PRELIMINARY PROSPECTUS Subjectalternative, each Pre-Funded Warrant to completion, dated ____________
Heatwurx, Inc.
1,500,000 Units
$5.10 per Unit
This is the initial public offering of Heatwurx, Inc. Each unit consists ofpurchase one share of common stock, and one half (1/2) common stock purchase warrant which may be exercised to purchase one sharethe number of Common Warrants sold in this offering will not change as a result of a change in the mix of the shares of our common stock at $5.00 per share for a period of one year. A total of 1,500,000 units are being offered by the Company. No public market currently exists for our common stock or warrants. We anticipate that the initial public offering price will be $5.10 per unit.and Pre-Funded Warrants sold. The units will not trade separately as units.
A selling stockholder has agreed to sell 200,000 shares of common stock or Pre-Funded Warrants, as applicable, and reserve another 100,000the accompanying Common Warrants, can only be purchased together in this offering but will be issued separately and will be immediately separable upon issuance.
We are also registering shares for saleof common stock that are issuable from time to cover a portiontime upon exercise of the Underwriter’s over-allotment option of 225,000 Units.Pre-Funded Warrants, Common Warrants and Placement Agent Warrants (as defined below).
This offering will terminate on ●, 202●, unless we decide to terminate the offering (which we may do at any time in our discretion) prior to that date. We will have one closing for all the securities purchased in this offering. The combined public offering price per share (or pre-funded warrant) and accompanying Common Warrants will be fixed for the duration of this offering.
We have engaged ●, or the placement agent, to act as our exclusive placement agent in connection with this offering. The placement agent has agreed to use its reasonable best efforts to arrange for the sale of the securities offered by this prospectus. The placement agent is not purchasing or selling any of the securities we are offering and the placement agent is not required to arrange the purchase or sale of any specific number or dollar amount of securities. We have agreed to pay to the placement agent the placement agent fees set forth in the table below, which assumes that we sell all of the securities offered by this prospectus. Since we will deliver the securities to be issued in this offering upon our receipt of investor funds, there is no arrangement for funds to be received in escrow, trust or similar arrangement. There is no minimum offering requirement as a condition of closing of this offering. Because there is no minimum offering amount required as a condition to closing this offering, we may sell fewer than all of the securities offered hereby, which may significantly reduce the amount of proceeds received by us, and investors in this offering will not receive a refund in the event that we do not sell an amount of securities sufficient to pursue our business goals described in this prospectus. In addition, because there is no escrow account and no minimum offering amount, investors could be in a position where they have invested in our company, but we are unable to fulfill all of our contemplated objectives due to a lack of interest in this offering. Further, any proceeds from the sale of 200,000 unitssecurities offered by us will be available for our immediate use, despite uncertainty about whether we would be able to use such funds to effectively implement our business plan. See the section entitled “Risk Factors” for more information. We will bear all costs associated with the offering. See “Plan of Distribution” on page 35 of this prospectus for more information regarding these arrangements.
Our common stock is listed on The Nasdaq Capital Market under the symbol “PCSA.” The closing price of our common stock on ●, 202●, as reported by The Nasdaq Capital Market, was $● per share. There is no established public trading market for the Pre-Funded Warrants or the Common Warrants, and we do not expect a selling stockholder, nor frommarket to develop. We do not intend to apply for listing of the exercisePre-Funded Warrants or the Common Warrants on any securities exchange or nationally recognized trading system. Without an active trading market, the liquidity of warrants underlying these units.the Pre-Funded Warrants and the Common Warrants will be limited.
We have also registered by separate prospectus the resale by our existing stockholders 1,450,000 shares
The public offering price per share of common stock and upaccompanying Common Warrant and any Pre-Funded Warrant and accompanying Common Warrant will be determined by us at the time of pricing, may be at a discount to 6,460,000 sharesthe current market price, and the recent market price used throughout this prospectus may not be indicative of common stock issuable upon conversionthe final public offering price.
Investing in our securities involves a high degree of 2,860,000 sharesrisk. See “Risk Factors” beginning on page 10 of Series A, Bthis prospectus before investing. You should also consider the risk factors described or referred to in any documents incorporated by reference in this prospectus, and C Preferred Stock. Resale shares owned by officers and directors and by one common stockholder are subject to a 13 month lockup. See “Underwriting.”in any applicable prospectus supplement, before investing in these securities.
We have applied to list our common stock and $5.00 warrants for quotation on the NYSE MKT Exchange under the proposed symbols of “___” and “____,” respectively.
We are a “smaller reporting company” as defined under the federal securities lawslaw and are subjectwe have elected to comply with certain reduced public company reporting requirements.requirements available to smaller reporting companies. See the section titled “Prospectus Summary — Implications of Being a Smaller Reporting Company.”
Investing in our common stock and warrants involves risks that are described in the “Risk Factors” section beginning on page 4 of this prospectus.
| | Per share of Common Stock and accompanying Common Warrant | | Per Pre-Funded Warrant and accompanying Common Warrant | | Total |
| Public offering price | | $ | | | | $ | | | | $ | | |
| Placement agent fees (1) | | $ | | | | $ | | | | $ | | |
| Proceeds to us, before expenses (2) | | $ | | | | $ | | | | $ | | |
| (1) | We have agreed to pay the placement agent a cash fee equal to 7.0% of the gross proceeds raised in this offering (other than proceeds received from the Company’s current directors and officers). We have also agreed to reimburse the placement agent for certain of its offering related expenses, including reimbursement for non-accountable expenses in legal fees and expenses in the amount of up to $112,500, and for its clearing expenses in the amount of $15,950. In addition, we have agreed to issue the placement agent or its designees warrants (“Placement Agent Warrants”) to purchase a number of shares of common stock equal to 4.0% of the shares of common stock sold in this offering (including the shares of common stock issuable upon the exercise of the Pre-Funded Warrants, but not including shares of common stock sold to current directors and officers of the Company), at an exercise price of $● per share, which represents 125% of the public offering price per share and accompanying warrant. For a description of compensation to be received by the placement agent, see “Plan of Distribution” for more information |
| |
| (2) | Because there is no minimum number of securities or amount of proceeds required as a condition to closing in this offering, the actual public offering amount, placement agent fees, and proceeds to us, if any, are not presently determinable and may be substantially less than the total maximum offering amounts set forth above. For more information, see “Plan of Distribution.” |
Neither the Securities and Exchange Commission nor any other state securities commission has approved or disapproved of these securities or determined ifpassed upon the adequacy or accuracy of this prospectus is truthful or complete.prospectus. Any representation to the contrary is a criminal offense.
| | | |
| Per unit | | Total |
Initial Public offering price | $ 5.10 | | $ 7,650,000 |
Underwriting discount and commissions | $ 0.408 | | 612,000 |
Proceeds to us, before offering expenses | $ 4.692 | | $ 7,038,000 |
|
Our Underwriter is offering these units on a firm commitment basis and expects that delivery
Delivery of the underlyingshares of common shares and warrants willstock is expected to be made on or about __________, 2012. To the extent that the Underwriter sells more than 1,500,000 units, the Underwriter has a 45-day option to purchase up to 25,000 additional units from us and 200,000 units from a selling stockholder at the initial public offering price less the underwriting discount to cover any overallotments. We will not receive any proceeds from the sale of the units by the selling stockholder, who will compensate the Underwriter directly.●, 202●.
Gilford Securities Incorporated
Prospectus dated , 2012●, 202●
TABLE OF CONTENTS
Prospectus Summary
Risk Factors
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Selling Security HolderABOUT THIS PROSPECTUS
Use of Proceeds
Dividend Policy
Dilution
Management’s DiscussionYou should rely only on the information we have provided or incorporated by reference into this prospectus, any applicable prospectus supplement and Analysis or Plan of Operation
Directors, Executive Officers, Promoters and Control Persons
Security Ownership of Certain Beneficial Owners and Management
Certain Relationships and Related Transactions
Description of Securities
Underwriting
Legal Matters
Whereany related free writing prospectus. We incorporate by reference important information into this prospectus. You may obtain the information incorporated by reference without charge by following the instructions under “Where You Can Find More Information.” You should carefully read this prospectus as well as additional information described under “Incorporation of Certain Information
Index By Reference,” before deciding to Financial Statements
F-invest in our securities.
Until ____, 2013, all dealers that effect transactions in these securities, whether orWe have not, participating in this offering, may be required to deliver a prospectus. This is in addition toand the dealers’ obligation to deliver a prospectus when acting as Underwriterplacement agent and with respect to their unsold allotments or subscriptions.
This prospectus contains statistical data, estimates and forecasts that are based on independent industry publications, other publicly available information and information based on our internal sources.
Neither we, the selling stockholders, nor the Underwriterits affiliates have not, authorized anyone to provide you with any information or to make any representations other than thoserepresentation not contained or incorporated by reference in this prospectus or in any related free writing prospectuses we have prepared.prospectus. We do not, and the placement agent and its affiliates do not, take noany responsibility for, and can provide no assurance as to the reliability of, any other information that others may giveprovide to you. This prospectus is not an offer to sell or an offer to buy securities in any jurisdiction where offers and sales are not permitted. The information in this prospectus is accurate only as of its date, regardless of the shares offered hereby, but onlytime of delivery of this prospectus or any sale of securities. You should also read and consider the information in the documents to which we have referred you under circumstances andthe caption “Where You Can Find More Information” in jurisdictions where itthe prospectus.
To the extent there is lawful to do so. Thea conflict between the information contained in this prospectus, on the one hand, and the information contained in any document incorporated by reference filed with the Securities and Exchange Commission (“SEC”) before the date of this prospectus, on the other hand, you should rely on the information in this prospectus. If any statement in a document incorporated by reference is currentinconsistent with a statement in another document incorporated by reference having a later date, the statement in the document having the late date modifies or supersedes the earlier statement.
We further note that the representations, warranties and covenants made by us in any agreement that is incorporated by reference or filed as an exhibit to the registration statement of which this prospectus is a part were made solely for the benefit of the parties to such agreement, including, in some cases, for the purpose of allocating risk among the parties to such agreements, and should not be deemed to be a representation, warranty or covenant to you. Moreover, such representations, warranties or covenants were accurate only as of its date.
the date when made. Accordingly, such representations, warranties and covenants should not be relied on as accurately representing the current state of our affairs.
Prospectus Summary
This summary highlights selected informationFor investors outside the United States: neither we nor the placement agent have done anything that would permit this offering or possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for that purpose is presentedrequired, other than in greater detail elsewhere inthe United States of America. Persons outside the U.S. who come into possession of this prospectus. This summary does not contain allprospectus must inform themselves about, and observe any restrictions relating to, the offering of the information you should consider before investing inshares of our common stock. You should read this entire prospectus carefully, including the sections titled “Risk Factors,” “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis or Plan of Operation and “Business,” and our consolidated financial statementsstock and the related notes included elsewheredistribution of this prospectus and any such free writing prospectus outside of the U.S.
Unless otherwise indicated, information contained in this prospectus before making an investment decision. Unlessconcerning our industry and the markets in which we operate, including our general expectations, market position and market opportunity, is based on our management’s estimates and research, as well as industry and general publications and research, surveys and studies conducted by third parties. We believe that the information from these third-party publications, research, surveys and studies included in this prospectus is reliable. Management’s estimates are derived from publicly available information, their knowledge of our industry and their assumptions based on such information and knowledge, which we believe to be reasonable. These data involve a number of assumptions and limitations which are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause our future performance to differ materially from our assumptions and estimates.
This prospectus includes trademarks, service marks and trade names owned by us or other companies. All trademarks, service marks and trade names included in this prospectus are the property of their respective owners.
As used in this prospectus, unless the context indicates or otherwise requires, the terms “Heatwurx,“the Company,” “our company,Company,” “we,” “us,” and “our” refer to HeatwurxProcessa Pharmaceuticals, Inc., a Delaware corporation, and its consolidated subsidiary.
Heatwurx,
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making an investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including the information set forth under the “Risk Factors” section of this prospectus and in the documents incorporated by reference into this prospectus for a discussion of the risks involved in investing in our securities.
Overview
We are a clinical-stage biopharmaceutical company focused on utilizing our “regulatory science” approach, including the principles associated with FDA’s Project Optimus Oncology initiative and the related FDA Draft Guidance, in the development of Next Generation Chemotherapy (“NGC”) oncology drug products. Our mission is to provide better treatment options than those that presently exist by extending a patient’s survival and/or improving a patient’s quality of life. This is achieved by improving upon FDA-approved, widely used oncology drugs or the cancer-killing metabolites of these drugs by altering how they are metabolized and/or distributed in the body, including how they are distributed to the actual cancer cells.
Regulatory science was conceived in the early 1990s when the founders of Processa and other faculty at the University of Maryland worked with the FDA to develop multiple FDA Guidances. Regulatory science is the science of developing new tools, standards, and approaches to assess the safety, efficacy, quality, and performance of all FDA-regulated products. Over the last 30 years, two of our founders, Dr. David Young and Dr. Sian Bigora, have expanded the original regulatory science concept by including the pre-clinical and clinical studies to justify the benefit-risk assessment required for FDA approval when designing the development programs of new drug products.
Our regulatory science approach defines the scientific information that the FDA requires to determine if the benefit outweighs the risk of a drug in a specific population of patients and at a specific dosage regimen for a specific drug product. The studies are designed to obtain the necessary scientific information to support the regulatory decision.
The FDA has more recently taken steps to define some of the regulatory science required for the FDA approval of oncology products. Through the FDA’s Project Optimus Oncology Initiative and the related Draft Guidance on determining the “optimal” dosage regimen for an oncology drug, the FDA has chosen to make the development of oncology drugs more science-based than in the past. Since the principles of the FDA’s Project Optimus and the related Draft Guidance have been used by our regulatory science approach in a number of non-oncology drugs, our experience with the principles of Project Optimus differentiates us from other biotechnology companies by focusing us not only on the clinical science, but also on the equally important regulatory process. We believe utilizing our regulatory science approach provides us with three distinct advantages:
| ● | greater efficiencies (e.g., the right trial design and trial readouts); |
| ● | greater possibility of drug approval by the FDA or other regulatory authorities; and |
| ● | greater ability to evaluate the benefit-risk of a drug compared to existing therapy, which allows prescribers to provide better treatment options for each patient. |
In January 2023, we announced our strategic prioritization to advance our pipeline of NGC proprietary small molecule oncology drugs. The NGC products are new chemical entities, but they work by changing the metabolism, distribution and/or elimination of already FDA-approved cancer drugs or their active metabolites while maintaining the mechanism of how the drug kills cancer cells. We believe our NGC treatments will provide improved safety-efficacy profiles when compared to their currently marketed counterparts – capecitabine, gemcitabine, and irinotecan. All future studies of these drugs are subject to availability of capital to conduct the trials.
The three NGC treatments in our pipeline are as follows:
| ● | NGC-Capecitabine (NGC-Cap) is a combination of PCS6422 and capecitabine, capecitabine being the oral prodrug of the cancer drug 5-fluorouracil (5-FU). PCS6422, without having any clinically meaningful biological effect itself, alters the metabolism of 5-FU, resulting in more 5-FU distribution to the cancer cells. In clinical trials, NGC-Cap has shown a safety profile different than capecitabine when administered alone. Side effects such as Hand-Foot Syndrome (HFS) and cardiotoxicity typically occur in up to 50-70% of patients treated with capecitabine and are caused by specific capecitabine metabolites. These types of toxicities frequently result in decreased doses, interrupted doses, or discontinuation of treatment with capecitabine. Since a much smaller amount of these metabolites are formed with NGC-Cap, these side effects appear in less patients and are less severe when they do occur. In addition, NGC-Cap has been found to be up to 50 times more potent than capecitabine based on the systemic exposure of the capecitabine metabolite 5-FU, which is metabolized to the cancer-killing metabolites. Like capecitabine, NGC-Cap could be used to treat patients with various cancers, such as metastatic colorectal, gastrointestinal, breast, and pancreatic. We estimate at least 200,000 patients in the United States were newly diagnosed in 2022 with metastatic colorectal, gastrointestinal, breast, and pancreatic cancers. On December 11, 2023, we had a successful meeting with the FDA regarding the next Phase 2 study supporting the advancement of NGC-Cap for cancer patients. The meeting with the FDA was supported by the interim results from the ongoing Phase 1B study that should complete enrollment in the first quarter of 2024. |
| ● | PCS3117, also referred to as NGC-Gemcitabine (NGC-Gem), is an oral analog of gemcitabine that is converted to its active metabolite by a different enzyme system than gemcitabine resulting in a positive response in gemcitabine patients as well as some gemcitabine treatment-resistant patients. Like gemcitabine, NGC-Gem could be used to treat patients with various cancers such as pancreatic, biliary tract, lung, ovarian, and breast. We estimate more than 275,000 patients in the United States were newly diagnosed in 2022 with pancreatic, biliary tract, lung, ovarian, and breast cancer. We plan to meet with the FDA to discuss potential study designs including implementation of the Project Optimus initiative as part of the design in 2024. |
| | |
| ● | PCS11T, also referred to as NGC-Irinotecan (NGC-Iri), is a prodrug of the active metabolite of irinotecan (SN-38). The chemical structure of NGC-Iri influences the uptake of the drug into cancer cells, resulting in more NGC-Iri entering cancer cells than normal cells in mice. These levels were significantly greater than those seen with irinotecan, resulting in lower doses of NGC-Iri having greater efficacy than irinotecan and improved safety in animal models. Like irinotecan, NGC-Iri could be used to treat patients with various cancers such as lung, colorectal, gastrointestinal, and pancreatic cancer. We estimate at least 200,000 patients in the United States were newly diagnosed in 2022 with lung, colorectal, gastrointestinal, and pancreatic cancer. We plan to conduct IND-enabling and toxicology studies in 2024. |
We have completed our Phase 2A trial for PCS12852 in gastroparesis patients with positive results. Additionally, in February 2023, due primarily to the inability to identify and enroll patients in our rare disease Phase 2 trial for PCS499 in ulcerative Necrobiosis Lipoidica (uNL), we decided to cease further enrollment in the PCS499 trial and terminated the trial. We did not experience any safety concerns during the conduct of either the PCS12852 or PCS499 trial. We are currently evaluating options to monetize these non-core drug assets, which may include out-licensing or partnering these assets with one or more third parties.
Our shift in prioritization to NGC oncology drugs does not change our mission. We continue to be focused on drug products that improve the survival and/or quality of life for patients by improving the safety and/or efficacy of the drug in a targeted patient population, while providing a more efficient and probable path to FDA approval and differentiating our drugs from those on the market or are currently being developed.
Historically, much of oncology drug development has searched for novel or different ways to treat cancer. Our approach is to take three current FDA-approved cancer drugs and modify and improve how the human body metabolizes and/or distributes these NGC treatments compared to their presently approved counterpart drugs while maintaining the cancer-killing mechanism of action; thus, our reason for calling our drugs Next Generation Chemotherapy (or NGC) treatments. Part of the development includes determining the optimal dosage regimen based on the dose-response relationship as described in the FDA’s Project Optimus Initiative and Draft Optimal Dosage Regimen Oncology Guidance. To date, we have data that suggests our NGC treatments are likely to have a better safety-efficacy profile than the current widely used marketed counterpart drugs, not only potentially making the development and approval process more efficient, but also clearly differentiating our NGC treatments from the existing treatment. We believe our NGC treatments have the potential to extend the survival and/or quality of life for more patients diagnosed with cancer while decreasing the number of patients who are required to dose-adjust or discontinue treatment because of side effects or lack of response.
Our Strategy
Our strategy is to develop our pipeline of NGC proprietary small molecule oncology drugs using our regulatory science approach to determine the optimal dosage regimen of our oncology drugs.
By changing either the metabolism, distribution, and/or elimination of already FDA-approved cancer drugs (e.g., capecitabine, gemcitabine, and irinotecan) or their active metabolites, we believe that our three new oncology drugs represent the next generation of chemotherapy with an improved safety profile, improved efficacy profile and/or potentially benefiting more patients while maintaining the mechanism of how the drug kills cancer cells. By combining these modified approved cancer treatments with our regulatory science approach and our experience using the principles of FDA’s Project Optimus initiative, we anticipate that we will be able to increase the probability of FDA approval, improve the safety-efficacy profile over the existing counterparts of our NGC drugs, and more efficiently develop each drug.
Our pipeline of NGCs (i) already has data demonstrating the desired pharmacological activity in humans or appropriate animal models and is able to provide improved safety and/or efficacy by some modification in the formation and/or distribution of the active moieties associated with the drug and (ii) targets cancers for which a single positive pivotal trial demonstrating efficacy might provide enough evidence that the clinical benefits of the drug and its approval outweighs the risks associated with the drug.
Our Drug Pipeline
Our pipeline currently consists of NGC-Cap, NGC-Gem and NGC-Iri (also identified as PCS6422, PCS3117 and PCS11T, respectively) and two non-oncology drugs (PCS12852 and PCS499). The non-oncology drugs are not included in the pipeline chart above, as we are exploring our options for those drugs. A summary of each drug is provided below.
Next Generation Chemotherapy Pipeline
| ● | Next Generation Capecitabine (NGC-Cap) is a combination of PCS6422 and a lower dose of the FDA-approved cancer drug capecitabine. PCS6422 is an orally administered irreversible inhibitor of the enzyme dihydropyrimidine dehydrogenase (DPD). DPD metabolizes 5-Fluorouracil (5-FU), the major metabolite of capecitabine and widely used itself as an intravenous chemotherapeutic agent in many types of cancer, to multiple metabolites classified as catabolites. These catabolites do not have any cancer-killing properties but frequently cause dose-limiting side effects that may require dose adjustments or discontinuation of therapy. |
Capecitabine, as presently prescribed and FDA-approved, forms the cancer drug 5-FU which is then further metabolized to anabolites (which kill both cancer cells and normal duplicating cells) and catabolites (which cause side effects and have no cancer killing properties). When capecitabine is given in combination with PCS6422 in NGC-Cap, PCS6422 significantly changes the metabolism of 5-FU, which results in a change in the distribution of 5-FU within the body. Due to this change in metabolism and the overall metabolite profile of anabolites and catabolites, the side effect and efficacy profile of NGC-Cap has been found to be different from capecitabine given without PCS6422. Since the potency of NGC-Cap is also greater than FDA-approved capecitabine based on the 5-FU systemic exposure per mg of capecitabine administered, the amount of capecitabine anabolites formed from 1 mg of capecitabine administered in NGC-Cap will, therefore, be much greater than formed from the administration of 1 mg of existing capecitabine.
On August 2, 2021, we enrolled the first patient in our Phase 1B dose-escalation maximum tolerated dose trial in patients with advanced refractory gastrointestinal (GI) tract tumors. Our interim analysis of Cohorts 1 and 2A of the ongoing clinical trial found no dose-limiting toxicities (DLTs), no drug-related adverse events greater than Grade 1, and no adverse events associated with the catabolites of 5-FU such as HFS. In this Phase 1B trial, it was demonstrated that the irreversible inhibition of DPD by PCS6422 could alter the metabolism, distribution and elimination of 5-FU, making NGC-Cap significantly (up to 50 times) more potent than capecitabine alone and potentially leading to higher levels of anabolites which can kill replicating cancer and normal cells. By administering NGC-Cap to cancer patients, the balance between anabolites and catabolites changes depending on the dosage regimens of PCS6422 and capecitabine used, making the efficacy-safety profile of NGC-Cap different than that of FDA-approved capecitabine and requiring further evaluation of the PCS6422 and capecitabine regimens to determine the optimal NGC-Cap regimens for patients.
In order for NGC-Cap to provide a safer and more efficacious profile for cancer patients compared to existing chemotherapy, understanding how the different regimens of PCS6422 and capecitabine may affect the systemic and tumor exposure to the anabolites, as well as the systemic exposure to the catabolites, is required. This can be achieved by following the timeline of DPD irreversible inhibition and the formation of new DPD using the plasma concentrations of 5-FU and its catabolites.
In an effort to better estimate the timeline of DPD inhibition and formation of new DPD, we modified the protocol for the Phase 1B trial and began enrolling patients in the amended Phase 1B trial in April 2022. On November 1, 2022, we announced that data from the Phase 1B trial identified multiple dosage regimens with potentially better safety and efficacy profiles than currently existing chemotherapy regimens. Since 5-FU exposure is dependent on both the PCS6422 regimen and the capecitabine regimen, safe regimens were identified as well as regimens that cause DLTs. One of the regimens in the Phase 1B trial did cause DLTs in two patients, one of whom died. The Phase 1B trial is continuing to enroll patients and is expected to complete enrollment in early 2024. The next trial will be a Phase 2 trial to determine which regimens provide an improved efficacy-safety profile over present therapy using the principles of the FDA’s Project Optimus initiative to help guide the design of the trial. This FDA initiative requires us to consider NGC regimens that are not at the maximum tolerated dose or exposure level.
Discussions with the FDA in April 2023 have clarified that the major goal for the next Phase 2 trial will be to evaluate and understand the dose- and exposure-response relationship for anti-tumor activity and safety. The specific dosage regimens for the trial will be defined following the determination of the MTD from our ongoing Phase 1B trial. Cohort 3 in the Phase 1B trial, which dosed patients with PCS6422 in combination with capecitabine at 150 mg BID (twice a day), completed with no dose-limiting toxicities. Enrollment in Cohort 4 was expanded to include six patients to further evaluate the safety at this dose. Enrollment in this cohort is now complete and to date, no DLTs have been observed in this cohort, but safety evaluation for this cohort is still ongoing. Once the cohort and the safety evaluation is complete, the need for any additional cohorts will be further evaluated. Based on the data from the Phase 1B trial and ongoing discussions with the FDA from a successful FDA meeting on December 11, 2023, we have begun Phase 2 trial preparation tasks and will collaborate with the FDA to further define the final design prior to the trial. The trial is planned for 2024, but we will need to obtain additional funding before we can conduct this trial.
Our license agreement with Elion Oncology, Inc. (“Elion”) for NGC-Cap requires us to use commercially reasonable efforts, at our sole cost and expense, to research, develop and commercialize products in one or more countries, including meeting specific diligence milestones that include dosing a first patient with a product in a Phase 2 or 3 clinical trial on or before October 2, 2024. We are currently conducting pre-trial activities and planning to dose the first patient in our Phase 2 trial in the second or third quarter of 2024.
General
| ● | PCS3117 is a cytidine analog similar to gemcitabine (Gemzar®), but different enough in chemical structure that some patients are more likely to respond to PCS3117 than gemcitabine. The difference in response occurs because NGC-Gem is metabolized to its active metabolite through a different enzyme system than gemcitabine. We continue to evaluate the potential use of NGC-Gem in patients with pancreatic and other potential cancers and to evaluate ways to identify patients who are more likely to respond to NGC-Gem than gemcitabine. We plan to meet with the FDA in 2024 to discuss potential trial designs including implementation of the Project Optimus initiative as part of the design. Similar to NGC-Cap, we will need to obtain additional funding before we can begin the Phase 2 trial for NGC-Gem. |
Heatwurx,Our license agreement with Ocuphire Pharma, Inc. (“Ocuphire”) for NGC-Gem requires us to use commercially reasonable efforts, at our sole cost and expense to oversee such commercialization efforts, to research, develop and commercialize products in one or more countries, including meeting specific diligence milestones that consist of: (i) dosing a patient in a clinical trial prior to June 16, 2024; and (ii) dosing a patient in a pivotal clinical trial or in a clinical trial for a second indication of the drug prior to June 16, 2026. We are currently negotiating with Ocuphire to extend these deadlines.
| ● | PCS11T is an analog of SN38 (SN38 is the active metabolite of irinotecan) and should have an improved safety/efficacy profile in every type of cancer that irinotecan is presently used. The manufacturing process and sites for drug substance and drug product are presently being evaluated and IND-enabling toxicology studies will then be initiated. In addition, we are defining the potential paths to approval, which include defining the targeted patient population and the type of cancer. We plan to conduct IND enabling and toxicology studies in 2024, subject to available funding. |
Non-Oncology Pipeline for Out-licensing or Partnership
| ● | PCS12852 is a highly specific and potent 5HT4 agonist that has already been evaluated in clinical studies in South Korea for gastric emptying and gastrointestinal motility in healthy volunteers and volunteers with a history of constipation. In October 2021, the FDA cleared our IND application to proceed with a Phase 2A trial for the treatment of gastroparesis. We enrolled our first patient on April 5, 2022 and completed enrollment of the trial on September 2, 2022. Results from this Phase 2A trial, which included 25 patients with moderate to severe gastroparesis, demonstrated improvements in gastric emptying in patients receiving 0.5 mg of PCS12852 as compared to placebo. The results indicated that for the patients in the PCS12852 group, the mean time for 50% of the gastric contents to empty (t50) compared to their baseline value (±SD) decreased by -31.90 min (±50.53) (compared to the change seen in the placebo group of only -9.36 min (±42.43). Significant gastric emptying differences were not observed between the placebo and the 0.1 mg dose. Adverse events associated with the administration of PCS12852 were generally mild to moderate as expected, limited in duration, and quickly resolved without any sequelae. There were no cardiovascular safety events or serious adverse events reported during the trial. Additionally, the 0.5 mg of PCS12852 showed a greater improvement than placebo in the gastroparesis symptomology scales used in the trial, including both total scores in the scales, as well as sub-scores such as nausea, vomiting and abdominal pain. With the trial now complete, we have the data necessary to finalize the development plan for the treatment of diabetic gastroparesis patients. We are exploring options for PCS12852, which may include licensing, partnering and/or collaborating opportunities. |
| ● | PCS499 is an oral tablet of the deuterated analog of one of the major metabolites of pentoxifylline (PTX or Trental®). PCS499 is a drug that can be used to treat unmet medical need conditions caused by multiple pathophysiological changes. We completed a Phase 2A trial for PCS499 in patients with ulcerative and non-ulcerative necrobiosis lipoidica (uNL and NL, respectively) in late 2020, and in May 2021, we enrolled the first patient in our Phase 2B trial for the treatment of uNL. Although we initiated several recruitment programs to enroll patients in this trial, we were only able to recruit four patients. We experienced extremely slow enrollment in the trial given the extreme rarity of the condition (rarer than reported in the literature), the impact of COVID-19, and the reluctance of patients to be in a clinical trial. We completed the Phase 2B uNL trial for those currently enrolled but halted further efforts to enroll new patients in the trial and have terminated the trial. There were no safety concerns during the conduct of the trial. Although we believe that PCS499 can be effective in treating uNL, preliminary data indicated that the placebo response was likely to be much greater than the literature and clinical experts believe; thus, a much larger sample size would be required in a pivotal trial for an indication where it was extremely difficult to enroll even four patients. We are exploring options for PCS499, which may include licensing, partnering and/or collaborating opportunities. |
Going Concern
This offering is being made on a best-efforts basis and we may sell fewer than all of the securities offered hereby and may receive significantly less in net proceeds from this offering. Assuming that we receive a minimum of $● of proceeds from this offering, we believe that the net proceeds from this offering, together with our cash on hand, will satisfy our capital needs until ● under our current business plan. In late 2024 or early 2025, we will need to raise additional capital to fund our operations and continue our planned development of our NGC drugs.
Compliance With the Nasdaq Capital Market Listing Requirements
Our common stock is currently listed for trading on Nasdaq Capital Market (the “Nasdaq”). On March 16, 2023 we received notice from Nasdaq indicating that we are not in compliance with the requirement to maintain a minimum bid price of $1.00 per share for continued listing on Nasdaq. We were provided a compliance period of 180 calendar days from the date of the notice, or until September 16, 2023, to regain compliance with the minimum closing bid requirement, pursuant to Nasdaq Listing Rule 5810(c)(3)(A). On September 19, 2023, Nasdaq notified us that it granted an extension until March 18, 2024 to regain compliance with the minimum closing bid requirement. If we fail to evidence compliance by March 18, 2024, we may be subject to delisting.
We will continue to monitor the closing bid price of our common stock and may, if appropriate, consider available options, including implementation of a reverse stock split of our common stock, to regain compliance with the minimum closing bid requirement. If we seek to implement a reverse stock split in order to remain listed on Nasdaq, the announcement or implementation of such a reverse stock split could negatively affect the price of our common stock and/or warrants.
We must satisfy Nasdaq’s continued listing requirements or risk delisting, which could have a material adverse effect on our business. If our common stock is delisted from Nasdaq, it could materially reduce the liquidity of our common stock and result in a corresponding material reduction in the price of our common stock as a result of the loss of market efficiencies associated with Nasdaq and the loss of federal preemption of state securities laws. In addition, delisting could harm our ability to raise capital through alternative financing sources on terms acceptable to us, or at all, and may result in the potential loss of confidence by investors, suppliers, customers and employees and fewer business development opportunities. If our common stock is delisted, it could be more difficult to buy or sell our common stock or to obtain accurate quotations, and the price of our common stock could suffer a material decline. Delisting could also impair our ability to raise capital on acceptable terms, if at all.
Implications of Being a Smaller Reporting Company
We are a “smaller reporting company” as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We may take advantage of certain of the scaled disclosures available to smaller reporting companies such as including: (i) not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes Oxley Act of 2002, as amended; (ii) scaled executive compensation disclosures; and (iii) the requirement to provide only two years of audited financial statements, instead of three years.
Corporate Information
We were incorporated under the laws of the Statestate of Delaware on March 29, 2011 as Heatwurxaq, Inc. and subsequently changed its name to Heatwurx, Inc. on April 15, 2011. Our founders were Larry Griffin and David Eastman, the principals of Hunter Capital Group, LLC, an investment banking entity, which acquired our technology, equipment designs, trademarks, and patent applications from Richard Giles, the inventor, in April 2011. In connection with the acquisition, we raised $1,000,000 in senior secured debt and $500,000 through the offering of Series A Preferred Stock to three investors. In October 2011, we completed a 7-1 forward stock split and raised gross proceeds of $3,000,000 through the sale of our Series B Preferred Stock. In August 2012, we raised gross proceeds of $1,520,000 through the sale of our Series C Preferred Stock. In August 2012, the proceeds from the sale of the Series C Preferred Stock were used to repay our secured debt.
We have not yet fully commercialized our products and we are therefore classified as a developmental stage enterprise.
We are an Original Equipment Manufacturer of Asphalt preservation and repair equipment. Our innovative, and eco-friendly hot-in-place recycling process corrects surface distresses within the top three inches of existing pavement by heating the surface material in excess of 300° Fahrenheit with our electrically powered infrared heating equipment, mechanically loosening the heated material with our processor/tiller attachment that is optimized for producing a seamless repair, and mixing in additional recycled asphalt pavement and a binder (asphalt-cement), and then compacting repaired area with a vibrating roller or compactor. We consider our equipment to be eco-friendly as the Heatwurx process reuses and rejuvenates distressed asphalt, uses recycled asphalt pavement for filler material, eliminates travel to and from asphalt batch plants, and extends the life of the roadway. We believe our equipment, technology and processes provide savings over other processes that are more labor and equipment intensive.
Our hot-in-place recycling process and equipment has been selected by the Technology Implementation Group of the American Association of State Highway Transportation Officials (AASHTO TIG) as an “additionally Selected Technology” for the year 2012. We develop, manufacture and intend to sell our unique, innovative and eco-friendly equipment to federal, state and local governmental agencies as well as contractors for the repair and rehabilitation of damaged and deteriorated asphalt surfaces.
Ourprincipal executive offices are located at 6041 South Syracuse Way,7380 Coca Cola Drive, Suite 315, Greenwood Village, Colorado 80111106, Hanover, Maryland 21076, and our telephone number is (303) 532-1641.(443) 776-3133. Our website address is www.heatwurx.com.www.processapharmaceuticals.com. The information contained in, or accessible through, our website is not incorporated by reference into this prospectus, and you should not consider any information contained in, or that can be accessed through, our website as part of this prospectus or in deciding whether to purchase our common stock.
- 1 -Additional Information
The offeringFor additional information related to our business and operations, please refer to the reports incorporated herein by reference, including our Annual Report on Form 10-K for the year ended December 31, 2022 and our subsequently filed reports on Form 10-Q, as described in the section entitled “Incorporation of Certain Documents by Reference” in this prospectus.
The Offering
| Issuer | | Processa Pharmaceuticals, Inc. |
Securities outstanding prior to this offering:
Common stock
Preferred stock
| 1,900,000 shares
2,860,000 shares (1)
| |
SecuritiesShares of common stock being offered – units consistingby us
| | Up to ● shares of common stock at an assumed combined public offering price of $● per share which is the last reported sales price of our common stock on The Nasdaq Capital Market on ●, 202● and assuming no sale of any Pre-Funded Warrants. |
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| Pre-Funded Warrants offered by us | | We are also offering to each purchaser whose purchase of shares of common stock in this offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election of the investor, 9.99%) of our outstanding common stock immediately following the consummation of this offering, the opportunity to purchase, if the purchaser so chooses, Pre-Funded Warrants, in lieu of shares of common stock that would otherwise result in the purchaser’s beneficial ownership exceeding 4.99% (or, at the election of the investor, 9.99%) of our outstanding common stock. Subject to limited exceptions, a holder of Pre-Funded Warrants will not have the right to exercise any portion of its Pre-Funded Warrants if the holder, together with its affiliates, would beneficially own in excess of 4.99% (or, at the election of the holder, 9.99%) of the number of shares of common stock outstanding immediately after giving effect to such exercise. Each Pre-Funded Warrant will be exercisable upon issuance for one share of our common stock and will expire when exercised in full. The purchase price of each Pre-Funded Warrant will equal the public offering price per share of common stock and accompanying Common Warrant less $0.0001, and the exercise price of each Pre-Funded Warrant will be $0.0001 per share. This offering also relates to the shares of common stock issuable upon exercise of any Pre-Funded Warrants sold in this offering. The exercise price and number of shares of common stock issuable upon exercise will be subject to certain further adjustments as described herein. See “Description of Securities” on page 25 of this prospectus. For each Pre-Funded Warrant we sell, the number of shares of common stock we are offering will be decreased on a one-for-one basis. Because a Common Warrant to purchase one share of our common stock is being sold together in this offering with each share of common stock and, in the alternative, each Pre-Funded Warrant to purchase one share of common stock, the number of Common Warrants sold in this offering will not change as a result of a change in the mix of the shares of our common stock and one half of one warrant: | Pre-Funded Warrant sold. |
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Common stock underlying unitsWarrants offered by us | | 1,500,000 sharesEach share of common stock or pre-funded warrant is being offered together with one Common Warrant to purchase one share of common stock. The Common Warrants will have an exercise price of $● per share (●% of the combined public offering price per share of common stock and accompanying warrants) and will be exercisable beginning on the effective date of the Warrant Stockholder Approval, provided however, if the Pricing Conditions are met, the Common Warrants will be exercisable upon the Initial Exercise Date. The Common Warrants will expire on the five-year anniversary of the Initial Exercise Date. See “Description of Securities We Are Offering” for additional information.
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Common stock
| | |
| Placement Agent Warrants | | We have agreed to issue to the placement agent or its designees, warrants, or the Placement Agent Warrants, to purchase warrantup to acquire4.0% of the aggregate number of shares of common stock sold in this offering (including the shares of common stock issuable upon the exercise of the Pre-Funded Warrants, but not including shares of common stock sold to the Company’s current directors and officers) at $5.00an exercise price equal to 125% of the public offering price per share underlying unitsand accompanying warrants to be sold in this offering. The Placement Agent Warrants will be exercisable upon issuance and will expire three (3) years from the commencement of sales under this offering. See “Plan of Distribution” for additional information |
| Common Stock Outstanding prior to this Offering (1) | 750,000 warrants
| 24,631,474 shares |
Common stock underlying $5.00 warrants
| 750,000 shares
| |
Common Stock to be Outstanding After this Offering (1) | | ● shares assuming we sell only shares of common stock and no Pre-Funded Warrants. |
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| Use of Proceeds | | We estimate that the net proceeds of this offering assuming no exercise of the warrants, after deducting placement agent fees and estimated offering expenses, will be approximately $●, assuming we sell only shares of common stock and no pre-funded warrants and assuming no exercise of the warrants. We intend to use the net proceeds from the offering to begin a Phase 2 clinical trial of NGC-Cap and for working capital and other general corporate purposes. We may also use a portion of the net proceeds, together with our existing cash and cash equivalents, to in-license, acquire, or invest in complementary businesses, technologies, products or assets; however, we have no current commitments or obligations to do so. Assuming that we receive a minimum of $● of proceeds from this offering, we believe that the net proceeds from this offering, together with our cash on hand, will satisfy our capital needs until ● under our current business plan. In late 2024 or early 2025, we will need to raise additional capital to fund our operations and continue our planned development of our NGC drugs. See the section titled “Use of Proceeds” for more information. |
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| Risk Factors | | Investing in our securities involves a high degree of risk. For a discussion of factors to consider before deciding to invest in our securities, you should carefully review and consider the “Risk Factors” section of this prospectus, as well as the risk factors described or referred to in any documents incorporated by reference in this prospectus, and in any applicable prospectus supplement. |
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| Market Symbol and trading | | Our common stock is listed on The Nasdaq Capital Market under the symbol “PCSA.” There is no established trading market for any of the warrants being issued and we do not expect a market to develop. In addition, we do not intend to apply for the listing of the Common Warrants or Pre-Funded Warrants on any national securities exchange or other trading market. Without an active trading market, the liquidity of the Common Warrants and Pre-Funded Warrants will be limited. |
| (1) | The number of shares of our common stock to be outstanding immediately after this offering as shown above is based on 24,631,474 shares of common stock outstanding as of September 30, 2023. The number of shares outstanding used throughout this prospectus, unless otherwise indicated, excludes: |
| 9,860,000●
| 141,611 shares (2) |
Use of proceeds
| We expect to use proceeds of this offering for dealer network development, executive management salaries and benefits, intellectual property development and protection, research and development, and general working capital purposes
In the event that the Underwriter exercises its over-allotment option, we will not receive any proceeds from the sale of the 200,000 units offered by a selling stockholder, nor from the exercise of warrants underlying these units.
|
Risk factors
| Please read “Risk Factors” for a discussion of factors you should consider before investing in our common stock or warrants.
issuable upon exercise of outstanding options, which have a weighted average exercise price of $18.22 per share; |
Proposed NYSE MKT Exchange symbols:
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Common stock
·
$5.00 warrants
|
“____”
“____”
| |
| ● | 4,554,867 shares of common stock issuable for restricted stock units (RSUs) (of which 2,291,923 are vested) issuable upon meeting distribution restrictions; |
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| ● | 3,366,480 shares of common stock issuable upon exercise of outstanding vested common warrants at a weighted-average exercise price of $1.61 per share; |
| | |
| ● | 467,735 shares of common stock reserved for issuance and available for future grant under our 2019 Omnibus Incentive Plan; and |
(1)
Shares of Series A, BUnless otherwise indicated or the context requires otherwise, all information in this prospectus assumes (i) we issue no Pre-Funded Warrants and C Preferred Stock will convert automatically into shares of common stock upon the closing date of this offering, as follows:
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Series A – 600,000 shares of Series A Preferred Stock are convertible into 4,200,000 shares of common stock at $0.12 per share;
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Series B – 1,500,000 shares of Series B Preferred Stock are convertible into 1,500,000 shares of common stock at $2.00 per share; and
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Series C – 760,000 shares of Series C Preferred Stock are convertible into 760,000 shares of common stock at $2.00 per share.
(2)
Amount gives effect to the automatic conversion of all 2,860,000 shares of preferred stock to 6,460,000 shares of common stock but does not include:
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the issuance of 1,022,000 and 1,440,000 shares of common stock upon exercise of stock options and performance stock options, respectively;
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the issuance of 25,000 units that may be sold by the Company upon(ii) no exercise of the Underwriter’s overallotment option;Common Warrants offered hereby.
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the issuance of 762,500 shares of common stock underlying 762,500 outstanding warrants issued by the Company, including the issuance of 12,500 warrants that may be sold by the Company upon exercise of the Underwriter’s overallotment option; andRISK FACTORS
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the issuance of 150,000 shares of common stock underlying warrants issued to our Underwriter in connection with this offering.
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Risk Factors
An investment in our common stock and warrantssecurities involves a high degree of risk. YouBefore deciding whether to purchase our securities, including the shares of common stock offered by this prospectus, you should carefully consider the risks and uncertainties described below, togetherunder “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, any subsequent Quarterly Report on Form 10-Q and our other filings with the SEC, all of the other information included in this prospectus, before making an investment decision.which are incorporated by reference herein. If any of the followingthese risks actually occurs, our business, financial condition, and/or results of operations could suffer. In that case, the trading price of our shares of common stock and warrants could decline, and you may lose all or part of your investment. You should read the section entitled “Cautionary Note Regarding Forward-Looking Statements” below for a discussion of what types of statements are forward-looking statements, as well as the significance of such statements in the context of this prospectus.
Risks Relating to the Company’s Business
We have a limited operating history and there can be no assurance that we can achieve or maintain profitability.We have a limited operating history that can be used to evaluate us, and the likelihood of our success must be considered in light of the problems, expenses, difficulties, complications and delays that we may encounter because we are a small business. As a result, we may not be profitable and we may not be able to generate sufficient revenue to develop as we have planned.
Our ability to achieve and maintain profitability and positive cash flow is dependent upon and will continue to be dependent upon:
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the market’s acceptance of our equipment;
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our ability to keep abreast of the changes by government agencies and in laws related to our business, particularly in the areas of intellectual property and environmental regulation;
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our ability to maintain any competitive advantage via patents, if attainable, or protection of our trade secrets;
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our ability to attract customers who require the products we offer;
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our ability to generate revenues through the sale of our products to potential customers; and
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our ability to manage the logistics and operations of the Company and the distribution of our products and services.
If we are unable to successfully manage these aspects of our business, our business, financial condition, and/or results of operations could suffer, the trading price of our shares of common stock and warrants could decline, and you may lose all or part of your investment.
We have incurred operating losses since formation. We expect to continue to incur net losses for the near term and may not be able to attain a level of profitability sufficient to sustain operations without additional sources of capital.
We have limited sales and a history of operating losses. We reported a net operating loss for the period from incorporation on March 29, 2011 to December 31, 2011, and for the nine month period ended September 30, 2012. We also had an accumulated deficit at December 31, 2011 and at September 30, 2012. We anticipate that we will continue to incur operating losses in the near term and we may not be able to achieve profitable operations. In order to achieve profitable operations we need to secure sufficient sales of our preservation and repair equipment. Our potential customers are federal, state, and local governmental entities, pavement contractors, equipment distributors and original equipment manufacturers. We cannot be certain that our business will be successful or that we will generate significant revenues and become profitable. If we are unable to achieve profitability or locate alternate sources of capital, we may be forced to cease operations.
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We currently have a single manufacturer of our equipment. If our manufacturing partner chooses not to manufacture our equipment or is otherwise unable to timely manufacture our equipment, we may not be able to locate another manufacturing partner in a timely manner to satisfy future demand for our products.
We currently have only one manufacturing partner. We do not have any agreement with our manufacturing partner, who is free to discontinue manufacturing services for us or to increase prices charged to us. This arrangement is adequate for the near term as we do not have a large number of customer orders and do not have any urgent need for equipment. However, we anticipate that as our business grows, we will contract with additional manufacturing partners to protect us against business interruptions related to our current sole manufacturing partner. If we experience any business interruption in our manufacturing partner’s business or if our manufacturing partner decides to discontinue manufacturing for us on agreeable terms, we may be unable to meet commitments to existing customers or attract new ones.
The growth of our business depends upon the development and successful commercial acceptance of our products. If we are unable to achieve successful commercial acceptance of our product, our business, financial condition, and/or results of operations could suffer.
We depend upon a variety of factors to ensure that our preservation and repair equipment is successfully commercialized, including timely and efficient completion of design and development, implementation of manufacturing processes, and effective sales, marketing, and customer service. Because of the complexity of our products, significant delays may occur, between development, introduction to the market and volume production phases.
The development and commercialization of our preservation and repair equipment involves many difficulties, including:
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retention and hiring of appropriate operational, research and development personnel;
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determination of the products’ technical specifications;
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successful completion of the development process;
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successful marketing of the preservation and repair equipment and achieving customer acceptance;
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obtain, manage and maintain key dealer relationships;
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produce products that meet the quality, performance and price expectations of our customers;
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develop effective sales, advertising and marketing programs; and
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manage additional customer service and warranty costs associated with supporting product modifications and/or subsequent potential field upgrades.
If we are unable to achieve successful commercial acceptance of our product, we may be unable to generate sufficient revenues to sustain operations and may be forced to cease operations.
We and our customers may be required to comply with a number of laws and regulations, both foreign and domestic, in the areas of safety, health and environmental controls.Failure to comply with government regulations could severely limit our sales opportunities and future revenues.
We intend to market our preservation and repair equipment domestically and internationally. We may be required to comply with local and international laws and regulations and obtain permits when required. We also cannot be certain that we will be able to obtain or maintain, required permits and approvals, that new or more stringent environmental regulations will not be enacted or that if they are, that we will be able to meet the stricter standards.
Failure to obtain operating permits, or otherwise to comply with federal and state regulatory and environmental requirements, could affect our abilities to market and sell our preservation and repair equipment and could have a
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material adverse effect on our business, financial condition, and/or results of operations, the trading price of our shares of common stock and warrants could decline, and you may lose all or part of your investment.
Our ability to grow the business depends on being able to demonstrate our equipment to potential customers and distributors and train them on proper usage. If we do not add more demonstration teams, our growth is limited geographically.
Our current marketing efforts utilize two driver/trainers that transport our equipment to potential customers and distributors to demonstrate the value of our equipment and train them on the process. This team can travel approximately 1,000 miles in any direction to conduct the demonstrations and training. These efforts are very time-consuming and with high gas prices, very expensive. In order to overcome the natural geographic limitations, we intend to deploy demonstration equipment throughout the country and hire and train additional driver/trainers. These efforts will be dependent upon our ability (i) to raise capital to purchase and/or lease new demonstration equipment and (ii) to locate and hire qualified personnel. If we cannot raise additional capital or locate qualified personnel, it will be much more difficult to grow our business. If that happens, our stock and warrant price may decline and our investors may lose all or a part of their investment.
Commodity or component price increases and/or significant shortages of component products may erode our expected gross profit on sales and adversely impact our ability to meet commitments to customers.
We require steel for the manufacture of our products. Accordingly, increases in the price of steel could significantly increase our production cost. If we were unable to fully offset the effect of any such increased costs through price increases, productivity improvements, or cost reduction programs, our expected gross profit on sales would decline.
We also rely on suppliers to secure component products required for the manufacture of our products. We have no assurance that key suppliers will be able to increase production in a timely manner in the event of an increase in the demand for our products. A disruption in deliveries to or from suppliers or decreased availability of components could have an adverse effect on our ability to meet our commitments to customers or increase our operating costs. If component supply is insufficient for the demand for our products, we may be unable to meet commitments to existing customers or attract new ones.
Our business is subject to the risk that our customers and/or other companies will produce their own version of our equipment which could significantly reduce our expected product sales.
We intend to sell finished products through an independent dealer network and directly to OEMs. Some of our potential customers are OEMs that manufacture or could in the future manufacture their own products. Despite their manufacturing abilities, we believe that these customers have chosen to purchase from us due to the quality of our products and to reduce their production risks and maintain their company focus. There is also the risk that other companies will copy our equipment and will become our competitors. However, we have no assurance that these customers will place significant equipment orders with us or continue to outsource manufacturing in the future. Our sales would decline and our profit margin would suffer if our potential customers decide to produce their own version of our products or there is increased competition from other manufacturers.
Our future success is dependent, in part, on the performance and continued service of Stephen Garland and other key management personnel. Without their continued service, we may be forced to interrupt or cease operations.
We are presently dependent to a great extent upon the experience, abilities and continued services of Stephen Garland, our Chief Executive Officer, and our other executive officers, who are all at-will employees. Mr. Garland is responsible for the development, and with the other members of the executive team, the execution of our strategic vision. Mr. Garland also has developed and cultivated significant relationships in our industry that are critical to our success. As the Company grows and more people are added to the team over time, Mr. Garland will share his knowledge of our company and the industry with new hires, and we will not be dependent upon Mr. Garland or any other individual. However, until the Company grows, there is a disproportionate dependence upon Mr. Garland, and the loss of his services would significantly impair our business operations. Some companies reduce the risk of the
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loss of key individuals by purchasing life insurance policies that pay the company upon the death of key personnel. We do not have a key man life insurance policy on Mr. Garland and do not intend to purchase one. If we interrupt or cease operations due to the loss of Mr. Garland’s or other executive officer availability, we may be unable to service our existing customers or acquire new customers, and our business may suffer and our stock and warrant prices may decline.
The success of our business depends upon our ability to attract, retain and motivate highly skilled employees. If we experience any adverse outcome in such matters, our ability to grow and manage our business may suffer.
We currently rely upon outside consultants for many aspects of our operations. Our ability to execute our business plan and be successful depends upon our ability to attract, retain and motivate highly skilled employees. As we expand our business, we will need to hire additional personnel to support our operations. We may be unable to retain our key employees or attract other highly qualified employees in the future. If we fail to attract new personnel with the requisite skills and industry knowledge we will need to execute against our business plan, our business, financial condition, and/or results of operations could suffer.
The success of our business depends, in part, upon our infrared heating process and technical information which may be difficult to protect and may be perceived to infringe on the intellectual property rights of third parties. If we are unable to protect our products from being copied by others it may negatively impact our expected sales. Claims by others of infringement could prove costly to defend and if we are unsuccessful we could be forced into an expensive redesign of our products.
We believe that the identification, acquisition and development of our infrared heating process are key drivers of our business. Our success depends, in part, on our ability to obtain patents, and operate without infringing on the proprietary rights of third parties. We cannot assure you that:
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the patents of others will not have an adverse effect on our ability to conduct our business;
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our patents will be issued;
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our patents, if issued, will provide us with competitive advantages;
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patents, if issued, will not be challenged by third parties;
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we will develop additional proprietary technology that is patentable; or
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others will not independently develop similar or superior technologies, duplicate elements of our preservation and repair equipment or design around it.
In the future, we may be accused of patent infringement by other companies. To defend and/or settle such claims, we may need to acquire licenses to use, or to contest the validity of, issued or pending patents. We cannot assure you that any license acquired under such patents would be made available to us on acceptable terms, if at all, or that we would prevail in any contest regarding the issued or pending patents of others. In addition, we could incur substantial costs in defending ourselves in suits brought against us for alleged infringement of another party's patents or in defending the validity or enforceability of our patents, if any, or in bringing patent infringement suits against other parties based on our patents. Any negative outcome of a patent infringement case or failure to obtain license agreements would necessitate the need to redesign our products, which creates added expense. Such redesigned products may not be accepted in the market place and we may not be able to continue our operations.
Because we are smaller and have fewer financial and other resources than many other companies that manufacture and sell equipment for road repair work, we may not be able to successfully compete in the very competitive road repair work equipment industry.
There are over eleven million miles of paved roadways throughout the world. There is significant competition among companies that manufacture and sell equipment to repair existing roadways. Our business faces competition from companies that are much more connected to the decision-makers, have been in business for a longer period of time, and have the financial and other resources that would enable them to invest in new technologies if they chose to. These companies may be able to achieve substantial economies of scale and scope, thereby substantially reducing
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their costs and the costs to their customers. If these companies are able to substantially reduce their marginal costs, the market price to the customer may decline and we may be not be able to offer our preservation and repair equipment at a price that allows us to compete economically. Even if we are able to operate profitably, these other companies may be substantially more profitable than us, which may make it more difficult for us to raise any financing necessary for us to achieve our business plan and may have a materially adverse effect on our business.
Mergers or other strategic transactions involving our competitors could weaken our competitive position, which could harm our operating results. If our competitors merge or are involved in other strategic transactions that place us at a disadvantage in the marketplace, our results of operations could decline.
Some of our competitors may enter into new alliances with each other or may establish or strengthen cooperative relationships. Any consolidation, acquisition, alliance or cooperative relationship could lead to pricing pressure and could result in a competitor with greater financial, technical, marketing, service and other resources which could result in a loss of our expected market share. If this occurs, our results of operations could decline.
Our long-term plan depends, in part, on our ability to expand the sales of our products to customers located outside of the United States and, accordingly, our business will be susceptible to risks associated with international operations. If we are unable to successfully manage the risks involved in international operations, the expected growth of our business may be negatively impacted.
We have no experience operating in foreign jurisdictions. We continue to explore opportunities outside of North America. Our lack of experience in operating our business outside of North America increases the risk that our current and any future international expansion efforts will not be successful. Conducting international operations subjects us to new risks that, generally, we do not face in the United States, including:
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fluctuations in currency exchange rates;
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unexpected changes in foreign regulatory requirements;
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longer accounts receivable payment cycles and difficulties in collecting accounts receivable;
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difficulties in managing and staffing international operations;
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potentially adverse tax consequences, including the complexities of foreign value added tax systems and restrictions on the repatriation of earnings;
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localization of our solutions, including translation into foreign languages and associated expenses;
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the burdens of complying with a wide variety of foreign laws and different legal standards, including laws and regulations related to privacy;
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increased financial accounting and reporting burdens and complexities;
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political, social and economic instability abroad, terrorist attacks and security concerns in general; and
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reduced or varied protection for intellectual property rights in some countries.
If we fail to manage the risks associated with international operations, expected international sales may not materialize or may not prove to be as profitable as anticipated.
We may be sued by claimants that allege that they were injured due to our equipment. Our business will be negatively impacted if we do not have sufficient insurance to protect us against these claims.
Any business today is at risk of becoming involved in lawsuits. It is extremely difficult to identify all possibly claims that could be made against us based on our business, but to name a few, we may be sued by drivers that claim that roads repaired by our equipment caused them to get into an automobile accident. Or a worker using our equipment to repair a road may claim that he or she was injured by our equipment. These claims may or may not be meritorious. In any event, we will attempt to protect ourselves against these claims by purchasing general liability insurance. There can be no assurance that we will be able to obtain the insurance or that it will be sufficient to protect us against future claims. Further, even if we obtain insurance, some of the litigation claims may not be
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covered under our insurance policies, or our insurance carriers may seek to deny coverage. As a result, we might also be required to incur significant legal fees with no assurance of outcome, and we may be subject to adverse judgments or settlements that could significantly impair our ability to operate.
We may not maintain sufficient insurance coverage for the risks associated with our business operations. Accordingly, we may incur significant expenses for uninsured events and our business, financial condition and results of operations could be materially and adversely affected.
Risks associated withaffected and we may not be able to achieve our goals, the value of our securities could decline and you could lose some or all of your investment. Additional risks not presently known to us or that we currently believe are immaterial may also significantly impair our business and operations include, but are not limited to, claims for wrongful acts committed by our officers, directors, employees and other representatives, the loss of intellectual property rights, the loss of key personnel and risks posed by natural disasters. Anyoperations. If any of these risks may result in significant losses. We do not carryoccur, our business, interruption insurance. In addition, we cannot provide any assurance that our insurance coverage is sufficient to cover any losses that we may sustain,results of operations or that we will be able to successfully claim our losses under our insurance policies on a timely basis or at all. If we incur any loss not covered by our insurance policies, or the compensated amount is significantly less than our actual loss or is not timely paid, our business, financial condition and results of operationsprospects could be materially and adversely affected.
We have raised substantial amounts of capital in private placements and if it is determinedharmed. In that we failed to comply with applicable securities laws, we could be subject to rescission claims or lawsuits that could severely damage our financial position.
We have offered and sold securities in private placements to investors pursuant to certain exemptions from the registration requirements of the Securities Act of 1933, as well as those of various state securities laws. Such exemptions are highly technical in nature and the basis for relying on such exemptions is factual; that is, the applicability of such exemptions depends upon our conduct and that of those persons contacting prospective investors and making the offering. We have not received a legal opinion to the effect that any of our prior offerings were exempt from registration under any federal or state law. Instead, we have relied upon the operative facts as the basis for such exemptions, including information provided by investors themselves. If any prior offerings did not qualify for such exemption, an investor would have the right to rescind its purchase of the securities if it so desired. If investors were successful in seeking rescission, we would face severe financial demands that could adversely affect our business and operations. Additionally, if we did not in fact qualify for the exemptions upon which it has relied, we may become subject to significant fines and penalties imposed by the Securities and Exchange Commission and state securities agencies.
We have historically operated as a private company and have limited experience in complying with public company obligations. Complying with these requirements will increase our costs and require additional management resources. Even with additional resources we may fail to adequately comply with public company obligations and, as a result,event, the market price of our common stock and the value of the warrants could be negatively affected.decline, and you could lose all or part of your investment.
Risks Related to Our Financial Position and Need for Capital
We need to raise additional capital to fund our operations.
We will face increased legal, accounting, administrativehave incurred recurring losses since inception and other costshad an accumulated deficit of approximately $73.0 million as of September 30, 2023. At November 30, 2023, we had cash and expenses ascash equivalents totaling $5.4 million and a public company. Complianceprepaid expense with the Sarbanes-Oxley Actclinical research organization of 2002, the Dodd-Frank Actour Phase 1B trial of 2010, as well as rules of the Securities and Exchange Commission and the NYSE MKT, for example, will result in significant initial cost to us as well as ongoing increases in our legal, audit and financial compliance costs. The Securities Exchange Act of 1934, as amended, will require, among other things,$660,000. Assuming that we file annual, quarterlyreceive a minimum of $● of proceeds from this offering, we believe that the net proceeds from this offering, together with our cash on hand, will allow us to begin our Phase 2 trial of NGC-Cap and satisfy our capital needs until ● under our current reports with respect to our business and financial condition. Our management and other personnelplan. In late 2024 or early 2025, we will need to devote a substantialraise additional capital to fund our operations and continue our planned development of our NGC drugs.
Following this offering, we will need to raise additional capital to complete the development efforts for NGC-Cap, NGC-Gem and/or NGC-Iri. If we are unable to raise capital when needed, we could be forced to delay, reduce or terminate certain of our development programs or other operations.
Following this offering, we will need to raise additional capital to fund our operations and continue to support our planned development of our next generation chemotherapy drugs. Our estimates of the amount of timecash necessary to these compliance initiatives. Moreover,fund our activities may prove to be wrong and we expect these rulescould spend our available financial resources much faster than we currently expect. Our future funding requirements will depend on many factors, including, but not limited to:
| ● | the timing, rate of progress and cost of any clinical trials and other manufacturing/product development activities for our current and any future product candidates that we develop, in-license or acquire; |
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| ● | the results of the clinical trials for our product candidates; |
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| ● | the timing of, and the costs involved in, FDA approval and any foreign regulatory approval of our product candidates, if at all; |
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| ● | the number and characteristics of any additional future product candidates we develop or acquire; |
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| ● | our ability to establish and maintain strategic collaborations, licensing, co-promotion or other arrangements and the terms and timing of such arrangements; |
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| ● | the degree and rate of market acceptance of any approved products; |
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| ● | costs under our third-party manufacturing and supply arrangements for our current and any future product candidates and any products we commercialize; |
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| ● | costs and timing of completion of any additional outsourced commercial manufacturing or supply arrangements that we may establish; |
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| ● | costs of preparing, filing, prosecuting, maintaining, defending and enforcing any patent claims and other intellectual property rights associated with our product candidates; |
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| ● | costs associated with prosecuting or defending any litigation that we are or may become involved in and any damages payable by us that result from such litigation; |
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| ● | costs of operating as a public company; |
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| ● | the emergence, approval, availability, perceived advantages, relative cost, relative safety and relative efficacy of alternative and competing products or treatments; |
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| ● | costs associated with any acquisition or in-license of products and product candidates, technologies or businesses; and |
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| ● | personnel, facilities and equipment requirements. |
We cannot be certain that additional funding will be available on acceptable terms, or at all. In addition, future debt financing into which we may enter may impose upon us covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, redeem our stock, make certain investments and regulationsengage in certain merger, consolidation or asset sale transactions.
If we are unable to make it more difficult and more expensive for us to obtain director and officer liability insurance, andraise additional capital when required or on acceptable terms, we may be required to significantly delay, scale back or discontinue the development of our product candidates, restrict our operations or obtain funds by entering into agreements on unattractive terms, which would likely have a material adverse effect on our business, stock price and our relationships with third parties with whom we have business relationships, at least until additional funding is obtained. If we do not have sufficient funds to continue operations, we could be required to seek bankruptcy protection or other alternatives that would likely result in our security holders losing some or all of their investment in us. In addition, our ability to achieve profitability or to respond to competitive pressures would be significantly limited.
In addition, if we are unable to secure sufficient capital to fund our operations, we may have to enter into strategic collaborations that could require us to share license rights with third parties in ways that we currently do not intend or on terms that may not be favorable to us or our security holders.
We have incurred a history of operating losses and expect to continue to incur substantial costs for the foreseeable future. We are not currently profitable, and we may never achieve or sustain profitability. Our financial situation creates doubt whether we will continue as a going concern.
We have incurred recurring losses since inception and had an accumulated deficit of approximately $73.0 million as of September 30, 2023. We expect continued operating losses and negative cash flow from operations for the foreseeable future. We have never generated revenue from operations, nor do we have any revenue under contract or any immediate sales prospects. We may never be able to maintainobtain regulatory approval for the samemarketing of our drug candidates in any indication in the United States or similar coverage.
Asinternationally. Even if we obtain regulatory approval for any drug candidates, development expenses will continue to increase. These conditions raise substantial doubt about our ability to continue as a public company,going concern, meaning that we may be unable to continue operations for the foreseeable future or realize assets and discharge liabilities in the ordinary course of operations. If we are unable to obtain funding, we will be subjectforced to Section 404 of the Sarbanes-Oxley Act relating to internal controls over financial reporting. We expect to incur significant expense and devote substantial management effort toward ensuring compliance with Section 404. We currently do not have an internal audit group, and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Implementing any appropriate changes to our internal controls may require specific compliance training for our directors, officers and employees, entail substantial costs to modify our existing accounting systems, and take a significant period of time to complete. Such changes may not, however, be effective in maintaining the
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adequacy of our internal controls, and any failure to maintain that adequacy,delay, reduce or consequent inability to produce accurate consolidated financial statements or other reports on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. Although we have not identified any material weaknesses in our internal control over financial reporting to date, we cannot assure you that our internal control over financial reporting will prove to be effective.
If we fail to comply with our public company obligations, our investors may lose confidence in the Company, the market price of our common stock and warrants could be negatively affected, and investigations by stock exchange/regulatory agencies could commence requiring additional management and financial resources.
Risks Related to our Common Stock and Warrants:
The exercise of our warrants and options may result in a dilution of our current stockholders' voting power and an increase in the number of shares eligible for future resale in the public market which may negatively impact the trading price of our shares of common stock and warrants.
The exercise ofeliminate some or all of our outstanding warrantsresearch and options could significantly dilutedevelopment programs, or we may be unable to continue operations. Although we continue to pursue these plans, there can be no assurance that we will be successful in obtaining sufficient funding on terms acceptable to us to fund continuing operations, if at all.
We will continue to expend substantial cash resources for the ownership interestsforeseeable future for the clinical development of our existing stockholders. Atproduct candidates and development of any other indications and product candidates we may choose to pursue. These expenditures will include costs associated with manufacturing and clinical development, such as conducting clinical trials, manufacturing operations and product candidate supply. Because the effective dateconduct and results of any clinical trial are highly uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete the development of our current and any future product candidates.
This offering is being made on a best efforts basis and we may sell fewer than all of the securities offered hereby and may receive significantly less in net proceeds from this offering. We believe that the net proceeds from this offering, together with our cash on hand, will satisfy our capital needs into ● under our current business plan. Following this offering, we anticipate having outstanding warrantswill need to purchase an aggregateraise additional capital to fund our operations and continue to support our planned development and commercialization activities.
Risks Related to This Offering and Ownership of 1,012,500 shares of common stock, including (i) the warrant to purchase 150,000 shares of common stock issuedOur Common Stock
Because management has broad discretion as to the Underwriteruse of the net proceeds from this offering, you may not agree with how we use them, and such proceeds may not be applied successfully.
Our management will have considerable discretion over the use of proceeds from this offering. We currently intend to use the net proceeds from this offering for continued research and development for NCG-Cap, and for working capital, capital expenditures, and general corporate purposes, including investing further in connection withresearch and development efforts. However, our management will have broad discretion in the application of the net proceeds from this offering and (ii)could spend the warrants to purchase 862,500 sharesproceeds in ways that do not necessarily improve our operating results or enhance the value of common stock at an exercise price of $5.00 per share issued pursuant to this offering (including 112,500 warrants issued pursuant to the Underwriter’s overallotment option). Additionally, the issuance of up to 1,022,000 shares of common stock upon exercise of stock options and 1,440,000 performance stock options outstanding as of November 10, 2012 will further dilute our existing stockholders’ voting interest. To the extent warrants and/securities, or options are exercised, additional shares of common stockthat you otherwise do not agree with. You will be issued,relying on the judgment of our management concerning these uses and such issuanceyou will dilute existing stockholders. Please seenot have the sectionopportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The failure of our management to apply these funds effectively could, among other things, result in this prospectus entitled “Dilution” for a tabular discussionunfavorable returns and uncertainty about our prospects, each of the theoretical impact of the warrants issued in this offering and the effects of the issuance of shares underlying such warrants on existing stockholders’ economic and percentage ownership.
In addition to the dilutive effects described above, the exercise of those securities would lead to an increase in the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public marketwhich could adversely affectcause the market price of our shares. Substantial dilution and/securities to decline.
Pending their use, we may invest the net proceeds from this offering in short- and intermediate-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government. These investments may not yield a substantial increasefavorable return to our stockholders. If we do not invest or apply the net proceeds from this offering in the number of common shares available for future resaleways that enhance stockholder value, we may negatively impact the tradingfail to achieve expected financial results, which could cause our stock price ofto decline.
If you purchase our shares of common stock and warrants.
As a new investor,securities sold in this offering, you will experience immediate and substantial dilution in the net tangible book value of your shares. In addition, we may issue additional equity or convertible debt securities in the future, which may result in additional dilution to investors.
The initial
Based on an assumed public offering price of $● per share and accompanying Common Warrant, the last reported sale price of our units in this offering reflects a common stock value that is considerably higher than theon The Nasdaq Capital Market on ●, 202●, and our as adjusted net tangible book value per share as of September 30, 2023, if you purchase securities in this offering, you will experience an increase of $● per share in the net tangible book value of the common stock you purchase representing the difference between our as adjusted net tangible book value per share after giving effect to this offering and the assumed public offering price per share of common stock. Investors purchasingThe exercise of outstanding stock options and warrants, including those sold in this offering, will, however, result in dilution of your investment. In addition, to the extent we need to raise additional capital in the future and we issue additional shares of common stock or securities exercisable, convertible or exchangeable for our common stock, our then existing stockholders may experience dilution and warrantsthe new securities may have rights senior to those of our common stock offered in this offering. See the section titled “Dilution” below for a more detailed illustration of the dilution you would incur if you participate in this offering.
There is no public market for the Pre-Funded Warrants or Common Warrants offered by us.
There is no established public trading market for the Pre-Funded Warrants or Common Warrants being offered in this offering, and we do not expect such a market to develop. In addition, we do not intend to apply to list the Pre-Funded Warrants or Common Warrants on any national securities exchange or other nationally recognized trading system. Without an active trading market, the liquidity of the Pre-Funded Warrants and Common Warrants will be limited.
Holders of Pre-Funded Warrants and Common Warrants purchased in this offering will pay a price that substantially exceeds the valuehave no rights as common stockholders until such holders exercise their Pre-Funded Warrants or Common Warrants and acquire our common stock.
Until holders of Pre-Funded Warrants or Common Warrants acquire shares of our tangible assetscommon stock upon exercise of such warrants, holders of Pre-Funded Warrants and Common Warrants will have no rights with respect to the shares of our common stock underlying such Pre-Funded Warrants and Common Warrants. Upon exercise of the Pre-Funded Warrants and Common Warrants, the holders will be entitled to exercise the rights of a common stockholder only as to matters for which the record date occurs after subtracting liabilities. As a result, investors will, as of September 30, 2012:the exercise date.
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incur immediate dilution of $4.28 per shareThe Common Warrants are speculative in nature.
The Common Warrants do not confer any rights of common stock basedownership on their holders, such as voting rights or the $5.00 allocation ofright to receive dividends, but rather merely represent the initial public offering price of $5.10 per unitright to a share of common stock; and
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contribute 60% of the total amount invested to date to fund our company based on the $5.00 allocation of the initial public offering price of $5.10 per unit to a share of common stock, but will own only 15% of the outstandingacquire shares of common stock afterat a fixed price for a limited period of time. Moreover, following this offering, the offering.
Provisions in our third amendedmarket value of the Common Warrants, if any, will be uncertain and restated certificatethere can be no assurance that the market value of incorporation, our amended and restated bylawsthe Common Warrants will equal or Delaware law might discourage, delayexceed their imputed offering price. The Common Warrants will not be listed or prevent a change-of-control of our companyquoted for trading on any market or changes in our management and, therefore, depressexchange. There can be no assurance that the tradingmarket price of our common stock will ever equal or exceed the exercise price of the Common Warrants, and warrants.consequently, the Common Warrants may expire valueless.
The Common Warrants being offered may not have value.
Provisions
The Common Warrants being offered by us in this offering have an exercise price of our third amended$● per share, subject to certain adjustments, and restated certificate of incorporation, our amended and restated bylaws, or Delaware law may have the effect of deterring unsolicited takeovers or delaying or preventing a change-of-control
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of our company or changes in our management, including transactions in which our stockholders might otherwise receive a premium for their shares over then current market prices. In addition, these provisions may limit the ability of stockholders to approve transactions that they may deem to be in their best interest. These provisions include:
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advance notice requirements for stockholder proposals and nominations of directors;
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the inability of stockholders to call special meetings; and
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limitationsexpire on the ability of stockholders to remove directors without cause or amend our bylaws.
The existencefive-year anniversary of the foregoing provisionsInitial Exercise Date, upon which date such Common Warrants will expire and anti-takeover measures could limithave no further value. In the priceevent that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of the Company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.
We may seek to raise additional funds, finance acquisitions or develop strategic relationships by issuing capital stock that would dilute your ownership. If these activities result in significant dilution, it may negatively impact the trading price of our shares of common stock and warrants.
We have financed our operations, and we expect to continue to finance our operations, acquisitions, if any, and the development of strategic relationships by issuing equity and/or convertible securities, which could significantly reduce the percentage ownership of our existing stockholders. Furthermore, any newly issued securities could have rights, preferences and privileges senior to those of our existing securities. Any issuances by us of equity securities may be at or below the prevailing market price of our stock and in any event may have a dilutive impact on your ownership interest, which could cause the market price of our common stock and/does not exceed the exercise price of the Common Warrants during the period when they are exercisable, the Common Warrants may not have any value.
Purchasers who purchase our securities in this offering pursuant to a securities purchase agreement may have rights not available to purchasers that purchase without the benefit of a securities purchase agreement.
In addition to rights and remedies available to all purchasers in this offering under federal securities and state law, the purchasers that enter into a securities purchase agreement will also be able to bring claims of breach of contract against us. The ability to pursue a claim for breach of contract provides those investors with the means to enforce the covenants uniquely available to them under the securities purchase agreement including: (i) timely delivery of shares; (ii) agreement to not enter into variable rate financings for one year from closing, subject to certain exceptions; (iii) agreement to not enter into any financings for 60 days from closing; and (iv) indemnification for breach of contract.
This is a best efforts offering, with no minimum amount of securities required to be sold, and we may not raise the amount of capital we believe is required for our business plans, including our near-term business plans.
The placement agent has agreed to use its reasonable best efforts to solicit offers to purchase the securities in this offering. The placement agent has no obligation to buy any of the securities from us or warrants to decline.arrange for the purchase or sale of any specific number or dollar amount of the securities. There is no required minimum number of securities that must be sold as a condition to completion of this offering. Because there is no minimum offering amount required as a condition to the closing of this offering, the actual offering amount, placement agent fees and proceeds to us are not presently determinable and may be substantially less than the maximum amounts set forth above. We may alsosell fewer than all of the securities offered hereby, which may significantly reduce the amount of proceeds received by us, and investors in this offering will not receive a refund in the event that we do not sell a sufficient number of securities to support our continued operations, including our near-term continued operations. Thus, we may not raise the amount of capital we believe is required for our operations in the short term and may need to raise additional funds, throughwhich may not be available or available on terms acceptable to us.
Because there is no minimum required for the incurrenceoffering to close, investors in this offering will not receive a refund in the event that we do not sell a sufficient number of debtsecurities to pursue the business goals outlined in this prospectus.
We have not specified a minimum offering amount nor have or will we establish an escrow account in connection with this offering. Because there is no escrow account and no minimum offering amount, investors could be in a position where they have invested in our company, but we are unable to fulfill our objectives due to a lack of interest in this offering. Further, because there is no escrow account in operation and no minimum investment amount, any proceeds from the issuance or sale of othersecurities offered by us will be available for our immediate use, despite uncertainty about whether we would be able to use such funds to effectively implement our business plan. Investor funds will not be returned under any circumstances whether during or after the offering.
If securities or instruments senior toindustry analysts do not publish research or publish inaccurate or unfavorable research about our common shares. The holders of any securities or instruments we may issue may have rights superior to the rights ofbusiness, our common stockholders. If we experience dilution from issuance of additional securitiesstock price and we grant superior rights to new securities over common stockholders, it may negatively impact the trading price of our shares of common stock and warrants, and you may lose all or part of your investment.volume could decline.
An active, liquid and orderly
The trading market for our common stock and warrants may not developwill depend in part on the research and reports that securities or industry analysts publish about us or our business. We currently have limited research coverage by securities and industry analysts. If we fail to maintain adequate coverage by securities or industry analysts, the trading price for our stock would be negatively impacted. If one or more of the analysts who cover us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.
Future sales of our common stock, warrants, or securities convertible into our common stock may depress our stock price.
The price of our common stock and warrants may be volatile. If an orderly trading market for our common stock and warrants does not develop and/or if the trading price for our common stock and warrants is volatile, the trading price of our shares of common stock and warrants may be negatively impacted.
Prior to this offering, there has been no public market for our common stock and warrants. The initial public offering price of our unit of one share of common stock and one half (1/2) common stock purchase warrant has been determined through negotiation with the Underwriter. This unit price will not necessarily reflect the price at which investors in the market will be willing to buy and sell our common stock or warrants following this offering. In addition, the trading price of our common stock and warrants following this offering is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. If an orderly trading market for our common stock and warrants does not develop and/or if the trading price for our common stock and warrants is volatile, the trading price of our shares of common stock and warrants may be negatively impacted, and you may lose all or part of your investment.
In addition, the stock market in general, and the market for newly public companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of companies’ stock, including ours, regardless of actual operating performance. These fluctuations may be even more pronounced in the trading market for our stock shortly following this offering. Historically, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against such a company. If securities class action litigation is instituted against us, it could result in substantial costs and a diversion of our management’s attention and resources and our business, financial condition, and/or results of operations could suffer, the trading price of our shares of common stock and warrants could decline, and, accordingly, you may lose all or part of your investment.
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A total of 7,910,000 of our total outstanding shares are being registered for resale. A total of 1,549,695 shares (excluding 630,000 shares of common stock issuable pursuant to vested stock options) are subject to lockup agreements with our Underwriter for a period of 13 months after the date of this prospectus and the balance of 6,360,305 shares may be sold immediately on the NYSE MKT Exchange. The large number of shares eligible for public sale could depress the market price of our common stock and warrants.
The market price of our common stock and warrants could decline as a result of sales of a large number of shares of our common stock in the market after this offering, andor warrants or the perception that these sales could occur. These sales, or the possibility that these sales may occur, may also depress the market price of our common stock and warrants. Based on shares outstanding as of November 10, 2012, we will have 9,860,000 shares of common stock outstanding after this offering. All of these shares of common stock will be freely tradable in the United States. The holders of 1,549,695 shares of outstanding common stock and 630,000 vested stock options have agreed with the Underwriter, subject to certain exceptions, not to dispose of or hedge any of their common stock (including the common stock issuable upon exercise of the vested stock options) during the 13-month period beginning on the date of this prospectus, except with the prior written consent of our Underwriter. After the expiration of the 13-month restricted period, these shares may be sold in the public market in the United States, subject to prior registration in the United States, if required, or reliance upon an exemption from U.S. registration.
In addition, upon completion of this offering, we intend to file a registration statement to register 1,800,000 shares of our outstanding common stock reserved for future issuance under our equity compensation plans. Upon the effectiveness of that registration statement, subject to the satisfaction of applicable exercise periods and, in certain cases, lock-up agreements with the representatives of the Underwriter referred to above, the shares of common stock issued upon exercise of outstanding options will be available for immediate resale in the United States in the open market.
Sales of our common stock, as lockup restrictions end, may depress the price of our common stock and warrants makingmight make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. These sales also could cause our stock price to fall and make it more difficult for you to sell shares of our common stock and warrants,and, accordingly, you
In addition, in the future, we may lose all or part of your investment.
Ownership of our common shares is concentrated and you and other investors will have minimal influence on stockholder decisions.
As of November 10, 2012, our executive officers, directors, and a small number of investors, beneficially owned an aggregate of 6,959,689issue additional shares of common stock, and/warrants or preferred stockother equity or debt securities convertible into common stock representing approximately 66% of the voting power of our then-outstanding capital stock. Asin connection with a result, our existing officers, directors, and such investors could significantly influence stockholder actions of which you disapprovefinancing, acquisition, litigation settlement, employee arrangements or that are contrary to your interests. This ability to exercise significant influence could prevent or significantly delay another company from acquiring or merging with us and the trading price of ourotherwise. We may also issue additional shares of common stock to satisfy the exercise of outstanding warrants. Any such issuances could result in substantial dilution to our existing stockholders and warrants could decline, and, accordingly, you may lose all or part of your investment.
Securities analysts may not cover our common stock and this may have a negative impact oncause the market price of our common stock and warrants.to decline.
The trading market for our common stock and warrants may depend on the research and reports that securities analysts publish about us or our business. We do not have any control over these analysts. There is no guarantee that securities analysts will cover our common stock. If securities analysts do not cover our common stock, the lack of research coverage may adversely affect the market price of our common stock and warrants. If we are covered by securities analysts, and our stock is downgraded, the price of our stock and warrants would likely decline. If one or more of these analysts ceases to cover us or fails to publish regularly reports on us, we could lose or fail to gain visibility in the financial markets, which could cause a decline in our stock and warrant price and/or trading volume, and, accordingly, you may lose all or part of your investment.
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The application of the Securities and Exchange Commission’s “penny stock” rules to our common stock could limit trading activity in the market, and our stockholders may find it more difficult to sell their stock.
If our common stock trades at less than $5.00 per share, then it will be subject to the Securities and Exchange Commission’s (“SEC”) penny stock rules. Penny stocks generally are equity securities with a price of less than $5.00. Penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. The broker-dealer must also make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security that becomes subject to the penny stock rules. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in our securities, which could severely limit their market price and liquidity of our securities. These requirements may restrict the ability of broker-dealers to sell our common stock and may affect your ability to resell our common stock which may depress the market price of our common stock and warrants and, accordingly, you may lose all or part of your investment.
We do not intend to pay dividends for the foreseeable future, and you must rely on increases in the market prices of our common stock and warrants for returns on your investment.
For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends on our common stock. Accordingly, investorsstock in the foreseeable future.
We do not anticipate declaring or paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain any future earnings to finance the operation and expansion of our business. Consequently, stockholders must be prepared to rely on sales of their common stock and warrants after price appreciation, to earn an investment return, which may never occur. Investors seeking cash dividends shouldoccur, as the only way to realize any future gains on their investment. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which stockholders have purchased their shares.
If we fail to regain compliance with the continued listing requirements of Nasdaq, our common stock and/or warrants may be delisted and the price of our common stock and/or warrants and our ability to access the capital markets could be negatively impacted.
On March 16, 2023 we received notice from Nasdaq indicating that we are not purchasein compliance with the requirement to maintain a minimum bid price of $1.00 per share for continued listing on Nasdaq. We were provided a compliance period of 180 calendar days from the date of the notice, or until September 16, 2023, to regain compliance with the minimum closing bid requirement, pursuant to Nasdaq Listing Rule 5810(c)(3)(A). On September 19, 2023, Nasdaq notified us that that it granted an extension until March 18, 2024 to regain compliance with the minimum closing bid requirement. If we fail to evidence compliance by March 18, 2024, we may be subject to delisting. If Nasdaq determines to delist our securities, we will have the right to appeal to a Nasdaq hearings panel. There can be no assurance that we will be able to regain compliance with the applicable Nasdaq listing requirements.
We will continue to monitor the closing bid price of our common stock and may, if appropriate, consider available options, including implementation of a reverse stock split of our common stock, to regain compliance with the minimum closing bid requirement. If we seek to implement a reverse stock split in order to remain listed on Nasdaq, the announcement or implementation of such a reverse stock split could negatively affect the price of our common stock and/or warrants.
We must satisfy Nasdaq’s continued listing requirements, including, among other things, a minimum stockholders’ equity of $2.5 million and a minimum closing bid price of $1.00 per share or risk delisting, which could have a material adverse effect on our business. If our common stock and warrants are delisted from Nasdaq, it could materially reduce the liquidity of our common stock and warrants and result in a corresponding material reduction in the price of our common stock and warrants as a result of the loss of market efficiencies associated with Nasdaq and the loss of federal preemption of state securities laws. In addition, delisting could harm our ability to raise capital through alternative financing sources on terms acceptable to us, or at all, and may result in the potential loss of confidence by investors, suppliers, customers and employees and fewer business development opportunities. If our common stock and warrants are delisted, it could be more difficult to buy or sell our common stock and warrants or to obtain accurate quotations, and the price of our common stock and warrants could suffer a material decline. Delisting could also impair our ability to raise capital on acceptable terms, if at all.
The sale of our common stock in this offering, including any shares issuable upon exercise of any Pre-Funded Warrants or Common Warrants, and any future sales of our common stock, or the perception that such sales could occur, may depress our stock price and our ability to raise funds in new stock offerings.
We may from time-to-time issue additional shares of common stock at a discount from the current trading price of our common stock. Any determinationAs a result, our stockholders would experience immediate dilution upon the purchase of any shares of our common stock sold at such a discount. In addition, as opportunities present themselves, we may enter into financing or similar arrangements in the future, including the issuance of debt securities, preferred stock or common stock. Sales of shares of our common stock in this offering, including any shares issuable upon exercise of any Pre-Funded Warrants or Common Warrants issued in this offering and in the public market following this offering, or the perception that such sales could occur, may lower the market price of our common stock and may make it more difficult for us to paysell equity securities or equity-related securities in the future at a time and price that our management deems acceptable, or at all.
Significant holders or beneficial holders of our common stock may not be permitted to exercise Pre-Funded Warrants that they hold.
A holder of a Pre-Funded Warrant will not be entitled to exercise any portion of any Pre-Funded Warrants which, upon giving effect to such exercise, would cause the aggregate number of shares of our common stock beneficially owned by the holder (together with its affiliates) to exceed 4.99% (or, at the election of the purchaser, 9.99%) of the number of shares of our common stock outstanding immediately after giving effect to the exercise. Such percentage may be increased or decreased by written notice by the holder of the Pre-Funded Warrants to any other percentage not in excess of 9.99%. Such increase or decrease will not be effective until the sixty-first (61st) day after such notice is delivered to us. As a result, you may not be able to exercise your Pre-Funded Warrants for shares of our common stock at a time when it would be financially beneficial for you to do so. In such circumstances, you could seek to sell your Pre-Funded Warrants to realize value, but you may be unable to do so in the absence of an established trading market for the Pre-Funded Warrants.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated by reference herein contain forward-looking statements. All statements other than statements of historical facts contained in this prospectus and the documents incorporated by reference herein are forward-looking statements, including statements regarding our future results of operations and financial position, business strategy, regulatory developments, research and development costs, the timing and likelihood of commercial success, the potential to develop future product candidates, plans and objectives of management for future operations, and future results of current and anticipated products. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. This prospectus and the documents incorporated by reference herein also contain estimates and other statistical data made by independent parties and by us relating to market size and growth and other data about our industry. This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. In addition, projections, assumptions and estimates of our future performance and the future performance of the markets in which we operate are necessarily subject to a high degree of uncertainty and risk.
In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this prospectus and the documents incorporated by reference herein are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this prospectus and are subject to a number of risks, uncertainties and assumptions, which we discuss in greater detail in the documents incorporated by reference herein, including under the heading “Risk Factors” and elsewhere in this prospectus. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this prospectus or the documents incorporated by reference herein, whether as a result of any new information, future events, changed circumstances or otherwise. For all forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, levels of activity, performance, and events and circumstances may be materially different from what we expect.
USE OF PROCEEDS
We estimate that the net proceeds from this offering will be approximately $●, based on an assumed public offering price of $● per share of common stock, the last reported sale price of our common stock on the Nasdaq Capital Market on ●, 202●, and assuming the sale of ● Common Warrants and no sale of any Pre-Funded Warrants in this offering after deducting the placement agent fees and estimated offering expenses payable by us. However, because this is a best efforts offering with no minimum number of securities or amount of proceeds as a condition to closing, the actual offering amount, the placement agent’s fees and net proceeds to us are not presently determinable and may be substantially less than the maximum amounts set forth on the cover page of this prospectus, and we may not sell all or any of the securities we are offering. As a result, we may receive significantly less in net proceeds.
We currently intend to use the net proceeds from this offering, together with our existing cash and cash equivalents, for continued research and development for NCG-Cap, and working capital and general corporate purposes. We may also use a portion of the net proceeds, together with our existing cash and cash equivalents, to in-license, acquire, or invest in complementary businesses, technologies, products or assets; however, we have no current commitments or obligations to do so.
We believe, based on our current operating plan, that our existing cash and cash equivalents together with the net proceeds from this offering and assuming no sale of any pre-funded warrants and no exercise of the warrants, will be sufficient to fund our operations into ●. However, the amounts and timing of our actual expenditures will depend on numerous factors, including the cost and timing to complete our Phase 1B trial; costs associated with the first part of our planned Phase 2 trial for NGC-Cap; any costs we incur related to NGC-Gem and NGC-Iri; for general and administrative costs to support operations; and other factors as described under “Risk Factors” in this prospectus and in the documents incorporated by reference herein. We therefore cannot estimate with certainty the amount of net proceeds to be used for the purposes described above. We may find it necessary or advisable to use the net proceeds for other purposes, and we will have broad discretion in the application of the net proceed and it may be necessary to reallocate funds. Accordingly, our management will have flexibility in applying the net proceeds from this offering. An investor will not have the opportunity to evaluate the economic, financial or other information on which we base our decisions on how to use the proceeds.
If we have based our estimates on assumptions that are incorrect, or we increase our anticipated clinical trials, then we could use our available capital resources sooner than we currently expect. We may satisfy our future cash needs through the sale of equity securities, debt financings, working capital lines of credit, corporate collaborations or license agreements, grant funding, interest income earned on invested cash balances or a combination of one or more of these sources.
Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments and U.S. government securities.
Each $● increase (decrease) in the assumed public offering price of $● per share, the last reported sale price of our common stock on the Nasdaq Capital Market on ●, 202●, and accompanying Common Warrant, would increase (decrease) the net proceeds to us by approximately $● million, assuming that the number of shares of common stock, Common Warrants and Pre-Funded Warrants offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated placement agent discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of ● shares in the number of shares of common stock (or common stock underlying Pre-Funded Warrants) and accompanying Common Warrants offered by us, as set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us by approximately $● million, assuming the assumed public offering price per share of common stock and accompanying Common Warrant remains the same, and after deducting the estimated placement agent discounts and commissions and estimated offering expenses payable by us.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We intend to retain future earnings, if any, to finance the operation of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our Board of Directors and will depend onafter considering our financial condition, results of operations, financial condition, contractual restrictions, restrictions imposed by applicable lawcapital requirements, business prospects and other factors our Board of Directors deems relevant.
We will have broad discretion overrelevant, and subject to the use of the net proceeds from this offering and may not use them effectively.
Our management will have broad discretion to use the net proceeds of this offering for a variety of purposes, including, further development of our products and operations, working capital, and general corporate purposes. We may spend or invest these proceeds in a way with which our stockholders disagree. Failure by our management to effectively use these funds could harm our business and financial condition. Until the net proceeds are used, they may be placed in investments that do not yield a favorable return to our investors, do not produce significant income or lose value. See “Use of Proceeds.”
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward looking statements that involve risks and uncertainties, principally in the sections entitled “Description of Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All statements other than statements of historical fact contained in this prospectus, including statements regarding future events, our future financial performance, business strategy and plans and objectives of management for future operations, are forward-looking statements. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” or “will” or the negative of these terms or other comparable terminology. Although we do not make forward looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks outlined under “Risk Factors” or elsewhere in this prospectus, which may cause our or our industry’s actual results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not
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possible for us to predict all risk factors, nor can we address the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual results to differ materially from thoserestrictions contained in any forward-looking statements. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assumes no obligation to update any such forward-looking statements.future financing instruments.
You should not place undue reliance on any forward-looking statement, each of which applies only as of the date of this prospectus. Before you invest in our securities, you should be aware that the occurrence of the events described in the section entitled “Risk Factors” and elsewhere in this prospectus could negatively affect our business, operating results, financial condition and stock price. Except as required by law, we undertake no obligation to update or revise publicly any of the forward-looking statements after the date of this prospectus to conform our statements to actual results or changed expectations.
Selling StockholderCAPITALIZATION
This prospectus includes the sale of up to 300,000 shares underlying 200,000 units that maybe sold to the Underwriter by a common stockholder in the event that our Underwriter exercises its over-allotment option.
The 300,000 shares of common stock underlying the 200,000 units were issued as follows. These shares were acquired by the selling stockholder in April 2011 upon consummation of the purchase by us of certain of our assets from the selling stockholder in a transaction that was exempt under Section 4(a)(2) of the Securities Act of 1933.
The following table sets forth information regarding the shares of common stock owned beneficially as of November 10, 2012, by the selling stockholder, Mr. Richard Giles. Mr. Giles owns more than 5% of the outstanding shares of Company common stock. He was a director of the Company from April 2011 to June 2012 and has been a consultant of the Company from April 2011 to the present.
| | | | |
Common stock |
Name of selling stockholder | Shares owned prior to offering (1) | Shares being Offered (2) | Shares owned after offering (3) | Percentage owned after offering (3) |
Richard Giles | 1,417,500 | 300,000 | 1,117,500 | 11% |
| | | | |
(1)
Includes 30,000 vested performance options.
(2)
Shares underlying 200,000 units constitute 200,000 shares of common stock and up to 100,000 shares of common stock upon exercise, if any, of 100,000 warrants included in the units.
(3)
Amount gives effect to the automatic conversion of all 2,860,000 shares of preferred stock to 6,460,000 shares of common stock and 30,000 vested performance options but does not include:
·
the issuance of 1,022,000 and 1,410,000 shares of common stock upon exercise of stock options and performance stock options, respectively;
·
the issuance of 762,500 shares of common stock underlying 762,500 outstanding warrants, including the issuance of 12,500 warrants upon exercise of our Underwriter’s overallotment option; and
·
the issuance of 150,000 shares of common stock underlying warrants issued to our Underwriter in connection with this offering.
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Use of Proceeds
We estimate that our net proceeds from this offering will be approximately $6,550,000, after deducting underwriting discounts and commissions of $612,000, our Underwriter’s expenses and our estimated offering expenses of $488,000. We will receive additional net proceeds of up to $117,300, after deducting $10,200 in underwriting discounts and commissions, if our Underwriter exercises its overallotment option to purchase up to 25,000 additional units from us, for total combined net proceeds of $6,667,300.
If our Underwriter exercises its over-allotment option and purchases 200,000 units from a selling stockholder, we will not receive any proceeds from the sale of the 200,000 units nor from the issuance of the additional 100,000 shares of common stock upon the exercise of warrants underlying these units. The warrants underlying the units offered by the selling stockholder are identical to the warrants underlying the units offered by us. The first proceeds from the exercise of any warrants will go to us. All amounts in excess of the aggregate exercise price of the warrants sold by us will go to the selling stockholder.
We intend to use the net proceeds of this offering for dealer network development, executive management salaries and benefits, intellectual property development and protection, research and development, and general working capital purposes as detailed below. Our planned capital expenditures for activities during calendar 2012 and 2013 that are to be funded from the proceeds of this offering are as follows:
| | | | |
| Use of proceeds |
Purpose | Without overallotment | Percent | With overallotment | Percent |
General working capital purposed | $ 3,970,000 | 60.6% | $ 4,087,300 | 61.3% |
Dealer network development | 1,200,000 | 18.3% | 1,200,000 | 18.0% |
Executive management salaries and benefits | 720,000 | 11.0% | 720,000 | 10.8% |
Intellectual property development and protection | 360,000 | 5.5% | 360,000 | 5.4% |
Research and development | 300,000 | 4.6% | 300,000 | 4.5% |
| $ 6,550,000 | 100.0% | $ 6,667,300 | 100.0% |
The following table summarizes the maximum proceeds from the exercise of our warrants, excluding 100,000 warrants underlying the sale of 200,000 units by a selling stockholder upon exercise of the Underwriter’s overallotment option. The warrants expire one year from the date of issuance.
| | | |
Warrant summary | Number of warrants | Exercise price | Maximum proceeds |
Warrants issued in this offering | 750,000 | $ 5.00 | $ 3,750,000 |
Warrants issuable under our Underwriter’s over-allotment option | 12,500 | $ 5.00 | 62,500 |
| 762,500 | | $ 3,812,500 |
We intend to use the net proceeds from the exercise of warrants, if any, for general working capital purposes.
Pending our application of proceeds as we have described, we will invest proceeds in short-term, investment grade interest bearing securities.
Dividend Policy
We have never declared or paid cash dividends on our common stock. We currently intend to retain future earnings to finance the operation, development and expansion of our business. We do not anticipate paying cash dividends on our common stock in the foreseeable future. Payment of future cash dividends, if any, will be at the discretion of our Board of Directors and will depend on our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors that our Board of Directors considers relevant.
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Capitalization
The following table sets forth our unauditedcash and cash equivalents and capitalization as of September 30, 2012. Our capitalization is presented:2023 as follows:
·
| ● | on an actual basis; and |
| | |
| ● | on as adjusted basis to give effect to the issuance by us of ● shares of our common stock in this offering at an assumed public offering price of $● per share, based on the last reported sale price of our common stock on the Nasdaq Capital Market on ●, 202●, assuming no sale of any Pre-Funded Warrants in this offering, after deducting the placement agent fees and estimated offering expenses payable by us. |
on an actual basis; and
·
on an as adjusted basis to reflect the sale of 1,500,000 units offered by the Company at $5.10 per unit, after deducting estimated underwriting expenses and commissions and offering expenses payable by us, and the conversion of all of our preferred stock into 6,460,000 shares of common stock.
You should read this table togetherinformation in conjunction with “Management’s Discussion and Analysis or Plan of Operation,” theour consolidated financial statements and notes thereto and other information appearing elsewhere inincorporated by reference into this prospectus.
| | |
| As of September 30, 2012 |
| Actual | As adjusted |
| (unaudited) | (unaudited) |
Stockholders’ equity: | | |
Common stock, $0.0001 par value: 20,000,000 shares authorized, 1,750,000 issued and outstanding (actual) and 3,250,000 issued and outstanding (as adjusted) | $ 175 | $ 971 |
Series A Preferred Stock, $0.0001 par value: 600,000 authorized, 600,000 issued and outstanding (actual) and no shares issued and outstanding (as adjusted) | 60 | - |
Series B Preferred Stock, $0.0001 par value: 1,500,000 authorized, 1,500,000 issued and outstanding (actual) and no shares issued and outstanding (as adjusted) | 150 | - |
Series C Preferred Stock, $0.0001 par value: 760,000 authorized, 760,000 issued and outstanding (actual) and no shares issued and outstanding (as adjusted) | 76 | - |
Additional paid-in capital | 5,666,101 | 12,065,951 |
Share purchase warrants | - | 150,000 |
Accumulated deficit | (2,610,530) | (2,610,530) |
Total stockholders’ equity | 3,056,032 | 9,606,392 |
Total capitalization | $ 3,056,032 | $ 9,606,392 |
The information provided above excludes:
·
1,022,000 and 1,440,000 shares of common stock issuable upon exercise of outstanding stock options and performance stock options, respectively;
·
up to 25,000 shares of common stock issuable upon exercise of our Underwriter’s overallotment option;
·
up to 762,500 shares of common stock issuable upon exercise of warrants issued by the Company, including the 12,500 warrants issuable upon exercise of our Underwriter’s overallotment option; and
·
150,000 shares of common stock issuable upon exercise of our Underwriter’s warrants.
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Determination of Offering Price
The price of the units we are offering was arbitrarily determined in order for us to raise up to a total of $7,650,000 in this offering, assuming no exercise of the Underwriter’s overallotment option. The offering price bears no relationship whatsoever to our assets, earnings, book value or other criteria of value. Among the factors considered were:
·
our lack of operating history,
·
the proceeds to be raised by the offering,
·
the amount of capital to be contributed by purchasers in this offering in proportion to the amount of stock to be retained by our existing stockholder, and
·
our relative cash requirements.
| | | As of September 30, 2023 | |
| | | Actual | | | As adjusted | |
| Cash and cash equivalents | | $ | 6,860,672 | | | $ | | |
| Preferred stock, $0.0001 par value: 1,000,000 shares authorized, no shares issued or outstanding | | | - | | | | - | |
| Common stock $0.0001 par value: 100,000,000 shares authorized, 24,731,474 issued and 24,631,474 outstanding, actual; ● shares issued and outstanding, as adjusted(1) | | | 2,473 | | | | | |
| Additional paid-in capital | | | 80,429,556 | | | | | |
| Treasury stock at cost – 100,000 shares | | | (300,000 | ) | | | (300,000 | ) |
| Accumulated equity | | | (72,964,150 | ) | | | | |
| | | | | | | | | |
| Total stockholders’ equity | | | 7,167,879 | | | | | |
| | | | | | | | | |
| Total capitalization | | $ | | | | $ | | |
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Dilution
Our pro forma(1) The foregoing tables and calculations (other than the historical net tangible book value (unaudited) as of September 30, 2012 was $556,032, or $0.07 per share of common stock and common stock equivalents. Our pro forma net tangible book value per share represents our total tangible assets at September 30, 2012, less total liabilities, divided by the pro forma total number ofcalculation) are based on 24,631,474 shares of common stock outstanding at such date. The pro forma total numberas of September 30, 2023, and exclude:
| ● | 141,611 shares of our common stock issuable upon exercise of outstanding options, which have a weighted average exercise price of $18.22 per share; |
| | |
| ● | 4,554,867 shares of common stock issuable for restricted stock units (RSUs) (of which 2,291,923 are vested) issuable upon meeting distribution restrictions; |
| | |
| ● | 3,366,480 shares of common stock issuable upon exercise of vested outstanding common warrants at a weighted-average exercise price of $1.61 per share; |
| | |
| ● | 467,735 shares of common stock reserved for issuance and available for future grant under our 2019 Omnibus Incentive Plan; and |
| | |
| ● | the exercise of the Pre-Funded Warrants and Common Warrants issued in this offering. |
In addition, to the extent that any outstanding options, RSUs, or warrants described above are exercised, new options are issued, or we issue additional shares of common stock outstanding assumes that all 2,860,000 sharesor other equity or convertible debt securities in the future, there will be further dilution to investors participating in this offering.
DILUTION
If you invest in our securities in this offering, your ownership interest will be immediately diluted to the extent of our preferred stock convert into 6,460,000 shares of common stock. The dilution in pro forma net tangible book value per share represents the difference between the $5.10combined public offering price paid by purchasers of units in this offering ($5.00 of which is attributable toper share and accompanying Common Warrant and the common stock and $0.10 of which is attributable to the warrants) and theas adjusted net tangible book value per share of our common stock immediately followingafter this offering.offering, assuming no value is attributed to the warrants.
Historical net tangible book value (deficit) per share is determined by dividing our total tangible assets less our total liabilities by the total number of shares of common stock outstanding. Our historical net tangible book value (deficit) as of September 30, 2023 was approximately ($7.2) million, or ($0.27) per share, based on 26,848,397 shares of common stock outstanding (which includes vested but unissued RSUs and excludes unvested RSAs) as of that date.
After giving effect to the sale of 1,500,000 units offeredshares of common stock and accompanying Common Warrants in this offering, at an assumed sale by us of ● shares in this offering at $5.10an assumed public offering price of $● per unit andshare, based on the last reported sale price of our common stock on the Nasdaq Capital Market on ●, 202●, assuming no sale of any Pre-Funded Warrants in this offering, after deducting estimated underwriting discountsthe placement agent fees and commissions, andestimated offering expenses payable by us, our pro formaas adjusted net tangible book value as adjusted, as of September 30, 20122023 would have been approximately $7,039,532$● million, or $0.72$● per share, which excludes the Common Warrants to purchase shares of our common stock.stock to be issued to investors in this offering.. This amount represents an immediate increase in pro forma net tangible book value of $0.65$● per share to theour existing stockholders and an immediate dilution in pro forma net tangible book value of $4.28$● per share of common stock to new investors purchasing unitsshares of our securities in this offering.
The following table illustrates this dilution to new investors on a per share basis:
| Assumed combined public offering price per share and accompanying Common Warrant | | | | | | $ | | |
| Historical net tangible book value (deficit) per share as of September 30, 2023 | | $ | (0.27 | ) | | | | |
| Increase in net tangible book value per share attributable to new investors participating in this offering | | | | | | | | |
| As adjusted net tangible book value per share after this offering | | | | | | | | |
| Dilution in as adjusted net tangible book value per share to new investors participating in this offering | | | | | | $ | | |
This table does not take into account further dilution to new investors that could occur upon the exercise of the warrants offered hereby or outstanding options and warrants having a per share exercise price less than the public offering price per share in this offering. To the extent that outstanding options or warrants are exercised, or restricted stock units vest and settle, investors purchasing our common stock will experience further dilution. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution in pro formato our stockholders.
The foregoing tables and calculations (other than the historical net tangible book value per share to new investors.
| | |
Offering price per unit attributable to common stock
| | $ 5.00
|
Pro forma net tangible book value (unaudited) as of September 30, 2012
| $ 0.07
| |
Increase per share resulting from this offering
| 0.65
| |
Pro forma net tangible book value after this offering
| | 0.72
|
Dilution per share to new investors in this offering
| | $4.28
|
Percentage dilution to new investors
| | 86%
|
The following table summarizes on a pro forma basis, as of September 30, 2012, the number of shares of common stock purchased from us, the total consideration paid to us, and the average price per share paid by existing stockholders and new investors purchasing units in this offering, before estimated offering expenses:
| | | | | | | | | |
| Shares purchased | | Total consideration | | Average price |
| Number | | Percent | | Amount | | Percent | | per share |
Common stockholders’ | 1,750,000 | | 18% | | $ - | | -% | | $ 0.00 |
Series A Preferred stockholders | 4,200,000 | | 43% | | 500,000 | | 4% | | $ 0.12 |
Series B Preferred stockholders | 1,500,000 | | 15% | | 3,000,000 | | 24% | | $ 2.00 |
Series C Preferred stockholders | 760,000 | | 8% | | 1,520,000 | | 12% | | $ 2.00 |
New investors | 1,500,000 | | 16% | | 7,500,000 | | 60% | | $ 5.00 |
Total | 9,710,000 | | 100% | | $12,520,000 | | 100% | | |
The information for existing stockholders in the table above:
·
assumes the conversion of all 2,860,000 shares of preferred stock into 6,460,000 shares of common stock;
·
excludes shares of common stock issuable upon exercise of outstanding stock options and outstanding warrants, warrants purchased in this offering, warrants issuable upon exercise of our Underwriter’s overallotment option and warrants issued to our Underwriter in this offering;
·
excludes the sale of 200,000 units by a selling stockholder; and
·
attributes $5.00 of the $5.10 unit price to the common stock and $0.10 to the warrants.
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Management’s Discussion and Analysis or Plan of Operation
You should read the following discussion of the financial condition and plan of operation in conjunction with our Heatwurx and predecessor carve-out financial statements and the notes to financial statements included elsewhere in this prospectus. Heatwurx, Inc. was incorporated on March 29, 2011 and we commenced operations on that date. However, as there was no financial activity subsequent to the date of incorporation on March 29, 2011 through April 15, 2011, the Company is using April 16, 2011 as the date of incorporation for the purpose of the financial statements including in this filing (other than the Company’s Statement of Stockholders’ Equity which includes the common stock issued upon the Company’s actual incorporation date of March 29, 2011). On April 15, 2011, we entered into an asset purchase agreement with Mr. Richard Giles, a current stockholder of Heatwurx, Inc. Pursuant to the agreement, we purchased the related business and activities of the design, manufacture and distribution of asphalt repair machinery under the Heatwurx brand.
Mr. Giles began developing the Heatwurx business during 2009. The financial statements of Heatwurx included in this prospectus as of December 31, 2010, for the year ended December 31, 2010 and for the period from January 1, 2011 through April 15, 2011 (date of acquisition of the Heatwurx business from Mr. Giles’ construction business have been disaggregated, or “carved-out” of the financial statements of Mr. Giles construction business, as our “predecessor”. These carved-out financial statements form what we refer to herein as the financial statement of our predecessor, and include both direct and indirect expenses. The historical direct expenses consist primarily of the various cost of development of the Heatwurx equipment (technology, design, etc.), incurred by Mr. Giles construction business on behalf of Heatwurx. Indirect expenses represent principally the estimated time Mr. Giles spent on Heatwurx activities. In addition, the net intercompany activities between predecessor and Mr. Giles Construction business have been accumulated in a single caption entitled, “Divisional Net Equity”.
The Heatwurx financial information as of December 31, 2011 and September 30, 2012, for the period from April 16, 2011 (date of incorporation) through December 31, 2011 and for the nine months ended September 30, 2012calculation) are referred to in this prospectus as the financial information of the successor.
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of various factors, including those discussed in “Risk Factors” and elsewhere in this prospectus.
Overview and Basis of Presentation
Heatwurx, Inc. was incorporated under the laws of the State of Delaware on March 29, 2011 as Heatwurxaq, Inc. and subsequently changed its name to Heatwurx, Inc. on April 15, 2011. We have not yet fully commercialized our products and we are therefore classified as a development stage enterprise.
We are an Original Equipment Manufacturer of Asphalt preservation and repair equipment. Our innovative, and eco-friendly hot-in-place recycling process corrects surface distresses within the top 3 inches of existing pavement by heating the surface material in excess of 300° Fahrenheit with our electrically powered infrared heating equipment, mechanically loosening the heated material with our processor/tiller attachment that is optimized for producing a seamless repair, and mixing in additional recycled asphalt pavement and a binder (asphalt-cement), and then compacting repaired area with a vibrating roller or compactor. We consider our equipment to be eco-friendly as the Heatwurx process reuses and rejuvenates distressed asphalt, uses recycled asphalt pavement for filler material, eliminates travel to and from asphalt batch plants, and extends the life of the roadway. We believe our equipment, technology and processes provide savings over other processes that can be more labor and equipment intensive.
Our hot-in-place recycling process and equipment has been selected by the Technology Implementation Group of the American Association of State Highway Transportation Officials (AASHTO TIG) as an “additionally Selected Technology” for the year 2012. We develop, manufacture and intend to sell our unique and innovative and eco-friendly equipment to federal, state and local agencies as well as contractors for the repair and rehabilitation of damaged and deteriorated asphalt surfaces.
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Critical Accounting Policies and Estimates
Use of Estimates
Management’s discussion and analysis of our financial condition and results of operations include the predecessor’s financial statements for the periods through April 15, 2011 and the successor’s financial statements for the period ended September 30, 2012. The preparation of these financial statements requires management to make estimates, allocations and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to impairment of long-lived assets, accrued liabilities and certain expenses. We base our estimates about the carrying values of assets and liabilities that are not readily apparent from other sources on historical experience and on other assumptions believed to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. Additionally, the financial information included here may not necessarily reflect the financial position, operating results, changes in our invested equity and cash flows in the future or what they would have been had we been a separate, stand-alone entity during the periods presented.
We believe the following critical accounting policies involve significant judgments and estimates used in the preparation of our financial statements.
Revenue Recognition
To date, our revenue has been immaterial. Equipment sales revenue is recognized when equipment is shipped to our customer and collection is reasonably assured.
Research and Development Expenses
Research and development costs are expensed as incurred and consist of direct and overhead-related expenses. Expenditures to acquire technologies, including licenses, which are utilized in research and development and that have no alternative future use are expensed when incurred. Technology we develop for use in our products is expensed as incurred until technological feasibility has been established after which it is capitalized and depreciated.
Stock-based Compensation
We account for stock-based compensation in accordance with Statement of Accounting Standard (“SFAS”) 123(R) “Share-based Payment (Revised 2004)” (“SFAS 123(R)”) and compensation cost for all share-based payments, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R), is recognized as an expense over the requisite service period.
The fair value of each option grant is estimated using the Black-Scholes option-pricing model. We account for equity instruments issued to non-employees in accordance with the provisions of SFAS 123(R), Emerging Issues Task Force Issue (“EITF”) No. 96-18, Accounting for Equity Instruments that are Issued to other than Employees for Acquiring, or in Conjunction with Selling Goods or Services and EITF 00-18, Accounting Recognition for Certain Transactions involving Equity Instruments Granted to Other Than Employees, as amended, which require that such equity instruments be recorded at their fair value on the measurement date.
Non-employee share-based compensation charges generally are immediately vested and have no future performance requirements by the non-employee and the total share-based compensation charge is recorded in the period of the measurement date.
Impairment of Long-Lived Assets
We review long-lived assets for impairment on an annual basis, as of December 31, or on an interim basis if an event occurs that might reduce the fair value of such assets below their carrying values. An impairment loss would
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be recognized based on the difference between the carrying value of the asset and its estimated fair value, which would be determined based on either discounted future cash flows or other appropriate fair value methods.
Results of operations
Our results of operations include the activity of the successor for the period from April 16, 2011 (date of incorporation) through September 30, 2012 and the activity of our predecessor for the periods prior to April 15, 2011. As such, our discussion for the relevant periods described below at times refers to the combined activity of the successor and predecessor.
For the nine months ended September 30, 2012, our net loss was $1,650,000, compared to a loss of $305,000 (consisting of a loss of $344,000 from the successor and income of $39,000 from the predecessor), for the nine months ended September 30, 2011. We incurred net losses of $902,000 (consisting of a loss of $941,000 from the successor and income of $39,000 from the predecessor) and $160,000 for the years ended December 31, 2011 and 2010, respectively, based on the methodology used in carving out our financial information from Mr. Richard Giles’ construction business, as described elsewhere in this prospectus. Further description of these losses is provided below.
Revenue
Revenue decreased from approximately $149,000 for the nine months ended September 30, 2011 (consisting of $143,000 from the predecessor and $6,000 from the successor) to $161,000 for the nine months ended September 30, 2012. Revenue for the nine months ended September 30, 2011 consisted principally of the sale of prototype equipment units (each unit consisting of one HWX-30 heating unit and one HWX-AP-40 asphalt processor) for $135,000. Revenue for the nine months ended September 30, 2012 consisted of sales of both the HWX-30 and HWX-AP-40 units to customers.
Revenue increased from approximately $136,000 for the year ended December 31, 2010 to $159,000 for the year ended December 31, 2011. Given we are still in a start-up stage, sales of our equipment have not been material to date. Accordingly, for accounting purposes we consider ourselves to be a development stage company.
Cost of goods sold
Cost of goods sold increased from approximately $78,000 for the nine months ended September 30, 2011 (consisting of $78,000 from the predecessor and $0 from the successor) to $100,000 for the nine months ended September 30, 2012.
Cost of goods sold decreased from approximately $146,000 for the year ended December 31, 2010 to $77,000 for the year ended December 31, 2011 (consisting of $77,000 from the predecessor and $0 from the successor). The decrease is principally due to the higher costs of product during 2010 when the predecessor was still working to standardize the prototype equipment.
Selling, general and administrative
Selling, general and administrative expenses increased from approximately $196,000 for the nine months ended September 30, 2011 (consisting of $13,000 from the predecessor and $183,000 from the successor) to $1,203,000 for the nine months ended September 30, 2012. The increase in selling, general and administrative expenses is principally due to stock-based compensation recorded for the nine months ended September 30, 2012 related to stock option grants for directors, officers and a consultant, increased employee expenses related to the hiring of company employees and marketing costs incurred with an outside consulting firm, among other costs.
Selling, general and administrative expenses increased from $44,000 for the year ended December 31, 2010 to $625,000 for the year ended December 31, 2011 (consisting of $13,000 from the predecessor and $612,000 from the successor). The increase in selling, general and administrative expenses is principally due to equipment rental, trade shows and promotional expenses, among other items. The increase in selling, general and administrative expenses is
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principally due to stock-based compensation recorded for the year ended December 31, 2011 related to stock option grants for directors, officers and a consultant and increased expenses related to the hiring of company employees.
Research and Development
Research and development increased from $69,000 for the nine months ended September 30, 2011 (consisting of $15,000 from the predecessor and $55,000 from the successor) to $355,000 for the nine months ended September 30, 2012. The principal reason for the increase is due to legal and other intellectual property consulting fees related to our research on technology and process that may be patentable incurred during the nine months ended September 30, 2012.
Research and development increased from $106,000 for the year ended December 31, 2010 to $188,000 for the year ended December 31, 2011 (consisting of $14,000 from the predecessor and $174,000 from the successor). The increase in research and development cost during 2011 consist principally of payments to the founder of the Heatwurx business who worked on research and development surrounding the Company’s equipment during 2011.
Income taxes
Prior to April 16, 2011, we operated as part of Mr. Richard Giles general construction business. The tax benefits related to the carved-out expenses benefit Mr. Giles construction business since the carved-out Heatwurx activities were part of Mr. Giles construction business. Because the carve-out tax benefits belong to Mr. Giles construction business, we are not given credit for the tax losses in the accompanying financial statements. Heatwurx, the successor company, has incurred tax losses since it began operations. A tax benefit would have been recorded for losses incurred since April 16, 2011; however, due to the uncertainty of realizing these assets, a valuation allowance was recognized which fully offset the deferred tax assets.
Liquidity and capital resources
On April 15, 2011, we entered into an Asset Purchase Agreement with an individual who is a current stockholder. Pursuant to the agreement, we purchased the related business and activities of the design, manufacture and distribution of asphalt repair machinery under the Heatwurx brand. The total purchase price was $2,500,000. The purchase price was paid in a $1,500,000 cash payment and the issuance of a senior subordinated note to the seller in the amount of $1,000,000.
To date we have relied exclusively on private placements with a small group of investors to finance our business and operations. We have had little revenue since our inception. Although we believe we have adequate working capital to support our currently planned level of operations through the end of 2012, it will be necessary for us to obtain additional financing to fund our operations, including general and administrative expenses, subsequent to year end. Although we believe we may be able to obtain some limited financing through additional bridge loans with our current investor group, we currently have no commitment from any third parties to provide us with capital or additional funding. We cannot assure that additional debt or equity or other funding will be available to us on acceptable terms, if at all. If we fail to obtain additional funding when needed, we would be forced to scale back, or terminate or operations, or seek to merge with or be acquired by another company.
If we successfully complete our initial public offering, we believe the proceeds we will receive from the offering will be sufficient to fund our operations, including our expected capital expenditures, through at least the end of 2013.
Recent accounting pronouncements
In May 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-04,Fair Value Measurement (“ASU 2011-04”), which amended ASC 820,Fair Value Measurements(“ASC 820”), providing a consistent definition and measurement of fair value, as well as similar disclosure requirements between U.S. Generally Accepted Accounting Principles (“GAAP”)and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles, clarifies the application of existing fair value measurement and expands the disclosure requirements. ASU 2011-04 will be effective for us for the fiscal year beginning January 1, 2012. The
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adoption of ASU 2011-04 is not expected to have a material effect on the Company’s financial statements or disclosures.
In September 2011, the FASB issued ASU 2011-05,Comprehensive Income (Topic 20): Presentation of Comprehensive Income(“ASU 2011-05”), which is effective for annual reporting periods beginning after December 31, 2011. ASU 2011-05 will become effective for us for the fiscal year beginning January 1, 2012. The guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. In addition, items of other comprehensive income that are reclassified to profit or loss are required to be presented separately on the face of the financial statements. This guidance is intended to increase the prominence of other comprehensive income in financial statements by requiring that such amounts be presented either in a single continuous statement of income and comprehensive income or separately in consecutive statements of income and comprehensive income. The adoption of ASU 2011-05 is not expected to have a material effect on the Company’s financial statement or disclosures.
In September 2011, the FASB issued ASU 2011-08,Testing Goodwill for Impairment (“ASU 2011-08”), which amends the guidance in ASC 350-20,Intangibles—Goodwill and Other – Goodwill. ASU 2011-08 provides entities with the option of performing a qualitative assessment before calculating the fair value of the reporting unit when testing goodwill for impairment. If the fair value of the reporting unit is determined, based on qualitative factors, to be more likely than not less than the carrying amount of the reporting unit, the entities are required to perform a two-step goodwill impairment test. ASU 2011-08 will be effective for us for the fiscal year beginning January 1, 2012. The adoption of ASU 2011-08 is not expected to have a material effect on the Company’s financial statements or disclosures.
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Business
Our business
Heatwurx, Inc. was incorporated under the laws of the State of Delaware on March 29, 2011 as Heatwurxaq, Inc. and subsequently changed its name to Heatwurx, Inc. on April 15, 2011. Our founders were Larry Griffin and David Eastman, the principals of Hunter Capital Group, LLC, an investment banking entity, which acquired our technology, equipment designs, trademarks, and patent applications from Richard Giles, the inventor in April 2011. In connection with the acquisition, we raised $1,500,000 in senior secured debt and $500,000 through the offering of Series A Preferred Stock to three investors. In October 2011, we completed a 7-1 forward stock split and raised gross proceeds of $3,000,000 through the sale of our Series B Preferred Stock. In August 2012, we raised gross proceeds of $1,520,000 through the sale of our Series C Preferred Stock. In August 2012, the proceeds from the sale of the Series C Preferred Stock were used to repay our secured debt.
We are an Original Equipment Manufacturer of asphalt preservation and repair equipment. Our innovative, and eco-friendly hot-in-place recycling process corrects surface distresses within the top three inches of existing pavement by heating the surface material in excess of 300° Fahrenheit with our electrically powered infrared heating equipment, mechanically loosening the heated material with our processor/tiller attachment that is optimized for producing a seamless repair, and mixing in additional recycled asphalt pavement and a binder (asphalt-cement), and then compacting repaired area with a vibrating roller or compactor. We believe our equipment, technology and processes provide savings over other repair processes that can be more labor and equipment intensive.
AASHTO TIG 2012
The Heatwurx process has been selected by the Technology Implementation Group of the American Association of State Highway Transportation Officials (AASHTO TIG) as an “additionally Selected Technology” for the year 2012.
In its nomination of Heatwurx to AASHTO, the Utah Department of Transportation (“UDOT”) noted that:
·
“The state of Utah has used this technology since the end of 2008, 2009, 2010 and expanded the use in 2011. UDOT has written a Warrantee specification for this technology so that we can use it as another tool in our toolbox to do pavement maintenance and pavement preservation at a lesser cost;”
·
“The potential value of the benefits is enormous. Reduction in asphalt material needed to repair a flexible pavement (recycling existing material) and increasing the life of the repair from one year to three to five years. Cost savings of 30 to 40% appear very achievable. This technology can be used all year long when other repairs in Utah can only be done in the warmer months;” and
·
“UDOT has tried this in the harshest climate, on I-80 in Utah. This route has major truck traffic and gets a lot of snow and plowing. The technology is ready to go and the equipment can be bought through Wheeler and Caterpillar dealers.”
Pothole Patching and Repair
Potholes occur on asphalt-surfaced pavements that are subjected to a broad spectrum of traffic levels, from two-lane rural routes to multi-lane interstate highways. Any agency responsible for asphalt-surfaced pavements eventually performs pothole patching or repair. Pothole patching or repair is generally performed either as an emergency repair under harsh conditions, or as routine maintenance scheduled for warmer and drier periods. Pothole patching and repair can be performed during various weather conditions.
Need for Pothole Patching or Repair
The decision to patch or repair potholes is influenced by many factors:
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·
The level of traffic
·
Location of pothole
·
Weather conditions
·
Resources
·
The tolerance of the traveling public
In most cases, the public likes all potholes to be patched or repaired promptly and forms a negative opinion of the agency when this fails to happen in a timely manner.
Potholes are generally caused by moisture, freeze-thaw cycle, traffic, poor underlying support, or some combination of these factors. Pothole patching or repair is necessary in those situations where potholes compromise safety and cause damage to vehicles.
Traditional pothole patching or repair operations can usually be divided into two distinct periods. The first period is winter repairs, when temperatures are low, base material are frozen, and additional moisture and freeze-thaw cycles are expected before the spring thaw. The second period is spring repairs, when base material is wet and soft, and few additional freeze-thaw cycles are expected.
Examples of Asphalt Repair and Patching Techniques
The following techniques and asphalt repair methods have been documented by the Transportation Research Board as part the Strategic Highway Research Program (“SHRP”). The Federal Highway Association Long Term Pavement Performance (“LTPP”) program conducted five years of additional research on pothole repair after the conclusion of SHRP, providing guidelines and recommendations to assist highway maintenance agencies and other related organizations in planning, constructing, and monitoring the performance of pothole repairs in asphalt-surfaced pavements.
Throw-and-Roll
Many maintenance agencies use the “throw-and-roll” method for patching potholes. It is the most commonly used method because of its high rate of production.
The throw-and-roll method consists of the following steps:
1.
Shovel the hot asphalt into a pothole (which may or may not be filled with water or debris).
2.
Drive over the asphalt using the truck tires to compact.
3.
Move on to the next pothole.
One difference between this method and the traditional throw-and-go method is that some effort is made to compact the patches. Compaction provides a tighter patch for traffic than simply leaving loose material. The extra time to compact the patches (generally one to two additional minutes per patch) will not significantly affect productivity. This is especially true if the areas to be patched are separated by long distances and most of the time is spent traveling between potholes.
Crack Sealing
Crack sealing is utilized by agencies, parking lot owners and homeowners to seal cracks in asphalt pavement to prevent water and other debris from penetrating the asphalt and causing further damage during the freeze and thaw cycles. This method is preventative and not suitable for repairing or patching potholes.
The process for sealing cracks consists of the following steps:
1.
Clean the surface of the area to be sealed and let dry.
2.
Heat the sealing material to 300° to 400° Fahrenheit.
3.
Pour the heated material into the crack.
4.
Let cool and dry.
5.
Place a layer of sand over the sealing material to prevent tracking by vehicle tires.
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Spray injection Patching
The spray injection repair technique is performed by spraying heated aggregate (minerals such as sand, grave, or crushed stone) into the area to be repaired. This repair method requires a truck to haul the replacement asphalt and specialized machinery to heat and disperse.
The spray-injection procedure consists of the following steps:
1.
Blow water and debris from the pothole with a high-pressure air blower.
2.
Spray a generous layer of binder (asphalt-cement) on the sides and bottom of the pothole.
3.
Blow heated aggregate (minerals such as sand, gravel or crushed stone) and asphalt-cement (binder) into the pothole.
4.
Cover the patched area with a layer of dry aggregate (minerals).
This procedure process does not include compaction of the repaired area.
Semi-Permanent Repair (Saw cut)
Many agencies employ semi-permanent repair methods such as saw cutting. This method represents an increased level of effort for repairing potholes. This increased effort increases the performance of the repair by improving the underlying and surrounding support provided for the repair. It also raises the cost, due to the increased labor required and the amount of time the repair takes.
The semi-permanent repair method has traditionally been considered one of the best for repairing potholes, short of full-depth removal and replacement. This procedure includes the following steps:
1.
Remove water and debris from the pothole.
2.
Using a radial saw with a hardened blade, cut the repair area on four sides creating a square or rectangle.
3.
Remove the material inside the section that was cut.
4.
Shovel hot asphalt into the repair area. Spread with an asphalt rake to proper grade.
5.
Compact with a vibrating drum roller or vibrating plate compactor.
This repair procedure results in a tightly compacted repair. However, it requires more workers and equipment and has a lower productivity rate than both the throw-and-roll and the spray-injection procedure.
Infrared Heating Technology
The infrared method utilized by Heatwurx consists of the following steps:
1.
Place infrared heating equipment on area to be repaired and heat until asphalt roadway reaches a temperature of 300° Fahrenheit through the full depth of the section. Overlap infrared equipment onto existing asphalt a minimum of 12 inches to enable seamless repair.
2.
Using a skid steer (compact loader), remove heater and move to the next section to be repaired for heating.
3.
Add recycled asphalt pavement as needed to provide proper volume and grade within the treated area.
4.
Using the skid steer, attach the asphalt processor and dig up the heated area.
5.
Apply binder (asphalt-cement) to the asphalt in the repair area.
6.
Repeat the processing until the material is thoroughly mixed.
7.
Using the screed (winged spreader) on the processor attachment, spread the asphalt to proper grade in preparation for compaction.
8.
Use asphalt rake to remove excess material and square up the sides.
9.
Compact treated area with a double wheel vibrating steel drum roller when treated area reaches a temperature range of 150° to 200° Fahrenheit.
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Heatwurx Products
Heatwurx HWX-30 – Electrically Powered Infrared Heater
The HEATWURX™ HWX-30 Electric Infrared Heater is designed to effectively heat asphalt pavement to a pliable 300° Fahrenheit without scorching, burning, or oxidizing the existing asphalt. The HWX-30 is easily attached to a skid steer with standard quick releases and is a self-contained mobile infrared heater that can be used to repair/rejuvenate asphalt damaged by potholes and cracking. The HEATWURX™ HWX-30 Electric Infrared Heater specifications are as follows:
·
Weight 3,550 lbs. (with generator mounted)
·
Heats repair area of 30 square feet
·
Generator requirement 45 kilowatts
·
Custom industrial heating elements
·
Cycle times 20 – 40 minutes depending on depth and weather conditions
·
Fuel consumption approximately 2.8 gallons of fuelper hour
·
Heavy duty steel constructed frame
·
Top wind 7,000 lbs. jacks
·
Six inches of heat resistance insulation
·
Heavy duty high temperature powder coated finish for maximum durability and visibility
·
Heavy duty steel attachment plate for skid steers or forklifts
Heatwurx AP-40 – Asphalt processor
The HEATWURX™ HWX-AP40 Asphalt Processor is powered by an orbital hydraulic motor and has a 40 inch working width. Designed to process and rejuvenate existing asphalt in place, it processes, remixes, and levels the heated, rejuvenated asphalt to the desired depth, ready for compaction. It is designed to easily attach to a skid steer and has custom beveled tines to provide a seamless bond between the repaired area and existing pavement.The HEATWURX™ HWX-AP40 Asphalt Processor specifications are as follows:
·
One inch wear plate with ability to adjust to desired depth
·
Orbital hydraulic motor
·
40” working width
·
5/16 inch processing blades
·
Custom beveled cutting blades tooling to maximize asphalt bonding
·
12 gauge wings to funnel material into desired location
Sources and Availability of Raw Materials
The primary raw material that is used in manufacturing our equipment is steel. We currently outsource our manufacturing to a contract manufacturer who procures all raw materials and components. See “Risk Factors” for a discussion on the risk related to having a single manufacturer of equipment.
Potential Markets and Major Customers
The potential customers of our equipment are federal, state, and local governments, the military, contractors, commercial real estate owners, home owner associations, and parking lot owners. We do not intend to sell directly into any of these markets but instead intend to rely on distribution agreements with other companies that are well-positioned in these markets or for entry into these markets. At this time, we do not have any major customers and are focused on building our relationships with distributors, and promoting our equipment and processes with governmental agencies and other potential customers.
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Intellectual Property
We currently have two U.S. patent applications pending. Our first patent application, entitled “Infrared Heating System and Method for Heating Surfaces” and filed in 2009, is currently in the examination process after having been rejected by the U.S. Patent Office. We have responded to the Rejections and continue to seek approval of this patent application from the U.S. Patent Office. Our second patent application, entitled “Asphalt Repair System and Method” and filed in 2010, is currently in the early stages of the substantive examination process by the U.S. Patent Office. We intend to develop other patentable technologies, but do not have any assurance that our current patent applications will be issued or that we will be able to develop future patentable technologies. We believe our ability to operate our business is not dependent on the patentability of our technology.
Governmental Regulation
We do not manufacture our own equipment nor do we utilize our own equipment to perform road repair. It will up to the manufacturer as well as the end-users to comply with any governmental regulations. To the extent that any regulations require changes to our equipment, we will have to comply or risk losing the customers. See “Risk Factors” for a discussion relating to compliance with government regulations. Research and Development
We intend to use $300,000 from the proceeds of this offering on further research and development. See “Use of Proceeds” and “Management’s Discussion and Analysis or Plan of Operations.”
Employees
As of September 30, 2012, we had six employees, all of which were full-time employees.
Competition
According to the 2011 IBIS World Report on US Road and Highway Maintenance, the total spent on road maintenance in the United States is in excess of $30 billion per year. As an emerging company, we are at a competitive disadvantage because we do not have the financial resources of larger, more established competitors, nor do we have a sales force large enough to challenge our competitors. We intend to address this disadvantage by entering into distribution agreements with larger companies, and providing education and training to our sales partners, customers, and governmental agencies. We also believe that our equipment and processes are better than what is offered by other companies, and that purchasers will choose our equipment because of its effectiveness, quality of design, reputation in the marketplace, as well as the recognition we have received from state and federal agencies. We intend to offer an industry standard one-year limited warranty and provide nationwide service though our OEM partners and dealers. See “Risk Factors” for a discussion of the risks associated with our company.
Facilities
The Company’s executive offices are located at 6041 South Syracuse Way, Suite 315, Greenwood Village, Colorado 80111. The one year lease for these facilities expires in August 2013. All manufacturing and storage of products is performed by contractors.
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Directors, Executive Officers, Promoters and Control Persons
Our directors and executive officers are:
| | |
Name
| Age
| Positions
|
Stephen Garland
| 45
| Chief Executive Officer, President and Interim Chairman
|
Allen Dodge
| 44
| Chief Financial Officer
|
Gus Blass III
| 60
| Director
|
Reginald Greenslade
| 49
| Director
|
Donald Larson
| 74
| Director
|
Stephen Garland. Stephen Garland has served as the President and Chief Executive Officer of Heatwurx, Inc. since January 2012, a Director since November 2011, and a consultant and interim Chief Executive Officer to the Company from October 2011 until December 31, 2011. From 2007 to present, Mr. Garland is the Managing Director of Sugarland Consulting, an executive management-consulting firm focused on the private equity and venture capital sector. Mr. Garland received a BA in liberal arts from Colorado State University, a Master of Science in Management from University of Denver, and Master of Global Management from Thunderbird School of Global Management. We believe that Mr. Garland’s consulting background and experience with a variety of companies and his strong educational background give him the skills and expertise to serve as a director of our company.
Allen Dodge. Allen Dodge has served as our Chief Financial Officer since August 2012. From July 2006 through July 2012, Mr. Dodge was the Executive Vice President/Chief Financial Officer of Health Grades, Inc., a leading provider of comprehensive information about physicians and hospitals. Mr. Dodge received a BA in business economics from UC Santa Barbara and is a certified public accountant.
Gus Blass III. Mr. Blass has been a director since August 2012. He has been a General Partner of Capital Properties LLC since 1981. Capital Properties owns and manages over one million square feet of warehouse space in the Little Rock, Arkansas area and invests in public and private companies. He has also been a Principal of Falcon Securities since 1984. Mr. Blass also serves on the board of directors at BancorpSouth and Black Raven Energy, both from 2007 to date. Mr. Blass has a Bachelor of Science Degree in Finance and Banking from the University of Arkansas. We believe that Mr. Blass’s financial and business expertise, including a diversified background of managing and directing public and private companies with substantial real property and serving on other boards of directors, give him the qualifications and skills to serve as a director and as the chairman of our audit committee.
Reginald Greenslade. Mr. Greenslade has been a director since September 2012. He has also been a director of Tuscany International Drilling Inc., a Canadian-based oilfield services company, from October 2007 to present, President of Tuscany International Drilling Inc. from April 2010 and President and Chief Executive Officer from June 2011 to present. Mr. Greenslade has also served as a director Spartan Oil Corp from June 2011 to present and a director of Spartan Exploration Ltd. from January 2010 to June 2011. Mr. Greenslade has served as an officer and/or director of both public and private companies during his career. We believe that his prior experience gives him the qualification and skills to serve as a director and as chairman of our nominating committee.
Donald Larson. Mr. Larson has been a director since November 2011. Mr. Larson is Chairman and Chief Executive Officer of W. D. Larson Companies LTD., Inc. (Larson Companies). Larson Companies with its affiliates is the second largest Peterbilt dealer group in North America operating in Minnesota, Wisconsin, North Dakota, South Dakota and Ohio. Mr. Larson opened his first Peterbilt dealership in South St. Paul, MN in 1971 and,
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through internal growth and acquisitions, has expanded to 16 locations employing more than 500 persons. Mr. Larson also owns and is Chairman and Chief Executive Officer of Citi-Cargo & Storage Co., Inc., a provider of business storage and transportation solutions, including contract public warehousing and distribution services throughout the Midwestern United States. We believe that Mr. Larson’s experience in building up the Larson companies and overseeing over 500 employees provides him ample experience to serve as a director of our company and chairman of our compensation committee.
Board of Directors
Our Board of Directors is comprised of four directors. Our directors serve one-year terms, or until an earlier resignation, death or removal, or their successors are elected. There are no family relationships among any of our directors or officers.
Other than fees paid to the Chairman of the Board of Directors, directors do not receive cash compensation for service on the Board of Directors. We reimburse our directors for their out-of-pocket costs, including travel and accommodations, relating to their attendance at any Board of Directors meeting. Directors are entitled to participate in our equity compensation plan. Upon their election to the Board of Directors, directors receive options to purchase 75,000 shares of common stock.
Director Compensation
The following table provides a summary of annual compensation for our Directors for the period from March 29, 2011 to December 31, 2011:
| | | |
Name | Option awards | All other compensation | Total |
Stephen Garland(1) | $ 72,816 | $ 20,000 | $ 92,816 |
Richard Giles(2) | - | $ 53,600 | $ 53,600 |
Charles Kirby(3) | $ 36,878 | - | $ 36,878 |
John McGrain(4) | $ 36,878 | - | $ 36,878 |
Hugh Wolff(5) | $ 72,816 | $16,000 | $ 88,816 |
Justin Yorke(6) | $ 73,755 | - | $ 73,755 |
(6) Mr. Garland received 75,000 common stock options as compensation for services as a director and a $20,000 consulting fee, unrelated to his service as a Director, during this period. (2) Mr. Giles resigned as a director in June 2012. Option awards do not include 1,400,000 options Mr. Giles received in conjunction with his sale of the Heatwurx process to the Company. He received $53,600 in consulting fees, unrelated to his service as a Director, during this period. (3) Mr. Kirby was issued 37,500 common stock options during the period. He resigned as a director in October 2011. (4) Mr. McGrain was issued 37,500 common stock options during the period. He resigned as a director in October 2011. (5) Mr. Wolf was issued 75,000 common stock options during the period. He received $16,000 in fees for his position as Chairman of the Board of Directors during this period. He resigned as a director in June 2012. (6) Mr. Yorke was issued 75,000 common stock options during the period. He resigned as a director in June 2012. |
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Committees of the Board of Directors
The charters of each of the following committees are available in print, free of charge, to any investor who requests it by writing to: 6041 South Syracuse Way, Suite 315, Greenwood Village, Colorado 80111.
Audit committee
Our audit committee consists of Mr. Blass, committee chairman and designated audit committee financial expert, and Messrs. Greenslade and Larson. All members of our audit committee meet the independence standards for directors as set forth in the NYSE MKT Exchange Rules. The audit committee reviews in detail and recommends approval by the full Board of Directors of our annual and quarterly financial statements, recommends approval of the remuneration of our auditors to the full board, reviews the scope of the audit procedures and the final audit report with the auditors, and reviews our overall accounting practices and procedures and internal controls with the auditors.
Compensation committee
Our compensation committee consists of Mr. Larson, committee chairman, and Messrs. Blass and Greenslade, all of whom are independent directors under the NYSE MKT Exchange Rules. The compensation committee reviews and approves annually the compensation of the Chief Executive Officer, provides recommendations annually to full Board of Directors regarding the compensation to other executive officers, and makes recommendations to the Board’s regarding other compensation issues.
Nominating and Corporate Governance Committee
Our nominating and corporate governance committee consists of Mr. Greenslade, committee chairman, and Messrs. Blass and Larson. The nominating and corporate governance committee determines the qualifications, qualities, skills, and other expertise required to be a director and develops criteria that it recommends to the full Board of Directors. The nominating and corporate governance committee also develops and recommends to the full Board of Directors a set of corporate governance guidelines applicable to us, including our certificate of incorporation and bylaws.
Code of Ethics and Business Conduct
We adopted a Code of Ethics and Business Conduct in October 2012, which applies to all of our employees, officers and directors. It establishes standards of conduct for individuals and also individual standards of business conduct and ethics. We will provide such Code of Ethics and Business Conduct in print, free of charge, to any investor who requests it by writing to: 6041 South Syracuse Way, Suite 315, Greenwood Village, Colorado 80111.
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Executive compensation
Summary Compensation Table
The following table provides a summary of annual compensation for our executive officers for the period from incorporation on March 29, 2011 to December 31, 2011. We do not have an employment agreement with either of our executive officers, who are referred to as our named executive officers.
| | | | | |
Name and principal position | | Salary | Option Awards ($) | All other compen- sation | Total |
Steve Garland – Interim Chief Executive Officer (1) (2) | | $ - | $ 72,816 | $ 20,000 | $ 92,816 |
Larry Griffin – President and Chief Executive Officer (3) (4) | | $ 81,250 | | $ 10,000 | $ 91,250 |
(4) Mr. Garland served as our interim Chief Executive Officer from November 2011 until December 31, 2011. His monthly compensation was $10,000 per month. (2) Mr. Garland received the options upon acceptance of his position on our company’s Board of Directors in November 2011. The options have an exercise price of $2.00 per share, which was the offering price of our Series B Preferred Stock in October 2011. (3) Mr. Griffin served as our President and Chief Executive Officer from April 2011 to November 2011. His annual base salary was $150,000. (4) Mr. Griffin received $10,000 principally as compensation for accrued but unused vacation. |
Outstanding Equity Awards at Fiscal Year-End
The following table provides information about outstanding stock options held by our named executive officers at December 31, 2011. No other named executive received stock or stock options. All of these options were granted under our 2011 Stock Incentive Plan. Our named executive officers did not hold any restricted stock or other stock awards at the end of 2011.
| | | | |
Name | | Number of Shares underlying Unexercised Options |
| | Exercisable | Option Exercise Price | Option Expiration Date |
Steve Garland | | 75,000 | $2.00 | 11/5/16 |
Equity compensation plan
Our Board of Directors and stockholdersapproved the Amended and Restated Heatwurx, Inc. 2011 Equity Incentive Plan (the “Plan”) in October 2012.
Eligibility. Employees, non-employee directors, advisors, and consultants of the Company and its affiliates are eligible to receive grants under the Plan.
Shares Available. In October 2012, the Board of Directors and stockholders increased the number of shares of common stock reserved for issuance under the Plan to a total of 1,800,000 shares. There are currently 1,022,000 outstanding option grants to officers, directors, employees and consultants under the Plan. If unexercised options
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expire or are terminated, the underlying shares will again become available for grants under the Plan.
Grants under the Plan. The Plan provides for the grant of options to purchase shares of common stock of the Company. Options may be incentive stock options, designed to satisfy the requirements of Section 422 of the U.S. Internal Revenue Code, or non-statutory stock options, which do not meet those requirements. Incentive stock options may only be granted to employees of the Company and its affiliates. Non-statutory stock options may be granted to employees, non-employee directors, advisors, and consultants of Company and its affiliates.
Outstanding Options. All currently outstanding options are exercisable at a price per share of $2.00, which was the offering price for our Series B and Series C Preferred Stock at the time of the grant of those options, and expire five years from the date of issuance. Options issued to directors are fully vested upon grant. Except as otherwise specified at the time of grant, all other options vest over a period of four years.
Administration of the Plan. The Plan provides that it will be administered by the Board or a Committee designated by the Board. Our Board of Directors appointed a Compensation Committee, which administers the Plan. The Compensation Committee has complete discretion to:
·
determine who should receive an option;
·
determine the type, the number shares, vesting requirements and other terms and conditions of options;
·
interpret the Plan and options granted under the Plan; and
·
make all other decisions relating to the operation and administration of the Plan and the options granted under the Plan.
Terms of Options. The exercise price for non-statutory and incentive stock options granted under the equity compensation plan may not be less than 100% of the fair market value of the common stock on the option grant date or 110% in the case of incentive stock options granted to employees who own stock representing more than 10% of the voting power of all classes of common stock of the Company and its parent and subsidiaries (“10%-Stockholders”). The Compensation Committee has the authority to establishing the vesting, including the terms under which vesting may be accelerated, and other terms and conditions of the options granted. Options can have a term of no more than ten years from the grant date except for incentive stock options granted to 10%-Stockholders which can have a term of no more than five years from the grant date.
The Plan authorizes the Compensation Committee to provide for accelerated vesting of options upon a “Change in Control,” as defined in the Plan. All of the options currently outstanding provide that if there is a Change in Control, (i) immediately prior to the effective date of the Change in Control, an unvested award will become fully exercisable as to all shares subject to the award and (ii) unless the option is assumed by a successor corporation or parent thereof, immediately following the Change in Control any unexercised options will terminate and cease to be outstanding. A Change in Control includes:
·
any Person (as such term is used in Sections 13(b) and 14(b) of the 1934 Act) is or becomes the beneficial owner ("Beneficial Owner") (as defined in Rule 13d-3 promulgated under the 1934 Act), directly or indirectly, of securities representing fifty percent (50%) or more of the combined voting power of the Company’s securities that are then outstanding; provided,however, that an initial public offering shall not constitute a Change in Control for purposes of the Plan;
·
a merger or consolidation after which the Company’s then current stockholders own less than 50% of the surviving corporation; or
·
a sale of all or substantially all of the Company’s assets.
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Amendment and Termination. The Board of Directors may amend or terminate the Plan and outstanding options at any time without the consent of option holders provided that such action does not adversely affect outstanding options. Amendments are subject to stockholder approval to the extent required by applicable laws and regulations. Unless terminated sooner, the Plan will automatically terminate on April 15, 2021, the tenth anniversary of April 15, 2011, the date the Plan was adopted by our Board of Directors and approved by our Stockholders.
The table below provides information as to the number of options outstanding and their weighted average exercise price at November 10, 2012.
| | | |
Equity compensation plan information as of November 10, 2012 |
Plan category | Number of securities to be issued upon exercise of outstanding options | Weighted-average exercise price of outstanding options | Number of securities remaining available for future issuance under equity compensation plans |
Equity compensation plan | 1,022,000 (1) | $2.00 | 478,000 |
(1) Excludes 1,440,000 performance options that were not issued under the equity compensation plan. |
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Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding beneficial ownership of our common stock as of November 10, 2012, by:
·
each of our executive officers and directors;
·
all executive officers and directors as a group; and
·
each person who is known by us to beneficially own more than 5% of our outstanding common stock.
Shares of common stock not outstanding but deemed beneficially owned because an individual has the right to acquire the shares of common stock within 60 days, including shares issuable upon conversion of preferred stock, are treated as outstanding when determining the amount and percentage of common stock owned by that individual and by all directors and executive officers as a group. The address of each executive officer and director is 6041 South Syracuse Way, Suite 315, Greenwood Village, Colorado 80111. The address of other beneficial owners is set forth below.
The percentage of shares beneficially owned before the offering shown in the table is based upon 8,360,00024,631,474 shares of common stock outstanding as of November 10, 2012, after giving effect to the conversion of all of our outstanding preferred stock into 6,460,000 shares of common stock, which will occur automatically upon completion of this offering. September 30, 2023, and exclude:
| ● | 141,611 shares of our common stock issuable upon exercise of outstanding options, which have a weighted average exercise price of $18.22 per share; |
| | |
| ● | 4,554,867 shares of common stock issuable for restricted stock units (RSUs) (of which 2,291,923 are vested) issuable upon meeting distribution restrictions; |
| | |
| ● | 3,366,480 shares of common stock issuable upon exercise of vested outstanding common warrants at a weighted-average exercise price of $1.61 per share; |
| | |
| ● | 467,735 shares of common stock reserved for issuance and available for future grant under our 2019 Omnibus Incentive Plan; and |
| | |
| ● | the exercise of the Pre-Funded Warrants and Common Warrants issued in this offering. |
DESCRIPTION OF CAPITAL STOCK
The information relating to numbers and percentages of shares beneficially owned after the offering gives effect to the issuance of shares of common stock in this offering. Except as set forth in footnote (8) to the table below, the percentage ownership information assumes no exercisefollowing description of the underwriter’s over-allotment option.
| | | | | | | |
Name of beneficial owner | | Shares beneficially owned prior to initial public offering | | Shares beneficially owned after initial public offering | Percentage of shares outstanding |
| Prior to initial public offering | | After initial public offering |
Executive officers and directors: | | | | | | | |
Stephen Garland (1) | | 375,000 | | 375,000 | 4.29% | | 3.66% |
Allen Dodge (2) | | - | | - | - | | - |
Gus Blass III (3) | | 356,130 | | 356,130 | 4.22% | | 3.58% |
Reginald Greenslade (4) | | 181,065 | | 181,065 | 2.15% | | 1.82% |
Donald Larson (5) | | 150,000 | | 150,000 | 1.78% | | 1.51% |
All executive officers and directors as a group (5 persons) | | 1,062,195 | | 1,062,195 | 12.71% | | 10.77% |
Stockholders owning more than 5%: | | | | | | | |
JMW Fund LLC 4 Richland Place Pasadena, California 91103 Manager: Justin Yorke (6) | | 1,575,000 | | 1,575,000 | 18.84% | | 15.97% |
San Gabriel Fund LLC 4 Richland Place Pasadena, California 91103 Manager: Justin Yorke (6) | | 1,575,000 | | 1,575,000 | 18.84% | | 15.97% |
| | | | | | | |
Kirby Enterprise Fund LLC (7) PO Box 3087 Greenwood Village, Colorado 80155 Manager: Charles Kirby | | 605,000 | | 605,000 | 7.24% | | 6.14% |
Charles F. Kirby Roth IRA (7) PO Box 3087 Greenwood Village, Colorado 80155 | | 482,000 | | 482,000 | 5.77% | | 4.89% |
Richard Giles (8) 6300 Sagewood Dr. Suite 400 Park City, Utah 84098 | | 1,417,500 | | 1,117,500 | 16.90% | | 11.30% |
(1) Consists of 375,000 shares of common stock issuable upon exercise of vested stock options. (2) Does not include 100,000 shares of common stock issuable upon exercise of unvested stock options. (3) Gus Blass III may be deemed to be the beneficial owner of securities held by a fund which owns 50,000 shares of common stock and 75,065 shares of Series B Preferred Stock, due to his position as manager of the fund. As a result, when including Mr. Blass’s personal stock holdings of 231,065 shares of common stock, consisting of 50,000 shares of common stock, 75,065 shares of common stock issuable upon conversion of Series B Preferred Stock, and 31,000 shares of common stock issuable upon conversion of Series C Preferred Stock and 75,000 shares of common stock underlying vested stock options, he may be deemed to own beneficially 356,130 shares of common stock, or approximately 4.22% and 3.58% of our common stock prior to and after this offering, respectively. (4) Includes 75,000 shares of common stock underlying vested stock options, 75,065 shares of common stock issuable upon conversion of Series B Preferred Stock, and 31,000 shares of common stock issuable upon conversion of Series C Preferred Stock. (5) Includes 75,000 shares of common stock underlying vested stock options and 75,000 shares of common stock. (6) Justin Yorke may be deemed to be the beneficial owner of securities held by JMW Fund LLC and of San Gabriel Fund LLC due to his position as manager of both funds. He is also the manager of funds owning an aggregate of 125,500 shares of Series C Preferred Stock. As a result, when including Mr. Yorke’s personal stock holdings of 87,495 shares of common stock, he may be deemed to own beneficially 3,362,994 shares of common stock, or approximately 40.23% and 34.11% of our common stock prior to and after this offering, respectively. (7) Charles Kirby is the beneficial owner of the Charles F. Kirby Roth IRA and may be deemed to be the beneficial owner of Kirby Enterprise Fund LLC due to his position as manager. He is also the manager of funds owning an aggregate of 30,000 shares of Series B Preferred Stock. As a result, when including Mr. Kirby’s personal stock holdings of 37,500 shares of common stock , he may be deemed to own beneficially 1,117,000 shares of common stock, or approximately 13.36% and 11.33% of our common stock prior to and after this offering, respectively. (8) Includes 30,000 shares of common stock underlying vested stock options and 1,387,500 shares of common stock. Excludes 10,000 unvested performance stock options and 1,400,000 unvested performance stock options which vest based on meeting certain future revenue goals. Assumes the full exercise of our Underwriter’s overallotment option and the sale of 300,000 shares to cover the 200,000 units to be sold by the Underwriter pursuant to the overallotment option. |
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Certain Relationships and Related Transactions
Transactions with Related Persons, Promoters and Certain Control Persons
This section describes the transactions we have engaged in with persons who were our directors or officers at the time of the transaction, and persons or entities known by us to be the beneficial owners of more than 5% of our common stock since our incorporation on March 29, 2011.
Transactions with Hunter Capital LLC
Larry Griffin, the former Chief Executive Officer of Heatwurx, was also an executive officer of Hunter Capital LLC. The Company leased office space and reimbursed Hunter Capital for its share of other related office expenses for the period from inception through December 31, 2011. Hunter Capital was compensated a total of $39,226 during that period.
Transactions with Richard Giles
Mr. Giles owns more than 5% of the outstanding shares of Company common stock. Mr. Giles was a director of the Company from April 2011 to June 2012 and has been a consultant of the Company from April 2011 to the present. His compensation as a consultant from April 2011 through September 30, 2012 was $145,600. He continues to be paid $15,000 a month for his consulting services.
Conflicts of Interest Policies
We have adopted a Code of Ethics and Business Conduct. All our directors, officers, and employees are required to be familiar with the Code of Ethics and comply with its provisions. The Code of Ethics expressly prohibits loans made by the Company to our directors and executive officers. Any other transaction involving an executive officer or director that may create a conflict of interest must receive the prior approval of the Audit Committee. All other conflicts must be reported to the Chief Financial Officer. The Code of Ethics provides that conflicts of interest should be avoided but allows the Audit Committee to approve transactions with executive officers or directors other than loans or guaranty transactions.
Other than as described in this section, there are no material relationships between us and any of our directors, executive officers, or known holders of more than 5% of our common stock.
Description of Securities
The following is a descriptionterms of our capital stock and certainthe provisions of our amended and restated certificate of incorporation and amended and restated bylaws are summaries and are qualified by reference to copies of the amended and restated certificate of incorporation and bylaws, which are filed with the SEC as exhibits to our bylaws as well as certain provisionsregistration statement of applicable law. Other thanwhich this prospectus forms a part.
We have the abilityauthority to issue preferred stock without stockholder authorization or approval as discussed below, we have no charter or bylaw provisions that would prevent or delay a change in control, or discourage potential bidders
General
We are authorized to issue 23,000,000an aggregate of 100,000,000 shares of capital stock, $0.0001 par value per share, consistingcommon stock and 1,000,000 shares of 20,000,000$0.0001 par value preferred stock. As of December ●, 2023, there were 24,631,474 shares of common stock outstanding and 3,000,000no shares of preferred stock. We have designated and issued 600,000, 1,500,000, and 760,000 shares of Series A, B and C Preferredstock outstanding.
Common Stock respectively, in separate private placements.
We have applied
Dividend Rights. Subject to list our common stock and $5.00 warrants on the NYSE MKT Exchange under the proposed symbols of “____” and “_____,” respectively. We cannot assure you, however, that an active or orderly trading market will develop for our common stock and warrants or that our common stock and warrants will trade in the public markets subsequent to this offering at or above the initial offering price.
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The following is a summary of the rights associated with our common stock and preferred stock.
Common stock
As of November 10, 2012, we had 16 stockholders of record owning a total of 1,900,000 shares of common stock. In addition, we had:
·
6,460,000 shares of common stock reserved and subject to issuance upon conversionholders of preferred stock;
·
1,525,000 sharesstock of common stock reserved for issuance pursuantany series that may be issued and outstanding from time to the unit offering registered hereby;
·
937,500 shares of common stock reserved for issuance pursuant to the exercise of warrants issuable under the unit offering registered hereby (including 150,000 warrants issued to our Underwriter in connection with this offering); and
·
2,462,000 shares of common stock reserved and subject to issuance upon exercise of 1,022,000 outstanding stock options and 1,440,000 outstanding performance stock options.
Our Certificate of Incorporation does not provide for cumulative voting and the holders of our common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Our preferred stockholders are entitled to cast the number of votes equal to the number of whole shares of common stock which they are convertible into. Thetime, holders of our common stock are entitled to receive ratably such common stock dividends if any,and other distributions as may be declared by our Board of Directors from time to time bytime.
Voting Rights. Each outstanding share of our common stock is entitled to one vote on all matters submitted to a vote of stockholders generally. In the Boardevent we issue one or more series of Directors outpreferred or other securities in the future such preferred stock or other securities may be given rights to vote, either together with the common stock or as a separate class on one or more types of funds legally available for that purpose. matters. The holders of our common stock do not have cumulative voting rights.
Liquidation Rights. In the event of our liquidation, dissolution or winding up, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any then outstanding. A merger, conversion, exchange or consolidation of us with or into any other person or sale or transfer of all or any part of our assets (which does not in fact result in our liquidation and distribution of assets) will not be deemed to be a voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of our affairs. Thecommon stock will be entitled, subject to any preferential or other rights of any then outstanding preferred stock, to receive all assets of the Company available for distribution to stockholders.
Preemptive Rights. As of the date hereof, the holders of our common stock have no preemptive or conversion rights.rights in their capacities as such holders.
All outstanding shares
Board of Directors. Holders of common stock and alldo not have cumulative voting rights with respect to the election of directors. At any meeting to elect directors by holders of our common stock, the presence, in person or by proxy, of the holders of a majority of the voting power of shares of commonour capital stock when issuedthen outstanding will constitute a quorum for such election. Directors may be elected by us will be fully paida plurality of the votes of the shares present and nonassessable. entitled to vote on the election of directors, except for directors whom the holders of any then outstanding preferred stock have the right to elect, if any.
Preferred Stock
Our boardBoard is authorized, subject to certain limitations prescribed by law, without further stockholder approval, to issue additional shares of common stock within the limits authorized by our Certificate of Incorporation without stockholder approval.
Preferred stock
Our certificate of incorporation authorizes the issuance offrom time to time up to 3,000,000an aggregate of 1,000,000 shares of preferred stock in one or more series and to fix or alter the designations, preferences, rights and any qualifications, limitations or restrictions of the shares of each such series thereof, including the dividend rights, dividend rates, conversion rights, voting rights and terms of redemption of shares constituting any series or designations of such series. To date we haveThe rights of holders of our common stock may be subject to, and adversely affected by, the rights of the holders of any preferred stock that may be issued a total of 2,860,000 sharesin the future. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change of control and may adversely affect the voting and other rights of holders of our common stock.
Indemnification of Directors and Officers
Our amended and restated certificate of incorporation provides that, to the fullest extent permitted by the Delaware General Corporate Law (“DGCL”) as it may hereafter be amended, none of our directors will be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director. Under the DGCL as it now reads, such limitation of liability is not permitted:
| ● | for any breach of the director’s duty of loyalty to us or our stockholders; |
| ● | for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; |
| | |
| ● | for payments of unlawful dividends or unlawful stock purchases or redemptions under Section 174 of the DGCL; or |
| | |
| ● | for any transaction from which the director derived an improper personal benefit. |
These provisions will have no effect on the availability of equitable remedies such as an injunction or rescission based on a director’s breach of his or her duty of care.
Our amended and restated certificate of incorporation and our amended and restated bylaws include provisions that require us to indemnify and advance expenses, to the fullest extent allowable under the DGCL as it now exists or may hereafter be amended, to our directors or officers for actions taken as a director or officer of us, or for serving at our request as a director or officer at another corporation or enterprise, as the case may be.
Section 145 of the DGCL provides that a corporation may indemnify directors and officers, as well as other employees and individuals, against expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement, that are incurred in connection with various actions, suits or proceedings, whether civil, criminal, administrative or investigative, other than an action by or in the right of the corporation, known as a derivative action, if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, if they had no reasonable cause to believe their conduct was unlawful. A similar standard is applicable in the case of derivative actions, except that indemnification only extends to expenses, including attorneys’ fees, incurred in connection with the defense or settlement of such actions, and the statute requires court approval before there can be any indemnification if the person seeking indemnification has been found liable to the corporation. The statute provides that it is not exclusive of other indemnification that may be granted by a corporation’s bylaws, disinterested director vote, stockholder vote, agreement or otherwise.
Our amended and restated bylaws require us to indemnify any person who was or is a party or is threatened to be made a party to, or was otherwise involved in, a legal proceeding by reason of the fact that he or she is or was a director or officer of the Company or is or was serving at our request as a director or officer of another corporation or enterprise, as the case may be, to the fullest extent authorized by the DGCL as it now exists or may hereafter be amended, against all expense, liability and loss (including attorneys’ fees, judgments, fines, Employee Retirement Income Security Act excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such director or officer in connection with such service. The right to indemnification in our amended and restated bylaws includes the right to be paid by the Company the expenses incurred in defending any proceeding for which indemnification may be sought in advance of the final disposition of such proceeding, subject to certain limitations. We carry directors’ and officers’ insurance protecting us, any director, officer, employee or agent of ours or who was serving at the request of the Company as a director, officer, employee or agent of another corporation or enterprise, as the case may be, against any expense, liability or loss, whether or not we would have the power to indemnify the person under the DGCL.
The limitation of liability and indemnification and advancement provisions in our amended and restated certificate of incorporation and our amended and restated bylaws may discourage stockholders from bringing a lawsuit against our directors for breach of fiduciary duty. These provisions also may reduce the likelihood of derivative litigation against our directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders. In addition, your investment in our common stock may be adversely affected to the extent we pay the costs of settlement and damage awards under these indemnification provisions.
Certain Anti-Takeover Effects
Provisions of Delaware Law. We are a Delaware corporation and Section 203 of the DGCL applies to us. It is an anti-takeover statute that is designed to protect stockholders against coercive, unfair or inadequate tender offers and other abusive tactics and to encourage any person contemplating a business combination with us to negotiate with our Board of Directors for the fair and equitable treatment of all stockholders.
Under Section 203 of the DGCL, a Delaware corporation is not permitted to engage in a “business combination” with an “interested stockholder” for a period of three years following the date that the stockholder became an interested stockholder. As defined for this purpose, the term “business combination” includes a merger, consolidation, asset sale or other transaction resulting in a financial benefit to the interested stockholder. The term “interested stockholder” is defined to mean a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation’s outstanding voting stock. This prohibition does not apply if:
| ● | prior to the time that the stockholder became an interested stockholder, the Board of Directors of the corporation approved either the business combination or the transaction resulting in the stockholder becoming an interested stockholder; |
| | |
| ● | upon completion of the transaction resulting in the stockholder becoming an interested stockholder, the stockholder owns at least 85% of the outstanding voting stock of the corporation, excluding voting stock owned by directors who are also officers and by certain employee stock plans; or |
| | |
| ● | at or subsequent to the time that the stockholder became an interested stockholder, the business combination is approved by the Board and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least two-thirds of the outstanding voting stock that the interested stockholder does not own. |
A Delaware corporation may elect not to be governed by these restrictions. We have not opted out of Section 203.
Advance Notice Procedures. Our bylaws establish an advance notice procedure for stockholder nominations of persons for election to our Board of Directors and for any proposals to be presented by stockholders at an annual meeting. Stockholders at an annual meeting will only be able to consider nominations and other proposals specified in the notice of meeting or brought before the meeting by or at the direction of our Board of Directors or by a stockholder who was a stockholder of record on the record date for the meeting, who is entitled to vote at the meeting and who has given our corporate secretary timely written notice, in proper form, of the stockholder’s intention to nominate a person for election as a director or to bring a proposal for action at the meeting.
Potential Effects of Authorized but Unissued Stock
Pursuant to our amended and restated certificate of incorporation, we have shares of common stock and preferred stock available for future issuance without stockholder approval. We may utilize these additional shares for a variety of corporate purposes, including future public offerings to raise additional capital, to facilitate corporate acquisitions or payment as a dividend on the capital stock.
The existence of unissued and unreserved common stock and preferred stock may enable our board of directors to issue shares to persons friendly to current management or to issue preferred stock with terms that could render more difficult or discourage a third-party attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise, thereby protecting the continuity of our management. In addition, the board of directors has the discretion to determine designations, rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences of each series A, Bof preferred stock, all to the fullest extent permissible under the Delaware General Corporation Law and C as detailed below. Any furthersubject to any limitations set forth in our certificate of incorporation. The purpose of authorizing the board of directors to issue preferred stock and to determine the rights and preferences applicable to such preferred stock is to eliminate delays associated with a stockholder vote on specific issuances. The issuance will require amendment of preferred stock, while providing desirable flexibility in connection with possible financings, acquisitions and other corporate purposes, could have the effect of making it more difficult for a third-party to acquire, or could discourage a third-party from acquiring, a majority of our outstanding voting stock.
Choice of Forum
Unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for any stockholder to bring (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action asserting a claim of breach of fiduciary duty owed by any director, officer or other employee of the Company or the Company’s stockholders, (iii) any action asserting a claim against the Company or any director or officer of the Company arising pursuant to, or a claim against the Company or any director or officer of the Company, with respect to the interpretation or application of any provision of the DGCL, our certificate of incorporation or bylaws, or (iv) any action asserting a claim governed by the internal affairs doctrine, except for, in each of the aforementioned actions, any claims to which the Court of Chancery of the State of Delaware determines it lacks jurisdiction. This provision will not apply to claims arising under the Exchange Act, or for any other federal securities laws which provide for exclusive federal jurisdiction. However, the exclusive forum provision provides that unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States of America will be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. Therefore, this provision could apply to a suit that falls within one or more of the categories enumerated in the exclusive forum provision and stockholder approval.that asserts claims under the Securities Act, inasmuch as Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. There is uncertainty as to whether a court would enforce such an exclusive forum provision with respect to claims under the Securities Act.
Series A Preferred Stock. As
We note that there is uncertainty as to whether a court would enforce the provision and that investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder. Although we believe this provision benefits us by providing increased consistency in the application of November 10, 2012, there were 600,000Delaware law in the types of lawsuits to which it applies, the provision may have the effect of discouraging lawsuits against our directors and officers.
DESCRIPTION OF SECURITIES WE ARE OFFERING
We are offering ● shares of Series A Preferred Stock outstanding.
The Series A Preferred Stock has the following terms:
·
annual dividend of $0.066664 cumulative dividend per share;
·
dividends accrue but are not payable unless declared by the Board of Directors or unless dividends are to be paid on common stock;
·
liquidation preference of $0.8333 per share with priority over common stock;
·
convertible intoour common stock at $0.119047an assumed combined public offering price of $● per share for a totaland accompanying Common Warrants (the last reported sale price of 4,200,000 shares;
·
voting rights equal toour common stock on an as-converted basis,Nasdaq on ●, 202●). We are also offering Pre-Funded Warrants to those purchasers whose purchase of shares of our common stock in this offering would result in the purchaser, together with its affiliates and
·
automatically converts to 4,200,000 certain related parties, beneficially owning more than 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding shares of common stock uponfollowing the closingconsummation of this offering.
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Series B Preferred Stock. Asoffering in lieu of November 10, 2012, there were 1,500,000the shares of Series B Preferred Stock outstanding.
The Series B Preferred Stock hascommon stocks that would result in such excess ownership. For each Pre-Funded warrant we sell, the following terms:
·
annual dividendnumber of $0.16 cumulative dividend per share;
·
dividends accrue but are not payable unless declared by the Board of Directors or unless dividends are to be paid on common stock;
·
liquidation preference of $2.00 per share with priority over common stock;
·
convertible into common stock at $2.00 per share for a total of 1,500,000 shares;
·
voting rights equal to common stock on an as-converted basis; and
·
automatically converts to 1,500,000 shares of common stock upon the closingwe sell in this offering will be decreased on a one-for-one basis. Each share of this offering.
Series C Preferred Stock. As of November 10, 2012, there were 760,000 shares of Series C Preferred Stock outstanding.
The Series C Preferred Stock has the following terms:
·
annual dividend of $0.16 cumulative dividend per share accrues and is payable quarterly;
·
liquidation preference of $2.00 per share with priority over common stock;
·
convertible intoour common stock at $2.00 per share for a total of 760,000 shares;
·
voting rights equal to common stock on an as-converted basis; and
·
automatically converts to 760,000 shares of common stock upon the closing of this offering.
or Pre-Funded Warrant is being sold together with one Common stock purchase warrants
$5.00 warrants.Up to 862,500 warrantsWarrant to purchase one share of common stock. The shares of our common stock at $5.00 per share, including 112,500and/or Pre-Funded Warrants and related warrants subject to our Underwriter exercising its overallotment option, are issuable upon the purchase of units in this offering and are being registered by this prospectus. The warrants expire one year from the date of issuance. The Underwriter’s overallotment option provides for the issuance of 112,500 warrants, 100,000 of which will be backed byissued separately. We are also registering the shares of our common stock held by a selling stockholder. The proceedsissuable from thetime to time upon exercise of the outstanding warrants will first goPre-Funded Warrants and Common Warrants offered hereby.
Common Stock
The material terms and provisions of our common stock are described under the caption “Description of Capital Stock” in this prospectus.
Common Warrants
The following summary of certain terms and provisions of the Common Warrants that are being offered hereby is not complete and is subject to, and qualified in its entirety by, the provisions of Common Warrant, the form of which is filed as an exhibit to the Company. Afterregistration statement of which this prospectus forms a part. Prospective investors should carefully review the Company has issued 762,500 sharesterms and provisions of common stock in connection with the exerciseform of warrants, any additional proceeds will go to the selling stockholder.
Underwriter’s warrants. We have agreed to issue to our Underwriter at the closing of this offering, for nominal consideration, warrants to purchase 150,000 shares of common stock. These warrants will be exercisableCommon Warrant for a four year period commencing on the first anniversarycomplete description of the closing dateterms and conditions of this offering atsuch warrant.
Duration and Exercise Price
The Common Warrants will have an exercise price of $6.00$● per share. These warrants will be restricted from sale, transfer, assignment or hypothecation for a period of one year from the closing of this offering, except to officers of our Underwriter and broker-dealers participating in this offering and their officers and partners, and except transfers by operation of law or by reason of our reorganization.
Indemnification of directors and officers
Our Certificate of Incorporation and bylaws provide that we will indemnify our directors and officers to the maximum extent permitted by Delaware law, including in circumstances in which indemnification is otherwise discretionary under Delaware law. We have agreed to indemnify our executive officers and directors for all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by them in respect of any civil, criminal or administrative action or proceeding to which they are made a party by reason of being or having been a director or officer, if (a) they acted honestly and in good faith with a view to our best interests, and (b) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, they had reasonable grounds for believing that their conduct was lawful.
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These indemnification provisions may be sufficiently broad to permit indemnification of our directors, officers and controlling persons for liabilities, including reimbursement of expenses incurred, arising under the Securities Act of 1933, as amended. To the extent that our directors, officers and controlling persons are indemnified under the provisions contained in our certificate of incorporation, bylaws, Delaware law or contractual arrangements against liabilities arising under the Securities Act, we have been advised that in the opinionshare (●% of the Securities and Exchange Commission such indemnification is againstcombined public policy as expressed in the Securities Act and is therefore unenforceable.
Transfer agent and registrar
The transfer agent and registrar for our common stock and warrants isCorporate Stock Transfer, Inc., Denver, Colorado.
Shares eligible for future sale
Prior to this offering there has been no public market for any of our securities. Future sales of substantial amountsprice per share of common stock and warrants inaccompanying warrants) and will be exercisable beginning on the public market, oreffective date of the perception that such sales may occur, could adversely affectWarrant Stockholder Approval, provided however, if the market pricesPricing Conditions are met, the Common Warrants will be exercisable upon Initial Exercise Date. The Common Warrants will expire on the five-year anniversary of our common stockthe Initial Exercise Date. The exercise price and warrants.
We are registering in this prospectus 1,725,000 sharesnumber of common stock, 862,500 warrants to purchase common stock at $5.00 per share, and 862,500 shares of common stock underlying the warrants to purchase common stock.
By separate prospectus we are also registering:
·
6,460,000 shares of common stock underlying our Series A, B and C Preferred Stock; and
·
1,450,000 shares of common stock.
Accordingly, up to 2,587,500 shares of common stock being sold under this prospectus (including 862,500 shares of common stock issuable upon exercise of the warrants is subject to appropriate adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting our common stock warrants) and upthe exercise price. The Common Warrants will be issued separately from the common stock and Pre-Funded Warrants and may be transferred separately immediately thereafter. The Common Warrants will be issued in certificated form only.
Exercisability
The Common Warrants will be exercisable, at the option of each holder, in whole or in part, by delivering to 8,360,000us a duly executed exercise notice accompanied by payment in full for the number of shares of our common stock including 6,460,000 issuable under conversionpurchased upon such exercise (except in the case of a cashless exercise as discussed below). A holder (together with its affiliates) may not exercise any portion of such holder’s Common Warrants to the extent that the holder would own more than 4.99% of the outstanding common stock immediately after exercise, except that upon at least 61 days’ prior notice from the holder to us, the holder may increase the amount of ownership of outstanding stock after exercising the holder’s Common Warrants up to 9.99% of the number of shares of our Series A, B and C Preferred Stock, will be free trading and may be sold at any time, except as limited by lockup agreements with our Underwriter as discussed below.
In additioncommon stock outstanding immediately after giving effect to the shares being registeredexercise, as such percentage ownership is determined in this offering, we have issued our Underwriter 150,000 warrants in connectionaccordance with this offering. The warrants are exercisable beginning one year after the closeterms of this offering and the underlying 150,000 common shares issuable upon exercise will be available for future sale.Common Warrants.
Stock options
We intend to fileCashless Exercise
If, at the time a holder exercises its Common Warrants, a registration statement on Form S-8registering the issuance or resale of the shares of common stock underlying the Common Warrants under the Securities Act is not then effective or available for the issuance of such shares, then in lieu of making the cash payment otherwise contemplated to register sharesbe made to us upon such exercise in payment of common stock issuable under our equity compensation plan. At November 10, 2012 there were 1,022,000 stock options outstanding under the planaggregate exercise price, the holder may elect instead to purchase an equalreceive upon such exercise (either in whole or in part) the net number of shares of common stock at $2.00 per share. At November 10, 2012 there were andetermined according to a formula set forth in the Common Warrant.
Fundamental Transactions
In the event of a fundamental transaction, as described in the Common Warrants and generally including any reorganization, recapitalization or reclassification of our shares of common stock, the sale, transfer or other disposition of all or substantially all of our properties or assets, our consolidation or merger with or into another person, the acquisition of more than 50% of the voting power represented by our outstanding shares of capital stock, any person or group becoming the beneficial owner of more than 50% of the voting power represented by our outstanding shares of capital stock, any merger with or into another entity or a tender offer or exchange offer approved by more than 50% of the voting power represented by our outstanding shares of capital, then upon any subsequent exercise of a Common Warrant, the holder will have the right to receive as alternative consideration, for each share of our common stock that would have been issuable upon such exercise immediately prior to the occurrence of such fundamental transaction, the number of shares of common stock of the successor or acquiring corporation or of our company, if it is the surviving corporation, and any additional 1,440,000 nonqualified performanceconsideration receivable upon or as a result of such transaction by a holder of the number of shares of our common stock options outstanding that were not issued under our equity compensation plan.
The registration statement on Form S-8for which the Common Warrant is expectedexercisable immediately prior to be filed not sooner than 90such event. Notwithstanding the foregoing, in the event of a fundamental transaction, the holders of the Common Warrants have the right to require us or a successor entity to redeem the Common Warrants for cash in the amount of the Black-Scholes Value (as defined in each warrant) of the unexercised portion of the Common Warrants concurrently with or within 30 days following the effectiveconsummation of a fundamental transaction.
However, in the event of a fundamental transaction which is not in our control, including a fundamental transaction not approved by our board of directors, the holders of the Common Warrants will only be entitled to receive from us or our successor entity, as of the date of consummation of such fundamental transaction the same type or form of consideration (and in the same proportion), at the Black Scholes Value of the unexercised portion of the Common Warrant that is being offered and paid to the holders of our common stock in connection with the fundamental transaction, whether that consideration is in the form of cash, stock or any combination of cash and stock, or whether the holders of our common stock are given the choice to receive alternative forms of consideration in connection with the fundamental transaction.
Transferability
Subject to applicable laws, a Common Warrant may be transferred at the option of the holder upon surrender of the Common Warrant to us together with the appropriate instruments of transfer.
Fractional Shares
No fractional shares of common stock will be issued upon the exercise of the Common Warrants. Rather, the number of shares of common stock to be issued will, at our election, either be rounded up to the next whole share or we will pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the exercise price.
Trading Market
There is no established trading market for the Common Warrants, and we do not expect such a market to develop. We do not intend to apply to list the Common Warrants on any securities exchange or other nationally recognized trading system. Without an active trading market, the liquidity of the Common Warrants will be extremely limited.
Right as a Stockholder
Except as otherwise provided in the Common Warrants or by virtue of the holder’s ownership of shares of our common stock, such holder of warrants does not have the rights or privileges of a holder of our common stock, including any voting rights, until such holder exercises such holder’s Common Warrants. The Common Warrants will provide that the holders of the Common Warrants have the right to participate in distributions or dividends paid on our shares of common stock.
Waivers and Amendments
The Common Warrants may be modified or amended or the provisions of such Common Warrants waived with our consent and the consent of the holders of at least a majority of the outstanding Common Warrants.
Pre-Funded Warrants
The following summary of certain terms and provisions of the Pre-Funded Warrants that are being offered hereby is not complete and is subject to, and qualified in its entirety by, the provisions of the Pre-Funded Warrant, the form of which will be filed as an exhibit to the registration statement of which this prospectus isforms a partpart. Prospective investors should carefully review the terms and provisions of the form of the Pre-Funded Warrant for a complete description of the terms and conditions of the Pre-Funded Warrants.
Duration and Exercise Price
Each Pre-Funded Warrant offered hereby will have an initial exercise price per share of common stock equal to $0.0001. The Pre-Funded Warrants will be immediately exercisable and will expire when exercised in full. The exercise price and number of shares of common stock issuable upon exercise is subject to appropriate adjustment in the event of share dividends, share splits, reorganizations or similar events affecting our shares of common stock and the exercise price.
Exercisability
The Pre-Funded Warrants will be effectiveexercisable, at the option of each holder, in whole or in part, by delivering to us a duly executed exercise notice accompanied by payment in full for the number of shares of common stock purchased upon filing.such exercise (except in the case of a cashless exercise as discussed below). A holder (together with its affiliates) may not exercise any portion of the Pre-Funded Warrant to the extent that the holder would own more than 4.99% of the outstanding shares of common stock immediately after exercise, except that upon at least 61 days’ prior notice from the holder to us, the holder may increase the amount of beneficial ownership of outstanding shares after exercising the holder’s Pre-Funded Warrants up to 9.99% of the number of our shares of common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Pre-Funded Warrants. Purchasers of Pre-Funded Warrants in this offering may also elect prior to the issuance of the Pre-Funded Warrants to have the initial exercise limitation set at 9.99% of our outstanding shares of common stock.
Cashless Exercise
In lieu of making the cash payment otherwise contemplated to be made to us upon such exercise in payment of the aggregate exercise price, the holder may elect instead to receive upon such exercise (either in whole or in part) the net number of shares of common stock determined according to a formula set forth in the Pre-Funded Warrants.
Fractional Shares
No fractional shares of common stock will be issued upon the exercise of the Pre-Funded Warrants. Rather, at the Company’s election, the number of shares of common stock options afterto be issued will be rounded up to the effective datenext whole share or the Company will pay a cash adjustment in an amount equal to such fraction multiplied by the exercise price.
Transferability
Subject to applicable laws, a Pre-Funded Warrant may be transferred at the option of the Form S-8 registration statementholder upon surrender of the Pre-Funded Warrants to us together with the appropriate instruments of transfer.
Trading Market
There is no established trading market for the Pre-Funded Warrants, and we do not expect such a market to develop. We do not intend to apply to list the Pre-Funded Warrants on any securities exchange or other nationally recognized trading system. Without an active trading market, the liquidity of the Pre-Funded Warrants will be eligible for resaleextremely limited.
Right as a Shareholder
Except as otherwise provided in the public market without restriction, subject to limitations applicable to affiliates under Rule 144Pre-Funded Warrants or by virtue of such holder’s ownership of shares of common stock, the holders of the Securities Act.
Lockup agreements
Our officers, directors and a selling stockholder who beneficially own 2,479,695Pre-Funded Warrants do not have the rights or privileges of holders of our shares of common stock, including 630,000any voting rights, until they exercise their Pre-Funded Warrants. The Pre-Funded Warrants will provide that the holders of the Pre-Funded Warrants have the right to participate in distributions or dividends paid on our shares of common stock.
Fundamental Transaction
In the event of a fundamental transaction, as described in the Pre-Funded Warrants and generally including any reorganization, recapitalization or reclassification of our shares of common stock, issuable pursuantthe sale, transfer or other disposition of all or substantially all of our properties or assets, our consolidation or merger with or into another person, the acquisition of more than 50% of the voting power represented by our outstanding shares of capital stock, any person or group becoming the beneficial owner of more than 50% of the voting power represented by our outstanding shares of capital stock, any merger with or into another entity or a tender offer or exchange offer approved by more than 50% of the voting power represented by our outstanding shares of capital, then upon any subsequent exercise of a Pre-Funded Warrant, the holder will have the right to vestedreceive as alternative consideration, for each share of our common stock options, and 287,195 sharesthat would have been issuable upon conversionsuch exercise immediately prior to the occurrence of Series A, Bsuch fundamental transaction, the number of shares of common stock of the successor or acquiring corporation or of our company, if it is the surviving corporation, and C Preferred Stock, have agreed withany additional consideration receivable upon or as a result of such transaction by a holder of the number of shares of our Underwriter not to sell their shares of
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common stock for 13which the Pre-Funded Warrant is exercisable immediately prior to such event.
Placement Agent Warrants
We have also agreed to issue to the placement agent (or its designees) Placement Agent Warrants to purchase up to ● shares of common stock. The Placement Agent Warrants will be exercisable six months after this offering and will have substantially the same terms as the Common Warrants described above, except that the Placement Agent Warrants will have an exercise price of $● per share (representing 125 % of the offering price per share and accompanying warrants) and a termination date that will be ● years from the effective datecommencement of the registration statementsales pursuant to this offering. See “Plan of Distribution” below.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
The following discussion describes certain material U.S. federal income tax consequences relating to the acquisition, ownership and disposition of our common stock, pre-funded warrants and common warrants by a U.S. Holder or Non-U.S. Holder (as each term is defined below). This discussion is based on the current provisions of the Internal Revenue Code of 1986, as amended (referred to as the “Code”), existing and proposed U.S. Treasury regulations promulgated thereunder, and administrative rulings and court decisions in effect as of the date hereof, all of which this prospectus isare subject to change at any time, possibly with retroactive effect. No ruling has been or will be sought from the Internal Revenue Service, or IRS, with respect to the matters discussed below, and there can be no assurance the IRS will not take a part withoutcontrary position regarding the written consenttax consequences of the acquisition, ownership or disposition of our Underwriter. common stock, pre-funded warrants or common warrants, or that any such contrary position would not be sustained by a court.
Underwriting
SubjectWe assume in this discussion that the shares of our common stock, pre-funded warrants and common warrants will be held as capital assets (generally, property held for investment). This discussion does not address all aspects of U.S. federal income taxes and does not address state or local taxes or U.S. federal gift and estate tax laws, or any non-U.S. tax consequences that may be relevant to holders in light of their particular circumstances. This discussion also does not address the special tax rules applicable to particular holders, such as:
| ● | a bank, insurance company, or other financial institution; |
| ● | a tax-exempt entity, organization, or arrangement; |
| ● | a government or any agency, instrumentality, or controlled entity thereof; |
| ● | 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; |
| ● | a “controlled foreign corporation” or a “passive foreign investment company”; |
| ● | a dealer or broker in stocks and securities, or currencies; |
| ● | a trader in securities that elects mark-to-market treatment or any other holder subject to mark-to-market treatment; |
| ● | a holder of our common stock, pre-funded warrants, or common warrants that is liable for the alternative minimum tax; |
| ● | a holder of our common stock, pre-funded warrants, or common warrants that received such security through the exercise of options, warrants, or similar derivative securities or otherwise as compensation; |
| ● | a holder of our common stock, pre-funded warrants, or common warrants that holds such security in a tax-deferred account (such as an individual retirement account or a plan qualifying under Section 401(k) of the Code); |
| ● | a holder of our common stock, pre-funded warrants, or common warrants that has a functional currency other than the U.S. dollar; |
| ● | a holder of our common stock, pre-funded warrants, or common warrants that holds such security as part of a hedge, straddle, constructive sale, conversion or other integrated transaction; |
| ● | a holder of our common stock, pre-funded warrants, or common warrants required to accelerate the recognition of any item of gross income with respect to such security, as a result of such income being recognized on an applicable financial statement; |
| ● | a holder of our common stock, pre-funded warrants, or common warrants that is a U.S. expatriate or former citizen or long-term resident of the United States; |
| ● | a holder of our common stock, pre-funded warrants, or common warrants that does not hold such security as a capital asset within the meaning of Section 1221 of the Code (generally, for investment purposes); |
| ● | a holder of our common stock, pre-funded warrants, or common warrants whose security may constitute “qualified small business stock” under Section 1202 of the Code or “Section 1244 stock” for purposes of Section 1244 of the Code; or |
| ● | a holder of our common stock, pre-funded warrants, or common warrants that acquired such security in a transaction subject to the gain rollover provisions of Section 1045 of the Code; |
In addition, this discussion does not address the tax treatment of partnerships or other pass-through entities or of persons who hold our common stock, pre-funded warrants or common warrants through partnerships or other entities which are pass-through entities for U.S. federal income tax purposes. A partner in a partnership or other pass-through entity that will hold our common stock, pre-funded warrants or common warrants should consult his, her or its own tax advisor regarding the tax consequences of the ownership and disposition of our common stock, pre-funded warrants or common warrants through a partnership or other pass-through entity, as applicable.
For the purposes of this discussion, a “U.S. Holder” means a beneficial owner of our common stock, pre-funded warrants or common warrants that is for U.S. federal income tax purposes (a) an individual citizen or resident of the United States, (b) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes), organized in or under the laws of the United States, any state thereof or the District of Columbia, (c) an estate the income of which is includable in gross income for U.S. federal income tax purposes regardless of its source, or (d) a trust if it (1) is subject to the termsprimary supervision of a court within the United States and conditionsone or more U.S. persons (within the meaning of Section 7701(a)(30) of the Code) has the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person. A “Non-U.S. Holder” is, for U.S. federal income tax purposes, a beneficial owner of common stock, pre-funded warrants or common warrants (other than a partnership or other entity or arrangement classified as a partnership for U.S. federal income tax purposes) that is not a U.S. Holder.
The discussion of U.S. federal income tax considerations is for information purposes only and is not tax advice. Investors should consult their own tax advisors regarding the U.S. federal, state, local and non-U.S. income and other tax considerations of acquiring, holding and disposing of our common stock, pre-funded warrants and common warrants.
Allocation of Purchase Price to Common Stock, Pre-Funded Warrants and Common Warrants
For U.S. federal income tax purposes, a holder’s acquisition of the common warrants and common stock or prefunded warrants, as applicable, should be treated as the acquisition of an underwriting agreement, Gilford Securities Incorporated has agreed to purchase 1,500,000 units from us at a price of $5.10 per unit. Each unit consists“investment unit” consisting of one share of common stock or one pre-funded warrant, as applicable, and one half (1/2) common stock purchasea warrant which may be exercised to purchaseacquire one share of our common stock, subject to adjustment. The purchase price for each investment unit will be allocated between these two components in proportion to their relative fair market values at $5.00 perthe time the unit is purchased by the holder. This allocation of the purchase price for each unit will establish the holder’s initial tax basis for U.S. federal income tax purposes in the common stock or pre-funded warrant, as applicable, and the common stock warrant included in each unit. We do not intend to advise holders of the common warrants and common stock or prefunded warrants, as applicable, with respect to this determination, and holders are advised to consult their tax and financial advisors with respect to the relative fair market values of the common stock or pre-funded warrant, as applicable, and the common warrants for U.S. federal income tax purposes.
Tax Treatment of Pre-Funded Warrants
Although it is not entirely free from doubt, we believe a pre-funded warrant should be treated as a share of our common stock for U.S. federal income tax purposes and a holder of pre-funded warrants should generally be taxed in the same manner as a holder of common stock as described below. Accordingly, for U.S. federal income tax purposes, no gain or loss should be recognized upon the exercise of a pre-funded warrant, and upon exercise, the holding period of the share of common stock received should include the holding period of the pre-funded warrant. Similarly, the tax basis of a share of common stock received upon exercise of a pre-funded warrant should include the tax basis of the pre-funded warrant (discussed below) increased by the exercise price of $0.0001. The balance of this discussion generally assumes that the characterization described above is respected for U.S. federal income tax purposes.
Tax Considerations Applicable to U.S. Holders
Exercise and Expiration of the Pre-Funded Warrants and Common Warrants
In general, a U.S. Holder will not recognize gain or loss for U.S. federal income tax purposes upon exercise of a pre-funded warrant or common warrant (collectively for the balance of this discussion a “warrant”), except to the extent such U.S. Holder receives a cash payment for a periodfractional share that would otherwise have been issuable upon exercise of one year.the warrant, which will be treated as a sale subject to the rules described below under “U.S. Holders — Disposition of Our Common Stock, Pre-Funded Warrants or Common Warrants.” The underwriting agreementU.S. Holder will provide that our Underwriter is committedtake a tax basis in the shares acquired on the exercise of a warrant equal to purchase all units offered in this offering, other than those coveredthe exercise price of the warrant, increased by the over-allotment option described below.U.S. Holder’s adjusted tax basis in the warrant exercised. A U.S. holder’s holding period in the common stock received upon exercise of a pre-funded warrant generally should include such U.S. holder’s holding period in the pre-funded warrants exchanged therefor. The resale by our stockholders of up to 6,460,000U.S. Holder’s holding period in the shares of our common stock issuableacquired on exercise of the common warrant will begin on the date of exercise of the common warrant (or possibly, the day after), and will not include any period for which the U.S. Holder held the common warrant.
In certain limited circumstances, a U.S. Holder may be permitted to undertake a cashless exercise of warrants into our common stock. The U.S. federal income tax treatment of a cashless exercise of warrants into our common stock is unclear, and the tax consequences of a cashless exercise could differ from the consequences upon conversionthe exercise of Seriesa warrant described in the preceding paragraph. Due to the absence of authority on the U.S. federal income tax treatment of a cashless exercise, there can be no assurance as to the tax treatment that would be adopted by the IRS or a court of law. U.S. Holders should consult their own tax advisors regarding the U.S. federal income tax consequences of a cashless exercise of warrants.
The lapse or expiration of a warrant will be treated as if the U.S. Holder sold or exchanged the warrant and recognized a capital loss equal to the U.S. Holder’s tax basis in the warrant. The deductibility of capital losses is subject to limitations.
Certain Adjustments to and Distributions on the Pre-Funded Warrants and Common Warrants
The exercise terms of the warrants may be adjusted in certain circumstances. An adjustment to the number of shares of common stock that will be issued on the exercise of the warrants or an adjustment to the exercise price of the warrants may be treated as a constructive distribution to a U.S. Holder of the warrants even if such holder does not receive any cash or other property in connection with the adjustment. If the exercise price is adjusted in certain other circumstances (or in certain circumstances, there is a failure to make adjustments), such adjustments may also result in a constructive distribution to a U.S. Holder. U.S. Holders should consult their tax advisors regarding the proper treatment of any adjustments to the warrants. Any constructive distribution will generally be taxed in the same manner as an actual distribution received by a U.S. Holder as discussed below under “Distributions.”
Distributions
We currently anticipate that we will retain all available funds and any future earnings for use in the operation of our business and do not anticipate declaring or paying any cash dividends on our common stock for the foreseeable future. In the event that we do make distributions to a U.S. Holder, those distributions generally will constitute dividends for U.S. tax purposes to the extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Distributions to a U.S. Holder that are not derived from our current or accumulated earnings and profits will constitute a return of capital that is applied against and reduces, but not below zero, the U.S. Holder’s adjusted tax basis in our common stock, common warrants or pre-funded warrants, as applicable, and to the extent in excess of such basis, will be treated as gain realized on the sale or exchange of our common stock, common warrants or pre-funded warrants, as applicable, as described below.
The U.S. Holder generally will recognize capital gain or loss in an amount equal to the difference between the amount realized and the U.S. Holder’s adjusted tax basis in the applicable common stock, pre-funded warrants or common warrants. Capital gain or loss will constitute long-term capital gain or loss if the U.S. Holder’s holding period for the applicable common stock, pre-funded warrant or common warrant exceeds one year. The deductibility of capital losses is subject to certain limitations. U.S. Holders who recognize losses with respect to a disposition of our common stock, pre-funded warrants or common warrants should consult their own tax advisors regarding the tax treatment of such losses.
Medicare Tax
Certain U.S. Holders that are individuals, estates or trusts are subject to a 3.8% tax on all or a portion of their “net investment income,” which may include all or a portion of their dividend income and net gains from the disposition of securities. Each U.S. Holder that is an individual, estate or trust is urged to consult its tax advisors regarding the applicability of the Medicare tax to its income and gains in respect of its investment in our securities.
Information Reporting and Backup Withholding
Information reporting requirements generally will apply to payments of dividends (including constructive dividends) on our common stock, pre-funded warrants and common warrants and to the proceeds of a sale or other disposition of common stock, common warrants and pre-funded warrants by a U.S. Holder unless such U.S. Holder is an exempt recipient, such as a corporation. Backup withholding will apply to those payments if the U.S. Holder fails to provide the holder’s taxpayer identification number, or certification of exempt status, or if the holder otherwise fails to comply with applicable requirements to establish an exemption. Backup withholding is not an additional tax. Rather, amounts withheld as backup withholding may be credited against a person’s U.S. federal income tax liability, and a holder generally may obtain a refund of any excess amounts withheld under the backup withholding rules by timely filing the appropriate claim for refund with the IRS and furnishing any required information.
Tax Considerations Applicable to Non-U.S. Holders
Exercise and Expiration of Pre-Funded Warrants and Common Warrants
In general, a Non-U.S. Holder will not be subject to U.S. federal income tax on the exercise of the warrants into shares of common stock. As described under “U.S. Holders - Exercise and Expiration of the Pre-Funded Warrants and Common Warrants” the U.S. federal income tax treatment of a cashless exercise of warrants into our common stock is unclear. A BNon-U.S. Holder should consult his, her, or its own tax advisor regarding the U.S. federal income tax consequences of a cashless exercise of warrants.
The expiration of a warrant will be treated as if the Non-U.S. Holder sold or exchanged the warrant and C Preferredrecognized a capital loss equal to the Non-U.S. Holder’s tax basis in the warrant. However, a Non-U.S. Holder will not be able to utilize a loss recognized upon expiration of a warrant against the Non-U.S. Holder’s U.S. federal income tax liability unless the loss is effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if an income tax treaty applies, is attributable to a permanent establishment or fixed base in the United States) or is treated as a U.S.-source loss and the Non-U.S. Holder is an individual nonresident and present 183 days or more in the taxable year of disposition in the United States and certain other conditions are met.
Certain Adjustments to and Distributions on the Pre-Funded Warrants and Common Warrants
As described under “U.S. Holders - Certain Adjustments to and Distributions on the Pre-Funded Warrants and Common Warrants” an adjustment to the warrants could result in a constructive distribution to a Non-U.S. Holder, which would be treated as described under “Distributions” below, and the tax treatment of a distribution on a warrant is unclear. Any resulting withholding tax attributable to deemed dividends would be collected from other amounts payable or distributable to the Non-U.S. Holder. Non-U.S. Holders should consult their tax advisors regarding the proper treatment of any adjustments to or distributions on the warrants.
Distributions
We currently anticipate that we will retain all available funds and any future earnings for use in the operation of our business and do not anticipate declaring or paying any cash dividends on our common stock for the foreseeable future. In the event that we do make distributions on our common stock or warrants to a Non-U.S. Holder, those distributions generally will be treated as dividends, as return of capital or as gain on the sale or exchange of common stock or warrants for U.S. federal income tax purposes as described in “U.S. Holders - Distributions.”
Subject to the discussions below under the sections titled “Information Reporting and Backup Withholding” and “Foreign Accounts,” any distribution (including constructive distributions) on our common stock or warrants that is treated as a dividend paid to a Non-U.S. Holder that is not effectively connected with the holder’s conduct of a trade or business in the United States will generally be subject to withholding tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty between the United States and the Non-U.S. Holder’s country of residence. To obtain a reduced rate of withholding under a treaty, a Non-U.S. Holder generally will be required to provide the applicable withholding agent with a properly executed IRS Form W-8BEN, IRS Form W-8BEN-E or other appropriate form, certifying the Non-U.S. Holder’s entitlement to benefits under that treaty. Such form must be provided prior to the payment of dividends and must be updated periodically and when otherwise required by law.
We generally are not required to withhold tax on dividends paid (or constructive dividends deemed paid) to a Non-U.S. Holder that are effectively connected with such holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed base that the holder maintains in the United States) if a properly executed IRS Form W-8ECI, stating that the dividends are so connected, is furnished to us. In general, such effectively connected dividends will be subject to U.S. federal income tax on a net income basis at the regular rates applicable to U.S. persons. A corporate Non-U.S. Holder receiving effectively connected dividends may also be subject to an additional “branch profits tax,” which is imposed, under certain circumstances, at a rate of 30% (or such lower rate as may be specified by an applicable treaty) on the corporate Non-U.S. Holder’s effectively connected earnings and profits, subject to certain adjustments.
Distributions to a Non-U.S. Holder that are not derived from our current or accumulated earnings and profits generally will be treated as a return of capital that will be applied against and reduce (but not below zero) the Non-U.S. Holder’s basis in its common stock or warrants, as applicable, and to the extent in excess of such basis, will be treated as gain from the sale or exchange of such common stock or warrants, as applicable, as described under “Disposition of Our Common Stock, Pre-Funded Warrants or Common Warrants” below.
If a Non-U.S. Holder holds stock through a financial institution or other agent acting on the holder’s behalf, the holder will be required to provide appropriate documentation to such agent. The holder’s agent may then be required to provide certification to the applicable withholding agent, either directly or through other intermediaries.
Disposition of Our Common Stock, Pre-Funded Warrants or Common Warrants
Subject to the discussions below under the sections titled “Information Reporting and 1,450,000Backup Withholding” and “Foreign Accounts,” a Non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax with respect to gain realized on a sale or other disposition of our common stock, pre-funded warrants or common warrants unless:
| ● | the gain is effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United States (and, if required by an applicable income tax treaty between the United States and such Non-U.S. Holder’s country of residence, the gain is attributable to a permanent establishment or fixed base maintained by the Non-U.S. Holder in the U.S.), in which case the Non-U.S. Holder will be taxed on a net income basis at the regular rates and in the manner applicable to U.S. persons, and if the Non-U.S. Holder is a corporation, an additional branch profits tax at a rate of 30%, or a lower rate as may be specified by an applicable income tax treaty, may also apply; |
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| ● | the Non-U.S. Holder is a nonresident alien present in the United States for 183 days or more in the taxable year of the disposition and certain other requirements are met, in which case the Non-U.S. Holder will be subject to a 30% tax (or such lower rate as may be specified by an applicable income tax treaty between the United States and such holder’s country of residence) on the net gain derived from the disposition, which may be offset by certain U.S.-source capital losses of the Non-U.S. Holder, if any, provided that the Non-U.S. Holder has timely filed U.S. federal income tax returns reporting those losses; or |
| ● | we are, or have been, a “United States real property holding corporation,” or USRPHC, for U.S. federal income tax purposes during the five-year period preceding such disposition (or the Non-U.S. Holder’s holding period, if shorter). We do not believe that we are or have been a USRPHC and, even if we are or were a USRPHC, as long as our common stock is regularly traded on an established securities market, dispositions will not be subject to tax for a Non-U.S. Holder that has not held more than 5% of our common stock, actually or constructively, during the five-year period preceding such Non-U.S. Holder’s disposition (or the Non-U.S. Holder’s holding period, if shorter). Special rules may apply to the determination of the 5% threshold in the case of a holder of a pre-funded warrant or common warrant. |
See the sections titled “Information Reporting and Backup Withholding” and “Foreign Accounts” below for additional information regarding withholding rules that may apply to proceeds of a disposition of our common stock, pre-funded warrants or common warrants paid to foreign financial institutions or non-financial foreign entities.
Information Reporting and Backup Withholding
We must report annually to the IRS and to each Non-U.S. Holder the gross amount of the distributions (including constructive distributions) on our common stock, pre-funded warrants or common warrants paid to such holder and the tax withheld, if any, with respect to such distributions. Non-U.S. Holders may have to comply with specific certification procedures to establish that the holder is not a U.S. person (as defined in the Code) in order to avoid backup withholding at the applicable rate, currently 24%. Generally, a Non-U.S. Holder will comply with such procedures if it provides a properly executed applicable IRS Form W-8 or by otherwise establishing an exemption. Dividends paid to Non-U.S. Holders subject to withholding of U.S. federal income tax, as described above under the heading “Distributions,” will generally be exempt from U.S. backup withholding.
Information reporting and backup withholding generally will apply to the proceeds of a disposition of our common stock, pre-funded warrants or common warrants by a Non-U.S. Holder effected by or through the U.S. office of any broker, U.S. or foreign, unless the Non-U.S. Holder certifies its status as a Non-U.S. Holder and satisfies certain other requirements, or otherwise establishes an exemption. Generally, information reporting and backup withholding will not apply to a payment of disposition proceeds to a Non-U.S. Holder where the transaction is effected outside the United States through a non-U.S. office of a non-U.S. broker. However, for information reporting purposes, dispositions effected through a non-U.S. office of a broker with substantial U.S. ownership or operations generally will be treated in a manner similar to dispositions effected through a U.S. office of a broker. Non-U.S. Holders should consult their own tax advisors regarding the application of the information reporting and backup withholding rules to them.
Copies of information returns may be made available to the tax authorities of the country in which the Non-U.S. Holder resides or is incorporated under the provisions of a specific treaty or agreement.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a Non-U.S. Holder can be refunded or credited against the Non-U.S. Holder’s U.S. federal income tax liability, if any, provided that an appropriate claim is timely filed with the IRS.
Foreign Accounts
Legislation commonly referred to as the “Foreign Account Tax Compliance Act,” or “FATCA,” generally imposes a 30% withholding tax on dividends on common stock, pre-funded warrants and common warrants if paid to a non-U.S. entity unless (i) if the non-U.S. entity is a “foreign financial institution,” the non-U.S. entity undertakes certain due diligence, reporting, withholding, and certification obligations, (ii) if the non-U.S. entity is not a “foreign financial institution,” the non-U.S. entity identifies certain of its U.S. investors, if any, or (iii) the non-U.S. entity is otherwise exempt under FATCA.
Intergovernmental agreements between the United States and foreign countries with respect to FATCA may significantly modify the requirements described in this section for Non-U.S. Holders. Holders should consult their own tax advisors regarding the possible implications of FATCA on their investment in our common stock, pre-funded warrants or common warrants.
The preceding discussion of material U.S. federal tax considerations is for information only. It is not tax advice. Prospective investors should consult their own tax advisors regarding the particular U.S. federal, state, local and non-U.S. tax consequences of purchasing, holding and disposing of our common stock, pre-funded warrants or common warrants, including the consequences of any proposed changes in applicable laws.
PLAN OF DISTRIBUTION
We have engaged ●, or the placement agent, to act as our exclusive placement agent to solicit offers to purchase the shares of our common stock, pre-funded warrants and common stock purchase warrants offered by this prospectus. The placement agent is not purchasing or selling any such securities, nor is it required to arrange for the purchase and sale of any specific number or dollar amount of such securities, other than to use its “reasonable best efforts” to arrange for the sale of such securities by us. Therefore, we may not sell all of the shares of common stock, pre-funded warrants and common stock purchase warrants being offered. The terms of this offering are subject to market conditions and negotiations between us, the placement agent and prospective investors. The placement agent will have no authority to bind us by virtue of the engagement letter. This is a best efforts offering and there is no minimum offering amount required as a condition to the closing of this offering. The placement agent may retain sub-agents and selected dealers in connection with this offering.
Investors purchasing securities offered hereby will have the option to execute a securities purchase agreement with us. Investors who do not enter into a securities purchase agreement shall rely solely on this prospectus in connection with the purchase of our securities in this offering. In addition to rights and remedies available to all purchasers in this offering under federal securities and state law, the purchasers which enter into a securities purchase agreement will also be able to bring claims of breach of contract against us. The ability to pursue a claim for breach of contract is material to larger purchasers in this offering as a means to enforce the following covenants uniquely available to them under the securities purchase agreement, including but not limited to: (i) a covenant to not enter into variable rate financings for a period of ● following the closing of the offering, subject to exceptions; and (ii) a covenant to not enter into any equity financings for ● from closing of the offering, subject to certain exceptions.
The nature of the representations, warranties and covenants in the securities purchase agreements shall include, but are not limited to:
| ● | standard issuer representations and warranties on matters such as organization, qualification, authorization, no conflict, no governmental filings required, current in SEC filings, no litigation, labor or other compliance issues, environmental, intellectual property and title matters and compliance with various laws such as the Foreign Corrupt Practices Act; and |
| ● | covenants regarding matters such as registration of shares issued and issuable upon exercise of the common stock purchase warrants, no integration with other offerings, no shareholder rights plans, use of proceeds, indemnification of purchasers, reservation and listing of common stock, and no subsequent equity sales for ●. |
Delivery of the shares of common stock, pre-funded warrants and common stock purchase warrants offered forhereby is expected to occur on or ●, 2024, subject to satisfaction of certain customary closing conditions.
Fees and Expenses
The following table shows the per share price and total cash fees we will pay to the placement agent in connection with the sale through our Underwriterof the securities pursuant to this prospectus.
| | Per share of Common Stock and accompanying Common Warrant | | | Per Pre-Funded Warrant and accompanying Common Warrant | | | Total | |
| Public offering price | | $ | | | | $ | | | | $ | | |
| Placement agent fees (1) | | $ | | | | $ | | | | $ | | |
| Proceeds to us, before expenses (2) | | $ | | | | $ | | | | $ | | |
| (1) | We have agreed to pay the placement agent a cash fee equal to 7.0% of the gross proceeds raised in this offering (other than proceeds received from the Company’s current directors and officers). We have also agreed to reimburse the placement agent for certain of its offering related expenses, including reimbursement for non-accountable expenses in legal fees and expenses in the amount of up to $112,500, and for its clearing expenses in the amount of $15,950. In addition, we have agreed to issue the placement agent or its designees warrants (“Placement Agent Warrants”) to purchase a number of shares of common stock equal to 4.0% of the shares of common stock sold in this offering (including the shares of common stock issuable upon the exercise of the Pre-Funded Warrants but not including shares of common stock sold to the Company’s current directors and officers), at an exercise price of $● per share, which represents 125% of the public offering price per share and accompanying warrant. |
| (2) | Because there is no minimum number of securities or amount of proceeds required as a condition to closing in this offering, the actual public offering amount, placement agent fees, and proceeds to us, if any, are not presently determinable and may be substantially less than the total maximum offering amounts set forth above. |
We estimate the total expenses of this offering paid or payable by us, exclusive of the placement agent’s cash fee and expenses payable by us, will be approximately $●. After deducting the fees and expenses due to the placement agent and our estimated expenses in connection with this offering, assuming we sell all of the shares and accompanying warrants offered hereby, we expect the net proceeds from this offering will be approximately $●.
Placement Agent Warrants
In addition, we have agreed to issue to the placement agent or its designees warrants, or the placement agent warrants, to purchase up to 4% of the aggregate number of shares of common stock sold in this offering (including shares underlying any pre-funded warrants), except in connection with proceeds in this offering raised from the Company’s current directors and officers, at an exercise price equal to 125% of the public offering price per share and accompanying common stock purchase warrant to be sold in this offering. The placement agent warrants will be exercisable upon issuance and will expire three (3) years from the commencement of sales under this offering. The placement agent warrants provide for customary anti-dilution provisions (for share dividends, splits and recapitalizations and the like) consistent with FINRA Rule 5110. The placement agent warrants and the shares of common underlying the placement agent warrants are registered pursuant to a separate prospectus covering such securities being filed with the SEC simultaneously with the filing ofon the registration statement of which this prospectus is a part. In the underwriting agreement, our Underwriter’s obligations are subject to approval of certain legal matters by its counsel, including, without limitation, the authorization and validityThe form of the shares, and of various other customary conditions, representations and warranties contained in the underwriting agreement, suchplacement agent warrant is included as receipt by our Underwriter of officers’ certificates and legal opinions of our counsel.
We have grantedan exhibit to the Underwriter an option, exercisable for 45 days from the date of this prospectus, to purchase up to 225,000 additional units at the public offering price listed on the cover page of this prospectus, less underwriting discounts and commissions. The Underwriter may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the units offered by this prospectus. Of the 225,000 units, 200,000 are being sold by the selling stockholder. If our Underwriter exercises its over-allotment option, the first 25,000 units will be units sold to the Underwriter by the Company, and the remaining 200,000 will be units sold to the Underwriter by the selling stockholder.
Commissions and discounts
The following table sets forth the public offering price and underwriting discount to be paid by us to our Underwriter and the proceeds, before expenses, to us. This information assumes either no exercise or full exercise by our Underwriter of its over-allotment option.
| | | |
| Per unit | Without option exercise(1) | With option exercise |
Public offering price | $5.10 | $7,650,000 | $7,777,500 |
Discount | $0.408 | $612,000 | $622,200 |
Non- accountable expense allowance(2) | $0.153 | $229,500 | $233,325 |
Proceeds before expenses(3) | $4.539 | $6,808,500 | $6,921,975 |
(1) We have granted our Underwriter an option, exercisable for 45 days after the date of this prospectus, to purchase a number of units equal to 15% of the number of units sold in this offering by us solely to cover over-allotments, if any, at the same price as the initial units offered. (2) We have agreed to pay our Underwriter a non-accountable expense allowance of 3% of the gross proceeds of the proposed offering, including shares sold on exercise of the over-allotment option. We will not receive proceeds from the sale of 200,000 units offered by a selling stockholder and the selling stockholder is responsible for the Underwriter discount and non-accountable expense allowance resulting from the sale of those units. We have paid our Underwriter $25,000 as an advance against this non-accountable expense allowance. (3) We estimate that the expenses of this offering payable by us, not including underwriting discounts and commissions and non-accountable expense allowance will be approximately $258,500. |
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Warrants
We have agreed to issue to our Underwriter at the closing of this offering, for nominal consideration, warrants to purchase 150,000 shares of common stock. These warrants will be exercisable for a period of 48 months commencing on the first anniversary of the closing date of this offering at an exercise price equal to 120% of the price of our common stock offered by this prospectus, or $6.00 per share. These warrants will be restricted from sale, transfer, assignment or hypothecation for a period of 12 months from the closing of this offering, except to officers of our Underwriter and broker-dealers participating in this offering and their officers and partners, and except transfers by operation of law or by reason of our reorganization.
These warrants contain provisions for appropriate adjustment in the event of any merger, consolidation, recapitalization, reclassification, stock dividend, stock split or similar transaction. The warrants do not entitle our Underwriter or a permissible transferee to any rights as a stockholder until the warrants are exercised and shares of our common stock are purchased pursuant to the exercise of the warrants.
These warrants and the shares of our common stock issuable upon their exercise may not be offered for sale except in compliance with the applicable provisions of the Securities Act. We have agreed that if we file a registration statement with the Securities and Exchange Commission, our Underwriter will have the right, for a period of seven years from the closing date of this offering, commencing one year from the closing date of this offering, to include in such registration statement the shares of our common stock issuable upon exercise of the warrants. In addition, we have agreed to register the shares of common stock underlying the warrants under certain circumstances upon the request of a majority of the holders of the warrants during the period commencing one year from the closing date of this offering and expiring 48 months thereafter.
Electronic distribution; directed share program
Our Underwriter has advised us that it will not engage in any electronic offer, sale or distribution of our units. Neither we nor our Underwriter will use any third party to host or provide access to our preliminary prospectus on the Internet.
We will not have a directed unit program for our employees.
Price stabilization, short positions and penalty bids
Until the distribution of the units is completed, Securities and Exchange Commission rules may limit our Underwriter from bidding for and purchasing our common stock and warrants. In connection with this offering, however, our Underwriter may engage in stabilizing transactions, over-allotment transactions, covering transactions and penalty bids in accordance with Regulation M under the Securities Exchange Act of 1934, as amended.
·
Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.
·
Over-allotment involves sales by our Underwriter of units in excess of the number of units our Underwriter is obligated to purchase, which creates a short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of units over-allotted by our Underwriter is not greater than the number of units that it may purchase in the over-allotment option. In a naked short position, the number of units involved is greater than the number of units in the over-allotment option. Our Underwriter may close out any covered short position by either exercising its over-allotment option or purchasing common stock or warrants in the open market.
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Covering transactions involve the purchase of common stock and warrants in the open market after the distribution has been completed in order to cover short positions. In determining the source of shares to close out the short position, our Underwriter will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which it may purchase units through the over-allotment option. If our Underwriter sells more units than could be covered by the over-allotment option (a naked short position) the position can only be closed out by buying common stock or warrants in the open
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market. A naked short position is more likely to be created if our Underwriter is concerned that there could be downward pressure on the price of the common stock or warrants in the open market after pricing that could adversely affect investors who purchase in this offering.
·
Penalty bids permit our Underwriter to reclaim a selling concession from a selected dealer when the unit originally sold by the selected dealer is purchased in a stabilizing covering transaction to cover short positions.
These stabilizing transactions, covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock and warrants or preventing or retarding a decline in the market price of our common stock and warrants. As a result, the price of our common stock and warrants may be higher than the price that might otherwise exist in the open market. Neither we nor our Underwriter makes any prediction or any representation as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock and warrants. Neither we nor our Underwriter makes any representation that our Underwriter will engage in these transactions. These transactions may be effected on the NYSE MKT Exchangeor otherwise and, if commenced, may be discontinued without notice at any time.
Lockup arrangements
Our officers and directors who beneficially own 1,062,195 shares of common stock, including 600,000 shares of common stock issuable pursuant to vested stock options, and 287,195 shares issuable upon conversion of Series A, B and C Preferred Stock, have agreed with our Underwriter not to sell their shares of common stock for 13 months from the effective date of the registration statement of which this prospectus isforms a part withoutpart.
Tail
We have also agreed to pay the written consentplacement agent a tail fee equal to the cash and warrant compensation in this offering, if any investor, who was contacted by the placement agent or who was introduced to us during the term of its engagement, provides us with capital in any public or private offering or other financing or capital raising transaction of any kind other than at-the-market facilities or equity line offerings during the nine (9) month period following expiration or termination of our Underwriter. Of these shares, 531,097engagement of the placement agent.
Right of First Refusal
Subject to consummation of the offering, we have granted a right of first refusal to the placement agent pursuant to which it has the right to act as the sole book-runner, manager, underwriter or placement agent, as applicable, if we decide to raise capital through a public offering (including an at-the-market facility) or private placement or any other capital-raising financing of equity, equity-linked or debt securities pursuant to which we engage an investment bank or broker/dealer at any time prior to the eight (8) months following the consummation of this offering.
Lock-Up Agreements
Our officers and directors have agreed with the placement agent to be subject to a lock-up period of ● following the closing of this offering. This means that, during the applicable lock-up period, such persons may not offer for sale, contract to sell, sell, distribute, grant any option, right or warrant to purchase, pledge, hypothecate or otherwise dispose of, directly or indirectly, any shares of Common Stockour common stock or any securities convertible into, or exercisable or exchangeable for, shares of our common stock. Certain limited transfers are eligiblepermitted during the lock-up period if the transferee agrees to these lock-up restrictions. We have also agreed to similar lock-up restrictions on the issuance and sale of our securities for early relief from● following the lockup ifclosing of this offering, subject to certain exceptions. The placement agent may, in its sole discretion and without notice, waive the terms of any of these lock-up agreements.
In addition, subject to certain exceptions, we have agreed to not issue any securities that are subject to a price reset based on the trading prices of our Common Stock tradescommon stock or upon a specified or contingent event in the future, or enter into any agreement to issue securities at or above $10 per sharea future determined price for 10 consecutive trading days commencing six months froma period of one year following the effectiveclosing date of this offering.
A selling stockholder who beneficially own 1,117,500 shares of common stock, including 30,000 shares of common stock issuable pursuant to vested stock options have agreed with our Underwriter not to sell its shares of common stock for 13 months from the effective date of the registration statement of which this prospectus is a part without the written consent of our Underwriter.
Our Underwriter has no present intention to waive or shorten the lockup period. The granting of any waiver of release would be conditioned, in the judgment of our Underwriter, on such sale not materially adversely impacting the prevailing trading market for our common stock on the NYSE MKT Exchange. Specifically, factors such as average trading volume, recent price trends and the need for additional public float in the market for our common stock and warrants would be considered in evaluating such a request to waive or shorten the lockup period.Indemnification
Following the expiration of the lockup period, all 2,179,695 shares of common stock, including 630,000 shares of common stock issuable pursuant to vested stock options, and 287,195 shares issuable upon conversion of Series A, B and C Preferred Stock beneficially held by our officers and directors will be available for sale by such persons subject to holding period restrictions on sale under Rule 144 of the Securities Act. We have registered the resale of these shares by a separate prospectus.
Board of Directors observation rights
For a period of three years after the date of this prospectus, our Underwriter has the right to appoint an observer reasonably acceptable to us to attend all meetings of our Board of Directors. We will reimburse this person for expenses incurred in attending any meeting.
Indemnification
We have agreed to indemnify our Underwriter and its controlling personsthe placement agent against specifiedcertain liabilities, including certain liabilities under the Securities Act, or to contribute to payments that our Underwriterthe placement agent may be required to make for such liabilities.Insofar as indemnification forin respect of those liabilities.
In addition, we will indemnify the purchasers of securities in this offering against liabilities arising out of or relating to (i) any breach of any of the representations, warranties, covenants or agreements made by us in the securities purchase agreement or related documents or (ii) any action instituted against a purchaser by a third party (other than a third party who is affiliated with such purchaser) with respect to the securities purchase agreement or related documents and the transactions contemplated thereby, subject to certain exceptions
Other Relationships
The placement agent and its affiliates have engaged, and may in the future engage, in investment banking transactions and other commercial dealings in the ordinary course of business with us or our affiliates. The placement agent has received, or may in the future receive, customary fees and commissions for these transactions.
In addition, in the ordinary course of their business activities, the placement agent and its affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) for their own account and for the accounts of their customers. Such investments and securities activities may involve securities and/or instruments of ours or our affiliates. The placement agent and its affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.
Electronic Distribution
A prospectus in electronic format may be made available on a website maintained by the placement agent and the placement agent may distribute prospectuses electronically. Other than the prospectus in electronic format, the information on these websites is not part of this prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or the placement agent and should not be relied upon by investors.
Participation in this Offering
● and ●, members of our board of directors and ●, our [officer title] have expressed interest in purchasing up to ●, ● and ●, respectively, of shares of our common stock being offered in this offering for investment purposes. As of November 30, 2023, ●, ● and ● respectively, owned ●, ● and ● shares of our common stock prior to this offering. Such purchases, if any, would be made at the public offering price.
Transfer Agent
The transfer agent and registrar for our common stock is Continental Stock Transfer & Trust Company, LLC (“Continental”). Continental will act as the registrar and transfer agent for the common stock purchase warrants and the pre-funded warrants.
Nasdaq listing
Our shares of common stock are listed on the NASDAQ Capital Market under the Securities Act of 1933 may be permittedsymbol “PCSA.”
LEGAL MATTERS
Certain legal matters relating to
- 42 -
directors, officers or persons controlling this offering and the registrant pursuant to the foregoing provisions, the registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is therefore unenforceable.
Legal Matters
The validity of the securities offered herebyby this prospectus will be passed onupon for us by Howard J. Kern, PC, Pacific Palisades, California. Brownstein Hyatt Farber Schreck,Foley & Lardner, LLP, Denver, Colorado,Jacksonville, Florida. ●, New York, New York is representing our Underwriter. acting as counsel for ● in connection with this offering.
Experts
EXPERTS
The predecessorconsolidated financial statements of Heatwurx, Inc. as of and for the fiscal years ended December 31, 2022 and 2021, incorporated by reference into this prospectus from the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, and for the period from January 1, 2009 (date of inception) to April 15, 2011 and the financial statements of the successor entity, Heatwurx, Inc., as of December 31, 2011 and for the period from April 16, 2011 (date of incorporation) to December 31, 2011, appearing in this Prospectus and Registration Statement2022, have been audited by Heinso incorporated in reliance on the report of BD & Associates, LLP,Company, an independent registered public accounting firm, as stated in their report appearing elsewherewhich is incorporated by reference herein, and are includedhas been so incorporated in reliance upon such report and upon the authority of such firm as experts in accounting and auditing.
Where You Can Find More InformationINFORMATION INCORPORATED BY REFERENCE
The SEC allows us to “incorporate by reference” information that we file with it into this prospectus, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is an important part of this prospectus. The information incorporated by reference is considered to be a part of this prospectus, and information that we file later with the SEC will automatically update and supersede information contained in this prospectus.
We incorporate by reference the documents listed below and any future filings made with the SEC under Sections 13(a), 13(c), 14, or 15(d) of the Exchange Act made after the date of the initial registration statement of which this prospectus forms a part and prior to effectiveness of the registration statement and subsequent to the date of this prospectus until the termination of the offering of the securities described in this prospectus (other than information in such filings that was “furnished,” under applicable SEC rules, rather than “filed”). We incorporate by reference the following documents or information that we have filed with the SEC:
| ● | Our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on March 30, 2023; |
| ● | Our Quarterly Report on Form 10-Q for the quarters ended March 31, 2023, June 30, 2023 and September 31, 2023, filed with the SEC on May 15, 2023, August 10, 2023 and November 13, 2023, respectively; |
| ● | Our Current Reports on Form 8-K, filed with the SEC on February 6, 2023, February 13, 2023; March 22, 2023; June 29, 2023; August 8, 2023 (excluding Item 7.01 and the exhibit related thereto); September 21, 2023; November 13, 2023; and November 15, 2023 |
| ● | Our Definitive Proxy Statement on Schedule 14A, filed with the SEC on May 1, 2023; and |
| ● | The description of our common stock contained in our Registration Statement on Form 8-A, filed on September 17, 2020 pursuant to Section 12(b) of the Exchange Act, which incorporates by reference the description of the shares of our common stock contained in the “Description of Securities.” |
We will furnish without charge to you, on written or oral request, a copy of any or all of the documents incorporated by reference in this prospectus, including exhibits to these documents. You should direct any requests for documents to Wendy Guy, Chief Administrative Officer at Processa Pharmaceuticals, Inc. 7380 Coca Cola Drive, Suite 106, Hanover, Maryland 21076 or at (443) 776-3133.
You also may access these filings on our website at www.processapharmaceuticals.com. We do not incorporate the information on our website into this prospectus or any supplement to this prospectus and you should not consider any information on, or that can be accessed through, our website as part of this prospectus or any supplement to this prospectus (other than those filings with the SEC that we specifically incorporate by reference into this prospectus or any supplement to this prospectus).
Any statement contained in a document incorporated or deemed to be incorporated by reference in this prospectus will be deemed modified, superseded or replaced for purposes of this prospectus to the extent that a statement contained in this prospectus modifies, supersedes or replaces such statement.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement on Form S-1 (File Number 333-______) underwe filed with the Securities Act with respect to the units offered hereby.SEC. This prospectus which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement orand the exhibits filed therewith.to the registration statement. For further information aboutwith respect to us and the units offered hereby, reference is madesecurities we are offering under this prospectus, we refer you to the registration statement and the exhibits and schedules filed therewith.
Statementsas a part of the registration statement. You should rely only on the information contained in this prospectus regardingor incorporated by reference into this prospectus. We have not authorized anyone else to provide you with different information. We are not making an offer of these securities in any jurisdiction where the contents of any contractoffer is not permitted. You should assume that the information contained in this prospectus, or any other document thatincorporated by reference in this prospectus, is filedaccurate only as an exhibit toof the registration statement are not necessarily complete, and in each instance we refer you todate of those respective documents, regardless of the copytime of such contractdelivery of this prospectus or other document filed as an exhibit to the registration statement. We currently do not file periodic reports with the SEC. Upon closingany sale of our initial public offering, we will be required tosecurities.
We file periodicannual, quarterly and current reports, proxy statements and other information with the SEC pursuant tounder the Exchange Act. Our SEC filings are available to the public from commercial document retrieval services and over the Internet at the SEC’s website at http://www.sec.gov.
A copy
We maintain a website at www.processapharmaceuticals.com. You may access our proxy statements, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the registration statement andExchange Act with the exhibits filed therewith may be inspected withoutSEC free of charge at the public reference room maintained by the SEC, located at 100 F Street, NE, Washington, DC 20549, and copies of allour website as soon as reasonably practicable after such material is electronically filed with, or any part of the registration statement may be obtained from that office. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. The SEC also maintains a website that contains reports, proxy and information statements and other information regarding registrants that file electronically withfurnished to, the SEC. The address of theinformation contained in, or that can be accessed through, our website is www.sec.gov.not incorporated by reference into, and is not part of, this prospectus.
If you are a stockholder, you
You may also request a copy of these filings, at no cost to you, by contactingwriting or telephoning us at: 6041 South Syracuse Way,at the following address:
Processa Pharmaceuticals, Inc.
Attn: Corporate Secretary
7380 Coca Cola Drive, Suite 315, Greenwood Village, Colorado 80111.106
Hanover, Maryland 21076
- 43 -Telephone (443) 776-3133
Index to Financial Statements
| |
Heatwurx, Inc. and Predecessor Carve-Out (A Development Stage Company)
| |
Report of Independent Registered Public Accounting Firm
| F-2
|
Balance Sheet and Statement of Assets, Liabilities and Divisional Net Deficit
| F-3
|
Statement of Operations
| F-4
|
Statement of Cash Flows
| F-5
|
Statement of Changes in Stockholders’ Equity and Divisional Net Deficit
| F-6
|
Notes to Financial Statements
| F-7
38 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Heatwurx,Processa Pharmaceuticals, Inc.
Greenwood Village, Colorado
We have audited the accompanying statement of assets, liabilities and divisional net equity of the predecessor carve-out entity to Heatwurx, Inc. (the “Company” or “Successor”) a development stage company, as of December 31, 2010 and the related statements of operations, divisional net equity, and cash flows for the year ended December 31, 2010 and for the period from January 1, 2009 (date of inception) to April 15, 2011 and the balance sheet of the successor entity, Heatwurx, Inc., as of December 31, 2011 and the related statements of operations, stockholders’ equity, and cash flows for the period from April 16, 2011 (date of incorporation) to December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
The accompanying statements of assets, liabilities and divisional net equity as of December 31, 2010 and the related statements of operations, divisional net equity, and cash flows for the year ended December 31, 2010 and for the period from January 1, 2009 (date of inception) to December 31, 2010 and to April 15, 2011 of the predecessor carve-out entity to Heatwurx, Inc. were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission (for inclusion in the registration statement on Form S-1 of Heatwurx, Inc.).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the predecessor carve-out entity to Heatwurx, Inc. at December 31, 2010, and the financial position of Heatwurx, Inc. as of December 31, 2011 and the results of the predecessor carve-out entity to Heatwurx, Inc. operations and cash flows for year ended December 31, 2010 and for the period from January 1, 2009 (date of inception) to December 31, 2010 and to April 15, 2011 and the results of operations of Heatwurx, Inc. for the period from April 16, 2011 (date of incorporation) to December 31, 2011,in conformity with accounting principles generally accepted in the United States of America.
/s/Hein & Associates LLP
Irvine, California
November 13, 2012
F-2
HEATWURX, INC. AND PREDECESSOR CARVE-OUT
(A Development Stage Company)
BALANCE SHEET AS OF SEPTEMBER 30, 2012 AND DECEMBER 31, 2011 AND STATEMENT OF ASSETS, LIABILITIES AND DIVISIONAL NET EQUITY AS OF DECEMBER 31, 2010
The accompanying notes are an integral part of these financial statements.
F-7
HEATWURX, INC. AND PREDECESSOR CARVE-OUT
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Information as of September 30, 2012 and for the nine months ended September 30, 2012, the nine months ended September 30, 2011 and for the period from April 16, 2011
(date of incorporation) through September 30, 2011is unaudited)
1.
PRINCIPAL BUSINESS ACTIVITIES:
Organization and Business – Heatwurx, Inc. (“Heatwurx”, the “Company” or the “Successor”) is a development stage, asphalt repair equipment and technology company. Heatwurx was incorporated on March 29, 2011 as Heatwurxaq, Inc. and subsequently changed its name to Heatwurx, Inc. on April 15, 2011. (Note 4)
As there was no financial activity subsequent to the date of incorporation on March 29, 2011 through April 15, 2011, the Company is using April 16, 2011 as the date of incorporation for the purpose of these financial statements and footnotes (other than the Company’s Statement of Stockholders’ Equity which includes the common stock issued upon the Company’s actual incorporation date of March 29, 2011).
Development Stage – From the date of incorporation, the Company has been in the development stage and therefore is classified as a development stage company.
Interim Financial Statements – The accompanying unaudited financial statements has been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial statements. Accordingly, it does not include all the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair statement of this financial information have been included. These financial statements should be read in conjunction with the audited financial statements and accompanying notes for the period ended December 31, 2011. The results of operations for the nine months ended September 30, 2012 are not necessarily indicative of the results for the full year ended December 31, 2012.
Predecessor Carve-Out Financial Statements – On April 15, 2011, the Company entered into an Asset Purchase Agreement with an individual who is a current stockholder of the Company. Pursuant to the agreement, the Company purchased the related business and activities of the design, manufacture and distribution of asphalt repair machinery under the Heatwurx brand. The assets acquired represent Heatwurx’s predecessor under Rule 405 of the Regulation C of the Securities Act of 1933, as amended, as the assets acquired represent the acquisition of a business and Heatwurx’s own operations were insignificant relative to the operations acquired. The accompanying predecessor financial statements present the full carve-out financial position, the relative revenues earned and expenses incurred, and the cash flows of the predecessor owner relative to the assets acquired.
Subsequent to the acquisition, the successor financial statements present the financial position, operations and cash flows of the assets acquired, the liabilities assumed and operations of the assets acquired as well as those acquired subsequently and are reflected at their purchase-date fair values. Those fair values are reflected as the cost of the assets acquired and the carrying amounts of the liabilities assumed, and are the basis of the resulting operations of the successor.
Prior to the acquisition of the predecessor assets, Heatwurx had minimal activity and was a development stage company. Its planned operations were to purchase the assets acquired and develop the business using the assets acquired. Heatwurx had no revenue for the period from incorporation on March 29, 2011 to the date of acquisition of the assets on April 15, 2011.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation – These financial statements and related notes are presented in accordance with the accounting principles generally accepted in the United States and are expressed in U.S. dollars. The Company’s fiscal year end is December 31.
F-8
The Company’s financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business.
The Company also faces certain risks and uncertainties which are present in many emerging companies regarding product development, future profitability, ability to obtain future capital, protection of patents and property rights, competition, rapid technological change, government regulations, recruiting and retaining key personnel, and third party manufacturing organizations.
Successful completion of the Company’s development program and its transition to profitable operations is dependent upon obtaining additional financing adequate to fulfill its development and commercialization activities, and achieve a level of revenues adequate to support the Company’s cost structure. Management believes that current cash and other sources of liquidity are sufficient to fund planned operations through at least December 31, 2012.
Many of the Company’s objectives to establish profitable business operations rely upon the occurrence of events outside its control; there is no assurance that the Company will be successful in accomplishing these objectives.
Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates and assumptions by management that affect reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from these estimates.
Cash and Cash Equivalents – The Company considers all highly liquid investments with a maturity at the date of purchase of three months or less to be cash equivalents. The Company had no cash equivalents at September 30, 2012. At times, the Company may have cash balances above the FDIC insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk.
Property and Equipment – Property and equipment consist of equipment, computer equipment and software and are stated at cost and are depreciated over the estimated useful lives of three years using a straight line depreciation methodology.
Impairment of Long-lived Assets – The Company periodically reviews its long-lived assets to determine potential impairment by comparing the carrying value of the long-lived assets with the estimated future net undiscounted cash flows expected to result from the use of the assets, including cash flows from disposition, whenever events or changes in circumstances indicate a potential impairment may exist. Should the sum of the expected future net cash flows be less than the carrying value, the Company would recognize an impairment loss at that date. An impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value (estimated discounted future cash flows) of the long-lived assets. There were no impairment charges for the period from April 16, 2011 (Date of Incorporation) through December 31, 2011.
Intangible Assets – Intangible assets consist of in-process research and development acquired as part of an acquisition. During development, in-process research and development is not subject to amortization and is tested for impairment. On completion of the project, in-process research and development are classified to developed technology and amortized over their estimated useful lives.
Stock-Based Compensation – The Company accounts for the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award, determined on the date of grant. The expense is to be recognized over the period during which an employee is required to provide services in exchange for the award. The Company estimates forfeitures at the time of grant and makes revisions, if necessary, at each reporting period if actual forfeitures differ from those estimates. The Company estimated future unvested forfeitures at 0% for the period ended September 30, 2012.
Advertising Expense – The Company charges advertising costs to expense as incurred and such costs were not material for the period of March 29, 2011 (Date of Incorporation) through December 31, 2011.
Income Taxes – The Company and its predecessor accounts for income taxes using the asset and liability method of accounting for deferred income taxes.
F-9
The provision for income taxes includes federal and state income taxes currently payable and deferred taxes resulting from temporary differences between the financial statement and tax bases of assets and liabilities. Valuation allowances are recorded to reduce deferred tax assets when it is more-likely-than-not that a tax benefit will not be realized.
With respect to uncertain tax positions, the Company would recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The tax benefits to be recognized in the financial statements from such a position would be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.
Revenue Recognition – The Company sells its equipment (HWX-30 heater and HWX-AP-40 asphalt processor), as well as certain consumables, such as rejuvenation oil, to third parties. Equipment sales revenue is recognized when equipment is shipped to our customer and collection is reasonably assured.
Other revenue represents revenue earned by the Company for the rental of certain equipment.
Interest income is recognized as earned, over the term of the investment.
Fair Value of Financial Instruments – The Company measures its financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. Additionally, the Company is required to provide disclosure and categorize assets and liabilities measured at fair value into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation. Level 1 provides the most reliable measure of fair value while Level 3 generally requires significant management judgment. Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. The fair value hierarchy is defined as follows:
·
Level 1 – quoted prices in active markets for identical assets or liabilities,
·
Level 2 – other significant observable inputs for the assets or liabilities through corroboration with market data at the measurement date,
·
Level 3 – significant unobservable inputs that reflect management’s best estimate of what market participants would use to price the assets or liabilities at the measurement date.
The carrying amount of certain financial instruments, including cash and cash equivalents and interest payable approximates fair value due to the relatively short maturity of such instruments. The senior secured and senior subordinated notes payable approximates the fair value of such instrument based upon management’s best estimate of interest rates that would be available to the Company for similar financial arrangement at September 30, 2012. The Company does not have any fair value instruments for assets and liabilities measured at fair value on a recurring or non-recurring basis, consequently, the Company did not have any fair value adjustments for assets and liabilities measured at fair value at September 30, 2012, nor gains or losses reported in the statement of operations.
Recent Accounting Pronouncements – In May 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-04,Fair Value Measurement (“ASU 2011-04”), which amended ASC 820,Fair Value Measurements(“ASC 820”), providing a consistent definition and measurement of fair value, as well as similar disclosure requirements between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles, clarifies the application of existing fair value measurement and expands the disclosure requirements. ASU 2011-04 became effective for the Company beginning January 1, 2012. The adoption of ASU 2011-04 did not have a material effect on the Company’s financial statements or disclosures.
In June 2011, the FASB issued ASU 2011-05,Comprehensive Income (Topic 20): Presentation of Comprehensive Income, which is effective for annual reporting periods beginning after December 31, 2011. ASU 2011-05 became effective for the Company on January 1, 2012. The guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. In addition, items of other comprehensive income that are reclassified to profit or loss are required to be presented separately on the face of the financial statements. This guidance is intended to increase the prominence of other comprehensive income in financial statements by requiring that such amounts be presented either in a single continuous statement of income and comprehensive income or separately in consecutive statements of income and comprehensive income. The adoption of ASU 2011-05 did not have a material effect on the Company’s financial statements or disclosures.
F-10
In September 2011, the FASB issued ASU 2011-08,Testing Goodwill for Impairment (“ASU 2011-08”), which amends the guidance in ASC 350-20,Intangibles—Goodwill and Other – Goodwill. ASU 2011-08 provides entities with the option of performing a qualitative assessment before calculating the fair value of the reporting unit when testing goodwill for impairment. If the fair value of the reporting unit is determined, based on qualitative factors, to be more-likely-than-not less than the carrying amount of the reporting unit, the entities are required to perform a two-step goodwill impairment test. ASU 2011-08 became effective for the Company beginning January 1, 2012. The adoption of ASU 2011-08 did not have a material effect on the Company’s financial statements or disclosures.
Subsequent Events – The Company performed an evaluation of subsequent events through the date of this filing.
3.
PROPERTY AND EQUIPMENT:
A summary of the cost of property and equipment, by component, and the related accumulated depreciation is as follows:
| | | | |
| | September 30, 2012 | December 31, 2011 | December 31, 2010 |
Computer equipment & software | | $ 10,174 | $ - | $ - |
Equipment | | 311,167 | 1,379 | 22,310 |
| | 321,341 | 1,379 | 22,310 |
Accumulated depreciation | | (5,628) | (178) | (4,889) |
| | $ 315,713 | $ 1,201 | $ 17,421 |
Depreciation expense for the nine months ended September 30, 2012 and September 30, 2011 was $5,450 and $238, respectively. Depreciation expense was $525 and $3,187 for the years ended December 31, 2011 and 2010, respectively.
4.
ACQUISITION:
On April 15, 2011, the Company entered into an Asset Purchase Agreement with an individual who is a current stockholder. Pursuant to the agreement, the Company purchased the related business and activities of the design, manufacture and distribution of asphalt repair machinery under the Heatwurx brand. The total purchase price was $2,500,000. The purchase price was paid in a $1,500,000 cash payment and the issuance of a senior subordinated note to the seller in the amount of $1,000,000. (Note 5)
The business essentially consisted of the investment in research and development of the technology, the patents applied for as a result of the research and development activities and certain distribution relationships that were in process, but not finalized as of the acquisition date. Collectively, these investments constitute the in-process research and development we refer to as the “asphalt preservation and repair solution”. The Company capitalized $2,500,000 of in-process research and development related to this asphalt preservation and repair solution. Upon completion, the related in-process research and development asset will be amortized over its estimated useful life. The estimated fair value of the in-process research and development was determined using the income approach. Under the income approach, the expected future cash flows from the asset are estimated and discounted to its net present value at an appropriate risk-adjusted rate of return.
In conjunction with the Asset Purchase Agreement, the Company granted 200,000 performance stock options to a founder of the Company with an exercise price of $0.40 per share and a term of 7 years. Following the effectiveness of the 7 for 1 stock split that was completed in October 2011, the 200,000 performance stock options were exchanged for 1,400,000 performance stock options with an exercise price of $0.057 per share.
The performance stock options will vest in full on the occurrence of any the following: (1) The Company achieves total revenue in year 2013 of $24,750,000 determined in accordance with generally accepted accounting principles in the United States; (2) the Company achieves total revenue in year 2014 of $49,500,000; or (3) the Company achieves total revenue in year 2015 of $99,000,000. If the performance stock options do not vest per the aforementioned vesting schedule, the performance stock options will immediately terminate and expire.
The performance stock options are being accounted for as contingent consideration and were recognized at its estimated fair value at the acquisition date in the amount of $0.
F-11
5.
NOTES PAYABLE:
Senior Secured Notes Payable – The Company issued senior secured promissory notes totaling $1,500,000 on April 15, 2011. The notes bear interest at a rate of 12% per annum and are due on October 15, 2013. As of December 31, 2011, the notes were subject to mandatory principal payments as follows:
| |
Date of Payment
| Amount
of Payment
|
July 15, 2012
| $ 150,000
|
October 15, 2012
| 150,000
|
January 15, 2013
| 150,000
|
April 15, 2013
| 300,000
|
July 15, 2013
| 300,000
|
October 15, 2013
| 450,000
|
Total principal payments
| $ 1,500,000
|
On July 14, 2012, the Company entered into a First Amendment to Senior Secured Promissory Notes with the holders of the Senior Secured Notes Payable for a deferral of the scheduled principal payment of $150,000 that was due on July 15, 2012. The note holders agreed to relinquish their rights to receive the July 15, 2012 payment in exchange for the Company’s early repayment of the Senior Secured Promissory Notes on or before August 31, 2012.
On August 6, 2012, the Company issued 760,000 Series C Preferred Stock for total gross proceeds of $1,520,000. The Series C Preferred Stock rank senior in liquidation and dividend preferences to the Company’s common stock. Holders of Series C Preferred Stock accrue dividends at the rate per annum $.16 per share. On August 8, 2012, the Company repurchased and retired the outstanding Senior Secured Promissory Notes for the principal balance of $1,500,000 outstanding plus accrued interest.
Senior Subordinated Note Payable – The Company issued a senior subordinated note payable in the amount of $1,000,000 on April 15, 2011. The note bears interest at a rate of 6% per annum and matures on April 15, 2014. As of September 30, 2012 and December 31, 2011, the note is subject to mandatory principal payments as follows:
| |
Date of Payment
| Amount of Payment
|
October 15, 2013
| $ 250,000
|
December 15, 2013
| 250,000
|
February 15, 2014
| 250,000
|
April 15, 2014
| 250,000
|
Total principal payments
| $ 1,000,000
|
Interest on the senior subordinated note payable totaling $2,466 was outstanding at September 30, 2012.
6.
INCOME TAXES:
The Company and its predecessor files income tax returns in the U.S. federal jurisdiction and the state of Utah. There are currently no income tax examinations underway for these jurisdictions since December 31, 2012 is the initial tax filing period.
The Company provides deferred income taxes for differences between the tax reporting bases and the financial reporting bases of assets and liabilities. The Company had no unrecognized income tax benefits. Should the Company incur interest and penalties relating to tax uncertainties, such amounts would beclassified as a component of interest expense and operating expense, respectively. Unrecognized tax benefits are not expected to increase or decrease within the next twelve months.
Deferred Income Taxes – The Company does not recognize the deferred income tax asset at this time because the realization of the asset is less likely than not. As of December 31, 2011, the Company has net operating losses for federal and state income tax purposes of approximately $725,680 and $725,580, respectively, which are available for application against future taxable income and which will start expiring in 2031 and 2026, respectively. The benefit
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associated with the net operating loss carry forward will more likely than not go unrealized unless a future operation is successful. Since the success of future operations is indeterminable, the potential benefits resulting from these net operating losses have not been recorded in the financial statements.
| |
| December 31, 2011
|
Deferred Tax Assets:
| |
Net operating loss carry forward
| $
283,010
|
Stock-based compensation
| 82,724
|
Depreciation
| 85
|
Total
| 365,819
|
Valuation allowance for deferred tax asset
| (349,879)
|
Total deferred tax assets
| $
15,941
|
| |
Deferred Tax Liabilities:
| |
Deferred state taxes
| $
15,941
|
Total deferred tax liability
| 15,941
|
Net deferred tax asset
| $
–
|
A reconciliation between the statutory federal income tax rate of 34% and our effective tax rate for the year ended December 31, 2011 is as follows:
| |
Federal statutory income tax rate
| (34.0)%
|
Deferred tax asset valuation allowance
| 34.0%
|
Effective income tax rate
| -
|
7.
STOCKHOLDERS’ EQUITY:
Common Stock – The Company has authorized 20,000,000 common shares with a $0.0001 par value. As of September 30, 2012 there were 1,750,000 common shares outstanding.
Preferred Stock – The Company has authorized 3,000,000 shares of Preferred Stock with a $0.0001 par value. As of September 30, 2012, 600,000 shares were designated as Series A Preferred Stock, 1,500,000 shares were designated as Series B Preferred Stock and 760,000 shares were designated as Series C Preferred stock.
Series A Preferred Stock– As of September 30, 2012 there were 600,000 shares of Series A Preferred Stock outstanding.
The Series A Preferred Stock ranks senior in liquidation and dividend preferences to the Company’s common stock. Holders of Series A Preferred Stock accrue dividends at the rate per annum of $0.066664. At September 30, 2012, Series A Preferred Stock had dividends accumulated of approximately $58,518. No dividends have been declared, therefore there are no amounts accrued on the balance sheet.
The holders of the Series A Preferred Stock have conversion rights equivalent to such number of fully paid and non-assessable shares of common stock as is determined by dividing the Series A original issue price of $0.8333 by the then applicable conversion price. The conversion ratio is subject to customary antidilution adjustments, including in the event that the Company issues equity securities at a price equivalent to less than the conversion price in effect immediately prior to such issue.
The holders of Series A Preferred Stock have a liquidation preference over the holders of the Company’s common stock equivalent to the purchase price per share of the Series A Preferred Stock plus any accrued and unpaid dividends, whether or not declared, on the Series A Preferred Stock. A liquidation would be deemed to occur upon the happening of customary events, including transfer of all or substantially all of the Company’s common stock or assets or a merger, or consolidation. The Company believes that such liquidation events are within its control and therefore has classified the Series A Preferred Stock in stockholders’ equity.
The holders of Series A Preferred Stock vote together as a single class with the holders of the Company’s common stock on all action to be taken by the Company’s stockholders. Each share of Series A Preferred Stock entitles the holder to the number of votes equal to the number of shares of common stock into which the
F-13
shares of the Series A Preferred Stock are convertible into as of the record date for determining stockholders entitled to vote on such matter.
In connection with the issuance of Series A Preferred Stock, the Company entered into an Investors’ Rights Agreement (the “Rights Agreement”). The Rights Agreement provides that holders of at least 40% of the Series A Preferred Stock, including common stock into which the Series A Preferred Stock has been converted, may demand and cause the Company to register a Form S-1 or Form S-3, if eligible, on their behalf for the shares of common stock issued, issuable or that may be issuable upon conversion of the Series A Preferred Stock (the “Registrable Securities”). Whenever required under this agreement to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its commercially reasonable efforts to cause such registration statement to become effective.
Series B Preferred Stock –As of September 30, 2012 there were 1,500,000 shares of Series B Preferred Stock outstanding.
The Series B Preferred Stock ranks senior in liquidation and dividend preferences to the Company’s common stock. Holders of Series B Preferred Stock accrue dividends at the rate per annum of $0.16 per share. At September 30, 2012, Series B Preferred Stock had dividends accumulated of approximately $227,507. No dividends have been declared, therefore there are no amounts accrued on the balance sheet.
The holders of the Series B Preferred Stock have conversion rights equivalent to such number of fully paid and non-assessable shares of common stock as is determined by dividing the Series B original issue price of $2.00 by the then applicable conversion price. The conversion ratio is subject to customary antidilution adjustments, including in the event that the Company issues equity securities at a price equivalent to less than the conversion price in effect immediately prior to such issue.
The holders of Series B Preferred Stock have a liquidation preference over the holders of the Company’s common stock equivalent to the purchase price per share of the Series B Preferred Stock plus any accrued and unpaid dividends, whether or not declared, on the Series B Preferred Stock. A liquidation would be deemed to occur upon the happening of customary events, including transfer of all or substantially all of the Company’s common stock or assets or a merger, or consolidation. The Company believes that such liquidation events are within its control and therefore the Company has classified the Series B Preferred Stock in stockholders’ equity.
The holders of Series B Preferred Stock vote together as a single class with the holders of the Company’s common stock on all action to be taken by the Company’s stockholders. Each share of Series B Preferred Stock entitles the holder to the number of votes equal to the number of shares of common stock into which the shares of the Series B Preferred Stock are convertible into as of the record date for determining stockholders entitled to vote on such matter.
In connection with the issuance of Series B Preferred Stock, the Company entered into an Investors’ Rights Agreement with the same terms and conditions as the Rights Agreement for the Series A Preferred Stock described above.
Series C Preferred Stock –As of September 30, 2012 there were 760,000 shares of Series C Preferred Stock outstanding.
The Series C Preferred Stock ranks senior in liquidation and dividend preferences to the Company’s common stock. Holders of Series C Preferred Stock accrue dividends at the rate per annum of $0.16 per share. At September 30, 2012, Series C Preferred Stock had dividends accumulated of approximately $19,323. As dividends are accrued and payable quarterly on the Series C Preferred Stock, the Company has accrued $19,323 for dividends payable in accrued expenses as of September 30, 2012.
The holders of the Series C Preferred Stock have conversion rights equivalent to such number of fully paid and non-assessable shares of common stock as is determined by dividing the Series C original issue price of $2.00 by the then applicable conversion price. The conversion ratio is subject to customary antidilution adjustments, including in the event that the Company issues equity securities at a price equivalent to less than the conversion price in effect immediately prior to such issue.
The holders of Series C Preferred Stock have a liquidation preference over the holders of the Company’s common stock equivalent to the purchase price per share of the Series C Preferred Stock plus any accrued and unpaid dividends, whether or not declared, on the Series C Preferred Stock. A liquidation would be deemed to
F-14
occur upon the happening of customary events, including transfer of all or substantially all of the Company’s common stock or assets or a merger, or consolidation. The Company believes that such liquidation events are within its control and therefore the Company has classified the Series C Preferred Stock in stockholders’ equity.
The holders of Series B Preferred Stock vote together as a single class with the holders of the Company’s common stock on all action to be taken by the Company’s stockholders. Each share of Series C Preferred Stock entitles the holder to the number of votes equal to the number of shares of common stock into which the shares of the Series C Preferred Stock are convertible into as of the record date for determining stockholders entitled to vote on such matter.
In connection with the issuance of Series C Preferred Stock, the Company entered into an Investors’ Rights Agreement with the same terms and conditions as the Rights Agreement for the Series A Preferred Stock described above.
Stock Options
| | | |
| Number of Options | | Weighted Average Exercise Price |
Balance, December 31, 2011 | 300,000 | | $ 2.00 |
Granted | 872,000 | | $ 2.00 |
Exercised | – | | $ – |
Cancelled | – | | $ – |
Balance, September 30, 2012 | 1,172,000 | | $ 2.00 |
Exercisable, September 30, 2012 | 1,172,000 | | $ 2.00 |
| | | | | |
Stock Options Outstanding | Stock Options Exercisable |
Exercise Price | Outstanding Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | Options Exercisable | Weighted Average Exercise Price |
$2.00 | 1,172,000 | $2.00 | 4.44 | 860,000 | $2.00 |
The fair value of each stock option granted was estimated on the date of grant using the Black Scholes option pricing model with the following assumptions:
| | |
| September 30, 2012 | December 31, 2011 |
Risk-free interest rate range | 0.62% – 0.91% | 0.88% – 1.08% |
Expected life | 5.0 years | 5.0 years |
Expected volatility | 39% | 39% |
Expected dividend | – | – |
Fair value range of options at grant date | $0.675– $0.705 | $0.704– $0.710 |
For the nine months ended September 30, 2012, the Company recorded stock-based compensation expense of $430,448. During the period ended December 31, 2011, the Company recorded stock-based compensation expense of $212,114.
As of September 30, 2012 there was $69,957 unrecognized compensation expense related to the issuance of the stock options.
F-15
Performance Stock Options
| | | |
| Number of Options | | Weighted Average Exercise Price |
Balance, December 31, 2011 and September 30, 2012 | 1,440,000 | | $ 0.11 |
Exercisable, September 30, 2012 | 30,000 | | $ 2.00 |
| | | | | | | |
Performance Options Outstanding | | Performance Options Exercisable |
Outstanding Performance Options | Weighted Average Exercise Price | | Performance Options Exercisable | Weighted Average
Exercise Price |
1,440,000 | $ 0.11 | | 30,000 | $ 2.00 |
See Note 4 for further discussion of the performance options.
8.
NET LOSS PER COMMON SHARE:
The Company computes loss per share of common stock using the two-class method required for participating securities. Our participating securities include all series of our convertible preferred stock. Undistributed earning allocated to these participating securities are added to net loss in determining net loss attributable to common stockholders. Basic and Diluted loss per share are computed by dividing net loss attributable to common stockholder by the weighted-average number of shares of common stock outstanding. No calculation was performed for the predecessor company as there was no common stock outstanding for the periods presented.
Outstanding options to purchase 1,212,000 (including 30,000 vested performance options) of common stock were outstanding for the periods ended September 30, 2012 and outstanding options to purchase 300,000 shares of common stock were outstanding for the period from April 16, 2011 through December 31, 2011, but were not included in the computation of diluted loss per share for the years then ended because the options' exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive. There were no options outstanding for the period from April 16, 2011 (incorporation) through September 30, 2011.
The calculation of the numerator and denominator for basic and diluted net loss per common share is as follows:
| | | | |
| For the period from April 16, 2011 (incorporation) through September 30, 2012 |
For the nine months ended September 30, 2012 | For the period from April 16, 2011 (incorporation) through September 30, 2011 |
For the period from April 16, 2011 through December 31, 2011 |
Net Loss | $ (2,591,207) | $ (1,650,110) | $ (344,217) | $ (941,097) |
Basic: | | | | |
Preferred stock cumulative dividend – Series A | 58,518 | 30,026 | 58,518 | 28,492 |
Preferred stock cumulative dividend – Series B | 227,507 | 180,822 | - | 46,685 |
Preferred stock cumulative dividend – Series C | 18,323 | 18,323 | - | - |
Net income available to preferred stockholders | 304,348 | 229,171 | 58,518 | 75,177 |
Net loss attributable to common stockholders | (2,895,555) | (1,879,281) | (402,735) | (1,016,274) |
Net loss | $ (2,591,207) | $ (1,650,110) | $ (344,217) | $ (941,097) |
F-16
9.
Commitments and Contingencies:
Lease Commitments –On July 18, 2012, the Company entered into a thirteen month lease for office space for our corporate headquarters located in Greenwood Village, Colorado. Under the terms of the lease agreement, the Company leased approximately 2,244 square feet of general office space. The lease term commenced on July 23, 2012 and continues through August 31, 2013.
Total rent expense for the year ended December 31, 2011 was $34,000 and for the nine months ended September 30, 2012 was approximately $12,800.
F-17
Heatwurx, Inc.
1,500,000 Units consisting of
1,500,000 Shares ofCommon Stock and
850,000 Common Stock Warrants
PROSPECTUS
Gilford Securities Incorporated
_____________, 2012
The information in this prospectus is not complete and may be changed. We may not sell these securities until the Registration Statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Subject to completion, dated _______, 2012
PROSPECTUS
Heatwurx, Inc.
Up to 7,910,000 ● Shares of Common Stock
We are registering:
·
the resale by our common stockholders of 1,450,000 shares of outstanding common stock; and
·
6,460,000 shares of common stock issuable upon conversion of Series A, B and C Preferred Stock.
No public market currently exists for our common stock and we can give no assurance that a public market will develop for our securities following this offering. We have applied to list our common stock and $5.00 warrants on the NYSE MKT Exchange under the proposed symbols of “____” and “_____,” respectively, but cannot assure you that the listing application will be approved.
We will not receive any proceeds from the sale of the 1,450,000 shares of common stock offered by our selling stockholders or from the sale of the 6,460,000 shares of common stock issuable upon conversion of Series A, B and C Preferred Stock and offered by our selling stockholders.
Investing in these securities involves a high degree of risk and immediate and substantial dilution. See ‘‘Risk Factors’’ beginning on page 5.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Pursuant to Rule 416 of the Securities Act of 1933, as amended, there are also being registered hereunder additional shares of common stock as may be issued to the selling stockholders because of any future stock dividends, stock distributions, stock splits, similar capital readjustments or other anti-dilution adjustments.
The date of this prospectus is , 2012
Prospectus Summary
This summary highlights key aspects of the information contained elsewhere in this prospectus. You should read this entire prospectus carefully, including the financial statements and the notes to the financial statements included elsewhere in this prospectus. Unless otherwise indicated, the information contained in this prospectus assumes that all 2,860,000 shares of our preferred stock convert into 6,460,000 shares of common stock and that no warrants are exercised.
Heatwurx, Inc.
General
Heatwurx, Inc. was incorporated under the laws of the State of Delaware on March 29, 2011 as Heatwurxaq, Inc. and subsequently changed its name to Heatwurx, Inc. on April 15, 2011. Our founders were Larry Griffin and David Eastman, the principals of Hunter Capital Group, LLC, an investment banking entity, which acquired our technology, equipment designs, trademarks, and patent applications from Richard Giles, the inventor in April 2011. In connection with the acquisition, we raised $1,500,000 in senior secured debt and $500,000 through the offering of Series A Preferred Stock to three investors. In October 2011, we completed a 7-1 forward stock split and raised gross proceeds of $3,000,000 through the sale of our Series B Preferred Stock. In August 2012, we raised gross proceeds of $1,520,000 through the sale of our Series C Preferred Stock. In August 2012, the proceeds from the sale of the Series C Preferred Stock were used to repay our secured debt.
We have not yet fully commercialized our products and we are therefore classified as a developmental stage enterprise.
We are an Original Equipment Manufacturer of Asphalt preservation and repair equipment. Our innovative, and eco-friendly hot-in-place recycling process corrects surface distresses within the top three inches of existing pavement by heating the surface material in excess of 300° Fahrenheit with our electrically powered infrared heating equipment, mechanically loosening the heated material with our processor/tiller attachment that is optimized for producing a seamless repair, and mixing in additional recycled asphalt pavement and a binder (asphalt-cement), and then compacting repaired area with a vibrating roller or compactor. We consider our equipment to be eco-friendly as the Heatwurx process reuses and rejuvenates distressed asphalt, uses recycled asphalt pavement for filler material, eliminates travel to and from asphalt batch plants, and extends the life of the roadway. We believe our equipment, technology and processes provide savings over other processes that can be more labor and equipment intensive.
Our hot-in-place recycling process and equipment has been selected by the Technology Implementation Group of the American Association of State Highway Transportation Officials (AASHTO TIG) as an “additionally Selected Technology” for the year 2012. We develop, manufacture and intend to sell our unique and innovative and eco-friendly equipment to federal, state and local agencies as well as contractors for the repair and rehabilitation of damaged and deteriorated asphalt surfaces.
Our executive offices are located at 6041 South Syracuse Way, Suite 315, Greenwood Village, Colorado 80111 and our telephone number is (303) 532-1641. Our website is www.heatwurx.com.
The offering
(1)
Preferred stockholders may elect to convert shares of their preferred stock into shares of common stock as follows:
·
Series A – 600,000 shares of Series A Preferred Stock are convertible into 4,200,000 shares of common stock at $0.12 per share;
·
Series B – 1,500,000 shares of Series B Preferred Stock are convertible into 1,500,000 shares of common stock at $2.00 per share; and
·
Series C – 760,000 shares of Series B Preferred Stock are convertible into 760,000 shares of common stock at $2.00 per share.
(2)
Amount gives effect to the automatic conversion of all 2,860,000 shares of preferred stock to 6,460,000 shares of common stock but does not include:
·
the issuance of 1,022,000 and 1,440,000 shares of common stock upon exercise of stock options and performance stock options, respectively;
·
the issuance of 25,000 units that may be sold by the Company upon exercise of the Underwriter’s overallotment option;
·
the issuance of 762,500 shares of common stock underlying 762,500 outstanding warrants issued by the Company, including the issuance of 12,500 warrants upon exercise of our Underwriter’s overallotment option; and
·
the issuance of 150,000 shares of common stock underlying warrants issued to our Underwriter in connection with this offering.
SS-2
Selling Stockholders
This prospectus relates to:
·
the resale by our common stockholders of 1,450,000 shares of common stock; and
·
6,460,000 shares of common stock issuable upon conversion of Series A, B and C Preferred Stock.
These securities were issued as follows:
·
Common Stock: Upon incorporation on March 29, 2011, 2,800,000 shares of common stock were sold at $0.001 par value. In January 2012, 1,050,000 of these shares were cancelled, resulting in a balance of 1,750,000 shares of Common Stock.
·
Series A Preferred Stock: In April 2011, we realized $500,000 from the sale of 600,000 shares of Series A Preferred Stock for $0.8333 per share.
·
Series B Preferred Stock: In October 2011, we realized $3,000,000 from the sale of 1,500,000 shares of Series B Preferred Stock for $2.00 per share.
·
Series C Preferred Stock: In August 2012, we realized $1,520,000 from the sale of 760,000 shares of Series C Preferred Stock for $2.00 per share.
The following tables set forth information regarding the shares of common stock owned beneficially as of September 30, 2012, by each selling stockholder and assumes the conversion of all 2,860,000 shares of preferred stock into 6,460,000 shares of common stock. The selling stockholders are not required, and may choose not to sell any of their shares of common stock.
None of the selling stockholders is an officer, director or other affiliate except as indicated below.
| | | | | |
Common stock |
Name of selling stockholder | Shares owned prior to offering(1) | Shares being Offered(1) | Shares owned after offering (1) | Percentage owned after offering (1) |
Richard Giles(2) | 1,087,500 | 1,087,500 | - | - |
W D Larson(3) | 75,000 | 75,000 | - | - |
Capital Properties LLC | 50,000 | 50,000 | - | - |
Gus Blass II | 50,000 | 50,000 | - | - |
Gus Blass III(4) | 50,000 | 50,000 | - | - |
Jay R Kuhne | 50,000 | 50,000 | - | - |
Mason Family Trust | 25,000 | 25,000 | - | - |
Chad K Kirby | 12,500 | 12,500 | - | - |
Kelsey Kirby | 12,500 | 12,500 | - | - |
Pole Creek Associates LLC | 7,500 | 7,500 | | |
Hillary Ridland | 5,000 | 5,000 | - | - |
Kimberly Stump | 5,000 | 5,000 | - | - |
Mccall Kuhne | 5,000 | 5,000 | - | - |
Pamela A Pryor | 5,000 | 5,000 | - | - |
Stacey Mercer | 5,000 | 5,000 | - | - |
Steve Jackson | 5,000 | 5,000 | | |
Total Common Stock | 1,450,000 | 1,450,000 | - | - |
| | | | |
SS-3
| | | | | | |
Common stock issuable upon conversion of Series A Preferred Stock |
Name of selling stockholder | Shares owned prior to offering | Shares being offered | Shares owned after offering (1) | Percentage owned after offering (1) |
JMW Fund LLC(5) | 225,000 | 225,000 | - | - |
San Gabriel Fund LLC(6) | 225,000 | 225,000 | - | - |
Kirby Enterprise Fund LLC(7) | 75,000 | 75,000 | - | - |
Charles F Kirby Roth 401k(8) | 75,000 | 75,000 | - | - |
Total Series A Preferred Stock | 600,000 | 600,000 | - | - |
| | | | |
Common stock issuable upon conversion of Series B Preferred Stock |
Name of selling stockholder | Shares owned prior to offering | Shares being offered | Shares owned after offering (1) | Percentage owned after offering (1) |
West Hampton Special Situations Fund, LLC | 125,000 | 125,000 | - | - |
Kirby Enterprise Fund, LLC(7) | 80,000 | 80,000 | - | - |
Capital Properties, LLC | 75,065 | 75,065 | - | - |
Echo Capital Growth Corporation | 75,065 | 75,065 | - | - |
Gus Blass, II | 75,065 | 75,065 | - | - |
Gus John Blass, III(4) | 75,065 | 75,065 | - | - |
Reg Greeenslade(9) | 75,065 | 75,065 | - | - |
Buddy & Linda Walker Comm. Prop. | 70,000 | 70,000 | - | - |
Jay R. Kuhne | 60,065 | 60,065 | - | - |
Daryl & Stacy Monday Comm. Prop. | 50,043 | 50,043 | - | - |
William J. Gordica | 50,043 | 50,043 | - | - |
Underwood Family Partners | 45,000 | 45,000 | - | - |
High Speed Aggregate | 37,532 | 37,532 | - | - |
James T. Galvin | 37,532 | 37,532 | - | - |
88 Lapis Investments, LLC | 25,022 | 25,022 | - | - |
Goldstein Family Associates, a Colorado LLP | 25,022 | 25,022 | - | - |
Reuben Sandler | 25,022 | 25,022 | - | - |
The Russell Trust dtd 6/23/97 | 25,022 | 25,022 | - | - |
Wayne T. & Maria A. Grau, Joint Ten. | 25,022 | 25,022 | - | - |
William Hubble | 25,022 | 25,022 | - | - |
Kirby Enterprise Capital Management, LLC(10) | 20,000 | 20,000 | - | - |
John Paulson | 18,766 | 18,766 | - | - |
Donald P. Wells | 15,013 | 15,013 | - | - |
Jeff P. Ploen | 15,000 | 15,000 | - | - |
Pamela A Pryor | 15,000 | 15,000 | - | - |
Bruce Stewart | 12,511 | 12,511 | - | - |
Jerry Donahue | 12,511 | 12,511 | - | - |
Lee & Janet Keyte Comm Pro. | 12,511 | 12,511 | - | - |
Linda Waitsman & Kenton Spuehler Jt. Ten. | 12,511 | 12,511 | - | - |
Shuster Family Trust dtd 4/4/80 | 12,511 | 12,511 | - | - |
Aaron A. & Patricia Grunfeld Jt. Ten. | 12,500 | 12,500 | - | - |
Cecelia Yorke | 12,500 | 12,500 | - | - |
David Erickson | 12,500 | 12,500 | - | - |
Georgette Pagano | 12,500 | 12,500 | - | - |
Linda G. McGrain | 12,500 | 12,500 | - | - |
Mary Schneider | 12,500 | 12,500 | - | - |
Michael A. Schneider | 12,500 | 12,500 | - | - |
Stephen C. Ball | 12,500 | 12,500 | - | - |
Justin & Jannina Yorke Comm. Prop. | 12,494 | 12,494 | - | - |
SS-4
| | | | | | |
Arthur Kassoff | 10,000 | 10,000 | - | - |
Dennis J. Gordica | 10,000 | 10,000 | - | - |
James R. Colburn | 10,000 | 10,000 | - | - |
Patrick M. Reidy | 10,000 | 10,000 | - | - |
Richard Orman | 10,000 | 10,000 | - | - |
The Mulhern Family Trust UDT 8/20/92 | 10,000 | 10,000 | - | - |
The Riverbend Fund, LLC | 10,000 | 10,000 | - | - |
Thomas E. Manoogian | 10,000 | 10,000 | - | - |
Darlyne Garofalo | 6,000 | 6,000 | - | - |
Andrew Elliot | 5,000 | 5,000 | - | - |
Antonio & Boliva Castaneda Jt. Ten. | 5,000 | 5,000 | - | - |
Barbara J. Chambers | 5,000 | 5,000 | - | - |
Beverly Yorke | 5,000 | 5,000 | - | - |
Brian R. Cullen | 5,000 | 5,000 | - | - |
Chris Antonsen | 5,000 | 5,000 | - | - |
Edward A. Cerkovnik. Sr. | 5,000 | 5,000 | - | - |
Horst H. Engel | 5,000 | 5,000 | - | - |
International Card Services, LLC | 5,000 | 5,000 | - | - |
Taylor Keyte | 5,000 | 5,000 | - | - |
Teddy Keyte | 5,000 | 5,000 | - | - |
Weston P. Munselle | 5,000 | 5,000 | - | - |
William Hoover | 5,000 | 5,000 | - | - |
Fred M. & Virginia Rusk Comm. Rop. | 3,000 | 3,000 | - | - |
Ximena Blanca Proano | 2,500 | 2,500 | - | - |
Monica F. Burman | 2,000 | 2,000 | - | - |
Doreen Fox Oswaks | 500 | 500 | - | - |
Francis Guiltinan | 300 | 300 | - | - |
Steven Guiltinan | 300 | 300 | - | - |
Christopher & Laura Bragg Jt. Ten. | 200 | 200 | - | - |
Kyle & Katie Miller | 200 | 200 | - | - |
Michael & Jennifer Skeehan Jt. Ten. | 200 | 200 | - | - |
Joeseph Guiltinan | 150 | 150 | - | - |
Nicole Guiltinan | 150 | 150 | - | - |
Total Series B Preferred Stock | 1,500,000 | 1,500,000 | - | - |
| | | | | |
Common stock issuable upon conversion of Series C Preferred Stock |
Name of selling stockholder | Shares owned prior to offering | Shares being offered | Shares owned after offering (1) | Percentage owned after offering (1) |
The Richland Fund LLC | 125,500 | 125,500 | | |
W Douglas Moreland | 75,000 | 75,000 | | |
Buddy Walker | 75,000 | 75,000 | | |
Alex Conner Blass Trust #3 | 31,000 | 31,000 | - | - |
Gus Blass II | 31,000 | 31,000 | - | - |
Wayne T Grau | 31,000 | 31,000 | - | - |
Reg Greenslade(9) | 31,000 | 31,000 | - | - |
The Russell Trust Dtd 6/23/97 | 25,000 | 25,000 | | |
Macquarie Private Wealth ITF Trevor | 25,000 | 25,000 | | |
Volcano Fund LLC | 25,000 | 25,000 | | |
Linda G McGrain | 20,000 | 20,000 | | |
Joseph W Skeehan | 20,000 | 20,000 | | |
Stephen C Ball | 15,000 | 15,000 | - | - |
Goldstein Family Associates | 15,000 | 15,000 | - | - |
High Speed Aggregate Inc | 15,000 | 15,000 | | |
SS-5
| | | | | |
Jay R Kuhne | 15,000 | 15,000 | | |
John Paulson Jr | 15,000 | 15,000 | | |
Donald P Wells | 15,000 | 15,000 | - | - |
Echo Capital Growth Corporation | 12,500 | 12,500 | - | - |
James T Galvin | 12,500 | 12,500 | - | - |
Growth Ventures Inc Roth 401 K | 12,500 | 12,500 | - | - |
William F Hubble | 12,500 | 12,500 | | |
Lee Keyte | 12,500 | 12,500 | | |
Jerry Donahue | 10,000 | 10,000 | - | - |
Fisk Investments LLC | 10,000 | 10,000 | - | - |
Aaron A Grunfeld | 10,000 | 10,000 | - | - |
Shuster Family Trust Dtd 4/4/80 | 10,000 | 10,000 | | |
Jim Williams | 7,500 | 7,500 | - | - |
Susan Cooper | 5,000 | 5,000 | - | - |
John Kennedy | 5,000 | 5,000 | | |
Weston P Munselle | 5,000 | 5,000 | | |
Michael A Schneider | 5,000 | 5,000 | | |
Frank Guiltinan | 4,000 | 4,000 | - | - |
Georgette Pagano | 3,500 | 3,500 | | |
Barbara J Chambers | 2,500 | 2,500 | - | - |
James R Colburn | 2,500 | 2,500 | - | - |
Brian R Cullen | 2,500 | 2,500 | - | - |
Beverly Yorke | 2,500 | 2,500 | - | - |
Cecelia Yorke | 2,500 | 2,500 | - | - |
Horst H Engel | 2,000 | 2,000 | - | - |
Amy Antonsen | 1,000 | 1,000 | - | - |
Joanna Antonsen | 1,000 | 1,000 | - | - |
Sarah B Trainotti | 1,000 | 1,000 | | |
Monica F Burman | 500 | 500 | - | - |
Total Series C Preferred Stock | 760,000 | 760,000 | - | - |
(1)
Amount gives effect to the automatic conversion of all 2,860,000 shares of preferred stock to 6,460,000 shares of common stock but does not include:
·
the issuance of 1,022,000 and 1,440,000 shares of common stock upon exercise of stock options and performance stock options, respectively;
·
the issuance of 225,000 units upon exercise of our Underwriter’s overallotment option;
·
the issuance of 862,500 shares of common stock underlying 862,500 outstanding warrants issued by the Company, including the issuance of 112,500 warrants upon exercise of our Underwriter’s overallotment option; and
·
the issuance of 150,000 shares of common stock underlying warrants issued to our Underwriter in connection with this offering.
(2)
Mr. Giles owns more than 16.90% of the outstanding shares of our common stock. Mr. Giles has agreed to sell the Underwriter 300,000 shares to back 200,000 units in the event the Underwriter exercises its overallotment option. Assuming exercise of the overallotment option, Mr. Giles will own 11.30% of the outstanding shares of our common stock. Mr. Giles was a director of the Company from April 2011 to June 2012 and has been a consultant of the Company from April 2011 to the present.
(3)
Mr. Larson is a director of our company.
(4)
Mr. Blass III is a director of our company.
(5)
JMW Fund LLC owns more than 5% of the outstanding shares of Company common stock.Justin Yorke is the Manager of the Fund and was a director from April 2011 until June 2012.
(6)
San Gabriel Fund LLC owns more than 5% of the outstanding shares of Company common stock.Justin Yorke is the Manager of the Fund and was a director from April 2011 until June 2012.
(7)
Kirby Enterprise Fund LLC owns more than 5% of the outstanding shares of Company common stock.Charles Kirby is the Manager of the Fund and was a director from April 2011 until October 2011.
(8)
Charles F Kirby Roth 401k owns more than 5% of the outstanding shares of Company common stock. Charles Kirby was a director from April 2011 until October 2011.
SS-6
(9)
Mr. Greenslade is a director of our company.
(10)
Kirby Enterprise Capital Management Fund LLC is an affiliate of a stockholder who owns more than 5% of the outstanding shares of Company common stock. Charles Kirby is the Manager of the Fund and was a director from April 2011 until October 2011.
Sale of Securities and Plan of Distribution
The sale of the securities described in this prospectus may be made from time-to-time in transactions, which may include block transactions by or for the account of the holders, in the over-the-counter market or in negotiated transactions through a combination of these methods of sale or otherwise. Sales may be made at fixed prices that may be changed, at market prices prevailing at the time of sale or at negotiated prices.
A post-effective amendment to the registration statement that includes this prospectus must be filed and declared effective by the Securities and Exchange Commission before a holder may:
·
sell any securities described in this prospectus according to the terms of this prospectus either at a fixed price or a negotiated price, either of which is not at the prevailing market price;
·
sell securities described in this prospectus in a block transaction to a purchaser who resells;
·
pay compensation to a broker-dealer that is other than the usual and customary discounts, concessions or commissions; or
·
make any arrangements, either individually or in the aggregate, that would constitute a distribution of the securities described in this prospectus.
Information contained in this prospectus, except for the cover page and the information under the heading ‘‘Selling Stockholders’’ is a part of a separate prospectus relating to a concurrent underwritten initial public offering by us. This prospectus contains information, including information relating to the concurrent underwritten offering, which may not be pertinent to the sale of the securities offered in this prospectus by the named holders.
No underwriting arrangements exist as of the date of this prospectus to sell any common stock on behalf of the selling stockholders. Upon being advised of any underwriting arrangements that may be entered into by a selling stockholder after the date of this prospectus, we will prepare a supplement to this prospectus to disclose those arrangements.
The selling stockholder may, from time to time, sell all or a portion of their shares of common stock at fixed prices that may be changed, at market prices prevailing at the time of sale, at prices related to such market prices or at negotiated prices. The selling stockholder may offer our common stock at various times in one or more of the following transactions:
·
on any national securities exchange, or other market on which our common stock may be listed at the time of sale;
·
in the over-the-counter market;
·
through block trades in which the broker or dealer so engaged will attempt to sell the shares as agent, but may position and resell a portion of the block as principal to facilitate the transaction;
·
through purchases by a broker or dealer as principal and resale by such broker or dealer for its account pursuant to this prospectus;
·
in ordinary brokerage transactions and transactions in which the broker solicits purchasers;
·
through options, swaps or derivatives;
·
in privately negotiated transactions;
·
in transactions to cover short sales; and
·
through a combination of any such methods of sale.
SS-7
In addition, the selling stockholder may also sell common stock pursuant to Rule 144 under the Securities Act of 1933 under the requirements of such rule, if available, rather than pursuant to this prospectus.
The selling stockholder may sell our common stock directly to purchasers or may use brokers, dealers, Underwriter or agents to sell our common stock upon terms and conditions that will be described in the applicable prospectus supplement. In effecting sales, brokers and dealers engaged by the selling stockholder may arrange for other brokers or dealers to participate. Brokers or dealers may receive commissions, discounts or concessions from a selling stockholder or, if any such broker-dealer acts as agent for the purchaser of such common stock , from such purchaser in amounts to be negotiated. Such compensation may, but is not expected to, exceed that which is customary for the types of transactions involved. Broker-dealers may agree to sell a specified number of such common stock at a stipulated price per share, and, to the extent such broker-dealer is unable to do so acting as agent for us or a selling stockholder, to purchase as principal any unsold common stock at the price required to fulfill the broker-dealer commitment. Broker-dealers who acquire common stock as principal may thereafter resell such common stock from time to time in transactions, which may involve block transactions and sales to and through other broker-dealers, including transactions of the nature described above, in the over-the-counter market or otherwise at prices and on terms prevailing at the time of sale, at prices related to the then-current market price or in negotiated transactions. In connection with such resales, broker-dealers may pay to or receive from the purchasers of such common stock commissions as described above.
The selling stockholder and any broker-dealers or agents that participate with them in sales of the common stock are deemed to be "Underwriter" within the meaning of the Securities Act of 1933 in connection with such sales. Accordingly, any commissions received by such broker dealers or agents and any profit on the resale of the common stock purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act of 1933.
From time to time the selling stockholder, other than officers, directors, and affiliates of the Company, may be engaged in short sales, short sales against the box, puts and calls and other hedging transactions in our securities, and may sell and deliver the common stock in connection with such transactions or in settlement of securities loans. These transactions may be entered into with broker-dealers or other financial institutions. In addition, from time to time, a selling stockholder may pledge its common stock pursuant to the margin provisions of its customer agreements with its broker-dealer. Upon delivery of the common stock or a default by a selling stockholder, the broker-dealer or financial institution may offer and sell the pledged common stock from time to time. Our officers, directors and a selling stockholder who beneficially own 2,479,695 shares of common stock, including 630,000 shares of common stock issuable pursuant to vested stock options, and 287,195 shares issuable upon conversion of Series A, B and C Preferred Stock, have agreed with our Underwriter not to sell their shares of common stock for 13 months from the effective date of the registration statement of which this prospectus is a part without the written consent of our Underwriter.
SS-8
Heatwurx, Inc.
Up to 7,910,000● Pre-Funded Warrants to Purchase up to ● Shares of Common Stock
Up to ● Common Warrants to Purchase up to ● Shares of Common Stock
Up to ● Placement Agent Warrants to Purchase up to ● Shares of Common Stock
PROSPECTUSUp to ● Shares of Common Stock underlying such Pre-Funded Warrants, Common Warrants and Placement Agent Warrants
PRELIMINARY PROSPECTUS
●, 2012202●
SS-9
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other expensesExpenses of issuanceIssuance and distributionDistribution.
The following is a list of estimatedtable sets forth all costs and expenses, other than underwriting discounts and commissions, paid or payable by the Registrant in connection with the issuance and distributionsale of the securitiescommon stock being registered, with the exception of underwriting discounts and commissions:
| | |
SEC registration fee | $ | 2,902 |
FINRA filing fee | | 1,000 |
NYSE MKT listing fee | | 60,000 |
Printing costs | | 5,000 |
Legal fees and expenses | | 50,000 |
Accounting fees and expenses | | 50,000 |
Transfer agent fees | | 5,000 |
Blue sky fees and expenses | | 5,000 |
Miscellaneous | | 4,598 |
Total | $ | 183,500 |
registered. All of the above expensesamounts shown are estimates except for the SEC registration fee are estimates. All ofand the above expenses will be borne by the registrant.FINRA filing fee:
| | Amount | |
| SEC registration fee | | $ | ● | |
| FINRA filing fee | | | ● | |
| Legal fees and expenses | | | ● | |
| Accounting fees and expenses | | | ● | |
| Transfer agent and registrar fees and expenses | | | ● | |
| Miscellaneous expenses | | | ● | |
| | | | |
| Total | | $ | ● | |
Item 14. Indemnification of Directors and Officers.
Processa Pharmaceuticals, Inc. is incorporated under the laws of the State of Delaware.
Section 102(b)(7) of the General Corporation Law of the State of Delaware, or the “DGCL,” permits a Delaware corporation to include a provision in its certificate of incorporation eliminating or limiting the personal liability of directors to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. This provision, however, may not eliminate or limit a director’s liability (1) for breach of the director’s duty of loyalty to the corporation or its stockholders, (2) for acts or omissions not in good faith or involving intentional misconduct or a knowing violation of law, (3) under Section 174 of the DGCL, or (4) for any transaction from which the director derived an improper personal benefit. The amended and officersrestated certificate of incorporation of Processa contains such a provision.
The Delaware Revised Statutes provide
Section 145(a) of the DGCL provides that a corporation may indemnify its officers and directors against expenses actually and reasonably incurred in the event an officerany person who was or director is made a party or is threatened to be made a party to anany threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action brought by or on behalfin the right of the corporation), by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as discussed below) by reason of his or her official position with the corporation provided the director or officer (1) is not liable for the breach of any fiduciary duties as a director, officer, employee or officer involving intentional misconduct, fraudagent of another corporation, partnership, joint venture, trust or a knowing violation ofother enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the lawperson in connection with such action, suit or (2)proceeding if the person acted in good faith and in a manner he or shethe person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal actions,action or proceeding, had no reasonable cause to believe his or herthe person’s conduct was unlawful. The Delaware Revised Statutes further provide
Section 145(b) of the DGCL provides that a corporation generally may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not indemnify an officeropposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or director if it is determined by a court thatmatter as to which such officer or director isperson shall have been adjudged to be liable to the corporation or responsible for any amounts paidunless and only to the corporation as a settlement, unless a court also determinesextent that the officerDelaware Court of Chancery or director is entitled to indemnificationthe court in lightwhich such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all of the relevant factscircumstances of the case, such person is fairly and circumstances. Thereasonably entitled to indemnity for such expenses which the Delaware Revised Statutes require a corporation to indemnify an officerCourt of Chancery or directorsuch other court shall deem proper.
Section 145(c) of the DGCL provides that to the extent hethat a present or she isformer director or officer of a corporation has been successful on the merits or otherwise successfully defendsin defense of any action, suit or proceeding referred to in subsections (a) and (b) of Section 145 of the action.DGCL, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection therewith.
Our
Section 145(e) of the DGCL permits a Delaware corporation to advance litigation expenses, including attorneys’ fees, incurred by present and former directors and officers prior to the final disposition of the relevant proceedings. The advancement of expenses to a present director or officer is conditioned upon receipt of an undertaking by or on behalf of such director or officer to repay the advancement if it is ultimately determined that such director or officer is not entitled to be indemnified by the corporation. Advancement to former officers and directors may be conditioned upon such terms and conditions, if any, as the corporation may deem appropriate.
Section 145(g) of the DGCL specifically allows a Delaware corporation to purchase liability insurance on behalf of its directors and officers and to insure against potential liability of such directors and officers regardless of whether the corporation would have the power to indemnify such directors and officers under Section 145 of the DGCL.
The amended and restated certificate of incorporation and the amended and restated bylaws provide that we willof Processa authorize the corporation to indemnify ourits directors and officers to the maximumfullest extent permitted by Delaware law, including in circumstances in which indemnification is otherwise discretionary under Delaware law. These indemnification provisions may be sufficiently broad
The foregoing summaries are necessarily subject to permit indemnification of our officers and directors for liabilities, including reimbursement of expenses incurred, arising under the Securities Act of 1933, as amended, which we refer to as the Securities Act. We have been advised that, in the opinioncomplete text of the SecuritiesDGCL and Exchange Commission, indemnificationProcessa’s amended and restated certificate of directors or officers for liabilities arising under the Securities Act is against public policyincorporation and therefore, such indemnification provisions may be unenforceable. The Underwriting Agreement, attached as Exhibit 1.1 hereto, provides for indemnification of the registrant’s Underwriteramended and its officers and directors for certain liabilities, including matters arising under the Securities Act.restated bylaws.
Item 15. Recent Sales of Unregistered Securities.
In the three years preceding the filing of this registration statement, the Company has issued the following securities that were not registered under the Securities Act:
| ● | On February 24, 2021, the Company closed a private placement for the sale of 1,321,132 shares of common stock at a purchase price of $7.75 per share to accredited and institutional investors for gross proceeds of $10.2 million. |
| ● | On March 23, 2022, the Company issued 123,609 shares of common stock (valued at $450,000) to Lincoln Park Capital Fund, LLC as a commitment fee in connection with entering into a Purchase Agreement. |
| ● | On November 18, 2023, the Company issued 300,000 warrants to purchase shares of common stock for $0.37 per share to an accredited investor pursuant to the terms of an Investor Relations Agreement. |
All sales of unregistered securities
No underwriters were involved in the following issuances of securities.
The offers, sales and issuances of the securities described belowabove were deemed to be exempt from the registration underrequirements of the Securities Act in reliance on Section 4(a)(2) and Rules 505 and 506 of Regulation D in that the issuance of securities to the accredited investors and fewer than 35 non-accredited investors did not involve a public offering. The recipients of securities in each of these transactions acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the securities issued in these transactions. Fewer than 35 non-accredited investors invested in the securities offered by us. Each of the non-accredited investors were provided with information required by Regulation D.
The offers, sales and issuances of the securities described under Plan-Related Issuancesbelow were deemed to be exempt from registrationSecurities Act, Rule 701 promulgated under the Securities Act in reliance on Rule 701 in thator Regulation D promulgated under the transactions were under compensatory benefit plans and contractsSecurities Act, relating to compensation as provided under Rule 701, as applicable, and/or Section 4(a)(2)transactions by an issuer not involving a public offering. All of the foregoing securities are deemed restricted securities for purposes of the Securities Act of 1933. The recipients of such securities were our employees, directors or bona-fide consultants and received the securities under the 2011 Plan. Appropriate legends were affixed to the securities issued in these transactions. Each of the recipients of securities in these transactions had adequate access, through employment, business or other relationships, to information about the Company.Act.
Common stock
Upon incorporation on March 29, 2011, 2,800,000 shares of common stock were issued at $0.001 par value.These shares were issued to the founders in exchange for services rendered in organizing the company. On November 10, 2012, we issued 150,000 shares of common stock upon exercise of stock options by three former directors. These exercises were exempt under Rule 701. We have not sold any other shares of Common Stock.
Series A Preferred Stock. We sold the Series A Preferred Stock on April 15, 2011 to accredited investors for $600,000 in a private placement. We relied on the exemption provided by Section 4(a)(2) of the Securities Act of 1933. As of November 10, 2012, there were 600,000 shares of Series A Preferred Stock outstanding.
The Series A Preferred Stock has the following terms:
·
annual dividend of $0.066664 cumulative dividend per share;
·
dividends accrue but are not payable unless declared by the Board of Directors or unless dividends are to be paid on common stock;
·
liquidation preference of $0.8333 per share with priority over common stock;
·
convertible into common stock at $0.119047 per share for a total of 4,200,000 shares;
·
voting rights equal to common stock on an as-converted basis; and
·
automatically converts to 4,200,000 shares of common stock upon the closing of this offering.
Series B Preferred Stock. We sold the Series B Preferred Stock in October 28, 2011 to accredited and under 35 non-accredited investors for $3,000,000 in a private placement. We relied on the exemptions provided by Section 4(a)(2) of the Securities Act of 1933 and Rules 505 and 506of Regulation D promulgated thereunder. As of September 30, 2012, there were 1,500,000 shares of Series B Preferred Stock outstanding.
The Series B Preferred Stock has the following terms:
·
annual dividend of $0.16 cumulative dividend per share;
·
dividends accrue but are not payable unless declared by the Board of Directors or unless dividends are to be paid on common stock;
·
liquidation preference of $2.00 per share with priority over common stock;
·
convertible into common stock at $2.00 per share for a total of 1,500,000 shares;
·
voting rights equal to common stock on an as-converted basis; and
·
automatically converts to 1,500,000 shares of common stock upon the closing of this offering.
Series C Preferred Stock. We sold the Series C Preferred Stock in August 6, 2012 to accredited investors and under 35 non-accredited investors for $1,520,000 in a private placement. We relied on the exemptions provided by Section 4(a)(2) of the Securities Act of 1933 and Rules 505 and 506 of Regulation D promulgated thereunder. As of November 10, 2012, there were 760,000 shares of Series C Preferred Stock outstanding.
The Series C Preferred Stock has the following terms:
·
annual dividend of $0.16 cumulative dividend per share accrues and is payable quarterly;
·
liquidation preference of $2.00 per share with priority over common stock;
·
convertible into common stock at $2.00 per share for a total of 760,000 shares;
·
voting rights equal to common stock on an as-converted basis; and
·
automatically converts to 4,200,000 shares of common stock upon the closing of this offering.
Plan-Related Issuances
From March 29, 2011 through November 10, 2012, we granted options to purchase 1,210,500 shares of our common stock, exercisable at $2.00 per share, to our directors, officers, employees, consultants and other service providers under our Equity Compensation Plan, of which 38,500 have been subsequently forfeited.
All option issuance were granted in reliance upon Rule 701, as applicable, and/or Section 4(a)(2) of the Securities Act of 1933.
Performance Options
On March 29, 2011, we granted performance options to purchase 1,400,000 shares of our common stock exercisable at $0.057 per share under certain circumstances. These options were not issued under the Equity Compensation Plan. On June 21, 2012, we granted performance options to purchase 40,000 shares of our common stock exercisable at $2.00 per share under certain circumstances. All these options were granted in reliance upon Section 4(a)(2) of the Securities Act of 1933.
Item 16. Exhibits and Financial Statement Schedules.
(a) ExhibitsExhibits.
NumberExhibit
