered to be anecdotal and not clinically proven. In certain cases, doctors may prescribe muscle relaxants for cramp prevention or recommend acetaminophen or NSAIDs for pain after cramping.

Arthritic and neuropathic pain: Arthritis, back pain and other injuries associated with obesity or age, as well as diabetic and chemotherapy-induced neuropathic pain all contribute to continued growth in the pain management market. According to Transparency Market Research, the 2015 pain management market was $60.2 billion in the U.S., and is expected to grow to $83.0 billion by 2024. Persistence Market research estimated that opioids accounted for more than half of that market. However, the widely recognized opioid crisis has resulted in pressure to reduce the administration of opioids. Today, half of all states have enacted laws that restrict the prescription or distribution of opioids, with 15 of those states limiting prescriptions in an opioid-naive patient to seven days, and three of those states limiting the initial prescription to five days. In addition to these restrictions, NSAIDs remain contraindicated in a significant portion of this market. For example, 39% of Americans age 60 and above, which represent the majority of arthritic patients, have chronic kidney disease and are not able to take NSAIDs.

Skin Barrier Health

The skin barrier health category encompasses illnesses and conditions that can lead to degradation of the protective outer layer of the skin, and secondary diseases that can lead to thinning and loss of the cohesive function of the skin, such as peripheral vascular disease, diabetes and graft versus host disease. Skin barrier health can be negatively affected by aggressive treatments, such as intense radiation therapy. Skin barrier challenges negatively affect a person’s ability to fight infections, heal wounds and control hydration. Skin barrier degradation is also commonly associated with the development of chronic, non-healing wounds. Common skin barrier health issues include radiation-induced dermatitis and incontinence associated dermatitis, or IAD.

Incontinence-associated dermatitis: IAD is an inflammatory skin condition that occurs when the skin is exposed to urine or stool, often leading to secondary infections, pain, or skin lesions. IAD occurs in approximately 20% of hospitalized patients, even when a defined skin regimen is used. In order to prevent IAD, commonly used prophylactics are wicking diapers or disposable garments and skin moisture barriers, also called barrier creams. In infants, IAD is frequently called diaper dermatitis. However, wet diapers and barrier creams can trap heat and moisture, which can cause inflammation, increased pressure and friction against the skin. The annual cost to the U.S. healthcare system of IAD is estimated to be approximately $215 million.

Our Strategy

We have strategically positioned our company to become a leading healthcare and wellness company by taking advantage of several emerging trends in healthcare: antibiotic stewardship, negativity around opioids, consumerization of healthcare and growth in self-care. Our products are designed to take advantage of the increasing desire for easily accessible, self-directed care, with options that are safe and easy to use. To spread awareness of our brand, we have used traditional media and in-store marketing to reach consumers. To increase acceptance of our products among pharmacists and physicians, we have used an expanding body of clinical evidence and a growing key customer list. With more and more consumers seeking treatment options from their local pharmacy and increasingly influential pharmacists, our strategy is to educate such pharmacists, as well as physicians, to increase adoption of our products. Building on the success of our initial product launches, we plan to leverage our tested research and development and marketing and commercial infrastructure to deliver sustainable high growth, while maintaining an attractive gross margin profile. Our future success will depend on our ability to execute on the following initiatives:

Pursue Revenue Growth Across Our Distribution Channels

We believe there is a significant opportunity to grow our sales through our established distribution channels by way of adding new customers and increasing sales with existing customers. To pursue this opportunity, we intend to continue to grow our dedicated sales team and to increase consistent face-to-face customer interaction in both the institutional and retail settings. We have experienced strong revenue growth in the retail pharmacy/consumer channel, where we have instituted and maintained a consistent calling effort of pharmacists. According to a pharmacist survey conducted by U.S. Pharmacist, 80% of the patients surveyed said they would purchase a product if recommended by their pharmacist and 82% of the patients surveyed said they would not purchase a product if their pharmacist counseled against it. According to the OTC Guide, an online resource for pharmacists published by Pharmacy Times, our current product suite addresses health issues for which pharmacists make an average of approximately eight million recommendations a month. We intend to expand this high-touch coverage to a greater number of pharmacists and their staff.

We market our products in the institutional care and retail pharmacy/consumer channels, and it is our goal to expand our distribution network to include durable medical equipment companies, and specialty and home health providers, among others. Further, we believe the adoption of our products by some of the most well-known academic teaching hospitals has produced an outsized impact on health professionals in our current targeted specializations, including urology, OBGYN, long-term care medical directors, pharmacists, consulting pharmacists and primary care physicians. We also believe the validation of our products in these clinical settings leads to increased acceptance at the pharmacy and retail level. The acceptance of our products across the continuum of care from the institutional setting to the home is a distinct competitive advantage over companies that only pursue retail channels.

Expand Coverage and Reimbursement

Inflammation were added to a national data registry for reimbursement by Medicare and Medicaid when a prescription for those products is written, which we believe will result in a significant reduction of out-of-pocket costs for a large proportion of our target customer base. As a result of this coverage and reimbursement access, we believe certain institutional providers will now be able to defray current treatment costs and potentially benefit from the utilization of our products.

In addition to increasing coverage and reimbursement by Medicare and Medicaid, we have recently started to engage with private insurance groups to implement step therapy protocols incorporating our products. As part of an insurer’s strategy to control the costs and risks posed by prescription drugs, a step therapy protocol would require a patient to first try our product before being eligible for reimbursement of prescription drug costs. This would be particularly applicable to Theraworx Relief for Joint Discomfort and Inflammation, where patients suffering from osteoarthritis often seek prescription pain medication to manage pain symptoms.

Similarly, we expect our products to gain acceptance among workers’ compensation insurer groups, who are actively looking for lower cost, potentially safer options for their members.

Continue to Introduce Innovative Products

We believe the success of our initial products under the Theraworx Protect and Theraworx Relief brands have confirmed that there is significant demand for low toxicity, innovative, affordable and widely accessible products such as ours in large and underserved markets. We are focused on driving growth through continuous product innovation and we believe we have a strong product pipeline, including product extensions and new delivery methods under our existing brands, as well as products to address new market opportunities in the topical immune health, neuromuscular health and skin barrier health categories.

Leverage Existing Infrastructure

We intend to leverage our existing research and development, manufacturing and commercialization infrastructure to introduce new products. Our Theraworx Relief for Joint Discomfort and Inflammation product is an example of a new product developed from our platform, marketed under our Theraworx Relief brand, distributed by our existing retail salesforce, and sold through the same retail network as our Theraworx Relief for Muscle Cramps and Spasms product. Another example is our Theraworx Protect U-Pak for Urinary Health product launched in August 2019 in over 8,000 pharmacies that already stock Theraworx Relief products. In addition, we are actively pursuing opportunities to be the exclusive manufacturing partner for existing customers that are looking to offer white label versions of our branded products in their stores.

Expand Our Existing Compendium of Clinical Evidence to Support Product Differentiation

In order to continue to build our library of clinical evidence in support of our product differentiation, our strategy is to work with key opinion leaders and hospital department chairs to:

•

convert these key influencers into supporters for our brand;

•

accelerate IRB approval and academic center prioritization;

•

reduce associated costs, as clinical study costs may be shared; and

•

improve the likelihood and speed of study presentation or publication.

As a result of our strategy, to date, over 40 clinical studies have been completed. The majority of these clinical studies are IRB approved, and have resulted in 20 peer-reviewed publications and clinical posters on the clinical effects of our products.

Expand Brand Awareness

We intend to continue to develop awareness of our brand. Our significant sales growth and expansion of our distribution network is evidence of increasing brand awareness in the marketplace. We have achieved this awareness through a combination of clinical studies and publications, television advertising and social media marketing, education of pharmacists, face-to-face physician interaction and in-store promotional activity. Since inception, we have seen pharmacy shelf space increase from four inches to nineteen inches in over 40% of our 47,000 pharmacy locations. In the topical analgesics space, we have increased our share of voice, a metric of brand awareness among peer products that measures relative media exposure in the marketplace, from 6% during the second quarter of 2018 to 32% during the second quarter of 2019. We plan to continue to invest in these efforts.

Risks Affecting Our Business

Our business is subject to a number of risks. These risks are discussed more fully in the section titled “Risk Factors” immediately following this prospectus summary on page 18. You should read these risks before you invest in our common stock. In particular, risks associated with our business include, but are not limited to, the following:

•

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

•

We will require additional capital to fund our operations, which may not be available on acceptable terms, if at all. Without obtaining adequate capital funding or improving our financial performance, we may not be able to continue as a going concern. As a result of the going concern explanatory paragraph expressed in the audit report in our 2018 consolidated financial statements, we were in default under our credit agreement. The default was later waived, but if we default under our credit agreement again, the lenders could terminate their commitments and cause any amounts outstanding to be immediately payable, and if we default prior to the completion of this offering, our lenders will have the right to vote a majority of all shares entitled to vote on any matter presented to our stockholders, including the election of directors.

•

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

•

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

•

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

•

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

•

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

•

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

•

We face significant competition from various health, wellness and self-care companies, and our operating results will suffer if we fail to compete effectively. We also face competition from customers developing competing products and manufacturers of similar products.

•

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

•

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

•

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

•

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

•

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

•

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

Recent Developments

2019 Financial Information (Preliminary and Unaudited)

Set forth below are certain estimated preliminary and unaudited financial results and other business metrics as of and for the year ended December 31, 2019. We have provided estimated ranges, rather than specific amounts, for certain of the preliminary and unaudited financial results described below primarily because our financial closing procedures for the year ended December 31, 2019 are not yet completed and, as a result, our actual results may differ materially from these estimates. The following information reflects our preliminary estimates with respect to such results based on currently available information, is not a comprehensive statement of our financial results and is subject to completion of our financial closing procedures. These results may change, and those changes may be material. This information should be read in conjunction with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for prior periods included elsewhere in this prospectus.

The following estimates of our preliminary and unaudited financial results and business metrics contain forward-looking statements and may differ from actual results. Please refer to “Special Note Regarding Forward-Looking Statements.” These estimates should not be viewed as a substitute for our full interim or annual financial statements prepared in accordance with U.S. generally accepted accounting principles, or GAAP. Further, our preliminary estimated results and metrics are not necessarily indicative of the results or metrics to be expected for any future period as a result of various factors, including, but not limited to, those discussed in the sections titled “Risk Factors” and “Special Note Regarding Forward-Looking Statements.” Accordingly, you should not place undue reliance upon these preliminary estimates.

The following estimated preliminary and unaudited financial results and other business metrics have been prepared by, and are the responsibility of, management. Our independent registered public accounting firm, KPMG LLP, has not audited, reviewed, compiled or performed any procedures with respect to these preliminary financial results. Accordingly, KPMG LLP does not express an opinion or any other form of assurance with respect thereto.


	Year Ended December 31, 2018			Year Ended December 31, 2019
	Year Ended December 31, 2018			Low End of Range			High End of Range
	(in millions)
				(unaudited, estimated)

Net revenues	$	29.0		$	46.2		$	47.2

Net revenues for retail pharmacy / consumer segment (excluding online sales) (1)	$	10.9		$	31.5		$	32.5

Net revenues for institutional care segment (1)	$	11.6		$	10.5		$	11.5

Gross profit	$	16.0		$	26.7		$	28.6

Loss from operations	$	(31.3	)	$	(38.1	)	$	(41.1	)

Net loss attributable to common stockholders	$	(51.8	)	$	(45.5	)	$	(48.5	)

Accumulated deficit	$	(113.4	)	$	(158.9	)	$	(161.9	)


	As of December 31, 2019
	As of December 31, 2019
	(unaudited)

Cash (in millions)	$	4.8

Number of retail pharmacy locations (in thousands) (1)		47.9

Number of institutional care locations (1)		1,064

Number of sales representatives (1)		89

Number of sales representative visits to retail pharmacies for the year ended (in thousands) (1)		84

(1)	See the section of this prospectus titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics” for more information.

Net revenues decreased from $14.3 million for the quarter ended September 30, 2019 to between $11.8 million and $12.8 million for the quarter ended December 31, 2019. This decrease was primarily due to a material reduction in our direct marketing spend in the quarter to avoid seasonally expensive media purchases and conserve cash.

Net revenues increased from $29.0 million for the year ended December 31, 2018 to between $46.2 million and $47.2 million for the year ended December 31, 2019. This increase was

primarily due to expanded penetration of Theraworx Relief Muscle Cramp and Spasm, and the recent release of Theraworx Joint Discomfort and Inflammation.

Net retail pharmacy/consumer segment revenues increased from $10.9 million for the year ended December 31, 2018 to between $31.5 million and $32.5 million for the year ended December 31, 2019. This increase was primarily due to expanded penetration of Theraworx Relief Muscle Cramp and Spasm, and the recent release of Theraworx Relief Joint Discomfort and Inflammation in the segment.

Net institutional care segment revenues decreased from $11.6 million for the year ended December 31, 2018 to between $10.5 million and $11.5 million for the year ended December 31, 2019. This decrease was primarily due to a lost contract with a significant customer, offset by an expanded customer base.

Gross profit as a percentage of net revenues, or gross margin, was 55% for the year ended December 31, 2018 as compared to between 58% and 61% for the year ended December 31, 2019. This increase was primarily due to direct labor efficiency, and the full amortization of expenses during the first nine months of 2018 associated with a patent that we had previously purchased. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Certain Factors Affecting Our Results—Patent Obligation.

January 2020 Issuance of Convertible Promissory Notes

On January 10, 2020, we entered into a note purchase agreement, pursuant to which we issued convertible promissory notes in an aggregate principal amount of $6.4 million, or the convertible notes, to certain accredited investors. Outstanding convertible note balances accrue interest at an annual rate of 6%, beginning on the date that is six months after the issuance of the notes, with accrued interest being added to the principal balance on each six-month anniversary thereafter. The outstanding principal amount, plus any accrued but unpaid interest, is due and payable on the maturity date of January 4, 2024 or, if later, the date that is 91 days following the latest maturity date of the senior secured term loan under our October 2018 credit agreement with Hayfin Services LLP, or the credit agreement.

The convertible notes are unsecured and are subordinated to our obligations under the credit agreement. Subject to this subordination, with the consent of Hayfin we may prepay the notes, in whole or in part, prior to the maturity date. As part of any repayment or prepayment of the notes, the holders would be entitled to receive (i) two times the outstanding principal amount or portion thereof being repaid or prepaid, plus (ii) a ratable portion of interest previously capitalized and added to the outstanding principal amount and (iii) any accrued but unpaid interest that has not been previously capitalized. Upon the closing of this offering, the principal and any accrued or capitalized interest on these notes will automatically convert into a number of shares of our common stock equal to (A) (i) two times the outstanding principal balance, plus (ii) interest previously capitalized and added to the outstanding principal amount and (iii) any accrued but unpaid interest that has not been previously capitalized, divided by (B) the initial public offering price per share.

Our Corporate Information

We were incorporated under the laws of the State of Wyoming in August 2013 under the name “Avadim Technologies, Inc.” In September 2013, we acquired our predecessor company Avadim, LLC, a North Carolina limited liability company that was formed and began operations in 2007. In August 2018, we converted to a corporation under the laws of the State of Delaware and in September 2018, we changed our corporate name to “Avadim Health, Inc.” Our principal executive offices are located at 81 Thompson Street, Asheville, North Carolina 28803, and our

telephone number is (828) 251-7111. Our corporate website address is www.avadimhealth.com. The information contained on, or accessible through, our website is not incorporated by reference into this prospectus, and you should not consider any information contained in, or that can be accessed through, our website as part of this prospectus.

This prospectus contains references to our trademarks and to trademarks belonging to other entities. Solely for convenience, the trademarks and trade names in this prospectus are referred to without the symbols ^® and ™, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

Implications of Being an Emerging Growth Company

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We will remain an emerging growth company until the earliest to occur of: (1) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; (2) the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates as of the prior June 30th; (3) the issuance, in any three-year period, by us of more than $1.0 billion in non-convertible debt securities; and (4) the last day of the fiscal year following the fifth anniversary of the completion of this offering. An emerging growth company may take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:

•

reduced obligations with respect to financial data, including presenting only two years of audited consolidated financial statements, selected financial data and related Management’s Discussion and Analysis of Financial Condition and Results of Operations in this prospectus;

•

an exception from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act;

•

reduced disclosure about our executive compensation arrangements in our periodic reports, proxy statements and registration statements; and

•

exemptions from the requirements of holding non-binding advisory votes on executive compensation or golden parachute arrangements.

We have elected to take advantage of certain of the reduced disclosure obligations in this prospectus and may elect to take advantage of other reduced reporting requirements in our future filings with the U.S. Securities and Exchange Commission, or the SEC. As a result, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests.

In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we may not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies, which may make comparison of our consolidated financial statements to those of other public companies more difficult.

Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company,” which would allow us to take advantage of many of the same exemptions from disclosure requirements, including reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements.

THE OFFERING

Common stock offered by us

5,000,000 shares.

Option to purchase additional shares

We have granted the underwriters an option for a period of 30 days after the date of this prospectus to purchase up to 750,000 additional shares of common stock.

Common stock to be outstanding after this offering

22,910,212 shares (or 23,660,212 shares if the underwriters exercise their option to purchase additional shares in full).

Use of proceeds

We estimate that the net proceeds to us from this offering will be approximately $66.8 million, or approximately $77.2 million if the underwriters exercise their option to purchase additional shares in full, assuming an initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use the net proceeds from this offering for sales and marketing activities, including the expansion of our sales team, for research and development of potential future products, for expansion of our manufacturing capabilities and working capital and other general corporate purposes. See the section titled “Use of Proceeds.”

Risk factors

Investing in our common stock involves a high degree of risk. See the section titled “Risk Factors” and the other information included in this prospectus for a discussion of factors you should consider carefully before deciding to invest in our common stock.

Directed Share Program

At our request, the underwriters have reserved for sale, at the initial public offering price, up to 5% of the shares offered by this prospectus for sale to our directors, officers, and certain employees and other parties that we may designate. If these persons purchase directed shares, it will reduce the number of shares available for sale to the general public. Any directed shares that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus.

Proposed Nasdaq Global Market symbol

“AHI”

The number of shares of our common stock to be outstanding after this offering is based on:

•

16,940,379 shares of our common stock outstanding as of September 30, 2019;

•

116,500 shares of common stock issued on January 1, 2020 upon the settlement of restricted stock units, or RSUs, that were outstanding as of September 30, 2019; and

•

the automatic conversion of all outstanding obligations under our outstanding convertible notes upon the closing of this offering into an aggregate of 853,333 shares of common stock at the assumed initial offering price of $15.00 per share, the midpoint of the price range set forth on the cover page of this prospectus.

The number of shares of common stock to be outstanding after this offering excludes:

•

1,776,641 shares of common stock issuable upon the exercise of options outstanding as of September 30, 2019 and granted under our August 2014 Stock Incentive Plan, or the 2014 Plan, our September 2015 Stock Incentive Plan, or the 2015 Plan, our March 2016 Stock Incentive Plan, or the 2016 Plan, and our January 2019 Stock Incentive Plan, or the 2019 Incentive Plan, with a weighted-average exercise price of $10.56 per share;

•

2,545,977 shares of common stock issuable upon the exercise of warrants outstanding as of September 30, 2019, with a weighted-average exercise price of $9.16 per share;

•

2,000,000 shares of common stock reserved for future issuance pursuant to our 2020 Equity Incentive Plan, or the 2020 EIP, which will become effective on the date of execution of the underwriting agreement for this offering, which initial number of shares reserved for issuance includes shares reserved for issuance pursuant to the 2019 Incentive Plan that are not granted as of the effective date of the 2020 EIP, as well as any automatic increases in the number of common shares reserved for future issuance under the 2020 EIP; and

•

508,211 shares of common stock reserved for future issuance pursuant to our 2020 Employee Stock Purchase Plan, or the ESPP, as well as any automatic increases in the number of common shares reserved for future issuance under the ESPP.

Unless otherwise indicated, this prospectus reflects and assumes the following:

•

no exercise of the outstanding options or warrants described above subsequent to September 30, 2019;

•

the expiration of the outstanding warrant to purchase Series W preferred stock upon the completion of this offering, assuming the receipt of gross proceeds of at least $50 million; see “Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Liquidity and Capital Resources—Indebtedness” for more information;

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no exercise by the underwriters of their option to purchase up to 750,000 additional shares of our common stock;

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the filing and effectiveness of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws immediately prior the closing of this offering; and

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a one-for-four reverse stock split of our common stock effected on January 17, 2020.

As of December 31, 2017 and 2018 and September 30, 2019, our outstanding stock-based compensation awards included stock options, which include service condition or time-based vesting option awards granted to both employees and non-employees, performance condition option awards, and RSU awards, as well as restricted stock awards, or RSAs. The majority of our stock-based compensation awards were made to employees.

Because no qualifying event has occurred, we have not recognized any stock-based compensation expense for the RSUs and the RSAs as they have both a time-based vesting condition and a liquidity event-based vesting condition. At September 30, 2019, we had $2.0 million of unrecognized expense related to RSUs and $20.8 million of unrecognized expense related to employee RSAs. The liquidity event-based vesting condition will be satisfied upon the later of (a) the expiration of the lock-up period following the completion of this offering and (b) the date on which the holder of the award would not be subject to suit under the “short swing” profit rules of Section 16(b) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, for the sale of the shares underlying the award at a profit following the completion of this offering. As a result, we expect that approximately $13,719,953 of the foregoing unrecognized amounts, representing approximately 1,556,372 shares, will begin to be recognized upon the completion of this offering.

SUMMARY CONSOLIDATED FINANCIAL DATA

The following tables summarize our consolidated financial data as of, and for the periods, ended on, the dates indicated. We have derived the summary consolidated statement of operations data for the years ended December 31, 2017 and 2018 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the summary consolidated statement of operations data for the nine months ended September 30, 2018 and 2019 and the summary consolidated balance sheet data as of September 30, 2019 from our unaudited interim consolidated financial statements included elsewhere in this prospectus. The unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements, and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly our financial position and results of operations.

Our historical results are not necessarily indicative of the results that may be expected in the future. The following summary financial data should be read in conjunction with the sections titled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.


	Years Ended December 31,						Nine Months Ended September 30,
	2017			2018			2018			2019
	(in thousands, except share and per share data)

Statement of Operations Data:

Net revenues	$	10,818		$	29,043		$	19,848		$	34,415

Cost of revenues		8,561			13,087			9,102			14,072


Gross profit		2,256			15,956			10,746			20,344


Selling and marketing expenses		19,179			33,842			23,506			34,253

General and administrative expenses		10,433			11,484			8,953			10,608

Research and development expenses		1,715			1,904			1,509			1,287


Total operating expenses		31,327			47,231			33,969			46,149


Loss from operations		(29,071	)		(31,275	)		(23,223	)		(25,805	)


Interest income		—			76			22			88

Interest expense		(154	)		(17,769	)		(1,703	)		(4,949	)

Loss on extinguishment of debt		—			(1,355	)		—			—

Change in fair value of warrant and derivative liabilities		—			811			28			(1,116	)


Total other expenses		(154	)		(18,237	)		(1,653	)		(5,978	)


Net loss		(29,224	)		(49,511	)		(24,876	)		(31,783	)

Preferred stock dividends		—			(647	)		(276	)		—

Accretion of preferred stock		—			(1,611	)		(1,003	)		—


Net loss attributable to common stockholders	$	(29,224	)	$	(51,769	)	$	(26,156	)	$	(31,783	)


Net loss per share attributable to common stockholders, basic and diluted (1)	$	(2.23	)	$	(3.71	)	$	(1.89	)	$	(2.21	)


Weighted-average number of common shares outstanding, basic and diluted (1)		13,107,987			13,959,138			13,874,743			14,392,712

(1)

See note 15 to our audited consolidated financial statements and note 14 to our unaudited interim consolidated financial statements both included elsewhere in this prospectus for an explanation of the method used to calculate basic and diluted net loss per share attributable to common stockholders and the weighted average number of shares used in the computation of per share amounts.


	As of September 30, 2019
	Actual			Pro Forma (2)			Pro Forma As Adjusted (3)
	(in thousands)

Balance Sheet Data:

Cash	$	7,194		$	13,594		$	81,062

Working capital (deficit) (1)		(44,160	)		(37,760	)		30,724

Total assets		32,775			39,175			104,909

Term loans payable		55,408			55,408			55,408

Total liabilities		83,998			83,998			82,982

Total stockholders’ equity (deficit)		(51,223	)		(44,823	)		21,927

(1)

We define working capital as current assets less current liabilities. This figure includes the full principal and accrued interest balance of our term loan as a current liability as of the balance sheet date as a result of our prior non-compliance with certain covenants set forth in the credit agreement. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness.” See our consolidated financial statements and the related notes included elsewhere in this prospectus for further details regarding our current assets and current liabilities.

(2)

Pro forma balance sheet data gives effect to our issuance of the convertible notes in the aggregate principal amount of $6.4 million on January 10, 2020 and the automatic conversion of all outstanding obligations under the convertible notes upon the closing of the offering into an aggregate of 853,333 shares of common stock at the assumed initial offering price of $15.00 per share, the midpoint of the price range set forth on the cover of this prospectus.

(3)

Pro forma as adjusted balance sheet data gives effect to the transactions described in footnote (2) as well as our sale of 5,000,000 shares of common stock in this offering at an assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Pro forma as adjusted balance sheet data is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase or decrease in the assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease pro forma as adjusted cash, working capital, total assets and total stockholders’ (deficit) equity by approximately $4.7 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions. We may also increase or decrease the number of shares we are offering. A 1,000,000 share increase or decrease in the number of shares offered by us would increase or decrease pro forma as adjusted cash, working capital, total assets and total stockholders’ equity (deficit) by approximately $14.0 million, assuming that the assumed initial offering price to the public, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions.

RISK FACTORS

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

Risks Related to Business, Financial Position and Industry

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Our operations have consumed significant amounts of cash since inception. As of September 30, 2019, our cash was $7.2 million. Based on our planned use of the net proceeds of this offering, our current cash and expected future sales, we estimate that such funds will be sufficient to satisfy our operating expenses, debt service, capital expenditure requirements and organic growth strategies for at least the next 18 months. This estimate is based on a number of assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Changing circumstances could cause us to consume capital significantly faster than we currently anticipate, and we may need to spend more than currently expected because of circumstances beyond our control. Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:

•

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

•

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

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

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the costs of future clinical evaluations;

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

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

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

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

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

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

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

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our commercialization efforts.

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

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

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

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

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the potential advantages compared to alternatives;

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effectiveness of our sales and marketing efforts;

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

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the convenience and ease of use of our products;

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the strength of our marketing and distribution support;

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the timing of market introduction of competitive products;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We may face competition from manufacturers of similar products.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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impairment of our business reputation and significant negative media attention;

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withdrawal of participants from our clinical evaluations;

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significant costs to defend any related regulatory actions or litigation;

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distraction of management’s attention from our primary business;

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

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

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inability to market our existing products;

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

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decreased demand for our products; and

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loss of revenue.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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pre-clinical and clinical studies;

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product safety and effectiveness;

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product labeling;

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product storage and shipping;

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record keeping;

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pre-market clearance, authorization or approval;

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marketing, advertising and promotion;

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product sales and distribution;

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product changes;

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product recalls; and

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

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

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

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

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initiate an inspection of our facilities;

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

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

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suspend or withdraw regulatory clearance, authorization or approval;

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suspend any ongoing clinical studies;

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

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impose restrictions on our cleared or authorized products;

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seize or recall our products;

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partially suspend or totally shutdown our manufacturing operations;

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issue advisories or other field actions;

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impose operating restrictions; or

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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reduced protection and ability to enforce intellectual property rights;

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reduced protection and security for intellectual property rights;

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foreign reimbursement, pricing or insurance regimes;

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unexpected changes in tariffs, trade barriers or regulatory requirements;

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

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failure to attract or keep an effective partner;

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

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

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greater difficulty with enforcing our contracts;

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

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data and healthcare privacy and other similar laws; and

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

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

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

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

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

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

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

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

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

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

Risks Related to Our Dependence on Third Parties

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

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

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

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

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

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

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

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

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

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

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

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

Risks Related to Intellectual Property

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Competitors may infringe our patents or other intellectual property.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Risks Related to Employee Matters and Managing Growth

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

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

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

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

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

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

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

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

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

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

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

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

Risks Related to Our Common Stock and This Offering

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

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

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

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

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

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the success of existing or new competitive products or technologies;

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

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failure or discontinuation of any of our product development programs;

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

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the recruitment or departure of key personnel;

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

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

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

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

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

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

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announcement or expectation of additional financing efforts;

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

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

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market conditions in the healthcare and wellness sector;

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general economic, industry and market conditions;

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changes in accounting principles; and

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

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

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

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

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

Upon the closing of this offering, based on the number of shares of common stock outstanding as of September 30, 2019, our executive officers, directors and stockholders who owned more than 5% of our outstanding common stock before this offering and their respective affiliates will, in the aggregate, hold common stock representing approximately 24% of our outstanding common stock. As a result, if these stockholders choose to act together, they would be able to control or significantly influence all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons, if they choose to act together, would control or significantly influence the election of directors, the composition of our management and approval of any merger, consolidation, sale of all or substantially all of our assets or other business combination that other stockholders may desire. Any of these actions could adversely affect the market price of our common stock.

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

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

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

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

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

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

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

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

The initial public offering price of our common stock will be substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase our common stock in this offering, you will pay a price per share that substantially exceeds our net tangible book value per share after this offering. Based on an assumed initial public offering price of $15.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, you will experience immediate dilution of $14.08 per share as of September 30, 2019, representing the difference between our pro forma as adjusted net tangible book value per share, after giving effect to this offering, and the assumed initial public offering price. See the section titled “Dilution” for additional information.

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

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

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

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

Sales of a substantial number of shares of our common stock in the public market, or the perception in the market that the holders of a large number of stockholders intend to sell shares of our common stock, could reduce the market price of our common stock. After this offering, we will have 22,910,212 shares of common stock outstanding, based on 16,940,379 shares of our common stock outstanding as of September 30, 2019. This includes the shares that we are selling in this offering, which may be resold in the public market immediately without restriction, unless purchased by our affiliates. Substantially all of the remaining 16,940,379 shares of common stock initially will be restricted as a result of securities laws, market standoff provisions or lock-up agreements, but will become eligible to be sold after this offering as described in the section titled “Shares Eligible for Future Sale.”

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

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

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

closing of this offering. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” if our annual gross revenues exceed $1.07 billion or if we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:

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

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

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

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reduced disclosure obligations regarding executive compensation; and

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

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

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

We will incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives and corporate governance practices.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We could be subject to securities class action litigation.

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

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

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

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

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

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

New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, which could affect the tax treatment of our domestic or future foreign earnings. Any new taxes could adversely affect our domestic and international business operations, and our business and financial performance. Further, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us. For example, on December 22, 2017, President Trump signed into law the Tax Act, which significantly revises the Code. The Tax Act, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted taxable income (except for certain small businesses), limitation of the deduction for NOLs carried forward from taxable years beginning after December 31, 2017 to 80% of current year taxable income and elimination of carrybacks of NOLs arising in taxable years ending after December 31, 2017, one-time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. We do not expect changes under the Tax Act to have a material impact on our tax liabilities in the near future. However, we continue to examine the impact that the Tax Act may have on our business in the longer term. Accordingly, notwithstanding the reduction in the U.S. federal corporate income tax rate, the overall impact of the Tax Act is uncertain and our business and financial condition could be adversely affected by the Tax Act. The Tax Act may also have an impact on holders of our common stock. We urge prospective investors to consult with their legal and tax advisors with respect to the Tax Act and the potential tax consequences of investing in or holding our common stock.

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

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

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

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

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

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

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

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

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

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

•

the potential benefits of our existing and potential future products;

•

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

•

our business strategies and goals;

•

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

•

our expectations regarding our manufacturing capabilities;

•

the performance of our third-party suppliers and manufacturers;

•

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

•

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

•

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

•

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

•

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

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

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

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

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

INDUSTRY AND OTHER DATA

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

DIVIDEND POLICY

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

USE OF PROCEEDS

We estimate that the net proceeds from this offering will be approximately $66.8 million (or $77.2 million if the underwriters exercise their option to purchase additional shares in full), assuming an initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Each $1.00 increase or decrease in the assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease the net proceeds to us from this offering by approximately $4.7 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions. We may also increase or decrease the number of shares we are offering. A 1,000,000 share increase or decrease in the number of shares offered by us would increase or decrease the net proceeds to us from this offering by approximately $14.0 million, assuming that the assumed initial public offering price, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions. We do not expect that a change in the initial public offering price or the number of shares by these amounts would have a material effect on the uses of the proceeds from this offering, although a decrease in such price or number of shares may accelerate the time at which we will need to seek additional capital in the future.

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

•

approximately $34.0 million for sales and marketing activities, including the expansion of our sales team;

•

approximately $3.4 million for research and development of potential future products;

•

approximately $6.6 million for expansion of our manufacturing capabilities; and

•

the remainder for working capital and other general corporate purposes.

Based on our planned use of the net proceeds of this offering, our current cash and expected future sales, we estimate that such funds will be sufficient to satisfy our operating expenses, debt service, capital expenditure requirements and organic growth strategies for at least the next 18 months. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we expect.

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

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

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

CAPITALIZATION

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

•

on an actual basis;

•

on a pro forma basis to give effect to (1) 116,500 shares of common stock issued on January 1, 2020 upon the settlement of restricted stock units, or RSUs, that were outstanding as of September 30, 2019; and (2) our issuance of the convertible notes in the aggregate principal amount of $6.4 million on January 10, 2020 and the automatic conversion of all outstanding obligations under the convertible notes upon the closing of this offering into an aggregate of 853,333 shares of our common stock at the assumed initial offering price of $15.00 per share, the midpoint of the price range set forth on the cover page of this prospectus; and

•

on an as adjusted basis to further reflect our sale of 5,000,000 shares of common stock in this offering at an assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

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


	As of September 30, 2019
	Actual			Pro Forma			Pro Forma As Adjusted (1)
	(in thousands, except share data)

Cash	$	7,194		$	13,594		$	81,062


Term loan		55,408			55,408			55,408

Series A redeemable preferred stock, par value $0.001 per share; 2,000,000 shares authorized, no shares issued or outstanding, actual or pro forma; no shares authorized, issued or outstanding, pro forma as adjusted		—			—			—

Series W redeemable preferred stock, par value $0.001 per share; 100 shares authorized, no shares issued or outstanding, actual or pro forma; no shares authorized, issued or outstanding, pro forma as adjusted		—			—			—

Stockholders’ equity (deficit):

Preferred stock, par value $0.001 per share; no shares authorized, issued or outstanding, actual or pro forma; 10,000,000 shares authorized, no shares issued or outstanding, pro forma as adjusted		—			—			—

Common stock, par value $0.001 per share; 200,000,000 shares authorized, 16,940,379 shares issued and outstanding, actual; 200,000,000 shares authorized, 17,910,212 shares issued and outstanding, pro forma; 200,000,000 shares authorized, 22,910,212 shares issued and outstanding, pro forma as adjusted		17			18			23

Additional paid-in capital		93,911			100,310			167,055

Accumulated deficit		(145,151	)		(145,151	)		(145,151	)


Total stockholders’ equity (deficit)		(51,223	)		(44,823	)		21,927


Total capitalization	$	4,185		$	10,585		$	77,335

(1)

The pro forma as adjusted information set forth above is illustrative only and will change based on the actual initial public offering price and number of shares issued in this offering, each determined at pricing. Each $1.00 increase or decrease in the assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease pro forma as adjusted cash, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $4.7 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. A 1,000,000 share increase or decrease in the number of shares offered by us would increase or decrease pro forma as adjusted cash, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $14.0 million, assuming that the assumed initial public offering price, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

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

•

16,940,379 shares of our common stock outstanding as of September 30, 2019;

•

116,500 shares of common stock issued on January 1, 2020 upon the settlement of RSUs that were outstanding as of September 30, 2019; and

•

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

•

1,776,641 shares of common stock issuable upon the exercise of options outstanding as of September 30, 2019 and granted under the 2014 Plan, the 2015 Plan, the 2016 Plan and the 2019 Incentive Plan, with a weighted-average exercise price of $10.56 per share;

•

2,545,977 shares of common stock issuable upon the exercise of warrants outstanding as of September 30, 2019, with a weighted-average exercise price of $9.16 per share;

•

2,000,000 shares of common stock reserved for future issuance pursuant to the 2020 EIP, which will become effective on the date of execution of the underwriting agreement for this offering, which initial number of shares reserved for issuance includes shares reserved for issuance pursuant to the 2019 Incentive Plan that are not granted as of the effective date of the 2020 EIP, as well as any automatic increases in the number of common shares reserved for future issuance under the 2020 EIP; and

•

508,211 shares of common stock reserved for future issuance pursuant to our ESPP, as well as any automatic increases in the number of common shares reserved for future issuance under the ESPP.

DILUTION

If you invest in our common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share and the pro forma as adjusted net tangible book value per share of our common stock after this offering.

As of September 30, 2019, we had a historical net tangible book value deficit of $(53.8) million, or $(3.18) per share of common stock. Our historical net tangible book value (deficit) per share represents total tangible assets less total liabilities, divided by the number of shares of our common stock outstanding as of September 30, 2019.

Our pro forma net tangible book deficit as of September 30, 2019 was $(47.4) million, or $(2.65) per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities divided by the pro forma number of shares of common stock outstanding as of September 30, 2019 after giving effect to 116,500 shares of common stock issued on January 1, 2020 upon the settlement of restricted stock units, or RSUs, that were outstanding as of September 30, 2019 and our issuance of the convertible notes in the aggregate principal amount of $6.4 million on January 10, 2020 and the automatic conversion of all outstanding obligations under the convertible notes upon the closing of this offering into an aggregate of 853,333 shares of our common stock at the assumed initial offering price of $15.00 per share, the midpoint of the price range set forth on the cover page of this prospectus.

After giving effect to the sale of 5,000,000 shares of common stock in this offering at an assumed initial public offering price of $15.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of September 30, 2019 would have been approximately $21.0 million, or approximately $0.92 per share. This amount represents an immediate increase in net tangible book value of $3.57 per share to our existing stockholders and immediate dilution of approximately $14.08 per share to new investors in this offering. We determine dilution by subtracting the pro forma as adjusted net tangible book value (deficit) per share after this offering from the amount of cash that a new investor paid for a share of common stock in this offering.

The following table illustrates this dilution:



Assumed initial public offering price per share				$	15.00

Historical net tangible book value (deficit) per share as of September 30, 2019	$	(3.18	)

Increase per share due to issuance and assumed conversion of the convertible notes		0.53


Pro forma net tangible book value per share as of September 30, 2019		(2.65	)

Increase per share attributable to investors participating in this offering		3.57


Pro forma as adjusted net tangible book value (deficit) per share after this offering					0.92


Dilution per share to new investors in this offering				$	14.08

The pro forma as adjusted dilution information discussed above is illustrative only and will change based on the actual initial public offering price and number of shares issued in this offering, each determined at pricing. Each $1.00 increase or decrease in the assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease the pro forma as adjusted net tangible book value

(deficit) per share by $0.20 per share and the dilution per share to investors participating in this offering by $0.80 per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. A 1,000,000 share increase in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase the pro forma as adjusted net tangible book value (deficit) per share by $0.54 and decrease the dilution per share to investors participating in this offering by $0.54, assuming the initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions. A 1,000,000 share decrease in the number of shares offered by us, as set forth on the cover page of this prospectus, would decrease the pro forma as adjusted net tangible book value (deficit) per share after this offering by $0.60 and increase the dilution per share to new investors participating in this offering by $0.60, assuming the assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their option to purchase an additional 750,000 shares of our common stock in full, the pro forma as adjusted net tangible book value (deficit) of our common stock would increase to $1.33 per share, representing an immediate increase in the pro forma as adjusted net tangible book value per share to existing stockholders of $0.41 per share and an immediate dilution of $13.67 per share to investors participating in this offering.

The following table summarizes, on a pro forma as adjusted basis as of September 30, 2019, the number of shares of our common stock, the total consideration and the average price per share: (1) paid to us by our existing stockholders; and (2) to be paid by investors purchasing our common stock in this offering at an assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. As the table below shows, investors participating in this offering will pay an average price per share substantially higher than our existing stockholders paid.


	Shares Purchased					Total Consideration					Weighted- Average
	Number		Percent			Amount		Percent			Price Per Share

Existing stockholders		17,910,212		78.2	%	$	63,724,464		45.9	%	$	3.56

New investors		5,000,000		21.8			75,000,000		54.1		$	15.00


Total		22,910,212		100.0	%	$	138,724,464		100.0	%

Each $1.00 increase or decrease in the assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease total consideration paid by new investors, total consideration paid by all stockholders and the average price per share paid by all stockholders by $5.0 million, $5.0 million and $0.22, respectively, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. Similarly, a 1,000,000 share increase or decrease in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase or decrease the total consideration paid by investors participating in this offering, total consideration paid by all stockholders and the average price per share paid by all stockholders by approximately $15.0 million, $15.0 million and $0.63, respectively, assuming the assumed initial public offering

price of $15.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, remains the same.

The foregoing tables and calculations are based on the number of shares of common stock outstanding after the closing of this offering and assume no exercise of any outstanding options or warrants. The information above excludes:

•

2,545,977 shares of common stock issuable upon the exercise of warrants outstanding as of September 30, 2019, with a weighted-average exercise price of $9.16 per share;

•

2,000,000 shares of common stock reserved for future issuance pursuant to the 2020 EIP Plan, which will become effective on the date of execution of the underwriting agreement for this offering, which initial number of shares reserved for issuance includes shares reserved for issuance pursuant to the 2019 Incentive Plan that are not granted as of the effective date of the 2020 EIP, as well as any automatic increases in the number of common shares reserved for future issuance under the 2020 EIP; and

•

508,211 shares of common stock reserved for future issuance pursuant to the ESPP, as well as any automatic increases in the number of common shares reserved for future issuance under the ESPP.

To the extent that outstanding stock options or warrants are exercised, new stock options, RSU or other equity awards are issued under our equity incentive plans, or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering. In addition, we may choose to raise additional capital because of market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans. If we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

SELECTED CONSOLIDATED FINANCIAL DATA

The following tables set forth our selected consolidated financial data as of, and for the periods ended on the dates indicated. We have derived the selected statement of operations data for the years ended December 31, 2017 and 2018 and our selected balance sheet data as of December 31, 2017 and 2018 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the selected consolidated statement of operations data for the nine months ended September 30, 2018 and 2019 and the selected consolidated balance sheet data as of September 30, 2019 from our unaudited interim consolidated financial statements included elsewhere in this prospectus. The unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements, and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly our financial position and results of operations.

Our historical results are not necessarily indicative of the results that may be expected in the future. The following selected financial data should be read in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.


	Years Ended December 31,						Nine Months Ended September 30,
	2017			2018			2018			2019
	(in thousands, except share and per share data)

Statement of Operations Data:

Net revenues	$	10,818		$	29,043		$	19,848		$	34,415

Cost of revenues		8,561			13,087			9,102			14,072


Gross profit		2,256			15,956			10,746			20,344


Selling and marketing expenses		19,179			33,842			23,506			34,253

General and administrative expenses		10,433			11,484			8,953			10,608

Research and development expenses		1,715			1,904			1,509			1,287


Total operating expenses		31,327			47,231			33,969			46,149


Loss from operations		(29,071	)		(31,275	)		(23,223	)		(25,805	)


Interest income		—			76			22			88

Interest expense		(154	)		(17,769	)		(1,703	)		(4,949	)

Loss on extinguishment of debt		—			(1,355	)		—			—

Change in fair value of warrant and derivative liabilities		—			811			28			(1,116	)


Total other expenses		(154	)		(18,237	)		(1,653	)		(5,978	)


Net loss		(29,224	)		(49,511	)		(24,876	)		(31,783	)

Preferred stock dividends		—			(647	)		(276	)		—

Accretion of preferred stock		—			(1,611	)		(1,003	)		—


Net loss attributable to common stockholders	$	(29,224	)	$	(51,769	)	$	(26,156	)	$	(31,783	)


Net loss per share attributable to common stockholders, basic and diluted (1)	$	(2.23	)	$	(3.71	)	$	(1.89	)	$	(2.21	)


Weighted-average number of common shares stock outstanding, basic and diluted (1)		13,107,987			13,959,138			13,874,743			14,392,712

(1)

See note 15 to our audited consolidated financial statements and note 14 to our unaudited interim consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to calculate basic and diluted net loss per share and the weighted average number of shares used in the computation of per share amounts.


	As of December 31,					As of September 30, 2019
	2017		2018			As of September 30, 2019
	(in thousands)

Balance Sheet Data:

Cash	$	2,867	$	17,448		$	7,194

Working capital (deficiency) (1)		299		(22,997	)		(44,160	)

Total assets		15,297		33,448			32,775

Term loans payable		—		41,284			55,408

Total liabilities		10,878		64,814			83,998

Total stockholders’ equity (deficit)		4,419		(31,366	)		(51,223	)

(1)

We define working capital as current assets less current liabilities. This figure includes the full principal and accrued interest balance of our term loan as a current liability as of December 31, 2018 and September 30, 2019 as a result of our prior non-compliance with certain covenants set forth in the credit agreement. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness.” See our consolidated financial statements and the related notes included elsewhere in this prospectus for further details regarding our current assets and current liabilities.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with “Selected Financial Data” and our consolidated financial statements and related notes appearing elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this prospectus, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. You should carefully read the “Risk Factors” section of this prospectus to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section entitled “Special Note Regarding Forward-Looking Statements.” Except where the context otherwise requires, the terms “we,” “us,” or “our” refer to the business of Avadim Health, Inc. and its consolidated subsidiaries.

Overview

We use an evidence-based approach to develop, test and market our products and are actively compiling a compendium of clinical evidence that includes 40 completed clinical studies to date. The majority of these clinical studies are IRB approved, and have resulted in 20 validating peer-reviewed publications or clinical posters. Our clinical evidence contributed to the successful registration of several of our products for Medicare and Medicaid reimbursement in September 2019. Our data also enables our sales teams to serve customers across the full continuum of care, from institutional care to self-care, including in hospitals, long-term care facilities, closed provider pharmacies, physician offices and retail pharmacies.

We have a portfolio of marketed products and future potential products. To date, we have six marketed products, three of which we consider to be cosmetics: Theraworx Protect for Immune Health, Theraworx Protect U-Pak for Urinary Health and Combat One for soldier and first responder readiness; and three of which we consider to be homeopathic drug products: Theraworx Relief for Muscle Cramps and Spasms, Theraworx Relief for Joint Discomfort and Inflammation and PHUEL for topical muscle nutrition. Cosmetics do not require premarket approval from the FDA. Homeopathic drug products require premarket approval from the FDA, and products without approval are subject to a risk-based enforcement approach. We market our homeopathic drug products without such approval. In addition to our currently marketed products, we plan to pursue the development and commercialization of additional topical products to address risks that may lead to skin and surgical conditions. We plan to launch a drug product under an OTC drug monograph in the next year, seek clearance from the FDA for a medical device pursuant to a 510(k) notification in the next two to three years and seek de novo classification from the FDA for a second medical device in the next two to three years.

At the end of July 2016, our initial products were used in approximately 60 acute care hospitals, 100 nursing homes and other long-term care facilities and we had not established a retail presence. At the end of November 2019, our products were used in more than 250 acute care hospitals, more than 750 nursing homes and other long-term care facilities and were available in over 47,000 pharmacy locations. Between 2017 and 2018, our net revenues increased from $10.8 million to $29.0 million, representing an annual growth rate of 168%. For the nine months ended September 30, 2019 as compared to the same period in 2018, we grew our net revenues from $19.8 million to $34.4 million, an increase of 73%.

Certain Factors Affecting Our Results

We believe the following factors are important to understanding our current and future financial condition and results of operations.

Adoption of Our Products and Brand Recognition Growth

We are a vertically integrated company with in-house research and development, manufacturing and commercialization capabilities. As described above, we have experienced significant expansion of our institutional care and retail pharmacy /consumer sales channels over the last several years. Our products and their respective launch dates are as follows:

•

Theraworx Protect for Immune Health (third quarter of 2013);

•

PHUEL (second quarter of 2014);

•

Combat One (third quarter of 2016);

•

Theraworx Relief for Muscle Cramps and Spasms (first quarter of 2017);

•

Theraworx Relief for Joint Discomfort and Inflammation (second quarter of 2019); and

•

Theraworx Protect U-Pak for Urinary Health (third quarter of 2019).

We believe our revenue growth in the institutional care channel, which includes hospitals, nursing homes and other long-term care facilities, is the result of our commitment to engage key decisionmakers. Revenue growth in our retail pharmacy/consumer channel is the result of our investment in television and digital media campaigns and our outreach efforts by our direct sales team to targeted physician and pharmacist decisionmakers. These investments have led to increased recommendations of our products and increased direct consumer demand resulting in increased sales. We believe that this combined approach to building brand equity and recognition has resulted in strong growth of our brand and validity in the marketplace.

We believe we will also continue to benefit from certain external factors, such as the trend away from the overuse of antibiotics, and the move away from oral systemic pain medications, such as opioids, as well as the fact that the use of NSAIDs is contraindicated in certain populations. In addition, we believe we benefit from growing acceptance of homeopathic products by consumers, increasing patient involvement in healthcare decision-making and increasing awareness of issues relating to microbial resistance associated with competitive products.

Attracting New Customers and Expanding Existing Customer Relationships

Our future growth depends in large part on our ability to attract new customers in both our institutional care and retail pharmacy/consumer channels, while at the same time expanding our relationships with our existing customers. In our institutional care channel, we intend to focus on expanding our presence with current institutional customers, while at the same time attracting new hospital and nursing home customers. In the hospital setting, we believe we can use our existing relationships with decisionmakers to increase the number of departments within a particular hospital that could be purchasers of our products. We also plan to leverage our existing academic hospital relationships to expand to affiliated facilities and referral partners. We also plan to leverage existing GPO contracts by expanding into new nursing homes and other institutional care facilities. We currently sell Theraworx Protect in approximately 1,000 nursing homes, other long-term care facilities and hospitals. According to the American Hospital Association, there were approximately 6,200 hospitals and, according to the CMS, approximately 15,500 nursing homes in the United States as of January 2019, which we believe represents a significant growth opportunity for us. We also launched both Theraworx Relief products and Theraworx Protect U-Pak in the nursing home setting in the fourth quarter of 2019 and expect increased revenues from this component of our institutional care channel over time.

In our retail pharmacy/consumer channel, we plan to drive volume through locations where our products are currently sold and to add new retail locations. To do this, we plan to continue to grow our dedicated sales team, to increase our advertising spend and to increase consistent face-to-face customer interaction. We have experienced strong revenue growth in the retail pharmacy/consumer channel where we have instituted and maintained a consistent calling effort of pharmacists. We also believe the adoption of our products in the institutional care setting leads to increased acceptance by pharmacies and retail stores. We plan to increase our retail pharmacy/consumer health sales team from approximately 50 dedicated sales representatives and managers to approximately 100 within the six months following this offering. We also plan to increase our spending on advertising campaigns. As a result, we expect a commensurate increase in our sales and marketing expenses in the near term. However, due to the time it takes to recruit and train new sales representatives, it may take several quarters before we are able to fully achieve the expected revenue increases from such expansion. In addition, it may take time to realize the benefits of our increased advertising spend. Accordingly, our profitability could be materially impacted until such increased revenues are achieved.

The expansion of our products into a retail chain is subject to each individual chain’s category review cycles which, at times, can require us to launch brands over extended timeframes. We believe the demand we have created with Theraworx Relief for Muscle Cramps and Spasms will facilitate category adoption for future products. We have experienced accelerated adoption in connection with the launches of Theraworx Relief for Joint Discomfort and Inflammation and Theraworx Protect U-Pak for Urinary Health products. For example, within the first 120 days following the initial launch, Theraworx Relief for Joint Discomfort and Inflammation was available in approximately 20,000 pharmacies. We believe we can replicate these rapid expansion rates when launching our future potential products.

Expanding Coverage and Reimbursement

We intend to expand coverage and reimbursement for our products among both insurance providers and workers’ compensation groups which will increase access to our products and further drive revenues. In September 2019, Theraworx Protect U-Pak for Urinary Health, Theraworx Relief for Muscle Cramps and Spasms and Theraworx Relief for Joint Discomfort and Inflammation were added to a national data registry, thereby enabling Medicare and Medicaid reimbursement for those products as well as HSA/FSA coverage of those products with a prescription. We believe this will drive exposure to our products and significantly facilitate the prescription process for doctors. We expect that as we are able to further expand our coverage and reimbursement access, it will drive adoption of our products by institutional providers, which will allow us to grow our revenues over time.

Customer Retention/Product Returns

Our ability to maintain our revenue base depends on our ability to retain our existing customers. From June 2018 to June 2019, the return rate for all of our products, on a unit basis, was less than 1%. Our return rates include all products returned due to the following reasons: damages during the shipping process; returns when orders are received by customers in error; when inventories do not sell within the shelf life of the product; and product failures.

We also focus on increasing sales to our existing customers through brand and product expansion. This can include expanding the number of products, or SKUs, at a location, by having our products available at multiple locations within one retail store or by expanding adoption of our products in a particular retail chain. For example, Kroger, which originally launched Theraworx Relief for Muscle Cramps and Spasms, now has added Theraworx Relief for Joint Discomfort and Inflammation. Another example is CVS, which originally launched Theraworx Relief for Muscle Cramps and Spasms in 1,700 of its stores and expanded to more than of its 8,000 stores by August 2019. Further, Theraworx Protect U-Pak for Urinary Health was originally placed by Walgreens behind its pharmacy counter in 4,700 stores and Walgreens has recently added the U-Pak to its the feminine hygiene category in 7,700 of its stores.

We believe building the Theraworx brand across each product family facilitates increased brand awareness and marketing efficiency across all our brands. Our direct sales representatives are selling multiple product lines on each call, increasing the value of each face-to-face interaction. We believe our media investments are also having an influence across all Theraworx products. We are currently covering 16,000 pharmacies with our direct sales force, and we believe that expanding our sales team will result in covering the majority of high-value pharmacies.

Patent Obligation

In July 2016, we entered into a settlement agreement to clarify our rights and obligations to the seller of a patent we acquired in March 2013, or the Purchased Patent, which Purchased Patent expired in August 2018. Under the settlement agreement, we agreed to make cash payments totaling up to $9,950,000 to the seller and issued the seller an aggregate of 237,500 shares of our common stock in two installments (of which 125,000 were issued in July 2016 and 112,500 of which were issued in January 2017). The cash payments are as follows: (i) $200,000 (paid in 2016); (ii) $750,000 payable in 12 equal monthly installments of $62,500 commencing October 2016 and ending September 2017; and (iii) payment of 6% of net sales of the covered products, which include Theraworx Protect, Theraworx Relief, Combat One and PHUEL, until a total of $9,000,000 has been paid pursuant to this clause (iii). As of September 30, 2019, the remaining balance that we could be required to pay pursuant to clause (iii) of the previous sentence was $4.8 million. During the nine months ended September 30, 2019, we issued 81,764 shares of our common stock in satisfaction of a portion of the cash payments that would otherwise have been due upon the net sales of the covered products.

We amortized the cost of the Purchased Patent on a straight-line basis through its expiration in August 2018. Amortization expense, which is reflected in cost of revenues, was $1.7 million and $0.8 million for the years ended December 31, 2017 and 2018, respectively, and $0.8 million for the nine months ended September 30, 2018. Other payments relating to this patent are expensed as incurred commensurate with the period in which the net sales of covered products are recognized. For the years ended December 31, 2017 and 2018 and the nine months ended September 30, 2018 and 2019, expenses related to the 6% due on net sales of covered products, which were also included in cost of revenues, were $0.5 million, $1.2 million, $0.7 million and $3.1 million, respectively.

Key Metrics

In order to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions, we review several key financial and operating metrics, primarily net revenues by segment, the number of locations in which our products are sold, both in terms of institutional care facilities and retail pharmacies, the resulting average revenues per location and, for our retail pharmacy / consumer segment, the number of sales representatives calling on pharmacists and the number of sales visits made to those locations. We count a location as a unique pharmacy, retail store, hospital, nursing home or care facility that has purchased any of our products during the 12 months preceding the date of determination. For the retail pharmacy/consumer segment, we exclude online sales through Amazon and our website, as they are not associated with a particular location. The table below sets forth these key metrics as of and for the years ended December 31, 2017 and 2018 and the nine months ended September 30, 2018 and 2019:


	Year Ended December 31,				Nine Months Ended September 30,
	2017		2018		2018		2019

Net revenues for retail pharmacy / consumer segment (excluding online sales)	$	641,809	$	10,941,424	$	7,074,269	$	24,138,657

Number of retail pharmacy locations as of end of period		7,266		40,179		35,592		47,822

Average revenues per location in retail pharmacy / consumer segment	$	88	$	272	$	199	$	505

Net revenues for institutional care segment	$	7,912,201	$	11,591,743	$	7,600,726	$	7,406,688

Number of institutional care locations as of end of period		681		930		766		955

Average revenues per location in institutional care segment	$	11,619	$	12,464	$	9,923	$	7,756

Number of sales representatives as of the end of period		35		52		37		90

Number of sales representative visits to retail pharmacies (1)								60,194

(1)	We did not begin recording this metric until 2019.

Our Segments

We currently sell our products through two primary distribution channels, which are our two reportable segments:

•

Retail Pharmacy/Consumer Segment: which primarily includes nationwide pharmacies and other retailers that sell direct to consumers, such as Walgreens, CVS and Walmart. The principal products we sell in this segment are our two Theraworx Relief branded products and our Theraworx Protect U-Pak for Urinary Health.

•

Institutional Care Segment: which primarily includes acute-care hospitals and nursing homes, as well as other long-term care facilities, including short-term rehabilitation and other facilities designed for post-hospitalization care during recovery. The principal product we sell in this segment is Theraworx Protect for Immune Health.

We also generate net revenues from sales of our PHUEL and Combat One products and we engage in contract manufacturing and provide quality assurance services to third parties. Net revenues from sales of PHUEL and Combat One products and from these other business activities, collectively classified as “Other” in Note 19 to our audited consolidated financial statements and Note 17 in our interim consolidated financial statements included elsewhere in this prospectus, represented less than 10% of our total net revenues for the year ended December 31, 2018 and the nine months ended September 30, 2018 and 2019.

Although we leverage many of the same resources in our business (including our research and development and manufacturing capabilities) to sell into each of our two distribution channels, and all of our products were developed using our proprietary product development platform, we nevertheless view them as distinct distribution segments due to how we manage our business.

Components of Our Operating Results

Net Revenues

We primarily generate revenues from the sales of our products in our institutional care and retail pharmacy/consumer channels. In our institutional care segment, we typically enter into agreements with healthcare supply contracting companies or GPOs, which enable us to sell to member hospitals, nursing homes and other institutional care facilities. GPO agreements typically include negotiated pricing for all group members. We do not sell directly to GPOs. Instead, members of a GPO purchase products directly from us under the terms negotiated by the GPO. We recognize revenues when or as the performance obligation is satisfied, depending on the terms of the underlying contract. For a majority of our sales, this is when products are shipped or delivered to the customer. For customer agreements with consignment clauses, such as certain national pharmacy chains, we recognize revenues when the end-user purchases products at the pharmacy counter. If a customer pays in advance, we record the contract liability as deferred revenue.

We also generate net revenues from the provision of quality assurance and contract manufacturing services to third parties.

Cost of Revenues

Cost of revenues primarily consists of the cost of materials, direct and indirect labor, depreciation associated with manufacturing equipment, manufacturing overhead costs, amortization and other expenses related to our Purchased Patent and shipping costs associated with the production and distribution of our products. As the Purchased Patent expired in August 2018, we will not incur amortization expenses related to the Purchased Patent for periods after September 30, 2018, although we do expect to continue to incur other expenses related to the Purchased Patent until the obligation described above under “—Certain factors affecting our results—Patent Obligation” is satisfied. On a segment basis, the cost of revenues presented by segment excludes amortization and other expenses related to this patent, which amounts are characterized as unallocated for the years ended December 31, 2017 and 2018. In 2019, we began including amortization and other expenses related to the patent obligation in segment cost of revenues. As a result, these expenses are included in our cost of revenues on a segment basis for the nine months ended September 30, 2019.

Selling and Marketing Expenses

Selling and marketing expenses consists of marketing, advertising, sales commissions, salaries and wages for sales personnel, stock-based compensation and promotional material. On a segment basis, the selling and marketing expenses presented for each segment only include certain marketing and advertising expenses related to our primary advertising vendor and certain sales commissions. Other amounts, including salaries and wages of sales and marketing personnel, non-cash stock-based compensation and marketing expenses are classified as unallocated. See Note 19 to our audited consolidated financial statements appearing elsewhere in this prospectus for additional information. We expect that following this offering, most sales and marketing expenses will be presented by segment. We expect to incur increased selling and marketing expenses as we continue to implement our direct-to-consumer television campaign and add additional sales representatives to our direct sales team.

General and Administrative Expenses

General and administrative expenses consist of salaries and other related costs, including stock-based compensation for personnel in our executive, finance, and administrative functions, professional fees for accounting, auditing, tax and consulting services, payroll and other compensation, travel, lodging, meals, mileage, credit card processing fees and other common general and administrative expenses. We expect that our general and administrative expenses will increase in the future as we increase our personnel headcount to support our continued growth. Following this offering, we also expect to incur increased expenses associated with being a public company, including costs of accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with the requirements of Nasdaq and the SEC; director and officer insurance costs; and investor and public relations costs.

Research and Development Expenses

Research and development costs consist of payroll and related costs for our scientist and research staff, experimental equipment and supplies, clinical studies and consultants engaged to assist with our product development. We expense research and development costs as incurred. We expect to incur increased research and development expenses as we roll out new product offerings and execute additional clinical studies for products in our pipeline.

Interest Expense

Interest expense consists of interest accrued on borrowings and capital leases, primarily our senior secured term loan and equipment financing arrangements. Interest expense also includes the amortization of debt discounts and debt issuance costs.

Change in Fair Value of Warrant Liability

We classify warrants to purchase common stock that we issued in April 2018 in conjunction with issuances of our convertible notes and Series A redeemable preferred stock and in October 2018 in conjunction with our senior secured term loan as liabilities and we record them at fair value. These warrants are subject to re-measurement at each balance sheet date, and we recognize any change in fair value in our consolidated statements of operations.

Income Taxes

We have not recognized an income tax benefit for any periods presented herein because we continue to maintain a full valuation allowance on our deferred tax assets. The income tax benefit

related to our losses for these years is offset by changes in the related valuation allowance. Realization of future tax benefits is dependent on our ability to generate sufficient taxable income within the carryforward periods. Based on our history of operating losses, our management has concluded that the likelihood of realizing deferred income tax assets in the future is at a level that requires us to maintain a full valuation allowance.

Results of Operations

Comparison of Nine Months Ended September 30, 2018 and 2019

The following table presents our operating results for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2019:


	Nine Months Ended September 30,						Change
	2018			2019			$			%

Net revenues	$	19,847,855		$	34,415,220		$	14,567,365			73	%

Cost of revenues		9,102,300			14,071,673			4,969,373			55


Gross profit		10,745,555			20,343,547			9,597,992			89


Selling and marketing expenses		23,506,361			34,253,391			10,747,030			46

General and administrative expenses		8,952,696			10,608,475			1,655,779			18

Research and development expenses		1,509,452			1,286,831			(222,621	)		(15	)


Total operating expenses		33,968,509			46,148,697			12,180,188			36


Loss from operations		(23,222,954	)		(25,805,150	)		(2,582,196	)		(11	)


Interest income		22,146			87,736			65,590			296

Interest expense		(1,703,099	)		(4,949,334	)		(3,246,235	)		191

Change in fair value of warrant and derivative liabilities		27,638			(1,116,466	)		(1,144,104	)		(4,140	)


Total other expenses		(1,653,315	)		(5,978,064	)		(4,324,749	)		(246	)


Net loss	$	(24,876,269	)	$	(31,783,214	)	$	(6,906,945	)		(28	)%

Net Revenues

The following table is a breakdown of our net revenues by segment for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2019:


	Nine Months Ended September 30,				Change
	2018		2019		$			%

Net revenues:

Retail pharmacy/consumer	$	11,030,932	$	25,870,658	$	14,839,726			135	%

Institutional care		7,600,726		7,406,688		(194,038	)		(3	)

Other		1,216,197		1,137,874		(78,323	)		(6	)


Total	$	19,847,855	$	34,415,220	$	14,567,365			73	%

Net revenues increased by $14.6 million to $34.4 million for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. The increase was primarily due to growth in sales in our retail pharmacy/consumer channel, which increased by $14.8 million as compared to the prior year. The increase was driven by increased Theraworx Relief sales in pharmacies.

Cost of Revenues

The following table is a breakdown of our cost of revenues by segment for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2019:


	Nine Months Ended September 30,				Change
	2018		2019		$		%

Cost of revenues:

Retail pharmacy/consumer	$	4,209,758	$	8,854,922	$	4,645,164		110	%

Institutional care		3,711,685		3,931,764		220,079		6

Other		1,180,857		1,284,987		104,130		9


Total	$	9,102,300	$	14,071,673	$	4,969,373		55	%

Cost of revenues increased $5.0 million to $14.1 million for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. As a percentage of net revenues, cost of revenues decreased to 41% for the nine months ended September 30, 2019 from 46% for the nine months ended September 30, 2018. This improvement in our cost of revenues as a percentage of net revenues was driven by a 1% decrease due to direct labor efficiency, and the full amortization of the Purchased Patent in the first nine months of 2018, which contributed to a 6% reduction in overhead costs between the periods. These cost reductions were offset by a 3% increase in average material costs as a result of the product launches of Theraworx U-Pak for Urinary Health and Theraworx Relief for Joint Discomfort & Inflammation.

Gross Profit

Our gross profit as a percentage of net revenues, or gross margin, was 59% for the nine months ended September 30, 2019 as compared to 54% for the nine months ended September 30, 2018. For our retail pharmacy/consumer segment, our gross margin improved to 66% for the nine months ended September 30, 2019 as compared to 62% for the nine months ended September 30, 2018. The gross margin of our institutional care segment decreased to 47% from 51% over the same period. Gross profit from our institutional care segment decreased as a percentage of net revenues, primarily due to a 4% increase in average material costs and a 2% increase in costs because of Purchased Patent related expenses. Please see the cost of revenues section above for the gross profit improvement explanation.

Selling and Marketing Expenses

The following table is a breakdown of our selling and marketing expenses by segment for the nine months ended September 30, 2018, as compared to the nine months ended September 30, 2019:


	Nine Months Ended September 30,				Change
	2018		2019		$			%

Selling and marketing expenses:

Retail pharmacy/consumer	$	13,712,944	$	15,573,051	$	1,860,107			14	%

Institutional care		761,252		636,039		(125,213	)		(16	)

Unallocated		9,032,165		18,044,301		9,012,136			100


Total	$	23,506,361	$	34,253,391	$	10,747,030			46	%

Selling and marketing expenses increased $10.7 million to $34.3 million for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. The increase in the retail pharmacy/consumer segment was primarily due to increased marketing and advertising expenses in connection with nationwide internet and television advertising campaigns to raise brand awareness for Theraworx Relief. The increase in the unallocated expenses was driven by increased salary and related fringe benefits to expand our sales force and increased non-cash stock-based compensation expenses.

General and Administrative Expenses

General and administrative expenses increased by $1.7 million to $10.6 million for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. The increase was primarily due to additional headcount in our corporate headquarters, additional professional fees and higher non-cash stock-based compensation expenses.

Research and Development Expenses

Research and development expenses decreased from $0.2 million to $1.3 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. The decrease was due to lower consulting expenses relating to research and development.

Interest Expense

Interest expense increased from $1.7 million to $4.9 million for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018 primarily as a result of our senior secured term loan, under which we initially borrowed $40.0 million in October 2018. There were additional amounts borrowed of $5.0 million in June 2019 and $5.0 million in August 2019.

Change in Fair Value of Warrant and Derivative Liabilities

We recorded expense of $1.1 million related to the increase in the fair value of our warrant and derivative liabilities during the nine months ended September 30, 2019. The change in fair value was driven primarily by the increase in the fair market valuation of our common stock.

Comparison of Years Ended December 31, 2017 and 2018

The following table presents our operating results for the year ended December 31, 2017 as compared to the year ended December 31, 2018:


	Year Ended December 31,						Change
	2017			2018			$			%

Net revenues	$	10,817,525		$	29,043,129		$	18,225,604			168	%

Cost of revenues		8,561,076			13,086,932			4,525,856			53


Gross profit		2,256,449			15,956,197			13,699,748			607


Selling and marketing expenses		19,179,005			33,842,475			14,663,470			76

General and administrative expenses		10,433,017			11,484,404			1,051,387			10

Research and development expenses		1,715,028			1,904,194			189,166			11


Total operating expenses		31,327,050			47,231,073			15,904,023			51


Loss from operations		(29,070,601	)		(31,274,876	)		(2,204,275	)		(8	)


Interest income		—			76,010			76,010			—

Interest expense		(153,578	)		(17,769,373	)		(17,615,795	)		11,470

Loss on extinguishment of debt		—			(1,354,529	)		(1,354,529	)		—

Change in fair value of warrant liability		—			811,339			811,339			—


Total other expenses		(153,578	)		(18,236,553	)		(18,082,975	)		11,774


Net loss	$	(29,224,179	)	$	(49,511,429	)	$	(20,287,250	)		(69	)%

Net Revenues

The following table is a breakdown of our net revenues by segment for the year ended December 31, 2017 as compared to the year ended December 31, 2018:


	Year Ended December 31,				Change
	2017		2018		$		%

Net revenues:

Retail pharmacy/consumer	$	1,314,836	$	15,731,557	$	14,416,721		1,096	%

Institutional care		7,912,201		11,591,743		3,679,542		47

Other		1,590,488		1,719,829		129,341		8


Total	$	10,817,525	$	29,043,129	$	18,225,604		168	%

Net revenues increased by $18.2 million to $29.0 million for the year ended December 31, 2018 as compared to the year ended December 31, 2017. The increase was primarily due to growth in sales in our retail pharmacy/consumer channel products, which increased by $14.4 million as compared to the prior year. The increase was driven by an increase in the sales to pharmacies. A portion of the increase was also due to growing demand for our Theraworx Protect products in the institutional care channel.

Cost of Revenues

The following table is a breakdown of our cost of revenues by segment for the year ended December 31, 2017 as compared to the year ended December 31, 2018:


	Year Ended December 31,				Change
	2017		2018		$			%

Cost of revenues:

Retail pharmacy/consumer	$	828,964	$	4,874,321	$	4,045,357			488	%

Institutional care		3,998,551		4,598,492		599,941			15

Other		1,549,661		1,573,508		23,847			2

Unallocated		2,183,900		2,040,611		(143,289	)		(7	)


Total	$	8,561,076	$	13,086,932	$	4,525,856			53	%

Cost of revenues increased $4.5 million to $13.1 million for the year ended December 31, 2018, as compared to the year ended December 31, 2017. As a percentage of net revenues, cost of revenues decreased to 45% for the year ended December 31, 2018 from 79% for the year ended December 31, 2017. This improvement in our cost of revenues as a percentage of net revenues was driven by a 5% reduction in average material costs because of economies of scale with the addition of Theraworx Relief for Muscle Cramps and Spasms, a 6% decrease due to direct labor efficiency and the full amortization of the Purchased Patent as of August 2018 which contributed to a 24% reduction in overhead for the full year.

Gross Profit

Our gross profit as a percentage of net revenues, or gross margin, was 55% for the year ended December 31, 2018 as compared to 21% for the year ended December 31, 2017. For our retail pharmacy/consumer segment, our gross margin improved to 69% for the year ended December 31, 2018 as compared to 37% for the year ended December 31, 2017. The gross margin of our institutional care segment also improved to 60% from 49% over the same period. Please see the cost of revenues section above for the gross profit improvement explanation.

Selling and Marketing Expenses

The following table is a breakdown of our selling and marketing expenses by segment for the year ended December 31, 2017, as compared to the year ended December 31, 2018:


	Year Ended December 31,				Change
	2017		2018		$			%

Selling and marketing expenses:

Retail pharmacy/consumer	$	2,762,324	$	20,180,965	$	17,418,641			631	%

Institutional care		1,178,854		1,189,861		11,007			1

Unallocated		15,237,827		12,471,649		(2,766,178	)		(18	)


Total	$	19,179,005	$	33,842,475	$	14,663,470			76	%

Selling and marketing expenses increased $14.7 million to $33.8 million for the year ended December 31, 2018 as compared to the year ended December 31, 2017. This increase was primarily

due to increased marketing and advertising expenses in connection with nationwide internet and television advertising campaigns to raise brand awareness for Theraworx Relief. This increase was partially offset by lower non-cash stock-based compensation and lower non-segment specific advertising and marketing expenses.

General and Administrative Expenses

General and administrative expenses increased by $1.1 million to $11.5 million for the year ended December 31, 2018 as compared to the year ended December 31, 2017. The increase was primarily due to an increase in headcount over the period in our corporate headquarters, as well as increased professional fees. This increase was partially offset by lower non-cash stock-based compensation expenses.

Research and Development Expenses

Research and development expenses increased $0.2 million to $1.9 million for the year ended December 31, 2018 compared to the year ended December 31, 2017. This increase was due to a larger percentage of salary costs allocated to research and development, caused by additional focus on new patent applications and new formulations.

Interest Expense

Interest expense increased to $17.8 million for the year ended December 31, 2018 as compared to $0.2 million for the year ended December 31, 2017 primarily as a result of our senior secured term loan, under which we initially borrowed $40.0 million in October 2018. As a result of the term loan being classified as a current liability, the discount on the term loan and debt acquisition costs were recognized on an accelerated basis in 2018.

Loss on Extinguishment of Debt

We recorded a loss on extinguishment of debt of $1.4 million during the year ended December 31, 2018, in connection with the retirement of $11.8 million of senior secured convertible notes that were issued in April 2018. We repaid a portion of the outstanding principal and accrued interest of the convertible notes using proceeds from our October 2018 senior secured term loan (see “—Liquidity and Capital Resources—Indebtedness”) and converted the remainder, along with accrued interest, into shares of our common stock. For additional information relating to such senior secured convertible notes, see Note 8 to our audited consolidated financial statements appearing elsewhere in this prospectus.

Change in Fair Value of Warrant Liability

We recorded income of $0.8 million related to the decrease in the fair value of our warrant liability during the year ended December 31, 2018. The change in fair value was driven primarily by the decrease in the volatility assumption for the warrant fair value calculation.

Liquidity and Capital Resources

We have limited capital resources and have experienced operating losses and negative cash flows from operations since inception. We expect to continue to experience negative cash flows from operations and incur net losses in the near term as we devote substantially all our efforts to marketing, commercializing our products and continuing product development. We expect future investment and financing activities to be funded by our product revenue, our existing cash and the net proceeds from this offering.

We incurred a net loss of $49.5 million during the year ended December 31, 2018, and as of December 31, 2018, we had a stockholders’ deficit of $31.4 million and $17.4 million of cash on hand. In connection with the audit of our consolidated financial statements for the year ended December 31, 2018, management and our independent registered public accounting firm had substantial doubts, based on our projections, that we would be able to comply with covenants under our senior secured term loan related to our revenue and profitability for the twelve months from the date such audited consolidated financial statements were available to be issued. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty. As a result, the amounts due under our senior secured term loan were classified as a current liability because we were not in compliance with the covenant requiring us to deliver an audit report with respect to our 2018 consolidated financial statements without a going concern explanatory paragraph, which would have allowed the lenders to call such loan prior to maturity had such right not been waived in September 2019. In September 2019, we amended the terms of our senior secured term loan, and we are now in compliance with all covenants. See “—Indebtedness” for additional information relating to such loan.

We anticipate our current capital resources and expected future sales along with the proceeds from this offering will enable us to satisfy our operating expenses, debt service, capital expenditure requirements and organic growth strategies for at least the next 18 months, excluding any potential repayment of the senior secured term loan prior to its maturity. Although we amended the terms of our senior secured term loan and obtained a waiver of the default that caused us to classify such loan as a current liability for the year ended December 31, 2018, there is no guarantee that we will remain in compliance with all covenants in the future, or that we will be able to obtain future waivers, when, and if needed, from our lenders in the future.

If we do not generate sufficient cash flow from operations when needed, or demand for our products is lower than currently expected, we would need to seek additional financing to address our liquidity needs. Such additional capital may not be available on reasonable terms, or at all, when needed. We may also elect to raise additional capital in the future as we continue to grow our business. If we raise additional funds through the issuance of preferred stock, convertible debt securities or other debt financing, these securities or other debt could also contain covenants that would restrict our operations and those securities may have rights senior to those of our common stock. Further, any sale of equity or convertible securities would result in dilution to our stockholders.

If necessary, we would also scale back our operating plan by deferring or limiting research and development activities, and/or initiate reductions to our workforce. We cannot predict whether any such actions would generate the expected liquidity, or any benefit at all.

Our liquidity requirements have and will continue to consist of sales and marketing expenses, research and development expenses, capital expenditures, working capital and general corporate expenses. Our future liquidity requirements will also include increased selling, general and administrative expenses, such as higher insurance costs and professional fees associated with being a public company. As demand for our products increase, we expect our capital requirements will also increase in order to purchase additional equipment and fund working capital requirements, such as inventory and accounts receivable.

Our present and future funding requirements will depend on many factors, including: (1) our revenue growth and ability to generate cash flows from operating activities; (2) the level of our

sales and marketing and research and development activities; (3) the effect of competing technological and market developments; (4) the cost of and potential delays in product development; and (5) any change in regulatory oversight applicable to our products.

Certain statements regarding our current and future liquidity requirements are forward-looking statements and involve risks and uncertainties. Actual results could vary materially and negatively as a result of many factors, including the factors referred to elsewhere in this prospectus under the caption “Risk Factors.” See “Special Note Regarding Forward-Looking Statements.” We have based our estimates regarding our future liquidity requirements on assumptions that may prove to be wrong and we could deplete our available capital resources sooner than we currently expect. If we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital or otherwise, our business, financial condition, and results of operations could be materially adversely affected.

Funding History

We have historically financed our operations primarily through a senior secured term loan, private placements of our equity securities and convertible notes, and collections from growing revenues. We have incurred negative cash flows from operations since our inception. At September 30, 2019, we had cash of $7.2 million and a stockholders’ deficit of $51.2 million. Our recent capital raising transactions through September 30, 2019 included the following:

•

We received $37.5 million of net proceeds in October 2018 from our $40.0 million senior secured term loan (with an incremental facility of $20.0 million; see “—Indebtedness”) , which bears interest at LIBOR plus 10% per annum and matures on October 5, 2023. We borrowed an additional $5.0 million under the senior secured term loan in each of June and August 2019, and have elected to defer payment of interest for the first year of the term with such amount added to the principal balance as contemplated by the terms of such loan. We also issued the lenders warrants to acquire an aggregate of 490,821 shares of our common stock, which have an exercise price per share of $0.04 and a term of ten years. The warrants also provide for the adjustment of the number of shares issuable upon exercise, subject to certain limited exceptions, if we issue shares of our common stock at a price per share lower than $17.00 per share, subject to adjustment.

•

We received $14.6 million of net proceeds from private placements of our common stock during the year ended December 31, 2017, $5.4 million during the year ended December 31, 2018 and $2.9 million during the nine months ended September 30, 2019.

•

We received $11.1 million of net proceeds in April 2018 from the sale of $11.8 million aggregate principal amount of 12.5% convertible notes with warrants, $7.5 million of which was repaid in October 2018 using the proceeds from our senior secured term loan, and the remaining $4.7 million, along with accrued but unpaid interest, was converted to shares of our common stock, such that there were no longer any such convertible notes outstanding at December 31, 2018. The warrants issued with the convertible notes have an exercise price of $17.00 per share, have a term of five years, and provide for the adjustment of the exercise price, subject to certain limited exceptions, if we issue shares of our common stock at a price per share lower than the then current exercise price per share.

•

We received $4.6 million of net proceeds in April 2018 from the sale of shares of our Series A redeemable preferred stock, which accrued dividends at an initial rate of 13.0% per annum, all of which shares were redeemed in October 2018 for $5.6 million using the proceeds from our senior secured term loan such that there were no longer any shares of

Series A redeemable preferred stock outstanding as at December 31, 2018. We also issued warrants to the purchasers of the Series A redeemable preferred stock, which warrants have an exercise price of $17.00 per share and a term of five years and provide for the adjustment of the exercise price, subject to certain limited exceptions, if we issue shares of our common stock at a price per share lower than the then current exercise price per share.

We expect to continue to incur significant upfront cash outlays for selling and marketing expenses and to continue to purchase manufacturing and packaging equipment, which expenses we expect to be offset by future operating cash flows from sales as our products gain market acceptance. If our products do not gain additional market acceptance in the timeframes we anticipate, we could be required to reduce our marketing campaign, delay the development and introduction of additional products and reduce other expenses, which will most likely have a material adverse impact on our results of operations, cash flows and financial condition.

Cash Flows

The following table shows a summary of our cash flows for the years ended December 31, 2017 and 2018 and the nine months ended September 30, 2018 and 2019:


	Year Ended December 31,						Nine Months Ended September 30,
	2017			2018			2018			2019

Net cash used by operating activities	$	(18,276,807	)	$	(31,161,092	)	$	(21,862,052	)	$	(19,971,763	)

Net cash used by investing activities		(765,302	)		(346,950	)		(532,137	)		(924,013	)

Net cash provided by financing activities		16,291,037			44,018,453			19,928,556			10,640,945


Net (decrease) increase in cash and restricted cash	$	(2,751,072	)	$	12,510,411		$	(2,465,633	)	$	(10,254,831	)

Operating Activities

Net cash used in operating activities was $20.0 million for the nine months ended September 30, 2019 and $21.9 million for the nine months year ended September 30, 2018. Net cash used by operating activities for the nine months ended September 30, 2019 resulted from our net loss of $31.8 million, adjusted for certain non-cash items including: (i) $4.7 million of paid-in- kind interest and amortization of debt discount; (ii) $6.9 million related to stock-based compensation, which increased from the nine months ended September 30, 2018 due to vesting of stock option awards; (iii) $0.9 million of depreciation and amortization; and (iv) a $1.1 million increase in the fair value of the warrant and derivative liabilities. Additionally, inventory increased $4.8 million to support Theraworx Relief sales growth, accounts payable increased by $2.5 million, driven by sales growth, and accrued expenses increased by $1.6 million due to increased consulting and professional services. Finally, deferred revenues decreased $0.9 million as a result of converting two of our consignment contracts to new terms under which the title and risk of ownership transfers to the customer and such customer is required to make payment to us when products are received at the retailer’s destination and not at the point of sale to the end user.

Net cash used in operating activities was $31.2 million for the year ended December 31, 2018 and $18.3 million for the year ended December 31, 2017. Net cash used by operating activities for

the year ended December 31, 2018 resulted from our net loss of $49.5 million, adjusted for certain non-cash items including: (i) $17.0 million of paid in kind interest and amortization of debt discount; (ii) $1.4 million loss on extinguishment of debt attributable to our convertible note offering, which we partially retired using proceeds from our senior secured term loan; (iii) $2.7 million related to stock-based compensation, which decreased from 2017 due to vesting of stock option awards, with no new stock options awarded in 2018 and an overall decrease in the number of shares issued for services; (iv) $1.8 million of depreciation and amortization; and (v) a $0.8 million decrease in the fair value of the warrant liability. Additionally, inventory increased $4.8 million to sustain Theraworx Relief sales growth, and we had a $1.8 million increase in accounts payable, while reducing accrued expenses by $0.7 million. Further, due to effective collection efforts, accounts receivable increased year over year at a lower rate than the increase in sales. Finally, deferred revenues increased $0.9 million as result of our new consignment customer contracts.

Investing Activities

Net cash used in investing activities was $0.9 million for the nine months ended September 30, 2019 and $0.5 million for the nine months ended September 30, 2018, driven by the purchase of new manufacturing equipment and for partial payments for new domestic and international patents.

Net cash used in investing activities was $0.3 million for the year ended December 31, 2018 and $0.8 million for the year ended December 31, 2017, driven by the purchase of new manufacturing equipment and for partial payments for new domestic and international patents.

Financing Activities

Net cash provided by financing activities was $10.6 million for the nine months ended September 30, 2019 and $19.9 million for the nine months ended September 30, 2018. Net cash provided by financing activities for the nine months ended September 30, 2019 consisted primarily of net proceeds from our senior secured term loan facility of $9.4 million and net proceeds from the sale of common stock of $2.9 million, offset in part by principal payments on capital lease obligations of $1.0 million and deferred offering costs of $0.7 million.

Net cash provided by financing activities for the nine months ended September 30, 2018 consisted primarily of net proceeds from our convertible notes of $10.6 million, $8.2 million of net proceeds from the sale of common stock and preferred stock and $1.9 million from subscriptions received for shares of common stock, which remained to be accepted as of September 30, 2018, offset in part by patent obligation payments of $0.2 million and principal payments on capital lease obligations of $0.6 million.

Net cash provided by financing activities was $44.0 million for the year ended December 31, 2018 and $16.3 million for the year ended December 31, 2017. Net cash provided by financing activities for the year ended December 31, 2018 consisted primarily of net proceeds from our senior secured term loan of $37.5 million, convertible notes and related warrants of $3.1 million, net of repayment of convertible notes, and net proceeds of $5.4 million from the sale of common stock, offset by patent obligation payments of $0.2 million, principal payments on capital lease obligations of $0.8 million and dividends paid on preferred stock of $0.6 million.

Net cash provided by financing activities for the year ended December 31, 2017 consisted mostly of net proceeds from our private placements of $14.6 million, $2.1 million in subscription proceeds for shares of common stock that remained to be issued as at the end of the year (which

was recorded as restricted cash), $0.5 million of proceeds from loans from related parties, less patent obligation payments of $0.4 million and principal payments on capital lease obligations of $0.4 million.

Indebtedness

In October 2018, we entered into a credit agreement, among our company, the lenders from time to time party thereto and Hayfin, as administrative agent and collateral agent for the lenders. The credit agreement, which we amended in September 2019 and again in December 2019, provides for a five-year, $40.0 million senior secured term loan, with an additional facility of up to $20.0 million if certain conditions are met. As of September 30, 2019, we had borrowed a total of $50.0 million under the term loan. The term loan matures on October 5, 2023, and bears interest at LIBOR, as adjusted from time to time, plus 10% per annum.

The credit agreement contains customary covenants, including requirements to (a) achieve specified minimum quarterly consolidated total net revenues in an amount that begins at approximately $11.0 million for the quarter ending December 31, 2019 and increases to approximately $17.0 million over the term of the credit agreement, (b) achieve specified minimum quarterly consolidated EBITDA amounts (as defined therein), although the EBITDA covenants will lapse upon the completion of this offering, assuming the receipt of gross proceeds of at least $50.0 million, and (c) maintain a cash balance of at least $4.0 million at all times, which minimum cash balance increases to $8.0 million following the completion of this offering. The credit agreement also contains customary covenants restricting our ability to grant liens, incur debt, make investments, consummate acquisitions or dispositions of assets, make restricted payments, and to enter into transactions with affiliates, among others. We are currently in compliance with all of the financial covenants in the credit agreement, as amended.

We are also required to deliver an audit report without a going concern explanatory paragraph. We did not comply with this covenant with respect to our 2018 consolidated financial statements, and accordingly we classified the indebtedness under the credit agreement as a current liability at December 31, 2018 as the lenders had right to accelerate the maturity of the indebtedness under the credit agreement prior to maturity. In September 2019, we obtained a limited waiver from Hayfin waiving the specific event of default resulting from the audit report covering our consolidated financial statements for the year ended December 31, 2018 having contained a going concern explanatory paragraph. Under the terms of the credit agreement, we will continue to be required to deliver an audit report without a going concern explanatory paragraph. Assuming the receipt of the estimated net proceeds from this offering in the amounts described in this prospectus, we expect to be in compliance with this covenant with respect to our 2019 consolidated financial statements.

In addition to the financial covenants, the credit agreement also contains customary events of default, including for certain affirmative covenant violations, and if we undergo a “change in control,” which for purposes of the credit agreement, following completion of this offering means any person or group, other than Stephen Woody, and certain of his affiliates, owns, directly or indirectly, beneficially or of record, shares representing more than 35% of our outstanding voting power.

In October 2018, we issued the lenders ten-year warrants to acquire an aggregate of 490,821 shares of our common stock, which was equal to approximately 3% of our fully diluted equity at such date, at an exercise price of $0.04 per share in connection with the entry into the credit agreement. These common stock warrants also provide for the adjustment of the number of shares issuable upon exercise, subject to certain limited exceptions, if we issue shares of our common

stock at a price per share lower than $17.00 per share, subject to adjustment. The warrants also provide the holders pre-emptive rights to purchase their pro rata portion of future equity issuances (including convertible securities exercisable or exchangeable for equity securities), subject to certain limited exceptions, including exceptions for offerings that are not for the purpose of raising capital, pursuant to an underwritten offering or for certain private placements at an effective price per share of common stock in excess of $17.00. We also granted the lenders certain registration rights applicable to the shares issuable upon exercise of these common stock warrants. See “Description of Capital Stock—Registration Rights.”

Our performance under the credit agreement is secured by a senior lien on all of our assets (including patents and trademarks) and a stock pledge on the equity interests of our subsidiaries, each of which also guarantee the loan.

In January 2020, we entered into a note purchase agreement, pursuant to which we issued the convertible notes in an aggregate principal amount of $6.4 million to certain accredited investors. Outstanding convertible note balances accrue interest at an annual rate of 6%, beginning on the date that is six months after the issuance of the notes, with accrued interest being added to the principal balance on each six-month anniversary thereafter. The outstanding principal amount, plus any accrued or capitalized but unpaid interest, is due and payable on the maturity date of January 4, 2024 or, if later, the date that is 91 days following the latest maturity date of the credit agreement.

The convertible notes are unsecured and are subordinated to our obligations under the credit agreement with Hayfin. Subject to this subordination, with the consent of Hayfin we may prepay the notes, in whole or in part, prior to the maturity date. As part of any repayment or prepayment of the notes, the holders would be entitled to receive (i) two times the outstanding principal amount or portion thereof being repaid or prepaid, plus (ii) a ratable portion of interest previously capitalized and added to the outstanding principal amount and (iii) any accrued but unpaid interest that has not been previously capitalized. Upon the closing of this offering, the principal and any accrued or capitalized interest on these notes will automatically convert into a number of shares of our common stock equal to (A) (i) two times the outstanding principal balance, plus (ii) interest previously capitalized and added to the outstanding principal amount and (iii) any accrued but unpaid interest that has not been previously capitalized, divided by (B) the initial public offering price per share.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of December 31, 2018:


	Payments due by period
(in thousands)	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years

Capital lease obligations	$	2,479	$	1,274	$	1,164	$	41		—

Operating lease obligations		1,707		466		923		318		—

Senior secured term loan (1)		41,284		41,284		—		—		—

Other (2)		294		294		—		—		—


Total	$	45,764	$	43,318	$	2,087	$	359		—

(1)

Includes $1.3 million of paid-in-kind interest accrued as of such date. Does not reflect additional borrowings of $10.0 million during the nine months ended September 30, 2019 or future interest payments due on the senior secured term loan. The senior secured term loan is reflected as due in less than one year as at December 31, 2018 because the

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maturity could have been accelerated by the lenders due to our breach of covenants in effect at such date. This breach has since been waived by the lenders and our credit agreement was amended in September 2019. See Notes 1 and 9 to our audited consolidated financial statements appearing elsewhere in this prospectus for more information and see “—Indebtedness.”

(2)	Reflects remaining balance due pursuant to an August 2018 arbitration dispute settlement, all of which was paid in May 2019.

This table does not reflect potential royalty payments due on covered net sales under our settlement agreement related to the Purchased Patent. See “Certain Factors Affecting Our Results—Patent Obligation” and Note 10 to our audited consolidated financial statements appearing elsewhere in this prospectus for more information.

Quarterly Results of Operations

The following tables summarize our unaudited quarterly consolidated statement of operations data for each of the 11 quarters through the period ended September 30, 2019. The information for each of these quarters has been prepared on the same basis as our audited annual consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for the fair presentation of the results of operations for these periods. This data should be read in conjunction with our consolidated financial statements included elsewhere in this prospectus. Historical results are not necessarily indicative of the results that may be expected in the future, and the quarterly results for the nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2019 or any other period. For a discussion of certain of our preliminary and unaudited financial results for the year ended December 31, 2019, see “Prospectus Summary—Recent Developments.”


	Three Months Ended
	March 31, 2017			June 30, 2017			September 30, 2017			December 31, 2017			March 31, 2018			June 30, 2018			September 30, 2018			December 31, 2018			March 31, 2019			June 30, 2019			September 30, 2019

Net revenues	$	1,940,330		$	2,101,354		$	2,613,885		$	4,161,956		$	4,704,455		$	6,705,457		$	8,437,944		$	9,195,273		$	9,617,480		$	10,501,351		$	14,296,389

Cost of revenues		1,670,158			1,864,291			1,829,763			3,196,864			2,409,618			3,394,834			3,297,848			3,984,632			3,245,391			4,132,583			6,693,699


Gross profit		270,172			237,063			784,122			965,092			2,294,837			3,310,623			5,140,096			5,210,641			6,372,089			6,368,768			7,602,690


Selling and marketing expense		4,695,610			4,015,239			4,387,399			6,080,757			6,773,257			8,332,937			8,372,877			10,363,404			9,436,739			12,970,048			11,846,604

General and administrative expenses		3,619,025			1,985,556			2,264,548			2,563,888			2,824,535			2,944,070			3,122,567			2,593,233			3,183,600			3,451,672			3,973,203

Research and development expenses		548,389			300,906			547,271			318,462			412,814			453,924			642,714			394,742			411,475			434,327			441,029


Total operating expenses		8,863,024			6,301,701			7,199,218			8,963,107			10,010,606			11,730,931			12,138,158			13,351,379			13,031,814			16,856,047			16,260,836

Total other expenses		33,006			31,969			39,114			49,489			101,612			1,064,310			576,208			16,494,422			2,297,112			2,356,601			1,324,351


Net loss	$	(8,625,858	)	$	(6,096,607	)	$	(6,454,210	)	$	(8,047,504	)	$	(7,817,381	)	$	(9,484,618	)	$	(7,574,270	)	$	(24,635,160	)	$	(8,956,837	)	$	(12,843,880	)	$	(9,982,497	)

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under the rules and regulations of the SEC. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for any other contractually narrow or limited purpose. However, from time to time, we enter into certain types of contracts that contingently require us to indemnify parties against third-party claims. The terms of such obligations vary by contract and in most instances a

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maximum dollar amount is not explicitly stated therein. Generally, amounts under these contracts cannot be reasonably estimated until a specific claim is asserted thus no liabilities have been recorded for these obligations on our consolidated balance sheets for any of the periods presented.

Critical Accounting Policies and Significant Judgments and Estimates

We have prepared our consolidated financial statements in accordance with GAAP. Our preparation of these consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, as well as the reported amount of revenue and expenses recorded during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from these estimates under different assumptions or conditions. While our significant accounting policies are described in Note 3 to our audited consolidated financial statements appearing elsewhere in this prospectus, we believe that the following accounting policies discussed below are the most critical to understanding management’s judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We primarily generate revenue from the sales of our Theraworx Protect and Theraworx Relief products in institutional care and retail pharmacy/consumer channels. We typically satisfy our performance obligations and recognize revenue at a point in time for product sales, typically when products are shipped or delivered to the customer, depending on the terms underlying each arrangement. For customer agreements with consignment clauses, we recognize revenue when the end-user purchases our products at the pharmacy counter. At that point in time, control transfers to the customer. Specifically, title and risk of loss transfers to the pharmacy and immediately transfers to the end-user and the pharmacy is required to make payment to us. If a customer has paid in advance of revenue recognition, then we record a contract liability as deferred revenue.

When determining transaction price, we consider variable consideration, which occurs in the form of fees, discounts and rebates to customers. We make allowances for fees, discounts and rebates to customers and sales returns, which we estimate using the expected value method based on historical experience. Although we base such estimates and make allowances based on our historical experience and other factors as noted above, this requires significant judgment by management. If estimates for allowances and sales returns are materially different, it could materially affect our consolidated financial statements.

Fair Value Accounting—Warrant Liability

We have outstanding warrants to purchase shares of our common stock, certain of which are accounted for as a liability in our consolidated financial statements because they contain anti-dilution provisions providing for downward adjustment of the exercise price in certain circumstances.

The warrants were recorded at fair value using a Monte Carlo simulation model based on an allocation of our aggregate value to the outstanding equity instruments, applying a discount to the warrant value for lack of marketability. This model requires our management to make various estimates and assumptions, including with respect to the risk-free interest rate, the remaining

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contractual life of the warrant, the expected volatility, annual dividend yield and fair value of our common stock. The warrants are subject to remeasurement at each balance sheet date with any changes in fair value being recognized in the statements of operations. We will continue to adjust the warrant liability for changes in fair value until the earlier of the expiration or exercise of the liability-classified warrants. Following this offering, it will not be necessary to determine the fair value of our common stock, as our shares will be traded in the public market.

Stock-Based Compensation

As of December 31, 2017 and 2018 and September 30, 2019, our outstanding stock-based compensation awards included stock options, which include service condition or time-based vesting option awards granted to both employees and non-employees, performance condition option awards, and RSU awards, as well as RSAs. The majority of our stock-based awards were made to employees.

Because no qualifying event has occurred, we have not recognized any stock-based compensation expense for the RSUs and the RSAs as they have both a time-based vesting condition and a liquidity event-based vesting condition. At September 30, 2019, we had $2.0 million of unrecognized expense related to RSUs and $20.8 million of unrecognized expense related to employee RSAs. The liquidity event-based vesting condition will be satisfied upon the later of (a) the expiration of the lock-up period following the completion of this offering and (b) the date on which the holder of the award would not be subject to suit under the “short swing” profit rules of Section 16(b) of the Exchange Act, for the sale of the shares underlying the award at a profit following the completion of this offering. As a result, we expect that approximately $13,719,953 of the foregoing unrecognized amounts, representing approximately 1,556,372 shares, will begin to be recognized upon the completion of this offering.

For the years ended December 31, 2017 and 2018 and the nine months ended September 30, 2018 and 2019, we had stock-based compensation expense related to our equity awards as follows:


	Year Ended December 31,				Nine Months Ended September 30,
	2017		2018		2018		2019

Cost of revenues	$	—	$	—	$	—	$	515,000

Selling and marketing expenses		4,925,437		2,528,106		1,902,547		5,584,255

General and administrative expenses		1,601,712		142,433		148,447		726,423

Research and development expense		360,687		79,095		79,095		42,238


Total stock-based compensation expense	$	6,887,836	$	2,749,634	$	2,130,089	$	6,867,916

We account for stock-based compensation under the fair value recognition and measurement provisions, in accordance with applicable accounting standards, which is recognized over the period during which an employee, consultant and/or advisor is required to provide service in exchange for the award (generally, the vesting period).

We use the Black-Scholes option pricing model to determine the fair value of stock options. The Black-Scholes option pricing model requires certain subjective inputs and assumptions, including the estimated fair value of our common stock, the expected term, risk-free interest rates, expected stock price volatility and expected dividend yield of our common stock.

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These assumptions used in the Black-Scholes option-pricing model, other than the fair value of our common stock (see the section titled “—Common Stock Valuations” below), are estimated as follows:

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Expected term. We estimate the expected term based on the simplified method for employees and the contractual term for non-employees. Under the simplified method, the expected term is the mid-point between the vesting term and the contractual term of the option.

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Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant.

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Expected volatility. We estimate the volatility of our common stock on the date of grant based on the average historical stock price volatility based on an analysis of a peer group of comparable companies.

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Expected dividend yield. Expected dividend yield is zero percent, as we have not paid and do not anticipate paying dividends on our common stock.

We continue to use judgment in evaluating the expected volatility and expected term utilized in our stock-based compensation expense calculation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may refine our estimates of expected volatility and expected term, which could materially impact our future stock-based compensation expense.

Based on the initial public offering price of $15.00 per share, as of September 30, 2019, the aggregate intrinsic value of our outstanding stock options was approximately $8.2 million, substantially all of which related to vested stock options, and the aggregate intrinsic value of our outstanding RSUs was approximately $1.7 million.

Common Stock Valuations

Prior to this offering, given the absence of a public trading market for our common stock, and in accordance with the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation, our board of directors exercised its reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of fair value of our common stock, including:

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independent third-party valuations of our common stock;

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the prices of the recent common stock and redeemable preferred stock sales by us to investors in arm’s-length transactions;

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our capital resources and financial condition;

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the preferences held by our preferred stock classes relative to those of our common stock;

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the likelihood and timing of achieving a liquidity event, such as an initial public offering or sale of the company, given prevailing market conditions;

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our historical operating and financial performance as well as our estimates of future financial performance;

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•

valuations of comparable companies;

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the hiring of key personnel;

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the status of our development, product introduction, and sales efforts;

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the relative lack of marketability of our common stock;

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industry information such as market growth and volume and macro-economic events; and

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additional objective and subjective factors relating to our business.

In valuing our common stock as of December 31, 2018 and September 30, 2019, our board of directors determined the fair value of our common stock using a combined and weighted income and market approach valuation methods. The income approach estimates value based on the expectation of future cash flows that a company will generate using a discounted cash flows method. These future cash flows are discounted to their present values using a discount rate based on our weighted-average cost of capital and is adjusted to reflect the risks inherent in our cash flows. The market approach estimates value based on a comparison of the subject company to comparable public companies in a similar line of business as well as completed transaction of acquisitions of companies similar to our company. From the comparable companies, a representative market value multiple is determined and then applied to the subject company’s financial forecasts to estimate the value of the subject company.

As of September 30, 2019 and December 31, 2018, the estimated fair value of our common stock was $20.60 and $18.20 per share, respectively. As of December 31, 2017, the estimated fair value of our common stock was $17.00 per share based on our historical and active fundraising as well as information provided by management. We believe that growth in revenues, expansion into new market segments and a broader range of comparable market guideline companies, which contributed to a decrease in volatility, were the main drivers behind the increase in our price per share from December 31, 2017 to September 30, 2019.

Following this offering, it will not be necessary to determine the fair value of our common stock, as our shares will be traded in the public market.

Recent Accounting Pronouncements

Please see note 3 to our audited consolidated financial statements appearing elsewhere in this prospectus for a discussion of recent accounting pronouncements.

Inflation

We do not believe that inflation has had a material effect on our business, financial condition or results of operations presented herein. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through selling price increases. Our inability or failure to do so could adversely affect our business, financial condition and results of operations.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk related to changes in interest rates. As of September 30, 2019, we had cash of $7.2 million. We generally hold our cash in interest-bearing accounts. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates.

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As of September 30, 2019, we had an aggregate of $55.4 million outstanding under our credit facility. The interest rate on our senior secured term loan bears interest at LIBOR, as adjusted from time to time, plus 10% per annum. The interest rate on our senior secured term loan is tied to LIBOR, and is therefore subject to interest rate risk. If overall interest rates had increased by 10% during the periods presented, our interest expense would not have been materially affected.

Internal Controls and Procedures

We will be required, pursuant to Section 404(a) of the Sarbanes-Oxley Act, or Section 404, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the year following our first annual report required to be filed with the SEC. This assessment will need to include disclosure of any material weaknesses identified by management over our internal control over financial reporting. However, our independent registered public accounting firm will not be required to report on the effectiveness of our internal control over financial reporting pursuant to Section 404(b) until the later of the year following our first annual report required to be filed with the SEC, or the date we are no longer an “emerging growth company” if we take advantage of the exemptions contained in the JOBS Act.

We have not initiated the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404. We may not be able to complete our evaluation, testing or any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are designed and operating effectively, which could result in a loss of investor confidence in the accuracy and completeness of our financial reports. This could cause the market price of our securities to decline, and we may be subjected to investigations or sanctions by the SEC.

Emerging Growth Company Status

We are an emerging growth company as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption. As a result, our consolidated financial statements may not be comparable to other public companies that comply with effective dates of such new or revised accounting standard for public companies. In the future, we may elect to opt-out of the extended period for adopting new accounting standards. If we do so, we would need to disclose such decision and it would be irrevocable. We also intend to rely on other exemptions provided by the JOBS Act, including without limitation, from providing an auditor’s attestation report on our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act. We will remain an emerging growth company until the earlier of: (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30^th; and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

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BUSINESS

Our Company

We use an evidence-based approach to develop, test and market our products and are actively compiling a compendium of clinical evidence that includes 40 completed clinical studies to date. The majority of these clinical studies are IRB approved, and have resulted in 20 validating peer-reviewed publications or clinical posters. See “Business—Clinical Evidence” for further details. Our clinical evidence contributed to the successful registration of several of our products for Medicare and Medicaid reimbursement in September 2019. Our data also enables our sales teams to serve customers across the full continuum of care, from institutional care to self-care, including in hospitals, long-term care facilities, closed provider pharmacies, physician offices and retail pharmacies.

We have a portfolio of marketed products and future potential products. To date, we have six marketed products, three of which we consider to be cosmetics: Theraworx Protect for Immune Health, Theraworx Protect U-Pak for Urinary Health and Combat One for soldier and first responder readiness; and three of which we consider to be homeopathic drug products: Theraworx Relief for Muscle Cramps and Spasms, Theraworx Relief for Joint Discomfort and Inflammation and PHUEL for topical muscle nutrition. Cosmetics do not require premarket approval from the FDA. Homeopathic drug products require premarket approval from the FDA, and products without approval are subject to a risk-based enforcement approach. We market our homeopathic drug products without such approval. In addition to our currently marketed products, we plan to pursue the development and commercialization of additional topical products to address risks that may lead to skin and surgical conditions. We plan to launch a drug product under an OTC drug monograph in the next year, seek clearance from the FDA for a medical device pursuant to a 510(k) notification in the next two to three years and seek de novo classification from the FDA for a second medical device in the next two to three years.

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care in topical immune health, neuromuscular health and skin barrier health. We aim to launch products that address skin care for individuals with diabetes, dermatitis, vaginal health, pre-operative bathing, pre- and post-operative surgical site staging and symptoms of peripheral neuropathy. We are currently evaluating several products in these areas which we plan to launch in the next two to three years.

The following table presents a summary of our currently marketed products:

Product Name

Description

Target Market

Launched

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Theraworx Protect

for Immune Health

Pre-saturated towelettes, foaming, and spray products designed to reduce risks that may lead to infections

Institutional

Care

2013

Theraworx Protect

U-Pak

for Urinary Health

Pre-saturated towelettes and foaming cleanser designed to reduce risks that may lead to urinary tract infections

Retail Pharmacies

Mass Retailers / Club
Online third parties

2019

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Theraworx Relief

for Muscle Cramps and
Spasms

Foaming and spray products indicated for individuals who suffer from muscle cramps and spasms and symptoms associated with restless leg syndrome

Retail Pharmacies

Mass Retailers / Club
Online third parties

2017

Theraworx Relief

for Joint Discomfort
and Inflammation

Foaming spray products with medical grade compression sleeves to address symptoms associated with individuals with moderate to severe osteoarthritis

Retail Pharmacies

Mass Retailers / Club
Online third parties

2019

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Combat One

Pre-saturated towelettes, foaming, and spray products for hygiene management in special situations, primarily for military purposes

US Military

First Responders

2016

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PHUEL

Pre-saturated towelettes and foaming spray products used before, during and after strenuous activity for recovery

Professional Teams

Athletes

Specialty Retailers

2014

Industry Landscape

We believe that consumers are increasingly adopting self-care routines to keep themselves and their families healthy, prevent disease, manage ailments and maintain control over chronic conditions. To help them with their healthcare decisions, consumers are more frequently turning to their pharmacist as healthcare services are increasingly offered by pharmacy retailers. We believe that a movement towards products that are widely available through the retail pharmacy/consumer channel, like ours, could reduce the number of hospital visits and costs to the healthcare system. In addition, our products are used for symptoms that typically are addressed by prescription drugs, which can have undesirable side effects. We believe the use of our products may spare the use of NSAIDs and addictive and cognitive-impairing medications, such as systemic muscle relaxants, lowering the incidence of harmful drug side effects.

We target three primary market areas: topical immune health, neuromuscular health and skin barrier health.

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We plan to target the skin barrier health category with a product we are preparing to launch in the next year that is a monographed skin protectant product to address risks associated with radiation dermatitis, moisture-associated dermatitis and incontinence-associated dermatitis. This product will be a reformulation of Theraworx Protect for Immune Health that will include an increase in the amount of allantoin as included so that it qualifies an active ingredient. We are also evaluating a potential future product for skin care of patients suffering with diabetic dermatitis for this category.

Topical Immune Health

Antibiotic-resistant pathogens: The CDC describes antibiotic resistance as one of the biggest public health challenges of our time and estimates that at least two million people in the United States contract an antibiotic-resistant infection each year and more than 162,000 people die annually from such infections. A 2016 report for the U.K. government projected that antibiotic-resistant infections could cause an additional 10 million deaths per year globally by 2050, overtaking deaths due to cancer.

The emergence of antibiotic-resistant pathogens is believed to be a result of the overuse and misuse of oral antibiotics, topical antibiotic ointments and antibacterial products, yet all remain widely used. Although the CDC has warned that we are running out of drugs to treat serious infections, physicians frequently prescribe antibiotics prophylactically to elderly patients and women with UTIs. Even when used properly, antibiotics can have safety issues. The CDC estimates that almost one out of five emergency department visits in the U.S. for adverse drug events are due to antibiotics. Additionally, frequent antimicrobial use can lead to antibiotic resistance and other illnesses, such as C. diff. The CDC estimates that antibiotic resistance adds $20 billion in excess direct healthcare costs annually, with additional costs to society for lost productivity as high as $35 billion a year.

Healthcare-associated infections: The CDC estimates that, on any given day, about one in every 31 hospital patients has an HAI. The Center for Disease Dynamics, Economics and Policy estimates that the top five HAIs in the U.S. by aggregate cost lead to approximately $9.8 billion in expenses annually. As a result of the ACA, hospitals can no longer charge patients for HAIs; each case of an HAI can cost a hospital from approximately $10,000 for CAUTIs to up to $46,000 for CLABSIs.

In order to stem rising rates of infection in hospitals, the Hospital Acquired Condition Reduction Program, established by the Affordable Care Act, instituted monetary penalties for poor infection performance at hospitals. In the fiscal year ending in 2019, 800 of 3,281 hospitals that Medicare evaluated for infections and avoidable injuries were penalized one percent of their Medicare payments.

UTIs are among the most common bacterial infections in the world and account for 25% of all infections in women. Pharmacists make more than one million recommendations per month for products related to UTIs. CAUTIs, a common type of UTI, account for approximately 40% of all HAIs. UTIs occur more often in women than men at a ratio of 8 to 1. The growth in antibiotic resistance is increasing the economic burden of UTIs. UTIs are also a significant cause of other illnesses, including pyelonephritis with sepsis and renal damage in young children, sometimes leading to pre-term birth or other health complications.

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Our Theraworx Protect products are cleansers designed to be used in hygiene protocols to address risks associated with antibiotic-resistant pathogens and HAIs by supporting the body’s natural defenses. Based on our estimates, we believe that the total addressable markets for Theraworx Protect for Immune Health and Theraworx Protect U-Pak for Urinary Health are in excess of $1.5 billion and $3 billion annually, respectively. The foregoing estimates do not include the potential market opportunities for our future potential products in the areas of pre-operative bathing and pre- and post-operative surgical site staging.

Neuromuscular Health

Cramps and spasms and symptoms associated with RLS: Nocturnal resting cramps and spasms can be symptomatic of a range of health issues and are a common side effect of many prescription drugs. These symptoms are more common in people over 50 years old and in pregnant women. An estimated 6% of the U.S. adult population experiences moderate-to-severe nocturnal cramping more than five times per month, which implies 19.6 million sufferers, based on the most recent data from the U.S. Census Bureau. The National Sleep Foundation estimates that approximately one in ten adult Americans suffer from RLS. This sleep-related movement disorder is known best for its overwhelming and often unpleasant urges to move the legs while at rest. Frequently recommended treatments for cramps, such as stretching, warm baths, pickle juice or extremity elevation are generally considered to be anecdotal and not clinically proven. In certain cases, doctors may prescribe muscle relaxants for cramp prevention, or recommend acetaminophen or NSAIDs for pain after cramping.

Our Theraworx Relief products are designed to address cramps and spasms and symptoms associated with RLS and arthritic and neuropathic pain by supporting topical vascular circulation and muscular activation. Based on our estimates, we believe the total addressable market for Theraworx Relief for Muscle Cramps and Spasms to be in excess of $2 billion and Theraworx Relief for Joint Discomfort and Inflammation to be in excess of $3 billion. The foregoing estimates do not include the potential market opportunities for our future potential products to treat symptoms of peripheral neuropathy.

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Skin Barrier Health

Common skin barrier health issues include radiation-induced dermatitis and IAD.

Radiation-induced dermatitis: Nearly 50% of cancer patients receive radiation therapy at some point during the course of their illness. Radiation therapy causes radiation-induced dermatitis in up to 85% of patients treated with radiation. These painful burns typically occur within the first two weeks of treatment and can last for several years. As many as a quarter of patients can experience skin peeling and ulceration, which can affect a patient’s quality of life and risk interrupting their treatment schedule. There is currently no standard treatment for the management of radiation dermatitis.

Incontinence-associated dermatitis: IAD is an inflammatory skin condition that occurs when the skin is exposed to urine or stool, often leading to secondary infections, pain, or skin lesions. Maintaining healthy skin in patients with incontinence is a daily challenge for healthcare professionals in hospitals, nursing homes, and community care centers. IAD occurs in approximately 20% of hospitalized patients, even when a defined skin regimen is used. In critically ill patients, the prevalence of IAD is estimated to be as high as 36%. In long-term acute care settings, for patients with both bowel and bladder incontinence, the incidence of IAD is as high as 42%. In infants, IAD is frequently called diaper dermatitis and occurs in approximately 10% of normal-weight infants and approximately 28% of low birth weight infants. IAD can increase the risk of secondary infection. In order to prevent IAD, commonly used prophylactics are wicking diapers or disposable garments and skin moisture barriers, also called barrier creams. However, wet diapers and barrier creams can trap heat and moisture, which can cause inflammation, increased pressure and friction against the skin. The annual cost to the U.S. healthcare system of IAD is estimated to be approximately $215 million. We intend to launch skin barrier products for individuals with conditions associated with radiation-induced dermatitis and IAD.

Our Bionome Engineered Platform

Our Bionome Engineered Platform enables us to create products by supporting the proper management of the stratum corneum, or outer layer of the skin, and the topical microbiome. Our proprietary product development algorithms are designed to optimize management of these two critical systems, which historically have been overlooked and undervalued in the marketplace.

We utilize our platform to develop products that we believe balance safety and efficacy. Our approach relies on the synergistic balance of our formulations, in concert with proper protocols, which are together designed to elicit an optimized response by the skin’s ecosystem.

Stratum Corneum and Topical Microbiome

The stratum corneum is the outer layer of the epidermis, or the skin. It serves as the front line of defense between the body and the environment. The healthy human stratum corneum has a surface pH of below 5.0, which is more than 100 times more acidic than a neutral pH of 7.0. This

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acidic environment is critical to several of the most significant bodily functions supported by the stratum corneum. The normal acidic state of the stratum corneum is naturally antimicrobial and is an optimal environment for the symbiotic relationship of the various bacteria, yeast, and fungi that inhabit the outer layer of the stratum corneum. These organisms are commonly referred to as the topical microbiome. A healthy skin microbiome creates acidic metabolites, which reinforce its own healthy low pH environment and secretes substances, which are essential to health.

The low pH environment of the stratum corneum maintains the integrity of the brick and mortar defensive structure and characteristic of the skin. The “bricks,” or corneocytes, provide a durable defense against the ordinary frictional wear and tear of life. In addition, to providing most of the mechanical strength of the tissue, these corneocytes provide a stabilizing scaffold for the mortar. The mortar is primarily made up of fats or lipids that are organized into broad sheets or “membranes.” Stacks of these membranes fill the spaces between the corneocytes. This brick and mortar structure provides primary barrier protection to the body. Other ingredients in the mortar include free fatty acids and antimicrobial peptides. These fatty acids and peptides are part of the innate immune system and represent the first line of defense to ward off infections.

We believe that our topically applied products support both the low pH environment of the stratum corneum and the skin surface microbiome. The innate protections of the stratum corneum can offer significant opportunities for future discoveries. We believe the success of our initial product offerings validates our approach toward products that leverage the stratum corneum and microbiome.

As the science around the stratum corneum, associated tissue and topical microbiome continues to progress, we believe our current and planned product portfolio is well-positioned to take advantage of further discoveries in the space.

Utilizing the Skin’s Ecosystem

The following diagram demonstrates how our platform utilizes the skin’s ecosystem for improved health.

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We call our proprietary product development platform a “bionome” engineered platform because “bio” means life, and “nome” means management. Through proper management of the skin’s ecosystem we believe we are able to meaningfully improve quality of life for our customers. Improving the health of the stratum corneum and topical microbiome prior to surgery, which we call “pre-surgical staging,” with our formulations leads to what we refer to as an outside-inside-outside process:

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Outside: Topical application of our formulations results in rapid absorption by the skin and acidification of the stratum corneum gradient

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Inside: once absorbed, our formulations facilitate what we refer to as the SMART method of action:

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Stratum corneum function for optimum defensive ability

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Minimize microbial adherence and quorum sensing, or bacterial cell to cell communication

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Antimicrobial peptide production

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Re-establish healthy inflammatory response

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Tissue respiration support

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Outside: the SMART method of action results in an optimized topical response that supports:

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Immune health

•

Neuromuscular health

•

Skin barrier health

Library of Ingredients

Our formulations are designed through the use of our proprietary algorithm, from a library of ingredients that have low toxicity profiles and are widely used in the areas of cosmetics, vitamins, dermatology, oncology and cardiology. We use a combination of ingredients from the following five systems to create proprietary products that reinforce the innate biology of the stratum corneum, topical microbiome, and associated tissue:

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Microbiome Balancing System: multiple ingredients are chosen to achieve a synergistic, comprehensive balancing effect, with minimal toxicity;

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Surfactant System: multiple surfactants are chosen to address biofilm formation, which is a resistant bacterial or fungal film, structures, with minimal toxicity;

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Absorption System: multiple agents are chosen to facilitate rapid absorption of our formulations for drying speed as well as a penetration vehicle for the other associated systems;

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Nutritional System: multiple health-supporting ingredients are chosen to enhance natural biological function; and

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Preservative System: our preservative system is a trade secret that is currently addressed within a provisional patent application.

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Methods of Action

We have focused on and will continue to focus development efforts on products that provide better solutions to clear market needs in our three core areas: topical immune health, neuromuscular health and skin barrier health. Each area of focus leverages aspects of our SMART method of action and has led to the development of multiple products in the categories of topical immune health and neuromuscular health and multiple future potential products that we intend to launch in the next two to three years in the topical immune health, neuromuscular health and skin barrier health categories.

Topical Immune Health

Our topical immune health products are designed to support the body’s natural defensive immune response. The identified methods of action of our topical immune products include stratum corneum optimization, minimized bacterial adherence and antimicrobial peptide support. The innate immune system is our body’s first line of defense. We have launched products that support three areas of immune health, including perineum care, total body immune care and catheter care. We have also identified additional conditions in this category for potential future products.

Neuromuscular Health

Our topical neuromuscular health products are designed to support the body’s neurologic and musculoskeletal systems. The identified methods of action of our neuromuscular products include the support of a healthy inflammatory response and tissue respiration. These lead to an effective antispasmodic and tissue relaxant effect in patients suffering from chronic nocturnal leg cramps and spasms, acute cramps and spasms and symptoms in patients suffering from RLS. We believe that establishing a healthy inflammatory response and topical circulatory health have far-reaching implications across a wide array of medical conditions where inflammation and vascular insufficiency are a concern. We have launched products for four neuromuscular health concerns, including muscle cramps and spasms, symptoms of RLS, osteoarthritis and muscle soreness. We have also identified three additional conditions for potential future products in this category.

The following image shows, for a representative individual in one of our clinical studies, the blood flow following the application of Theraworx Relief.

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Skin Barrier Health

The epidermis performs both protective and defensive functions, with the stratum corneum providing the first line of defense. Maintaining a healthy permeability barrier is vital to the cohesive and adhesive characteristics of the skin. Our future potential products for skin barrier health derive benefit from all methods of action of our SMART staging.

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We have identified a number of conditions for future potential products in skin barrier health areas. Based on clinical data, the formulations used in our Theraworx Protect products have a documented multimodal mechanism of action that supports the defensive functions of the stratum corneum, interrupts biofilm attachment and formation, facilitates the production of natural antimicrobial peptides and inhibits the over expression of inflammatory enzymes known to inflict excessive inflammation. We believe these mechanisms of action can be used to address multiple health concerns in the area of skin barrier health.

Our Strategy

We have strategically positioned our company to become a leading healthcare and wellness company by taking advantage of several emerging trends in healthcare: antibiotic stewardship, negativity around opioids, consumerization of healthcare and growth in self-care. Our products are designed to take advantage of the increasing desire for easily accessible, self-directed care, with treatment options that are safe and easy to use. To spread awareness of our brand, we have used traditional media and in-store marketing to reach consumers. To increase acceptance of our products among pharmacists and physicians, we have used an expanding body of clinical evidence and a growing key customer list. With more and more consumers seeking treatment options from their local pharmacy and increasingly influential pharmacists, our strategy is to educate such pharmacists, as well as physicians, to increase adoption of our products. Building on the success of our initial product launches, we plan to leverage our tested research and development and marketing and commercial infrastructure to deliver sustainable high growth, while maintaining an attractive gross margin profile. Our future success will depend on our ability to execute on the following initiatives:

Pursue Revenue Growth Across Our Distribution Channels

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Expand Coverage and Reimbursement

We intend to expand coverage and reimbursement of our products among both insurance providers and workers’ compensation groups, which will increase access to our products and further drive revenues. In September 2019, Theraworx Protect U-Pak for Urinary Health, Theraworx Relief for Muscle Cramps and Spasms and Theraworx Relief for Joint Discomfort and Inflammation were added to a national data registry for reimbursement by Medicare and Medicaid when a prescription for those products is written, which we believe will result in a significant reduction of out-of-pocket costs for a large proportion of our target customer base. As a result of this coverage and reimbursement access, we believe certain institutional providers will now be able to defray current treatment costs and potentially benefit from the utilization of our products.

Similarly, we expect our products to gain acceptance among workers’ compensation insurer groups, who are actively looking for lower cost, potentially safer options for their members.

Continue to Introduce Innovative Products

Leverage Existing Infrastructure

We intend to leverage our existing research and development, manufacturing and commercialization infrastructure to introduce new products to the market. Our Theraworx Relief for Joint Discomfort and Inflammation product is an example of a new product developed from our platform, marketed under our Theraworx Relief brand, distributed by our existing retail salesforce, and sold through the same retail network as our Theraworx Relief for Muscle Cramps and Spasms product. Another example is our Theraworx Protect U-Pak for Urinary Health product launched in August 2019 in over 8,000 pharmacies that already stock Theraworx Relief products. In addition, we are actively pursuing opportunities to be the exclusive manufacturing partner for existing customers that are looking to offer white label versions of our branded products in their stores.

Expand Our Existing Compendium of Clinical Evidence to Support Product Differentiation

In order to continue to build our library of clinical evidence in support of our product differentiation, our strategy is to work with key opinion leaders and hospital department chairs to:

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convert these key influencers into supporters for our brand;

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accelerate IRB approval and academic center prioritization;

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reduce associated costs, as clinical study costs may be shared; and

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improve the likelihood and speed of study presentation or publication.

Expand Brand Awareness

Our Products

Theraworx Protect

We currently have two products offered within the Theraworx Protect brand family: Theraworx Protect for Immune Health and Theraworx Protect U-Pak for Urinary Health.

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Theraworx Protect For Immune Health

Theraworx Protect for Immune Health is a topical immune health product aimed at improving hygiene, potentially reducing risks that may lead to HAIs. Theraworx Protect for Immune Health was launched in 2013 and is available in the form of a foam, a spray, a swab and several types of pre-saturated towels. Theraworx Protect for Immune Health supports the critical permeability barrier of the skin and is particularly suitable for use in at-risk, difficult-to-treat patient populations, including pediatrics and geriatrics, whose skin cannot tolerate exposure to more caustic products. We believe Theraworx Protect for Immune Health will continue to gain a strong foothold by displacing other topical approaches prone to resistance and adverse events.

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Theraworx Protect for Immune Health is used in hospitals, nursing homes and other long-term care facilities to address different needs, including:

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perineal cleaning during insertion of Foley urethral catheters, and follow-up catheter maintenance; and

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regular high-acuity bathing of patients in intensive care units.

We offer several applications of Theraworx Protect for Immune Health, including:

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several types of pre-saturated towels infused with a measured amount of Theraworx Protect solution;

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a foaming applicator to apply Theraworx Protect to a cloth for cleaning and protective application;

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a nasal swab to support immune health; and

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a cleansing, no-rinse spray to utilize Theraworx Protect in applications where wiping a cloth may not be desired, such as cleaning around an open wound.

Theraworx Protect for Immune Health is used in more than 250 acute care hospitals and more than 750 nursing homes and other long-term care facilities.

Theraworx Protect U-Pak For Urinary Health

The U-Pak uses the Theraworx Protect formulation and is designed as a hygiene product to reduce risks that may lead to UTIs. Launched in 2019, it is our first Theraworx Protect product marketed directly to consumers. The U-Pak was initially launched in over 8,000 Walgreens locations, 4,700 of which feature the product both behind the pharmacy counter and on their retail shelves. The U-Pak is also sold at independent pharmacies, and we expect that U-Pak will be launched in CVS, Rite Aid and Publix before the end of the year.

The U-Pak contains pre-saturated towelettes and a foaming cleanser to be used after fecal evacuation to manage micro debris left behind after routine cleansing. For pre-menopausal women who suffer from post-coital UTIs, the cloths and foaming cleanser are to be used prior to and after sexual intercourse. For patients who engage in self-catheterization, the cloths and foaming cleanser are to be used before and after catheter insertion. During a 12-month clinical surveillance in 16 nursing homes, the rate of newly diagnosed UTIs fell 61% in patients whose nurses incorporated Theraworx Protect as part of their daily perineal hygiene regimen.

Theraworx Relief

We currently have two products offered within the Theraworx Relief brand family: Theraworx Relief for Muscle Cramps and Spasms and Theraworx Relief for Joint Discomfort and Inflammation.

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Theraworx Relief for Muscle Cramps and Spasms

Theraworx Relief for Muscle Cramps and Spasms is a topical spray or foam product for the relief of muscle cramps and spasms and symptoms related to RLS. It was launched in 2017 and produces a locally-acting muscle relaxant effect. The active homeopathic U.S. Phamarcopeia ingredient in this product is magnesium sulfate. The anti-spasmodic impact of Theraworx Relief for Muscle Cramps and Spasms reduces the severity and incidence of nocturnal cramps and spasms which demonstrated an improvement in sleep behavior and daytime functions. In a study of 35 patients diagnosed with RLS who used Theraworx Relief on a daily basis, these individuals showed a 52% improvement in symptom scores. In a study of patients with chronic nocturnal cramps and spasms, patients treated with Theraworx Relief demonstrated a significant reduction in the incidence and severity of those cramps and spasms. The reduction in incidence and severity was also observed to lead to improved sleep and daytime function. According to research firm Information Resources, Inc.’s point of sale data, Theraworx Relief for Muscle Cramp and Spasm foam and spray products ranked #1 and #6 out of over 1,600 products in the topical analgesics rub category over a four week period ending August 11, 2019, respectively. These two products were responsible for 80.3% of the total growth in that category, experienced period over period growth of 35.3% and 38.2%, respectively, compared to average growth of just 2.4% in that category, and achieved an average price per unit over 2.5 times the category average.

Theraworx Relief for Muscle Cramps and Spasms is widely distributed in over 47,000 pharmacy locations, including Walgreens, Walmart, CVS, Rite Aid, Sam’s Club, Kroger, Albertsons, Publix and Target.

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Theraworx Relief for Joint Discomfort and Inflammation

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Theraworx Relief for Joint Discomfort and Inflammation targets consumers with inflamed and injured joints. Launched in May 2019, Theraworx Relief for Joint Discomfort and Inflammation is sold as both a standalone foam or a foam with a medical grade compression glove or sleeve. The active homeopathic U.S. Pharmacopeia ingredient in this product is olibanum. We believe Theraworx Relief for Joint Discomfort and Inflammation is the first dual modality option for combining a medical grade compression garment for the hand and knee with an anti-inflammatory foam. In a study of patients with hand or knee arthritis using Theraworx Relief for Joint Discomfort and Inflammation combined with medical grade compression, individuals showed a 41% and 55% improvement on the Visual Analog Scale for pain in the hand and knee, respectively.

In a pre-launch survey we conducted of more than 300 retail pharmacists, more than 95% said they would recommend this dual compression and topical product before an oral NSAID.

Theraworx Relief for Joint Discomfort and Inflammation is available in more than 20,000 pharmacy locations, including Walgreens, CVS, Rite Aid, Health Mart and Kroger.

Combat One

Combat One for soldier readiness uses the Theraworx Protect formulation and has been branded and packaged specifically for the government, military, law enforcement and first responder markets. We offer several Combat One applications, including pre-saturated towelettes, foaming applicators and spray applicators, which are designed for use in environments where proper hygiene can be a challenge. The foaming applicators provide a means to use Combat One in conjunction with a cloth for cleaning and protective application.

Combat One is currently being used by United States special forces and being evaluated by the U.S. government for broader deployment.

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PHUEL

Launched in 2016, PHUEL for topical muscle nutrition uses the Theraworx Relief formulation andis intended to complement and enhance intense training regimens when integrated into sports recovery programs. We offer several PHUEL applications, including foamers and no-rinse sprayers. The product has been used by NFL, MLB, NHL and major NCAA teams. We plan to continue further studies and to market the product more broadly to endurance athletes both online and through specialty retailers.

Our Pipeline

We will continue to develop new products using our Bionome Engineered Platform and plan to market multiple new products in the coming years. We currently expect that our future products will focus on skincare for individuals with diabetes, pre-operative bathing, pre- and post-operative surgical site staging and symptoms of peripheral neuropathy.

We have additional launch plans that are prioritized by their potential to leverage our core competencies and capitalize on the emerging global demand for drug sparing products. We strive to launch safe and effective products that we believe can reach broad markets and that provide alternative symptom control options to first line prescription drugs. We believe patients and caregivers are increasingly seeking alternative healthcare options to mitigate unwanted side effects. This is particularly true of current pain and antibiotic medications, because of their widely reported drawbacks.

Within the next three years, we plan to launch the following six potential future products:

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For skin protection to address the risks associated with radiation-associated dermatitis, moisture-associated dermatitis and incontinence-associated dermatitis that will primarily target the institutional care market. This potential future product is currently in the formulation development stage and will be subject to future product development and clinical studies before commercialization. We plan to launch this product under an OTC drug monograph. We currently expect this product will be made available as a foam, spray or gel.

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To address skin care of patients suffering with diabetic dermatitis that will primarily target the retail pharmacy/consumer market and physicians. This potential future product is currently in the formulation development stage and will be subject to further studies before commercialization. We plan to launch this product under an OTC drug monograph. We currently expect this product will be made available as a foam, spray or gel.

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For pre-operative bathing that will primarily target the institutional care market. This potential future product is currently in ongoing clinical studies and will be subject to further clinical studies, as well as finalization of its packaging before commercialization. We plan to market this product as a cosmetic. We currently expect this product will be made available as a foam, spray, towel or gel.

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For pre-operative surgical site staging that will primarily target the institutional care market. This potential future product will be the subject of a de novo classification request we are preparing and we will need to complete the de novo classification process before commercialization. We currently expect this product will be made available as a foam, spray, towel or gel.

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For skin and wound cleansing that will primarily target the institutional care market. This potential future product will be the subject of a 510(k) submission we are preparing and we will need to complete the 510(k) process before commercialization. We currently expect this product will be made available as a foam, spray or gel.

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For risks associated with diabetic neuropathy that will primarily target the retail pharmacy/consumer market. This potential future product is currently in the formulation development stage and will need to undergo further product development and clinical studies before commercialization. We plan to launch this product under an OTC drug monograph. We currently expect this product will be made available as a foam, spray or gel.

See “Business—Government Regulation” for a description of the regulatory approval process for each product classification described above.

Clinical Evidence

Theraworx Protect

Evidence of the effectiveness of Theraworx Protect for Immune Health and Theraworx Protect U-Pak for Urinary Health has been shown in 26 clinical studies, 11 of which were IRB approved and 15 of which were peer-reviewed publications or posters presented at medical symposia. Please see below for several representative studies of Theraworx Protect for Immune Health and Theraworx Protect U-Pak for Urinary Health.


Study Name / Characteristics / Publication	Focus of the Study	Key Highlights
*“Effect of an innovative pH lowering wound therapeutic on MMP levels and bacterial biofilm colonization of chronic non-healing wounds.”* • Company funded • IRB-approved • Open-label experimental design-comparison to standard treatment • 25 patients to date, ongoing • Peer-reviewed poster presented at Symposia for Advanced Wound Care in Fall 2018. (University of North Carolina—Dept. of Vascular Surgery-Raleigh, NC and UF Shands Gainesville, FL)	Patients placed on a 4-week protocol with Theraworx Protect to determine effects on pH in the wound bed, Matrix metallopeptidsase 9, or MMP9, an inflammatory marker, bacteria biofilm, bacterial load and oxygen levels in the wound. Primary Outcome Measures: • Effect of Theraworx Protect on lowering biofilm in the wound bed; • Effect of Theraworx Protect on reducing MMP9 activity in the wound bed; • Effect of Theraworx Protect on reducing overall bacterial load in the wound bed; and • Effect of Theraworx Protect on lowering pH in the wound bed Secondary Outcome Measure: • Effect of Theraworx Protect on wound size after 4-weeks of application in patients with non-healing wounds	In nine patients who completed the study, 99.99% reduction in resistant biofilm, 56% reduction in MMP9 activity, a 1.1 log reduction in pH from on average of 7.1 to 6.0 and 70% reduction in bacterial load over the 4 week treatment period was shown.

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Study Name / Characteristics / Publication	Focus of the Study	Key Highlights

*“Efficacy and safety of a novel skin cleansing formulation versus chlorhexidine gluconate”* • Company funded • IRB-approved • Randomized placebo-controlled double-blind • Peer-reviewed publication American Journal of Infection Control (BioScience Laboratories, Inc, Bozeman, MT)	Compared Theraworx Protect to CHG 4% in a decolonization bacterial study of the groin. Primary Outcome Measure: • To assess Theraworx Protect Non-inferiority with respect to CHG Safety • No adverse events were reported during this study.	In a study of 81 individuals, Theraworx Protect was found to be non-inferior to 4% CHG both 10 minutes and 6 hours after application.


*“Theraworx skin care formulation reduces nosocomial associated CAUTI rates when used for urinary catheter insertion and maintenance”* • Independent study • Retrospective cohort study; multi-site • Peer-reviewed publication Journal of Clinical and Medical Investigations (Multi-Center Study Conducted in High-Risk Neurological, Cardiovascular and Trauma Critical Care Settings)	Retrospective study of electronic health records to determine effects of Theraworx Protect on CAUTI in high risk intensive care units, or ICUs. Primary Outcome Measure: • To assess instances of CAUTI when using Theraworx Protect compared to instance when using previous standard practice in each studied hospital	With prolonged use of 20 months or more in accordance with visual and descriptive protocols, the mean change in CAUTI rates was a reduction of 52.88% in high risk ICUs.

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Study Name / Characteristics / Publication	Focus of the Study	Key Highlights

*“Efficacy of a novel skin antiseptic against carbapenem-resistant Enterobacteriaceae, or CRE”* • Independent study (though one author is a consultant of the Company) • Independent laboratory-based efficacy study • Peer-reviewed publication American Journal of Infection Control, April 2015 (University of Louisville Departments of medicine, infectious diseases, translational research and epidemiology)	A laboratory-based study evaluating the efficacy of Theraworx Protect against carbapenem- resistant Escherichia coli and carbapenem-resistant Klebsiella pneumoniae using vitro skin, a testing substrate that mimics human skin, with similar topography, pH, surface tension and ionic strength. Primary Outcome Measure • Effect of Theraworx Protect on reduction of CRE	A reduction of carbapenem-resistant Escherichia coli (E. coli) by more than 99.9% and Klebsiella pneumoniae by approximately 99% was demonstrated.


*“Preventing Chronic Urinary Tract Infections from Urinary and Fecal Incontinence: The Impact of Theraworx”* • Independent study • Open label experimental design • Abstract submitted for publication	A 16-site study of nursing home data measuring the effects of Theraworx Protect in post-menopausal women suffering from chronic UTI caused by urinary and fecal incontinence. Primary Outcome Measure • Effect of Theraworx Protect daily protocol on newly diagnosed UTIs in patients with chronic UTI	Data showed a 61% reduction of UTIs over a 12-month timeframe.

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Theraworx Relief

Evidence of the effectiveness of Theraworx Relief for Muscle Cramps and Spasms has been shown in 10 clinical studies, seven of which were IRB approved and four of which were peer-reviewed publications or posters presented at medical symposia. Similarly, evidence of the effectiveness of Theraworx Relief for Joint Discomfort and Inflammation has been shown in four clinical studies, four of which were IRB approved. Please see below for several representative studies of Theraworx Relief for Muscle Cramps and Spasms and Theraworx Relief for Joint Discomfort and Inflammation.


Study Name / Characteristics / Publication	Focus of the Study	Key Highlights
*“Effects of Topical Anti-inflammatory and a dual modality consisting of topical inflammatory foam + impregnated medical grade compressive sleeves in moderate to severe arthritic joints”* • Company funded • IRB-approved • Open-label, experimental Design • Abstract currently under review (Brown University and Omega Research Institute)	A study to determine the effects of Theraworx Relief topical foam together with medical grade compression on symptoms and function in patients with moderate to severe arthritic joints. Primary Outcome Measure • Effect of Theraworx Relief for Joint Discomfort and Inflammation, using both the foam only and dual modality arm product, on reduction in measured pain using Visual Analog Scale in patients diagnosed with moderate to severe arthritis of the hand and knee both during treatment and after suspension of treatment Secondary Outcome Measure • Effect of Theraworx Relief for Joint Discomfort and Inflammation on patients reporting function during treatment and after suspension of treatment Safety • No adverse events were reported during the three week study	Patients with arthritis of the hand and knee using Theraworx Relief experienced a 27% and 38% improvement in the Visual Analog Scale for pain, respectively. Patients with hand and knee arthritis using Theraworx Relief and compression experienced 41% and 55% improvement on the Visual Analog Scale for pain, respectively.

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Study Name / Characteristics / Publication	Focus of the Study	Key Highlights

*“Restless Leg Syndrome: The Efficacy of a Non-Systemic,* *Non-Centrally Acting Topical Treatment.”* • Company funded • IRB-approved • Open label experimental design • Abstract submitted for publication (Brown University)	A study to determine the effects of Theraworx Relief in refractory RLS sufferers with moderate to severe symptoms using the International Restless Leg Scale. Primary Outcome Measure • Effect of Theraworx Relief on the severity of symptoms associated with RLS after application and after a two week suspension of application Secondary Outcome Measure • Effect of Theraworx Relief on reduction in symptom severity during sleep Safety • One patient reported mild skin sensitivity	After four weeks of treatment with Theraworx Relief, the mean International Restless Leg Scale Score decreased, demonstrating an overall improvement of 52% from the baseline score.


*“Report on Theraworx Active and muscle oxygenation and blood flow”* • Company funded • IRB-approved • Randomized, placebo controlled-crossover design mechanism of action study (Blood Flow) • Abstract diagnostic summary (University of Louisiana Lafayette School of Kinesiology)	A study of 12 participants to examine muscle oxygenation and blood flow with Theraworx Active compared to placebo using near infrared spectroscopy. Primary Outcome Measure • Effect of Theraworx Relief on deep tissue blood flow Statistical Significance • There was a statistically significant increase in deep tissue blood flow (p = 0.05)	Theraworx Active was revealed to be statistically associated with greater blood flow compared to patients given a placebo, and the trend was reversed when patients crossed over to placebo. Theraworx Active was not directly associated with increased muscle oxygenation. Therworx Active contained the same formulation as Theraworx Relief currently does.

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Results from previous clinical evaluations are not necessarily predictive of the efficacy of our products, and the results of future clinical evaluations, and interim results, are not necessarily indicative of final results. Moreover, if there is a flaw in a clinical study, it may not become apparent until the study is well advanced or potentially until well after it is complete. Finally, some of our studies are funded in full or in part by us. See “Risk Factors—Risks Related to Business, Financial Position and Industry—Positive results, if any, obtained in clinical evaluations may not necessarily be indicative of the efficacy of our products and the results in future clinical evaluations or other studies, and failure to replicate positive results from early studies may inhibit our ability to support and market our products or any future potential products or product extensions.”

Sales and Marketing

We have a dedicated sales team of 90 direct representatives across four sales areas: Institutional Care, Retail Pharmacy/Consumer, Community Health and Government.

Institutional Care

Our institutional care sales team primarily markets to acute care centers, hospitals and nursing homes and other long-term care centers. In the U.S., there are approximately 6,200 acute care centers and 15,500 nursing homes and long-term care centers. As of November 2019, we had more than 250 acute care customers and more than 750 long-term care customers. We have established contractual relationships with the four national healthcare distributors, Cardinal Health, Owens & Minor, Medline Industries, and McKesson, each of which are currently purchasing our TheraworxProtect products for distribution through their systems.

We have also secured contracts with several large GPOs, providing our brands broad supply chain access. In May 2014, we entered into an innovation contract with Med-Assets, enabling approximately 3,300 acute care hospitals to purchase our products. As of the date hereof, we are on contract with the two largest GPOs, Vizient and Premier, enabling more than 5,000 acute care hospitals to purchase our products. Additionally, we have contracted with several large integrated delivery networks, including UHS, Capstone, Henry Ford and Health Partners. As of the date hereof, our brands are also contracted with the two largest GPOs in long-term care, Forum and Managed Healthcare Associates, enabling more than 15,000 nursing homes and other long-term care facilities to purchase our products.

We believe our success in the institutional care sales area provides credibility to consumers who may purchase our products through a retail channel.

Retail Pharmacy/Consumer

Our retail sales team primarily markets to pharmacies, specialty retail locations and online retailers. It takes approximately 30 days to hire new retail sales representatives, 30 days on average to train new retail sales representatives and 30 days for trained retail sales representatives to begin closing sales.

In the U.S., there are approximately 67,000 pharmacies. According to the National Council on Patient Information and Education, pharmacists, on average, offer advice on self-care or OTC products 7.2 times per day. According to the Consumer Healthcare Products Association, consumers make an average of 26 trips per year to their pharmacy to purchase OTC products, while they only visit doctors an average of three times per year. Pharmacists make millions of recommendations each month to our targeted demographics who we believe could benefit from

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our products. Our team of retail sales representatives directly engages with the pharmacist and in-store support staff to drive recommendations of our products. Since the hiring of our consumer health sales representatives in early 2019, our sales representatives logged over 70,300 face-to-face interactions with pharmacists by October 2019. From August through October 2019, our consumer health sales representatives averaged 9,306 pharmacist interactions per month. These interactions can have a significant impact on the revenue growth from a visited store. In a review of revenue growth from stores selling Theraworx Protect, average revenue growth during the second quarter of 2019 compared to average revenue growth during the third and fourth quarter of 2018 for visited stores that had been selling product for over 30 days was 103% in stores visited one to four times and 156% in stores visited five to ten times compared to 25% growth in stores without a pharmacist visit.

We sell Theraworx Relief for Cramps and Spasms, Theraworx Relief for Joint Discomfort and Inflammation and Theraworx Protect U-Pak for Urinary Health primarily to pharmacies. We believe the awareness created through our retail pharmacy/consumer channel will increase awareness among patients, caregivers and physicians in our institutional care channel, which may lead to increased usage of our products in the acute and long-term care settings.

As of November 2019, our products are available in over 47,000 pharmacy locations, up from approximately 7,200 locations at the beginning of 2018. Our top retail partners include: Walgreens (over 8,000 stores), CVS (over 8,000 stores), Health Mart (over 4,900 stores), Walmart (over 3,700 stores), Rite Aid (over 3,100 stores), Albertsons (over 2,300 stores), Kroger (over 2,100 stores), Target (over 2,000 stores), Publix (over 1,100 stores) and Sam’s Club (over 250 stores). In addition to our rapidly expanding store count, our brands have increasingly been given additional and more prominent shelf space. We also have distribution agreements with the nation’s three largest pharmaceutical distributors, AmerisourceBergen, Cardinal Health and McKesson.

We also sell our products online through our website and Amazon. We entered into an agreement with Amazon in October 2017, and since the initial offering of Theraworx Relief to their shoppers, Theraworx Relief has earned the “Best Seller” badge numerous times in the muscle rub category.

Our direct-to-consumer, or DTC, branding initiatives are driven by traditional DTC marketing campaigns, including television and social media campaigns. We work with Guthy-Renker, a leading direct marketing company, on all DTC initiatives.

Community Health

Our Community Health team sells PHUEL and our Theraworx Protect line into specialty retail, schools, universities and professional organizations.

Government

Our Government team sells Combat One products in the U.S. government, military, law enforcement and first responder markets.

Manufacturing, Fulfillment and Packaging Facilities

We have in-house manufacturing facilities, capabilities and functions. We manufacture substantially all of our Theraworx Protect, Theraworx Relief (with the exception of the compression garments), PHUEL and Combat One products in two main facilities located in Asheville, North Carolina. Of the 170,081 square feet under lease, 18,456 square feet comprises our head office and testing facility, and 151,625 square feet comprises our manufacturing, fulfillment, warehousing, staging and distribution facilities.

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Much of the equipment utilized to produce and package our products is proprietary. Our manufacturing facilities, operated through our wholly-owned subsidiary, Relion Manufacturing, are 21 CFR Part 820 and Part 211 compliant and maintain ISO 13485 and ISO 9001 certifications.

Relion Manufacturing also provides manufacturing and medical packaging services to certain third parties on a contract basis.

We anticipate that our existing facilities will be sufficient to handle the anticipated demand for our currently marketed and expected future products.

Competition

Notwithstanding the size of the health, wellness and self-care market, our industry remains highly fragmented. We do not compete with any single competitor across all of our product lines and have numerous competitors of varying sizes, including personal care companies, branded consumer healthcare companies and private label manufacturers.

The Theraworx Protect brand competes with Sage Products, Medline and Mölnlycke, the makers of CHG 2% and 4% products. In the area of perineal care, our brand also competes with Sage Products and C.R. Bard.

The Theraworx Relief brand competes with Hyland’s Natural Relief tablets; Novartis, the maker of Voltaren; Johnson & Johnson, the maker of Bengay; Chattem, the maker of Icy-Hot; Biofreeze; Hitamisu, the maker of Salonpas; Aspercreme and Capsaicin. However, we believe there are no other topical, clinically-validated anti-inflammatory foams available in the marketplace. There are other topical OTC pain products in the U.S., such as topical menthol, lidocaine and capsaicin, but none of these options are anti-inflammatory.

We compete on the basis of numerous factors, including brand awareness and loyalty, ease of use, product quality, product variety, package design, shelf space, price, advertising, promotion, customer service and the ability to identify and satisfy consumer demand. We believe that we currently compete effectively with respect to each of these factors.

Coverage and Reimbursement

In September 2019, Theraworx Protect U-Pak, Theraworx Relief for Muscle Cramps and Spasms and Theraworx Relief for Joint Discomfort and Inflammation were added to a national data registry, thereby enabling Medicare and Medicaid reimbursement as well as HSA and FSA coverage with a prescription. Inclusion in this registry allows doctors to view our products as a prescriptive option in their electronic health record systems. We believe this will increase exposure to our products and significantly facilitate the prescription process for doctors. We are also pursuing a pathway for our Theraworx Protect for Immune Health products for urinary catheters and central line catheters to be included in institutional reimbursements through diagnosis related group, or DRG, codes.

Intellectual Property

Our trademarks are among our most important assets. Substantially all of our sales are from products bearing proprietary brand names. Accordingly, our future success may depend in part upon our ability to build and protect our rights and the goodwill associated with our trademarks, particularly Theraworx Protect for Immune Health, Theraworx Relief for Joint Discomfort and Inflammation, Theraworx Relief for Muscle Cramps and Spasms, Theraworx Protect U-Pak for Urinary Health, Combat One and PHUEL. As of September 1, 2019, we maintained 11 U.S. trademarks, including eight registrations and three applications.

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We monitor and protect our brands by enforcing our trademark rights against infringers. If we are not able to effectively enforce our rights, others may be able to infringe or dilute our trademarks and diminish the value associated with our brands, which could have a material adverse effect on our business, financial condition and results of operations.

We are continually developing new technology and ideas and also rely on a combination of patents, copyrights and trade secrets to protect our proprietary information. To protect our trade secrets, we employ internal policies and controls as well as confidentiality and proprietary information agreements with vendors, employees, consultants and other third parties. Despite these protections, it may be possible for unauthorized parties to copy our products or gain access to or independently develop our proprietary information, any of which could have a material adverse effect on our business. As of September 12, 2019, we had two issued U.S. active patents, three pending U.S. patent applications, one pending U.S. provisional application covering multiple new formulations and methods, three issued foreign active patents, and 20 pending foreign patent applications, covering a number of our products or portions of our products or methods of using our products. Each foreign asset is a corresponding counterpart of one or more U.S. patents or patent applications. None of these patents or patent applications is individually material to our business.

Government Regulation

Cosmetics, homeopathic drug products and medical devices are subject to regulation by the FDA, as well as various other federal, state, local and foreign regulatory authorities. These laws and regulations principally relate to the ingredients, design, safety, clearance, approval or authorization, manufacture, packaging, recordkeeping, proper labeling, advertising, marketing, shipment and disposal of such products. In addition, the FTC is specifically authorized to regulate advertising of OTC products to prevent unfair or deceptive acts or practices in such advertising. Although the FDA has the authority to evaluate the substantiation of written advertising and promotional materials, it generally examines advertising and promotional material to determine the intended use of a product. Pursuant to a memorandum of understanding between the FDA and the FTC, the FDA has primary responsibility for preventing misbranding of cosmetics, OTC homeopathic drug products, OTC monograph drug products and devices by label review, whereas the FTC exercises primary jurisdiction over all matters regulating the truth or falsity of advertising of these products. Failure to comply with applicable requirements may subject a cosmetic, an OTC homeopathic drug, and an OTC monograph drug or a medical device and its manufacturer to a variety of administrative sanctions, such as FDA refusal to clear or approve a pending application, issuance of warning letters or letters, mandatory product recalls, import detentions, civil monetary penalties and judicial sanctions, such as product seizures, injunctions and criminal prosecution.

FDA Regulation of Cosmetics

Under the FDC Act, a cosmetic is a product that is applied to the human body and intended to cleanse, beautify, or alter its appearance. The labeling of cosmetic products is subject to the requirements of the FDC Act, the Fair Packaging and Labeling Act, and FDA implementing regulations.

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The FDC Act prohibits marketing of adulterated cosmetics, e.g., products that contain unsafe ingredients, products with deficiencies in the manufacturing process, or products with labeling that render the product adulterated. It is also unlawful under the FDC Act to market a cosmetic that is misbranded. Whereas adulteration is generally associated with the product’s ingredients, composition, or manufacturing conditions, misbranding is generally a label or labeling violation. For example, a cosmetic may be misbranded because its label or labeling lacks certain information that is required by law or regulation; because it includes statements that are prohibited by law or regulation; or because the information included on the label or labeling does not conform to specific formatting requirements.

The FDA relies heavily on voluntary compliance by the cosmetics industry. There is no premarket ingredient or label review requirement and no list of approved ingredients, and there are no regulations governing cGMPs. As such, FDA enforcement activities generally target either unsafe cosmetics or cosmetics that, by virtue of inappropriate claims in the product’s labeling or promotional materials, are subject to the regulatory regime that governs drugs.

In contrast to a cosmetic, under the FDC Act, a drug is defined, in relevant part, as a product intended for use in the treatment, or prevention of disease or intended to affect the structure or any function of the body. The FDA may consider labeling claims in determining the intended use of a product. If the FDA interprets labeling claims for a cosmetic product to be claims affecting the structure or function of the human body, or intended for a disease condition, the product may be regulated as a new drug, which generally may not be marketed without approval of an NDA. The marketing of an unapproved drug is a prohibited act. Although the distinction between a cosmetic use and a drug use can be difficult to draw in some cases, failure to recognize the distinction can lead a cosmetic product to be the subject of FDA enforcement action. Additionally, OTC products that are both cosmetics and drugs must meet the requirements for both cosmetics and drugs.

To facilitate its regulation of cosmetic manufacturing, FDA administers the Voluntary Cosmetic Registration Program through which cosmetic firms can register their establishments and ingredients with the FDA. Although voluntary registration is one of the few ways the FDA can become aware of the existence of a cosmetic establishment (and thus helps FDA identify facilities for inspection), registering or being assigned a registration number does not denote approval of the establishment or its products by the FDA.

The FDA monitors compliance of cosmetic products through market surveillance and inspection of cosmetic manufacturers and distributors to ensure that the products do not contain false or misleading labeling and that they are not manufactured under unsanitary conditions. Inspections may also arise from consumer or competitor complaints submitted to the FDA. In the event the FDA identifies false or misleading labeling, unsanitary conditions, or other failures to comply with FDA requirements, the FDA may require a recall or market withdrawal of a product or changes to the manufacturing process or product formulation or take other enforcement actions, including warning or untitled letters, seizures and injunctions.

FDA Regulation of OTC Monograph Drug Products

Generally, any new drug must undergo FDA review for safety and efficacy to obtain marketing approval before it may be legally marketed in the United States. However, if the drug is generally recognized as safe and effective, or GRASE, then it is exempt from regulation as a new drug and may be marketed without prior approval. In 1972, the FDA initiated the comprehensive review of safety, effectiveness, and labeling (i.e., a review of the GRASE status) of OTC drugs then on the market, known as FDA’s OTC Drug Monograph Review, which establishes parameters under which OTC drugs may be marketed as GRASE without the need for approval of a New Drug Application. The FDA’s OTC Drug Monograph Review is a rulemaking process that establishes conditions under

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which certain active ingredients, in certain amounts, and with specific labeling, may be marketed as OTC drugs without requiring FDA approval. Monographs do not specify which inactive ingredients may or may not be used. Instead, FDA has issued a regulation requiring inactive ingredients to be “safe” and “suitable” and to not interfere with the drug’s efficacy. It is the responsibility of the manufacturer, marketer and distributor to ensure that the finished product, including all inactive ingredients, is safe and effective for its intended use. If FDA determines that an OTC drug does not conform to the conditions in the applicable FDA regulation and monograph, the product may be adulterated or misbranded and subject to FDA enforcement actions.

The monograph process is ongoing; several monographs have yet to be finalized and are in various stages of completion. FDA generally exercises enforcement discretion with regard to OTC drugs marketed under monographs that have not yet been finalized, such that FDA generally will not take enforcement action against them unless: (i) FDA is aware of documented consumer injuries related to the product; (ii) the product is marketed as OTC, but is required to be marketed by prescription only; or (iii) the product label or labeling suggests it is intended to treat a serious disease condition and unwarranted claims for treatment could preclude consumer from obtaining required medical attention.

FDA Policy Regarding Homeopathic Drugs

Homeopathy is premised on a belief that diseases or symptoms can be treated by very small doses of substances that treat the same disease or symptoms in larger quantities in healthy persons. The FDC Act expressly defines a drug to include an article recognized in the official Homeopathic Pharmacopoeia of the United States, or HPUS. However, according to FDA, that does not exempt homeopathic drugs from premarket approval (unless they are GRASE). From 1988 until October 2019, FDA has permitted drug products labeled as homeopathic to be marketed without FDA approval and with perceived Agency tolerance under the enforcement policies in FDA’s CPG 400.400. Conditions Under which Homeopathic Drugs May be Marketed. In December 2017, the FDA released a draft guidance entitled Drug Products Labeled as Homeopathic, in which the FDA announced that it would withdraw the CPG simultaneously with the issuance of the final guidance. However, in October 2019, FDA withdrew the CPG and issued a revised draft guidance document setting forth the FDA’s interpretation that homeopathic drugs are unapproved new drugs and intent to prioritize enforcement actions for homeopathic drugs under a risk-based approach. As stated in the draft guidance, FDA intends to focus its enforcement authorities on the following kinds of products: (1) products with reports of injury that raise potential safety concerns; (2) products that contain or claim to contain ingredients associated with potentially significant safety concerns; (3) products for routes of administration other than oral and topical; (4) products intended to be used for the prevention or treatment of serious and/or life-threatening diseases and conditions; (5) products for vulnerable populations; and (6) products that do not meet standards of quality, strength, or purity as required under the law. It is not clear if or when the FDA will finalize this revised draft guidance. In the interim, FDA intends to apply its general approach to prioritizing risk-based regulatory and enforcement action, which involves risk-based prioritization considering all the facts of a given circumstance. However, the FDA is not bound by its enforcement policy and can take action against an unapproved homeopathic drug at any time.

Homeopathic drugs are not exempt from FDA regulation or requirements related to adulteration, labeling or misbranding. A homeopathic drug still must comply with any applicable drug requirements. For example, the product must be manufactured in a drug manufacturing establishment registered with the FDA, the product must be listed with the FDA, the product must be labeled in accordance with applicable drug labeling rules, the product must be manufactured in accordance with cGMPs, the product must be packaged in accordance with applicable packaging rules, and adverse event reports must be submitted.

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FDA Regulation of Medical Devices

The FDC Act classifies medical devices into one of three categories based on the risks associated with the device and the level of control necessary to provide reasonable assurance of safety and effectiveness. Class I devices are deemed to be low risk and are subject to the fewest regulatory controls. Class II devices provide intermediate levels of risk. They are subject to general controls, and some Class II devices must also comply with special controls. Class III devices are generally the highest risk devices and are subject to the highest level of regulatory control to provide reasonable assurance of the device’s safety and effectiveness. Class III devices must typically be approved by FDA before they are marketed.

Pre-market Authorization and Notification

While most Class I and some Class II devices can be marketed without prior FDA authorization, most medical devices can be legally sold within the U.S. only if the FDA has: (i) approved a PMA application prior to marketing, generally applicable to most Class III devices; (ii) cleared the device in response to a premarket notification, or 510(k) submission, generally applicable to Class I and II devices; or (iii) authorized the device to be marketed through the de novo process, generally applicable for novel Class I or II devices.

510(k) Notification

Product marketing in the U.S. for most Class II and limited Class I devices typically follows a 510(k) pathway. To obtain 510(k) clearance, a manufacturer must submit a premarket notification demonstrating that the proposed device is substantially equivalent to a legally marketed device, referred to as the predicate device. A predicate device may be a previously 510(k) cleared device or a device that was in commercial distribution before May 28, 1976 for which the FDA has not yet called for submission of PMA applications, or a product previously granted de novo authorization. The manufacturer must show that the proposed device has the same intended use as the predicate device, and it either has the same technological characteristics, or it is shown to be equally safe and effective and does not raise different questions of safety and effectiveness as compared to the predicate device. Though the FDA has a user fee goal to clear a traditional 510(k) within 90 days of receipt, the clearance pathway can take substantially longer.

After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, requires a new 510(k) clearance or could require a PMA approval. The FDA requires each manufacturer to make this determination in the first instance, but the FDA can review any such decision. If the FDA disagrees with a manufacturer’s decision not to seek a new 510(k) clearance, it may retroactively require the manufacturer to seek 510(k) clearance or PMA approval. The FDA also can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or PMA approval is obtained.

De Novo Classification

Devices of a new type that the FDA has not previously classified based on risk are automatically classified into Class III by operation of the FDC Act, regardless of the level of risk they pose. To avoid requiring PMA review of low- to moderate-risk devices classified in Class III by operation of law, Congress enacted a provision to allow FDA to classify a low- to moderate-risk device not previously classified into Class I or II. To grant a request for de novo classification, FDA must find that general controls or general and special controls provide a reasonable assurance of safety and effectiveness for the device.

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PMA Approval

A product not eligible for 510(k) clearance or de novo classification must follow the PMA approval pathway, which requires proof of the safety and effectiveness of the device to the FDA’s satisfaction. Results from adequate and well-controlled clinical trials are required to establish the safety and effectiveness of a Class III PMA device for each indication for which FDA approval is sought. After completion of the required clinical testing, a PMA including the results of all preclinical, clinical, and other testing, and information relating to the product’s marketing history, design, labeling, manufacture, and controls, is prepared and submitted to the FDA. The PMA approval process is generally more expensive, rigorous, lengthy, and uncertain than the 510(k) premarket notification. As part of the PMA review, the FDA will typically inspect the manufacturer’s facilities for compliance with Quality System Regulation, or QSR, requirements, which impose elaborate testing, control, documentation and other quality assurance procedures. The FDA’s review of a PMA application typically takes one to three years but may last longer. Even after approval of a PMA, a new PMA or PMA supplement may be required in the event of a modification to the device, its labeling or its manufacturing process.

Postmarket Requirements

Once a device is on the market, numerous regulatory requirements apply. These include the QSR; labeling regulations; the Medical Device Reporting regulation, which requires that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur; the Reports of Corrections and Removals regulation, which requires manufacturers to report recalls and field actions to the FDA if initiated to reduce a risk to health posed by the device or to remedy a violation of the FDC Act; and establishment registration and device listing requirements.

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

The FDA also regulates the advertising and promotion of medical devices, including direct-to-consumer advertising, the prohibition on promoting products for uses or in patient populations that are not described in or are inconsistent with the product’s approved labeling, known as off-label use, industry-sponsored scientific and educational activities, and promotional activities involving the internet. The FDA imposes stringent restrictions on manufacturers’ communications regarding use of their products. Violations of the FDC Act relating to the inappropriate promotion of cleared or approved products may lead to investigations alleging violations of federal and state healthcare fraud and abuse and other laws, as well as state consumer protection laws.

FDA Enforcement Mechanisms

FDA has a variety of enforcement mechanisms at its disposal. Manufacturing facility inspections are one of the primary ways that the FDA enforces cosmetic, OTC monograph drug product and OTC homeopathic drug product requirements. During an inspection, FDA inspectors examine the facility’s manufacturing practices and records for compliance with cGMPs. The FDA may also take samples of labels and promotional materials to review for compliance with the applicable laws and regulations. If the FDA observes manufacturing deficiencies or labeling or

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promotional violations that are sufficiently serious, the FDA may take administrative or other enforcement action, most often in the form of a warning or untitled letter.

The FDA generally issues a warning or untitled letter as a first attempt to secure voluntary compliance. Warning or untitled letters regarding cosmetics, homeopathic drugs and OTC drugs may result from facility inspections, review of labels of products taken off the shelf of stores, and/or reviews of product websites. If the violation is intentional or flagrant, part of a history of repeated or continuous violations, or poses a reasonable possibility of injury or death to consumers, the FDA may take stronger enforcement action without first issuing a warning or untitled letter.

In some cases, such as an imminent threat to public health or safety, or if the FDA is not satisfied with the corrective actions taken in response to a warning or untitled letter, the FDA may take an enforcement action authorized by the FDC Act to prevent a violative cosmetic or drug product from entering or staying on the market and/or to penalize the company for its action but the FDA is not required to first issue a warning letter before pursuing other enforcement actions. These enforcement actions include civil product seizures, civil injunctions, and criminal prosecution.

With regard to medical devices, FDA uses many of the same enforcement tools. FDA may initiate an inspection of facilities, issue an untitled or warning letter asserting violation of law, seek an injunction or impose civil or criminal penalties or monetary fines, suspend or withdraw regulatory clearance, authorization or approval, suspend any ongoing clinical studies, delay or refuse clearance, authorization or approval of a pending regulatory submissions or supplements, impose restrictions on cleared or authorized products, seize or recall product, partially suspend or totally shutdown manufacturing operations, issue advisories or other field actions, impose operating restrictions, or refer matters to the Department of Justice or other enforcement or regulatory bodies.

FTC Regulation of Advertising

The FTC regulates cosmetic, OTC drug, including homeopathic drug, and non-restricted medical device advertising and promotional materials under the FTC Act, which prohibits unfair or deceptive acts or practices as well as the dissemination of any false advertisement that is likely to induce the purchase of cosmetics or drugs. The FTC requires that all express and implied claims must be substantiated and that advertisers have a reasonable basis for all claims.

The FTC has historically applied a standard of competent and reliable scientific evidence for health-related claims and defined the standard generally to require tests, analyses, research or studies that have been conducted and evaluated in an objective manner by qualified persons and are generally accepted in the profession to yield accurate and reliable results. More recently, the FTC has interpreted this standard as requiring, in some instances, randomized, double-blind, placebo-controlled clinical trials.

The FTC has issued an enforcement policy statement for OTC homeopathic drug products intended solely for self-limiting disease conditions amenable to self-diagnosis of symptoms and treatment pursuant to which marketing claims for OTC homeopathic drug products must meet the same standards as marketing claims for other OTC drugs (that is, they must be supported by competent and reliable scientific evidence). However, according to the policy statement, a claim that is based only on homeopathic theory (and that is not supported by competent and reliable scientific evidence) may be permissible if accompanied by a disclaimer that effectively communicates to consumers that: (1) there is no scientific evidence that the product works; and (2) the product’s claims are based only on theories of homeopathy that are not accepted by most modern medical experts.

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The FTC is authorized to issue cease-and-desist orders enforceable by injunctions, civil penalties, and criminal contempt proceedings as penalties for violating the FTC Act, as well as to proceed directly in federal court for injunctive relief and to obtain ancillary consumer redress.

Other Healthcare Laws and Regulations and Healthcare Reform

Healthcare Laws and Regulations

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

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

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

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

If our operations are found to be in violation of any of the federal and state laws described above or any other governmental regulations that apply to us, we may be subject to significant civil, criminal, and administrative penalties, including, without limitation, damages, fines, imprisonment, disgorgement, exclusion from participation in government healthcare programs, additional reporting obligations and oversight if we become subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with these laws, and the curtailment or restructuring of our operations.

Healthcare Reform

In the United States and some foreign jurisdictions there have been, and continue to be, several legislative and regulatory changes and proposed reforms to the healthcare system to contain costs, improve quality and expand access to care. In the United States, there have been and continue to be a number of healthcare-related legislative initiatives that have significantly affected the healthcare industry. For example, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively, the ACA, was passed in March 2010, and substantially changed the way healthcare is financed by both governmental and private insurers, and continues to significantly impact the U.S. healthcare industry.

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

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budget proposals for fiscal years 2019 and 2020 contain further drug price control measures that could be enacted during the budget process or in other future legislation. Further, the Trump administration released a “Blueprint” to lower overall drug prices and reduce out-of-pocket costs of drugs paid by consumers, which also contains additional proposals to increase drug manufacturer competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their products. At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.

Employees

As of September 30, 2019, we employed 226 full-time and 3 part-time employees. None of our employees are represented by a collective bargaining agreement. There are no pending labor-related legal actions against us filed with any state or federal agency. We have not experienced any work stoppages and we consider our relations with our employees to be good.

Legal Proceedings

From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. Except as described below, we are not currently a party to any litigation the outcome of which, we believe, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, cash flows or financial condition. Defending such legal proceedings is costly and can impose a significant burden on management and employees. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

In October 2018, CWE Enterprises, Inc. filed a complaint in the U.S. District Court for the Western District of North Carolina, alleging that we had breached an agreement with CWE to make certain royalty payments to CWE that would be due on the sale of specified products by us. The dispute is currently in arbitration, and all legal proceedings have been stayed pending the outcome of the arbitration. We deny the claims made by CWE and intend to defend this action vigorously.

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MANAGEMENT

Executive Officers and Directors

The following table provides information regarding our current executive officers and directors, including their ages, as of January 2, 2020:


Name	Age		Position(s)

Executive Officers

Stephen Woody		57	Chief Executive Officer, Founder and Chairman of our Board of Directors

David Fann (1)		65	President and Director

Joseph McGuire		61	Chief Financial Officer

Ralph Lombardo		58	Senior Vice President, Sales and Marketing

Non-Employee Directors

Dewey Andrew (3)(4)		77	Director

Humberto Antunes (2)(4)		58	Director

Linda McGoldrick (2)(4)		64	Director

Charles Owen III (3)(4)		59	Director

Karan Rai		43	Director

James Rosati (2)(3)		70	Director

(1)	Mr. Fann will resign from our board of directors contingent upon, and effective immediately prior to, the effectiveness of the registration statement of which this prospectus is a part. Mr. Fann will continue to serve as our President.

(2)	Member of the audit committee upon the completion of this offering.

(3)	Member of the compensation committee upon the completion of this offering.

(4)	Member of the nominating and corporate governance committee upon the completion of this offering.

Executive Officers

Stephen Woody is our founder and has served as our Chief Executive Officer and a director since our inception in 2013. Mr. Woody also founded and served as managing member of our predecessor company, Avadim LLC, from 2007 to 2013. During his professional career, he has assisted numerous life science companies with business development, quality control, regulatory support and strategic planning necessary for their launch of new or modified medical devices. Prior to founding Avadim LLC, he founded G3 Medical, Inc. which focused on manufacturing, packaging and sterilization services along with quality control. He previously founded Integrated Quality Systems, Inc., an organization focused on launching new medical devices into the healthcare sector. He began his career in the medical device field at Medical Action Industries, Inc., where he was responsible for quality and business development. Mr. Woody received a Bachelor of Science in mathematics from the University of North Carolina at Asheville. We believe Mr. Woody’s deep understanding of our company as our founder and chief executive officer, and his extensive business and executive management experience, make him particularly well qualified to serve on our board of directors.

David Fann has served as our President since July 2014 and as a director since September 2014. He previously co-founded Solar Energy Initiatives, Inc., a solar power company, and served as its chief executive officer from 2009 to 2013. He also held leadership and management positions with a number of other companies, including Netholdings.com Inc., FNDS3000 Corporation and Global Axcess Corporation. Mr. Fann filed a voluntary petition for relief as a debtor under Chapter 7 in U.S. Bankruptcy Court for the Western District of North Carolina in January 2013, and

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he was discharged as a debtor in March 2014 in a final decree closing the case in December 2014. There are no pending legal proceedings related to this matter. We believe Mr. Fann is qualified to serve on our board of directors as a result of his history and involvement as an officer and director of our company and his significant management experience. Mr. Fann will resign from our board of directors contingent upon, and effective immediately prior to, the effectiveness of the registration statement of which this prospectus is a part. Mr. Fann will continue to serve as our President.

Joseph McGuire has served as our Chief Financial Officer since October 2014. Prior to joining our company, he had approximately 25 years of experience serving as chief financial officer for numerous privately held and publicly traded companies in the financial services, investment and manufacturing industries, where his responsibilities included financial reporting, capital raising and investor relations. He began his career with Price Waterhouse, where he was a certified public accountant, and later held management positions with Dean Witter Reynolds and Paine Webber, Inc. Mr. McGuire received a Bachelor of Science in accounting from the University of Notre Dame.

Ralph Lombardo has served with our company and our predecessor company, Avadim LLC, since 2009 and as our Senior Vice President of Sales and Marketing since February 2015. Prior to joining us, he worked in sales for 15 years with Purdue Pharma, where he served in a number of roles with increasing responsibility, including regional sales director and senior director roles. Earlier in his career, Mr. Lombardo was a sales representative for Wyeth Labs. Mr. Lombardo received a Bachelor of Science in nutrition and a Masters of Business Administration, each from Youngstown State University.

Non-Employee Directors

Dewey Andrew has served as a director of our company since 2017. He has been an independent business consultant and investor since 2001. Previously, he founded and served as chief executive officer of Mountaineer Distributing Company and was the owner and general manager of Smoky Mountain Distributors. He also served as chairman of First Commercial Bank in Asheville, North Carolina. Mr. Andrew received a Bachelor of Arts from Elon College and a Master of Education from the University of North Carolina at Chapel Hill. We believe that Mr. Andrew’s significant corporate ownership and management experience provide him with the qualifications and skills to serve on our board of directors.

Humberto Antunes has served as a director of our company since 2017. He is a partner of Gore Range Capital, a venture capital firm focused on the healthcare industry, since May 2017. He founded and has served as principal of Terra2 Solutions, a healthcare and wellness think tank, since April 2017. From 1997 to 2016, he served in a number of roles of increasing responsibility with Galderma Pharma S.A., a global pharmaceutical company, including as its chief executive officer from 2004 to 2015 and chairman of its board of directors from 2015 to 2016. In 2014, he co-founded Nestlé Skin Health and served as its chief executive officer until 2016. He currently serves on the board of directors of the American Skin Association. Mr. Antunes received a Bachelor of Science in Business Administration with a major in International Economics from the University of Nebraska, Lincoln and continued his post-graduate studies in executive education at the IMD Business School in Lausanne, Switzerland. We believe that Mr. Antunes’s industry experience, particularly as a chief executive officer of a global pharmaceutical company, provides him with the qualifications and skills to serve on our board of directors.

Linda McGoldrick has served as a director of our company since January 2019. In 1985, she founded, and currently serves as Chairman and Chief Executive Officer of, Financial Health Associates International, a strategic consulting company specializing in healthcare and life sciences. From April 2019 through December 2019, Ms. McGoldrick served as President and interim Chief Executive Officer of Zillion, Inc., a health, technology and condition management

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company. Over her professional career, she has served in a number of leadership roles, including senior vice president and National Development director for the Healthcare and Life Sciences Industry Practices at Marsh-MMC Companies, international operations and marketing director of Veos plc, a European medical devices company, and managing director Europe for Kaiser Permanente International. In 2018, she was appointed by the Governor of Massachusetts to serve on the state’s Health Information Technology Commission. She has served as a director of numerous publicly traded and private held companies and non-profit organizations in the U.S., U.K. and Europe and currently serves on the faculty of the National Association of Corporate Directors. Ms. McGoldrick received a Bachelor of Arts in Sociology from Ohio Wesleyan University and Master of Social Work from the University of Pennsylvania and a Master of Business Administration from the Wharton School, University of Pennsylvania in Management. We believe that Ms. McGoldrick’s extensive experience as a director, global business strategy leader and policy expert for U.S. and European companies and organizations provides her with the qualifications and skills to serve on our board of directors.

Charles Owen III has served as director of our company since 2014. Since 2007, he has owned and served as the President of Fletcher Warehousing Company, a logistics company, and since 2009 has also served as the president of Fletcher Transportation and Logistics Company, a freight carrier serving western North Carolina. He previously served as president of Charles D. Owen Manufacturing Co., Inc. from 1985 until its acquisition by Springs Global, Inc. in 2003 and subsequently served as president of the Blanket Division of Springs Global. He has been a member of the board of directors of the University of North Carolina Health System since 2006 and is currently Chairman. He previously served on the board of directors of the Mission Health Care System in Asheville, North Carolina and on the Regional Board of Wachovia Bank. He currently serves as Administrator for the Micro Inception Angel Fund of Western North Carolina. Mr. Owen received a Bachelor of Science in Business Administration from the University of North Carolina at Chapel Hill and a Bachelor of Science in Textile Materials and Management from North Carolina State University. We believe that Mr. Owen’s extensive operational and strategic management experience provides him with the qualifications and skills to serve on our board of directors.

Karan Rai has served as a director of our company since 2015. In February 2017, he founded, and has since served as Managing Partner of ASGARD Partners & Co., an investment and financial advisory firm. From 2012 to February 2017, he served as executive vice president and chief financial officer, and later as president, of ADS, Inc., a provider of logistics and supply chain solutions to the U.S. armed forces. He previously served as vice president in JPMorgan Chase & Co.’s Investment Banking Group. Mr. Rai received a Bachelor of Science in Economics degree from Northwood University and a Master of Business Administration degree with distinction in Finance and Strategy from the Yale University School of Management. We believe that Mr. Rai’s extensive financial management experience provides him with the qualifications and skills to serve on our board of directors.

James Rosati has served as a director of our company since January 2019 and previously served as a consultant to our company from 2017 until his appointment as a director. He served as President and Chief Executive Officer of The Beacon Mutual Insurance Company, an insurance company, from 2007 until his retirement in June 2017. He previously served a partner at the investment banking company Riparian Partners, LLC and as Chief Executive Officer of the worldwide Telecommunications Division of Cookson Group plc. He began his career at Old Stone Bank, where he served in various roles, including president and chief executive officer and chairman of the board of directors, later serving as president and chief executive officer and director of Old Stone Corporation, a publicly traded company. Mr. Rosati is a veteran of the United States Coast Guard and earned a Bachelor of Science in economics from Bryant University. We believe that Mr. Rosati’s extensive leadership and management experience provides him with the qualifications and skills to serve on our board of directors.

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Board Composition

Our board of directors will consist of seven members upon the effectiveness of the registration statement of which this prospectus is a part. Our board of directors’ primary responsibilities include providing oversight, strategic guidance, counseling and direction to our management. Our board of directors meets on a regular basis and on an ad hoc basis as required.

In accordance with the terms of our amended and restated certificate of incorporation and amended and restated bylaws, each of which will be effective immediately prior to the closing of this offering, our board of directors will be divided into three classes, Class I, Class II and Class III, with members of each class serving staggered three-year terms. Effective upon the closing of this offering, our board of directors will be divided into the following classes:

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Class I, which will consist of Messrs. Antunes and Andrew, whose terms will expire at our first annual meeting of our stockholders to be held after the closing of this offering;

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Class II, which will consist of Ms. McGoldrick and Mr. Rosati, whose terms will expire at our second annual meeting of our stockholders to be held after the closing of this offering; and

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Class III, which will consist of Messrs. Owen, Rai and Woody, whose terms will expire at our third annual meeting of our stockholders to be held after the closing of this offering.

At each annual meeting of our stockholders to be held after the initial classification, the successors to directors whose terms then expire will be elected to serve from the time of election and qualification until the third annual meeting following their election and until their successors are duly elected and qualified. The authorized size of our board of directors may be changed only by resolution by a majority of the board of directors. We expect that any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. This classification of the board of directors may have the effect of delaying or preventing changes in our control or management. Following the closing of this offering, our directors may be removed for cause by the affirmative vote of the holders of at least 66²/₃% of our voting stock.

Director Independence

Applicable Nasdaq rules require a majority of a listed company’s board of directors to be comprised of independent directors within one year of listing. In addition, Nasdaq rules require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating and corporate governance committees be independent and that audit committee members also satisfy independence criteria set forth in Rule 10A-3 under the Exchange Act. The Nasdaq independence definition includes a series of objective tests, such as that the director is not, and has not been for at least three years, one of our employees, that neither the director nor any of his or her family members has engaged in various types of material business dealings with us, among others. In addition, under applicable Nasdaq rules, a director will only qualify as an “independent director” if, in the opinion of the listed company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

Our board of directors has determined that five of our directors, Messrs. Andrew, Antunes, Owen and Rosati and Ms. McGoldrick, are independent directors, as defined under applicable Nasdaq rules. In making such determination, our board of directors considered the relationships

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that each such non-employee director has with our company and all other facts and circumstances that our board of directors deemed relevant in determining his or her independence, including the beneficial ownership of our capital stock by each non-employee director. Messrs. Woody and Fann are not independent by virtue of their employment with us, and Mr. Rai is not independent by virtue of his position with ASGARD Partners, which has provided financial advisory services to our company. See “Certain Relationships and Related Party Transactions” below.

There are no family relationships among any of our directors or executive officers.

Board Leadership Structure

Our board of directors is currently chaired by our Chief Executive Officer, Mr. Woody. Our board believes that combining the positions of Chief Executive Officer and Chairman helps to ensure that the board and management act with a common purpose. In the board’s view, separating the positions of Chief Executive Officer and Chairman has the potential to give rise to divided leadership, which could interfere with good decision-making or weaken our ability to develop and implement strategy. Instead, the board believes that combining the positions of Chief Executive Officer and Chairman provides a single, clear chain of command to execute our strategic initiatives and business plans. In addition, we believe that a combined Chief Executive Officer and Chairman is better positioned to act as a bridge between management and the board, facilitating the regular flow of information between the two. The board also believes that it is advantageous to have a Chairman with an extensive history with, and knowledge, of our company, as is the case with our Chief Executive Officer, who is also a founder of our company, as compared to a relatively less informed independent Chairman.

Role of the Board in Risk Oversight

One of the key functions of our board of directors is informed oversight of our risk management process. Our board of directors does not have a standing risk management committee, but rather administers this oversight function directly through the board of directors as a whole, as well as through various standing committees of our board of directors that address risks inherent in their respective areas of oversight. In particular, our board of directors is responsible for monitoring and assessing strategic risk exposure and our audit committee has the responsibility to consider and discuss our major financial risk exposures and the steps our management has taken to monitor and control these exposures, including guidelines and policies to govern the process by which risk assessment and management is undertaken. The audit committee also monitors compliance with legal and regulatory requirements.

Board Committees

Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee. Our board of directors may establish other committees to facilitate the management of our business. The composition and functions of the audit, compensation and nominating and corporate governance committees are described below.

Audit Committee

Upon completion of this offering, our audit committee will consist of Ms. McGoldrick and Messrs. Antunes and Rosati, with Ms. McGoldrick serving as chair of the audit committee. Our board of directors has determined that each of these individuals meets the independence requirements of the Sarbanes-Oxley Act, as well as Rule 10A-3 under the Exchange Act, and the applicable listing standards of Nasdaq. Each member of our audit committee can read and understand fundamental consolidated financial statements in accordance with Nasdaq audit

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committee requirements. In arriving at this determination, the board has examined each audit committee member’s scope of experience and the nature of their prior and current employment.

Our board of directors has determined that Ms. McGoldrick qualifies as an audit committee financial expert within the meaning of SEC regulations and meets the financial sophistication requirements of the Nasdaq Listing Rules. In making this determination, our board has considered Ms. McGoldrick’s formal education and previous and current experience in financial and accounting roles.

The functions of this committee include, among other things:

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evaluating the performance, independence and qualifications of our independent auditors and determining whether to retain our existing independent auditors or engage new independent auditors;

•

reviewing and approving the engagement of our independent auditors to perform audit services and any permissible non-audit services;

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monitoring the rotation of partners of our independent auditors on our engagement team as required by law;

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prior to engagement of any independent auditor, and at least annually thereafter, reviewing a formal written statement delineating all relationships between the independent auditor and us that may reasonably be thought to bear on their independence, and assessing and otherwise taking the appropriate action to oversee the independence of our independent auditor;

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reviewing our annual and quarterly consolidated financial statements and reports, including the disclosures contained under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and discussing the statements and reports with our independent auditors and management;

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reviewing with our independent auditors and management significant issues that arise regarding accounting principles and financial statement presentation and matters concerning the scope, adequacy and effectiveness of our financial controls;

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reviewing with management and our auditors any earnings announcements and other public announcements regarding material developments;

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

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preparing the report that the SEC requires in our annual proxy statement;

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reviewing and providing oversight of any related-person transactions in accordance with our related person transaction policy and reviewing and monitoring compliance with legal and regulatory responsibilities, including our code of business conduct and ethics;

•

reviewing our major financial risk exposures, including the guidelines and policies to govern the process by which risk assessment and risk management is implemented;

•

engaging external advisors as it deems necessary;

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•

reviewing on a periodic basis our investment policy; and

•

reviewing and evaluating on an annual basis the performance of the audit committee and the audit committee charter.

We will provide appropriate funding for the audit committee, as determined by the committee. We believe that the composition and functioning of our audit committee complies with all applicable requirements of the Sarbanes-Oxley Act, and all applicable SEC and Nasdaq rules and regulations. We intend to comply with future requirements to the extent they become applicable to us, including once we are no longer a smaller reporting company, as defined in SEC rules.

Compensation Committee

Upon completion of this offering, our compensation committee will consist of Messrs. Andrew, Owen and Rosati, with Mr. Rosati serving as chair of the compensation committee. Each of these individuals is a non-employee director, as defined in Rule 16b-3 promulgated under the Exchange Act. Our board of directors has determined that each of these individuals is ‘‘independent’’ as defined under the applicable listing standards of Nasdaq, including the standards specific to members of a compensation committee. The functions of this committee include, among other things:

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reviewing, modifying and approving (or if it deems appropriate, making recommendations to the full board of directors regarding) our overall compensation strategy and policies;

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reviewing and making recommendations to the full board of directors regarding the compensation and other terms of employment of our executive officers (provided that the chief executive officer may not be present during voting or deliberations as to his own compensation);

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reviewing and making recommendations to the full board of directors regarding performance goals and objectives relevant to the compensation of our executive officers and assessing their performance against these goals and objectives;

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reviewing and making recommendations to the full board of directors regarding the equity incentive plans, compensation plans and similar programs advisable for us, as well as modifying, amending or terminating existing plans and programs;

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evaluating risks associated with our compensation policies and practices and assessing whether risks arising from our compensation policies and practices for our employees are reasonably likely to have a material adverse effect on us;

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reviewing and making recommendations to the full board of directors regarding the type and amount of compensation to be paid or awarded to our non-employee board members;

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establishing policies with respect to votes by our stockholders to approve executive compensation to the extent required by Section 14A of the Exchange Act and, if applicable, determining our recommendations regarding the frequency of advisory votes on executive compensation;

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reviewing and assessing the independence of compensation consultants, legal counsel and other advisors as required by Section 10C of the Exchange Act;

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•

administering our equity incentive plans;

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establishing policies with respect to equity compensation arrangements;

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reviewing the competitiveness of our executive compensation programs and evaluating the effectiveness of our compensation policy and strategy in achieving expected benefits to us;

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reviewing and making recommendations to the full board of directors regarding the terms of any employment agreements, severance arrangements, change in control protections and any other compensatory arrangements for our executive officers;

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reviewing with management and approving our disclosures under the caption “Compensation Discussion and Analysis” in our periodic reports or proxy statements to be filed with the SEC, to the extent such caption is included in any such report or proxy statement;

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preparing the report that the SEC requires in our annual proxy statement; and

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reviewing and evaluating on an annual basis the performance of the compensation committee and the compensation committee charter.

We believe that the composition and functioning of our compensation committee complies with all applicabl

AVADIM HEALTH, INC. S-1/A