S-4/A
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As filed with the Securities and Exchange Commission on April 17, 2019

Registration No. 333-229666

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 2

to

Form S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

FLEX PHARMA, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   2834   46-5087339

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

31 St. James Avenue, 6th Floor

Boston, MA 02116

(617) 874-1821

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

 

 

 

William McVicar, Ph.D

President and Chief Executive Officer

31 St. James Avenue, 6th Floor

Boston, MA 02116

(617) 874-1821

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

 

 

Copies to:

 

Walter Van Dorn, Esq.

Dentons US LLP

1221 Avenue of the Americas

New York, New York 10020-1089

(212) 768-6700

 

Thomas Redekopp, Esq.

Dentons Canada LLP

77 King Street West, Suite 400

Toronto, Ontario M5K 0A1

(416) 863-4511

 

Andrew L. Strong, Esq.

Christina F. Pearson, Esq.

Pillsbury Winthrop Shaw Pittman LLP

Two Houston Center

909 Fannin, Suite 2000

Houston, TX 77010-1028

(713) 276-7600

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement and at the effective time of the merger of Falcon Acquisition Sub, LLC, a wholly owned subsidiary of Flex Pharma, Inc., a Delaware corporation, with and into Salarius Pharmaceuticals, LLC, a Delaware limited liability company, as described in the agreement and plan of merger dated as of January 3, 2019, as attached as Annex A to the proxy statement/prospectus/information statement forming part of this registration statement.

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, 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(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 emerging growth company. See 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.  ☒

If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer)  ☐

Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer)  ☐

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.

 

 

 


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

 

PRELIMINARY—SUBJECT TO COMPLETION, DATED APRIL 17, 2019

 

LOGO    LOGO

PROPOSED MERGER—YOUR VOTE IS VERY IMPORTANT

To the Stockholders of Flex Pharma, Inc. and Members of Salarius Pharmaceuticals, LLC:

On January 3, 2019, Flex Pharma, Inc., a Delaware corporation (which we refer to as “Flex” or “Flex Pharma”), Falcon Acquisition Sub, LLC, a Delaware limited liability company and a wholly owned subsidiary of Flex Pharma (which we refer to as “Merger Sub”), and Salarius Pharmaceuticals, LLC, a Delaware limited liability company (which we refer to as “Salarius”), entered into an Agreement and Plan of Merger (which we refer to as the “Merger Agreement”) pursuant to which, among other things, Merger Sub will merge with and into Salarius, with Salarius continuing as a wholly owned subsidiary of Flex Pharma and the surviving company of the merger (which we refer to as the “merger”).

The Merger Agreement (i) values Flex Pharma at $10.5 million, subject to adjustment, on a dollar-for-dollar basis, based on Flex Pharma’s net cash balance at the closing of the merger compared to a target net cash of $3.3 million, and (ii) values Salarius at $36.6 million, subject to adjustment, on a dollar-for-dollar basis, based on the sale of Series A Units pursuant to subscription agreements that Salarius entered into prior to the Merger Agreement compared to the target sale of $7.0 million of Series A Units.

At the closing of the merger, each outstanding common unit, profits interest common unit and Series A unit of Salarius will convert into the right to receive shares of Flex Pharma’s common stock (subject to the payment of cash in lieu of fractional shares and after giving effect to an anticipated reverse stock split of Flex Pharma’s common stock, as described below) at the conversion ratio formulae described in the Merger Agreement. Under those formulae, immediately following the effective time of the merger, Flex Pharma’s current stockholders will own approximately 19.9% of the combined company (on a partially-diluted basis, excluding the effect of certain options, the dividend or distribution of rights and Warrants (as defined below) to Flex Pharma’s current stockholders and the possible issuance of a warrant to Wedbush (as defined below)) and Salarius’ current members will own approximately 80.1% of the combined company (on a partially-diluted basis, excluding the effect of certain options, the dividend or distribution of rights and Warrants to Flex Pharma’s current stockholders and the possible issuance of a warrant to Wedbush). For purposes of calculating the conversion ratios, the number of outstanding shares of Flex Pharma’s common stock immediately before the merger takes into account the dilutive effect of Flex Pharma’s common stock underlying options outstanding as of the closing of the merger that have an exercise price less than or equal to $1.35 per share of Flex Pharma’s common stock (approximately 849,610 shares as of April 1, 2019). Approximately 1,447,426 shares of Flex Pharma’s common stock underlie options outstanding as of April 1, 2019 that have an exercise price greater than $1.35 per share of Flex Pharma’s common stock. If the closing of the merger had occurred on April 1, 2019, then each outstanding unit of Salarius would have converted into the right to receive approximately that number of shares of Flex Pharma’s common stock set forth in the following table (such amount subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to Flex Pharma’s common stock). The table assumes that (i) 3,525 common units, 7,334 profits interest common units and 7,426 Series A units of Salarius and (ii) 18,919,086 shares of Flex Pharma (which includes the dilutive effect of certain options, as discussed above) were outstanding as of April 1, 2019.

 

Type of Unit

   No. of Shares of
Flex Pharma’s
Common Stock
 

common unit

     3,535.9187  

profits interest common unit

     2,771.6463 (1) 

Series A unit

     5,838.8478  


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(1)

On average, each outstanding profits interest common unit of Salarius would have converted into the right to receive approximately 2,771.6463 shares of Flex Pharma’s common stock. Salarius issued its profits interest common units at various times and, therefore, the profits interest common units have various values. The actual number of shares of Flex Pharma’s common stock into which each outstanding profits interest common unit would have converted depends on such unit’s actual value.

In addition, at or prior to the closing of the merger, Flex Pharma will pay a dividend of or distribute one right per share of Flex Pharma’s common stock to its stockholders of record as of a date and time determined by Flex Pharma’s board of directors. Each right will entitle such stockholders to receive a warrant to purchase shares of Flex Pharma’s common stock (which we refer to as a “Warrant”) six months and one day following the closing date of the merger.

The Warrants will contain customary terms and conditions, provided that the Warrants:

 

   

will have an exercise price per share of Flex Pharma’s common stock equal to the fair market value of a share of Flex Pharma’s common stock on the closing date of the merger (such exercise price subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to Flex Pharma’s common stock);

 

   

will be immediately exercisable upon receipt, which receipt will be six months and one day following the closing date of the merger;

 

   

will be exercisable for five years after receipt;

 

   

will be subject to a cashless exercise, at the option of Flex Pharma, under certain circumstances; and

 

   

will be exercisable, in the aggregate, with respect to that number of share of Flex Pharma’s common stock equal to the Warrant Aggregate Value (as defined in the Merger Agreement) divided by the value (determined using the Black-Scholes-Merton option pricing formula) of a warrant to purchase a share of Flex Pharma’s common stock on the closing date of the merger.

The Warrant Aggregate Value generally represents the difference between (i) Flex Pharma’s value and (ii) the value of Flex Pharma’s common stock that Flex Pharma’s current stockholders will have in the combined company. Accordingly, the Warrant Aggregate Value will be based in part on Flex Pharma’s net cash balance at the time of closing of the merger and adjusted for the amount of additional financing consummated by Salarius at or before the closing of the merger, as further described in the Merger Agreement. If the closing of the merger had occurred on April 12, 2019, then the Warrant Aggregate Value would have been approximately $1,556,180 (as calculated in Section 1.12(e) of the Merger Agreement) and, when issued, the Warrants would be exercisable, in the aggregate, with respect to approximately 4,550,233 shares of Flex Pharma’s common stock (such amount calculated by dividing the Warrant Aggregate Value by the value of a warrant to purchase a share of Flex Pharma’s common stock as calculated using the Black-Scholes-Merton option pricing formula and subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to Flex Pharma’s common stock), assuming that (i) Flex Pharma’s net cash balance as of April 12, 2019 was $3.3 million, (ii) Salarius issued and sold $6.4 million of Series A preferred units on or before April 12, 2019, and (iii) the value (determined using the Black-Scholes-Merton option pricing formula assuming a volatility of 75% and a risk-free rate equal to the 5-year United States treasury rate in effect on April 12, 2019) of a warrant to purchase a share of Flex Pharma’s common stock on April 12, 2019 was $0.342. Flex Pharma’s dividend or distribution of rights to its current stockholders and its issuance of Warrants to such stockholders will not impact the number of shares of Flex Pharma’s common stock into which each outstanding unit of Salarius will convert. However, the rights and Warrants will reduce Salarius’ current members’ ownership of the combined company and increase Flex Pharma’s current stockholders’ ownership of the combined company, in each case by approximately 5.0% to 75.1% and 24.9%, respectively, on a partially-diluted basis (based on the assumptions stated above).

Flex Pharma common stock is listed on the Nasdaq Capital Market under the symbol “FLKS.” Prior to consummation of the merger, Flex Pharma intends to file an initial listing application for the combined company


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with Nasdaq pursuant to its “reverse merger” rules. On [●], 2019, the last trading day before the date of this proxy statement/prospectus/information statement, the closing sale price of Flex Pharma common stock was $[●] per share.

Following the merger, Flex Pharma will change its name to “Salarius Pharmaceuticals, Inc.” (which we refer to as “New Salarius” or the “combined company”) and expects to trade on the Nasdaq Capital Market under the symbol “SLRX.”

Flex Pharma is holding a special meeting of its stockholders to obtain the necessary stockholder approvals necessary to complete the merger and related matters. At the special meeting, which will be held at [●], at [●] local time, on [], 2019, unless postponed or adjourned to a later date, Flex Pharma will ask its Stockholders, among other things to consider and act upon the following matters:

 

  1.

To approve the issuance of Flex Pharma’s common stock to Salarius’ members pursuant to the Merger Agreement and the resulting “change of control” of Flex Pharma under Nasdaq rules and the dividend or distribution of rights, and issuance of Warrants, to Flex Pharma’s stockholders pursuant to the Merger Agreement. The issuance requires Flex Pharma’s stockholders’ approval under Nasdaq rules because it exceeds 20% of the number of shares of Flex Pharma’s common stock outstanding prior to the issuance. The issuance also requires Flex Pharma’s stockholders’ approval under Nasdaq’s rules because it will result in a “change of control” of Flex Pharma.

 

  2.

To approve an amendment of Flex Pharma’s Amended and Restated Certificate of Incorporation (which we refer to as the “Certificate of Incorporation”) to effect a reverse stock split of Flex Pharma’s common stock (which we refer to as the “reverse stock split”). This amendment is intended to help Flex Pharma satisfy the listing requirements of the Nasdaq Capital Market. Upon the effectiveness of the amendment of the Certificate of Incorporation effecting the reverse stock split, the outstanding shares of Flex Pharma’s common stock will be combined into a lesser number of shares to be determined by Flex Pharma’s board of directors prior to the effective time of such amendment.

 

  3.

To approve an amendment of Flex Pharma’s Certificate of Incorporation to effect the name change of Flex Pharma to “Salarius Pharmaceuticals, Inc.”

 

  4.

To consider and vote on an adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the meeting to approve Proposal 1, 2 or 3.

After careful consideration, and upon the recommendation of the Special Committee of Flex Pharma’s board of directors, Flex Pharma’s board of directors (i) determined that the merger and the other transactions contemplated by the Merger Agreement are fair to, and in the best interests of Flex Pharma and its stockholders, (ii) authorized and approved the Merger Agreement and the transactions contemplated by the Merger Agreement, (iii) declared that the Merger Agreement, the merger and the other transactions contemplated by the Merger Agreement are advisable to Flex Pharma and its stockholders and (iv) recommended that Flex Pharma’s stockholders approve the proposals referred to above. Accordingly, Flex Pharma’s board of directors unanimously recommends that Flex Pharma’s stockholders vote “FOR” each of the proposals referred to above.

After careful consideration, the Salarius board of managers (i) determined that the merger is fair to, and in the best interests of, the Salarius and the Salarius members, (ii) has adopted and declared advisable the Merger Agreement and approved the adoption of the Merger Agreement and the approval of the merger and related transactions, and (iii) has determined to recommend that the Salarius members vote to adopt the Merger Agreement, approve the merger and related transactions. Accordingly, Salarius’ board of managers unanimously recommends that its members sign and return the member written consent to Salarius indicating their approval of the merger and other transactions contemplated by the Merger Agreement.

More information about Flex Pharma, Salarius and the proposed transactions are contained in this proxy statement/prospectus/information statement. Flex Pharma and Salarius urge you to read the proxy statement/


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prospectus/information statement carefully and in its entirety. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER “RISK FACTORS” BEGINNING ON PAGE 21.

Your vote is important. If you are a Flex Pharma stockholder, whether or not you expect to attend the special meeting in person, please complete, date, sign and promptly return the accompanying proxy card in the enclosed postage paid envelope to ensure that your shares will be represented and voted at the special meeting. You can also vote your shares via the internet or by telephone as provided in the instructions set forth in the enclosed proxy card. If you hold your shares in “street name” through a broker, you should follow the procedures provided by your broker.

Flex Pharma and Salarius are excited about the opportunities the merger brings to both Flex Pharma’s stockholders and Salarius’ members, and thank you for your consideration and continued support.

 

Yours sincerely,     

/s/ William McVicar

 

    

/s/ David J. Arthur

 

 

William McVicar

    

 

David J. Arthur

President, Chief Executive Officer and Director      Chief Executive Officer and Manager
Flex Pharma, Inc.      Salarius Pharmaceuticals, LLC

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or passed upon the adequacy or accuracy of this proxy statement/prospectus/information statement. Any representation to the contrary is a criminal offense.

This proxy statement/prospectus/information statement is dated [], 2019, and is first being mailed to stockholders and members on or about [], 2019.


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REFERENCES TO ADDITIONAL INFORMATION

This proxy statement/prospectus/information statement contains a notice of meeting with respect to the special meeting of stockholders at which Flex Pharma’s stockholders will consider and vote on the proposals (1) to approve the issuance of Flex Pharma’s common stock to Salarius’ members pursuant to the Merger Agreement and the resulting “change of control” of Flex Pharma under Nasdaq rules and the dividend or distribution of rights, and issuance of Warrants, to Flex Pharma’s stockholders pursuant to the Merger Agreement, (2) to approve an amendment of Flex Pharma’s Certificate of Incorporation to effect a reverse stock split of Flex Pharma’s common stock to satisfy the listing requirements of the Nasdaq Capital Market, (3) approve an amendment of Flex Pharma’s Certificate of Incorporation to effect the name change of Flex Pharma to “Salarius Pharmaceuticals, Inc.”, and (4) to consider and vote on an adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the meeting to approve Proposals 1, 2 or 3.

If you are a Flex Pharma Stockholder:

Additional business and financial information about Flex Pharma can be found in documents previously filed by Flex Pharma with the U.S. Securities and Exchange Commission (which we refer to as the “SEC”). This information is available to you without charge on the SEC’s website. Flex Pharma’s stockholders will also be able to obtain the proxy statement/prospectus/information statement, free of charge, from Flex Pharma by requesting copies in writing using the following contact information:

FLEX PHARMA, INC.

Attn: Secretary

31 St. James Avenue, 6th Floor

Boston, MA 02116

Tel: (617) 874-1821

You may also request additional copies from Flex Pharma’s proxy solicitor using the following contact information:

INNISFREE M&A INCORPORATED

501 Madison Avenue, 20th Floor

New York, NY 10022

Stockholders Call Toll-Free: 888-750-5834

To ensure timely delivery of these documents, any requests should be made no later than [], 2019 to receive them before the special meeting.

See “Where You Can Find More Information” beginning on page 278.

If you are a Salarius member:

If you have additional questions or would like to obtain an additional copy of the proxy statement/prospectus/information statement, free of charge, please contact:

SALARIUS PHARMACEUTICALS, LLC

Tiberend Strategic Advisors, Inc.

Joshua Drumm, Ph.D. (Investors)

(212) 375-2664

jdrumm@tiberend.com

David Schemelia (Media)

(212) 375 6298

dschemelia@tiberend.com


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LOGO

Flex Pharma, Inc.

31 St. James Avenue, 6th Floor, BOSTON, MA 02116

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

To Be Held On [], 2019

To the Stockholders of Flex Pharma, Inc.:

A special meeting of stockholders of Flex Pharma, Inc. (which we refer to as “Flex Pharma”) will be held at [●], local time, on [●], 2019, at [●], to consider and act upon the following matters:

 

  1.

To approve the issuance of Flex Pharma’s common stock to Salarius’ members pursuant to the Agreement and Plan of Merger (which we refer to as the “Merger Agreement”) dated January 3, 2019 by and among Flex Pharma, Inc., Falcon Acquisition Sub, LLC, a Delaware limited liability company and a wholly owned subsidiary of Flex Pharma (which we refer to as “Merger Sub”), and Salarius Pharmaceuticals, LLC, a Delaware limited liability company (which we refer to as “Salarius”) and the resulting “change of control” of Flex Pharma under Nasdaq rules and the dividend or distribution of rights, and issuance of Warrants, to Flex Pharma’s stockholders pursuant to the Merger Agreement.

 

  2.

To approve an amendment of Flex Pharma’s Amended and Restated Certificate of Incorporation (which we refer to as the “Certificate of Incorporation”) to effect a reverse stock split of Flex Pharma’s common stock (which we refer to as the “reverse stock split”).

 

  3.

To approve an amendment of Flex Pharma’s Certificate of Incorporation to effect the name change of Flex Pharma to “Salarius Pharmaceuticals, Inc.”

 

  4.

To consider and vote on an adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the meeting to approve Proposals 1, 2 or 3.

If Flex Pharma is to complete the merger with Salarius, stockholders must approve Proposals 1, 2 and 3. The approval of Proposal 4 is not a condition to the closing of the transactions contemplated by the Merger Agreement.

Stockholders also will consider and act on any other matters as may properly come before the special meeting or any adjournment or postponement thereof, including any procedural matters incident to the conduct of the special meeting.

Flex Pharma’s common stock is the only type of security entitled to vote at the special meeting. The board of directors has fixed April 17, 2019 as the record date for the determination of stockholders entitled to notice of, and to vote at, the special meeting and any adjournment or postponement thereof. Only holders of record of shares of Flex Pharma’s common stock at the close of business on the record date are entitled to notice of, and to vote at, the special meeting. At the close of business on the record date, Flex Pharma had [●] shares of common stock outstanding and entitled to vote at the special meeting. Each holder of record of shares of common stock on the record date will be entitled to one vote for each share held on all matters to be voted upon at the special meeting.

Your vote is important. The affirmative vote of the holders of a majority of the shares of Flex Pharma’s common stock present in person or represented by proxy and entitled to vote on such matter at the special meeting is required for approval of Proposals 1 and 4. The affirmative vote of holders of a majority of the outstanding shares of Flex Pharma’s common stock as of the record date for the special meeting is required for approval of Proposals 2 and 3. Whether or not you plan to attend the special meeting in person, please submit your proxy promptly by telephone or via the internet in accordance with the instructions on the enclosed proxy


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card or complete, date, sign and promptly return the accompanying proxy card in the enclosed postage paid envelope to ensure that your shares will be represented and voted at the special meeting. If you date, sign and return your proxy card without indicating how you wish to vote, your proxy will be counted as a vote in favor of Proposals 1 through 4. If you fail either to return your proxy card or to vote in person at the special meeting, your shares will not be counted for purposes of determining whether a quorum is present at the special meeting and will have the same effect as a vote against Proposals 2 and 3. If you attend the special meeting, you may, upon your written request, withdraw your proxy and vote in person. You may revoke your proxy (i) at any time before the polls close at the special meeting by sending a written notice to the Corporate Secretary of Flex Pharma, (ii) at any time before the polls close at the special meeting by providing a duly executed proxy card bearing a later date than the proxy being revoked, (iii) before 11:59 p.m. Eastern Time on [●] by submitting a proxy on a later date by telephone or via the internet (only your last telephone or internet proxy will be counted), or (iii) by attending the special meeting and voting in person.

By Order of the Board of Directors of Flex Pharma, Inc.

/s/ William McVicar

 

William McVicar

President, Chief Executive Officer and Director

[●], 2019

Boston, Massachusetts

FLEX PHARMA’S BOARD OF DIRECTORS (1) HAS DETERMINED THAT THE MERGER AND THE OTHER TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT ARE FAIR TO, AND IN THE BEST INTERESTS OF, FLEX PHARMA AND ITS STOCKHOLDERS, (2) HAS AUTHORIZED AND APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT, (3) HAS DECLARED THAT THE MERGER AGREEMENT, THE MERGER AND THE OTHER TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT ARE ADVISABLE TO FLEX PHARMA AND ITS STOCKHOLDERS AND (4) RECOMMENDED THAT FLEX PHARMA’S STOCKHOLDER APPROVE THE PROPOSALS REFERRED TO ABOVE.

FLEX PHARMA’S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT FLEX PHARMA’S STOCKHOLDERS VOTE “FOR” EACH OF THE PROPOSALS REFERRED TO ABOVE.

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR FLEX PHARMA’S SPECIAL MEETING TO BE HELD ON [], 2019

The accompanying proxy statement/prospectus/information statement is available at www.proxyvote.com


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TABLE OF CONTENTS

 

     Page  

QUESTIONS AND ANSWERS ABOUT THE MERGER

     1  

SUMMARY

     10  

The Companies

     10  

The Combined Company

     10  

Summary of the Merger

     11  

Overview of the Merger Agreement

     14  

RISK FACTORS

     21  

Risks Related to the Merger

     21  

Risks Related to the Reverse Stock Split

     26  

Risks Related to Flex Pharma

     26  

Risks Related to Flex Pharma’s Financial Condition

     30  

Regulatory Risks Relating to Flex Pharma’s Business

     31  

Intellectual Property Risks Related to Flex Pharma’s Business

     32  

Risks Related to Ownership of Flex Pharma’s Common Stock

     33  

Risks Related to Salarius

     36  

Risks Related to Salarius’ Financial Condition and Capital Requirements

     36  

Risks Related to the Development of Salarius’ Product Candidates

     39  

Risks Related to Regulatory Approval of Salarius’ Product Candidates and Other Legal Compliance Matters

     45  

Risks Related to Salarius’ Intellectual Property

     50  

Risks Related to Salarius’ Reliance on Third Parties

     57  

Risks Related to Commercialization of Salarius’ Product Candidates

     60  

Risks Related to Salarius’ Business Operations

     64  

Risks Related to the Combined Company

     65  

Tax Risks Related to the Merger

     68  

SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION AND DATA

     74  

Selected Historical Consolidated Financial Data of Flex Pharma

     74  

Selected Historical Consolidated Financial Data of Salarius

     75  

Selected Unaudited Pro Forma Condensed Combined Financial Data of Flex Pharma and Salarius

     75  

COMPARATIVE HISTORICAL AND UNAUDITED PRO FORMA PER SHARE AND PER UNIT DATA

     78  

Flex Pharma

     78  

Salarius

     78  

Flex Pharma and Salarius

     78  

MARKET PRICE AND DIVIDEND INFORMATION

     79  

Flex Pharma

     79  

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

     80  

THE SPECIAL MEETING

     81  

Date, Time and Place

     81  

Purposes of the Flex Pharma Special Meeting

     81  

Record Date; Shares Outstanding and Entitled to Vote

     81  

How to Vote Your Shares

     81  

How to Change Your Vote

     82  

 

i


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     Page  

Proxies; Counting Your Vote

     82  

Appraisal Rights and Dissenters’ Rights

     83  

Solicitation of Proxies

     83  

MATTERS BEING SUBMITTED TO A VOTE OF FLEX PHARMA STOCKHOLDERS

     84  

Flex Pharma Proposal 1—To approve the issuance of Flex Pharma’s common stock to Salarius’ members pursuant to the Merger Agreement and the resulting “change of control” of Flex Pharma under Nasdaq rules and the dividend or distribution of rights, and issuance of Warrants, to Flex Pharma’s stockholders pursuant to the Merger Agreement

     84  

Flex Pharma Proposal 2—To approve an amendment of Flex Pharma’s Certificate of Incorporation to effect a reverse stock split of its common stock

     85  

Flex Pharma Proposal 3—To approve an amendment of Flex Pharma’s Certificate of Incorporation to effect the name change of Flex Pharma to “Salarius Pharmaceuticals, Inc.”

     92  

Flex Pharma Proposal 4—To consider and vote on an adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the meeting to approve Proposals 1, 2 or 3

     94  

THE WRITTEN CONSENT OF SALARIUS MEMBERS

     95  

THE MERGER

     96  

Historical Background of Flex Pharma

     96  

History of Flex Pharma’s Strategic Alternatives and Significant Corporate Events

     99  

Flex Pharma’s Reasons for the Merger; Recommendations of Flex Pharma’s board of directors

     107  

Recommendation of Flex Pharma’s board of directors

     109  

Salarius Reasons for the Merger

     109  

Opinion of Flex Pharma’s Financial Advisor

     110  

Interests of Flex Pharma’s Directors and Executive Officers in the Merger

     118  

Severance and Change in Control Provisions of Employment Arrangements

     119  

Retention Awards

     120  

Golden Parachute Compensation

     120  

Federal Securities Law Consequences; Resale Restrictions

     121  

Material U.S. Federal Income Tax Consequences of the Reverse Stock Split and the Merger

     121  

Reverse Stock Split

     122  

Merger

     123  

Anticipated Accounting Treatment

     123  

Interests of Salarius’ Managers and Executive Officers in the Merger

     123  

THE MERGER AGREEMENT

     124  

Structure of the Merger

     124  

Completion and Effectiveness of the Merger

     125  

Merger Consideration

     125  

Fractional Shares

     127  

Procedures for Surrendering Salarius Certificates

     127  

Warrants to be Issued to Flex Pharma Stockholders

     128  

Listing of Flex Pharma Common Stock

     129  

Conditions to Completion of the Merger

     130  

Representations and Warranties

     132  

Definition of Material Adverse Effect

     134  

Conduct of Business Pending the Merger

     135  

Obligations to Recommend the Transaction

     141  

No Solicitation

     144  

 

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     Page  

Registration Statement and Proxy Statement/Prospectus/Information Statement

     146  

Employee Matters

     147  

Regulatory Approvals

     148  

Indemnification of Officers and Directors

     149  

Tax Matters

     150  

Other Agreements

     151  

Termination of the Merger Agreement and Termination Fees

     151  

Expenses

     155  

Specific Performance

     158  

Amendment

     158  

VOTING AND OTHER ANCILLARY AGREEMENTS

     159  

Voting Agreements

     159  

Lock-Up Agreements

     160  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER, THE REVERSE STOCK SPLIT AND THE WARRANTS

     162  

Reverse Stock Split

     163  

Distribution of Warrants

     164  

Tax Consequences of the Merger to U.S. Holders of Units and Flex Pharma Common Stock

     164  

Tax Consequences to U.S. Holders of Owning and Disposing of Shares Received in the Merger

     166  

Information Reporting and Backup Withholding

     166  

Reporting Requirements

     167  

FLEX PHARMA BUSINESS

     168  

Overview

     168  

Historical Business and Programs

     169  

Scientific Approach

     169  

FLX-787

     170  

HOTSHOT

     172  

Intellectual Property

     173  

Royalty Agreement

     175  

Manufacturing

     175  

Sales and Marketing

     175  

Competition

     176  

Government Regulation

     176  

Employees

     187  

Corporate and Other Information

     187  

Legal Proceedings

     187  

Available Information

     188  

FLEX PHARMA PROPERTY

     189  

FLEX PHARMA’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     190  

Business Overview

     190  

Historical Business and Programs

     191  

Merger Agreement

     192  

Components of Operating Results

     194  

Results of Operations

     196  

 

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     Page  

Liquidity and Capital Resources

     200  

Contractual Obligations

     204  

Net Operating Loss and Research and Development Carryforwards

     204  

Off-Balance Sheet Arrangements

     205  

Critical Accounting Policies and Significant Judgments and Estimates

     205  

FLEX PHARMA’S MANAGEMENT AND CORPORATE GOVERNANCE

     209  

SALARIUS’ BUSINESS

     211  

SALARIUS’ MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     229  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT FLEX PHARMA MARKET RISK

     241  

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

     241  

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

     244  

MANAGEMENT FOLLOWING THE MERGER

     250  

PRINCIPAL STOCKHOLDERS OF FLEX PHARMA

     260  

PRINCIPAL MEMBERS OF SALARIUS

     262  

DESCRIPTION OF FLEX PHARMA CAPITAL STOCK

     264  

Authorized Capital Stock

     264  

Common Stock

     264  

Listing

     264  

Transfer Agent and Registrar

     264  

Preferred Stock

     264  

Provisions of Flex Pharma’s Certificate of Incorporation and Bylaws and Delaware Anti-Takeover Law

     265  

DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES

     267  

COMPARISON OF RIGHTS OF HOLDERS OF FLEX PHARMA STOCK AND SALARIUS MEMBERSHIP UNITS

     268  

LEGAL MATTERS

     278  

EXPERTS

     278  

Flex Pharma

     278  

Salarius

     278  

WHERE YOU CAN FIND MORE INFORMATION

     278  

FLEX PHARMA STOCKHOLDER PROPOSALS

     280  

WHERE YOU CAN FIND MORE INFORMATION

     281  

INDEX TO FLEX PHARMA’S CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

Years ended December 31, 2018 and 2017

     F-1  

Consolidated Financial Statements

     F-1  

 

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     Page  

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     F-2  

Opinion on the Financial Statements

     F-2  

Basis for Opinion

     F-2  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     F-8  

INDEX TO SALARIUS’ FINANCIAL STATEMENTS

     F-35  

SALARIUS’ FINANCIAL STATEMENTS

     F-37  

SALARIUS PHARMACEUTICALS, LLC NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2018 AND 2017

     F-41  

APPENDIXES

    
Appendix A —  

Amendment to the Amended and Restated Certificate of Incorporation of Flex Pharma, Inc. (regarding reverse stock split)

     App A-1  
Appendix B —  

Amendment to the Amended and Restated Certificate of Incorporation of Flex Pharma, Inc. (regarding name change)

     App B-1  
Appendix C —  

Form of Proxy Card

     App C-1  

 

ANNEXES     
Annex A —  

Agreement and Plan of Merger

     A-1  
Annex B —  

Form of Voting Agreement Between Flex Pharma, Salarius and Certain Members of Salarius

     B-1  
Annex C —  

Form of Voting Agreement Between Salarius, Flex Pharma and Directors and Officers of Flex Pharma

     C-1  
Annex D —  

Form of Lock-Up Agreement Executed by Certain Members of Salarius

     D-1  
Annex E —  

Form of Lock-Up Agreement Executed by Directors and Officers of Flex Pharma

     E-1  
Annex F —  

Opinion of Wedbush Securities, Inc.

     F-1  

PART II INFORMATION NOT REQUIRED IN PROXY STATEMENT/PROSPECTUS/INFORMATION STATEMENT

     II-1  

Item 20. Indemnification of Directors and Officers

     II-1  

Item 21. Exhibits and Financial Statement Schedules

     II-1  

Item 22. Undertakings

     II-1  

FLEX PHARMA, INC. EXHIBIT INDEX TO REGISTRATION STATEMENT ON FORM S-4 EXHIBIT INDEX

     II-4  

SIGNATURES

     II-10  

 

 

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References to “Flex Pharma” and “Salarius” in this proxy statement/prospectus/information statement refer to Flex Pharma, Inc. and Salarius Pharmaceuticals, LLC, respectively. References to the “combined company” refer to Flex Pharma and its wholly owned subsidiary, Salarius, after the merger. Except as otherwise noted, references to “we,” “us” or “our” refer to both Flex Pharma and Salarius. References to “Merger Sub” refer to Falcon Acquisition Sub, LLC, a newly formed, wholly owned subsidiary of Flex Pharma.

References to the “Merger Agreement” refer to that certain agreement and plan of merger dated as of January 3, 2019 among Flex Pharma, Merger Sub and Salarius, as amended from time to time. References to the “merger” refer to the merger of Merger Sub with and into Salarius, with Salarius surviving as the surviving entity and as a wholly owned subsidiary of Flex Pharma as contemplated under the Merger Agreement.

 

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QUESTIONS AND ANSWERS ABOUT THE MERGER

Except as specifically indicated, the following information and all other information contained in this proxy statement/prospectus/information statement does not give effect to the reverse stock split described in Proposal 2.

The following section provides answers to frequently asked questions about the special meeting of stockholders and the merger. This section, however, only provides summary information. These questions and answers may not address all issues that may be important to you as a stockholder or member. For a more complete response to these questions and for additional information, please refer to the cross-referenced pages below. You should carefully read this entire proxy statement/prospectus/information statement, including each of the annexes.

Q: What is the merger?

A: Flex Pharma, Merger Sub and Salarius have entered into a Merger Agreement that contains the terms and conditions of the proposed business combination of Flex Pharma and Salarius. Under the Merger Agreement, Flex Pharma will acquire all of the outstanding memberships units of Salarius. This transaction is referred to as the merger.

Immediately prior to the effective time of the merger, each Salarius common unit, Salarius Series A preferred unit and Salarius profits interest common unit will be converted into the right to receive a number of shares of Flex Pharma common stock determined as follows:

 

   

each Salarius common unit will be converted into a number of Flex Pharma common stock equal to an exchange ratio, which we refer to as the Exchange Ratio;

 

   

each Salarius Series A preferred unit will be converted into (x) a number of shares of Flex Pharma common stock equal to $1,089.00 divided by the quotient of (i) $36,600,000 (which we refer to as the “Salarius Merger Date Equity Value”), divided by (ii) the product determined by multiplying (a) the quotient determined by dividing the total number of shares of Flex Pharma common stock outstanding immediately prior to the effective time of the merger by 19.9% by (b) 80.1% (such product which we refer to as “Salarius Merger Shares”) ((i) divided by (ii), which we refer to as the “Flex Pharma Stock Per Share Value”), plus (y) a number of shares of Flex Pharma common stock equal to the Exchange Ratio (as defined below); and

 

   

each Salarius profits interest common unit will be converted into a number of shares of Flex Pharma common stock equal to the quotient of (a) the dollar amount determined individually for each Salarius profits interest common unit based on the agreed upon calculation methodology between Flex Pharma and Salarius (which we refer to as the “Merger Date Profits Interest Unit Net Value”) with respect to such Salarius profits interest common unit, divided by (b) the Flex Pharma Stock Per Share Value.

Flex Pharma stockholders will continue to own and hold their existing shares of Flex Pharma common stock.

Immediately following the effective time of the merger, Salarius’ current members will own approximately 80.1% of the combined company (on a partially-diluted basis, excluding the effect of certain options, the dividend or distribution of rights and Warrants to Flex Pharma’s current stockholders and the possible issuance of a warrant to Wedbush) and Flex Pharma’s current stockholders will own approximately 19.9% of the combined company (on a partially-diluted basis, excluding the effect of certain options, the dividend or distribution of rights and Warrants to Flex Pharma’s current stockholders and the possible issuance of a warrant to Wedbush). For purposes of calculating the conversion ratios of membership units of Salarius, the number of outstanding shares of Flex Pharma’s common stock immediately before the merger takes into account the dilutive effect of Flex Pharma’s common stock underlying options outstanding as of the closing of the merger that have an exercise price less than or equal to $1.35 per share of Flex Pharma’s common stock (approximately 849,610 shares as of April 1, 2019). Approximately 1,447,426 shares of Flex Pharma’s

 

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common stock underlie options outstanding as of April 1, 2019 that have an exercise price greater than $1.35 per share of Flex Pharma’s common stock.

In addition, at or prior to the closing of the merger, Flex Pharma will pay a dividend of or distribute one right per share of Flex Pharma’s common stock to its current stockholders of record as of a date and time determined by Flex Pharma’s board of directors. Each right will entitle such stockholders to receive a warrant to purchase shares of Flex Pharma’s common stock (which we refer to as a “Warrant”) six months and one day following the closing date of the merger. The Warrants will have an exercise price per share of Flex Pharma’s common stock equal to the fair market value of a share of Flex Pharma’s common stock on the closing date of the merger (such exercise price subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to Flex Pharma’s common stock). The Warrants will be exercisable, in the aggregate, with respect to that number of share of Flex Pharma’s common stock equal to the Warrant Aggregate Value (as defined in the Merger Agreement) divided by the value (determined using the Black-Scholes-Merton option pricing formula) of a warrant to purchase a share of Flex Pharma’s common stock on the closing date of the merger. The Warrant Aggregate Value generally represents the difference between (i) Flex Pharma’s value and (ii) the value of Flex Pharma’s common stock that Flex Pharma’s current stockholders will have in the combined company. Accordingly, the Warrant Aggregate Value will be based in part on Flex Pharma’s net cash balance at the time of closing of the merger and adjusted for the amount of additional financing consummated by Salarius at or before the closing of the merger, as further described in the Merger Agreement. If the closing of the merger had occurred on April 12, 2019, then the Warrant Aggregate Value would have been approximately $1,556,180 (as calculated in Section 1.12(e) of the Merger Agreement) and, when issued, the Warrants would be exercisable, in the aggregate, with respect to approximately 4,550,233 shares of Flex Pharma’s common stock (such amount calculated by dividing the Warrant Aggregate Value by the value of a warrant to purchase a share of Flex Pharma’s common stock as calculated using the Black-Scholes-Merton option pricing formula and subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to Flex Pharma’s common stock), assuming that (i) Flex Pharma’s net cash balance as of April 12, 2019 was $3.3 million, (ii) Salarius issued and sold $6.4 million of Series A preferred units on or before April 12, 2019, and (iii) the value (determined using the Black-Scholes-Merton option pricing formula assuming a volatility of 75% and a risk-free rate equal to the 5-year United States treasury rate in effect on April 12, 2019) of a warrant to purchase a share of Flex Pharma’s common stock on April 12, 2019 was $0.342. Flex Pharma’s dividend or distribution of rights to its current stockholders and its issuance of Warrants to such stockholders will not impact the number of shares of Flex Pharma’s common stock into which each outstanding unit of Salarius will convert. However, the rights and Warrants will reduce Salarius’ current members’ ownership of the combined company and increase Flex Pharma’s current stockholders’ ownership of the combined company, in each case by approximately 5.0% to 75.1% and 24.9%, respectively, on a partially-diluted basis (based on the assumptions stated above).

For a more complete description of the merger, please see the section entitled “The Merger Agreement” beginning on page 124 of this proxy statement/prospectus/information statement.

The calculation of the Exchange Ratio and the number of shares of Flex Pharma common stock to which each Salarius member is entitled is complex. Please see the section entitled “The Merger Agreement—Merger Consideration” in this proxy statement/prospectus/information statement for more information.

Q: What will happen to Flex Pharma if, for any reason, the merger with Salarius does not close?

A: Flex Pharma has invested significant time and incurred, and expects to continue to incur, significant expenses related to the proposed merger with Salarius. In the event the merger does not close, Flex Pharma will have a limited ability to continue its current operations without obtaining additional financing. Although Flex Pharma’s board of directors may elect to, among other things, attempt to complete another strategic transaction if the merger with Salarius does not close, Flex Pharma’s board of directors would

 

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likely vote to divest all or a portion of Flex Pharma’s business or take steps necessary to liquidate or dissolve Flex Pharma’s business and assets if a viable alternative strategic transaction is not available.

Q: Why are the two companies proposing to merge?

A: Following the merger, Flex Pharma and Salarius believe that the merger will result in a clinical-stage oncology company targeting the epigenetic causes of cancers for patients that need them most. Flex Pharma and Salarius believe that the combined company will have the following potential advantages: (i) a differentiated, clinical-stage clinical product development pipeline that addresses significant unmet needs in oncology; (ii) appropriate resources; (iii) an experienced management team; and (iv) the potential to access additional sources of capital.

Flex Pharma’s board of directors considered a number of factors that supported its decision to approve the Merger Agreement. In the course of its deliberations, Flex Pharma’s board of directors also considered a variety of risks and other countervailing factors related to entering into the Merger Agreement.

For a more complete discussion of Flex Pharma’s reasons for the merger, please see the section entitled “The Merger—Flex Pharma’s Reasons for the Merger; Recommendations of the Flex Pharma Board of Directors” beginning on page 107 of this proxy statement/prospectus/information statement.

Q: What is required to consummate the merger?

A: To consummate the merger, among other things, Flex Pharma’s stockholders must approve (1) the issuance of Flex Pharma’s common stock to Salarius’ members pursuant to the Merger Agreement and the resulting “change of control” of Flex Pharma under Nasdaq rules, (2) an amendment of Flex Pharma’s Certificate of Incorporation to effect a reverse stock split of Flex Pharma’s common stock, and (3) an amendment of Flex Pharma’s Certificate of Incorporation to effect the name change of Flex Pharma to “Salarius Pharmaceuticals, Inc.” The affirmative vote of the holders of a majority of the shares of Flex Pharma’s common stock present in person or represented by proxy and entitled to vote on such matter at the special meeting is required for approval of Proposals 1 and 4. The affirmative vote of holders of a majority of the outstanding shares of Flex Pharma’s common stock as of the record date for the special meeting is required for approval of Proposals 2 and 3.

The adoption of the Merger Agreement and the approval of the merger and related transactions by the members of Salarius require the affirmative votes of the holders of a majority of Salarius common units, Salarius Series A preferred units and Salarius profits interest common units, voting together as a single class.

In addition to obtaining the stockholder and member approvals, each of the other closing conditions set forth in the Merger Agreement must be satisfied or waived in order to consummate the merger.

For a more complete description of the closing conditions under the Merger Agreement, please see the section entitled “The Merger Agreement—Conditions to Completion of the Merger” beginning on page 130 of this proxy statement/prospectus/information statement.

Q: Are there any federal or state regulatory requirements that must be complied with or federal or state regulatory approvals or clearances that must be obtained in connection with the merger?

A: Neither Flex Pharma nor Salarius is required to make any filings or to obtain any approvals or clearances from any antitrust regulatory authorities in the United States or other countries to consummate the merger. In the United States, Flex Pharma must comply with applicable federal and state securities laws and Nasdaq rules and regulations in connection with the issuance of shares of Flex Pharma’s common stock in the merger, including the filing with the Securities and Exchange Commission (which we refer to as the “SEC”) of this proxy statement/prospectus/information statement and the required stockholder approval for the

 

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resulting “change of control” of Flex Pharma under Nasdaq rules. Prior to consummation of the merger, Flex Pharma intends to file an initial listing application with the Nasdaq Capital Market pursuant to Nasdaq’s “reverse merger” rules and to effect the initial listing of Flex Pharma’s common stock issuable in connection with the merger.

Q: What will Salarius’ members receive in the merger?

A: Subject to the terms of the Merger Agreement, on a pro forma basis, based upon the number of shares of Flex Pharma common stock to be issued in the merger, (i) Flex Pharma’s current stockholders will own approximately 19.9% of the combined company (on a partially-diluted basis, excluding the effect of certain options, the dividend or distribution of rights and Warrants to Flex Pharma’s current stockholders and the possible issuance of a warrant to Wedbush) and Salarius’ current members will own approximately 80.1% of the combined company (on a partially-diluted basis, excluding the effect of certain options, the dividend or distribution of rights and Warrants to Flex Pharma’s current stockholders and the possible issuance of a warrant to Wedbush). Please also see the answer to the above question “What is the merger?”

For a more complete discussion of the conversion ratio at the effective time of the merger, please see the section entitled “The Merger Agreement—Merger Consideration” beginning on page 125 of this proxy statement/prospectus/information statement.

Q: Who will be the directors of Flex Pharma following the Merger?

A: Immediately following the merger, the combined company is expected to have a seven member board of directors, six of whom will be designated by Salarius and one of whom will be designated by Flex Pharma. Flex Pharma expects the board of directors to be comprised of: Jonathan P. Northrup, Paul Lammers, David J. Arthur, Tess Burleson, Arnold C. Hanish, Bruce J. McCreedy and William K. McVicar.

Q: Who will be the executive officers of Flex Pharma immediately following the Merger?

A: Immediately following the merger, the executive management team of Flex Pharma is expected to be composed solely of the members of the Salarius executive management team prior to the merger, as set forth below:

 

Name

       

Position with the Combined Company

David J. Arthur       Chief Executive Officer
Scott Jordan       Chief Financial Officer

Q: What are the material federal income tax consequences of the merger?

A: The receipt of Flex Pharma common stock and cash in lieu of fractional shares, if any, in exchange for Salarius common units, Salarius Series A preferred units and Salarius profits interest common units (collectively referred to as the “Units”) pursuant to the Merger Agreement is intended to qualify as an exchange described in Section 351 of the Internal Revenue Code of 1986, as amended (which we refer to as the “Code”) for U.S. holders (as defined in “Material U.S. Federal Income Tax Consequences of the Merger, the Reverse Stock Split and the Warrants”) for U.S. federal income tax purposes. It is intended that a U.S. holder generally will not recognize gain or loss on the receipt of Flex Pharma common stock in exchange for the Units (although such U.S. holder may recognize gain with respect to any cash received in lieu of fractional shares). Flex Pharma’s stockholders will not sell, exchange or dispose of any shares of Flex Pharma’s common stock as a result of the merger. Thus, there will be no material U.S. federal income tax consequences to Flex Pharma’s stockholders as a result of the merger.

The dividend or distribution of rights and issuance of Warrants to Flex Pharma’s stockholders is intended to constitute a distribution of stock under Section 305(a) of the Code. Thus, there should not be any material U.S. federal income tax consequences to Flex Pharma’s stockholders as a result of the distribution.

 

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For a more complete description of the tax consequences of the merger, please see the section entitled “The Merger—Material U.S. Federal Income Tax Consequences of the Reverse Stock Split and the Merger” beginning on page 121 of this proxy statement/prospectus/information statement.

Q: Why is Flex Pharma seeking stockholder approval to issue shares of common stock to existing members of Salarius in the merger?

A: Because Flex Pharma’s common stock is listed on the Nasdaq Capital Market, Flex Pharma is subject to the Nasdaq Listing Rules. Rule 5635(a) of Nasdaq Listing Rules requires stockholder approval with respect to issuances of Flex Pharma’s common stock, among other instances, when the shares to be issued are being issued in connection with the acquisition of the stock or assets of another company and are equal to 20% or more of the outstanding shares of Flex Pharma’s common stock before the issuance. Rule 5635(b) of the Nasdaq Listing Rules also requires stockholder approval when any issuance or potential issuance will result in a “change of control” of the issuer. Although Nasdaq has not adopted any rule on what constitutes a “change of control” for purposes of Rule 5635(b), Nasdaq has previously indicated that the acquisition of, or right to acquire, by a single investor or affiliated investor group, as little as 20% of the common stock (or securities convertible into or exercisable for common stock) or voting power of an issuer could constitute a change of control.

In the case of the merger, Flex Pharma will be issuing approximately 76,151,698 shares of its common stock, and the common stock to be issued pursuant to the Merger Agreement will represent greater than 20% of its voting stock. Accordingly, Flex Pharma is seeking stockholder of approval of this issuance under Nasdaq Listing Rules.

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

A: Prior to the effective time of the merger, the outstanding shares of Flex Pharma’s common stock will be combined into a lesser number of shares to be determined by Flex Pharma’s board of directors within a range approved by Flex Pharma’s stockholders. Flex Pharma’s board of directors believes that a reverse stock split may be desirable for a number of reasons. Flex Pharma’s common stock is currently, and is expected to be following the completion of the merger, listed on the Nasdaq Capital Market. According to applicable Nasdaq rules, in order for Flex Pharma’s common stock to continue to be listed on the Nasdaq Capital Market, Flex Pharma must satisfy certain requirements established by such market. Flex Pharma’s board of directors expects that a reverse stock split of Flex Pharma’s common stock will increase the market price of Flex Pharma’s common stock so that Flex Pharma is able to maintain compliance with the relevant Nasdaq listing requirements for the foreseeable future.

Q: Why am I receiving this proxy statement/prospectus/information statement?

A: You are receiving this proxy statement/prospectus/information statement because you have been identified as a stockholder or member of Flex Pharma or Salarius, as applicable, as of the applicable record date, and thus you are entitled to either vote at Flex Pharma’s special meeting or sign and return the Salarius written consent to adopt and approve the matters set forth in the written consent. This document serves as:

 

   

a proxy statement of Flex Pharma used to solicit proxies for its special meeting of stockholders to vote on the matters set forth above;

 

   

a prospectus of Flex Pharma used to offer shares of Flex Pharma common stock in exchange for Salarius common unit, Salarius Series A preferred unit and Salarius profits interest common unit in the merger; and

 

   

an information statement of Salarius used to solicit the written consent of its members for approval of matters relating to the merger.

 

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This document contains important information about the merger and the special meeting of Flex Pharma, and you should read it carefully.

Q: How does Flex Pharma’s board of directors recommend that Flex Pharma’s stockholders vote?

A: After careful consideration, Flex Pharma’s board of directors unanimously recommends that Flex Pharma’s stockholders vote:

FOR Proposal 1 to approve the issuance of Flex Pharma’s common stock to Salarius’ members pursuant to the Merger Agreement and the resulting “change of control” of Flex Pharma under Nasdaq rules and the dividend or distribution of rights, and issuance of Warrants, to Flex Pharma’s stockholders pursuant to the Merger Agreement;

FOR Proposal 2 to approve an amendment of Flex Pharma’s Certificate of Incorporation to effect a reverse stock split of Flex Pharma’s common stock;

FOR Proposal 3 to approve an amendment of Flex Pharma’s Certificate of Incorporation to effect the name change of Flex Pharma to “Salarius Pharmaceuticals, Inc.”; and

FOR Proposal 4 to approve an adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the meeting to approve Proposals 1, 2 or 3.

Q: As a Salarius member, how does Salarius’ board of managers recommend that I vote?

A: After careful consideration, Salarius’ board of managers recommends that Salarius members execute the written consent indicating their vote in favor of the adoption of the Merger Agreement and the approval of the merger and the transactions contemplated thereby.

Q: What risks should I consider in deciding whether to vote in favor of the merger or to return the written consent, as applicable?

A: You should carefully read the section of this proxy statement/prospectus/information statement entitled “Risk Factors” beginning on page 21, which sets forth certain risks and uncertainties related to the merger, risks and uncertainties to which the combined company’s business will be subject, risks and uncertainties to which Flex Pharma, as an independent company, is subject and risks and uncertainties to which Salarius, as an independent company, is subject.

Q: When do you expect the merger to be consummated?

A: Flex Pharma and Salarius anticipate that the consummation of the merger will occur in the first half of 2019 as promptly as practicable after the special meeting to be held on [●], 2019 and following satisfaction or waiver of all closing conditions. However, the exact timing of the consummation of the merger is not yet known. For a more complete description of the closing conditions under the Merger Agreement, please see the section entitled “The Merger Agreement—Conditions to Completion of the Merger” beginning on page 130 of this proxy statement/prospectus/information statement.

Q: How will the reverse stock split and the merger affect stock options to acquire Flex Pharma’s common stock and Flex Pharma’s stock option plans?

A: As of the effective time of the reverse stock split, Flex Pharma will adjust and proportionately decrease the number of shares of Flex Pharma’s common stock reserved for issuance upon exercise of, and adjust and proportionately increase the exercise price of, all stock options to acquire Flex Pharma’s common stock. All stock options to acquire shares of Flex Pharma’s common stock that are outstanding immediately prior to the effective time of the merger will remain outstanding following the effective time of the merger. In addition, as of the effective time of the reverse stock split, Flex Pharma will adjust and proportionately decrease the total number of shares of Flex Pharma’s common stock that may be the subject of future grants under Flex Pharma’s stock option plans.

 

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Q: What do I need to do now?

A: You are urged to read this proxy statement/prospectus/information statement carefully, including each of the annexes, and to consider how the merger affects you. If you are a Flex Pharma stockholder and if your shares are registered directly in your name, you may submit your proxy promptly by telephone or via the internet in accordance with the instructions on the enclosed proxy card or complete, date and sign the enclosed proxy card and return it by mail in the enclosed postage-paid envelope. Alternatively, you can deliver your completed proxy card in person or vote by completing a ballot in person at the special meeting. If you are a Flex Pharma stockholder and if you hold your shares in “street name” please see the instructions included below.

If you are a member of Salarius, you may execute and return your written consent to Salarius in accordance with the instructions provided.

Q: If my Flex Pharma shares are held in “street name” by my broker, will my broker vote my shares for me?

A: Broker non-votes occur when a beneficial owner of shares held in “street name” does not give instructions to the broker or nominee holding the shares as to how to vote on matters deemed “non-discretionary.” Generally, if shares are held in street name, the beneficial owner of the shares is entitled to give voting instructions to the broker or nominee holding the shares. If the beneficial owner does not provide voting instructions, the broker or nominee can still vote the shares with respect to matters that are considered to be “discretionary,” but may not vote the shares with respect to “non-discretionary” matters. Your broker will not be able to vote your shares of Flex Pharma’s common stock without specific instructions from you for “non-discretionary” matters. You should instruct your broker to vote your shares, following the procedures provided by your broker. Under rules applicable to broker-dealers, Proposals 1, 2, 3 and 4 are considered a non-discretionary matter.

Q: How many Flex Pharma shares must be represented to have a quorum and hold the special meeting?

A: A quorum of Flex Pharma’s stockholders is necessary to hold a valid meeting. A quorum will be present if Flex Pharma stockholders of record holding at least a majority of Flex Pharma’s outstanding common stock entitled to vote at the special meeting are present in person or represented by proxy.

Q: What happens if I do not return a proxy card or otherwise provide proxy instructions?

A: The failure to return your proxy card or otherwise provide proxy instructions will have the same effect as voting against Proposals 2 and 3, and your shares will not be counted for purposes of determining whether a quorum is present at the special meeting.

Q: May I vote in person at the special meeting of Flex Pharma stockholders?

A: If you are a stockholder of Flex Pharma and your shares of Flex Pharma’s common stock are registered directly in your name with Flex Pharma’s transfer agent, you are considered, with respect to those shares, the stockholder of record, and the proxy materials and proxy card are being sent directly to you by Flex Pharma. If you are a Flex Pharma stockholder of record, you may attend the special meeting to be held on [●], 2019 and vote your shares in person, rather than signing and returning your proxy.

If your shares of Flex Pharma’s common stock are held by a bank, broker or other nominee, you are considered the beneficial owner of shares held in “street name,” and the proxy materials are being forwarded to you together with a voting instruction card. As the beneficial owner, you are also invited to attend the special meeting. Since a beneficial owner is not the stockholder of record, you may not vote these shares in person at the special meeting unless you obtain a proxy from your broker issued in your name giving you the right to vote the shares at the special meeting.

 

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Q: When and where is the special meeting of Flex Pharma stockholders being held?

A: The special meeting of Flex Pharma stockholders will be held at [●], at [●], local time, on [●], 2019. Subject to space availability, all Flex Pharma stockholders as of the record date, or their duly appointed proxies, may attend the meeting. Since seating is limited, admission to the meeting will be on a first-come, first-served basis.

Q: May I change my vote after I have submitted a proxy by telephone or via the internet or mailed my signed proxy card?

A: Any Flex Pharma stockholder of record voting by proxy, other than those Flex Pharma stockholders who have executed a voting agreement and irrevocable proxy, has the right to revoke the proxy (i) at any time before the polls close at the special meeting by sending a written notice stating that he, she or it would like to revoke his, her or its proxy to the Corporate Secretary of Flex Pharma, (ii) at any time before the polls close at the special meeting by providing a duly executed proxy card bearing a later date than the proxy being revoked, (iii) before 11:59 p.m. Eastern Time on [●] by submitting a proxy on a later date by telephone or via the internet (only your last telephone or internet proxy will be counted) or (iv) by attending the special meeting and voting in person. Attendance alone at the special meeting will not revoke a proxy. If a stockholder of Flex Pharma has instructed a broker to vote its shares of Flex Pharma’s common stock that are held in “street name,” the stockholder must follow directions received from its broker to change those instructions.

Q: Who will count the vote at the special meeting of Flex Pharma stockholders?

A: Votes will be counted by the inspector of elections appointed for the special meeting, who will separately count “FOR” and “AGAINST” votes and abstentions.

Q: Should Flex Pharma’s stockholders send in their stock certificates now?

A: No. After the merger is consummated, Flex Pharma’s stockholders will receive written instructions, as applicable, from Flex Pharma’s transfer agent for exchanging their certificates representing shares of Flex Pharma’s common stock for new certificates giving effect to the reverse stock split.

Q: Am I entitled to appraisal rights?

A: Neither Flex Pharma’s stockholders nor Salarius’ members are entitled to appraisal rights in connection with the merger or any of the proposals to be voted on at the special meeting.

Q: Who is paying for this proxy solicitation?

A: Flex Pharma will bear the cost of soliciting proxies, including the printing, mailing and filing of this proxy statement/prospectus/information statement, the proxy card and any additional information furnished to Flex Pharma’s stockholders. You will need to obtain your own internet access if you choose to access the proxy materials and/or vote over the internet. Flex Pharma and Salarius may use the services of its directors, officers and other employees to solicit proxies from Flex Pharma’s stockholders without additional compensation. In addition, Flex Pharma has engaged Innisfree M&A Incorporated, a proxy solicitation firm, to solicit proxies from Flex Pharma’s stockholders for a fee of $25,000 plus costs associated with solicitation campaigns. Flex Pharma will also reimburse Innisfree M&A Incorporated for reasonable out-of-pocket expenses. Arrangements will also be made with banks, brokers, nominees, custodians and fiduciaries who are record holders of Flex Pharma’s common stock for the forwarding of solicitation materials to the beneficial owners of Flex Pharma’s common stock. Flex Pharma will reimburse these banks, brokers, nominees, custodians and fiduciaries for the reasonable out-of-pocket expenses they incur in connection with the forwarding of solicitation materials.

 

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Q: Who can provide me with additional information and help answer my questions?

A: If you are a Flex Pharma stockholder and would like additional copies, without charge, of this proxy statement/prospectus/information statement or if you have questions about the merger and the other proposals being considered at the special meeting, including the procedures for voting your shares, you should contact Innisfree M&A Incorporated, Flex Pharma’s proxy solicitor, by telephone at 888-750-5834.

If you are a member of Salarius and would like additional copies of this proxy statement/prospectus/information statement without charge or if you have questions about the merger, including the procedures for voting your units, you should contact:

Salarius Pharmaceuticals, LLC

Tiberend Strategic Advisors, Inc.

Joshua Drumm, Ph.D. (Investors)

(212) 375-2664

jdrumm@tiberend.com

David Schemelia (Media)

(212) 375 6298

dschemelia@tiberend.com

 

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SUMMARY

This summary highlights selected information from this proxy statement/prospectus/information statement and may not contain all of the information that is important to you. To better understand the merger, the other proposals being considered at the Flex Pharma special meeting and the actions that are the subject of the Salarius member consent, you should read this entire proxy statement/prospectus/information statement carefully, including the materials attached as annexes, as well as other documents referred to or incorporated by reference herein. See “Where You Can Find More Information” beginning on page 278 of this proxy statement/prospectus/information statement. Page references are included in parentheses to direct you to a more detailed description of the topics presented in this summary.

The Companies

Flex Pharma, Inc.

31 St. James Avenue, 6th Floor

Boston, MA 02116

(617) 874-1821

Flex Pharma is biotechnology company that was focused on developing innovative and proprietary treatments for muscle cramps, spasms and spasticity associated with severe neurological conditions. In June 2018, the Company announced that it was ending its ongoing Phase 2 clinical trials of FLX-787 in patients with motor neuron disease (which we refer to as “MND”), primarily with amyotrophic lateral sclerosis (which we refer to as “ALS”), and in patients with Charcot-Marie-Tooth disease (which we refer to as “CMT”), due to oral tolerability concerns observed in both studies. Additionally, in June 2018, Flex Pharma announced a restructuring plan to reduce its cost structure in order to preserve liquidity. In connection with the restructuring plan, the Company reduced its workforce by approximately 60%. Flex Pharma continues to operate its consumer business, which sells HOTSHOT®, Flex Pharma’s consumer product launched in 2016 to prevent and treat exercise-associated muscle cramps.

Salarius Pharmaceuticals, LLC

2450 Holcombe Blvd

Suite J-608

Houston, TX 77021

346-772-0346

Salarius is a clinical-stage oncology company targeting the epigenetic causes of cancers and is developing treatments for patients that need them the most. The company’s lead candidate, Seclidemstat, is currently in clinical development for treating Ewing sarcoma, for which it has Orphan Drug designation and Pediatric Rare Disease Designation by the U.S. Food and Drug Administration. Salarius believes that Seclidemstat is the only reversible inhibitor of the epigenetic modulator LSD1 currently in human trials, and that it could have potential for improved safety and efficacy compared to other LSD1-targeted therapies. Salarius is also developing Seclidemstat for a number of cancers with high unmet need and expects to commence additional clinical studies in 2019 targeting advanced solid tumors, including prostate, breast and ovarian cancers.

The Combined Company

At the effective time of the merger, the current stockholders of Flex Pharma and current members of Salarius are expected to own approximately 19.9% and 80.1% of the combined company, respectively (on a partially-diluted basis, excluding the effect of certain options, the dividend or distribution of rights and Warrants to Flex Pharma’s current stockholders and the possible issuance of a warrant to Wedbush). For purposes of



 

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calculating the conversion ratios of membership units of Salarius, the number of outstanding shares of Flex Pharma’s common stock immediately before the merger takes into account the dilutive effect of Flex Pharma’s common stock underlying options outstanding as of the closing of the merger that have an exercise price less than or equal to $1.35 per share of Flex Pharma’s common stock (approximately 849,610 shares as of April 1, 2019). Approximately 1,447,426 shares of Flex Pharma’s common stock underlie options outstanding as of April 1, 2019 that have an exercise price greater than $1.35 per share of Flex Pharma’s common stock.

In addition, at or prior to the closing of the merger, Flex Pharma will pay a dividend of or distribute one right per share of Flex Pharma’s common stock to its current stockholders of record as of a date and time determined by Flex Pharma’s board of directors. Each right will entitle such stockholders to receive a Warrant six months and one day following the closing date of the merger. The Warrants will have an exercise price per share of Flex Pharma’s common stock equal to the fair market value of a share of Flex Pharma’s common stock on the closing date of the merger (such exercise price subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to Flex Pharma’s common stock). The Warrants will be exercisable, in the aggregate, with respect to that number of share of Flex Pharma’s common stock equal to the Warrant Aggregate Value (as defined in the Merger Agreement) divided by the value (determined using the Black-Scholes-Merton option pricing formula) of a warrant to purchase a share of Flex Pharma’s common stock on the closing date of the merger. The Warrant Aggregate Value generally represents the difference between (i) Flex Pharma’s value and (ii) the value of Flex Pharma’s common stock that Flex Pharma’s current stockholders will have in the combined company. Accordingly, the Warrant Aggregate Value will be based in part on Flex Pharma’s net cash balance at the time of closing of the merger and adjusted for the amount of Series A financing consummated by Salarius at or before the closing of the merger, as further described in the Merger Agreement.

The principal executive office of the combined company is expected to be located in Houston, Texas.

Summary of the Merger

Upon the terms and subject to the conditions of the Merger Agreement, Flex Pharma will acquire all of the outstanding membership units of Salarius. Immediately prior to the effective time of the merger, each Salarius common unit, Salarius Series A preferred unit and Salarius profits interest common unit will be converted into the right to receive a number of shares of Flex Pharma common stock determined as follows:

 

   

each Salarius common unit will be converted into a number of Flex Pharma common stock equal to the Exchange Ratio;

 

   

each Salarius Series A preferred unit will be converted into (x) a number of shares of Flex Pharma common stock equal to $1,089.00 divided by the quotient of (i) $36,600,000 (which we refer to as the “Salarius Merger Date Equity Value”), divided by (ii) the product determined by multiplying (a) the quotient determined by dividing the total number of shares of Flex Pharma common stock outstanding immediately prior to the effective time of the merger by 19.9% by (b) 80.1% (such product which we refer to as “Salarius Merger Shares”) ((i) divided by (ii), which we refer to as the “Flex Pharma Stock Per Share Value”), plus (y) a number of shares of Flex Pharma common stock equal to the Exchange Ratio (as defined below); and

 

   

each Salarius profits interest common unit will be converted into a number of shares of Flex Pharma common stock equal to the quotient of (a) the dollar amount determined individually for each Salarius profits interest common unit based on the agreed upon calculation methodology between Flex Pharma and Salarius (which we refer to as the “Merger Date Profits Interest Unit Net Value”) with respect to such Salarius profits interest common unit, divided by (b) the Flex Pharma Stock Per Share Value.



 

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The calculation of the Exchange Ratio and the number of shares of Flex Pharma common stock to which each Salarius member is entitled is complex. Please see the section entitled “The Merger Agreement—Merger Consideration” in this proxy statement/prospectus/information statement for more information.

The merger will be completed as promptly as practicable after all of the conditions to completion of the merger are satisfied or waived, including the approval of the stockholders of Flex Pharma and the approval of the members of Salarius. Flex Pharma and Salarius are working to complete the merger as quickly as practicable, however, Flex Pharma and Salarius cannot predict the exact timing of the completion of the merger because it is subject to various conditions.

Following the merger, assuming that Flex Pharma receives the required stockholder approval of Flex Pharma Proposal 3, Flex Pharma will change its name to “Salarius Pharmaceuticals, Inc.” which we refer to as “New Salarius” or the “combined company.”

Reasons for the Merger (see page 107)

In the course of its evaluation of the merger and the Merger Agreement, Flex Pharma’s board of directors considered a number of factors, including, among others, the following factors:

 

   

information concerning Flex Pharma’s business, financial performance, financial condition, results of operation, business and strategic objectives, as well as the risks of accomplishing those objectives;

 

   

the possible alternatives to the merger, the range of possible benefits and risks to the Flex Pharma stockholders of those alternatives and the timing and the likelihood of accomplishing the goal of any of such alternatives and Flex Pharma’s board of directors’ assessment that the merger presented a superior opportunity to such alternatives for Flex Pharma stockholders;

 

   

Flex Pharma’s board of directors’ view of the valuation of the potential merger candidates;

 

   

the ability of Flex Pharma’s stockholders to participate in the future growth potential of the combined company following the merger;

 

   

the results of discussions with third parties relating to a possible business combination or similar transaction with Flex Pharma;

 

   

the process undertaken by Flex Pharma’s board of directors in connection with pursuing a strategic transaction and the terms and conditions of the proposed merger, in each case in light of the current market dynamics;

 

   

current financial market conditions and historical market prices, volatility and trading information with respect to Flex Pharma’s common stock;

 

   

the potential for obtaining a superior offer from an alternative purchaser in light of the other potential strategic buyers previously identified and contacted by or on behalf of Flex Pharma and the risk of losing the proposed transaction with Salarius;

 

   

the terms of the Merger Agreement, including the parties’ representations, warranties and covenants, the conditions to their respective obligations and the termination rights of the parties;

 

   

the financial analysis presented by Wedbush to Flex Pharma’s board of directors on January 3, 2019 and Wedbush’s opinion, dated January 3, 2019, to Flex Pharma’s board of directors;

 

   

the likelihood that the merger would be consummated; and

 

   

the Merger Agreement, subject to the limitations and requirements contained in the Merger Agreement, provides Flex Pharma’s board of directors with flexibility to furnish information to and conduct



 

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negotiations with third parties in certain circumstances and, upon payment to Salarius of a termination fee of $350,000 (which Flex Pharma’s board of directors believes is reasonable under the circumstances) to terminate the Merger Agreement, to accept a superior proposal.

In the course of its deliberations, Flex Pharma’s board of directors also considered, among other things, the following negative factors:

 

   

the possibility that the merger will not be consummated and the potential negative effect of the public announcement of the merger on Flex Pharma’s business and stock price;

 

   

the challenges inherent in the combination of the two divergent businesses of the size and scope of Flex Pharma and Salarius;

 

   

certain provisions of the Merger Agreement that could have the effect of discouraging competing proposals involving Flex Pharma, including the restrictions on Flex Pharma’s ability to solicit proposals for competing transactions involving Flex Pharma and that under certain circumstances Flex Pharma may be required to pay to Salarius termination fee of $350,000;

 

   

the substantial fees and expenses associated with completing the merger; and

 

   

the risk that the merger may not be completed despite the parties’ efforts or that the closing may be unduly delayed and the effects on Flex Pharma as a standalone company because of such failure or delay, and that a more limited range of alternative strategic transactions may be available to Flex Pharma in such an event.

Flex Pharma’s board of directors did not find it practicable to and did not quantify or attempt to assign any relative or specific weights to the various factors that it considered in reaching its determination that the merger and the Merger Agreement are advisable and in best interests of Flex Pharma and its stockholders. In addition, Flex Pharma’s board of directors did not undertake to make any specific determination as to whether any particular factor, or any aspect of any particular factor, was favorable or unfavorable to the ultimate determination of Flex Pharma’s board of directors, but rather Flex Pharma’s board of directors conducted an overall analysis of the factors described above.

Opinion of Flex Pharma’s Financial Advisor (see page 110)

In connection with the merger, Flex Pharma’s financial advisor, Wedbush Securities, Inc., which we refer to as Wedbush, delivered its opinion to the board of directors of Flex Pharma that, as of January 3, 2019, and based upon and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations set forth in its opinion, the Exchange Ratio provided for in the Merger Agreement was fair, from a financial point of view, to Flex Pharma.

The full text of Wedbush’s written opinion, dated January 3, 2019, which sets forth, among other things, the assumptions made, procedures followed, matters considered and qualifications and limitations on the review undertaken by Wedbush in connection with such opinion, is attached hereto as Annex F and is incorporated by reference herein. Wedbush’s opinion does not address Flex Pharma’s underlying business decision to enter into the merger or the relative merits of the merger as compared with any other strategic alternative which may have been available to Flex Pharma. Wedbush’s opinion was not intended to be and does not constitute a recommendation to any holder of Flex Pharma common stock as to how such holder should vote or otherwise act with respect to the merger or any other matter. Wedbush’s opinion does not in any manner address the price at which Flex Pharma common stock will trade at any time. In addition, Wedbush expressed no opinion as to the fairness of the transaction to the holders of any class of securities, creditors or other constituencies of Flex Pharma. Wedbush provided its opinion for the information and assistance of the board of directors of Flex Pharma in connection with, and for the purposes of its evaluation of, the merger.



 

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Overview of the Merger Agreement

Merger Consideration (see page 125)

Immediately prior to the effective time of the merger, each Salarius common unit, Salarius Series A preferred unit and Salarius profits interest common unit will be converted into the right to receive a number of shares of Flex Pharma common stock determined as follows:

 

   

each Salarius common unit will be converted into a number of Flex Pharma common stock equal to the Exchange Ratio;

 

   

each Salarius Series A preferred unit will be converted into (x) a number of shares of Flex Pharma common stock equal to $1,089.00 divided by the quotient of (i) $36,600,000 (which we refer to as the “Salarius Merger Date Equity Value”), divided by (ii) the product determined by multiplying (a) the quotient determined by dividing the total number of shares of Flex Pharma common stock outstanding immediately prior to the effective time of the merger by 19.9% by (b) 80.1% (such product which we refer to as “Salarius Merger Shares”) ((i) divided by (ii), which we refer to as the “Flex Pharma Stock Per Share Value”), plus (y) a number of shares of Flex Pharma common stock equal to the Exchange Ratio (as defined below); and

 

   

each Salarius profits interest common unit will be converted into a number of shares of Flex Pharma common stock equal to the quotient of (a) the dollar amount determined individually for each Salarius profits interest common unit based on the agreed upon calculation methodology between Flex Pharma and Salarius (which we refer to as the “Merger Date Profits Interest Unit Net Value”) with respect to such Salarius profits interest common unit, divided by (b) the Flex Pharma Stock Per Share Value.

No fractional shares of Flex Pharma common stock will be issuable pursuant to the merger to Salarius’ members. Instead, each Salarius member who would otherwise be entitled to receive a fraction of a share of Flex Pharma common stock will be paid in cash.

Conditions to Completion of the Merger (see page 130)

Consummation of the merger is subject to a number of conditions (subject to certain exceptions in the Merger Agreement), including, among others, the following:

 

   

effectiveness of the registration statement on Form S-4 of which this proxy statement/prospectus forms a part, and no stop orders or proceedings;

 

   

there must not have been issued a temporary restraining order, preliminary or permanent injunction or other order preventing the consummation of the merger and there shall not be any legal requirement which has the effect of making the consummation of the merger illegal;

 

   

obtaining requisite Salarius member and Flex Pharma stockholder approvals;

 

   

expiration or termination of applicable waiting periods under the Heart-Scott-Rodino Antitrust Improvements Act of 1976 (which we refer to as the “HSR Act”) and foreign legal requirements relating to antitrust or competition matters;

 

   

all representations and warranties in the Merger Agreement must be true and correct, except in each case where the failure of to be true and correct has not had, and would not reasonably be expected to have, a material adverse effect on the party making the representations and warranties;

 

   

the absence of a material adverse effect on the other party since the date of the Merger Agreement (see the section entitled “The Merger Agreement—Definition of Material Adverse Effect” for the definition of material adverse effect);



 

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the Nasdaq listing application must have been approved; and

 

   

receipt of all required consents, performance or compliance with in all material respects all covenants and obligations on or before the closing of the merger and delivery of certain certificates and other documents required under the Merger Agreement for the closing of the merger.

Each of Flex Pharma and Salarius may waive any or all of the conditions to the consummation of the merger that are for its benefit to the extent permitted by applicable law. Flex Pharma and Salarius do not believe that applicable law would permit them to waive (i) the condition for obtaining Salarius members’ approval or (ii) the condition for obtaining Flex Pharma stockholders’ approval of Proposal 1.

No Solicitation (see page 144)

Each of Salarius and Flex Pharma agreed that, subject to specified exceptions in the Merger Agreement, Salarius and Flex Pharma will not, nor will either of them authorize or permit any of their subsidiaries or any representatives of their subsidiaries to, directly or indirectly:

 

   

initiate, solicit, facilitate or encourage any inquiries, proposals or offers that constitute or may reasonably be expected to lead to, an acquisition proposal;

 

   

enter into or participate in any discussions or negotiations regarding any acquisition proposal, or furnish any information to any person in connection with, in response to, relating to or for the purpose of assisting with or facilitating an acquisition approval; or

 

   

enter into any letter of intent or similar document or contract relating to an acquisition proposal, or approve, endorse or recommend any acquisition proposal.

Termination of the Merger Agreement and Termination Fees (see page 151)

Either Flex Pharma or Salarius can terminate the Merger Agreement under specified circumstances, which would prevent the merger from being consummated. The Merger Agreement provides that, upon termination of the Merger Agreement under specified circumstances, Salarius may be required to pay Flex Pharma a termination fee of $1,000,000 or $350,000, and/or up to $200,000 in expense reimbursements, or Flex Pharma may be required to pay Salarius a termination fee of $350,000 and/or up to $200,000 in expense reimbursements.

Nasdaq Listing (see page 129)

Pursuant to the Merger Agreement, Flex Pharma agreed to use its commercially reasonable efforts to cause the shares of Flex Pharma common stock being issued in the merger to be approved for listing on the Nasdaq Capital Market at or prior to the effective time of the merger.

Voting Agreements (see page 159)

Concurrently with the execution of the Merger Agreement, certain executive officers, directors and stockholders of Flex Pharma (solely in their respective capacities as stockholders of Flex Pharma), owning in the aggregate approximately 0.5% of Flex Pharma’s outstanding common stock and 9.8% of Flex Pharma’s fully-diluted common stock (including common stock which may be issued upon exercise of options), and certain executive officers and managers of Salarius (solely in their respective capacities as Salarius members), owning in the aggregate approximately 35% of Salarius’ outstanding membership units, entered into voting agreements with Flex Pharma and Salarius. The voting agreements provide, among other things, that the parties to the voting agreements will vote their shares of Flex Pharma’s common stock and membership units of Salarius (i) in favor of the transactions contemplated by the Merger Agreement and grant a proxy to vote such shares or membership units in favor of the transactions and (ii) against any competing acquisition proposals. In addition, the voting agreements place restrictions on the transfer of the shares of Flex Pharma common stock and Salarius’ membership units held by the respective signatory stockholders or members.



 

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Lock-up Agreements (see page 160)

Concurrently with the execution of the Merger Agreement, certain executive officers, directors and stockholders of Flex Pharma (solely in their respective capacities as stockholders of Flex Pharma), owning in the aggregate approximately 0.5% of Flex Pharma’s outstanding common stock and 9.8% of Flex Pharma’s fully-diluted common stock (including common stock which may be issued upon exercise of options), and certain executive officers and managers of Salarius (solely in their respective capacities as Salarius members), owning in the aggregate approximately 35% of Salarius’ outstanding membership units, entered into lock-up agreements, pursuant to which such parties have agreed not to, except in limited circumstances, sell or transfer, or engage in similar transactions with respect to, shares of Flex Pharma’s common stock, including, as applicable, shares received in the merger and issuable upon exercise of certain warrants and options, from the closing of the merger until 90 days from the closing date of the merger.

Management Following the Merger (see page 250)

At the effective time of the merger, the executive management team of the combined company is expected to include the following individuals:

 

Name

       

Position with the Combined Company

David J. Arthur       Chief Executive Officer
Scott Jordan       Chief Financial Officer

The Board of Directors Following the Merger (see page 252)

At the effective time of the merger, the combined company is expected to have a seven member board of directors, six of whom will be designated by Salarius and one of whom will be designated by Flex Pharma. Flex Pharma expects the board of directors to be comprised of Jonathan P. Northrup, Paul Lammers, David J. Arthur, Tess Burleson, Arnold C. Hanish, Bruce J. McCreedy and William K. McVicar.

Interests of Certain Directors, Managers and Executive Officers in the Merger (see pages 118 and 123)

 

   

Flex Pharma’s directors and executive officers, and Salarius’ managers and executive officers have economic interests in the merger that are different from, or in addition to, those of Flex Pharma’s stockholders or Salarius’ members generally. These interests include:

 

   

Each of Flex Pharma’s and Salarius’ executive officers are parties to employment agreements or arrangements that provide for severance benefits, including accelerated vesting of outstanding equity awards, in the event of certain qualifying terminations of employment following the merger;

 

   

Flex Pharma’s executive officers will receive cash retention awards, subject to continued employment with Flex Pharma through the effective time of the merger; and

 

   

Flex Pharma’s directors and executive officers are entitled to continued indemnification and insurance coverage under indemnification agreements and the Merger Agreement, and the directors and executive officers of the combined company will be entitled to indemnification and insurance coverage following the merger.

These interests are discussed in more detail in the section entitled “The Merger—Interests of Flex Pharma’s Directors and Executive Officers in the Merger” beginning on page 118 and “The Merger—Interests of Salarius’ Managers and Executive Officers in the Merger” beginning on page 123. Each of Flex Pharma’s board of directors and Salarius’ board of managers was aware of and considered these interests, among other matters, in reaching its decision to approve and declare advisable the Merger Agreement, the merger and the other transactions contemplated by the Merger Agreement.



 

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Additionally, concurrently with the execution of the Merger Agreement, certain executive officers, directors and stockholders of Flex Pharma (solely in their respective capacities as stockholders of Flex Pharma), owning in the aggregate approximately 0.5% of Flex Pharma’s outstanding common stock and 9.8% of Flex Pharma’s fully-diluted common stock (including common stock which may be issued upon exercise of options), and certain executive officers and managers of Salarius (solely in their respective capacities as Salarius members), owning in the aggregate approximately 35% of Salarius’ outstanding membership units, entered into voting agreements and lock-up agreements with Flex Pharma and Salarius. The voting agreements provide, among other things, that the parties to the voting agreements will vote their shares of Flex Pharma’s common stock and membership units of Salarius (i) in favor of the transactions contemplated by the Merger Agreement and grant a proxy to vote such shares or membership units in favor of the transactions and (ii) against any competing acquisition proposals. In addition, the voting agreements place restrictions on the transfer of the shares of Flex Pharma common stock and Salarius’ membership units held by the respective signatory stockholders or members. The voting agreement is discussed in greater detail in the section entitled “Voting and Other Ancillary Agreements” in this proxy statement/prospectus/information statement. The affirmative vote of the holders of a majority of the shares of Flex Pharma’s common stock present in person or represented by proxy and entitled to vote on such matter at the special meeting is required for approval of Proposals 1 and 4. The affirmative vote of holders of a majority of the outstanding shares of Flex Pharma’s common stock as of the record date for the special meeting is required to approval of Proposals 2 and 3. The lock-up agreements provide, among other things, that the parties will not, except in limited circumstances, sell or transfer, or engage in similar transactions with respect to, shares of Flex Pharma’s common stock, including, as applicable, shares received in the merger and issuable upon exercise of certain warrants and options, from the closing of the merger until 90 days from the closing date of the merger. The lock-up agreement is discussed in greater detail in the section entitled “Voting and Other Ancillary Agreements” in this proxy statement/prospectus/information statement.

Federal Securities Law Consequences; Resale Restrictions (see page 121)

The issuance of Flex Pharma’s common stock in the merger to Salarius’ members will be effected by means of a registration under the Securities Act of 1933, as amended (which we refer to as the “Securities Act”). Upon issuance, such common stock generally will be freely transferable.

The dividend or distribution to Flex Pharma’s stockholder of rights to receive a Warrant will be effected by means of a dividend, which does not require registration under the Securities Act. The issuance of Warrants with respect to such rights, as well as any exercise of such Warrants for Flex Pharma’s common stock, will be effected by means of a subsequent registration under the Securities Act.

Material U.S. Federal Income Tax Consequences of the Merger (see page 121)

The receipt of Flex Pharma common stock in exchange for the outstanding Units of Salarius pursuant to the Merger Agreement is intended to qualify as an exchange described in Section 351 of the Code for U.S. federal income tax purposes. Under such an exchange, a U.S. holder generally will not recognize gain or loss on the receipt of Flex Pharma common stock in exchange for Units (although they may recognize gain with respect to any cash received in lieu of fractional shares as discussed below). Accordingly, other than with respect to cash received in lieu of fractional shares:

 

   

U.S. holders will recognize no gain or loss on their receipt of Flex Pharma common stock in exchange for Units;

 

   

each U.S. holder’s aggregate tax basis in the shares of Flex Pharma common stock received in the merger will be the same as their aggregate tax basis in the Units surrendered in exchange therefor, with such aggregate basis allocated pro rata among each share of Flex Pharma common stock received in the merger; and



 

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the holding period of common stock received in exchange for Units will include the holding period of the Units for which it is exchanged, except to the extent the Flex Pharma common stock is received by such holder in exchange for interests in Section 751 assets of Salarius that are neither capital assets nor Section 1231 assets, in which case the holding period of such stock begins on the day following the date of the merger.

The foregoing discussion assumes that no U.S. holder’s share of Salarius’ nonrecourse liabilities exceeds their adjusted tax basis in their Units. If this assumption is not accurate with respect to any U.S. holder, such U.S. holder is strongly urged to consult its own tax advisor with respect to the U.S. holder’s specific tax consequences of the merger, taking into account its own particular circumstances.

The tax treatment of cash received in lieu of fractional shares by U.S. holders is not entirely certain. Flex Pharma intends to take the position that the receipt of cash in lieu of fractional shares by U.S. holders generally will be treated as money received in the Section 351 exchange and U.S. holders may recognize gain, if any, but not loss as a result thereof. The amount of gain required to be recognized by a holder will be equal to the lesser of (i) the amount of cash received and (ii) the amount of gain realized on the exchange. The amount of gain realized on the exchange, if any, will be the excess of (x) the sum of the fair value of the Flex Pharma common stock received, plus any cash received in lieu of fractional shares, plus such holder’s share of Salarius’ nonrecourse liabilities immediately prior to the merger, over (y) such holder’s adjusted tax basis in the Units exchanged in the merger. Except as noted below, gain recognized by a U.S. holder on the receipt of cash in lieu of fractional shares in the merger will generally be taxable as capital gain. However, a portion of this gain may be separately computed and taxed as ordinary income under Section 751 of the Code to the extent attributable to “unrealized receivables,” including depreciation recapture, or to “inventory items” owned by Salarius. To the extent a U.S. holder of Units receives cash in lieu of fractional shares, such holder’s basis in the Flex Pharma common stock received in the merger will be calculated as described above, but increased by the amount of any gain, if any, recognized in the merger and decreased by the amount of cash received. It is possible, however, that the receipt of cash in lieu of a fractional share may be treated as if the U.S. holder received the fractional share in the merger and then received the cash in a redemption of the fractional share, in which case the U.S. holder should generally recognize gain or loss equal to the difference between the amount of the cash received in lieu of the fractional share and the U.S. holder’s tax basis allocable to such fractional share.

Capital gain recognized by a U.S. holder will generally be long-term capital gain if the U.S. holder has held its Units for more than one year as of the effective time of the merger. If the U.S. holder is an individual, such long-term capital gain will generally be eligible for reduced rates of taxation. The deductibility of losses is subject to limitations.

Passive losses that were not deductible by a U.S. holder in prior taxable periods because they exceeded a U.S. holder’s share of Salarius’ income may be utilized to offset any gain recognized in the merger and may be deducted in full upon the U.S. holder’s taxable disposition of its common stock received in the merger.

Flex Pharma’s stockholders will not sell, exchange or dispose of any shares of Flex Pharma’s common stock as a result of the merger. Thus, there will be no material U.S. federal income tax consequences to Flex Pharma’s stockholders as a result of the merger.

The dividend or distribution of rights and issuance of Warrants to Flex Pharma’s stockholders is intended to constitute a distribution of stock under Section 305(a) of the Code. Thus, there will be no material U.S. federal income tax consequences to Flex Pharma’s stockholders as a result of the dividend or distribution.

Tax matters are complicated, and the tax consequences of the merger to a particular Salarius unitholder will depend on such unitholder’s circumstances. Accordingly, you should consult your tax advisor for a full understanding of the tax consequences of the merger to you, including the applicability and effect of federal,



 

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state, local and non-U.S. income and other tax laws. For more information, please see the section entitled “Material U.S. Federal Income Tax Consequences of the Merger, the Reverse Stock Split and the Warrants” beginning on page 162 of this proxy statement/prospectus/information statement.

Risk Factors (see page 21)

Both Flex Pharma and Salarius are subject to various risks associated with their businesses and their industries, and the combined business will also be subject to those and other risks. The merger, including the possibility that the merger may not be consummated, poses a number of risks to both Flex Pharma and Salarius, as well as to their respective stockholders and members, including, but not limited to:

 

   

the Exchange Ratio is not adjustable based on the market price of Flex Pharma common stock so the merger consideration at the closing may have a greater or lesser value than at the time the Merger Agreement was signed;

 

   

failure to complete the merger may result in Flex Pharma or Salarius paying a termination fee to the other party and could harm the common stock price of Flex Pharma and future business and operations of each company;

 

   

if the conditions to the merger are not met, the merger may not occur;

 

   

some Flex Pharma and Salarius executive officers and directors have interests in the merger that are different from yours and that may influence them to support or approve the merger without regard to your interests;

 

   

the market price of Flex Pharma common stock following the merger may decline as a result of the merger;

 

   

Flex Pharma stockholders and Salarius members will have a reduced ownership and voting interest in, and will exercise less influence over the management of the combined company as compared to their current ownership and voting interest in the respective companies following the completion of the merger;

 

   

during the pendency of the merger, Flex Pharma and Salarius may not be able to enter into a business combination with another party at a favorable price because of restrictions in the Merger Agreement, which could adversely affect their respective businesses;

 

   

certain provisions of the Merger Agreement may discourage third parties from submitting competing proposals, including proposals that may be superior to the arrangements contemplated by the Merger Agreement; and

 

   

because the lack of a public market for Salarius’ securities, it is difficult to evaluate the fairness of the merger.

These risks and other risks are discussed in greater detail under the section titled “Risk Factors” in this proxy statement/prospectus/information statement. Flex Pharma and Salarius both encourage you to read and consider all of these risks carefully.

Regulatory Approvals (see page 148)

Neither Flex Pharma nor Salarius is required to make any filings or to obtain approvals or clearances from any antitrust regulatory authorities in the United States or other countries to consummate the merger. In the United States, Flex Pharma must comply with applicable federal and state securities laws and Nasdaq rules and regulations in connection with the issuance of shares of Flex Pharma’s common stock in the merger and the issuance of securities, including the filing with the SEC of this proxy statement/prospectus/information statement.



 

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Anticipated Accounting Treatment (see page 123)

The merger will be treated by Flex Pharma as a reverse merger under the purchase method of accounting in accordance with U.S. Generally Accepted Accounting Principles (which we refer to as “GAAP”). For accounting purposes, Salarius is considered to be acquiring Flex Pharma in this transaction.

Appraisal Rights and Dissenters’ Rights (see page 83)

Neither Flex Pharma’s stockholders nor Salarius’ members are entitled to appraisal rights in connection with the merger.

Comparison of Stockholder Rights (see page 268)

Flex Pharma is incorporated under the laws of the State of Delaware, and Salarius is organized as a limited liability company under the laws of the State of Delaware. Upon completion of the merger, Salarius members will become Flex Pharma stockholders and their rights will be governed by the Delaware General Corporation Law, the amended and restated bylaws of Flex Pharma, as amended, which we refer to as the Flex Pharma bylaws, and the amended and restated certificate of incorporation of Flex Pharma, as amended, and as provided herein. The material differences between the current rights of Salarius members and their rights as holders of Flex Pharma common stock after the merger are more fully described under the section titled “Comparison of Rights of Holders of Flex Pharma Stock and Salarius Membership Units” in this proxy statement/prospectus/information statement.



 

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RISK FACTORS

The combined company will be faced with a market environment that cannot be predicted and that involves significant risks, many of which will be beyond its control. In addition to the other information contained in this proxy statement/prospectus/information statement, you should carefully consider the material risks described below before deciding how to vote your shares of stock. Also, you should read and consider the risks associated with the business of Flex Pharma because these risks may affect the combined company—these risks can be found in Flex Pharma’s Annual Report on Form 10-K, as updated by subsequent Quarterly Reports on Form 10-Q, all of which are filed with the SEC. You should also read and consider the other information in this proxy statement/prospectus/information statement and the other documents incorporated by reference into this proxy statement/prospectus/information statement. Please see the section entitled “Where You Can Find More Information” in this proxy statement/prospectus/information statement.

Risks Related to the Merger

The value of the merger consideration to be issued to Salarius’ current members at the closing, and the number of Warrants to be issued to Flex Pharma’s current stockholders after the closing, may have a greater or lesser value than at the time the Merger Agreement was signed.

The Merger Agreement values Flex Pharma at $10.5 million, subject to adjustment, on a dollar-for-dollar basis, based on Flex Pharma’s net cash balance at the closing of the merger compared to target net cash of $3.3 million. Also, the Merger Agreement values Salarius at $36.6 million, subject to adjustment, on a dollar-for-dollar basis, based on the sale of Series A Units pursuant to subscription agreements that Salarius entered into prior to the Merger Agreement compared to the target sale of $7.0 million of Series A Units.

Flex Pharma and Salarius based these values on arms-length negotiations and not on prevailing market prices in any trading market. Also, Flex Pharma’s net cash balance could be greater or less than the target net cash of $3.3 million and Salarius could sell more or less than $7.0 million of Series A Units.

The value of the merger consideration to be issued to Salarius’ current members could be worth less than Salarius’ value at the time the Merger Agreement if Flex Pharma’s net cash balance is substantially less than the target net cash or Salarius sells less than $7.0 million of Series A Units.

The Warrant Aggregate Value will decrease to the extent that Flex Pharma’s net cash balance is less than the target net cash value or Salarius sells more than $7.0 million worth of Series A Units. A decrease in the Warrant Aggregate Value will decrease the number of Warrants that Flex Pharma will issue to its current stockholders and, accordingly, (i) decrease Flex Pharma’s current stockholders’ ownership of the combined company (on a fully-diluted basis) and (ii) increase Salarius’ current members’ ownership of the combined company (on a fully-diluted basis).

The Warrant Aggregate Value will increase to the extent that Flex Pharma’s net cash balance is more than the target net cash value or Salarius sells less than $7.0 million worth of Series A Units. An increase in the Warrant Aggregate Value will increase the number of Warrants that Flex Pharma will issue to its current stockholders and, accordingly, (i) increase Flex Pharma’s current stockholders’ ownership of the combined company (on a fully-diluted basis) and (ii) decrease Salarius’ current members’ ownership of the combined company (on a fully-diluted basis).

 

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Failure to complete the merger may result in Flex Pharma and Salarius paying a termination fee and/or expenses to the other party and could harm the common stock price of Flex Pharma and future business and operations of each company.

If the merger is not completed, Flex Pharma and Salarius are subject to the following risks:

 

   

if the Merger Agreement is terminated under certain circumstances, Flex Pharma may be required to pay Salarius a termination fee of $350,000 and/or reimburse Salarius’ expenses up to a maximum of $200,000;

 

   

if the Merger Agreement is terminated under certain circumstances, Salarius may be required to pay Flex Pharma a termination fee of $350,000 or $1,000,000 (depending on the circumstances);

 

   

the price of Flex Pharma stock may decline and remain volatile; and

 

   

costs related to the merger, such as banking fees, legal and accounting fees which Flex Pharma and Salarius estimate will total approximately $2.9 million and $1.9 million, respectively.

In addition, if the Merger Agreement is terminated and the board of directors of Flex Pharma or Salarius determines to seek another business combination, there can be no assurance that either Flex Pharma or Salarius will be able to find a partner willing to provide equivalent or more attractive consideration than the consideration to be provided by each party in the merger.

If the conditions to the merger are not met, the merger may not occur.

Even if the merger is approved by the stockholders of Flex Pharma and the members of Salarius, specified conditions must be satisfied or waived to complete the merger. These conditions are set forth in the Merger Agreement and described in the section entitled “The Merger Agreement—Conditions to the Completion of the Merger” in this proxy statement/prospectus/information statement. Flex Pharma and Salarius cannot assure you that all of the conditions will be satisfied or waived. If the conditions are not satisfied or waived, the merger may not occur or could be delayed, and Flex Pharma and Salarius each may lose some or all of the intended benefits of the merger.

The merger may be completed even though material adverse changes may result from the announcement of the merger, industry-wide changes and other causes.

In general, either Flex Pharma or Salarius can refuse to complete the merger if there is a material adverse change affecting the other party between January 3, 2019, the date of the Merger Agreement, and the closing. However, certain types of changes do not permit either party to refuse to complete the merger, even if such change could be said to have a material adverse effect on Flex Pharma or Salarius, including changes from:

 

   

conditions generally affecting the industries in which Flex Pharma and Salarius participate or the United States or global economy or capital markets as a whole;

 

   

any failure by Flex Pharma and Salarius to meet internal projections or forecasts;

 

   

any failure by Flex Pharma to meet third-party revenue or earnings predictions or any change in the price or trading volume of Flex Pharma’s common stock;

 

   

the execution, delivery, announcement or performance of the obligations under the Merger Agreement or the announcement, pendency or anticipated consummation of the merger;

 

   

any natural disaster or any acts of terrorism, sabotage, military action or war or any escalation or worsening thereof;

 

   

any changes in GAAP or applicable law;

 

   

any action taken at the request of Salarius or Flex Pharma, respectively;

 

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any change in the cash position of Flex Pharma which results from operations in the ordinary course of business; or

 

   

the license, sale, divestiture and/or winding down of Flex Pharma’s legacy assets.

If adverse changes occur and Flex Pharma and Salarius still complete the merger, the combined company stock price may suffer. This in turn may reduce the value of the merger to the stockholders of Flex Pharma, members of Salarius or both.

Some Flex Pharma and Salarius executive officers, directors and managers have interests in the merger that are different from yours and that may influence them to support or approve the merger without regard to your interests.

Certain officers, directors and managers of Flex Pharma and Salarius participate in arrangements that provide them with interests in the merger that are different from yours, including, among others, the continued service as a director of the combined company, severance and retention benefits, incentive payments upon achievement of key milestones relating to the merger, the acceleration of stock option vesting, certain indemnification and liability insurance coverage, and the potential ability to sell an increased number of shares of common stock of the combined company in accordance with Rule 144 under the Securities Act of 1933, as amended, or the Securities Act.

For example, Flex Pharma has entered into employment agreements and amendments to employment agreements with each of its executive officers that provide for severance benefits. In addition, on June 14, 2018, Flex Pharma approved retention arrangements with its two remaining executive officers, which provide for retention payments if such officers are employed with Flex Pharma at the time of closing of the merger, upon delivery of an executed waiver and general release of any and all known claims. Each executive officer is also eligible to receive full payment of the officer’s annual performance bonus for fiscal year 2018 within 30 days of the closing of the merger, or no later than March 15, 2019, if the executive officer is an employee in good standing at the time of payment. These annual bonus payments were made on March 15, 2019. In addition, on June 14, 2018, each executive officer received a stock option grant, subject to vesting, which vests in full upon execution of the Merger Agreement and termination of employment (other than for cause). The retention agreements also extended the exercisability period of previously issued stock option grants. The closing of the merger will also result in the acceleration of vesting of options to purchase shares of Flex Pharma common stock held by the Flex Pharma directors. For more information concerning the treatment of Flex Pharma options in connection with the merger, see the section entitled “The Merger Agreement—Treatment of Flex Pharma Stock Options and Awards” in this proxy statement/prospectus/information statement.

Certain of Salarius’ managers and executive officers are expected to become managers and executive officers of Flex Pharma upon the closing of the merger and all of Flex Pharma’s and Salarius’ directors, managers and executive officers are entitled to certain indemnification and liability insurance coverage. Additionally, Salarius has entered into employment agreements with each of its executive officers that provide for severance benefits. For more information, see the section entitled “Management Following the Merger – Severance and Change in Control Benefits.”

These interests, among others, may influence the officers and directors of Flex Pharma and Salarius to support or approve the merger. For more information concerning the interests of Flex Pharma’s and Salarius’ executive officers, managers and directors, see the sections entitled “The Merger—Interests of Flex Pharma’s Directors and Executive Officers in the Merger” and “The Merger—Interests of Salarius Managers and Executive Officers in the Merger” in this proxy statement/prospectus/information statement.

 

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The market price of Flex Pharma’s common stock following the merger may decline as a result of the merger.

The market price of Flex Pharma’s common stock may decline as a result of the merger for a number of reasons including if:

 

   

investors react negatively to the combined company’s business and prospects;

 

   

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

 

   

the combined company does not achieve the perceived benefits of the merger as rapidly or to the extent anticipated by financial or industry analysts.

Flex Pharma’s current stockholders and Salarius’ current members may not realize a benefit from the merger commensurate with the ownership dilution they will experience in connection with the merger.

If the combined company is unable to realize the full strategic and financial benefits currently anticipated from the merger, Flex Pharma’s stockholders and Salarius’ members will have experienced substantial dilution of their ownership interests in their respective companies without receiving any commensurate benefit, or only receiving part of the commensurate benefit to the extent the combined company is able to realize only part of the strategic and financial benefits currently anticipated from the merger.

During the pendency of the merger, Flex Pharma and Salarius may not be able to enter into a business combination with another party at a favorable price because of restrictions in the Merger Agreement, which could adversely affect their respective businesses.

Covenants in the Merger Agreement impede the ability of Flex Pharma and Salarius to make acquisitions, subject to certain exceptions relating to fiduciaries duties, as set forth elsewhere in this proxy statement/prospectus/information statement, or complete other transactions that are not in the ordinary course of business pending completion of the merger. As a result, if the merger is not completed, the parties may be at a disadvantage to their competitors during that period. In addition, while the Merger Agreement is in effect, each party is generally prohibited from soliciting, initiating, encouraging or entering into certain extraordinary transactions, such as a merger, sale of assets or other business combination outside the ordinary course of business, with any third party, subject to certain exceptions described elsewhere in this proxy statement/prospectus/information statement. Any such transactions could be favorable to such party’s stockholders or members.

Certain provisions of the Merger Agreement may discourage third parties from submitting alternative takeover proposals, including proposals that may be superior to the arrangements contemplated by the Merger Agreement.

The terms of the Merger Agreement prohibit each of Flex Pharma and Salarius from soliciting alternative takeover proposals or cooperating with persons making unsolicited takeover proposals, except, with respect to Flex Pharma, in limited circumstances when Flex Pharma’s board of directors determines in good faith, based on advice of outside legal counsel, that the failure to take such action would reasonably be expected to be inconsistent with its fiduciary duties under applicable law.

If the Merger Agreement is terminated under certain circumstances (including termination because of a decision by Flex Pharma’s board of directors to approve or recommend another transaction), Flex Pharma may be required to pay Salarius a termination fee of $350,000 and/or reimburse Salarius’ expenses up to a maximum of $200,000. Also, if the Merger Agreement is terminated under certain circumstances (including terminating because of a decision by Salarius’ board of managers to approve or recommend another transaction), Salarius may be required to pay Flex Pharma a termination fee of $350,000 or $1,000,000 (depending on the circumstances).

 

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These termination fee and expense reimbursement may discourage third parties from submitting alternative takeover proposals to Flex Pharma or its stockholders, or Salarius or its members, and may cause the respective boards of directors to be less inclined to recommend an alternative proposal.

Because the lack of a public market for Salarius’ membership units makes it difficult to evaluate the fairness of the merger, the members of Salarius may receive consideration in the merger that is less than the fair market value of the Salarius membership units or Flex Pharma may pay more than the fair market value of the Salarius membership units.

The outstanding membership units of Salarius are privately held and are not traded in any public market. The lack of a public market makes it extremely difficult to determine the fair market value of Salarius. Because the percentage of Flex Pharma equity to be issued to Salarius members was determined based on negotiations between the parties, it is possible that the value of the Flex Pharma common stock to be received by Salarius members will be less than the fair market value of Salarius, or Flex Pharma may pay more than the aggregate fair market value for Salarius.

The number of shares of Flex Pharma’s common stock into which the outstanding membership units of Salarius will convert does not adjust based on the market price of Flex Pharma common stock. Therefore, the merger consideration at the closing may have a greater or lesser value than at the time the Merger Agreement was signed.

The calculation of the number of shares of Flex Pharma’s common stock into which each outstanding membership unit of Salarius will convert (which we refer to as the “conversion ratio”) is complex. Any changes in the market price of Flex Pharma common stock before the completion of the merger will not affect the conversion ratios. Therefore, if before the completion of the merger the market price of Flex Pharma common stock declines from the market price on the date of the Merger Agreement, then Salarius’ members could receive merger consideration with substantially lower value. Similarly, if before the completion of the merger the market price of Flex Pharma common stock increases from the market price on the date of the Merger Agreement, then Salarius’ members could receive merger consideration with substantially higher value.

Salarius members and Flex Pharma stockholders will have reduced ownership and voting interest in, and will exercise less influence over the management of, the combined company as compared to their current ownership and voting interest in the respective companies following the completion of the merger.

After the completion of the merger, the current members of Salarius and stockholders of Flex Pharma will own a smaller percentage of the combined company than their ownership of their respective companies prior to the merger. Immediately after the merger, Salarius members will own approximately 80.1% of the common stock of Flex Pharma (on a partially-diluted basis, excluding the effect of certain options, the dividend or distribution of rights and Warrants to Flex Pharma’s current stockholders and the possible issuance of a warrant to Wedbush), with Flex Pharma stockholders, whose shares of Flex Pharma common stock will remain outstanding after the merger, owning approximately 19.9% of the common stock of the combined company (on a partially-diluted basis, excluding the effect of certain options, the dividend or distribution of rights and Warrants to Flex Pharma’s current stockholders and the possible issuance of a warrant to Wedbush). These estimates are based on the currently anticipated conversion ratios and are subject to adjustment. In addition, it is expected that the combined company will have a board of directors consisting of seven members, six of whom will be designated by Salarius and one of whom will be designated by Flex Pharma. Consequently, stockholders of Flex Pharma and members of Salarius will be able to exercise less influence over the management and policies of the combined company than they currently exercise over the management and policies of their respective companies.

 

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Risks Related to the Reverse Stock Split

The reverse stock split may not increase Flex Pharma’s stock price over the long-term.

The principal purpose of the reverse stock split is to increase the per-share market price of Flex Pharma’s common stock above the minimum bid price requirement under the Nasdaq Listing Rules so that the listing of the combined company and the shares of Flex Pharma common stock being issued in the merger on the Nasdaq Capital Market will be approved. It cannot be assured, however, that the reverse stock split will accomplish this objective for any meaningful period of time. While it is expected that the reduction in the number of outstanding shares of common stock will proportionally increase the market price of Flex Pharma’s common stock, it cannot be assured that the reverse stock split will increase the market price of its common stock by a multiple of the reverse stock split ratio chosen by Flex Pharma’s board of directors, or result in any permanent or sustained increase in the market price of Flex Pharma’s common stock, which is dependent upon many factors, including Flex Pharma’s business and financial performance, general market conditions, and prospects for future success. Thus, while the stock price of the combined company might meet the continued listing requirements for the Nasdaq Capital Market initially, it cannot be assured that it will continue to do so.

The reverse stock split may decrease the liquidity of Flex Pharma’s common stock.

Although Flex Pharma’s board of directors believes that the anticipated increase in the market price of Flex Pharma’s common stock could encourage interest in its common stock and possibly promote greater liquidity for its stockholders, such liquidity could also be adversely affected by the reduced number of shares outstanding after the reverse stock split. The reduction in the number of outstanding shares may lead to reduced trading and a smaller number of market makers for Flex Pharma’s common stock.

The reverse stock split may lead to a decrease in Flex Pharma’s overall market capitalization.

Should the market price of Flex Pharma’s common stock decline after the reverse stock split, the percentage decline may be greater, due to the smaller number of shares outstanding, than it would have been prior to the reverse stock split. A reverse stock split is often viewed negatively by the market and, consequently, can lead to a decrease in Flex Pharma’s overall market capitalization. If the per share market price does not increase in proportion to the reverse stock split ratio, then the value of the combined company, as measured by its stock capitalization, will be reduced. In some cases, the per-share stock price of companies that have effected reverse stock splits subsequently declined back to pre-reverse split levels, and accordingly, it cannot be assured that the total market value of Flex Pharma’s common stock will remain the same after the reverse stock split is effected, or that the reverse stock split will not have an adverse effect on Flex Pharma’s stock price due to the reduced number of shares outstanding after the reverse stock split.

Risks Related to Flex Pharma

For risks related to the business of Flex Pharma, in addition to the risk factors noted below, please refer to the section entitled “Item 1A. Risk Factors” set forth in Flex Pharma’s Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the SEC on March 6, 2019 and included elsewhere in this proxy statement/prospectus/information statement and are incorporated by reference herein.

There is no assurance that the proposed merger between Flex Pharma and Salarius will be completed in a timely manner or at all. If the merger with Salarius is not consummated, Flex Pharma’s business could suffer materially and its stock price could decline.

The consummation of the proposed merger between Flex Pharma and Salarius is subject to a number of closing conditions, including the approval by Flex Pharma’s stockholders of several merger-related matters and other customary closing conditions. The parties are targeting a closing of the transaction in the first half of 2019, however, there can be no assurance that the proposed merger will be consummated on their desired timeframe, or at all.

 

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If the proposed merger between Flex Pharma and Salarius is not consummated, Flex Pharma may be subject to a number of material risks, and its business and stock price could be adversely affected, as follows:

 

   

Flex Pharma has incurred and expects to continue to incur significant expenses related to the proposed merger with Salarius even if the merger is not consummated;

 

   

Flex Pharma may be required to pay Salarius a termination fee of $350,000 and/or reimburse Salarius’ expenses up to a maximum of $200,000, depending on the reason for the termination;

 

   

the market price of Flex Pharma’s common stock may decline to the extent that the current market price reflects a market assumption that the proposed merger will be completed; and

 

   

Flex Pharma may not pursue an alternate merger transaction if the proposed merger with Salarius is not completed.

If the merger is not completed, Flex Pharma’s Board of Directors may decide to pursue a dissolution, liquidation or winding-up of the company. In such an event, the amount of cash available for distribution to its stockholders will depend heavily on the timing of such liquidation, distribution or winding-up as well as the amount of cash that will need to be reserved for commitments and contingent liabilities.

There can be no assurance that the merger will be completed. If the merger is not completed, Flex Pharma’s board of directors would likely decide to pursue a dissolution, liquidation or winding-up of the company. In such an event, the amount of cash available for distribution to its stockholders will depend heavily on the timing of such decision, as with the passage of time the amount of cash available for distribution will be reduced as Flex Pharma continues to fund its operations. In addition, if Flex Pharma dissolves, liquidates or winds-up, it would be required under Delaware corporate law to pay its outstanding obligations, as well as to make reasonable provision for contingent and unknown obligations, prior to making any distributions to its stockholders. Flex Pharma’s commitments and contingent liabilities may include: (i) any pending litigation against Flex Pharma, and other various claims and legal actions arising in the ordinary course of business and (ii) payments to certain employees. As a result of this requirement, a portion of Flex Pharma’s assets may need to be reserved pending the resolution of such obligations. In addition, Flex Pharma may be subject to litigation or other claims related to its dissolution, liquidation or winding-up. If a dissolution, liquidation or winding-up were pursued, Flex Pharma’s board of directors, in consultation with its advisors, would need to evaluate these matters and make a determination about a reasonable amount to reserve. Accordingly, holders of its common stock could lose all or a significant portion of their investment in the event of its liquidation, dissolution or winding up.

If Flex Pharma fails to continue to meet all applicable Nasdaq Capital Market requirements and Nasdaq determines to delist Flex Pharma’s common stock, the delisting could prevent the closing of the merger and adversely affect the market liquidity of its common stock and the market price of Flex Pharma’s common stock could decrease.

On August 13, 2018, Flex Pharma received a letter from the listing qualifications department of The Nasdaq Stock Market, noting that for the prior 30 consecutive business days the bid price of its common stock had closed below $1.00 per share, the minimum closing bid price required by the continued listing requirements of Nasdaq Listing Rule 5450(a)(1). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), Flex Pharma was provided a period of 180 calendar days, or until February 11, 2019, to regain compliance. In order to regain compliance with the minimum closing bid price rule, the closing bid price of Flex Pharma’s common stock must be at least $1.00 or higher for a minimum of 10 consecutive business days during the 180-day compliance period. On February 12, 2019, Flex Pharma received a letter from the listing qualifications department of The Nasdaq Stock Market, noting that Flex Pharma’s transfer to the Nasdaq Capital Market was approved and that Flex Pharma was granted an additional 180 period, or until August 12, 2019, to regain compliance with the minimum closing bid price requirement.

 

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On September 27, 2018, Flex Pharma received a letter from the listing qualifications department of The Nasdaq Stock Market, noting that for the prior 30 consecutive business days the market value of its common stock was below $5 million, the minimum amount required by the continued listing requirements of Nasdaq Listing Rule 5450(b)(1)(C). In accordance with Nasdaq Listing Rule 5810(c)(3)(D), Flex Pharma has been provided a period of 180 calendar days, or until March 26, 2019, to regain compliance. In order to regain compliance with the minimum market value rule, the market value of Flex Pharma’s common stock must meet or exceed $5 million for a minimum of 10 consecutive business days during the 180-day grace period. On November 26, 2018, Flex Pharma received a letter from Nasdaq notifying Flex Pharma that it regained compliance with Nasdaq Listing Rule 5450(b)(1)(C). The letter noted that for the last 10 consecutive business days from the date of the letter, the market value of the Flex Pharma’s publicly held shares was $5 million or greater.

If Flex Pharma does not regain compliance prior to the expiration of the 180-day compliance period, and if it appears to Nasdaq that Flex Pharma will not be able to cure the deficiency, or if Flex Pharma fails to comply with other listing requirements in the future, Nasdaq will provide Flex Pharma with a written notification that its securities are subject to delisting from Nasdaq. At that time, Flex Pharma may appeal the delisting determination to a Nasdaq hearings panel.

The failure to maintain Flex Pharma’s listing on Nasdaq could have an adverse effect on the market price and liquidity of its shares of common stock and reduce its ability to raise additional capital. In addition, if Flex Pharma’s common stock is delisted from Nasdaq and the trading price remains below $5.00 per share, trading in Flex Pharma’s common stock might also become subject to the requirements of certain rules promulgated under the Exchange Act, which require additional disclosure by broker-dealers in connection with any trade involving a stock defined as a “penny stock” (generally, any equity security not listed on a national securities exchange or quoted on Nasdaq that has a market price of less than $5.00 per share, subject to certain exceptions).

As a result of the closure of Flex Pharma’s Phase 2 studies and the reductions in Flex Pharma’s workforce announced in June 2018, Flex Pharma has only four employees remaining as of the date of this filing. If Flex Pharma is unable to retain the remaining employees, Flex Pharma’s ability to consummate the planned merger transaction may be delayed or seriously jeopardized.

On June 13, 2018, Flex Pharma announced workforce reductions, and current headcount has been reduced to four employees. Flex Pharma’s cash conservation activities may yield unintended consequences, such as attrition beyond the planned workforce reductions and reduced employee morale, which may cause the remaining employees to seek alternate employment. Competition among biotechnology companies for qualified employees is intense, and the ability to retain the remaining employees is critical to Flex Pharma’s ability to effectively manage its business and to consummate the planned merger transaction. Additional attrition could have a material adverse effect on Flex Pharma’s business and ability to consummate the merger. In addition, as a result of the reduction in Flex Pharma’s workforce, Flex Pharma faces an increased risk of employment litigation.

Flex Pharma is an early stage company with a limited commercial history and a history of net losses. Flex Pharma expects to incur net losses in the future and may never achieve sustained profitability or even revenue.

Flex Pharma is a clinical stage biotechnology company that has announced an end to its Phase 2 clinical trials of FLX-787 due to oral tolerability concerns observed in the two studies. Flex Pharma currently has no foreseeable path to significant revenue with its current clinical assets. Flex Pharma has historically incurred substantial net losses. Flex Pharma incurred losses attributable to stockholders of $21.9 million and $34.4 million for the years ended December 31, 2018 and 2017, respectively. Flex Pharma expects its losses to continue. These losses have had, and will continue to have, an adverse effect on Flex Pharma’s working capital, total assets and stockholders’ equity. Because of the numerous risks and uncertainties associated with Flex Pharma’s business, Flex Pharma may never become profitable. Even if Flex Pharma did achieve profitability, it may not be able to

 

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sustain or increase profitability on a quarterly or annual basis. Flex Pharma’s inability to achieve and then maintain profitability would negatively affect its business, financial condition, results of operations and cash flows.

Flex Pharma’s business to date has been almost entirely dependent on the clinical success of FLX-787. With the failure of FLX-787, Flex Pharma has no immediate prospects for significant revenue or profitability.

Due to the early stage nature of Flex Pharma’s business and its limited marketing activities to date, with the failure of FLX-787 it is not likely Flex Pharma has any immediate prospects for significant revenue or profitability.

The loss of Flex Pharma’s key members of its executive management team could adversely affect its business.

Flex Pharma cannot make any assurances that any of the key remaining members of its management team will remain with Flex Pharma in the event the merger is not consummated. Accordingly, Flex Pharma may be unable to execute any reasonable salvage strategy or properly execute a liquidation, dissolution or winding up of the company.

Declining general economic or business conditions may have a negative impact on Flex Pharma’s business.

Continuing concerns over U.S. health care reform legislation and energy costs, geopolitical issues, such as the government shut down or Brexit, the availability and cost of credit in the United States and other countries have in the past and may in the future contribute to increased volatility and diminished expectations for the global economy. These factors, if combined with low business and consumer confidence and high unemployment, could precipitate an economic slowdown and recession. If the economic climate deteriorates, Flex Pharma’s business, as well as the financial condition of Flex Pharma’s suppliers and Flex Pharma’s third-party suppliers, could be adversely affected, resulting in a negative impact on Flex Pharma’s business, financial condition and results of operations.

Flex Pharma depends on its information technology and telecommunications systems, and any failure of these systems could harm its business.

Flex Pharma depends on information technology and telecommunications systems for significant aspects of its operations. These information technology and telecommunications systems support a variety of functions, including research and development activities and Flex Pharma’s general and administrative activities. Information technology and telecommunications systems are vulnerable to damage from a variety of sources, including telecommunications or network failures, malicious human acts and natural disasters. Moreover, despite network security and back-up measures, some of its systems are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive and liability-creating problems. Despite the precautionary measures Flex Pharma has taken to prevent unanticipated problems that could affect its information technology and telecommunications systems, failures or significant downtime of Flex Pharma’s information technology or telecommunications systems or those used by its third-party service providers could prevent Flex Pharma from processing all manner of significant data, conducting research and development activities and managing the administrative aspects of Flex Pharma’s business.

 

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Risks Related to Flex Pharma’s Financial Condition

Flex Pharma has incurred significant losses since its inception and anticipates that it will continue to incur significant losses for the foreseeable future.

Flex Pharma has generated limited revenue from sales of HOTSHOT, and has generated no revenue from any of its drug product candidates. Flex Pharma has incurred net losses in each year since its inception on February 24, 2014, including a consolidated net loss of $21.9 million for the year ended December 31, 2018. As of December 31, 2018, Flex Pharma had an accumulated deficit of approximately $133.0 million. Its prior losses, combined with expected future losses, have had and may continue to have an adverse effect on its stockholders’ equity and working capital.

To date, Flex Pharma has financed its operations with net proceeds from the private placement of its preferred stock and its initial public offering. The amount of its future net losses will depend, in part, on the rate of its future expenditures and its ability to generate revenue.

The net losses Flex Pharma incurs may fluctuate significantly from quarter-to-quarter and year-to-year, such that a period-to-period comparison of its results of operations may not be a good indication of its future performance. In any particular quarter or quarters, its operating results could be below the expectations of investors, which could cause its stock price to decline.

If the merger is not completed, Flex Pharma would need to raise substantial additional funding to the extent it continues its drug development efforts, which may not be available on acceptable terms, or at all. Failure to obtain this necessary capital when needed may force it to delay, limit or terminate its drug development efforts or other operations.

Flex Pharma has generated limited revenue from sales of HOTSHOT, and has generated no revenue from any of its drug product candidates. Flex Pharma has incurred net losses in each year since its inception on February 26, 2014, including a consolidated net loss of $21.9 million for the year ended December 31, 2018. As of December 31, 2018, Flex Pharma had an accumulated deficit of approximately $133.0 million. If the merger is not completed, Flex Pharma will require substantial additional capital to fund its research and development and expenses related to its consumer brand and HOTSHOT. Flex Pharma had unrestricted cash and cash equivalents of $9.8 million at December 31, 2018. Flex Pharma’s current operating plan assumes limited research and development activities and that it will continue to sell HOTSHOT. In the event that the merger is not completed, Flex Pharma would likely pursue a liquidation, dissolution or winding-up of Flex Pharma, or may seek to complete an alternate strategic transaction or may elect to continue to market HOTSHOT and operate its consumer business. Based on the Company’s operating plan, the Company believes that its existing cash and cash equivalents will be sufficient to allow the Company to fund its current operating plan for at least 12 months from March 6, 2019, the date the consolidated financial statements for the year ended December 31, 2018 were issued.

Flex Pharma cannot predict to what extent it will resume drug development activities for FLX-787 or other drug product candidates. Further, only a small minority of all research and development programs ultimately result in commercially successful drugs. Clinical failure can occur at any stage of clinical development and clinical trials may produce negative or inconclusive results, and Flex Pharma may decide, or regulators may require it, to conduct additional clinical or preclinical trials. In addition, data obtained from trials are susceptible to varying interpretations, and regulators may not interpret its data as favorably as it does, which may delay, limit or prevent regulatory approval. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will generate the same results or otherwise provide adequate data to demonstrate the efficacy and safety of a drug candidate. Further, even if Flex Pharma completes the development of FLX-787 or any future drug product candidate and gains marketing approvals from the FDA and comparable foreign regulatory authorities in a timely manner, it cannot be sure that such drug product candidate will be commercially successful in the pharmaceutical market. If the results of clinical trials, the anticipated or actual timing of marketing approvals, or the market acceptance of any drug product candidate, if approved, do not meet the expectations of

 

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investors or public market analysts, the market price of its common stock would likely decline. Further, even if Flex Pharma resumes drug development activities, it will need substantial additional financing to complete the development of FLX-787 or any other drug product candidates it may develop.

Flex Pharma expects to incur losses for the foreseeable future. Its ability to achieve profitability in the future is dependent upon achieving a level of revenues adequate to support its cost structure. Flex Pharma may never achieve profitability, and unless and until it does, Flex Pharma will continue to need to raise additional capital. If Flex Pharma raises additional capital through the sale of equity or convertible debt securities, the issuance of those securities could result in substantial dilution for Flex Pharma’s current stockholders and the terms may include liquidation or other preferences that adversely affect the rights of its current stockholders, further diminishing current stockholders ability to realize any value for their stock holdings. Furthermore, the issuance of additional securities, whether equity or debt, by Flex Pharma, or the possibility of such issuance, may cause the market price of Flex Pharma’s common stock to decline further and existing stockholders may not agree with its financing plans or the terms of such financings. There can be no assurances, however, that additional funding will be available on terms acceptable to Flex Pharma, or at all.

If Flex Pharma is unable to raise capital when needed, it could be forced to delay, reduce or eliminate its development efforts, which could materially adversely affect its business, financial condition and results of operations, or it may be required to cease operations.

Regulatory Risks Relating to Flex Pharma’s Business

Flex Pharma is required to comply with laws governing the transmission, security and privacy of health information that require significant compliance costs, and any failure to comply with these laws could result in material criminal and civil penalties.

Under the administrative simplification provisions of the federal Health Insurance Portability and Accountability Act of 1996, (which we refer to as “HIPAA”), the U.S. Department of Health and Human Services has issued regulations which establish uniform standards governing the conduct of certain electronic health care transactions and protecting the privacy and security of Protected Health Information, (which we refer to as “PHI”), used or disclosed by health care providers and other covered entities. Three principal regulations with which Flex Pharma is currently required to comply have been issued in final form under HIPAA: privacy regulations, security regulations and standards for electronic transactions.

The privacy regulations cover the use and disclosure of PHI by health care providers. It also sets forth certain rights that an individual has with respect to his or her PHI maintained by a health care provider, including the right to access or amend certain records containing PHI or to request restrictions on the use or disclosure of PHI. Flex Pharma has also implemented policies, procedures and standards to comply appropriately with the final HIPAA security regulations, which establish requirements for safeguarding the confidentiality, integrity and availability of PHI, which is electronically transmitted or electronically stored. The HIPAA privacy and security regulations establish a uniform federal “floor” and do not supersede state laws that are more stringent or provide individuals with greater rights with respect to the privacy or security of, and access to, their records containing PHI. As a result, Flex Pharma is required to comply with both HIPAA privacy regulations and varying state privacy and security laws. Almost all U.S. states now require notification to affected individuals and state authorities, as well as the media in certain cases, in the event of a breach of the security of personal information (including PHI in a few states), often with significant financial penalties for noncompliance.

The Health Information Technology for Economic and Clinical Health Act, (which we refer to as the “HITECH Act”), enacted pursuant to the American Recovery and Reinvestment Act of 2009, (which we refer to as “ARRA”), made sweeping changes to the health information privacy and security regulations of HIPAA by expanding the scope and application of the statute. These changes include, among other things: (1) establishing an affirmative obligation to provide patient data breach notification in the event of the unauthorized acquisition,

 

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access, use or disclosure of unsecured PHI; (2) elaborating upon the standard for “minimum necessary” uses and disclosures of PHI by a covered entity; (3) restricting certain uses of PHI for marketing purposes (by expanding the definition of marketing activities requiring authorization); (4) prohibiting certain sales of PHI; (5) establishing an affirmative obligation to provide an accounting of disclosures made for payment, treatment and health care operations (up to three years made through an electronic health record); (6) requiring covered entities to agree to individuals’ requests to restrict disclosure of PHI in certain circumstances; (7) applying the security regulations and certain provisions of the privacy regulations to business associates; and (8) modifying an individuals’ right to access PHI in an electronic format. The U.S. Department of Health and Human Services issued modifications to the HIPAA Regulations, effective March 26, 2013, implementing some of these changes including the obligation to provide patient data breach notifications, which subject the company to additional administrative requirements in the United States. With regard to the accounting of disclosures, the HITECH Act provides for removing the exception in the existing HIPAA privacy regulations’ accounting of disclosures of PHI requirement for disclosures of PHI for payment, treatment, and health care operations purposes made through an electronic health record (within the past three years). The U.S. Department of Health and Human Services issued proposed regulations to implement this provision of the HITECH Act in May 2011, but those regulations have not been finalized.

The HITECH Act also implemented measures to strengthen enforcement of HIPAA and increased applicable penalties for HIPAA violations. Penalties are now tiered and range from $100 to $50,000 per violation with an annual cap for the same violations of $25,000 to $1,500,000. The Office for Civil Rights of the U.S. Department of Health and Human Services, (which we refer to as the “OCR”), has increased enforcement activities and has recently levied large penalties for violations. In addition, as mandated by the HITECH Act, OCR has begun an audit program to assess compliance by covered entities and their business associates with the HIPAA privacy and security rules and breach notification standards.

Flex Pharma seeks to comply with HIPAA privacy regulations and state privacy laws. Given the complexity of HIPAA, the HITECH Act and state privacy restrictions, the possibility that the regulations may change, and the fact that the regulations are subject to changing and potentially conflicting interpretation, Flex Pharma’s ability to comply with HIPAA, the HITECH Act and state privacy requirements is uncertain and the costs of compliance are significant. To the extent that Flex Pharma or its third-party billing company submit electronic health care claims and payment transactions that do not comply with the electronic data transmission standards established under HIPAA and the HITECH Act, payments to Flex Pharma may be delayed or denied. Additionally, the costs of complying with any changes to HIPAA, the HITECH Act and state privacy restrictions may have a negative impact on Flex Pharma’s operations. Flex Pharma could be subject to criminal penalties and civil sanctions for failing to comply with HIPAA, the HITECH Act and state privacy restrictions, which could result in the incurrence of significant monetary penalties.

If Flex Pharma ever again pursued clinic studies or placed a product or products in the market for use by patients, a host of federal and state healthcare regulations would apply to Flex Pharma’s business, which would create operational risk and potential liability.

Intellectual Property Risks Related to Flex Pharma’s Business

If Flex Pharma is unable to maintain intellectual property protection, its competitive position could be harmed.

Flex Pharma’s ability to protect its proprietary discoveries and technologies affects its ability to monetize any of its remaining assets. Currently, Flex Pharma relies on a combination of issued U.S. patents, U.S. and foreign patent applications, copyrights, trademarks and trademark applications, confidentiality or non-disclosure agreements, material transfer agreements, licenses, work-for-hire agreements and invention assignment agreements to protect its intellectual property rights. Flex Pharma also maintains certain company know-how, trade secrets and technological innovations designed to provide Flex Pharma with a competitive advantage in the market place as trade secrets.

 

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To the extent there is any remaining value in any of these intellectual property assets, it may be lost if Flex Pharma is unable to protect its intellectual property.

Flex Pharma may face intellectual property infringement claims that could be time-consuming and costly to defend, and could result in Flex Pharma’s loss of significant rights and the assessment of treble damages.

From time to time Flex Pharma may face intellectual property infringement, misappropriation, or invalidity/non- infringement claims from third parties. Some of these claims may lead to litigation. The outcome of any such litigation can never be guaranteed, and an adverse outcome could affect Flex Pharma negatively. For example, were a third party to succeed on an infringement claim against Flex Pharma, it may be required to pay substantial damages (including up to treble damages if such infringement were found to be willful). Potential damages could easily consume all or most of Flex Pharma’s remaining cash. In addition, Flex Pharma could face an injunction, barring Flex Pharma from conducting the allegedly infringing activity. The outcome of the litigation could require Flex Pharma to enter into a license agreement which may not be under acceptable, commercially reasonable, or practical terms or Flex Pharma may be precluded from obtaining a license at all.

Finally, Flex Pharma could initiate claims to assert or defend its own intellectual property against third parties. If one or more of its patents were held to be invalid or not infringed, Flex Pharma might not be able to exclude others from offering similar or identical products or services. Any intellectual property litigation, irrespective of whether Flex Pharma is the plaintiff or the defendant, and regardless of the outcome, is expensive and time-consuming, and could divert its management’s attention from its business and negatively affect its operating results or financial condition.

Risks Related to Ownership of Flex Pharma’s Common Stock

The price of Flex Pharma’s common stock may be volatile and fluctuate substantially, which could result in substantial losses for Flex Pharma stockholders.

Flex Pharma’s stock price has been and is likely in the future to be volatile. The stock market in general and the market for smaller clinical biotechnology 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, Flex Pharma stockholders may not be able to sell their common stock at or above the price they paid for it. The market price for Flex Pharma’s common stock may be influenced by many factors, including:

 

   

announcements and market perceptions related to the merger;

 

   

issuances of new equity securities pursuant to a future offering, including issuances of preferred stock or convertible debt;

 

   

the success of competitive products, services or technologies;

 

   

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

 

   

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

 

   

the recruitment or departure of key personnel;

 

   

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

 

   

variations in Flex Pharma’s financial results or those of companies that are perceived to be similar to Flex Pharma;

 

   

changes in the structure of health care payment systems;

 

   

market conditions in the diagnostic services sector;

 

   

general economic, industry and market conditions; and

 

   

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

 

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Anti-takeover provisions in Flex Pharma’s charter documents and under Delaware law could make an acquisition of Flex Pharma more difficult and may prevent attempts by Flex Pharma’s stockholders to replace or remove Flex Pharma’s management.

Provisions in Flex Pharma’s certificate of incorporation and bylaws may delay or prevent an acquisition or a change in management. These provisions include a classified board of directors, a prohibition on actions by written consent of Flex Pharma’s stockholders and the ability of the board of directors to issue preferred stock without stockholder approval. In addition, because Flex Pharma is incorporated in Delaware, it is governed by the provisions of Section 203 of the Delaware General Corporation Law (which we refer to as the “DGCL”), which prohibits stockholders owning in excess of 15% of the outstanding voting stock from merging or combining with Flex Pharma, subject to limited exceptions. Although Flex Pharma believes these provisions collectively will provide for an opportunity to receive higher bids by requiring potential acquirors to negotiate with Flex Pharma’s board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by Flex Pharma’s stockholders to replace or remove then current management by making it more difficult for stockholders to replace members of the board of directors, which is responsible for appointing the members of management.

If Flex Pharma’s shares become subject to the penny stock rules, it may be more difficult to sell Flex Pharma shares.

The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or authorized for quotation on certain automated quotation systems, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The OTC Bulletin Board does not meet such requirements. If the price of Flex Pharma’s common stock remains less than $5.00 and Flex Pharma is not listed on a national securities exchange, its common stock may be deemed a penny stock. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document containing specified information. In addition, the penny stock rules require that prior to effecting any transaction in a penny stock not otherwise exempt from those rules, a broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive: (i) the purchaser’s written acknowledgment of the receipt of a risk disclosure statement; (ii) a written agreement to transactions involving penny stocks; and (iii) a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for common stock, and therefore stockholders may have difficulty selling their shares.

An active trading market for Flex Pharma’s common stock may not develop.

Prior to Flex Pharma’s initial public offering on January 28, 2015, there was no public market for its common stock. The listing of Flex Pharma’s common stock on the Nasdaq Capital Market does not assure that a meaningful, consistent and liquid trading market exists. Although Flex Pharma’s common stock is listed on the Nasdaq Capital Market, trading volume in its common stock has been limited and an active trading market for Flex Pharma’s shares may never develop or be sustained. If an active market for Flex Pharma’s common stock does not develop, it may be difficult for investors to sell their shares without depressing the market price for the shares or at all.

Reports published by securities or industry analysts, including projections in those reports that exceed actual results, could adversely affect Flex Pharma’s common stock price and trading volume.

Securities research analysts may establish and publish their own periodic projections for Flex Pharma’s business. These projections may vary widely from one another and may not accurately predict the results Flex Pharma actually achieves. Flex Pharma’s stock price may decline if actual results do not match securities

 

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research analysts’ projections. Similarly, if one or more of the analysts who writes reports on Flex Pharma downgrades its stock or publishes inaccurate or unfavorable research about its business, Flex Pharma’s stock price could decline. If one or more of these analysts ceases coverage of the company or fails to publish reports on Flex Pharma regularly, Flex Pharma’s stock price or trading volume could decline. If no or a limited number of securities or industry analysts cover Flex Pharma, the trading price for its stock and the trading volume could be adversely affected.

Future sales of Flex Pharma’s common stock, or the perception that future sales may occur, may cause the market price of its common stock to decline, even if its business is doing well.

Sales of substantial amounts of Flex Pharma’s common stock in the public market, or the perception that these sales may occur, could materially and adversely affect the price of its common stock and could impair its ability to raise capital through the sale of additional equity securities. Flex Pharma maintains a shelf registration statement on Form S-3 with the SEC pursuant to which Flex Pharma may, from time to time, sell up to an aggregate of $125 million of its common stock, preferred stock, debt securities and warrants. Sales of securities under the registration statement will result in dilution of its stockholders and could cause its stock price to fall.

Flex Pharma is an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may make its common stock less attractive to investors.

Flex Pharma is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, (which we refer to as the “JOBS Act”), and may remain an emerging growth company for up to five years. For so long as Flex Pharma remains an emerging growth company, Flex Pharma is permitted and intends to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:

 

   

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

 

   

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

 

   

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

 

   

reduced disclosure obligations regarding executive compensation; and

 

   

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

Flex Pharma has taken advantage of reduced reporting burdens in its periodic disclosure reports. In particular, Flex Pharma has not included all of the executive compensation related information that would be required if Flex Pharma were not an emerging growth company. Flex Pharma cannot predict whether investors will find Flex Pharma’s common stock less attractive if Flex Pharma relies on these exemptions. If some investors find Flex Pharma’s common stock less attractive as a result, there may be a less active trading market for its common stock and its stock price may be more volatile.

Since the initial public offering on January 28, 2015, Flex Pharma has incurred significantly increased costs and its management has had to devote substantial time as a result of operating as a public company; and such costs are expected to further increase after Flex Pharma is no longer an “emerging growth company.”

As a public company, Flex Pharma incurs significant legal, accounting and other expenses that Flex Pharma did not incur as a private company. The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and

 

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Consumer Protection Act, the listing requirements of the Nasdaq Capital Market 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. Flex Pharma’s management and other personnel have had to devote a substantial amount of time to these compliance initiatives since becoming a public company. Moreover, these rules and regulations have increased its legal and financial compliance costs and have made certain activities more time-consuming and costly.

Because Flex Pharma is still a relatively new public company and in the aftermath of the termination of its clinical studies, Flex Pharma cannot yet predict or estimate the costs Flex Pharma may incur in the future with respect to these compliance initiatives or the timing of such costs. In addition, 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.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, (which we refer to as “Section 404”), as an emerging growth company, Flex Pharma is not required to include an attestation report on internal control over financial reporting issued by its independent registered public accounting firm in its annual report. To achieve compliance with Section 404 within the prescribed period, Flex Pharma will be engaged in a process to document and evaluate its internal control over financial reporting, which is both costly and challenging. In this regard, Flex Pharma will need to continue to dedicate internal resources, potentially engage outside consultants and 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 that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite Flex Pharma’s efforts, there is a risk that Flex Pharma will not be able to conclude, within the prescribed timeframe or at all, that its internal control over financial reporting is effective as required by Section 404. If Flex Pharma identifies one or more material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of its financial statements.

Because Flex Pharma does not anticipate paying any cash dividends on its capital stock in the foreseeable future, if ever, capital appreciation, if any, will be Flex Pharma’s sole source of gain.

Flex Pharma does not anticipate paying future dividends on its capital stock. Flex Pharma currently intends to retain all of its future earnings, if any, to finance the growth and development of its business. In addition, the terms of any future debt agreements may preclude Flex Pharma from paying dividends. As a result, capital appreciation, if any, on the common stock will be Flex Pharma’s stockholders’ sole source of gain for the foreseeable future.

Risks Related to Salarius

Risks Related to Salarius’ Financial Condition and Capital Requirements

Salarius has incurred losses since its inception, has a limited operating history on which to assess its business, and anticipates that it will continue to incur significant losses for the foreseeable future.

Salarius is a clinical development-stage biopharmaceutical company with limited operating history. Salarius has no products approved for commercial sale and has not generated any revenue from product sales. From inception to March 25, 2019, Salarius has raised net cash proceeds of approximately $8.3 million from the sale of membership units and received $9.6 million in grants, primarily from the Cancer Prevention and Research Institute of Texas (which we refer to as “CPRIT”). Salarius has never been profitable and has incurred operating losses in each year since inception. Salarius’ net losses were $1.7 million for the twelve months ended December 31, 2018, and $1.7 million and $1.2 million for the years ended December 31, 2017 and 2016, respectively. As of December 31, 2018, Salarius had a members’ deficit of $1.3 million. As of December 31,

 

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2018, Salarius had cash and cash equivalents of $3.2 million. In addition, Salarius held $2.9 million in escrow related to the sales of Series A Preferred units. These funds were being held in escrow until the issuance of such units was completed, whereupon such restriction was removed. These amounts are classified as restricted cash on Salarius’ balance sheet as of December 31, 2018 included elsewhere in this proxy statement/prospectus/information statement.

Salarius will continue to require substantial additional capital to continue its clinical development and potential commercialization activities. Accordingly, Salarius will need to raise substantial additional capital to continue to fund its operations. The amount and timing of its future funding requirements will depend on many factors, including the pace and results of its clinical development efforts. Failure to raise capital as and when needed, on favorable terms or at all, would have a negative impact on its financial condition and its ability to develop its product candidates.

Salarius has devoted substantially all of its financial resources to identify, acquire, and develop its product candidates, including conducting clinical trials and providing general and administrative support for its operations. To date, Salarius has financed its operations primarily through the sale of privately-placed equity securities. The amount of its future net losses will depend, in part, on the rate of its future expenditures and its ability to obtain funding through equity or debt financings, strategic collaborations, or grants. Biopharmaceutical product development is a highly speculative and competitive undertaking and involves a substantial degree of risk. Salarius expects losses to increase as it completes Phase 1 development and advances into Phase 2 development of its lead product candidates. It may be several years, if ever, before Salarius completes pivotal clinical trials and has a product candidate approved for commercialization. Salarius expects to invest significant funds into the research and development of its current product candidates to determine the potential to advance these product candidates to regulatory approval. Large sums of money will be expected before Salarius knows if it has a clinically successful product candidate.

If Salarius obtains regulatory approval to market a product candidate, its future revenue will depend upon the size of any markets in which its product candidates may receive approval, and its ability to achieve sufficient market acceptance, pricing, reimbursement from third-party payors, and adequate market share for its product candidates in those markets. Even if Salarius obtains adequate market share for its product candidates, because the potential markets in which its product candidates may ultimately receive regulatory approval could be very small, Salarius may never become profitable despite obtaining such market share and acceptance of its products.

Salarius expects to continue to incur significant expenses and increasing operating losses for the foreseeable future and its expenses will increase substantially if and as Salarius:

 

   

continues the clinical development of its product candidates;

 

   

continues efforts to discover new product candidates;

 

   

undertakes the manufacturing of its product candidates or increases volumes manufactured by third parties;

 

   

advances its programs into larger, more expensive clinical trials;

 

   

initiates additional pre-clinical, clinical, or other trials or studies for its product candidates;

 

   

seeks regulatory and marketing approvals and reimbursement for its product candidates;

 

   

establishes a sales, marketing, and distribution infrastructure to commercialize any products for which Salarius may obtain marketing approval and market for itself;

 

   

seeks to identify, assess, acquire, and/or develop other product candidates;

 

   

makes milestone, royalty or other payments under third-party license agreements;

 

   

seeks to maintain, protect, and expand its intellectual property portfolio;

 

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seeks to attract and retain skilled personnel; and

 

   

experiences any delays or encounters issues with the development and potential for regulatory approval of its clinical candidates such as safety issues, clinical trial accrual delays, longer follow-up for planned studies, additional major studies, or supportive studies necessary to support marketing approval.

Further, the net losses Salarius incurs may fluctuate significantly from quarter to quarter and year to year, such that a period-to-period comparison of its results of operations may not be a good indication of its future performance.

Salarius has never generated any revenue from product sales and may never generate revenue or be profitable.

Salarius has no products approved for commercialization and has never generated any revenue. Salarius’ ability to generate revenue and achieve profitability depends on its ability, alone or with strategic collaborators, to successfully complete the development of, and obtain the regulatory and marketing approvals necessary to commercialize one or more of its product candidates. Salarius does not anticipate generating revenue from product sales for the foreseeable future. Salarius’ ability to generate future revenue from product sales depends heavily on its success in many areas, including but not limited to:

 

   

completing research and development of its product candidates;

 

   

obtaining regulatory and marketing approvals for its product candidates;

 

   

manufacturing product candidates and establishing and maintaining supply and manufacturing relationships with third parties that are commercially feasible, meet regulatory requirements and Salarius’ supply needs in sufficient quantities to meet market demand for its product candidates, if approved;

 

   

marketing, launching and commercializing product candidates for which Salarius obtains regulatory and marketing approval, either directly or with a collaborator or distributor;

 

   

gaining market acceptance of its product candidates as treatment options;

 

   

addressing any competing products;

 

   

protecting and enforcing its intellectual property rights, including patents, trade secrets, and know-how;

 

   

negotiating favorable terms in any collaboration, licensing, or other arrangements into which Salarius may enter;

 

   

obtaining reimbursement or pricing for its product candidates that supports profitability; and

 

   

attracting, hiring, and retaining qualified personnel.

Even if one or more of the product candidates that Salarius develops is approved for commercial sale, Salarius anticipates incurring significant costs associated with commercializing any approved product candidate. Portions of its current pipeline of product candidates have been in-licensed from third parties, which make the commercial sale of such in-licensed products potentially subject to additional royalty and milestone payments to such third-parties. Salarius will also have to develop, contract for or acquire manufacturing capabilities to continue development and potential commercialization of its product candidates. Salarius will need to develop or procure its drug product in a commercially feasible manner in order to successfully commercialize any future approved product; if any. Additionally, if Salarius is not able to generate revenue from the sale of any approved products, Salarius may never become profitable.

 

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Raising additional capital may cause dilution to Salarius’ members, restrict its operations or require Salarius to relinquish rights.

To the extent that Salarius raises additional capital through the sale of equity, convertible debt or other securities convertible into equity the ownership interest of Salarius’ members will be diluted, and the terms of these new securities may include liquidation or other preferences that adversely affect rights of Salarius’ equity holders. Debt financing, if available at all, would likely involve agreements that include covenants limiting or restricting Salarius’ ability to take specific actions, such as incurring additional debt, making capital expenditures, making additional product acquisitions, or declaring dividends. If Salarius raises additional funds through strategic collaborations or licensing arrangements with third parties, Salarius may have to relinquish valuable rights to its product candidates or future revenue streams or grant licenses on terms that are not favorable to Salarius. Salarius cannot be assured that it will be able to obtain additional funding if and when necessary to fund its entire portfolio of product candidates to meet its projected plans. If Salarius is unable to obtain funding on a timely basis, Salarius may be required to delay or discontinue one or more of its development programs or the commercialization of any product candidates or be unable to expand its operations or otherwise capitalize on potential business opportunities, which could materially harm Salarius’ business, financial condition, and results of operations.

Salarius has also historically received funds from state and federal government grants for research and development including CPRIT. The grants have been, and any future government grants and contracts Salarius may receive may be, subject to the risks and contingencies set forth below under the risk factor titled “Reliance on government funding for Salarius’ programs may add uncertainty to its research and commercialization efforts with respect to those programs that are tied to such funding and may impose requirements that limit its ability to take specified actions, increase the costs of commercialization and production of product candidates developed under those programs and subject it to potential financial penalties, which could materially and adversely affect its business, financial condition and results of operations.” Although Salarius might apply for government contracts and grants in the future, it cannot assure you that it will be successful in obtaining additional grants for any product candidates or programs. Failure to receive additional government grants in the future may substantially harm Salarius’ business.

Risks Related to the Development of Salarius’ Product Candidates

Clinical trials are costly, time consuming and inherently risky, and Salarius may fail to demonstrate safety and efficacy to the satisfaction of applicable regulatory authorities.

Clinical development is expensive, time consuming and involves significant risk. Salarius cannot guarantee that any clinical trials will be conducted as planned or completed on schedule, if at all. A failure of one or more clinical trials can occur at any stage of development. Events that may prevent successful or timely completion of clinical development include but are not limited to:

 

   

inability to generate satisfactory pre-clinical, toxicology, or other in vivo or in vitro data or diagnostics to support the initiation or continuation of clinical trials;

 

   

delays in reaching agreement on acceptable terms with clinical research organizations, (which we refer to as “CROs”), and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and clinical trial sites;

 

   

delays in obtaining required institutional review board, (which we refer to as the “IRB”), approval at each clinical trial site;

 

   

failure to permit the conduct of a clinical trial by regulatory authorities, after review of an investigational new drug or equivalent foreign application or amendment;

 

   

delays in recruiting qualified patients in its clinical trials;

 

   

failure by clinical sites or CROs or other third parties to adhere to clinical trial requirements;

 

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failure by Salarius clinical sites, CROs or other third parties to perform in accordance with the good clinical practices requirements of the U.S. Food and Drug Administration, (which we refer to as the “FDA”), or applicable foreign regulatory guidelines;

 

   

patients dropping out of Salarius’ clinical trials;

 

   

adverse events or tolerability or animal toxicology issues significant enough for the FDA or other regulatory agencies to put any or all clinical trials on hold;

 

   

occurrence of adverse events associated with Salarius’ product candidates;

 

   

changes in regulatory requirements and guidance that require amending or submitting new clinical protocols;

 

   

the cost of clinical trials of Salarius’ product candidates;

 

   

negative or inconclusive results from Salarius’ clinical trials which may result in Salarius’ deciding, or regulators requiring Salarius, to conduct additional clinical trials or abandon development programs in other ongoing or planned indications for a product candidate; and

 

   

delays in reaching agreement on acceptable terms with third-party manufacturers and the time for manufacture of sufficient quantities of its product candidates for use in clinical trials.

Any inability to successfully complete clinical development and obtain regulatory approval for its product candidates could result in additional costs to Salarius or impair its ability to generate revenue. In addition, if Salarius makes manufacturing or formulation changes to its product candidates, Salarius may need to conduct additional pre-clinical trials or the results obtained from such new formulation may not be consistent with previous results obtained. Clinical trial delays could also shorten any periods during which its products have patent protection and may allow competitors to develop and bring products to market before Salarius does, which could impair its ability to successfully commercialize its product candidates and may harm its business and results of operations.

The approach Salarius is taking to discover and develop novel oncology therapeutics using epigenetic enzymes to moderate transcription factors and thereby control abnormal protein expression is unproven and may never lead to marketable products.

The scientific discoveries that form the basis for Salarius’ efforts to discover and develop its current product candidates are relatively recent. To date, neither Salarius nor any other company has received regulatory approval to market therapeutics using epigenetic enzymes. The scientific evidence to support the feasibility of developing drugs based on these discoveries is both preliminary and limited. Successful development of therapeutic products by Salarius will require solving a number of issues. In addition, any product candidates that Salarius develops may not demonstrate in patients the chemical and pharmacological properties ascribed to them in laboratory and pre-clinical trials, and they may interact with human biological systems in unforeseen, ineffective or even harmful ways. For instance, Salarius’ clinical and pre-clinical data to date is not validated and Salarius has no way of knowing if after validation Salarius’ clinical trial data will be complete and consistent. If Salarius does not successfully develop and commercialize product candidates based upon this technological approach, it may not become profitable and the value of its capital stock may decline.

Further, Salarius’ focus on epigenetic enzyme technology for developing product candidates as opposed to multiple, more proven technologies for drug development increases the risk associated with its business. If Salarius is not successful in developing an approved product using its technology, it may not be able to identify and successfully implement an alternative product development strategy. In addition, work by other companies pursuing similar technologies may encounter setbacks and difficulties that regulators and investors may attribute to Salarius’ product candidates, whether appropriate or not.

 

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Salarius’ therapeutic product candidates are based on a relatively novel technology, which makes it difficult to predict the time and cost of development and of subsequently obtaining regulatory approval, if at all.

Salarius has concentrated its research and development efforts to date on a limited number of product candidates based on its epigenetic enzyme therapeutic platform and identifying its initial targeted disease indications. Salarius’ future success depends on its successful development of viable product candidates. Currently, only one of its product candidates Seclidemstat, a reversible LSD1 inhibitor, is in Phase 1 clinical development, and the remainder of its product candidates are in pre-clinical development. There can be no assurance that Salarius will not experience problems or delays in developing its product candidates and that such problems or delays will not cause unanticipated costs, or that any such development problems can be solved.

The clinical trial and manufacturing requirements of the FDA, the European Medicines Agency, (which we refer to as the “EMA”), and other regulatory authorities, and the criteria these regulators use to determine the safety and efficacy of a product candidate, vary substantially according to the type, complexity, novelty and intended use and market of the product candidate. The regulatory approval process for novel product candidates such as epigenetic enzyme therapeutics can be more expensive and take longer than for other, better known or more extensively studied product candidates. It is difficult to determine how long it will take or how much it will cost to obtain regulatory approvals for Salarius’ product candidates in either the United States or the European Union or how long it will take to commercialize its product candidates, even if approved for marketing. Approvals by the European Commission may not be indicative of what the FDA, and vice versa, may require for approval and different or additional pre-clinical trials or clinical trials may be required to support regulatory approval in each respective jurisdiction. Delay or failure to obtain, or unexpected costs in obtaining, the regulatory approval necessary to bring a potential product candidate to market could decrease Salarius’ ability to generate sufficient product revenue, and Salarius’ business, financial condition, results of operations and prospects may be harmed.

Salarius’ product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial viability of an approved label, or result in significant negative consequences following marketing approval, if any.

Undesirable side effects caused by its product candidates could cause Salarius or regulatory authorities to interrupt, delay, or terminate clinical trials or even if approved, result in a restrictive label or delay regulatory approval by the FDA or comparable foreign authorities.

In addition, to date Salarius’ product candidates have been studied in only a very limited number of patients. Salarius may experience a high rates or severity of adverse events and comparable or high rates of discontinuation in testing in its future clinical trials. There is no guarantee that severe side effects will not be identified through ongoing clinical trials of Salarius’ product candidates for current and other indications. Undesirable side effects and negative results for other indications may negatively impact the development and potential for approval of Salarius’ product candidates for their proposed indications.

Additionally, even if one or more of its product candidates receives marketing approval, and Salarius or others later identify undesirable side effects caused by such products, potentially significant negative consequences could result, including but not limited to:

 

   

regulatory authorities may withdraw approvals of such products;

 

   

regulatory authorities may require additional warnings on the label;

 

   

Salarius may be required to create a Risk Evaluation and Mitigation Strategy, (which we refer to as “REMS”), plan, which could include a medication guide outlining the risks of such side effects for distribution to patients, a communication plan for healthcare providers, and/or other elements to assure safe use;

 

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Salarius could be sued and held liable for harm caused to patients; and

 

   

its reputation may suffer.

Any of these events could prevent Salarius from achieving or maintaining market acceptance of a product candidate, even if approved, and could significantly harm or cause the complete failure of its business, results of operations, and prospects.

Salarius’ product development program may not uncover all possible adverse events that patients who take its product candidates may experience. The number of subjects exposed to Seclidemstat or its other product candidates and the average exposure time in the clinical development program may be inadequate to detect rare adverse events, or chance findings, that may only be detected once the product is administered to more patients and for greater periods of time.

Clinical trials by their nature use a sample of the potential patient population. However, with a limited number of subjects and limited duration of exposure, Salarius cannot be fully assured that rare and severe side effects of Seclidemstat or its other product candidates will be uncovered. Such rare and severe side effects may only be uncovered with a significantly larger number of patients exposed to the drug. If such safety problems occur or are identified after Seclidemstat or another product candidate reaches the market, the FDA may require that Salarius amend the labeling of the product or recall the product, or may even withdraw approval for the product.

Salarius is heavily dependent on the success of its product candidates, which are in the early stages of clinical development. Some of its product candidates may produce results in pre-clinical or clinical settings, or for other indications than those for which Salarius contemplates conducting development and seeking FDA approval, and Salarius cannot give any assurance that it will generate data for any of its product candidates sufficient to receive regulatory approval in its planned indications, which will be required before they can be commercialized.

Salarius has invested substantially all of its efforts and financial resources to identify, acquire and develop its portfolio of product candidates. Its future success is dependent on its ability to successfully further develop, obtain regulatory approval for, and commercialize one or more product candidates. Salarius currently generates no revenue from sales of any products, and Salarius may never be able to develop or commercialize a product candidate.

Salarius currently has one product candidate in Phase 1 clinical trials for advanced solid tumors – Seclidemstat. This is only one of the multiple indications for which Salarius plans to develop this product candidate. There can be no assurance that the data that Salarius develops for its product candidates in its planned indications will be sufficient to obtain regulatory approval.

In addition, none of its product candidates have advanced into a pivotal clinical trial for Salarius’ proposed indications and it may be years before any such clinical trial is initiated and completed, if at all. Salarius is not permitted to market or promote any of its product candidates before it receives regulatory approval from the FDA or comparable foreign regulatory authorities, and Salarius may never receive such regulatory approval for any of its product candidates. Salarius cannot be certain that any of its product candidates will be successful in clinical trials or receive regulatory approval. Further, its product candidates may not receive regulatory approval even if they are successful in clinical trials. If Salarius does not receive regulatory approvals for its product candidates, Salarius may not be able to continue its operations.

Product development involves a lengthy and expensive process with an uncertain outcome, and results of earlier pre-clinical and clinical trials may not be predictive of future clinical trial results.

Clinical testing is expensive and generally takes many years to complete, and the outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. The results of pre-clinical trials and early

 

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clinical trials of Salarius’ product candidates may not be predictive of the results of larger, later-stage controlled clinical trials. Product candidates that have shown promising results in early-stage clinical trials may still suffer significant setbacks in subsequent clinical trials. Salarius’ clinical trials to date have been conducted on a small number of patients in limited numbers of clinical sites for a limited number of indications. Salarius will have to conduct larger, well-controlled trials in its proposed indications to verify the results obtained to date and to support any regulatory submissions for further clinical development. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles despite promising results in earlier, smaller clinical trials. Moreover, clinical data are often susceptible to varying interpretations and analyses. Salarius does not know whether any Phase 1, Phase 2, Phase 3, or other clinical trials Salarius may conduct will demonstrate consistent or adequate efficacy and safety with respect to the proposed indication for use sufficient to receive regulatory approval or market its drug candidates.

Salarius may use its financial and human resources to pursue a particular research and/or development program or product candidate and fail to capitalize on programs or product candidates that may be more profitable or for which there is a greater likelihood of success.

Because Salarius has limited financial and human resources, it may forego or delay pursuit of opportunities with some programs or product candidates or for other indications that later prove to have greater commercial potential. Salarius’ resource allocation decisions may cause it to fail to capitalize on viable commercial products or more profitable market opportunities. Salarius’ spending on current and future research and development programs and future product candidates for specific indications may not yield any commercially viable products. Salarius may also enter into additional strategic collaboration agreements to develop and commercialize some of its programs and potential product candidates in indications with potentially large commercial markets. If Salarius does not accurately evaluate the commercial potential or target market for a particular product candidate, it may relinquish valuable rights to that product candidate through strategic collaborations, licensing or other royalty arrangements in cases in which it would have been more advantageous for Salarius to retain sole development and commercialization rights to such product candidate, or Salarius may allocate internal resources to a product candidate in a therapeutic area in which it would have been more advantageous to enter into a partnering arrangement.

Salarius may find it difficult to enroll patients in its clinical trials given the limited number of patients who have the diseases for which its product candidates are being studied. Difficulty in enrolling patients is a common hurdle faced by early stage biotechnology companies and could, and often does, delay or prevent clinical trials of product candidates.

Identifying and qualifying patients to participate in clinical trials of Salarius’ product candidates is essential to its success. The timing of Salarius’ clinical trials depends in part on the rate at which Salarius can recruit patients to participate in clinical trials of its product candidates, and Salarius may experience delays in its clinical trials if Salarius encounters difficulties in enrollment, clinical enrollment is inherently difficult, and often time consuming.

The eligibility criteria of Salarius’ planned clinical trials may further limit the available eligible trial participants as Salarius expects to require that patients have specific characteristics that Salarius can measure or meet the criteria to assure their conditions are appropriate for inclusion in its clinical trials. Salarius may not be able to identify, recruit, and enroll a sufficient number of patients to complete its clinical trials in a timely manner because of the perceived risks and benefits of the product candidate under study, the availability and efficacy of competing therapies and clinical trials, and the willingness of physicians to participate in its planned clinical trials. If patients are unwilling to participate in Salarius’ clinical trials for any reason, the timeline for conducting trials and obtaining regulatory approval of its product candidates may be delayed.

If Salarius experiences delays in the completion of, or termination of, any clinical trials of its product candidates, the commercial prospects of its product candidates could be harmed, and its ability to generate product revenue from any of these product candidates could be delayed or prevented. In addition, any delays in

 

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completing its clinical trials would likely increase its overall costs, impair product candidate development and jeopardize its ability to obtain regulatory approval relative to its current plans. Any of these occurrences may harm its business, financial condition, and prospects significantly.

Salarius may face potential product liability, and, if successful claims are brought against it, Salarius may incur substantial liability and costs which could be greater than its insurance coverage or overall resources. If the use or misuse of Salarius’ product candidates harms patients, or is perceived to harm patients even when such harm is unrelated to its product candidates, Salarius’ regulatory approvals, if any, could be revoked or otherwise negatively impacted and Salarius could be subject to costly and damaging product liability claims. If Salarius is unable to obtain adequate insurance or is required to pay for liabilities resulting from a claim excluded from, or beyond the limits of, its insurance coverage, a material liability claim could adversely affect its financial condition.

The use or misuse of Salarius’ product candidates in clinical trials and the sale of any products for which Salarius may obtain marketing approval exposes Salarius to the risk of potential product liability claims. Product liability claims might be brought against Salarius by consumers, healthcare providers, pharmaceutical companies or others selling or otherwise coming into contact with its product candidates and approved products, if any. There is a risk that Salarius’ product candidates may induce adverse events. If Salarius cannot successfully defend against product liability claims, it could incur substantial liability and costs. Patients with the diseases targeted by Salarius’ product candidates may already be in severe and advanced stages of disease and have both known and unknown significant preexisting and potentially life-threatening health risks. During the course of treatment, patients may suffer adverse events, including death, for reasons that may be related to Salarius’ product candidates. Such events could subject Salarius to costly litigation, require it to pay substantial amounts of money to injured patients, delay, negatively impact or end its opportunity to receive or maintain regulatory approval to market its products, or require Salarius to suspend or abandon its commercialization efforts. Even in a circumstance in which an adverse event is unrelated to Salarius’ product candidates, the investigation into the circumstance may be time-consuming or inconclusive. These investigations may delay Salarius’ regulatory approval process or impact and limit the type of regulatory approvals its product candidates receive or maintain. As a result of these factors, a product liability claim, even if successfully defended, could have a material adverse effect on Salarius’ business, financial condition or results of operations.

Although Salarius has product liability insurance, which covers its clinical trials in the United States, for up to $1 million per occurrence, up to an aggregate limit of $3 million, its insurance may be insufficient to reimburse it for any expenses or losses Salarius may suffer. Salarius will also likely be required to increase its product liability insurance coverage for the advanced clinical trials that it plans to initiate. If Salarius obtains marketing approval for any of its product candidates, it will need to expand its insurance coverage to include the sale of commercial products. There is no way to know if Salarius will be able to continue to obtain product liability coverage and obtain expanded coverage if it requires it, in sufficient amounts to protect it against losses due to liability, on acceptable terms, or at all. Salarius may not have sufficient resources to pay for any liabilities resulting from a claim excluded from, or beyond the limits of, its insurance coverage. Where Salarius has provided indemnities in favor of third parties under its agreements with them, there is also a risk that these third parties could incur liability and bring a claim under such indemnities. An individual may bring a product liability claim against Salarius alleging that one of its product candidates causes, or is claimed to have caused, an injury or is found to be unsuitable for consumer use. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability, and a breach of warranties. Claims could also be asserted under state consumer protection acts. Any product liability claim brought against Salarius, with or without merit, could result in:

 

   

withdrawal of clinical trial volunteers, investigators, patients or trial sites or limitations on approved indications;

 

   

the inability to commercialize, or if commercialized, decreased demand for, its product candidates;

 

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if commercialized, product recalls, withdrawals of labeling, marketing or promotional restrictions or the need for product modification;

 

   

initiation of investigations by regulators;

 

   

loss of revenues;

 

   

substantial costs of litigation, including monetary awards to patients or other claimants;

 

   

liabilities that substantially exceed Salarius’ product liability insurance, which Salarius would then be required to pay itself;

 

   

an increase in Salarius’ product liability insurance rates or the inability to maintain insurance coverage in the future on acceptable terms, if at all;

 

   

the diversion of management’s attention from Salarius’ business; and

 

   

damage to Salarius’ reputation and the reputation of its products and its technology.

Product liability claims may subject Salarius to the foregoing and other risks, which could have a material adverse effect on its business, financial condition or results of operations.

Risks Related to Regulatory Approval of Salarius’ Product Candidates and Other Legal Compliance Matters

A potential breakthrough therapy designation by the FDA for Salarius’ product candidates may not lead to a faster development or regulatory review or approval process, and it does not increase the likelihood that Salarius’ product candidates will receive marketing approval.

Salarius may seek a breakthrough therapy designation from the FDA for some of its product candidates. A breakthrough therapy is defined as a drug or biological product that is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the drug or biological product may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. For drugs or biological products that have been designated as breakthrough therapies, interaction and communication between the FDA and the sponsor of the trial can help to identify the most efficient path for clinical development while minimizing the number of patients placed in ineffective control regimens. Drugs designated as breakthrough therapies by the FDA could also be eligible for accelerated approval.

Designation as a breakthrough therapy is within the discretion of the FDA. Accordingly, even if Salarius believes one of its product candidates meets the criteria for designation as a breakthrough therapy, the FDA may disagree and instead determine not to make such designation. In any event, the receipt of a breakthrough therapy designation for a product candidate may not result in a faster development process, review or approval compared to drugs considered for approval under conventional FDA procedures and does not assure ultimate approval by the FDA. In addition, even if one or more of Salarius’ product candidates qualify and are designated as breakthrough therapies, the FDA may later decide that the drugs or biological products no longer meet the conditions for designation and the designation may be rescinded.

Salarius may seek Fast Track designation for one or more of its product candidates, but it might not receive such designation, and even if Salarius does, such designation may not actually lead to a faster development or regulatory review or approval process.

If a product candidate is intended for the treatment of a serious condition and nonclinical or clinical data demonstrate the potential to address unmet medical need for this condition, a product sponsor may apply for FDA Fast Track designation. If Salarius seeks Fast Track designation for a product candidate, Salarius may not receive it from the FDA. However, even if Salarius receives Fast Track designation, Fast Track designation does

 

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not ensure that Salarius will receive marketing approval or that approval will be granted within any particular timeframe. Salarius may not experience a faster development or regulatory review or approval process with Fast Track designation compared to conventional FDA procedures. In addition, the FDA may withdraw Fast Track designation if it believes that the designation is no longer supported by data from Salarius’ clinical development program. Fast Track designation alone does not guarantee qualification for the FDA’s priority review procedures.

Even if Salarius obtains regulatory approval for a product, Salarius will remain subject to ongoing regulatory requirements.

If any of Salarius’ product candidates are approved, Salarius will be subject to ongoing regulatory requirements with respect to manufacturing, labeling, packaging, storage, marketing, advertising, promotion, sampling, record-keeping, conduct of post-marketing clinical trials, and submission of safety, efficacy and other post-approval information, including both federal and state requirements in the United States and requirements of comparable foreign regulatory authorities.

Manufacturers and manufacturers’ facilities are required to continuously comply with FDA and comparable foreign regulatory authority requirements, including ensuring that quality control and manufacturing procedures conform to current Good Manufacturing Practices, (which we refer to as “cGMP”), regulations and corresponding foreign regulatory manufacturing requirements. As such, Salarius and its contract manufacturers will be subject to continual review and inspections to assess compliance with cGMP and adherence to commitments made in any new drug application (which we refer to as “NDA”) or marketing authorization application.

Any regulatory approvals that Salarius receives for its product candidates may be subject to limitations on the approved indicated uses for which the product candidate may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase 4 clinical trials, and surveillance to monitor the safety and efficacy of the product candidate. Salarius will be required to report adverse reactions and production problems, if any, to the FDA and comparable foreign regulatory authorities. Any new legislation addressing drug safety issues could result in delays in product development or commercialization, or increased costs to assure compliance. If its original marketing approval for a product candidate was obtained through an accelerated approval pathway, Salarius could be required to conduct a successful post-marketing clinical trial in order to confirm the clinical benefit for its products. An unsuccessful post-marketing clinical trial or failure to complete such a trial could result in the withdrawal of marketing approval.

If a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, or disagrees with the promotion, marketing or labeling of a product, the regulatory agency may impose restrictions on that product or Salarius, including requiring withdrawal of the product from the market. If Salarius fails to comply with applicable regulatory requirements, a regulatory agency or enforcement authority may, among other things:

 

   

issue warning letters;

 

   

impose civil or criminal penalties;

 

   

suspend or withdraw regulatory approval;

 

   

suspend any of Salarius’ ongoing clinical trials;

 

   

refuse to approve pending applications or supplements to approved applications submitted by Salarius;

 

   

impose restrictions on Salarius’ operations, including closing its contract manufacturers’ facilities; or

 

   

require a product recall.

Any government investigation of alleged violations of law would be expected to require Salarius to expend significant time and resources in response and could generate adverse publicity. Any failure to comply with

 

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ongoing regulatory requirements may significantly and adversely affect its ability to develop and commercialize its products and the value of Salarius and its operating results would be adversely affected.

Healthcare legislative reform measures may have a material adverse effect on Salarius’ business, financial condition or results of operations.

In the United States, there have been and continue to be a number of legislative initiatives to contain healthcare costs or otherwise change or reform the provision of healthcare products and services to the patient population. For example, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or the Health Care Reform Law, was passed, which substantially changes the way health care is financed by both governmental and private insurers, and significantly impacts the U.S. pharmaceutical industry. The Health Care Reform Law, among other things, addresses a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted, or injected, increases the minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program and extends the rebate program to individuals enrolled in Medicaid managed care organizations, establishes annual fees and taxes on manufacturers of specified branded prescription drugs, and promotes a new Medicare Part D coverage gap discount program.

In addition, other legislative changes have been proposed and adopted in the United States since the Health Care Reform Law was enacted and Salarius expects that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand or lower pricing for its product candidates, or additional pricing pressures.

Salarius may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws, false claims laws, and health information privacy and security laws. If Salarius is unable to comply, or has not fully complied, with such laws, it could face substantial penalties.

If Salarius obtains FDA approval for any of its product candidates and begins commercializing those products in the United States, its operations may be subject to various federal and state fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute, the federal False Claims Act, and physician sunshine laws and regulations. These laws may impact, among other things, its proposed sales, marketing, and education programs. In addition, Salarius may be subject to patient privacy regulation by both the federal government and the states in which Salarius conduct its business. The laws that may affect its ability to operate include:

 

   

the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, to induce, or in return for, the purchase or recommendation of an item or service reimbursable under a federal healthcare program, such as the Medicare and Medicaid programs;

 

   

federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent;

 

   

HIPAA, which created new federal criminal statutes that prohibit executing a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters;

 

   

HIPAA, as amended by the Health Information Technology and Clinical Health Act, and its implementing regulations, which imposes specified requirements relating to the privacy, security, and transmission of individually identifiable health information;

 

   

the federal physician sunshine requirements under the Health Care Reform Laws requires manufacturers of drugs, devices, biologics, and medical supplies to report annually to the U.S. Department of Health and Human Services information related to payments and other transfers of value

 

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to physicians, other healthcare providers, and teaching hospitals, and ownership and investment interests held by physicians and other healthcare providers and their immediate family members and applicable group purchasing organizations; and

 

   

state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws that may apply to items or services reimbursed by any third-party payor, including governmental and private payors, to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures, and state laws governing the privacy and security of health information in specified circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.

Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of Salarius’ business activities could be subject to challenge under one or more of such laws. In addition, recent health care reform legislation has strengthened these laws. For example, the Health Care Reform Law, among other things, amends the intent requirement of the federal anti-kickback and criminal healthcare fraud statutes. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. Moreover, the Health Care Reform Law provides that the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the False Claims Act.

If Salarius’ operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to Salarius, Salarius may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from participation in government health care programs, such as Medicare and Medicaid, imprisonment, and the curtailment or restructuring of its operations, any of which could adversely affect its ability to operate Salarius’ business and its results of operations.

Reliance on government funding for Salarius’ programs may add uncertainty to its research and commercialization efforts with respect to those programs that are tied to such funding and may impose requirements that limit its ability to take specified actions, increase the costs of commercialization and production of product candidates developed under those programs and subject Salarius to potential financial penalties, which could materially and adversely affect its business, financial condition and results of operations.

During the course of Salarius’ development of its product candidates, it has been funded in part through federal and state grants, including but not limited to the funding it received from CPRIT. In addition to the funding Salarius has received to date, it intends to continue to apply for federal and state grants to receive additional funding in the future. Contracts and grants funded by the U.S. government, state governments and their related agencies include provisions that reflect the government’s substantial rights and remedies, many of which are not typically found in commercial contracts, including powers of the government to:

 

   

require repayment of all or a portion of the grant proceeds, in specified cases with interest, in the event Salarius violates specified covenants pertaining to various matters that include a failure to achieve specified milestones or to comply with terms relating to use of grant proceeds, or failure to comply with specified laws;

 

   

terminate agreements, in whole or in part, for any reason or no reason;

 

   

reduce or modify the government’s obligations under such agreements without the consent of the other party;

 

   

claim rights, including intellectual property rights, in products and data developed under such agreements;

 

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audit contract related costs and fees, including allocated indirect costs;

 

   

suspend the contractor or grantee from receiving new contracts pending resolution of alleged violations of procurement laws or regulations;

 

   

impose U.S. manufacturing requirements for products that embody inventions conceived or first reduced to practice under such agreements;

 

   

impose qualifications for the engagement of manufacturers, suppliers and other contractors as well as other criteria for reimbursements;

 

   

suspend or debar the contractor or grantee from doing future business with the government;

 

   

control and potentially prohibit the export of products;

 

   

pursue criminal or civil remedies under the False Claims Act, False Statements Act and similar remedy provisions specific to government agreements; and

 

   

limit the government’s financial liability to amounts appropriated by the U.S. Congress on a fiscal year basis, thereby leaving some uncertainty about the future availability of funding for a program even after it has been funded for an initial period.

In addition to those powers set forth above, the government funding Salarius may receive could also impose requirements to make payments based upon sales of its products, if any, in the future.

Salarius may not have the right to prohibit the U.S. government from using specified technologies developed by it, and Salarius may not be able to prohibit third-party companies, including its competitors, from using those technologies in providing products and services to the U.S. government. The U.S. government generally takes the position that it has the right to royalty-free use of technologies that are developed under U.S. government contracts. These and other provisions of government grants may also apply to intellectual property Salarius licenses now or in the future.

In addition, government contracts and grants normally contain additional requirements that may increase Salarius’ costs of doing business, reduce its profits, and expose it to liability for failure to comply with these terms and conditions. These requirements include, for example:

 

   

specialized accounting systems unique to government contracts and grants;

 

   

mandatory financial audits and potential liability for price adjustments or recoupment of government funds after such funds have been spent;

 

   

public disclosures of some contract and grant information, which may enable competitors to gain insights into Salarius’ research program; and

 

   

mandatory socioeconomic compliance requirements, including labor standards, non-discrimination and affirmative action programs and environmental compliance requirements.

If Salarius fails to maintain compliance with any such requirements that may apply to it now or in the future, Salarius may be subject to potential liability and to termination of Salarius’ contracts.

If Salarius fails to comply with environmental, health and safety laws and regulations, Salarius could become subject to fines or penalties or incur costs and liabilities that could have a material adverse effect on its business, financial condition or results of operations.

Salarius’ research and development activities and its third-party manufacturers’ and suppliers’ activities involve the controlled storage, use, and disposal of hazardous materials, including the components of its product candidates and other hazardous compounds. Salarius and its manufacturers and suppliers are subject to laws and

 

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regulations governing the use, manufacture, storage, handling, and disposal of these hazardous materials. In some cases, these hazardous materials and various wastes resulting from their use are stored at Salarius’ and its manufacturers’ facilities pending their use and disposal. Salarius cannot eliminate the risk of contamination, which could cause an interruption of its commercialization efforts, research and development efforts and business operations, environmental damage resulting in costly clean-up and liabilities under applicable laws and regulations governing the use, storage, handling, and disposal of these materials and specified waste products. Although Salarius believes that the safety procedures utilized by it and its third-party manufacturers for handling and disposing of these materials generally comply with the standards prescribed by these laws and regulations, Salarius cannot guarantee that this is the case or eliminate the risk of accidental contamination or injury from these materials. In such an event, Salarius may be held liable for any resulting damages and such liability could exceed its resources and state or federal or other applicable authorities may curtail Salarius’ use of specified materials and/or interrupt its business operations. Furthermore, environmental laws and regulations are complex, change frequently, and have tended to become more stringent. Salarius cannot predict the impact of such changes and cannot be certain of its future compliance. Salarius does not currently carry biological or hazardous waste insurance coverage.

Risks Related to Salarius’ Intellectual Property

Salarius may not be successful in obtaining or maintaining necessary rights to its targets, product compounds and processes for its development pipeline through acquisitions and in-licenses.

Presently, Salarius has rights to the intellectual property, through licenses from third parties and under patents and patent applications that Salarius owns, to modulate only a subset of the known epigenetic enzyme targets. Because Salarius’ programs may involve a range of targets, including targets that require the use of proprietary rights held by third parties, the growth of its business may depend in part on Salarius’ ability to acquire, in-license or use these proprietary rights. In addition, Salarius’ product candidates may require specific formulations to work effectively and efficiently and these rights may be held by others. Salarius may be unable to acquire or in-license any compositions, methods of use, processes or other third-party intellectual property rights from third parties that it identifies. The licensing and acquisition of third-party intellectual property rights is a competitive area, and a number of more established companies are also pursuing strategies to license or acquire third-party intellectual property rights that Salarius may consider attractive. These established companies may have a competitive advantage over Salarius due to their size, cash resources and greater clinical development and commercialization capabilities.

For example, Salarius has previously and may continue to collaborate with academic institutions worldwide to accelerate its pre-clinical and clinical research or development under written agreements with these institutions. Typically, these institutions provide an option to negotiate a license to any of the institution’s rights in technology resulting from the collaboration. Regardless of such right of first negotiation for intellectual property, Salarius may be unable to negotiate a license within the specified time frame or under terms that are acceptable to it. If Salarius is unable to do so, the institution may offer the intellectual property rights to other parties, potentially blocking Salarius’ ability to pursue its program.

In addition, companies that perceive Salarius to be a competitor may be unwilling to assign or license rights to it. Salarius also may be unable to license or acquire third-party intellectual property rights on terms that would allow it to make an appropriate return on its investment. If Salarius is unable to successfully obtain rights to third-party intellectual property rights, its business, financial condition and prospects for growth could suffer.

Salarius intends to rely on patent rights for its product candidates and any future product candidates. If Salarius is unable to obtain or maintain exclusivity from the combination of these approaches, Salarius may not be able to compete effectively in its markets.

Salarius relies or will rely upon a combination of patents, trade secret protection, and confidentiality agreements to protect the intellectual property related to its technologies and product candidates. Its success

 

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depends in large part on its and its licensors’ ability to obtain regulatory exclusivity and maintain patent and other intellectual property protection in the United States and in other countries with respect to its proprietary technology and products.

Salarius has sought to protect its proprietary position by filing patent applications in the United States and abroad related to its product candidates that are important to its business. This process is expensive and time consuming, and Salarius may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that Salarius will fail to identify patentable aspects of its research and development output before it is too late to obtain patent protection.

The patent position of biotechnology and pharmaceutical companies generally is highly uncertain and involves complex legal and factual questions for which legal principles remain unsolved. The patent applications that Salarius owns or in-licenses may fail to result in issued patents with claims that cover its product candidates in the United States or in other foreign countries. There is no assurance that all potentially relevant prior art relating to its patents and patent applications has been found, which can invalidate a patent or prevent a patent from issuing from a pending patent application. Even if patents do successfully issue, and even if such patents cover Salarius’ product candidates, third parties may challenge their validity, enforceability, or scope, which may result in such patents being narrowed, found unenforceable or invalidated. Furthermore, even if they are unchallenged, Salarius’ patents and patent applications may not adequately protect its intellectual property, provide exclusivity for its product candidates, or prevent others from designing around the Salarius claims. Any of these outcomes could impair Salarius’ ability to prevent competition from third parties, which may have an adverse impact on its business.

Salarius, independently or together with its licensors, has filed several patent applications covering various aspects of its product candidates. Salarius cannot offer any assurances about which, if any, patents will issue, the breadth of any such patent or whether any issued patents will be found invalid and unenforceable or will be threatened by third parties. Any successful opposition to these patents or any other patents owned by or licensed to Salarius after patent issuance could deprive Salarius of rights necessary for the successful commercialization of any product candidates that Salarius may develop. Further, if Salarius encounters delays in regulatory approvals, the period of time during which Salarius could market a product candidate under patent protection could be reduced.

If Salarius cannot obtain and maintain effective protection of exclusivity from its regulatory efforts and intellectual property rights, including patent protection or data exclusivity, for its product candidates, Salarius may not be able to compete effectively and its business and results of operations would be harmed.

Salarius may not have sufficient patent term protections for its product candidates to effectively protect its business.

Patents have a limited term. In the United States, the statutory expiration of a patent is generally 20 years after it is filed. Although various extensions may be available, the life of a patent, and the protection it affords, is limited. Even if patents covering its product candidates are obtained, once the patent life has expired for a product candidate, Salarius may be open to competition from generic medications. In addition, upon issuance in the United States any patent term can be adjusted based on specified delays caused by the applicant(s) or the U.S. Patent and Trademark Office (which we refer to as the “USPTO”).

Patent term extensions under the Hatch-Waxman Act in the United States and under supplementary protection certificates in Europe may be available to extend the patent or data exclusivity terms of Salarius’ product candidates. Salarius will likely rely on patent term extensions, and Salarius cannot provide any assurances that any such patent term extensions will be obtained and, if so, for how long. As a result, Salarius may not be able to maintain exclusivity for its product candidates for an extended period after regulatory approval, if any, which would negatively impact its business, financial condition, results of operations and

 

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prospects. If Salarius does not have sufficient patent terms or regulatory exclusivity to protect its product candidates, its business and results of operations will be adversely affected.

Changes in U.S. patent law could diminish the value of patents in general, thereby impairing Salarius’ ability to protect its products, and recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of its patent applications and the enforcement or defense of its issued patents.

As is the case with other biotechnology companies, Salarius’ success is heavily dependent on patents and the ability to enforce and protect these patients. Obtaining and enforcing patents in the biotechnology industry involve both technological and legal complexity, and is therefore costly, time-consuming and inherently uncertain. In addition, the United States has recently enacted and is currently implementing wide-ranging patent reform legislation. Recent U.S. Supreme Court rulings have narrowed the scope of patent protection available in specified circumstances and weakened the rights of patent owners in specified situations. In addition to increasing uncertainty with regard to Salarius’ ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken Salarius’ ability to obtain new patents or to enforce Salarius’ existing patents and patents that it might obtain in the future. Some of Salarius’ patent claims may be affected by the recent U.S. Supreme Court decision in Association for Molecular Pathology v. Myriad Genetics. In Myriad, the Supreme Court held that unmodified isolated fragments of genomic sequences, such as the DNA constituting the BRCA1 and BRCA2 genes, are not eligible for patent protection because they constitute a product of nature. The exact boundaries of the Supreme Court’s decision remain unclear as the Supreme Court did not address other types of nucleic acids.

On December 16, 2014, the USPTO issued guidance to patent examiners titled 2014 Interim Guidance on Patent Subject Matter Eligibility (Fed. Reg. 79 (241): 74618-33. These guidelines instruct USPTO examiners on the ramifications of the Prometheus and Myriad rulings and apply the Myriad ruling to natural products and principles including all naturally occurring nucleic acids. In addition, the USPTO continues to provide updates to its guidance and this is a developing area. The recent USPTO guidance could make it impossible for Salarius to pursue similar patent claims in patent applications Salarius may prosecute in the future.

Salarius’ patent portfolio contains claims of various types and scope, including chemically modified mimics, as well as methods of medical treatment. The presence of varying claims in Salarius’ patent portfolio significantly reduces, but may not eliminate, its exposure to potential validity challenges under Myriad or future judicial decisions. However, it is not yet clear what, if any, impact this recent Supreme Court decision or future decisions will have on the operation of Salarius’ business.

For Salarius’ U.S. patent applications containing a claim not entitled to priority before March 16, 2013, there is a greater level of uncertainty in the patent law. On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. The USPTO has promulgated regulations and developed procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, did not come into effect until March 16, 2013. Accordingly, it is not yet clear what, if any, impact the Leahy-Smith Act will have on the operation of Salarius’ business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of its patent applications and the enforcement or defense of its issued patents, all of which could have a material adverse effect on Salarius’ business, financial condition or results of operations.

An important change introduced by the Leahy-Smith Act is that, as of March 16, 2013, the United States transitioned to a “first-to-file” system for deciding which party should be granted a patent when two or more patent applications are filed by different parties claiming the same invention. A third party that files a patent

 

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application in the USPTO after that date but before Salarius could therefore be awarded a patent covering an invention of Salarius’ even if Salarius had made the invention before it was made by the third party. This will require Salarius to be cognizant going forward of the time from invention to filing of a patent application. Furthermore, Salarius’ ability to obtain and maintain valid and enforceable patents depends on whether the differences between its technology and the prior art allow its technology to be patentable over the prior art. Since patent applications in the United States and most other countries are confidential for a period of time after filing, Salarius cannot be certain that it was the first to either (i) file any patent application related to its product candidates or (ii) invent any of the inventions claimed in its patents or patent applications.

Among some of the other changes introduced by the Leahy-Smith Act are changes that limit where a patentee may file a patent infringement suit and new procedures providing opportunities for third parties to challenge any issued patent in the USPTO. Included in these new procedures is a process known as Inter Partes Review, or IPR, which has been generally used by many third parties over the past two years to invalidate patents. The IPR process is not limited to patents filed after the Leahy-Smith Act was enacted, and would therefore be available to a third party seeking to invalidate any of Salarius’ U.S. patents, even those issued before March 16, 2013. Because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary standard in U.S. federal court necessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party may attempt to use the USPTO procedures to invalidate Salarius’ patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district court action.

If Salarius is unable to maintain effective proprietary rights for its product candidates or any future product candidates, Salarius may not be able to compete effectively in its proposed markets.

In addition to the protection afforded by patents, Salarius relies on trade secret protection and confidentiality agreements to protect proprietary know-how that is not patentable or that Salarius elects not to patent, processes for which patents are difficult to enforce and any other elements of its product candidate discovery and development processes that involve proprietary know-how, information or technology that is not covered by patents. However, trade secrets can be difficult to protect. Salarius seeks to protect its proprietary technology and processes, in part, by entering into confidentiality agreements with its employees, consultants, scientific advisors, and contractors. Salarius also seeks to preserve the integrity and confidentiality of its data and trade secrets by maintaining physical security of its premises and physical and electronic security of its information technology systems. While Salarius has confidence in these individuals, organizations and systems, agreements or security measures may be breached, and Salarius may not have adequate remedies for any breach. In addition, its trade secrets may otherwise become known or be independently discovered by competitors.

Although Salarius expects all of its employees and consultants to assign their inventions to Salarius, and all of its employees, consultants, advisors, and any third parties who have access to its proprietary know- how, information, or technology to enter into confidentiality agreements, Salarius cannot provide any assurances that all such agreements have been duly executed or that its trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to its trade secrets or independently develop substantially equivalent information and techniques. Misappropriation or unauthorized disclosure of Salarius’ trade secrets could impair its competitive position and may have a material adverse effect on its business, financial condition or results of operations. Additionally, if the steps taken to maintain its trade secrets are deemed inadequate, Salarius may have insufficient recourse against third parties for misappropriating the trade secret.

Third-party claims of intellectual property infringement may prevent or delay Salarius’ development and commercialization efforts.

Salarius’ commercial success depends in part on its ability to develop, manufacture, market and sell its product candidates and use its proprietary technology without infringing the patent rights of third parties.

 

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Numerous third-party U.S. and non-U.S. issued patents and pending applications exist in the area of epigenetic enzyme inhibitors and related technologies. Salarius is aware of U.S. and foreign patents and pending patent applications owned by third parties that cover therapeutic uses of epigenetic inhibitors. Salarius is currently monitoring these patents and patent applications. Salarius may in the future pursue available proceedings in the U.S. and foreign patent offices to challenge the validity of these patents and patent applications. In addition, or alternatively, Salarius may consider whether to seek to negotiate a license of rights to technology covered by one or more of such patents and patent applications. If any patents or patent applications cover its product candidates or technologies, Salarius may not be free to manufacture or market its product candidates, as planned, absent such a license, which may not be available to Salarius on commercially reasonable terms, or at all.

It is also possible that Salarius has failed to identify relevant third-party patents or applications. For example, applications filed before November 29, 2000 and applications filed after that date that will not be filed outside the United States remain confidential until patents issue. Moreover, it is difficult for industry participants, including Salarius, to identify all third-party patent rights that may be relevant to its product candidates and technologies because patent searching is imperfect due to differences in terminology among patents, incomplete databases and the difficulty in assessing the meaning of patent claims. Salarius may fail to identify relevant patents or patent applications or may identify pending patent applications of potential interest but incorrectly predict the likelihood that such patent applications may issue with claims of relevance to its technology. In addition, Salarius may be unaware of one or more issued patents that would be infringed by the manufacture, sale or use of a current or future product candidate, or Salarius may incorrectly conclude that a third-party patent is invalid, unenforceable or not infringed by its activities. Additionally, pending patent applications that have been published can, subject to specified limitations, be later amended in a manner that could cover Salarius’ technologies, its product candidates or the use of its product candidates.

There have been many lawsuits and other proceedings involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries, including patent infringement lawsuits, interferences, oppositions, and reexamination proceedings before the USPTO and corresponding foreign patent offices. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which Salarius is developing product candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that its product candidates may be subject to claims of infringement of the patent rights of third parties.

Parties making claims against Salarius may obtain injunctive or other equitable relief, which could effectively block its ability to further develop and commercialize one or more of its product candidates. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from its business. In the event of a successful claim of infringement against Salarius, Salarius may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, pay royalties, redesign its infringing products or obtain one or more licenses from third parties, which may be impossible or require substantial time and monetary expenditure.

Salarius may not be successful in meeting its obligations under its existing license agreements necessary to maintain its product candidate licenses in effect. In addition, if required in order to commercialize its product candidates, Salarius may be unsuccessful in obtaining or maintaining necessary rights to its product candidates through acquisitions and in-licenses.

Salarius currently has rights to the intellectual property, through licenses from third parties and under patents that Salarius does not own, to develop and commercialize its product candidates. Because its programs may require the use of proprietary rights held by third parties, the growth of its business will likely depend in part on its ability to maintain in effect these proprietary rights. Any termination of license agreements with third parties with respect to its product candidates would be expected to negatively impact its business prospects.

Salarius may be unable to acquire or in-license any compositions, methods of use, processes, or other third-party intellectual property rights from third parties that Salarius identifies as necessary for its product candidates.

 

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The licensing and acquisition of third-party intellectual property rights is a competitive area, and a number of more established companies are also pursuing strategies to license or acquire third-party intellectual property rights that Salarius may consider attractive. These established companies may have a competitive advantage over Salarius due to their size, cash resources, and greater clinical development and commercialization capabilities. In addition, companies that perceive Salarius to be a competitor may be unwilling to assign or license rights to Salarius. Even if Salarius is able to license or acquire third-party intellectual property rights that are necessary for its product candidates, there can be no assurance that they will be available on favorable terms.

Salarius collaborates with academic institutions worldwide to identify product candidates, accelerate its research and conduct development. Typically, these institutions have provided Salarius with an option to negotiate an exclusive license to any of the institution’s rights in the patents or other intellectual property resulting from the collaboration. Regardless of such option, Salarius may be unable to negotiate a license within the specified timeframe or under terms that are acceptable to Salarius. If Salarius is unable to do so, the institution may offer the intellectual property rights to other parties, potentially blocking its ability to pursue a program of interest to Salarius.

If Salarius is unable to successfully obtain and maintain rights to required third-party intellectual property, Salarius may have to abandon development of that product candidate or pay additional amounts to the third-party, and its business and financial condition could suffer.

The patent protection and patent prosecution for some of Salarius’ product candidates is dependent on third parties.

While Salarius normally seeks and gains the right to fully prosecute the patents relating to its product candidates, there may be times when patents relating to its product candidates are controlled by its licensors. If future licensors fail to appropriately and broadly prosecute and maintain patent protection for patents covering any of its product candidates, its ability to develop and commercialize those product candidates may be adversely affected and Salarius may not be able to prevent competitors from making, using, importing, and selling competing products. In addition, even where Salarius now has the right to control patent prosecution of patents and patent applications Salarius has licensed from third parties, Salarius may still be adversely affected or prejudiced by actions or inactions of its licensors in effect from actions prior to Salarius assuming control over patent prosecution.

If Salarius fails to comply with obligations in the agreements under which Salarius licenses intellectual property and other rights from third parties or otherwise experience disruptions to its business relationships with its licensors, Salarius could lose license rights that are important to its business.

Salarius is a party to intellectual property licenses and supply agreements that are important to its business and may enter into additional license agreements in the future. Salarius’ existing agreements impose, and Salarius expects that future license agreements will impose, various diligence, milestone payment, royalty, purchasing, and other obligations on it. If Salarius fails to comply with its obligations under these agreements, or Salarius is subject to a bankruptcy, its agreements may be subject to termination by the licensor, in which event Salarius would not be able to develop, manufacture, or market products covered by the license or subject to supply commitments.

Salarius may be involved in lawsuits to protect or enforce its patents or the patents of its licensors, which could be expensive, time consuming, and unsuccessful.

Competitors may infringe Salarius’ patents or the patents of its licensors. If Salarius or one of its licensing partners were to initiate legal proceedings against a third party to enforce a patent covering one of its product candidates, the defendant could counterclaim that the patent covering its product candidate is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or

 

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unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness, written description, clarity or non- enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement, during prosecution. The outcome following legal assertions of invalidity and unenforceability is unpredictable.

Interference proceedings provoked by third parties or brought by Salarius or declared by the USPTO may be necessary to determine the priority of inventions with respect to Salarius’ patents or patent applications or those of its licensors. An unfavorable outcome could require Salarius to cease using the related technology or to attempt to license rights to it from the prevailing party. Salarius’ business could be harmed if the prevailing party does not offer Salarius a license on commercially reasonable terms. Its defense of litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract its management and other employees. In addition, the uncertainties associated with litigation could have a material adverse effect on its ability to raise the funds necessary to continue its clinical trials, continue its research programs, license necessary technology from third parties, or enter into development partnerships that would help Salarius bring its product candidates to market.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of Salarius’ 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. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of its common stock.

Salarius may be subject to claims that its employees, consultants, or independent contractors have wrongfully used or disclosed confidential information of third parties or that its employees have wrongfully used or disclosed alleged trade secrets of their former employers.

Salarius employs individuals who were previously employed at universities or other biotechnology or pharmaceutical companies, including Salarius’ competitors or potential competitors. Although Salarius has written agreements and makes every effort to ensure that its employees, consultants, and independent contractors do not use the proprietary information or intellectual property rights of others in their work for Salarius, Salarius may in the future be subject to any claims that its employees, consultants, or independent contractors have wrongfully used or disclosed confidential information of third parties. Litigation may be necessary to defend against these claims. If Salarius fails in defending any such claims, in addition to paying monetary damages, Salarius may lose valuable intellectual property rights or personnel, which could adversely impact its business. Even if Salarius is successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

Salarius may not be able to protect its intellectual property rights throughout the world.

Filing, prosecuting, and defending patents on product candidates in all countries throughout the world would be prohibitively expensive, and its intellectual property rights in some countries outside the United States can be less extensive than those in the United States. 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. Competitors may use Salarius’ technologies in jurisdictions where Salarius has not obtained patent protection to develop its own products and may also export infringing products to territories where Salarius has patent protection, but enforcement is not as strong as that in the United States. These products may compete with its products and its patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of some countries, particularly some developing countries, do not favor the enforcement of patents, trade secrets, and other intellectual property protection, particularly those

 

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relating to biotechnology products, which could make it difficult for Salarius to stop the infringement of its patents or marketing of competing products in violation of its proprietary rights generally. Proceedings to enforce Salarius’ patent rights in foreign jurisdictions, whether or not successful, could result in substantial costs and divert Salarius’ efforts and attention from other aspects of its business, could put Salarius’ patents at risk of being invalidated or interpreted narrowly and its patent applications at risk of not issuing and could provoke third parties to assert claims against Salarius. Salarius may not prevail in any lawsuits that Salarius initiates and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, its efforts to enforce its intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that Salarius develops or licenses.

Risks Related to Salarius’ Reliance on Third Parties

Salarius relies on or will rely on third parties to conduct its clinical trials, manufacture its product candidates and perform other services. If these third parties do not successfully perform and comply with regulatory requirements, Salarius may not be able to successfully complete clinical development, obtain regulatory approval or commercialize its product candidates and its business could be substantially harmed.

Salarius has relied upon and plans to continue to rely upon third-parties such as CROs, hospitals, etc. to conduct, monitor and manage its ongoing clinical programs. Salarius relies on these parties for execution of clinical trials and manages and controls only some aspects of their activities. Salarius remains responsible for ensuring that each of its trials is conducted in accordance with the applicable protocol, legal, regulatory, and scientific standards and its reliance on these third parties does not relieve Salarius of its regulatory responsibilities. Salarius and its CROs and other vendors are required to comply with all applicable laws, regulations and guidelines, including those required by the FDA and comparable foreign regulatory authorities for all of its product candidates in clinical development. If Salarius or any of its CROs or vendors fail to comply with applicable laws, regulations and guidelines, the results generated in its clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require Salarius to perform additional clinical trials before approving its marketing applications. Salarius cannot be assured that its CROs and other vendors will meet these requirements, or that upon inspection by any regulatory authority, such regulatory authority will determine that efforts, including any of its clinical trials, comply with applicable requirements. Its failure to comply with these laws, regulations and guidelines may require Salarius to repeat clinical trials, which would be costly and delay the regulatory approval process.

If any of Salarius’ relationships with these third-parties terminate, Salarius may not be able to enter into arrangements with alternative third parties in a timely manner or do so on commercially reasonable terms. In addition, third parties may not prioritize Salarius’ clinical trials relative to those of other customers and any turnover in personnel or delays in the allocation of third party employees may negatively affect its clinical trials. If third parties do not successfully carry out their contractual duties or obligations or meet expected deadlines, Salarius’ clinical trials may be delayed or terminated and Salarius may not be able to meet its current plans with respect to its product candidates. CROs, in particular, may also involve higher costs than anticipated, which could negatively affect Salarius’ financial condition and operations.

In addition, Salarius does not currently have, nor does Salarius currently plan to establish the capability to manufacture product candidates for use in the conduct of its clinical trials, and Salarius lacks the resources and the capability to manufacture any of its product candidates on a clinical or commercial scale without the use of third-party manufacturers. Salarius plans to rely on third-party manufacturers and their responsibilities will include purchasing from third-party suppliers the materials necessary to produce its product candidates for its clinical trials and regulatory approval. There are expected to be a limited number of suppliers for the active ingredients and other materials that Salarius expects to use to manufacture its product candidates, and Salarius may not be able to identify alternative suppliers to prevent a possible disruption of the manufacture of its product candidates for its clinical trials, and, if approved, ultimately for commercial sale. Although Salarius generally does not expect to begin a clinical trial unless Salarius believes it has a sufficient supply of a product candidate to

 

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complete the trial, any significant delay or discontinuity in the supply of a product candidate, or the active ingredient or other material components in the manufacture of the product candidate could delay completion of its clinical trials and potential timing for regulatory approval of its product candidates, which would harm its business and results of operations.

Salarius expects to rely on third parties to manufacture its clinical product supplies, and Salarius intends to rely on third parties to produce and process its product candidates, if approved, and Salarius’ commercialization of any of its product candidates could be stopped, delayed or made less profitable if those third parties fail to obtain approval of government regulators, fail to provide Salarius with sufficient quantities of drug product, or fail to do so at acceptable quality levels or prices.

Salarius does not currently have nor does it currently plan to develop the infrastructure or capability internally to manufacture its clinical supplies for use in the conduct of Salarius’ clinical trials, and Salarius lacks the resources and the capability to manufacture any of its product candidates on a clinical or commercial scale. Salarius currently relies on outside vendors to manufacture its clinical supplies of its product candidates and plans to continue relying on third parties to manufacture its product candidates on a commercial scale, if approved.

Salarius does not yet have sufficient information to reliably estimate the cost of the commercial manufacturing of its product candidates and its current costs to manufacture its drug products is not commercially feasible, and the actual cost to manufacture its product candidates could materially and adversely affect the commercial viability of its product candidates. As a result, Salarius may never be able to develop a commercially viable product.

In addition, Salarius’ reliance on third-party manufacturers exposes Salarius to the following additional risks:

 

   

Salarius may be unable to identify manufacturers on acceptable terms or at all.

 

   

Salarius’ third-party manufacturers might be unable to timely formulate and manufacture Salarius’ product or produce the quantity and quality required to meet Salarius’ clinical and commercial needs, if any.

 

   

Contract manufacturers may not be able to execute Salarius’ manufacturing procedures appropriately.

 

   

Salarius’ future third-party manufacturers may not perform as agreed or may not remain in the contract manufacturing business for the time required to supply its clinical trials or to successfully produce, store and distribute its products.

 

   

Manufacturers are subject to ongoing periodic unannounced inspection by the FDA and corresponding state agencies to ensure strict compliance with cGMPs and other government regulations and corresponding foreign standards. Salarius does not have control over third-party manufacturers’ compliance with these regulations and standards.

 

   

Salarius may not own, or may have to share, the intellectual property rights to any improvements made by Salarius’ third-party manufacturers in the manufacturing process for its product candidates.

 

   

Salarius’ third-party manufacturers could breach or terminate their agreement with Salarius.

Each of these risks could delay Salarius’ clinical trials, the approval, if any of its product candidates by the FDA or the commercialization of its product candidates or result in higher costs or deprive Salarius of potential product revenue. In addition, Salarius relies on third parties to perform release testing on its product candidates prior to delivery to patients. If these tests are not appropriately conducted and test data are not reliable, patients could be put at risk of serious harm and could result in product liability suits.

The manufacture of medical products is complex and requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of

 

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medical products often encounter difficulties in production, particularly in scaling up and validating initial production and absence of contamination. These problems include difficulties with production costs and yields, quality control, including stability of the product, quality assurance testing, operator error, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations. Furthermore, if contaminants are discovered in Salarius’ supply of its product candidates or in the manufacturing facilities, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination. Salarius cannot be assured that any stability or other issues relating to the manufacture of its product candidates will not occur in the future. Additionally, Salarius’ manufacturers may experience manufacturing difficulties due to resource constraints or as a result of labor disputes or unstable political environments. If Salarius’ manufacturers were to encounter any of these difficulties, or otherwise fail to comply with their contractual obligations, Salarius’ ability to provide its product candidates to patients in clinical trials would be jeopardized. Any delay or interruption in the supply of clinical trial supplies could delay the completion of clinical trials, increase the costs associated with maintaining clinical trial programs and, depending upon the period of delay, require Salarius to commence new clinical trials at additional expense or terminate clinical trials completely.

Salarius may be unable to realize the potential benefits of any collaboration.

Even if Salarius is successful in entering into a collaboration with respect to the development and/or commercialization of one or more product candidates, there is no guarantee that the collaboration will be successful. Collaborations may pose a number of risks, including:

 

   

collaborators often have significant discretion in determining the efforts and resources that they will apply to the collaboration, and may not commit sufficient resources to the development, marketing or commercialization of the product or products that are subject to the collaboration;

 

   

collaborators may not perform their obligations as expected;

 

   

any such collaboration may significantly limit Salarius’ share of potential future profits from the associated program, and may require it to relinquish potentially valuable rights to its current product candidates, potential products or proprietary technologies or grant licenses on terms that are not favorable to Salarius;

 

   

collaborators may cease to devote resources to the development or commercialization of Salarius’ product candidates if the collaborators view its product candidates as competitive with their own products or product candidates;

 

   

disagreements with collaborators, including disagreements over proprietary rights, contract interpretation or the course of development, might cause delays or termination of the development or commercialization of product candidates, and might result in legal proceedings, which would be time consuming, distracting and expensive;

 

   

collaborators may be impacted by changes in their strategic focus or available funding, or business combinations involving them, which could cause them to divert resources away from the collaboration;

 

   

collaborators may infringe the intellectual property rights of third parties, which may expose Salarius to litigation and potential liability;

 

   

the collaborations may not result in Salarius achieving revenues to justify such transactions; and

 

   

collaborations may be terminated and, if terminated, may result in a need for Salarius to raise additional capital to pursue further development or commercialization of the applicable product candidate.

As a result, a collaboration may not result in the successful development or commercialization of Salarius’ product candidates.

 

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Salarius enters into various contracts in the normal course of its business in which Salarius indemnifies the other party to the contract. In the event Salarius has to perform under these indemnification provisions, it could have a material adverse effect on its business, financial condition and results of operations.

In the normal course of business, Salarius periodically enters into academic, commercial, service, collaboration, licensing, consulting and other agreements that contain indemnification provisions. With respect to Salarius’ academic and other research agreements, Salarius typically indemnifies the institution and related parties from losses arising from claims relating to the products, processes or services made, used, sold or performed pursuant to the agreements for which Salarius has secured licenses, and from claims arising from Salarius’ or its sublicensees’ exercise of rights under the agreement. With respect to Salarius’ collaboration agreements, Salarius indemnifies its collaborators from any third-party product liability claims that could result from the production, use or consumption of the product, as well as for alleged infringements of any patent or other intellectual property right by a third party. With respect to consultants, Salarius indemnifies them from claims arising from the good faith performance of their services.

Should Salarius’ obligation under an indemnification provision exceed applicable insurance coverage or if Salarius were denied insurance coverage, Salarius’ business, financial condition and results of operations could be adversely affected. Similarly, if Salarius is relying on a collaborator to indemnify Salarius and the collaborator is denied insurance coverage or the indemnification obligation exceeds the applicable insurance coverage, and if the collaborator does not have other assets available to indemnify Salarius, its business, financial condition and results of operations could be adversely affected.

Risks Related to Commercialization of Salarius’ Product Candidates

Salarius currently has limited marketing and sales experience. If Salarius is unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell its product candidates, Salarius may be unable to generate any revenue.

Although some of its employees may have marketed, launched, and sold other pharmaceutical products in the past while employed at other companies, Salarius has no experience selling and marketing its product candidates and Salarius currently has no marketing or sales organization. To successfully commercialize any products that may result from its development programs, Salarius will need to find one or more collaborators to commercialize its products or invest in and develop these capabilities, either on its own or with others, which would be expensive, difficult and time consuming. Any failure or delay in the timely development of Salarius’ internal commercialization capabilities could adversely impact the potential for success of its products.

If commercialization collaborators do not commit sufficient resources to commercialize its future products and Salarius is unable to develop the necessary marketing and sales capabilities on its own, Salarius will be unable to generate sufficient product revenue to sustain or grow its business. Salarius may be competing with companies that currently have extensive and well-funded marketing and sales operations, particularly in the markets its product candidates are intended to address. Without appropriate capabilities, whether directly or through third-party collaborators, Salarius may be unable to compete successfully against these more established companies.

Salarius may attempt to form collaborations in the future with respect to its product candidates, but it may not be able to do so, which may cause it to alter its development and commercialization plans.

Salarius may attempt to form strategic collaborations, create joint ventures or enter into licensing arrangements with third parties with respect to its programs that it believes will complement or augment its existing business. Salarius may face significant competition in seeking appropriate strategic collaborators, and the negotiation process to secure appropriate terms is time consuming and complex. Salarius may not be successful in its efforts to establish such a strategic collaboration for any product candidates and programs on terms that are acceptable to it, or at all. This may be because Salarius’ product candidates and programs may be deemed to be at too early of a stage of development for collaborative effort, its research and development

 

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pipeline may be viewed as insufficient, the competitive or intellectual property landscape may be viewed as too intense or risky, and/or third parties may not view its product candidates and programs as having sufficient potential for commercialization, including the likelihood of an adequate safety and efficacy profile.

Any delays in identifying suitable collaborators and entering into agreements to develop and/or commercialize Salarius’ product candidates could delay the development or commercialization of its product candidates, which may reduce their competitiveness even if they reach the market. Absent a strategic collaborator, Salarius would need to undertake development and/or commercialization activities at its own expense. If Salarius elects to fund and undertake development and/or commercialization activities on its own, it may need to obtain additional expertise and additional capital, which may not be available to it on acceptable terms or at all. If Salarius is unable to do so, it may not be able to develop its product candidates or bring them to market and its business may be materially and adversely affected.

If the market opportunities for its product candidates are smaller than Salarius believes they are, Salarius may not meet its revenue expectations and, assuming approval of a product candidate, its business may suffer.

Given the small number of patients who have the diseases that Salarius is targeting, its eligible patient population and pricing estimates may differ significantly from the actual market addressable by its product candidates. For example, based off data from the National Institute of Health (NIH) and physician collaborators, Salarius believes that there are approximately 500 Ewing sarcoma patients diagnosed annually in the United States. Because the patient populations in the market for its product candidates may be small, Salarius must be able to successfully identify patients and acquire a significant market share to achieve profitability and growth, which would negatively affect its revenue and operating results.

Salarius faces substantial competition and its competitors may discover, develop or commercialize products faster or more successfully than Salarius.

The development and commercialization of new drug products is highly competitive. Salarius faces competition from major pharmaceutical companies, specialty pharmaceutical companies, biotechnology companies, universities and other research institutions worldwide with respect to oncology therapies and the other product candidates that it may seek to develop or commercialize in the future. The list of companies working on some form of cancer treatment is almost limitless with big and small companies working on every aspect of oncology therapies worldwide.

If Salarius’ competitors obtain marketing approval from the FDA or comparable foreign regulatory authorities for their product candidates more rapidly than Salarius, it could result in its competitors establishing a strong market position before Salarius is able to enter the market.

Many of Salarius’ competitors have materially greater name recognition and financial, manufacturing, marketing, research and drug development resources than it does. Additional mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in its competitors. Large pharmaceutical companies in particular have extensive expertise in pre-clinical and clinical testing and in obtaining regulatory approvals for drugs. In addition, academic institutions, government agencies, and other public and private organizations conducting research may seek patent protection with respect to potentially competitive products or technologies. These organizations may also establish exclusive collaborative or licensing relationships with Salarius’ competitors. Failure of Seclidemstat or other product candidates to effectively compete against established treatment options or in the future with new products currently in development would harm Salarius’ business, financial condition, results of operations and prospects.

The commercial success of any of Salarius’ current or future product candidates will depend upon the degree of market acceptance by physicians, patients, third-party payors, and others in the medical community.

Even with the approvals from the FDA and comparable foreign regulatory authorities, the commercial success of Salarius’ products will depend in part on the health care providers, patients, and third-party payors

 

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accepting its product candidates as medically useful, cost-effective, and safe. Any product that Salarius brings to the market may not gain market acceptance by physicians, patients and third-party payors. The degree of market acceptance of any of Salarius’ products will depend on a number of factors, including but not limited to:

 

   

the efficacy of the product as demonstrated in clinical trials and potential advantages over competing treatments;

 

   

the prevalence and severity of the disease and any side effects;

 

   

the clinical indications for which approval is granted, including any limitations or warnings contained in a product’s approved labeling;

 

   

the convenience and ease of administration;

 

   

the cost of treatment;

 

   

the willingness of the patients and physicians to accept these therapies;

 

   

the perceived ratio of risk and benefit of these therapies by physicians and the willingness of physicians to recommend these therapies to patients based on such risks and benefits;

 

   

the marketing, sales and distribution support for the product;

 

   

the publicity concerning its products or competing products and treatments; and

 

   

the pricing and availability of third-party insurance coverage and reimbursement.

Even if a product displays a favorable efficacy and safety profile upon approval, market acceptance of the product remains uncertain. Efforts to educate the medical community and third-party payors on the benefits of the products may require significant investment and resources and may never be successful. If its products fail to achieve an adequate level of acceptance by physicians, patients, third-party payors, and other health care providers, Salarius will not be able to generate sufficient revenue to become or remain profitable.

Salarius may not be successful in any efforts to identify, license, discover, develop, or commercialize additional product candidates.

Although a substantial amount of Salarius’ effort will focus on the continued clinical testing, potential approval, and commercialization of its existing product candidates, the success of Salarius’ business is also expected to depend in part upon its ability to identify, license, discover, develop, or commercialize additional product candidates. Research programs to identify new product candidates require substantial technical, financial, and human resources. Salarius may focus its efforts and resources on potential programs or product candidates that ultimately prove to be unsuccessful. Salarius’ research programs or licensing efforts may fail to yield additional product candidates for clinical development and commercialization for a number of reasons, including but not limited to the following:

 

   

Salarius’ research or business development methodology or search criteria and process may be unsuccessful in identifying potential product candidates;

 

   

Salarius may not be able or willing to assemble sufficient resources to acquire or discover additional product candidates;

 

   

its product candidates may not succeed in pre-clinical or clinical testing;

 

   

its potential product candidates may be shown to have harmful side effects or may have other characteristics that may make the products unmarketable or unlikely to receive marketing approval;

 

   

competitors may develop alternatives that render Salarius’ product candidates obsolete or less attractive;

 

   

product candidates Salarius develops may be covered by third parties’ patents or other exclusive rights;

 

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the market for a product candidate may change during Salarius’ program so that such a product may become unreasonable to continue to develop;

 

   

a product candidate may not be capable of being produced in commercial quantities at an acceptable cost, or at all; and

 

   

a product candidate may not be accepted as safe and effective by patients, the medical community, or third-party payors.

If any of these events occur, Salarius may be forced to abandon its development efforts for a program or programs, or Salarius may not be able to identify, license, discover, develop, or commercialize additional product candidates, which would have a material adverse effect on its business, financial condition or results of operations and could potentially cause Salarius to cease operations.

Failure to obtain or maintain adequate reimbursement or insurance coverage for products when approved to market, if any, could limit Salarius’ ability to market those products and decrease its ability to generate revenue.

The pricing, coverage, and reimbursement of Salarius’ approved products, if any, must be sufficient to support its commercial efforts and other development programs and the availability and adequacy of coverage and reimbursement by third-party payors, including governmental and private insurers, are essential for most patients to be able to afford expensive treatments. Sales of Salarius’ approved products, if any, will depend substantially, both domestically and abroad, on the extent to which the costs of its approved products, if any, will be paid for or reimbursed by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or government payors and private payors. If coverage and reimbursement are not available, or are available only in limited amounts, Salarius may have to subsidize or provide products for free or Salarius may not be able to successfully commercialize its products.

In addition, there is significant uncertainty related to the insurance coverage and reimbursement for newly approved products. In the United States, the principal decisions about coverage and reimbursement for new drugs are typically made by Centers for Medicare and Medicaid Services, (which we refer to as “CMS”), an agency within the U.S. Department of Health and Human Services, as CMS decides whether and to what extent a new drug will be covered and reimbursed under Medicare. Private payors tend to follow the coverage reimbursement policies established by CMS to a substantial degree. It is difficult to predict what CMS will decide with respect to reimbursement for novel product candidates such as Salarius’ and what reimbursement codes its product candidates may receive if approved.

Outside the United States, international operations are generally subject to extensive governmental price controls and other price-restrictive regulations, and Salarius believes the increasing emphasis on cost-containment initiatives in Europe, Canada, and other countries has and will continue to put pressure on the pricing and usage of products. In many countries, the prices of products are subject to varying price control mechanisms as part of national health systems. Price controls or other changes in pricing regulation could restrict the amount that Salarius is able to charge for its products, if any. Accordingly, in markets outside the United States, the potential revenue may be insufficient to generate commercially reasonable revenue and profits.

Moreover, increasing efforts by governmental and private payors in the United States and abroad to limit or reduce healthcare costs may result in restrictions on coverage and the level of reimbursement for new products and, as a result, they may not cover or provide adequate payment for its products. Salarius expects to experience pricing pressures in connection with products due to the increasing trend toward managed healthcare, including the increasing influence of health maintenance organizations and additional legislative changes. The downward pressure on healthcare costs in general, particularly prescription drugs has and is expected to continue to increase in the future. As a result, profitability of Salarius’ products, if any, may be more difficult to achieve even if they receive regulatory approval.

 

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Risks Related to Salarius’ Business Operations

Salarius’ future success depends in part on its ability to retain its president and chief executive officer and to attract, retain, and motivate other qualified personnel.

Salarius is a small company with a limited number of employees performing multiple tasks each. Salarius is highly dependent on David J. Arthur, its president and chief executive officer, the loss of whose services may adversely impact the achievement of its objectives. Mr. Arthur could leave Salarius’ employment at any time, as he is an “at will” employee. Recruiting and retaining other qualified employees, consultants, and advisors for Salarius’ business, including scientific and technical personnel, will also be critical to Salarius success. There is currently a shortage of highly qualified personnel in Salarius’ industry, which is likely to continue. Additionally, this shortage of highly qualified personnel is particularly acute in the area where Salarius is located. As a result, competition for personnel is intense and the turnover rate can be high. Salarius may not be able to attract and retain personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for individuals with similar skill sets. In addition, failure to succeed in development and commercialization of Salarius’ product candidates may make it more challenging to recruit and retain qualified personnel. The inability to recruit and retain qualified personnel, or the loss of the services of Mr. Arthur may impede the progress of Salarius’ research, development, and commercialization objectives and would negatively impact Salarius’ ability to succeed in its product development strategy.

Salarius will need to expand its organization and Salarius may experience difficulties in managing this growth, which could disrupt its operations.

As of April 1, 2019, Salarius had six employees. As Salarius’ development and commercialization plans and strategies develop, Salarius expects to need additional managerial, operational, sales, marketing, financial, legal, and other resources. Its management may need to divert a disproportionate amount of its attention away from its day-to-day activities and devote a substantial amount of time to managing these growth activities. Salarius may not be able to effectively manage the expansion of its operations, which may result in weaknesses in its infrastructure, operational mistakes, loss of business opportunities, loss of employees, and reduced productivity among remaining employees. Salarius’ expected growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of additional product candidates. If its management is unable to effectively manage its growth, its expenses may increase more than expected, its ability to generate and/or grow revenue could be reduced and Salarius may not be able to implement its business strategy. Salarius’ future financial performance and its ability to commercialize product candidates and compete effectively will depend, in part, on its ability to effectively manage any future growth.

Failure in Salarius’ information technology and storage systems could significantly disrupt the operation of Salarius’ business and/or lead to potential large liabilities.

Salarius’ ability to execute its business plan and maintain operations depends on the continued and uninterrupted performance of its information technology systems. Information technology systems are vulnerable to risks and damages from a variety of sources, including telecommunications or network failures, malicious human acts and natural disasters. Moreover, despite network security and back-up measures, some of Salarius’ and its vendors’ servers are potentially vulnerable to physical or electronic break-ins, including cyber-attacks, computer viruses and similar disruptive problems. These events could lead to the unauthorized access, disclosure and use of non- public information which in turn could lead to operational difficulties and liabilities. The techniques used by criminal elements to attack computer systems are sophisticated, change frequently and may originate from less regulated and remote areas of the world. As a result, Salarius may not be able to address these techniques proactively or implement adequate preventative measures. If its computer systems are compromised, it could be subject to fines, damages, litigation and enforcement actions, and it could lose trade secrets, the occurrence of which could harm its business. Despite precautionary measures to prevent unanticipated problems that could affect its information technology systems, sustained or repeated system failures that interrupt Salarius’ ability to generate and maintain data could adversely affect its ability to operate its business.

 

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Salarius’ principal members own a significant percentage of its stock and will be able to exert significant control over matters subject to member approval.

Salarius’ managers and executive officers currently beneficially own in excess of approximately 35% of Salarius’ outstanding equity, and together with the holders of more than 5% of Salarius’ outstanding equity, collectively own 46.9% of Salarius’ outstanding equity. Therefore, these equity holders have the ability and may continue to have the ability to influence Salarius through this ownership position. These equity holders may be able to determine some or all matters requiring equity holder approval. For example, these equity holders, acting together, may be able to control elections of directors, amendments of organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for Salarius’ membership units that you may believe are in your best interest as one of Salarius’ members.

Risks Related to the Combined Company

In determining whether you should approve the merger, the issuance of shares of Flex Pharma common stock and other matters related to the merger, as the case may be, you should carefully read the following risk factors in addition to the risks described above.

If any of the events described in “Risks Related to Flex Pharma” or “Risks Related to Salarius” occur, those events could cause potential benefits of the merger not to be realized.

Following completion of the merger, the combined company will be susceptible to many of the risks described in the sections herein entitled “Risks Related to Flex Pharma” and “Risks Related to Salarius.” To the extent any of the events in the risks described in those sections occur, those events could cause the potential benefits of the merger not to be realized and the market price of the combined company’s common stock to decline.

The historical financial information of Flex Pharma and Salarius presented herein may not be representative of their respective results or financial condition if they had been operated as a combined company, and as a result may not be representative of the combined company’s results or financial condition after the merger.

The historical financial information of Flex Pharma and Salarius included elsewhere in this proxy statement/prospectus/information statement reflect assumptions and allocations made by Flex Pharma and Salarius, respectively. The historical results and financial condition of Flex Pharma and Salarius presented herein may be different from those that would have resulted had Flex Pharma and Salarius been operated together as a combined company during the applicable periods or at the applicable dates. As a result, the historical financial information of Flex Pharma and Salarius are not indicative of future operating results or financial position of the combined company.

The unaudited pro forma condensed combined financial information presented herein may not be representative of the combined companies’ results after the merger.

The unaudited pro forma condensed combined financial information included elsewhere in this proxy statement has been presented for informational purposes only and is not necessarily indicative of the financial position or results of operations that actually would have occurred had the merger been completed as of the date indicated, nor is it indicative of future operating results or financial position. The unaudited pro forma condensed combined financial information has been derived from the historical financial statements of Flex Pharma and Salarius and adjustments and assumptions have been made regarding the combined company after giving effect to the merger. The information upon which these adjustments and assumptions have been made is preliminary, and these kinds of adjustments and assumptions are difficult to make with accuracy. Moreover, the unaudited pro forma condensed combined financial information does not reflect all costs that are expected to be incurred by the

 

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combined company in connection with the merger. The assumptions used in preparing the unaudited pro forma condensed combined financial information may not ultimately be accurate, and other factors may affect the combined company’s results and financial condition following consummation of the merger. The unaudited pro forma condensed combined financial information does not reflect the costs of integration activities or transaction-related costs or incremental expenditures associated with the transaction. Accordingly, the unaudited pro forma condensed combined financial information included elsewhere in this proxy statement does not reflect what Flex Pharma’s or Salarius’ results or financial condition would have been had Flex Pharma and Salarius been a consolidated entity during all periods presented.

Failure by the combined company to comply with the initial listing standards of Nasdaq will prevent its stock from being listed on Nasdaq and may prevent the closing of the merger.

Flex Pharma, under the new name “Salarius Pharmaceuticals, Inc.,” will be required to meet the initial listing requirements of Nasdaq to maintain the listing and continued trading of its shares on Nasdaq. These initial listing requirements are more difficult to achieve than the continued listing requirements. Pursuant to the Merger Agreement, Flex Pharma agreed to use its commercially reasonable efforts to cause the shares of Flex Pharma common stock being issued in the merger to be approved for listing on Nasdaq at or prior to the effective time of the merger. Based on information currently available to Flex Pharma, Flex Pharma anticipates that its stock will be unable to meet the $4.00 minimum bid price (or, to the extent applicable, $3.00 minimum closing price) initial listing requirement at the closing of the merger unless it effects a reverse stock split. The board of directors of Flex Pharma intends to effect a reverse stock split of the shares of Flex Pharma common stock. In addition, often times a reverse stock split will not result in a trading price for the affected common stock that is proportional to the ratio of the split. If Flex Pharma is unable to satisfy Nasdaq listing requirements, Salarius is not obligated to close the merger. Also, following the merger, if the combined company is unable to satisfy Nasdaq listing requirements, Nasdaq may notify the combined company that its shares of common stock will not be listed on Nasdaq.

Upon a potential delisting from Nasdaq, if the combined company’s common stock is not then eligible for quotation on another market or exchange, trading of the shares could be conducted in the over-the-counter market or on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it is likely that there would be significantly less liquidity in the trading of the combined company’s common stock; decreases in institutional and other investor demand for the shares, coverage by securities analysts, market making activity and information available concerning trading prices and volume; and fewer broker dealers willing to execute trades in the combined company’s common stock. Also, it may be difficult for the combined company to raise additional capital if the combined company’s common stock is not listed on a major exchange. The occurrence of any of these events could result in a further decline in the market price of the combined company’s common stock and could have a material adverse effect on the combined company.

The merger will result in changes to Flex Pharma’s board of directors and the combined company may pursue different strategies than either Flex Pharma or Salarius may have pursued independently.

If Flex Pharma and Salarius complete the merger, the composition of Flex Pharma’s board of directors will change in accordance with the Merger Agreement. Following completion of the merger, the combined company’s board of directors is expected to consist of seven members, one of whom shall be designed by Flex Pharma and the other six of whom shall be designated by Salarius. Currently, it is anticipated that the combined company will continue to advance the product and development efforts and business strategies of Salarius primarily. However, because the composition of the board of directors of the combined company will consist of directors from both Flex Pharma and Salarius, the combined company may determine to pursue certain business strategies that neither Flex Pharma nor Salarius would have pursued independently.

 

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Ownership of the combined company’s common stock may be highly concentrated, and it may prevent you and other stockholders from influencing significant corporate decisions.

Upon completion of the merger, Salarius’ current members are estimated to beneficially own or control approximately 80.1% of the combined company (on a partially-diluted basis, excluding the effect of certain options, the dividend or distribution of rights and Warrants to Flex Pharma’s current stockholders and the possible issuance of a warrant to Wedbush). Accordingly, Salarius’ current members will have substantial influence over the outcome of a corporate action of the combined company requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of the combined company’s assets or any other significant corporate transaction. Salarius’ current members also may exert influence in delaying or preventing a change in control of the combined company, even if such change in control would benefit the other stockholders of the combined company.

The combined company’s management will be required to devote a substantial time to comply with public company regulations.

As a public company, the combined company will incur significant legal, accounting and other expenses that Salarius did not incur as a private company. The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act as well as rules implemented by the SEC and the Nasdaq Capital Market, impose various requirements on public companies, including those related to corporate governance practices. The combined company’s management and other personnel will need to devote a substantial amount of time to these requirements. Certain members of Salarius’ management, which will continue as the management of the combined company, do not have significant experience in addressing these requirements. Moreover, these rules and regulations will increase the combined company’s legal and financial compliance costs relative to those of Salarius and will make some activities more time-consuming and costly.

Among other things, Salarius’ management will be responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The combined company’s compliance with these requirements will require that it incur substantial accounting and related expenses and expend significant management efforts. The combined company will need to hire additional accounting and financial staff to comply with public company regulations. The costs of hiring such staff may be material and there can be no assurance that such staff will be immediately available to the combined company.

Moreover, if the combined company identifies deficiencies in its internal control over financial reporting that are deemed to be material weaknesses, investors could lose confidence in the accuracy and completeness of the combined company’s financial reports, the market price of the combined company’s common stock could decline and the combined company could be subject to sanctions or investigations by the Nasdaq Capital Market, the SEC or other regulatory authorities.

The sale or availability for sale of a substantial number of shares of common stock of the combined company after the merger and after expiration of the lock-up period could adversely affect the market price of such shares after the merger.

Sales of a substantial number of shares of common stock of the combined company in the public market after the merger or after expiration of the lock-up period and other legal restrictions on resale, or the perception that these sales could occur, could adversely affect the market price of such shares and could materially impair the combined company’s ability to raise capital through equity offerings in the future. Flex Pharma and Salarius are unable to predict what effect, if any, market sales of securities held by significant stockholders, directors or officers of the combined company or the availability of these securities for future sale will have on the market price of the combined company’s common stock after the merger.

 

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Tax Risks Related to the Merger

In addition to reading the following risk factors, you are urged to read “Material U.S. Federal Income Tax Consequences of the Merger, the Reverse Stock Split and the Warrants” for a more complete discussion of the expected material U.S. federal income tax consequences of the merger, the reverse stock split and the distributions of the Warrants, and owning and disposing of common stock received in the merger.

No ruling has been requested with respect to the tax consequences of the merger.

Pursuant to the Merger Agreement, it is intended that the merger will qualify as an exchange described in Section 351 of the Code and that the U.S. holders of units will generally not recognize any gain or loss as a result of the merger (other than gain that may be recognized with respect to cash received in lieu of fractional shares). No ruling has been or will be requested from the Internal Revenue Service, (which we refer to as the “IRS”), with respect to the tax consequences of the merger. Under certain circumstances, the merger may be treated as a taxable transaction, and result in tax liability, for a Salarius member, depending on such member’s particular situation. See “Material U.S. Federal Income Tax Consequences of the Merger, the Reverse Stock Split and the Warrants.”

Because the merger will result in an ownership change under Section 382 of the Code for Flex Pharma, pre-merger net operating loss carryforwards and certain other tax attributes will be subject to limitations.

If a corporation undergoes an “ownership change” within the meaning of Section 382 of the Code, the corporation’s net operating loss carryforwards and certain other tax attributes arising from before the ownership change are subject to limitations on use after the ownership change. In general, an ownership change occurs if there is a cumulative change in the corporation’s equity ownership by certain stockholders that exceeds fifty percentage points over a rolling three-year period. Similar rules may apply under state tax laws. The merger will result in an ownership change for Flex Pharma and, accordingly, Flex Pharma’s net operating loss carryforwards and certain other tax attributes will be subject to limitations on their use after the merger. Additional ownership changes in the future could result in additional limitations on the combined company’s net operating loss carryforwards. Consequently, even if the combined company achieves profitability, it may not be able to utilize a material portion of Flex Pharma’s net operating loss carryforwards and other tax attributes, which could have a material adverse effect on cash flow and results of operations.

Salarius members will be allocated taxable income and gain of Salarius through the time of the merger and will not receive any additional distributions attributable to that income.

Salarius members will be allocated their proportionate share of Salarius’ taxable income and gain for the period ending at the time of the merger. Salarius members will have to report, and pay taxes on, such income even though they will not receive any additional cash distributions attributable to such income.

The U.S. federal income tax treatment of owning and disposing of common stock received in the merger will be different than the U.S. federal income tax treatment of owning and disposing of units.

Salarius is classified as a partnership for U.S. federal income tax purposes and, generally, is not subject to entity-level U.S. federal income taxes. Instead, each Salarius member is required to take into account its respective share of Salarius’ items of income, gain, loss and deduction in computing its federal income tax liability as if the Salarius member had earned such income directly, even if no cash distributions are made to the Salarius member. A pro rata distribution of cash by Salarius to a Salarius member who is a U.S. holder (as defined in “Material U.S. Federal Income Tax Consequences of the Merger, the Reverse Stock Split and the Warrants”) is generally not taxable for U.S. federal income tax purposes unless the amount of cash distributed is in excess of the Salarius member’s adjusted tax basis in its Units.

In contrast, Flex Pharma is classified as a corporation for U.S. federal income tax purposes and is subject to U.S. federal income tax on its taxable income. Any future distribution of cash by Flex Pharma to a stockholder

 

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who is a U.S. holder generally will be included in such U.S. holder’s income as ordinary dividend income to the extent of Flex Pharma’s current or accumulated “earnings and profits,” as determined under U.S. federal income tax principles and will be reported to such owner of Form 1099-DIV. A portion of the cash distributed to stockholders by Flex Pharma after the merger may exceed Flex Pharma’s current or accumulated earnings and profits. Cash distributions in excess of Flex Pharma’s current or accumulated earnings and profits will be treated as a non-taxable return of capital, reducing a U.S. holder’s adjusted tax basis in such stockholder’s common stock and, to the extent the cash distribution exceeds such stockholder’s adjusted tax basis, as gain from the sale or exchange of such common stock. See “Material U.S. Federal Income Tax Consequences of the Merger, the Reverse Stock Split and the Warrants.”

Flex Pharma and Salarius do not anticipate that the combined company will pay any cash dividends in the foreseeable future.

The current expectation is that the combined company will retain its future earnings (if any) to fund the development and growth of the combined company’s business. As a result, capital appreciation, if any, of the common stock of the combined company will be your sole source of gain, if any, for the foreseeable future.

Anti-takeover provisions in the combined company’s charter documents and under Delaware law could make an acquisition of the combined company more difficult and may prevent attempts by the combined company’s stockholders to replace or remove the combined company’s management.

Provisions in the combined company’s certificate of incorporation and bylaws may delay or prevent an acquisition or a change in management. These provisions include a classified board of directors, a prohibition on actions by written consent of the combined company’s stockholders and the ability of the board of directors to issue preferred stock without stockholder approval. In addition, because the combined company will be incorporated in Delaware, it is governed by the provisions of Section 203 of the DGCL, which prohibits stockholders owning in excess of 15% of the outstanding combined company’s voting stock from merging or combining with the combined company, subject to limited exceptions. Although Flex Pharma and Salarius believe these provisions collectively will provide for an opportunity to receive higher bids by requiring potential acquirors to negotiate with the combined company’s board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by the combined company’s stockholders to replace or remove then current management by making it more difficult for stockholders to replace members of the board of directors, which is responsible for appointing the members of management.

The market price of the combined company’s common stock is expected to be volatile, and the market price of its common stock may drop following the merger.

The market price of the combined company’s common stock following the merger could be subject to significant fluctuations. Market prices for securities of early-stage pharmaceutical, biotechnology and other life sciences companies have historically been particularly volatile. Some of the factors that may cause the market price of the combined company’s common stock to fluctuate include:

 

   

the ability of the combined company to obtain regulatory approvals for Seclidemstat or other product candidates, and delays or failures to obtain such approvals;

 

   

failure of any of the combined company’s product candidates, if approved, to achieve commercial success;

 

   

failure to maintain its existing third-party license and supply agreements;

 

   

failure by the combined company or its licensors to prosecute, maintain, or enforce its intellectual property rights;

 

   

changes in laws or regulations applicable to its product candidates;

 

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any inability to obtain adequate supply of its product candidates or the inability to do so at acceptable prices;

 

   

adverse regulatory authority decisions;

 

   

introduction of new products, services, or technologies by its competitors;

 

   

failure to meet or exceed financial and development projections the combined company may provide to the public;

 

   

failure to meet or exceed the financial and development projections of the investment community;

 

   

the perception of the pharmaceutical industry by the public, legislatures, regulators, and the investment community;

 

   

announcements of significant acquisitions, strategic collaborations, joint ventures, or capital commitments by the combined company or its competitors;

 

   

disputes or other developments relating to proprietary rights, including patents, litigation matters, and its ability to obtain patent protection for its technologies;

 

   

additions or departures of key personnel;

 

   

significant lawsuits, including patent or stockholder litigation;

 

   

if securities or industry analysts do not publish research or reports about its business, or if they issue an adverse or misleading opinions regarding its business and stock;

 

   

changes in the market valuations of similar companies;

 

   

general market or macroeconomic conditions;

 

   

sales of its common stock by the combined company or its stockholders in the future;

 

   

trading volume of its common stock;

 

   

announcements by commercial partners or competitors of new commercial products, clinical progress or the lack thereof, significant contracts, commercial relationships or capital commitments;

 

   

adverse publicity relating to epigenetics and/or oncology therapeutics generally, including with respect to other products and potential products in such markets;

 

   

the introduction of technological innovations or new therapies that compete with potential products of the combined company;

 

   

changes in the structure of health care payment systems; and

 

   

period-to-period fluctuations in the combined company’s financial results.

Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. This historical volatility is even higher in the biotechnology market. These broad market fluctuations may also adversely affect the trading price of the combined company’s common stock.

In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm the combined company’s profitability and reputation.

Additionally, a decrease in the stock price of the combined company may cause the combined company’s common stock to no longer satisfy the continued listing standards of the Nasdaq Capital Market. If the combined company is not able to maintain the requirements for listing on the Nasdaq Capital Market, it could be delisted, which could have a materially adverse effect on its ability to raise additional funds as well as the price and liquidity of its common stock.

 

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The combined company will incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies.

The combined company will incur significant legal, accounting and other expenses that Salarius did not incur as a private company, including costs associated with public company reporting requirements. The combined company will also incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act, as well as new rules implemented by the SEC and The Nasdaq Stock Market LLC. These rules and regulations are expected to increase the combined company’s legal and financial compliance costs and to make some activities more time-consuming and costly. Estimates of the overall costs of public company compliance for a company like the combined company could exceed $1 million per year.

The combined company’s management team will consist of the executive officers of Salarius prior to the merger, none of whom have previously managed and operated a public company. These executive officers and other personnel will need to devote substantial time to gaining expertise regarding operations as a public company and compliance with applicable laws and regulations. These rules and regulations may also make it difficult and expensive for the combined company to obtain directors’ and officers’ liability insurance. As a result, it may be more difficult for the combined company to attract and retain qualified individuals to serve on the combined company’s board of directors or as executive officers of the combined company, which may adversely affect investor confidence in the combined company and could cause the combined company’s business or stock price to suffer.

The certificate of incorporation of the combined company will provide that the Court of Chancery of the State of Delaware is the exclusive forum for certain disputes between the combined company and its stockholders, which could limit its stockholders’ ability to obtain a favorable judicial forum for disputes with the combined company or its directors, officers or other employees.

The certificate of incorporation of the combined company will provide that the Court of Chancery of the State of Delaware is the sole and exclusive forum for any derivative action or proceeding brought on the combined company’s behalf, any action asserting a breach of fiduciary duty owed by any of its directors, officers or other employees to the combined company or its stockholders, any action asserting a claim against it arising pursuant to any provisions of the Delaware General Corporation Law, its certificate of incorporation or its bylaws, or any action asserting a claim against it that is governed by the internal affairs doctrine. The choice of forum provision applies only to the foregoing actions or proceedings and it does not apply to actions arising under the Securities Act of 1933 or the Securities Exchange Act of 1934. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with the combined company or its directors, officers or other employees, which may discourage such lawsuits against the combined company and its directors, officers and other employees. If a court were to find the choice of forum provision to be inapplicable or unenforceable in an action, the combined company may incur additional costs associated with resolving such action in other jurisdictions.

An active trading market for the combined company’s common stock may not develop and its stockholders may not be able to resell their shares of common stock for a profit, if at all.

Prior to the merger, there has been no public market for Salarius’ equity. An active trading market for the combined company’s shares of common stock may never develop or be sustained. If an active market for its common stock does not develop or is not sustained, it may be difficult for its stockholders to sell their shares or sell their shares quickly at an attractive price or at all.

Future sales of shares by existing stockholders could cause the combined company’s stock price to decline.

If stockholders of the combined company sell, or indicate an intention to sell, substantial amounts of the combined company’s common stock in the public market after restrictions on resale discussed in this proxy

 

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statement/prospectus/information statement lapse, the trading price of the common stock of the combined company could decline. Based on shares outstanding as of December 31, 2018 and shares expected to be issued upon completion of the merger, the combined company is expected to have outstanding a total of approximately 94.2 million shares of common stock immediately following the completion of the merger, without giving effect to any stock splits. Of the 94.2 million shares of common stock, [●] million shares, without giving effect to the stock split, will be available for sale in the public market beginning 90 days after any closing of the merger as a result of the expiration of lock-up or similar agreements between certain equity holders of the combined company and Salarius. All other outstanding shares of common stock will be freely tradable, without restriction, in the public market. If these shares are sold, the trading price of the combined company’s common stock could decline.

If the ownership of the combined company’s common stock is highly concentrated, it may prevent stockholders from influencing significant corporate decisions and may result in conflicts of interest that could cause the combined company’s stock price to decline.

Executive officers and directors of the combined company and their affiliates are expected to beneficially own or control approximately 11.8% of the outstanding shares of common stock of the combined company following the completion of the merger. Accordingly, these executive officers, directors and their affiliates, acting as a group, will have substantial influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of the combined company’s assets or any other significant corporate transactions. These stockholders may also delay or prevent a change of control of the combined company, even if such a change of control would benefit the other stockholders of the combined company. The significant concentration of stock ownership may adversely affect the trading price of the combined company’s common stock due to investors’ perception that conflicts of interest may exist or arise.

If equity research analysts do not publish research or reports, or publish unfavorable or inaccurate research or reports, about the combined company, its business or its market, its stock price and trading volume could decline.

The trading market for the combined company’s common stock will be influenced by the research and reports that equity research analysts publish about it and its business. Equity research analysts may elect not to provide research coverage of the combined company’s common stock after the completion of the merger, and such lack of research coverage may adversely affect the market price of its common stock. In the event it does have equity research analyst coverage, the combined company will not have any control over the analysts or the content and opinions included in their reports. The price of the combined company’s common stock could decline if one or more equity research analysts downgrade its stock or issue other unfavorable commentary or research. If one or more equity research analysts ceases coverage of the combined company or fails to publish reports on it regularly, demand for its common stock could decrease, which in turn could cause its stock price or trading volume to decline.

The combined company will have broad discretion in the use of cash and may invest or spend its cash in ways with which stockholders do not agree and in ways that may not increase the value of stockholders’ investments.

The combined company will have broad discretion over the use of cash. Stockholders may not agree with the combined company’s decisions, and its use of cash may not yield any return on stockholders’ investments. The combined company’s failure to use its cash effectively could compromise its ability to pursue its growth strategy and the combined company might not be able to yield a significant return, if any, on its investment of cash.

 

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If the combined company fails to maintain proper and effective internal controls, its ability to produce accurate financial statements on a timely basis could be impaired.

The combined company will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of The Nasdaq Stock Market LLC. The Sarbanes-Oxley Act requires, among other things, that the combined company maintain effective disclosure controls and procedures and internal control over financial reporting. The combined company must perform system and process evaluation and testing of its internal control over financial reporting to allow management to report on the effectiveness of its internal controls over financial reporting in its Annual Report on Form 10-K filing for that year, as required by Section 404 of the Sarbanes-Oxley Act. As a private company, Salarius, has never been required to test its internal controls within a specified period. This will require that the combined company incur substantial professional fees and internal costs to expand its accounting and finance functions and that it expend significant management efforts. The combined company may experience difficulty in meeting these reporting requirements in a timely manner.

The combined company may discover weaknesses in its system of internal financial and accounting controls and procedures that could result in a material misstatement of its financial statements. The combined company’s internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.

If the combined company is not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act, or if it is unable to maintain proper and effective internal controls, the combined company may not be able to produce timely and accurate financial statements. If that were to happen, the market price of its common stock could decline and it could be subject to sanctions or investigations by The Nasdaq Stock Market LLC, the SEC, or other regulatory authorities.

 

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SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONDENSED COMBINED

FINANCIAL INFORMATION AND DATA

The following tables present summary historical financial data for Flex Pharma and Salarius, summary unaudited pro forma condensed combined financial data for Flex Pharma and Salarius, and comparative historical and unaudited pro forma per share and per unit data for Flex Pharma and Salarius.

Selected Historical Consolidated Financial Data of Flex Pharma

The selected consolidated statements of operations data for the years ended December 31, 2018 and December 31, 2017, and the consolidated balance sheet data as of December 31, 2018 and December 31, 2017 are derived from Flex Pharma’s audited consolidated financial statements included elsewhere in this proxy statement/prospectus/information statement. Flex Pharma’s historical results are not necessarily indicative of the results that may be expected in any future period.

The selected historical consolidated financial data below should be read in conjunction with the section titled “Flex Pharma Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors—Risks Related to Flex Pharma” and Flex Pharma’s consolidated financial statements and related notes included elsewhere in this proxy statement/prospectus/information statement.

 

     Year Ended
December 31,
2018
     Year Ended
December 31,
2017
 
               

Consolidated Statement of Operations Data:

     

Net product revenue

   $ 826,515      $ 1,260,973  

Other revenue

     11,627        13,526  
  

 

 

    

 

 

 

Total revenue

     838,142        1,274,499  

Costs and expenses:

     

Cost of product revenue

     430,750        506,530  

Research and development

     11,908,294        16,989,911  

Selling, general and administrative

     10,573,321        18,503,684  
  

 

 

    

 

 

 

Total costs and expenses

     22,912,365        36,000,125  
  

 

 

    

 

 

 

Loss from operations

     (22,074,223      (34,725,626

Interest income, net

     152,006        291,964  
  

 

 

    

 

 

 

Net loss attributable to common stockholders

   $ (21,922,217    $ (34,433,662
  

 

 

    

 

 

 

Net loss per share attributable to common stockholders—basic and diluted(1)

   $ (1.22    $ (1.99
  

 

 

    

 

 

 

Weighted-average number of common shares outstanding—basic and diluted(1)

     18,016,841        17,260,626  
  

 

 

    

 

 

 

 

(1)

See Note 2 and Note 15 of Flex Pharma’s audited consolidated financial statements included elsewhere in this prospectus/information statement for an explanation of the method used to compute basic and diluted net loss per share of common stock and the weighted-average number of shares used in computation of the per share amounts.

 

     As of
December 31,
2018
     As of
December 31,
2017
 
               

Consolidated Balance Sheet Data:

     

Cash, cash equivalents and marketable securities

   $ 9,829,624      $ 33,315,759  

Working capital(2)

   $ 9,208,296      $ 28,687,467  

Total assets

   $ 10,389,626      $ 34,992,772  

Accumulated deficit

   $ (132,961,275    $ (111,079,275

Total stockholders’ equity

   $ 9,282,756      $ 29,105,888  

 

(2)

Flex Pharma defines working capital as current assets less current liabilities.

 

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Selected Historical Financial Data of Salarius

The selected statements of operations data for the years ended December 31, 2018 and 2017 and the selected balance sheet data as of December 31, 2018 and 2017 are derived from Salarius’ audited financial statements included elsewhere in this proxy statement/prospectus/information statement.

Salarius’ historical results are not necessarily indicative of the results that may be expected in any future period.

The selected historical financial data below should be read in conjunction with the sections titled “Salarius Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors—Risks Related to Salarius’ Financial Condition and Capital Requirements” and Salarius’ financial statements and related notes included elsewhere in this proxy statement/prospectus/information statement.

 

     Years Ended December 31,  
     2018      2017  

Statements of Operations Data:

     

Revenue:

     

Grant revenue

   $ 1,951,351      $ 1,851,892  
  

 

 

    

 

 

 

Total revenue

     1,951,351        1,851,892  
  

 

 

    

 

 

 

Operating expenses:

     

Research and development

     1,287,621        2,129,672

General and administrative

     2,348,361        1,471,067  
  

 

 

    

 

 

 

Total operating expenses

     3,635,982        3,600,739
  

 

 

    

 

 

 

Operating loss

     (1,684,631      (1,748,847

Other income

     14,994        1,512
  

 

 

    

 

 

 

Net loss

   $ (1,669,637)      $ (1,747,335)  
  

 

 

    

 

 

 

Earnings per unit, basic and diluted

   $ (177.29    $ (201.08

Weighted-average units used in computing earnings per unit, basic and diluted

     10,268        9,151  

 

     As of December 31,  
     2018      2017  

Balance Sheet Data:

     

Cash and cash equivalents

   $ 3,228,288      $ 394,297  

Working capital (deficit)

   $ (1,504,070    $ (1,193,142

Total assets

   $ 6,613,823      $ 690,043  

8% Convertible Series 1 Preferred Units

   $ —        $ 1,868,444

Accumulated deficit

   $ (5,396,896    $ (3,470,800

Total members’ deficit

   $ (1,271,114    $ (2,900,426

Selected Unaudited Pro Forma Condensed Combined Financial Data of Flex Pharma and Salarius

The following selected unaudited pro forma condensed combined financial data has been prepared using the acquisition method of accounting under U.S. GAAP. On January 4, 2019, Flex Pharma announced that it had entered into a definitive agreement to acquire all of the outstanding shares of Salarius pursuant to the offer and the merger. For accounting purposes, Salarius is considered to be acquiring Flex Pharma in the merger.

The unaudited pro forma condensed combined balance sheet combines the historical balance sheets of Salarius and Flex Pharma as of December 31, 2018, giving effect to the merger as if it had occurred on December 31, 2018. The unaudited pro forma condensed combined statement of operations combines the

 

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historical statements of income for Salarius and Flex Pharma for the year ended December 31, 2018, giving effect to the merger as if it had occurred on January 1, 2018. The pro forma financial information does not give effect to the costs of any integration activities or benefits that may result from the realization of future cost savings from operating efficiencies, or any other synergies that may result from the merger and changes in commodity and share prices. Additionally, the pro forma financial information does not give effect to the proposed reverse stock split described in Flex Pharma Proposal 2, beginning on page 85.

The unaudited pro forma condensed combined financial information assumes that, at the Effective Time, each share of Salarius’ membership units will be converted into the right to receive shares of Flex Pharma common stock such that, immediately following the Effective Time, Salarius’ current members are expected to own approximately 80.1% of the Flex Pharma’s common stock (on a partially-diluted basis, excluding the effect of certain options, the dividend or distribution of rights and Warrants to Flex Pharma’s current stockholders and the possible issuance of a warrant to Wedbush), and is subject to adjustment to account for the occurrence of certain events discussed elsewhere in this proxy statement/prospectus/information statement.

The summary selected unaudited pro forma condensed combined financial information has been prepared for information purposes only and does not purport to represent what the actual results of operations or the consolidated financial position of Salarius would be had the merger occurred on the dates assumed, nor is this information necessarily indicative of future consolidated results of operations or financial position. The following information has been derived from, and should be read in conjunction with, the unaudited pro forma condensed combined financial statements and the related notes included elsewhere in this document.

 

     Year Ended
December 31,
2018
 

Unaudited Pro Forma Condensed Combined Statements of Operations Data:

  

Net product revenue

   $ 826,515  

Grant revenue

     1,951,351  

Other revenue

     11,627  
  

 

 

 

Total revenue

     2,789,493  

Costs and expenses:

  

Cost of product revenue

     430,750

Research and development

     13,195,915

Selling, general and administrative

     10,957,563  
  

 

 

 

Total costs and expenses

     24,584,228  
  

 

 

 

Loss from operations

     (21,794,735
  

 

 

 

Interest income, net

     167,000
  

 

 

 

Net loss attributable to common stockholders

   $ (21,627,735
  

 

 

 

Net loss per share, attributable to common stockholders—basic and diluted

   $ (0.23
  

 

 

 

Weighted-average number of common shares outstanding—basic and diluted

     94,168,539  

 

 

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     As of
December 31,
2018
 

Unaudited Pro Forma Condensed Combined Balance Sheet data:

  

Cash and cash equivalents

   $ 13,057,912

Working capital

     2,547,295  

Total assets

     23,027,016  

Accumulated deficit

     (6,741,896

Total stockholders’ equity

     8,878,278  

 

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COMPARATIVE HISTORICAL AND UNAUDITED PRO FORMA PER SHARE AND PER UNIT DATA

The information below reflects the historical net loss and book value per share of Flex Pharma common stock and the historical net loss and book value per unit of Salarius in comparison with the unaudited pro forma net loss and book value per share after giving effect to the proposed merger of Flex Pharma with Salarius on a pro forma basis. The unaudited pro forma net loss and book value per share does not give effect to the proposed reverse stock split of Flex Pharma common stock.

You should read the tables below in conjunction with the audited financial statements of Flex Pharma included in this proxy statement/prospectus/information statement and the audited financial statements of Salarius included in this proxy statement/prospectus/information statement and the related notes and the unaudited pro forma condensed combined financial information and notes related to such financial statements included elsewhere in this proxy statement/prospectus/information statement.

Flex Pharma

 

     Year Ended
December 31,
2018
 

Historical Per Common Share Data:

  

Basic and diluted net loss per share

   $ (1.22

Book value per share

   $ 0.51  

Salarius

 

     Year Ended
December 31,
2018
 

Historical Per Common Unit Data:

  

Basic and diluted net loss per unit

    
$(177.29)
 

Book value per unit

     $(123.80)  

Flex Pharma and Salarius

 

     Year Ended
December 31,
2018
 

Combined Company Pro Forma Data:

  

Basic and diluted net loss per share

   $ (0.23

Book value per share

   $ 0.09  

 

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MARKET PRICE AND DIVIDEND INFORMATION

Flex Pharma

Flex Pharma common stock is listed on the Nasdaq Capital Market under the symbol “FLKS.”

As shown in the table below, on January 3, 2019, the last full trading day prior to the public announcement of the proposed merger, the closing price per share of Flex Pharma’s common stock as reported on the Nasdaq Global Market was $0.384 per share. On [●], 2019, the last practicable date before the printing of this proxy statement/prospectus/information statement, the closing price per share of Flex Pharma’s common stock as reported on the Nasdaq Capital Market was $[●], per share and Flex Pharma’s approximate number of holders of common stock was [●].

 

 

Flex Pharma Common Stock

 

Date

   Nasdaq Global Market
Closing Price per Share
     Nasdaq Capital Market
Closing Price per Share
 

January 3, 2019

   $ 0.384        n/a  

[●], 2019

     n/a      $ [●]  

Because the market price of Flex Pharma common stock is subject to fluctuation, the market value of the shares of Flex Pharma common stock that Salarius’ members will be entitled to receive in the merger may increase or decrease.

Assuming approval of Flex Pharma Proposal 3 and successful application for initial listing with the Nasdaq Capital Market, following the consummation of the merger, Flex Pharma common stock will be listed on the Nasdaq Capital Market and expects to trade under Flex Pharma’s new name, Salarius Pharmaceuticals, Inc. and new trading symbol, “SLRX.”

As of April 17, 2019, the record date for the Flex Pharma’s special meeting, Flex Pharma had approximately [●] holders of record of its common stock. For detailed information regarding the beneficial ownership of certain stockholders of Flex Pharma upon consummation of the merger, see the section entitled “Principal Stockholders of Flex Pharma After the Merger” in this proxy statement/prospectus/information statement.

Dividend Policy

Flex Pharma has never declared or paid cash dividends on its capital stock and does not expect to pay any cash dividends to its stockholders in the foreseeable future. Payment of future cash dividends, if any, will be at the discretion of Flex Pharma’s board of directors and will depend on a number of factors, including its results of operations, financial condition, future prospects, contractual restrictions, restrictions imposed by applicable law and other factors Flex Pharma’s board of directors deems relevant.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This proxy statement/prospectus/information statement contains “forward-looking statements” of Flex Pharma within the meaning of the Private Securities Litigation Reform Act of 1995, which is applicable to Flex Pharma, but not Salarius, because Flex Pharma, unlike Salarius, is a public company subject to the reporting requirements of the Exchange Act. For this purpose, any statements contained herein regarding Flex Pharma, other than statements of historical fact, may be forward-looking statements under the provisions of the Private Securities Litigation Reform Act of 1995. In addition, any statements contained herein regarding Salarius, other than statements of historical fact, should be considered forward-looking statements. Such statements can be identified by the fact that they do not relate strictly to historical or current facts. Statements that include words such as “expect,” “believe,” “will,” “may,” “might,” “anticipate,” “continue,” “plan,” “estimate,” “intend,” “should,” “can,” “likely,” “could,” “predict,” “project,” “forecast,” “potential,” “possible” or the negative of these words or other words or expressions of similar meaning may identify forward-looking statements. These forward-looking statements are found at various places throughout this proxy statement/prospectus/information statement and relate to a variety of matters, including but not limited to:

 

   

the timing and anticipated completion of the proposed merger;

 

   

the expected benefits of and potential value created by the proposed merger for the stockholders of Flex Pharma and members of Salarius;

 

   

the amount of cash and cash equivalents that will be available to fund the combined company’s business after the merger and the length of time that the combined company anticipates such cash and cash equivalents will be available to fund the combined company’s operating plan after the merger;

 

   

the likelihood of the satisfaction of certain conditions to completion of the merger and whether and when the merger will be completed;

 

   

Flex Pharma’s and Salarius’ respective results of operations, financial condition and businesses and their respective objectives, plans and expectations; and

 

   

information about the combined company and the expected impact of the proposed merger on the combined company and its future business, operating results and financial condition.

These statements are subject to risks and uncertainties, including the risks described in this proxy statement/prospectus/information statement under the section “Risk Factors,” that could cause actual results to differ materially from those expressed in, or implied or projected by, the forward-looking information and statements in this proxy statement/prospectus/information statement. Forward-looking statements are not guarantees of performance. These statements are based upon the current beliefs and expectations of management of Flex Pharma and Salarius and are subject to a number of factors that could cause actual outcomes and results to be materially different from those projected or anticipated. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. Except to the extent required by applicable law or regulation, neither Flex Pharma nor Salarius undertakes any obligation to update or publish revised forward-looking statements to reflect events or circumstances after the date hereof or the date of the forward-looking statements or to reflect the occurrence of unanticipated events.

 

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THE SPECIAL MEETING

Date, Time and Place

A special meeting of Flex Pharma’s stockholders will be held at [●] local time, on [●], 2019 at [●].

Purposes of the Flex Pharma Special Meeting

The purpose of the special meeting is to consider and vote on the following proposals:

 

  1.

To approve the issuance of Flex Pharma’s common stock to Salarius’ members pursuant to the Merger Agreement and the resulting “change of control” of Flex Pharma under Nasdaq rules and the dividend or distribution of rights, and issuance of Warrants, to Flex Pharma’s stockholders pursuant to the Merger Agreement.

 

  2.

To approve an amendment of Flex Pharma’s Certificate of Incorporation to effect a reverse stock split of Flex Pharma’s common stock.

 

  3.

To approve an amendment of Flex Pharma’s Certificate of Incorporation to effect the name change of Flex Pharma to “Salarius Pharmaceuticals, Inc.”

 

  4.

To consider and vote on an adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the meeting to approve Proposals 1, 2 or 3.

If Flex Pharma is to complete the merger with Salarius, stockholders must approve Proposals 1, 2, and 3. The approval of Proposal 4 is not a condition to the completion of the merger with Salarius.

Stockholders also will consider and act on any other matters as may properly come before the special meeting or any adjournment or postponement thereof, including any procedural matters incident to the conduct of the special meeting.

Record Date; Shares Outstanding and Entitled to Vote

The Flex Pharma board of directors has fixed April 17, 2019 as the record date for the determination of stockholders entitled to notice of, and to vote at, the special meeting and any adjournment or postponement thereof. Only holders of record of shares of Flex Pharma’s common stock at the close of business on the record date are entitled to notice of, and to vote at, the special meeting. At the close of business on the record date, Flex Pharma had [●] shares of common stock outstanding and entitled to vote at the special meeting. Each holder of record of shares of common stock on the record date will be entitled to one vote for each share held on all matters to be voted upon at the special meeting.

How to Vote Your Shares

If you hold your shares in your own name, you may submit a proxy by telephone, via the internet or by mail or vote by attending the special meeting and voting in person.

 

   

Submitting a Proxy by Telephone: You can submit a proxy for your shares by telephone until 11:59 p.m. Eastern Time on [●] by calling the toll-free telephone number on the enclosed proxy card.

 

   

Submitting a Proxy via the internet: You can submit a proxy via the internet until 11:59 p.m. Eastern Time on [●] by accessing the web site listed on your proxy card and following the instructions you will find on the web site.

 

   

Submitting a Proxy by Mail: If you choose to submit a proxy by mail, simply mark the enclosed proxy card, date and sign it, and return it in the postage paid envelope provided or return it to Vote Processing, c/o Broadridge, 51 Mercedes Way, Edgewood, NY 11717.

 

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By casting your vote in any of the three ways listed above, you are authorizing the individuals listed on the proxy to vote your shares in accordance with your instructions.

If your shares are held in the name of a bank, broker or other nominee, you will receive instructions from the holder of record that you must follow for your shares to be voted. Please follow the instructions from the holder of record carefully. Also, please note that if the holder of record of your shares is a broker, bank or other nominee and you wish to vote in person at the special meeting, you must request a proxy from your bank, broker or other nominee that holds your shares and present that proxy and proof of identification at the special meeting.

How to Change Your Vote

Any Flex Pharma stockholder of record voting by proxy, other than those Flex Pharma stockholders who have executed a voting agreement and irrevocable proxy, has the right to revoke the proxy by:

 

   

at any time before the polls close at the special meeting, sending a written notice stating that he, she or it would like to revoke his, her or its proxy to the Corporate Secretary of Flex Pharma;

 

   

at any time before the polls close at the special meeting, delivering a duly executed proxy card to the Corporate Secretary of Flex Pharma bearing a later date than the proxy being revoked;

 

   

before 11:59 p.m. Eastern Time on [●], submitting a proxy on a later date by telephone or via the internet (only your last telephone or internet proxy will be counted); or

 

   

attending the special meeting, withdrawing your proxy, and voting in person. Attendance alone at the special meeting will not revoke a proxy.

If a stockholder of Flex Pharma has instructed a broker to vote its shares of Flex Pharma’s common stock that are held in “street name,” the stockholder must follow directions received from its broker to change those instructions.

Proxies; Counting Your Vote

A majority of the shares entitled to vote, present in person or represented by proxy constitute a quorum at the special meeting. Stockholders shall have one vote for each share of stock entitled to vote owned by them as of the record date. Assuming the presence of a quorum at the meeting:

 

   

To approve the issuance of Flex Pharma’s common stock to Salarius’ members pursuant to the Merger Agreement and the resulting “change of control” of Flex Pharma under Nasdaq rules and the dividend or distribution of rights, and issuance of Warrants, to Flex Pharma’s stockholders pursuant to the Merger Agreement, the affirmative vote of the holders of a majority of the shares of Flex Pharma’s common stock present in person or represented by proxy and entitled to vote on such matter at the special meeting is required. A failure to submit a proxy card or vote at the special meeting or “broker non-vote” will have no effect on the outcome of this proposal.

 

   

To approve an amendment of Flex Pharma’s Certificate of Incorporation to effect a reverse stock split of Flex Pharma’s common stock, the affirmative vote of holders of a majority of the outstanding shares of Flex Pharma’s common stock as of the record date for the special meeting is required. A failure to submit a proxy card or vote at the special meeting, or an abstention will have the same effect as a vote against the approval of this proposal.

 

   

To approve an amendment of Flex Pharma’s Certificate of Incorporation to effect the name change of Flex Pharma to “Salarius Pharmaceuticals, Inc.”, the affirmative vote of holders of a majority of the outstanding shares of Flex Pharma’s common stock as of the record date for the special meeting is required. A failure to submit a proxy card or vote at the special meeting, or an abstention will have the same effect as a vote against the approval of this proposal.

 

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To consider and vote on an adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the meeting to approve Proposals 1, 2 or 3, the affirmative vote of the holders of a majority of the shares of Flex Pharma’s common stock having voting power present in person or represented by proxy at the special meeting is required. A failure to submit a proxy card or vote at the special meeting, will have no effect on the outcome of this proposal.

Appraisal Rights and Dissenters’ Rights

Neither holders of Flex Pharma’s common stock nor holders of Salarius’ membership units are entitled to appraisal rights or dissenters’ rights in connection with the merger.

Solicitation of Proxies

Flex Pharma will bear the cost of soliciting proxies, including the printing, mailing and filing of this proxy statement/prospectus/information statement, the proxy card and any additional information furnished to Flex Pharma’s stockholders. You will need to obtain your own internet access if you choose to access the proxy materials and/or vote over the internet. Flex Pharma and Salarius may use the services of its directors, officers and other employees to solicit proxies from Flex Pharma’s stockholders without additional compensation. In addition, Flex Pharma has engaged Innisfree M&A Incorporated, a proxy solicitation firm, to solicit proxies from Flex Pharma’s stockholders for a fee of $25,000, plus additional fees for solicitation campaigns and for reasonable out-of-pocket expenses. Arrangements will also be made with banks, brokers, nominees, custodians and fiduciaries who are record holders of Flex Pharma’s common stock for the forwarding of solicitation materials to the beneficial owners of Flex Pharma’s common stock. Flex Pharma will reimburse these banks, brokers, nominees, custodians and fiduciaries for the reasonable out-of-pocket expenses they incur in connection with the forwarding of solicitation materials.

 

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MATTERS BEING SUBMITTED TO A VOTE OF FLEX PHARMA STOCKHOLDERS

Flex Pharma Proposal 1—To approve the issuance of Flex Pharma’s common stock to Salarius’ members pursuant to the Merger Agreement and the resulting “change of control” of Flex Pharma under Nasdaq rules and the dividend or distribution of rights, and issuance of Warrants, to Flex Pharma’s stockholders pursuant to the Merger Agreement

General

At the Flex Pharma special meeting, Flex Pharma stockholders will be asked to approve the issuance of shares of Flex Pharma common stock in the merger and the dividend or distribution of rights, and issuance of Warrants, to Flex Pharma’s stockholders pursuant to the Merger Agreement.

If the merger is completed, Merger Sub will merge with and into Salarius, with Salarius surviving the merger as a wholly owned subsidiary of Flex Pharma.

Pursuant to the terms of the Merger Agreement, upon completion of the merger, Salarius members will have the right to receive, for each share of Salarius membership units they hold, that number of shares of Flex Pharma common stock, if any, as determined pursuant to the conversion ratios described in the Merger Agreement and summarized in this proxy statement/prospectus/information statement. Following completion of the merger, Salarius’ current members are expected to own 80.1% of Flex Pharma’s outstanding common stock and Flex Pharma’s current stockholders are expected to own 19.9% of Flex Pharma’s outstanding common stock (in each case, on a partially-diluted basis, excluding the effect of certain options, the dividend or distribution of rights and Warrants to Flex Pharma’s current stockholders and the possible issuance of a warrant to Wedbush). If the merger had been completed on April 17, 2019, the record date for the Flex Pharma special meeting, an aggregate of approximately [●] million shares of Flex Pharma common stock would have been issuable to Salarius members upon completion of the merger.

In addition, at or prior to the closing of the merger, Flex Pharma will pay a dividend of or distribute one right per share of Flex Pharma’s common stock to its stockholders of record as of a date and time determined by Flex Pharma’s board of directors. Each right will entitle such stockholders to receive a Warrant to purchase shares of Flex Pharma’s common stock six months and one day following the closing date of the merger. The number of shares subject to each Warrant will be determined pursuant to the formulae described in the Merger Agreement and summarized in this proxy statement/prospectus/information statement. If the merger had been completed on April 17, 2019, the record date for the Flex Pharma special meeting, Flex Pharma would have paid a dividend or distributed to its current stockholders rights to receive Warrants to purchase an aggregate of approximately [●] shares of Flex Pharma’s common stock.

The terms of, reasons for and other aspects of the Merger Agreement, the merger, the issuance of shares of Flex Pharma common stock in the merger and the dividend or distribution of rights, and issuance of Warrants, to Flex Pharma’s stockholders pursuant to the Merger Agreement are described in detail in the other sections of this proxy statement/prospectus/information statement. The full text of the Merger Agreement is attached to this proxy statement/prospectus/information statement as Annex A.

Vote Required; Recommendation of Flex Pharma Board of Directors

The affirmative vote of the holders of a majority of the shares of Flex Pharma’s common stock present in person or represented by proxy and entitled to vote on such matter at the special meeting is required for approval of Proposal 1.

A failure to submit a proxy card or vote at the Flex Pharma special meeting, an abstention or “broker non-vote” will have no effect on the outcome of Proposal 1.

 

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FLEX PHARMA’S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT FLEX PHARMA STOCKHOLDERS VOTE “FOR” PROPOSAL 1 TO APPROVE THE ISSUANCE OF FLEX PHARMA’S COMMON STOCK TO SALARIUS’ MEMBERS PURSUANT TO THE MERGER AGREEMENT AND THE RESULTING “CHANGE OF CONTROL” OF FLEX PHARMA UNDER NASDAQ RULES AND THE DIVIDEND OR DISTRIBUTION OF RIGHTS, AND ISSUANCE OF WARRANTS, TO FLEX PHARMA’S STOCKHOLDERS PURSUANT TO THE MERGER AGREEMENT.

Flex Pharma Proposal 2—To approve an amendment of Flex Pharma’s Certificate of Incorporation to effect a reverse stock split of its common stock

General

Prior to the effective time of the merger, the outstanding shares of Flex Pharma’s common stock will be combined into a lesser number of shares to be determined by Flex Pharma’s board of directors. Flex Pharma’s board of directors believes that a reverse stock split may be desirable for a number of reasons. Flex Pharma’s common stock is currently, and will be following the completion of the merger, listed on the Nasdaq Capital Market. According to applicable Nasdaq rules, in order for Flex Pharma’s common stock to continue to be listed on the Nasdaq Capital Market, Flex Pharma must satisfy certain requirements established by such market. Flex Pharma’s board of directors expects that a reverse stock split of Flex Pharma’s common stock will increase the market price of Flex Pharma’s common stock so that Flex Pharma is able to maintain compliance with the relevant Nasdaq listing requirements for the foreseeable future.

The board of directors has adopted and is recommending that Flex Pharma’s stockholders approve an amendment to Flex Pharma’s Certificate of Incorporation, and thereby authorize the board of directors, in its discretion, to effect a reverse stock split of Flex Pharma’s outstanding shares of common stock at any time prior to the effective time of the merger into a lesser number of shares at a reverse stock split ratio to be determined by the board of directors within the range of 1-for-10 to 1-for-40. In the event the board of directors effects a reverse stock split, the total number of outstanding shares of Flex Pharma’s common stock will be reduced in proportion to the reverse stock split ratio, but the total number of authorized shares of Flex Pharma’s common stock and the par value of its common stock will not change.

The form of proposed amendment to Flex Pharma’s Certificate of Incorporation to effect the reverse stock split and reduce the number of outstanding shares proportionally is attached to this proxy statement as Appendix A. We refer to this amendment as the reverse stock split amendment in this proxy statement/prospectus/information statement.

If Proposal 2 is approved, the board of directors will have the authority, but not the obligation, in its sole discretion and without any further action on the part of the stockholders, to effect the reverse stock split within the range of 1-for-10 to 1-for-40 and the proportional reduction in outstanding shares, at any time it believes to be most advantageous to Flex Pharma and its stockholders, but in any event prior to the effective time of the merger. This proposal would give the board of directors the authority to implement one, but not more than one, reverse stock split. The board will also retain the authority not to effect the reverse stock split amendment even if Flex Pharma receives stockholder approval.

A reverse stock split would be effected by the filing of the reverse stock split amendment with the Secretary of State of the State of Delaware. If the reverse stock split amendment is not filed with the Secretary of State of the State of Delaware prior to the effective time of the merger, the reverse stock split amendment will be deemed abandoned, without any further effect. Thus, subject to stockholder approval, the board of directors, at its discretion, may file the amendment to effect a reverse stock split or abandon it and effect no reverse stock split if it determines that such action is not in the best interest of Flex Pharma and its stockholders. Furthermore, if both Proposal 2 and Proposal 3 are approved, Flex Pharma may decide to effect the corresponding amendments to its certificate of incorporation by combining them into one document and filing only one certificate of amendment with the Delaware Secretary of State.

 

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If, following approval by Flex Pharma’s stockholders, a reverse stock split is undertaken, the number of issued and outstanding shares of Flex Pharma’s common stock will be reduced in accordance with a reverse stock split ratio determined by the board of directors. Except for adjustments that may result from the treatment of fractional shares, as described below, each stockholder will hold the same percentage of common stock outstanding immediately following the reverse stock split as such stockholder held immediately prior to the reverse stock split.

Reasons for the Reverse Stock Split

Nasdaq Listing Compliance

Flex Pharma’s board of directors intends for the reverse stock split to increase the per share market price of the Flex Pharma’s common stock to satisfy the listing requirements of the Nasdaq Capital Market. In order to continue trading on the Nasdaq Capital Market, the closing price for Flex Pharma’s common stock must be at least $4.00 for at least five trading days following the reverse stock split. Assuming Flex Pharma’s common stock in fact maintains that minimum closing price for such period and Flex Pharma receives notification from Nasdaq that it meets the initial listing requirements for business combinations that result in a “change of control,” Flex Pharma would then be subject to the continued listing requirements of the Nasdaq Capital Market, which include a minimum bid price for the stock of $1.00, among other requirements.

In addition to enabling Flex Pharma to meet the initial listing requirements, Flex Pharma’s board of directors believes that the increased market price of Flex Pharma’s common stock expected to result from the implementation of a reverse stock split will improve the marketability and liquidity of it common stock.

Notwithstanding the foregoing, there can be no assurance that the market price per share following the reverse stock split will remain in excess of the minimum bid price for a sustained period of time. In addition, there can be no assurance that Flex Pharma’s common stock will not be delisted due to a failure to meet other listing requirements even if the market price per share of Flex Pharma’s common stock on a post-reverse-stock-split basis remains in excess of the minimum bid price requirement.

Flex Pharma’s board of directors believes that a continued listing on the Nasdaq Capital Market for Flex Pharma’s common stock may provide a broad market for its common stock and facilitate the use of the common stock in financing and other transactions.

Increased Investor Interest

An investment in Flex Pharma’s common stock may not appeal to brokerage firms that are reluctant to recommend lower-priced stocks to their clients. Also, investors also may be dissuaded from purchasing lower-priced stocks because the brokerage commissions, as a percentage of the total transaction, tend to be higher for such stocks. Moreover, analysts at many brokerage firms do not monitor the trading activity or otherwise provide coverage of lower-priced stocks.

For the foregoing reasons, Flex Pharma is asking its stockholders to approve the reverse stock split amendment authorizing a reverse stock split and proportional reduction in outstanding shares and grant the board of directors the discretion to determine the reverse stock split ratio within the range of 1-for-10 to 1-for-40 and effect the reverse stock split at any time prior to the effective date of the merger.

 

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Effects of the Reverse Stock Split

If approved and implemented, the principal effects of the reverse stock split would include the following, all of which have been considered by Flex Pharma’s board of directors in approving the reverse stock split amendment:

 

   

The number of outstanding shares of Flex Pharma’s common stock will be reduced and each stockholder will own fewer shares than they currently own.

 

   

The number of shares of Flex Pharma’s common stock reserved and available for issuance under our equity-based compensation plans and the number of shares of Flex Pharma’s common stock issuable upon exercise of outstanding options and warrants will be reduced proportionately based on the reverse stock split ratio selected by the board of directors, and the exercise price of all outstanding options and warrants will be increased proportionately.

 

   

Except for adjustments that may result from the treatment of fractional shares resulting from the reverse stock split, which are explained below under the heading “—Fractional Shares,” each stockholder will hold the same percentage of Flex Pharma’s outstanding common stock immediately following the reverse stock split as the stockholder held immediately prior to the reverse stock split.

 

   

The voting rights, rights to dividends and distributions and other rights of Flex Pharma’s common stock will not be changed as a result of the reverse stock split.

The following table shows the number of shares of Flex Pharma’s common stock that would be (i) issued and outstanding; (ii) authorized and reserved for issuance upon the exercise of outstanding stock options and warrants; (iii) authorized and unreserved for issuance; and (iv) authorized, in each case upon the implementation of the reverse stock split at each indicated reverse stock split ratio based on Flex Pharma’s capitalization at December 31, 2018. Because rounding for fractional shares will occur at the level of each beneficial holder, it is currently not possible to determine the exact number of new shares that will be issued in exchange for old shares in the reverse stock split, and therefore the post-split numbers of issued and outstanding stock in the following tables represent maximum values.

Common Stock

 

Reverse Stock Split
Ratio

   Common Stock
Issued and
Outstanding
     Common Stock
Authorized and
Reserved for
Issuance
     Common Stock
Authorized and
Unreserved for
Issuance
     Total Shares of
Common Stock
Authorized
 

Pre-split

     18,069,476        2,320,981        79,609,543        100,000,000  

1-for-10

     1,806,948        232,098        97,960,954        100,000,000  

1-for-15

     1,204,632        154,732        98,640,636        100,000,000  

1-for-20

     903,474        116,049        98,980,477        100,000,000  

1-for-25

     722,779        92,839        99,184,382        100,000,000  

1-for-30

     602,316        77,366        99,320,318        100,000,000  

1-for-35

     516,271        66,314        99,417,415        100,000,000  

1-for-40

     451,737        58,025        99,490,238        100,000,000  

In addition, if approved and implemented, other possible effects of the reverse stock split include the following, all of which have been considered by Flex Pharma’s board of directors in approving the reverse stock split amendment:

 

   

It is anticipated that the reduction in outstanding shares of Flex Pharma’s common stock will result in an increase in the per share price of its common stock. However, there is no assurance that such a result will occur. Similarly, there is no assurance that if the per share price of its common stock increases as a result of the reverse stock split, such increase in the per share price will be permanent, which will be dependent on several factors.

 

   

One of the purposes for the proposed reverse stock split is to comply with the initial listing standards for the Nasdaq Capital Market. However, there can be no assurance that the reverse stock split alone

 

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will guarantee or even help Flex Pharma’s initial listing of its common stock on the Nasdaq Capital Market. Specifically, there is no assurance that (i) the market price per share of its common stock following the reverse stock split will rise in proportion to the reduction in the number of shares of its common stock outstanding before the reverse stock split; (ii) the market price per share of its common stock will either exceed or remain in excess of the $4.00 minimum bid price as required for initial listing on the Nasdaq Capital Market; or (iii) Flex Pharma will otherwise meet the initial listing requirements for the Nasdaq Capital Market. If Flex Pharma is unable to maintain the listing of Flex Pharma’s common stock on the Nasdaq Capital Market, Flex Pharma’s liquidity and stock price may be negatively affected and the merger may not close.

 

   

The reverse stock split could be viewed negatively by the market and, consequently, could lead to a decrease in Flex Pharma’s overall market capitalization. It is often the case that the reverse stock split-adjusted stock price and market capitalization of companies that effect a reverse stock split decline. Should the per share price of Flex Pharma’s common stock decline after implementation of the reverse stock split, the percentage decline may be greater than would occur in the absence of the reverse stock split. Furthermore, the liquidity of Flex Pharma’s common stock could be adversely affected by the reduced number of shares of its common stock that will be outstanding following the reverse stock split.

 

   

The anticipated resulting increase in per share price of Flex Pharma’s common stock due to the reverse stock split is expected to encourage greater interest in its common stock by brokers and investors and possibly promote greater liquidity for its stockholders. However, there is no assurance that such greater interest will occur. In addition, the liquidity of Flex Pharma’s shares could be adversely affected by the reduced number of shares of its common stock that would be outstanding after the reverse stock split.

 

   

Since the reverse stock split will decrease the number of shares held by Flex Pharma’s stockholders, the reverse stock split may increase the number of stockholders who hold less than a “round lot,” or 100 shares. Typically, the transaction costs to stockholders selling “odd lots” are higher on a per share basis. Consequently, the reverse stock split could increase the transaction costs to existing stockholders in the event they wish to sell all or a portion of their shares.

The reverse stock split will not affect our Company continuing to be subject to the periodic reporting requirements of the Exchange Act. The reverse stock split is not intended as, and will not have the effect of, a “going private transaction” covered by Rule 13e-3 under the Exchange Act.

The reverse stock split would not be accompanied by a decrease in Flex Pharma’s authorized shares of common stock or authorized shares of blank check preferred stock.

Procedures for Effecting the Reverse Stock Split and Filing the Reverse Stock Split Amendment

If Flex Pharma’s stockholders approve the reverse stock split amendment and Flex Pharma’s board of directors subsequently determines that it is in the best interest of Flex Pharma and its stockholders to effect a reverse stock split, the board of directors, in its sole discretion, at any time prior to the effective date of the merger, will determine the ratio of the reverse stock split to be implemented within the range approved by Flex Pharma’s stockholders. Flex Pharma’s board of directors believes that stockholder approval of a range of potential exchange ratios (rather than a single exchange ratio) is in the best interest of Flex Pharma and its stockholders because it provides the board of directors with the flexibility to achieve the desired results of the reverse stock split in light of the fact that it is not possible to predict market conditions at the time the reverse stock split would be implemented. The decision of the board of directors as to whether and when to effect the reverse stock split, and the decision of the board of directors regarding the final reverse stock split ratio will be based, in part, on existing and expected trading prices for Flex Pharma’s common stock, its compliance with the minimum bid price requirement of the Nasdaq Capital Market, and prevailing general market and economic conditions. The board of directors intends to select a reverse stock split ratio that it believes would be most likely to achieve the anticipated benefits of the reverse stock split as described above.

 

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After Flex Pharma’s board of directors determines to effect a reverse stock split and has determined the reverse stock split ratio, the board of directors will determine the effective date of the reverse stock split and will announce publicly such information. Any such reverse stock split will become effective upon the filing of the reverse stock split amendment with the Secretary of State of the State of Delaware or such later date as indicated in the reverse stock split amendment. The actual timing of any such filing will be made by the board of directors at such time as the board of directors believes to be most advantageous to Flex Pharma and its stockholders.

Fractional Shares

No fractional shares of Flex Pharma’s common stock would be issued as a result of the reverse stock split, if any. Each holder of Flex Pharma’s common stock at the effective time of the reverse stock split, if any, who otherwise would be entitled to a fractional share will, in lieu thereof, be entitled to receive a cash payment equal to: (i) the fractional share amount multiplied by (ii) the product of (a) the closing sale price of a share of Flex Pharma’s common stock as reported on the Nasdaq Capital Market or other principal market of the common stock, as applicable, on the effective date of the reverse stock split and (b) the reverse stock split ratio, as determined by the board of directors. Except for the right to receive the cash payment in lieu of fractional shares, stockholders will not have any voting, dividend or other rights with respect to the fractional shares they would otherwise be entitled to receive. Because rounding for fractional shares will occur at the level of each beneficial holder, it is currently not possible to determine the exact number of new shares that will be issued in exchange for old shares in the reverse stock split.

Stockholders should be aware that, under the escheat laws of the various jurisdictions where stockholders reside, where Flex Pharma is domiciled, and where the funds will be deposited, sums due for fractional interests that are not timely claimed after the effective date of the reverse stock split may be required to be paid to the designated agent for each such jurisdiction, unless correspondence has been received by Flex Pharma or the exchange agent concerning ownership of such funds within the time permitted in such jurisdiction. Thereafter, stockholders otherwise entitled to receive such funds will have to seek to obtain them directly from the state to which they were paid.

Exchange of Pre-Split Shares for Post-Split Shares

If Flex Pharma’s stockholders approve and Flex Pharma implements a reverse stock split, its transfer agent will act as its exchange agent for purposes of implementing the exchange of pre-reverse stock split shares of common stock for post-reverse stock split shares of common stock.

Registered Book Entry Stockholders. Holders of Flex Pharma’s common stock holding all of their shares electronically in book-entry form with our transfer agent do not need to take any action (the exchange will be automatic) to receive post-reverse stock split shares.

Registered Certificated Stockholders. Some of the holders of Flex Pharma’s common stock hold their shares in certificate form or a combination of certificate and book-entry form. If a stockholder’s shares of common stock are held in certificate form, the stockholder will receive a transmittal letter from Flex Pharma’s transfer agent as soon as practicable after the effective date of the reverse stock split. The letter of transmittal will contain instructions on how to surrender the stockholder’s certificate(s) representing the stockholder’s pre-reverse stock split shares to the transfer agent. Upon receipt of the stockholder’s pre-reverse stock split certificate(s) and the properly completed and executed letter of transmittal, the stockholders will be issued the appropriate number of shares of common stock electronically in book-entry form under the Direct Registration System (which we refer to as the “DRS”). No new shares in book-entry form will be reflected until the stockholders surrenders the stockholders outstanding pre-reverse stock split certificate(s), together with the properly completed and executed letter of transmittal, to Flex Pharma’s transfer agent. At any time after receipt of the stockholder’s DRS statement, the stockholder may request a stock certificate representing the stockholder’s ownership interest.

 

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STOCKHOLDERS SHOULD NOT DESTROY ANY STOCK CERTIFICATES AND SHOULD NOT SUBMIT ANY CERTIFICATES UNTIL REQUESTED TO DO SO.

Accounting Matters

The reverse stock split is not expected to affect total stockholders’ equity on Flex Pharma’s balance sheet. However, because the par value of Flex Pharma’s common stock will remain unchanged on the effective date of the reverse stock split, the components that make up stockholders’ equity will change by offsetting amounts. The stated common stock components will be reduced, and the additional paid-in capital component will be increased by the amount by which the stated common stock component is reduced. The per share net loss and net book value of Flex Pharma’s common stock will be increased because there will be fewer shares of our common stock outstanding. Net loss per share amounts in prior periods will be restated to reflect the reverse stock split. Flex Pharma does not anticipate that any other accounting consequences would arise as result of the reverse stock split.

Material U.S. Federal Income Tax Consequences of the Reverse Stock Split

The following is a discussion of material U.S. federal income tax consequences to U.S. holders (as defined below) of the reverse stock split. This discussion is based upon current provisions of the Code, existing and proposed Treasury regulations (which we refer to as the “Treasury Regulations”) promulgated under the Code and judicial authority and administrative interpretations, all as of the date of this document, and all of which are subject to change, possibly with retroactive effect, and are subject to differing interpretations. Changes in these authorities may cause the tax consequences to vary substantially from the consequences described below. No ruling has been or is expected to be sought from IRS with respect to any of the tax consequences discussed below. As a result, there can be no assurance that the IRS will not assert, or that a court would not sustain, a position contrary to any of the conclusions set forth below.

This discussion is limited to U.S. holders that hold their Flex Pharma common stock as “capital assets” within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address any tax consequences arising under the tax on net investment income or the alternative minimum tax, nor does it address any tax consequences arising under the laws of any state, local or non-U.S. jurisdiction, or under any U.S. federal laws other than those pertaining to income taxes. Furthermore, this discussion does not address all aspects of U.S. federal income taxation that may be applicable to U.S. holders in light of their particular circumstances or to U.S. holders that may be subject to special rules under U.S. federal income tax laws, including, without limitation:

 

   

a bank, insurance company or other financial institution;

 

   

a tax-exempt or a governmental organization;

 

   

a real estate investment trust;

 

   

an S corporation or other pass-through entity (or an investor in an S corporation or other pass-through entity);

 

   

a regulated investment company or a mutual fund;

 

   

a dealer or broker in stocks and securities, or currencies;

 

   

a trader in securities that elects mark-to-market treatment;

 

   

a holder of Flex Pharma common stock that received such stock through the exercise of an employee option, pursuant to a retirement plan or otherwise as compensation;

 

   

a holder of options, or holders of restricted stock or bonus stock, granted under any benefit plan;

 

   

a person whose functional currency is not the U.S. dollar;

 

 

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a person subject to Section 451(b) of the Code; or

 

   

a person who is a former citizen or former long-term resident of the United States.

If a partnership, or any entity (or arrangement) treated as a partnership for U.S. federal income tax purposes, holds Flex Pharma common stock, the tax treatment of a partner in such partnership generally will depend on the status of the partner and the activities of the partnership and upon certain determinations made at the partner level. A partner in a partnership holding Flex Pharma common stock should consult its own tax advisor about the U.S. federal income tax consequences of the reverse stock split.

For purposes of this discussion, “U.S. holder” is a beneficial owner of Flex Pharma common stock that is for U.S. federal income tax purposes:

 

   

an individual citizen or resident of the United States;

 

   

a corporation (or any other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia;

 

   

an estate, whose income is subject to U.S. federal income tax regardless of its source; or

 

   

a trust (i) the administration of which is subject to the primary supervision of a U.S. court and that has one or more United States persons that have the authority to control all substantial decisions of the trust or (ii) that has made a valid election under applicable Treasury Regulations to be treated as a United States person.

Tax Consequences of the Reverse Stock Split Generally

The reverse stock split will constitute a “recapitalization” for U.S. federal income tax purposes. As a result, a U.S. holder of Flex Pharma common stock will not recognize gain or loss upon the reverse stock split, except with respect to cash received in lieu of a fractional share of Flex Pharma common stock, as discussed below. A U.S. holder’s aggregate tax basis in the shares of Flex Pharma common stock received pursuant to the reverse stock split, other than any portion of basis allocated to any fractional share of Flex Pharma common stock, will equal the aggregate tax basis of the shares of the Flex Pharma common stock surrendered, and such U.S. holder’s holding period in the shares of Flex Pharma common stock received will include the holding period in the shares of Flex Pharma common stock surrendered. Treasury Regulations provide detailed rules for allocating the tax basis and holding period of the shares of Flex Pharma common stock surrendered to the shares of Flex Pharma common stock received in a recapitalization pursuant to the reverse stock split. U.S. holders of shares of Flex Pharma common stock acquired on different dates and at different prices should consult their tax advisors regarding the allocation of the tax basis and holding period of such shares.

Cash in Lieu of Fractional Shares

A U.S. holder of Flex Pharma common stock that receives cash in lieu of a fractional share of Flex Pharma common stock pursuant to the reverse stock split should recognize capital gain or loss in an amount equal to the difference between the amount of cash received and the U.S. holder’s tax basis in the shares of Flex Pharma common stock surrendered that is allocated to such fractional share of Flex Pharma common stock. Such capital gain or loss should be long-term capital gain or loss if the U.S. holder’s holding period for Flex Pharma common stock surrendered exceeded one year at the effective time of the reverse stock split. The deductibility of losses is subject to limitations.

Information Reporting and Backup Withholding

Cash payments received by a U.S. holder of Flex Pharma common stock pursuant to the reverse stock split may be subject to information reporting and may be subject to U.S. backup withholding (currently at 24%) unless

 

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such holder provides proof of an applicable exemption or a correct taxpayer identification number and otherwise complies with the applicable requirements of the backup withholding rules. Any amount withheld under the U.S. backup withholding rules is not an additional tax and will generally be allowed as a refund or credit against the U.S. holder’s U.S. federal income tax liability provided that the required information is timely furnished to the IRS.

No Appraisal Rights

No appraisal rights are available under the Delaware General Corporation Law or under our Restated Certificate of Incorporation or Amended and Restated Bylaws to any stockholder who dissents from the proposal to approve the amendment to our Restated Certificate of Incorporation to effect the reverse stock split.

Board Discretion to Implement the Reverse Stock Split

If the proposed reverse stock split is approved at the special meeting, the board of directors, in its sole discretion, at any time prior to the effective date of the merger, may determine to implement the reverse stock split. Notwithstanding the approval of the form of the reverse stock split amendment at the special meeting, the board of directors, in its sole discretion, may determine not to implement the reverse stock split.

Vote Required; Recommendation of Flex Pharma Board of Directors

The affirmative vote of holders of a majority of the outstanding shares of Flex Pharma’s common stock as of the record date for the special meeting is required for approval of Proposal 2.

A failure to submit a proxy card or vote at the special meeting or an abstention or “broker non-vote” will have the same effect as a vote “AGAINST” such proposal.

FLEX PHARMA’S BOARD OF DIRECTORS RECOMMENDS FLEX PHARMA STOCKHOLDERS VOTE “FOR” PROPOSAL 2 TO APPROVE AN AMENDMENT OF FLEX PHARMA’S CERTIFICATE OF INCORPORATION TO EFFECT A REVERSE STOCK SPLIT OF FLEX PHARMA’S COMMON STOCK.

Flex Pharma Proposal 3—To approve an amendment of Flex Pharma’s Certificate of Incorporation to effect the name change of Flex Pharma to “Salarius Pharmaceuticals, Inc.”

General

Flex Pharma’s board of directors has adopted resolutions approving, declaring advisable and recommending that Flex Pharma’s stockholders approve an amendment to Flex Pharma’s certificate of incorporation to change its corporate name from “Flex Pharma, Inc.” to “Salarius Pharmaceuticals, Inc.” If approved, the change to Flex Pharma’s corporate name will become effective upon the filing of a certificate of amendment with the Secretary of State of the State of Delaware. Flex Pharma currently plans to file the certificate of amendment as soon as reasonably practicable after receiving approval of the amendment from its stockholders. However, the board of directors has reserved the right to abandon the proposed amendment if, at any time before the filing of the certificate of amendment, it determines that changing Flex Pharma’s name is no longer in the best interests of Flex Pharma or its stockholders. If both Proposal 2 and Proposal 3 are approved, Flex Pharma may decide to effect the corresponding amendments to its certificate of incorporation by combining them into one document and filing only one certificate of amendment with the Delaware Secretary of State.

If Proposal 3 is approved, Article I of our certificate of incorporation will be amended to reflect Flex Pharma’s new corporate name. The proposed amendment to Article I of Flex Pharma’s certificate of incorporation is set forth in its entirety in Appendix B to this proxy statement/prospectus/information

 

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statement. If Proposal 3 is approved, Flex Pharma expects that the trading symbol for its common stock on the Nasdaq Capital Market may be changed to “SLRX” concurrently with, or shortly after, Flex Pharma’s name change, although Flex Pharma is not soliciting votes for the change in trading symbol.

The DGCL does not require stockholder approval to change Flex Pharma’s corporate name. However, the Merger Agreement requires Flex Pharma to seek stockholder approval of an amendment of Flex Pharma’s certificate of incorporation to effect the name change.

Reason for Proposed Amendment

The purpose of the proposed name change is to allow for recognition of the business of the combined company following completion of the merger. Flex Pharma’s management believes that the current name no longer accurately reflects the business and mission of the combined company post-merger. Also, Flex Pharma is required to change its name pursuant to the Merger Agreement.

Effect of Proposed Amendment

If approved by Flex Pharma’s stockholders, the change to Flex Pharma’s corporate name will not affect the validity of any of our existing stock certificates that bear the name “Flex Pharma, Inc.” If the proposed name change is approved, stockholders with certificated shares may continue to hold existing certificates, and the number of shares represented by those certificates will remain unchanged by any corporate action contemplated by this proposal. New stock certificates that are issued after the name change becomes effective, including any representing post-reverse split shares, will bear the name “Salarius Pharmaceuticals, Inc.”

Stockholders Holding Common Stock in “Street Name.” Banks, brokers and other nominees will be instructed to effect the name change and the CUSIP change in the accounts of their customers holding common stock in “street name” (i.e., through a bank, broker or other nominee).

Stockholders Holding Common Stock in Certificate Form. Registered stockholders who hold their shares of common stock in certificate form are not required to do anything. Certificates issued with Flex Pharma’s current corporate name will continue to be valid after the name change. Stockholders holding shares in certificate form should not destroy their stock certificates nor submit the stock certificates to us to have them reissued.

If the proposal to change Flex Pharma’s name is not approved, the proposed amendment to its certificate of incorporation will not be made and its name will remain unchanged.

Vote Required; Recommendation of Flex Pharma Board of Directors

The affirmative vote of holders of a majority of the outstanding shares of Flex Pharma’s common stock as of the record date for the special meeting is required for approval of Proposal 3.

A failure to submit a proxy card or vote at the special meeting or an abstention or “broker non-vote” will have the same effect as a vote “AGAINST” such proposal.

FLEX PHARMA’S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT FLEX PHARMA STOCKHOLDERS VOTE “FOR” PROPOSAL 3 TO APPROVE AN AMENDMENT OF FLEX PHARMA’S CERTIFICATE OF INCORPORATION TO EFFECT THE NAME CHANGE OF FLEX PHARMA TO “SALARIUS PHARMACEUTICALS, INC.”

 

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Flex Pharma Proposal 4—To consider and vote on an adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the meeting to approve Proposals 1, 2 or 3

General

Flex Pharma is asking its stockholders to consider and vote upon a proposal to approve one or more adjournments of the special meeting, if necessary or appropriate, to permit further solicitation of proxies in favor of approval of Proposals 1, 2 or 3.

If the number of shares of Flex Pharma’s common stock present in person or represented by proxy at the special meeting voting in favor of Proposals 1, 2 or 3 is insufficient to approve such proposal at the time of the special meeting, then Flex Pharma may move to adjourn the special meeting in order to enable the Flex Pharma’s board of directors to solicit additional proxies in respect of such proposal. In that event, Flex Pharma’s stockholders will be asked to vote only upon the adjournment proposal, Proposal 4, and not on any other proposal.

In this proposal, Flex Pharma is asking its stockholders to authorize the holder of any proxy solicited by Flex Pharma’s board of directors to vote in favor of granting discretionary authority to the proxy or attorney-in-fact to vote to adjourn the special meeting one or more times for the purpose of soliciting additional proxies. If Flex Pharma’s stockholders approve this Proposal 4, Flex Pharma could adjourn the special meeting and any adjourned session of the special meeting and use the additional time to solicit additional proxies, including the solicitation of proxies from Flex Pharma’s stockholders that previously have returned properly executed proxies or authorized a proxy by using the Internet or telephone. Among other things, approval of Proposal 4 could mean that, even if Flex Pharma has received proxies representing a sufficient number of votes against the approval of Proposal 1, that such proposal would be defeated, Flex Pharma could adjourn the special meeting without a vote on such proposal and seek to obtain sufficient votes in favor of such proposal to obtain approval of that proposal.

Flex Pharma currently does not intend to propose adjournment at the special meeting if there are sufficient votes to approve Proposals 1, 2 and 3.

Vote Required; Recommendation of Flex Pharma Board of Directors

The affirmative vote of holders of a majority of Flex Pharma’s common stock, present in person or represented by proxy at the Flex Pharma special meeting is required for approval of Flex Pharma Proposal 4.

A failure to submit a proxy card or vote at the Flex Pharma special meeting, an abstention or a “broker non-vote” will have no effect on the outcome of Proposal 4.

FLEX PHARMA’S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT FLEX PHARMA’S STOCKHOLDERS VOTE “FOR” PROPOSAL 4 TO ADJOURN THE SPECIAL MEETING, IF NECESSARY OR APPROPRIATE, TO SOLICIT ADDITIONAL PROXIES IF THERE ARE INSUFFICIENT VOTES AT THE TIME OF THE MEETING TO APPROVE PROPOSALS 1, 2 OR 3.

 

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THE WRITTEN CONSENT OF SALARIUS MEMBERS

As a member of Salarius, you are being provided with a written consent of members in connection with this proxy statement/prospectus/information statement. The written consent of members seeks your approval of the adoption of the Merger Agreement, and your approval of the merger and related transactions. The affirmative vote of the holders of a majority of common units, profits interest common units and Series A preferred units of Salarius, voting together as a single class, is required to approve these matters.

After careful consideration, the Salarius board of managers (i) determined that the merger is fair to, and in the best interests of, the Salarius and the Salarius members, (ii) has adopted and declared advisable the Merger Agreement and approved the adoption of the Merger Agreement and the approval of the merger and related transactions, and (iii) has determined to recommend that the Salarius members vote to adopt the Merger Agreement, approve the merger and related transactions. Accordingly, Salarius’ board of managers unanimously recommends that its members sign and return the member written consent to Salarius indicating their approval of the merger and other transactions contemplated by the Merger Agreement.

 

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THE MERGER

This section and the section entitled “The Merger Agreement” beginning on page 124 of this proxy statement/prospectus/information statement describe the material aspects of the merger, including the Merger Agreement. While Flex Pharma believes that this description covers the material terms of the merger and the Merger Agreement, it may not contain all of the information that is important to you. You should read carefully this entire proxy statement/prospectus/information statement, including the Merger Agreement, which is attached as Annex A to this proxy statement/prospectus/information statement, and the other documents to which Flex Pharma has referred to or incorporated by reference herein. For a more detailed description of where you can find those other documents, please see the section entitled “Where You Can Find More Information” beginning on page 278 of this proxy statement/prospectus/information statement.

The following chronology summarizes the key meetings and events that led to the signing of the Merger Agreement. The following chronology does not purport to catalog every conversation among the Board, the Strategic Committee, members of Flex Pharma management or Flex Pharma’s representatives and other parties.

Historical Background of Flex Pharma

Flex Pharma is a biotechnology company. Prior to June 2018, it focused on developing innovative and proprietary treatments for muscle cramps, spasms and spasticity associated with severe neurological conditions.

In June 2018, Flex Pharma announced that it was ending its ongoing Phase 2 clinical trials of FLX-787 in patients with motor neuron disease (which we refer to as “MND”), primarily with amyotrophic lateral sclerosis (which we refer to as “ALS”), and in patients with Charcot-Marie-Tooth disease (which we refer to as “CMT”), due to oral tolerability concerns observed in both trials. Additionally, in June 2018, Flex Pharma initiated a process to explore a range of strategic alternatives for enhancing stockholder value, including a potential sale or merger of Flex Pharma, and announced a restructuring to reduce its cost structure to help preserve liquidity. In connection with the restructuring, Flex Pharma reduced its workforce by approximately 60%. Flex Pharma continues to operate with a reduced workforce that focuses its efforts on limited research and development activities and operating Flex Pharma’s consumer business, which sells HOTSHOT®, Flex Pharma’s consumer product launched in 2016 to prevent and treat exercise-associated muscle cramps.

On June 1, 2018, Flex Pharma’s board of directors held a meeting. The meeting included members of Flex Pharma’s management (which we refer to as “Flex Management”) and representatives of Cooley LLP (which we refer to as “Cooley”), Flex Pharma’s legal counsel. Flex Pharma’s board of directors discussed the increasing oral tolerability issues in Flex Pharma’s ongoing Phase 2 clinical trials at that time, potential FLX-787 development options, and broader strategic options. Flex Pharma’s board of directors requested that Flex Management provide additional information regarding the development of FLX-787 and strategic options at a meeting to be held on June 8, 2018. Flex Pharma’s board of directors also instructed Flex Management to contact prospective financial advisors (based on qualification, expertise and reputation) to assist Flex Pharma’s board of directors.

On June 5, 2018 and June 6, 2018, Flex Management and a member of Flex Pharma’s board of directors, either individually or as group, contacted three prospective financial advisors.

On June 8, 2018, Flex Pharma’s board of directors held a meeting. The meeting included members of Flex Management and representatives of Cooley. Flex Management provided a final recommendation to Flex’s board of directors regarding the development of FLX-787 and strategic options. Flex Pharma’s board of directors approved a plan to stop Flex Pharma’s ongoing Phase 2 studies in MND and CMT, restructure Flex Pharma (including a reduction in headcount), and engage Wedbush to assist Flex Pharma’s board of directors with a strategic assessment to enhance stockholder value (including a potential sale or merger of Flex Pharma). Flex Pharma’s board of directors also approved Flex Pharma’s continued efforts to assess FLX-787 in dysphagia

 

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(difficulty swallowing) and the continued operations of Flex Pharma’s consumer business, which sells HOTSHOT. In addition, Flex’s board of directors established a Strategic Committee (which we refer to as the “Strategic Committee”) to, among other things, make recommendations to Flex Pharma’s board of directors with respect to strategic matters. The Strategic Committee consisted of Dr. McVicar, Mr. Randle, Mr. Hutt and Dr. Tung. Flex Pharma’s board of directors considered Wedbush and two other prospective financial advisors, each of which had been recommended by one or more members of the board of directors. In doing so, the board of directors considered (i) such prospective financial advisor’s capabilities, relevant transaction experience, proposed staffing and proposed fees and (ii) whether such prospective financial advisor had any potential conflicts of interest. The board of directors determined it appropriate to engage Wedbush due in particular to Wedbush’s experience with reverse takeovers, industry experience and reputation. The board of directors instructed Flex Pharma’s management to negotiate an engagement letter with Wedbush and to present it to the board of directors for review.

On June 12, 2018, Flex Pharma executed an engagement letter with Wedbush for Wedbush to act as Flex Pharma’s exclusive financial advisor in connection with Flex Pharma’s strategic assessment to enhance stockholder value.

On June 13, 2018, Flex Pharma publicly announced its decisions to terminate its ongoing Phase 2 studies in MND and CMT, its restructuring (including a 60% reduction in headcount), its engagement of Wedbush to assist with a strategic assessment to enhance stockholder value, and Flex Pharma’s intention to continue to assess FLX-787 in dysphagia and to continue to sell HOTSHOT through its consumer business.

From June 2018 through January 2019, Flex Pharma, with Wedbush’s assistance, assessed Flex’s Pharma’s alternatives and conducted a process of identifying and evaluating potential parties for a potential sale, merger or other transaction involving Flex Pharma. In its review, Flex Pharma and Wedbush focused on public and private pharmaceutical and biotechnology companies with (i) a portfolio of products or product development candidates with the potential for significant value appreciation, (ii) resources sufficient to achieve potentially meaningful development milestones within such portfolio (including the perceived ability to obtain resources through capital markets or otherwise, either prior to or concurrent with the effectiveness of a transaction with Flex Pharma), (iii) an ability to enter into an agreement in the near-term for a transaction with Flex Pharma and to proceed promptly toward consummating the transaction, and (iv) a management team with the breadth and skills to accomplish the foregoing and subsequently manage the company.

Between June 13 2018 and October 2018, at the direction of Flex Pharma’s board of directors, Wedbush contacted (or was contacted by) 184 companies to gauge their interest in a potential sale, merger or other transaction involving Flex Pharma. These parties’ primary interest was in a strategic transaction with Flex Pharma, in the form of a merger or acquisition.

As part of Flex Pharma’s process for assessing the value of a potential strategic transaction, Flex Pharma provided a process letter to companies that had indicated an interest in pursuing a strategic transaction with Flex Pharma. The process letter outlined several factors that would be used by Flex Pharma to evaluate each potential candidate and its indication of interest. The factors included, among others:

 

   

transaction structure;

 

   

valuation and pro forma equity ownership split;

 

   

plans for financing prior to or concurrent with a transaction;

 

   

composition of the board of directors of the combined entity;

 

   

cash resources at closing;

 

   

due diligence requirements;

 

   

plans for Flex Pharma’s assets and employees;

 

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information concerning the potential candidate, including its programs, platforms, technology, key personnel, key stockholders, current cash balance, projected cash burn through closing, financing and valuation history, anticipated uses of the combined entity’s cash balance, regulatory strategy for the potential candidate’s products and/or technology, material direct and contingent liabilities, availability of audited financial statements and status of public filings, if any, and availability and completeness of a data room;

 

   

approvals that must be obtained to complete a transactions and/or conditions of closing a transaction; and

 

   

external advisors engaged or to be engaged by the potential candidate.

During June 2018 and September 2018, Wedbush received (on behalf of Flex Pharma) 40 fully-executed non-disclosure agreements from potential candidates. These non-disclosure agreements contain customary use and non-disclosure provisions. Many of the non-disclosure agreements also contain standstill provisions, in each case in customary form. The standstill provision allows a potential candidate to propose a possible transaction directly to Flex Pharma’s board of directors on a confidential basis, if such proposal does not require Flex Pharma to make a public announcement regarding the possible transaction. The standstill provision also prohibited a potential candidate from publicly requesting or publicly proposing that Flex Pharma amend or waive the standstill provision, but such prohibition automatically terminated in accordance with its terms upon Flex Pharma’s entry into the Merger Agreement. Flex Management then held diligence discussions with 37 companies and received 26 indications of interest from potential candidates (including Salarius). Following receipt of process letters, Flex Pharma and Wedbush worked together to evaluate potential candidates through a combination of review of: (1) candidate-provided presentation materials; (2) publicly available candidate information (e.g., websites, press releases and scientific publications), and (3) confidential materials supplied by email or in confidential data rooms. In many cases, the review of written material was supplemented by teleconferences or face-to-face meetings with personnel of the potential candidate. This due diligence by Flex Pharma and Wedbush often produced a series of questions for potential candidates to address in calls, teleconferences or in writing.

As part of the evaluation of each potential candidate, Flex Pharma and/or Wedbush reviewed: (1) the innovativeness and potential for clinical and commercial success of the candidate’s technology, including the mechanisms of action and the candidate’s ability to protect potential products with its intellectual property; (2) the development stage, strategy, plans and data for products in development including, if available, information on pharmacology, toxicology, drug metabolism, pharmacokinetics, pharmacodynamics, clinical, regulatory, and manufacturing and controls for drug substance and drug products; (3) the breadth of the development pipeline; (4) the attractiveness of the target market, commercialization plans and product revenue forecasts, if available; (5) the potential for news flow based on development plans; (6) the qualifications and strength of the candidate’s CEO and top managers with attention to their ability to be successful running a US-based public company; (7) the strength of the investor syndicate including the willingness of current investors to participate in concurrent or post-transaction financing rounds; and, (8) the candidate’s cash position, operating plans through potentially meaningful development milestones and plans for future financing.

These standardized evaluations were used to compare the relative attractiveness of potential candidates for discussion with the Strategic Committee, and to support the prioritization of candidates with the greatest potential to bring value to Flex Pharma’s stockholders.

In the case of each potential candidate (other than Salarius), this process resulted either in the potential candidate’s decision not to move forward or Flex Pharma’s determination that (i) a potential transaction with a potential candidate lacked one or more critical elements (for example, the potential candidate did not have sufficient cash on hand, or financing commitments, to provide the combined entity with adequate resources to operate for a sufficient period of time) and/or (ii) the terms of a potential transaction with the potential candidate (including Flex Pharma’s current stockholders’ ownership of the combined entity and the probability of the

 

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potential transaction closing) were inadequate to Flex Pharma and its current stockholders or did not represent the highest value reasonably available to Flex Pharma and its current stockholders. The assessment of the highest value transaction for Flex Pharma’s stockholders was performed by the Strategic Committee, a subset of the board of directors, and included a number of factors. Important considerations included, but were not limited to, the percent of the combined entity that would be owned by Flex Pharma’s stockholders as derived by the value attributed to Flex Pharma and the potential candidate in its indication of interest, plus any additional value Flex Pharma’s stockholders may ultimately receive (e.g., from warrants). However, the reasonableness of the candidate’s valuation, and the potential public market valuation of the combined entity were also considered, as was the probability that the candidate’s operating plans were sound and funded through potentially meaningful development milestones. Ultimately, Salarius was the only potential candidate in the process that Flex Pharma determined met all the critical elements (for example, it would have sufficient cash on hand or financing commitments) and with which Flex Pharma ultimately reached a mutual understanding on deal terms (including Flex Pharma’s current stockholders’ ownership of the combined company). As a result, Flex Pharma’s board of directors determined that Flex Pharma should negotiate a merger agreement with Salarius, and Flex Pharma and Salarius moved forward to do so. A more detailed chronological description of the merger process follows below under “The MergerBackground of the Merger- History of Flex Pharma’s Strategic Alternatives and Significant Corporate Events.”

History of Flex Pharma’s Strategic Alternatives and Significant Corporate Events

As noted above, on June 8, 2018, Flex Pharma’s board of directors approved a plan to stop Flex Pharma’s ongoing Phase 2 studies in MND and CMT, restructure Flex Pharma and engage Wedbush to assist Flex Pharma’s board of directors with a strategic assessment to enhance stockholder value. Flex Pharma’s board of directors also established the Strategic Committee (initially consisting of Stuart Randle (Chair), William McVicar, Roger Tung and Peter Hutt) to, among other things, make recommendations to Flex Pharma’s board of directors with respect to strategic matters.

On June 12, 2018, Flex Pharma executed an engagement letter with Wedbush for Wedbush to act as Flex Pharma’s exclusive financial advisor in connection with Flex Pharma’s strategic assessment to enhance stockholder value.

On June 13, 2018, Flex Pharma publicly announced its decisions to terminate its ongoing Phase 2 studies in MND and CMT, its restructuring (including a 60% reduction in headcount), and its engagement of Wedbush to assist with a strategic assessment to enhance stockholder value.

On June 15, 2018, Flex Pharma and Wedbush held a kick-off meeting to discuss the strategic assessment, timelines, planned outreach, responsibilities and expectations. Also, Flex Pharma engaged Duane Morris LLP (which we refer to as “Duane Morris”) as its legal counsel in connection with the strategic assessment and a potential transaction with a potential candidate.

On June 18, 2018, Flex Pharma provided the form of confidentiality agreement for potential candidates to Wedbush, which Wedbush provided to potential candidates.

On June 19, 2018, Flex Pharma and Wedbush finalized Flex Pharma’s corporate presentation, which Wedbush provided to potential candidates that executed confidentiality agreements.

Between June 2018 and September 2018, Flex Pharma and Wedbush held initial calls with 37 interested parties regarding a potential sale, merger or other transaction. During this time, Flex Management provided updates of the strategic assessment process to the Strategic Committee and Flex Pharma’s board of directors through meetings, email and individual phone calls.

Between July 2018 and September 2018, Wedbush distributed process letters to 37 potential candidates.

 

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On July 3, 2018, Mr. Hutt resigned from the Strategic Committee due to his time constraints.

On July 16, 2018, the Strategic Committee held a meeting. The meeting included John McCabe and representatives of Wedbush and Duane Morris. At the meeting, Flex Management and Wedbush provided an update of the strategic assessment process.

By July 20, 2018, Wedbush received 20 indications of interest from potential candidates. Wedbush received an additional six indications of interest after July 20, 2018, bringing the total number of indications of interest to 26. As indicated, the process letter provided to each potential candidate requested that it submit a letter of interest that included information Flex Pharma would use to evaluate it as a candidate, including the value attributed to Flex Pharma and the candidate and the proposed equity ownership split of the combined entity. The following table shows, for each of Parties 1 through 9 and Salarius, the value attributed by such party to Flex Pharma, such party’s proposed ownership percentage of Flex Pharma’s stockholders in the combined entity, and such party’s self-determined valuation, in each case subject to assumptions stated in the indications of interest.

 

Party Number

   Value
Attributed to

Flex Pharma
($M)
     Proposed
Ownership of
Flex Pharma’s
Stockholder
in Combined
Entity

(%)
    Counterparty’s
Self-Valuation
($M)
     Total
Valuation of
Combined
Entity

($M)
 

1

   $ 10.30        7.9   $ 120.00      $ 130.30  

2

   $ 9.00        15.5   $ 49.00      $ 58.00  

3

   $ 7.00        9.9   $ 64.00      $ 71.00  

4

   $ 15.00        10.0   $ 135.00      $ 150.00  

5

   $
 
15.00, later
reduced1
 
 
    

8.6%, later
reduced to

5.3%1

 
 

 

  $ 160.00      $ 175.00  

6

   $ 10.00        11.8   $ 75.00      $ 85.00  

7

   $ 8.60        3.9   $ 211.50      $ 220.10  

8

   $ 17.30        18.7   $ 75.00      $ 92.30  

9

     unspecified        6.50     unspecified        unspecified  

Salarius

   $ 10.5       

22.3%, later
reduced to
19.9%2
 
 
 
  $ 36.6      $ 47.1  

 

1.

Party 5’s letter of interest dated July 20, 2018 proposed 8.6% of the combined entity’s equity would be owned by Flex Pharma’s stockholders based on the valuations of $15 million for Flex Pharma and $160 million for Party 5. However, Party 5 ultimately agreed in a non-binding term sheet dated October 20, 2018 that Flex Pharma’s stockholder would own 5.3% of the combined entity and that such ownership would be supplemented by warrants issued to Flex Pharma’s stockholders such that its stockholders would own in total (including the initial 5.3% of the combined entity) 10% of the economic value of the combined entity if the combined entity reached a market capitalization of $500 million.

 

2.

Salarius’ letter of interest dated July 20, 2018 proposed 22.3% of the combined company’s equity would be owned by Flex Pharma’s stockholders based on the valuations of $10.5 million for Flex Pharma and $36.6 million for Salarius (subject to certain adjustments described in this proxy statement/prospectus/information statement). On December 16, 2018, Salarius informed Flex Pharma that this proposed equity split could create a taxable event for certain Salarius members. Flex Pharma and Salarius agreed to change the initial equity that would be owned by Flex Pharma’s stockholders to 19.9% and to add a right for Flex Pharma’s stockholders to receive warrants, to be granted six months and one day after the closing of the merger, that would have a value that would bring Flex Pharma’s stockholder ownership to a level consistent with a valuation of $10.5M (subject to certain adjustments described in this proxy statement/prospectus/information statement).

 

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On July 23, 2018, Roderick MacKinnon resigned from Flex Pharma’s board of directors to pursue other interests.

On July 25, 2018, the Strategic Committee held a meeting. The meeting included members of Flex Management, representatives of Wedbush and Duane Morris, and Michelle Stacy (a member of Flex Pharma’s board of directors). The Strategic Committee reviewed the potential candidates and the terms of their proposed transactions to determine which potential candidates it would invite to present in person to the Strategic Committee and Flex Management. The Strategic Committee determined that it would invite seven potential candidates (which we refer to as Party 1, Party 2, Party 3, Party 4, Party 5, Party 6 and Party 7) to present based on this indication of interest. In determining which parties would be invited to present, the Strategic Committee and Flex Pharma’s management considered, among other factors: each party’s portfolio of products and the potential for significant value appreciation; whether the party had cash on hand or had the ability to raise capital before or concurrent with a potential transaction that was sufficient to fund the combined entity through meaningful development milestones that could increase stockholder value; the value attributed to Flex Pharma and the ownership percentage of Flex Pharma’s stockholders in the combined entity; the ability of the party to enter into an agreement with Flex Pharma in the near-term; and, whether the party’s management team would be able to accomplish the transaction and manage a public company.

Also at its meeting on July 25, 2018, the Strategic Committee determined that it may invite other potential candidates to present if they possessed the attributes important to Flex Pharma and if they provide additional information on their ability to secure adequate financing for the combined entity through potentially meaningful development milestones. The Strategic Committee did not invite Salarius to present as part of the initial group of seven companies because of uncertainty at that time relating to Salarius’ ability to secure adequate financing for the combined company.

On July 25, 2018, Flex Pharma’s board of directors held a meeting. At the meeting, the Strategic Committee provided an overview of the strategic assessment process to Flex Pharma’s board of directors. After the meeting, Wedbush contacted Parties 1 to 7 to arrange for in person presentations to occur between August 1, 2018 and August 7, 2018.

On July 31, 2018, Party 3 informed Wedbush that it did not feel it could meet the timelines for a potential transaction and withdrew from the process.

On July 31, 2018, Party 4 informed Wedbush that it had decided to withdraw from the process because it was no longer interested in pursuing a merger with Flex Pharma.

On August 1, 2018, Wedbush communicated with Party 1 regarding Party 1’s plans for financing the combined entity. Based upon those communications, Flex Pharma determined that Party 1 was no longer a suitable candidate because of Party 1’s inability to raise funds needed to support the combined entity through a potentially meaningful development milestone.

On August 2, 2018, Party 2 and Party 5 presented in person to the Strategic Committee, Flex Management, Wedbush and a Flex Pharma advisor.

On August 2, 2018, another potential candidate who previously submitted an indication of interest (which we refer to as Party 8) contacted Wedbush to provide an update on Party 8’s planned financing for the combined entity. Based upon that information, at the request of Flex Pharma, Wedbush invited Party 8 to present in person on August 7, 2018.

On August 3, 2018, Party 6 presented in person to the Strategic Committee, Flex Management, Wedbush and a Flex Pharma advisor.

 

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On August 7, 2018, Party 7 and Party 8 presented in person to the Strategic Committee, Flex Management, Wedbush and a Flex Pharma advisor.

Following the in-person presentations on August 7, 2018, the Strategic Committee selected Party 8 as the lead candidate because it appeared that Party 8 represented the highest potential value for Flex Pharma and its stockholders, based on the criteria identified above.

The Strategic Committee directed Flex Management and Wedbush to pursue negotiations with Party 8 but to also continue discussions with the other parties that presented in case Flex Pharma was unable to agree to the terms of a transaction with Party 8.

On August 13, 2018, Party 8 granted access to its virtual data room to Flex Pharma’s representatives.

On August 14, 2018, Flex Pharma granted access to its virtual data room to Party 8’s representatives.

On August 15, 2018, Flex Management held a call with Party 8 to discuss due diligence matters.

On August 20, 2018, Party 8 was provided with a draft version of a merger agreement.

Through the end of August 2018 and into early September 2018, Flex Management and Flex Pharma’s representatives continued due diligence and merger term discussions with Party 8.

The key negotiated terms discussed with Party 8 included the structure of the potential transaction, the amount of cash expected to be delivered by Flex Pharma at the closing of the transaction, the percentage ownership that Flex Pharma’s stockholders would hold in the combined entity, the amount of additional financing expected to be delivered by Party 8 prior to, or in conjunction with, the closing of the transaction and the status of litigation filed against Flex Pharma.

On August 23, 2018, the Strategic Committee held a meeting. The meeting included members of Flex Management. During the meeting, Flex Management provided an update on (i) the status of negotiations with Party 8 and the timing of a potential transaction, (ii) Party 8’s financing efforts and (iii) Flex Pharma’s continued discussions with the other potential candidates.

On August 27, 2018, the Strategic Committee held a meeting. The meeting included members of Flex Management and representatives of Cooley, Flex Pharma’s corporate counsel. At the meeting, Flex Management provided an update on the status of negotiations with Party 8, the timing of the potential transaction and the proposed ownership of Flex Pharma’s current stockholders’ of the combined entity. The Strategic Committee instructed Flex Management to continue negotiations with Party 8.

On September 5, 2018, Flex Pharma’s board of directors held a meeting. At the meeting, Flex Management updated Flex Pharma’s board of directors on the status of the potential transaction with Party 8.

On September 10, 2018, Party 8 informed Flex Pharma that it was withdrawing from negotiations due to its growing uncertainty regarding its ability to raise funds needed to support the combined entity through potentially meaningful development milestones.

On September 11, 2018, the Strategic Committee held a meeting. The meeting included members of Flex Management and representatives of Wedbush. At the meeting, the Strategic Committee discussed Party 8’s withdrawal. Wedbush informed the Strategic Committee that, as previously instructed by the Strategic Committee, it had continued discussions with the other parties that presented in early August, as well as other companies that previously submitted indications of interest. Wedbush also told the Strategic Committee that it was arranging diligence discussions with Flex Management for updates from potential candidates that had, or

 

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appeared to have, met Flex Pharma’s criteria for a potential candidate, including the ability to secure financing to support the combined company through potentially meaningful development milestones. In addition, Wedbush informed the Strategic Committee that another potential candidate (which we refer to as Party 9), which did not initially submit an indication of interested, expressed its interest in submitting an indication of interest. The Strategic Committee instructed Wedbush and Flex Management to continue diligence discussions with potential candidates.

On September 13, 2018, Flex Management and Wedbush held diligence discussions with Party 9.

On September 14, 2018, Flex Management and Wedbush held discussions with Party 5 to discuss diligence, Party 5’s interest in a potential transaction with Flex Pharma, Party 5’s clinical development plans, and Party 5’s financing plans to support the combined company through potentially meaningful development milestones.

On September 14, 2018, the Strategic Committee held a meeting. The meeting included members of Flex Management. At the meeting, Wedbush provided a summary of the discussions with the potential candidates. The Strategic Committee instructed Wedbush and Flex Management to continue parallel discussions with Party 5 and Party 9 and to continue to consider other potential candidates that submitted an indication of interest or that otherwise expressed interest in a transaction if such candidates met Flex Pharma’s criteria.

On September 14, 2018, Flex Pharma provided Party 5’s representatives with access to Flex Pharma’s virtual data room, and Party 5 provided Flex Pharma’s representatives with access to Party 5’s virtual data room.

On September 19, 2018, the Strategic Committee and Flex Management held a due diligence call with Party 9.

On September 20, 2018, Party 9 submitted its indication of interest.

From September 20, 2018 to October 1, 2018, Flex Management and Wedbush continued to have diligence discussions with Party 5, Party 9 and other parties that previously submitted indications of interest or otherwise expressed interest to assess such potential candidates’ recent progress and whether a combination with Flex Pharma would meet Flex Pharma’s criteria. Due to increasing confidence in the potential for Salarius to raise capital in a concurrent financing, Flex Pharma and Salarius discussed diligence during this time.

On October 1, 2018, the Strategic Committee held a meeting. The meeting included members of Flex Management and representatives of Wedbush. At the meeting, Flex Management and Wedbush provided an update on discussion with potential candidates. The Strategic Committee instructed Flex Management and Wedbush to continue discussions with Party 5, Party 9 and Salarius.

On October 2, 2018, Salarius provided access to its virtual data room to representatives of Flex Pharma.

On October 4, 2018, Party 9 withdrew itself from merger discussions.

On October 4, 2018, the Strategic Committee held a meeting. The meeting included members of Flex Management, representatives of Wedbush and a Flex Pharma advisor. Flex Management and Wedbush discussed the withdrawal of Party 9. Wedbush also informed the Strategic Committee that based upon recent due diligence efforts, there continued to be uncertainty related to Salarius’ ability to obtain financing through potentially meaningful development milestones. The Strategic Committee selected Party 5 as the lead merger candidate and instructed Flex Management and Wedbush to continue due diligence with Party 5 and enter into merger negotiations.

From October 4, 2018 to October 8, 2018, Flex Pharma and Party 5 discussed potential terms of a reverse takeover, subject to continued due diligence and negotiations. The key terms discussed and negotiated with

 

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Party 5 included the values of the respective parties and the ownership of Flex Pharma’s stockholders in the combined entity, the structure of the transaction, the amount of cash expected to be delivered by Flex Pharma at the close of the transaction, the potential issuance of a warrant to Flex Pharma’s stockholders as part of the transaction, the period of exclusivity, the status of outstanding litigation and the termination provisions of an acquisition agreement. Those discussions culminated in the execution of a generally non-binding term sheet between the parties on October 10, 2018. The terms included the structure of the proposed transaction, the valuations for Flex Pharma and Party 5, the share split (5.3%/94.7% for Flex Pharma/Party 5), description of warrants to be granted Flex Pharma’s stockholders to bring Flex Pharma’s stockholders’ ownership to 10% of the economic value of the combined entity if the combined entity reached a market capitalization of $500 million, Flex Pharma target cash at closing, various other terms and a binding 14 day exclusivity period between the parties.

From October 4, 2018 to November 1, 2018, Flex Pharma and Wedbush held numerous discussions with Party 5 and its representatives to discuss due diligence and potential terms of a reverse takeover.

On November 1, 2018, the Strategic Committee held a meeting. The meeting included members of Flex Management and representatives of Wedbush and Duane Morris. At the meeting, Flex Management and Wedbush provided an update of the continued negotiations and diligence with Party 5. Flex Management summarized for the Strategic Committee the more significant terms that were being negotiated, including those terms that Flex Management felt presented the most significant risk to reaching agreement with Party 5, specifically including Party 5’s recently requested closing condition requiring FlexPharma to have at least a specified minimum amount of cash at closing. Wedbush also informed the Strategic Committee that, in lieu of a portion of Wedbush’s success fee, Wedbush would be willing to accept warrants having a value equal to such portion, which would help Flex Pharma to preserve its cash.

On November 5, 2018, the Strategic Committee held a meeting. The meeting included members of Flex Management, representatives of Cooley and other members of Flex Pharma’s board of directors. At the meeting, Flex Management and Wedbush provided an update of the continued negotiations and diligence with Party 5 including an update on the significant terms that were continuing to be negotiated.

On November 7, 2018, the Strategic Committee held a meeting. The meeting included members of Flex Management and representatives of Wedbush. At the meeting, Flex Management and Wedbush provided an update of the continued negotiations and diligence with Party 5. Flex Management informed the Strategic Committee that Party 5 continued to require a closing condition based on a minimum amount of Flex Pharma’s cash at closing, which represented significant risk to closing a transaction. Flex Management and the Strategic Committee also discussed the advantages and disadvantages of alternatives for Flex Pharma, including the potential value to its stockholders of liquidating Flex Pharma, in the event Flex Pharma could not reach agreement with Party 5.

On November 8, 2018, Party 5 informed Wedbush that Party 5 would not agree to a transaction with Flex Pharma unless Flex Pharma agreed to a closing condition based on a minimum amount of Flex Pharma’s cash at closing.

Later on November 8, 2018, Flex Pharma’s board of directors held a meeting. At the meeting, the Strategic Committee, Flex Management and Wedbush discussed Party 5’s proposed terms, including a closing condition based on the amount of Flex Pharma’s cash. The Strategic Committee and the board of directors concluded that Party 5’s proposed terms represented significant risk to closing a transaction with Party 5 and, therefore, continuing discussions with Party 5 was not in the best interest of Flex Pharma and its stockholders. The Strategic Committee and Flex Pharma’s board of directors instructed Flex Management to withdraw from negotiations with Party 5. Flex Management and Wedbush then presented alternatives for Flex Pharma and provided an update on discussions with Salarius and an overview of Salarius’ indication of interest. The Strategic Committee also discussed the potential value to Flex Pharma’s stockholders of liquidating Flex Pharma as a

 

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potential alternative to continued transaction discussions. The Strategic Committee and Flex Pharma’s board of directors instructed Flex Management and Wedbush to enter into diligence discussions with Salarius to determine if a potential transaction with Salarius would meet Flex Pharma’s criteria and if Salarius had secured, or would be able to secure, adequate funding to support the combined company through potentially meaningful development milestones that could increase stockholder value.

Following the meeting, Wedbush informed Party 5 that Flex Pharma was withdrawing from transaction negotiations.

On November 9, 2018, Flex Management and Wedbush held a due diligence discussion with Salarius and their representatives to discuss the status of Salarius’ clinical development plan, Salarius’ interest in a potential transaction with Flex Pharma, the potential timing of such a transaction and the status of Salarius’ fund raising efforts. Based upon the information provided during that call, Flex Pharma decided to continue diligence discussions with Salarius.

On November 9, 2018, Salarius provided access to its virtual data room for additional Flex Pharma representatives and Flex Pharma provided access to its virtual data room for Salarius representatives.

Through November 16, 2018, Flex Pharma and Salarius discussed diligence, as well as potential transaction terms in the form of a draft generally non-binding term sheet. The key terms discussed and negotiated with Salarius included the structure of the transaction, the values attributed to the respective parties, the ownership percentage of Flex Pharma’s stockholders in the combined company, the amount of cash that Flex Pharma expected to deliver at the closing of the transaction, the amount of financing that Salarius expected to complete prior to the transaction, the conditions of closing, the status of outstanding litigation, the size and allocation of members of the combined company’s board of directors, the operations of the respective businesses prior to the closing of the transaction, the termination provisions in the acquisition agreement and the treatment of Flex Pharma’s legacy assets.

On November 16, 2018, the Strategic Committee held a meeting. The meeting included members of Flex Management and representatives of Wedbush and Duane Morris. At the meeting, Flex Management and Wedbush summarized their recent discussions with Salarius. Flex Management recommended that Flex Pharma enter into exclusivity with Salarius (subject to a “fiduciary out”), continue diligence with Salarius and begin negotiating a merger agreement with Salarius. The Strategic Committee agreed with the recommendation. In deciding to continue discussions with Salarius, Flex Pharma’s Management and the Strategic Committee believed that due to the passage of time and Flex Pharma’s previous and extensive efforts to complete a transaction, that the continued effort to complete a transaction with Salarius was warranted, and if the transaction were not successful, that Flex Pharma would likely face dissolution.

On November 19, 2018, the parties executed a thirty-one day exclusivity agreement, which included a “fiduciary out” for Flex Pharma’s board of directors.

On November 21, 2018, Flex Pharma sent Salarius a draft merger agreement.

On November 26, 2018, the Chairman of Salarius visited the offices of Flex Pharma and met with members of Flex Management and Flex Pharma’s board of directors to discuss the potential merger, the appropriate credentials for certain roles on the board of directors of the combined company and other matters.

On December 1, 2018, Salarius sent to Flex Pharma its initial comments on the draft merger agreement.

On December 16, 2018, Salarius informed Flex Pharma that Salarius’ members would be subject to a taxable event based on current deal terms. Salarius and Flex continued to discuss the matter and proposed that certain terms of the deal be changed in order to avoid the taxable event.

 

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On December 18, 2018, Flex Pharma and Salarius agreed to extend the exclusivity period until December 31, 2018.

On December 20, 2018, Flex Management informed Flex Pharma’s board of directors of the proposed change in economic terms, which would reduce Flex Pharma’s stockholders’ ownership of the combined company to 19.9% in exchange for receiving warrants to purchase shares of the combined company, as discussed elsewhere in this proxy statement/prospectus/information statement. Flex Pharma’s board of directors approved the change in the terms.

On December 30, 2018, Flex Pharma and Salarius agreed to extend the exclusivity period until January 7, 2019.

On January 1, 2018, Flex Pharma engaged Dentons Canada LLP (which we refer to as “Dentons”) as legal counsel to assist Flex Pharma with the transaction.

Between November 16, 2018 and January 3, 2019, in addition to the above, numerous discussions occurred between Flex Pharma’s representatives (including Flex Management, members of Flex Pharma’s board of directors, Wedbush, Duane Morris and Dentons) and Salarius’ management and representatives. These discussions included continued due diligence by Flex Pharma and Salarius, negotiation of the Merger Agreement and operations of the merged company, among others. In addition, Flex Pharma and Salarius discussed the potential issuance of a warrant to Wedbush in lieu of a portion of Wedbush’s success fee. These discussions eventually resulted in a final draft merger agreement that was presented to the Strategic Committee and Flex Pharma’s board of directors on January 3, 2019.

On January 3, 2019, the Strategic Committee held a meeting to discuss the terms of the proposed transaction with Salarius. The meeting included members of Flex Management, representatives of Wedbush, Dentons and Cooley, and members of Flex Pharma’s board of directors. The Dentons’ representative reviewed the fiduciary duties of the Strategic Committee and Flex Pharma’s board of directors with respect to the proposed merger with Salarius. The Dentons’ representative also provided an overview of the negotiation process with Salarius’ representatives, as well as a presentation regarding the terms and conditions of the draft Merger Agreement, the draft voting agreement, the draft lock-up agreement and other related documents. The Strategic Committee also discussed that to date, Salarius had not had, and had not requested to have, discussions with Flex Management or directors regarding their roles, compensation, retention or investment arrangements in connection with the proposed transaction, other than Dr. McVicar’s position as director of the combined company following the merger, which is described in the section entitled “The MergerInterests of Flex Pharma’s Directors and Executive Officers in the Merger” beginning on page 118 of this proxy statement/prospectus/information statement. (The discussions regarding Dr. McVicar’s position as a director of the combined company occurred after Flex Pharma and Salarius had agreed on their relative valuations, including Flex Pharma’s current stockholders’ economic interest in the combined company.) Representatives of Wedbush then informed the Strategic Committee that Wedbush was prepared to deliver its fairness opinion to Flex Pharma’s board of directors. The Strategic Committee unanimously determined that the transaction with Salarius represented the highest value reasonably available to Flex Pharma and its stockholders. The Strategic Committee also unanimously determined that the Merger Agreement and the transactions contemplated by the Merger Agreement were advisable, fair to, and in the best interests of, Flex Pharma’s stockholders and that it was advisable and in the best interests of Flex Pharma and its stockholders to enter into the Merger Agreement and the related agreements and to consummate the transactions contemplated thereby. In addition, the Strategic Committee recommended that Flex Pharma’s board of directors (i) approve and declare advisable to Flex Pharma and its stockholders the Merger Agreement, the merger and the transactions contemplated by the Merger Agreement, (ii) direct Flex Pharma to enter into and deliver the Merger Agreement and the related agreements, and (iii) recommend (and the Strategic Committee did recommend) that Flex Pharma’s stockholders vote to approve the proposals in this proxy statement/prospectus/information statement.

 

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Immediately following the meeting of the Strategic Committee, Flex Pharma’s board of directors held a meeting to consider the proposed transaction with Salarius. The meeting included members of Flex Management and representatives of Wedbush, Dentons and Cooley. Representatives of Wedbush confirmed that (i) Wedbush had not provided any investment banking services to Salarius, or received any compensation from Salarius, in the last two years, (ii) none of Wedbush or its corporate advisory affiliates owned any equity or debt interests in Salarius during the last two years, and (iii) neither Wedbush nor any member of Wedbush’s transaction team had any other conflicts of interest or potential conflicts of interest relating to Flex Pharma’s potential transaction with Salarius. Representatives of Wedbush provided an overview of the transaction process with Salarius. Representatives of Wedbush then orally delivered to Flex Pharma’s board of directors Wedbush’s fairness opinion, which was confirmed by Wedbush’s delivery of its written fairness opinion, that, as of that date, and based upon the assumptions made, procedures followed, matters considered, and qualifications and limitations set forth in its written fairness opinion, the consideration to be paid by Flex Pharma pursuant to the Merger Agreement was fair, from a financial point of view, to Flex Pharma. After further discussing the advantages and risks of the proposed transaction that are described in the section entitled “The MergerFlex Pharma’s Reasons for the Merger; Recommendations of the Flex Pharma Board of Directors,” and based on the discussions, deliberations and recommendations at the Strategic Committee meeting, Flex Pharma’s board of directors unanimously determined that the transaction with Salarius represented the highest value reasonably available to Flex Pharma and its stockholders. Flex Pharma’s board of directors also determined that the merger and the other transactions contemplated by the Merger Agreement and related agreements, on the terms and subject to the conditions set forth in the Merger Agreement, were fair to, and in the best interests of, Flex Pharma and its stockholders. In addition, Flex Pharma’s board of directors (i) authorized and approved the execution, delivery and performance of the Merger Agreement by Flex Pharma, and the transactions contemplated by the Merger Agreement and the related agreements, (ii) declared that the Merger Agreement, the merger and the other transactions contemplated by the Merger Agreement and the related documents are advisable, (iii) directed Flex Pharma’s Chief Executive Officer or Chief Financial Officer to execute and deliver the Merger Agreement and the related agreements on behalf of Flex Pharma and (iv) recommend that Flex Pharma’s stockholders vote to approve the proposals in this proxy statement/prospectus/information statement. Flex Pharma’s board of directors also approved the issuance of a warrant to Wedbush in lieu of a portion of their success fee.

Later on January 3, 2019, Flex Pharma and Salarius executed the Merger Agreement, the voting agreements and the lock-up agreements.

On January 4, 2019, Flex Pharma and Salarius issued a joint press release publicly announcing their entry into the Merger Agreement.

Flex Pharma’s Reasons for the Merger; Recommendations of Flex Pharma’s board of directors

In the course of its evaluation of the merger and the Merger Agreement, the Flex Pharma board of directors held numerous meetings, consulted with its management, legal counsel and its financial advisor and reviewed a significant amount of information and, in reaching its decision to approve the merger and the Merger Agreement, Flex Pharma’s board of directors considered a number of factors, including, among others, the following factors:

 

   

information concerning Flex Pharma’s business, financial performance (both past and prospective) and its financial condition, results of operation (both past and prospective), business and strategic objectives, as well as the risks of accomplishing those objectives;

 

   

the possible alternatives to the merger, the range of possible benefits and risks to the Flex Pharma stockholders of those alternatives and the timing and the likelihood of accomplishing the goal of any of such alternatives and Flex Pharma’s board of directors’ assessment that the merger presented a superior opportunity to such alternatives for Flex Pharma stockholders;

 

   

Flex Pharma’s board of directors’ view of the valuation of the potential merger candidates. In particular, taking into account the advice of Wedbush, Flex Pharma’s board of directors’ view that

 

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Salarius was the most attractive candidate because of its clinical and preclinical programs. After considering the financial advice it had received from Wedbush, Flex Pharma’s board of directors believed that the merger would create a publicly traded company that would create more value for Flex Pharma’s stockholders than any of the other proposals that Flex Pharma’s board of directors had received;

 

   

the ability of Flex Pharma’s stockholders to participate in the future growth potential of the combined company following the merger;

 

   

the results of discussions with third parties relating to a possible business combination or similar transaction with Flex Pharma;

 

   

the process undertaken by Flex Pharma’s board of directors in connection with pursuing a strategic transaction and the terms and conditions of the proposed merger, in each case in light of the current market dynamics;

 

   

current financial market conditions and historical market prices, volatility and trading information with respect to Flex Pharma’s common stock;

 

   

the potential for obtaining a superior offer from an alternative purchaser in light of the other potential strategic buyers previously identified and contacted by or on behalf of Flex Pharma and the risk of losing the proposed transaction with Salarius;

 

   

the terms of the Merger Agreement, including the parties’ representations, warranties and covenants, the conditions to their respective obligations and the termination rights of the parties;

 

   

The financial analysis presented by Wedbush to Flex Pharma’s board of directors on January 3, 2019 and Wedbush’s opinion, dated January 3, 2019, to Flex Pharma’s board of directors that, as of the date of the opinion and based upon its analysis and subject to the assumptions made, matters considered, qualifications and limitations set forth therein, the Exchange Ratio, as provided in the Merger Agreement, was fair to Flex Pharma from a financial point of view (as more fully described in the section entitled “The MergerOpinion of Flex Pharma’s Financial Advisor” beginning on page 110);

 

   

the likelihood that the merger would be consummated; and

 

   

the Merger Agreement, subject to the limitations and requirements contained in the Merger Agreement, provides Flex Pharma’s board of directors with flexibility to furnish information to and conduct negotiations with third parties in certain circumstances and, upon payment to Salarius of a termination fee of $350,000 (which Flex Pharma’s board of directors believes is reasonable under the circumstances) to terminate the Merger Agreement, to accept a superior proposal.

In the course of its deliberations, Flex Pharma’s board of directors also considered, among other things, the following negative factors:

 

   

the possibility that the merger will not be consummated and the potential negative effect of the public announcement of the merger on Flex Pharma’s business and stock price;

 

   

the challenges inherent in the combination of the two divergent businesses of the size and scope of Flex Pharma and Salarius;

 

   

certain provisions of the Merger Agreement that could have the effect of discouraging proposals for competing proposals involving Flex Pharma, including the restrictions on Flex Pharma’s ability to solicit proposals for competing transactions involving Flex Pharma and that under certain circumstances Flex Pharma may be required to pay to Salarius termination fee of $350,000;

 

   

the substantial fees and expenses associated with completing the merger; and

 

   

the risk that the merger may not be completed despite the parties’ efforts or that the closing may be unduly delayed and the effects on Flex Pharma as a standalone company because of such failure or

 

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delay, and that a more limited range of alternative strategic transactions may be available to Flex Pharma in such an event.

Although this discussion of the information and factors considered by Flex Pharma’s board of directors is believed to include the material factors considered by Flex Pharma’s board of directors, it is not intended to be exhaustive. In light of the variety of factors considered in connection with their evaluation of the merger and the complexity of these matters, Flex Pharma’s board of directors did not find it practicable to and did not quantify or attempt to assign any relative or specific weights to the various factors that it considered in reaching its determination that the merger and the Merger Agreement are advisable and in best interests of Flex Pharma and its stockholders. In addition, Flex Pharma’s board of directors did not undertake to make any specific determination as to whether any particular factor, or any aspect of any particular factor, was favorable or unfavorable to the ultimate determination of Flex Pharma’s board of directors, but rather Flex Pharma’s board of directors conducted an overall analysis of the factors described above, including discussions with and questioning of Flex Management, Cooley, Duane Morris, Dentons and Wedbush.

Recommendation of Flex Pharma’s board of directors

After careful consideration, Flex Pharma’s board of directors approved the Merger Agreement and the merger and determined that the Merger Agreement and the merger are advisable, and in the best interests of, the stockholders of Flex Pharma. Therefore, Flex Pharma’s board of directors recommends Flex Pharma stockholders vote “ FOR ” the issuance of the shares of Flex Pharma common stock in the merger and the other Flex Pharma proposals set forth in this proxy statement/prospectus/information statement.

In considering the recommendation of Flex Pharma’s board of directors with respect to the issuance of shares of Flex Pharma common stock in the merger, you should be aware that the directors and executive officers of Flex Pharma may have interests in the merger that are different from, or are in addition to, the interests of Flex Pharma stockholders. Please see “The Merger-Interests of Flex Pharma’s Executive Officers and Directors in the Merger.”

FLEX PHARMA’S BOARD UNANIMOUSLY DETERMINED THAT THE MERGER AGREEMENT AND THE MERGER ARE ADVISABLE, FAIR AND IN THE BEST INTERESTS OF FLEX PHARMA’S STOCKHOLDERS AND UNANIMOUSLY APPROVED THE MERGER AGREEMENT. FLEX PHARMA’S BOARD UNANIMOUSLY RECOMMENDS THAT FLEX PHARMA’S STOCKHOLDERS APPROVE THE ISSUANCE OF FLEX PHARMA’S COMMON STOCK PURSUANT TO THE MERGER AGREEMENT AND THE DIVIDEND OR DISTRIBUTION OF RIGHTS, AND ISSUANCE OF WARRANTS, TO FLEX PHARMA’S STOCKHOLDERS PURSUANT TO THE MERGER AGREEMENT AND THE REVERSE STOCK SPLIT.

Salarius Reasons for the Merger

In the course of reaching its decision to approve the merger, Salarius’ board of managers consulted with its senior management, financial advisor and legal counsel, reviewed a significant amount of information and considered a number of factors, including, among others:

 

   

the potential to provide its current members with greater liquidity by owning stock in a public company;

 

   

Salarius’ need for capital to support the clinical development of its product candidates and the potential to access public market capital, including sources of capital from a broader range of investors than it otherwise would be able to obtain if it continued to operate as a privately-held company;

 

   

the expectation that the merger would be a more time- and cost-effective means to access capital than other options considered;

 

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the fact that shares of Flex Pharma common stock issued to Salarius members will be registered pursuant to a registration statement on Form S-4 by Flex Pharma and will become freely tradable for Salarius’ members who are not affiliates of Salarius;

 

   

the likelihood that the merger will be consummated on a timely basis;

 

   

the terms and conditions of the Merger Agreement, including, without limitation, the following:

 

   

the determination that the conversion ratios are not subject to adjustment based on trading prices is appropriate to reflect the expected relative percentage ownership of Flex Pharma stockholders and Salarius members, based on the judgment of Salarius’ board of managers; and

 

   

the conclusion of Salarius’ board of managers that the potential termination fee of $350,000, and/or expense reimbursements and/or third-party expenses of up to $200,000, payable by Flex Pharma to Salarius and the circumstances when such fee may be payable, were reasonable.

Salarius’ board of managers also considered a number of uncertainties and risks in its deliberations concerning the merger and the other transactions contemplated by the Merger Agreement, including the following:

 

   

the possibility that the merger might not be completed in a timely manner, or at all, and the potential adverse effect of the public announcement of the merger on the reputation of Salarius and the ability of Salarius to obtain financing in the future in the event the merger is not completed;

 

   

the termination fee of $1,000,000 or $350,000, and/or expense reimbursements, payable by Salarius to Flex Pharma upon the occurrence of certain events, and the potential effect of such termination fee in deterring other potential acquirers from proposing a competing transaction that may be more advantageous to Salarius’ members;

 

   

the expenses to be incurred in connection with the merger and related administrative challenges associated with combining the companies;

 

   

the additional public company expenses and obligations that Salarius’ business will be subject to following the merger to which it has not previously been subject; and

 

   

various other risks associated with the combined company and the merger, including the risks described in the section titled “Risk Factors” in this proxy statement/prospectus/information statement.

The foregoing information and factors considered by Salarius’ board of managers are not intended to be exhaustive, but are believed to include all of the material factors considered by Salarius’ board of managers. In view of the wide variety of factors considered in connection with its evaluation of the merger and the complexity of these matters, Salarius’ board of managers did not find it useful, and did not attempt, to quantify, rank or otherwise assign relative weights to these factors. In considering the factors described above, individual members of Salarius’ board of managers may have given different weight to different factors. Salarius’ board of managers conducted an overall analysis of the factors described above, including thorough discussions with, and questioning of, Salarius’ management and Salarius’ legal advisors, and considered the factors overall to be favorable to, and to support, its determination.

Opinion of Flex Pharma’s Financial Advisor

Scope of the Assignment

In June 2018, the Flex Pharma board of directors engaged Wedbush to provide investment banking services in connection with Flex Pharma’s evaluation and consideration of various strategic alternatives, including a potential merger or sale transaction. As a result of its consideration of various strategic alternatives, the Flex Pharma board of directors decided to pursue a strategic transaction with Salarius. The Flex Pharma board of directors requested that Wedbush render an opinion as to whether the consideration to be paid by Flex Pharma in

 

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the merger was fair, from a financial point of view. At the January 3, 2019 meeting of the Flex Pharma board of directors, Wedbush rendered its oral opinion, subsequently confirmed by delivery of a written opinion dated January 3, 2019, to the Flex Pharma board of directors that, as of the date of such opinion, and based upon the assumptions made, procedures followed, matters considered, and qualifications and limitations of the review set forth in its written opinion, the consideration to be paid by Flex Pharma in the merger was fair, from a financial point of view. For purposes of Wedbush’s opinion, the term “consideration” refers to the shares of Flex Pharma common stock to be issued by Flex Pharma in the merger. At the request of the Flex Pharma board of directors, for purposes of rendering its opinion, Wedbush assumed that the number of shares of Flex Pharma common stock to be issued in the merger is based on an ascribed valuation of $9.0 million for Flex Pharma and $36.0 million for Salarius.

The full text of Wedbush’s written opinion, which sets forth the procedures followed, assumptions made, matters considered, and qualifications and limitations of the review undertaken in connection with such opinion, is attached to this proxy statement/prospectus/information statement as Annex F. Wedbush’s opinion was intended solely for the benefit and use of the Flex Pharma board of directors (in its capacity as such) in connection with its consideration of the merger. Wedbush’s opinion was not intended to be used for any other purpose without Wedbush’s prior written consent in each instance, except as expressly provided for in the engagement letter between Flex Pharma and Wedbush. Wedbush has consented to the use of Wedbush’s opinion in this proxy statement/prospectus/information statement. Wedbush’s opinion did not address Flex Pharma’s underlying business decision to enter into the Merger Agreement or complete the merger or the merits of the merger as compared to any alternative transactions that were or may be available to Flex Pharma, and did not constitute a recommendation to the Flex Pharma board of directors or to any holder of Flex Pharma common stock as to how such shareholder should vote with respect to the merger or otherwise. The following summary of Wedbush’s opinion is qualified in its entirety by reference to the full text of such opinion.

For purposes of its opinion and in connection with its review, Wedbush, among other things:

 

   

reviewed a draft of the Merger Agreement dated January 3, 2019;

 

   

reviewed certain publicly available business and financial information relating to Flex Pharma and Salarius;

 

   

reviewed certain internal information, primarily financial in nature, including financial and operating data furnished to Wedbush by the managements of Flex Pharma and Salarius and approved for Wedbush’s use by Flex Pharma;

 

   

reviewed certain publicly available information with respect to Flex Pharma and other companies in the biopharmaceutical industry that Wedbush believed to be similar in certain respects, in whole or in part, to Salarius;

 

   

considered the financial terms, to the extent publicly available, of selected recent business combinations and initial public offerings of companies in the biopharmaceutical industry that Wedbush believed to be similar in certain respects to Salarius, in whole or in part, and to the merger; and

 

   

made inquiries regarding and discussed the draft Merger Agreement and other matters related thereto with Flex Pharma’s and Salarius’ respective counsel.

In addition, Wedbush held discussions with the members of management of Flex Pharma and Salarius, respectively, concerning their views as to the financial and other information described in the bullet points above. Wedbush also conducted such other analyses and examinations and considered such other financial, economic and market criteria as Wedbush deemed appropriate to arrive at its opinion.

In rendering its opinion, Wedbush has assumed and relied upon the accuracy and completeness of all information that was publicly available or was furnished to or discussed with Wedbush by Flex Pharma or otherwise reviewed by Wedbush. With respect to information provided to or reviewed by Wedbush, Flex

 

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Pharma’s management advised Wedbush that such information was reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of Flex Pharma. Wedbush expressed no view as to the reasonableness of such financial information or the assumptions on which it was based.

Wedbush further relied on the assurances of Flex Pharma’s management that they were not aware of any facts that would make the information provided to Wedbush incomplete or misleading. Wedbush did not make and was not provided with any independent evaluations or appraisals of any of the assets, properties, liabilities (including any contingent, derivative or off-balance-sheet assets or liabilities) or securities, nor did Wedbush make any physical inspection of the properties or assets, of Flex Pharma or Salarius. With respect to the operating income and expense forecasts of Flex Pharma, Wedbush assumed that such projections had been reasonably prepared on a basis reflecting the best currently available estimates and judgments of the management of Flex Pharma as to the future operating income and expenses of Salarius and Flex Pharma and that Salarius and Flex Pharma will perform substantially in accordance with such projections. Wedbush assumed no responsibility for and expressed no view as to any such projections or the assumptions on which they were based. Wedbush did not evaluate the solvency or fair value of Salarius, Flex Pharma, or any of their respective subsidiaries (or the impact of the merger thereon) under any law relating to bankruptcy, insolvency or similar matters.

Wedbush’s opinion was based on financial, economic, market and other conditions as in effect on, and the information made available to Wedbush as of, the date of such opinion. Wedbush also relied, without independent verification, on the accuracy and completeness of Salarius’ and Flex Pharma’s representations and warranties in the Draft Merger Agreement, without regard to any qualifications or exceptions that may be set forth in disclosure schedules, and the information provided to Wedbush by Flex Pharma and Salarius. In addition, Wedbush assumed that the merger would be consummated in accordance with the terms set forth in the Draft Merger Agreement without any waiver, amendment or delay of any terms or conditions that would be material to Wedbush’s analysis. Representatives of Flex Pharma advised Wedbush that, and Wedbush further assumed that, the final terms of the Merger Agreement would not differ from the terms set forth in the Draft Merger Agreement in any respect material to Wedbush’s analysis. Wedbush also assumed that all governmental, regulatory or other consents and approvals necessary for the consummation of the merger would be obtained without imposition of any terms or conditions that would be material to Wedbush’s analysis. Wedbush noted that events occurring after the date of its opinion could materially affect the assumptions used in preparing its opinion. Wedbush did not undertake any obligation to reaffirm or revise its opinion or otherwise comment upon any events occurring after the date of such opinion.

Wedbush was not a legal, tax or regulatory advisor, and did not express any opinion as to any tax or other consequences that may arise from the merger, nor did its opinion address any legal, regulatory or accounting matters, as to which Wedbush understood that Flex Pharma had obtained such advice as it deemed necessary from qualified professionals. Wedbush was a financial advisor only and relied upon, without independent verification, the assessment of Salarius and Flex Pharma and their legal, tax or regulatory advisors with respect to legal, tax or regulatory matters. Wedbush assumed that the merger will have the tax effects contemplated by the Merger Agreement.

Wedbush is an investment banking firm and a member of The New York Stock Exchange and other principal stock exchanges in the United States, and is regularly engaged as part of its business in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, private placements, secondary distributions of listed and unlisted securities, and valuations for corporate, estate and other purposes. Wedbush was selected by Flex Pharma based on Wedbush’s experience, expertise and reputation and its familiarity with Flex Pharma. The Flex Pharma board of directors did not impose any limitations on Wedbush with respect to the investigations made or procedures followed in rendering its opinion. Wedbush’s opinion was approved by a fairness committee at Wedbush in accordance with the requirements of FINRA Rule 5150.

In rendering its opinion, Wedbush expressed no opinion as to the amount or nature of any compensation to any officers, directors, or employees of Flex Pharma, or any class of such persons, whether relative to the

 

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consideration to be paid in the merger or otherwise, or with respect to the fairness of any such compensation. Wedbush did not opine as to the merits of the merger as compared to any alternative transactions that may have been available to Flex Pharma.

Wedbush was not asked to, nor did it, offer any opinion as to the terms, other than the consideration to be paid by Flex Pharma to the extent expressly set forth in Wedbush’s opinion, of the Merger Agreement or the form of the merger. Wedbush did not express any opinion with respect to the terms of any other agreement entered into or to be entered into in connection with the merger. Wedbush expressed no opinion as to the price at which Flex Pharma common stock may trade at any time subsequent to the announcement of the merger.

Flex Pharma agreed to pay Wedbush a fee for rendering its opinion, which is not contingent upon the success of the merger and a success fee which is contingent on the consummation of the merger. Flex Pharma has the option to pay half of the success fee in the form of five-year warrants to purchase shares of Flex Pharma common stock on a “cashless basis.” In addition, Flex Pharma agreed to reimburse Wedbush for its reasonable out-of-pocket expenses and to indemnify Wedbush for certain liabilities arising out of the engagement. Wedbush has not previously provided investment banking services to Salarius.

In the ordinary course of its business, Wedbush and its affiliates, as well as investment funds in which Wedbush and its affiliates may have financial interests, may acquire, hold or sell, long or short positions, or trade or otherwise effect transactions, in debt, equity, and other securities and financial instruments (including loans and other obligations) of, or make investments in, Salarius, Flex Pharma, or in any other entity.

Summary of Analyses

The following is a summary of the material financial analyses performed by Wedbush in connection with reaching its opinion:

 

   

Flex Pharma Valuation consisting of:

 

   

Liquidation Analysis

 

   

Public Market Equity Value Analysis

 

   

Salarius Valuation consisting of:

 

   

Public Company Market Valuation Analysis

 

   

Precedent M&A Transaction Analysis

 

   

Precedent Initial Public Offering Analysis

The following summaries are not a comprehensive description of Wedbush’s opinion or the analyses and examinations conducted by Wedbush, and the preparation of an opinion necessarily is not susceptible to partial analysis or summary description. Wedbush believes that such analyses and the following summaries must be considered as a whole and that selecting portions of such analyses and of the factors considered, without considering all such analyses and factors, would create an incomplete view of the process underlying the analyses. The order in which the analyses are described below does not represent the relative importance or weight given to the analyses by Wedbush. Some of the summaries of financial analyses below include information presented in tabular format. In order to fully understand the analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of Wedbush’s analyses. Considering the data described below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of the analyses.

In performing its analyses, Wedbush made numerous assumptions with respect to industry performance and general business and economic conditions such as industry growth, inflation, interest rates and many other

 

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matters, many of which are beyond the control of Flex Pharma and Wedbush. Any estimates contained in Wedbush’s analyses are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by such analyses.

Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before January 3, 2019 and is not necessarily indicative of current market conditions.

Liquidation Analysis

The Liquidation Analysis is a valuation methodology that calculates a company’s value based on the amount of cash the company would have available for distribution to common shareholders in a liquidation after the payment of creditors. Flex Pharma provided an estimated cash balance of $9.7 million at December 31, 2018. Based upon Flex Pharma management’s estimates of future liabilities with respect to payables and accruals, payment of director and officer tail policy, employee severance and retention, retention of wind down officers, consultants, and related costs, legal wind down costs, director and officer deductible holdbacks, additional amounts for unplanned expenses, Wedbush noted that Flex Pharma management estimated that the cash available for distribution to common shareholders upon liquidation of Flex Pharma, which would likely be completed between December 2020 and December 2021, would be between $3.5 million and $5.0 million.

Public Market Equity Value Analysis

The Public Market Equity Value Analysis is based on the number of Flex Pharma fully-diluted shares using the treasury stock method and the volume-weighted average price of Flex Pharma common stock at trading intervals of the 5 days, 10 days, 15 days, and 30 days ending January 3, 2019. Wedbush noted that on June 13, 2018, Flex Pharma issued a press release announcing its decision to close the Phase 2 studies of FLX-787. Flex Pharma’s announcement resulted in Flex Pharma’s common stock dropping from a per share closing price of $4.18 on June 12, 2018 to $1.04 on June 13, 2018. Wedbush calculated the Equity Value range to Flex Pharma to be $5.6 to $7.1 million.

The stand-alone analyses of Flex Pharma yielded an Equity Value range of $3.5 to $7.1 million.

Salarius Valuation Summary

Public Company Market Valuation Analysis

Wedbush reviewed selected financial data of 13 publicly traded companies with market capitalization under $600 million in the biopharmaceutical industry that have initiated a Phase 1 oncology trial in the lead program and do not have product candidates beyond Phase 1. The below $600 million criteria was not based on the expected market capitalization of Salarius and was chosen by Wedbush to obtain a meaningful sample size of comparison companies. Wedbush chose the selected publicly traded companies based on its experience and professional judgement. Wedbush did not exclude any company that met this criteria unless the company had previously announced that it intended to pursue a corporate restructuring or an asset sale. Wedbush noted that, although such companies were considered similar to Salarius, none of the companies had the same management, make-up, regulatory outlook, technology, or size or mix of business as Salarius and, accordingly, there are inherent limitations on the applicability of these peer companies to the valuation analysis.

 

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Wedbush analyzed the Equity Value of the selected publicly-traded companies and found a mean Equity Value of $248.3 million and a median Equity Value of $141 million.

 

Issuer

   Market
Cap
 

Adaptimmune

   $ 558.4  

Gritstone

     495.1  

Arcus