The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statementregistration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statementthis registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
Explanatory Note
This pre-effective amendment to the Registration Statement amends the prior Amendment No. 3 to remove the primary prospectus for the proposed underwritten public offering and retains the prospectus for the secondary offering of shares by the selling stockholders. Accordingly, we are only registering for resale up to 1,750,000 shares of common stock (including 300,000 shares held by a selling stockholder which had been reserved for the over-allotment in the primary offering) and up to 6,460,000 shares of common stock issuable upon the conversion of our Series A, B, and C Preferred Stock.
The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell, these securities andnor does it is not soliciting offersseek an offer to buy these securities in any statejurisdiction where the offer or sale is not permitted.
Subject to completion, dated May 14, 2013PRELIMINARY PROSPECTUS, SUBJECT TO COMPLETION, DATED JANUARY 19, 2024
PROSPECTUS
Heatwurx, Inc.
Up to 8,210,0001,750,000 Shares of Common Stock
Up to 1,750,000 Pre-Funded Warrants to Purchase up to 1,750,000 Shares of Common Stock
Up to 1,750,000 Common Warrants to Purchase up to 1,750,000 Shares of Common Stock
Up to 70,000 Placement Agent Warrants to Purchase up to 70,000 Shares of Common Stock
Up to 3,570,000 Shares of Common Stock underlying such Pre-Funded Warrants, Common Warrants and Placement Agent Warrants
We are registering:
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the resale by our common stockholders ofoffering up to 1,750,000 shares of our common stock and accompanying common warrants to purchase up to 1,750,000 shares of our common stock (the “Common Warrants”), at an assumed combined public offering price of $4.00 per share of common stock and accompanying Common Warrant (equal to the last sale price of our common stock as reported by The Nasdaq Capital Market on January 18, 2024). The Common Warrants have an exercise price equal to 100% of the combined public offering price per share of the common stock and accompanying Common Warrant and will be exercisable beginning on the effective date of stockholder approval of the issuance of the shares upon exercise of the warrants (“Warrant Stockholder Approval”), provided however, if the Pricing Conditions (as defined below) are met, the Common Warrant will be exercisable upon issuance (the “Initial Exercise Date”). The Common Warrants will expire on the five-year anniversary date of the Initial Exercise Date. As used herein “Pricing Conditions” means that the combined offering price per share and accompanying Common Warrant is such that the Warrant Stockholder Approval is not required under Nasdaq rules because either (i) the offering is an at-the-market offering under Nasdaq rules and such price equals or exceeds the sum of (a) the applicable “Minimum Price” per share under Nasdaq rule 5635(d) plus (b) $0.125 per whole share of common stock underlying the Common Warrant or (ii) the offering is a discounted offering where the pricing and discount (including attributing a value of $0.125 per whole share underlying the warrants) meet the pricing requirements under the Nasdaq rules.
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;stock immediately following the consummation of this offering, the opportunity to purchase, if the purchaser so chooses, pre-funded warrants (the “Pre-Funded Warrants”), in lieu of shares of common stock that would otherwise result in the purchaser’s beneficial ownership exceeding 4.99% 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 investor, 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 for one share of common stock at an exercise price of $0.0001 per share of common stock. The public offering price per Pre-Funded Warrant and
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6,460,000 accompanying Common Warrant, is equal to the public offering price per share of common stock and accompanying Common Warrant less $0.0001. Each Pre-Funded Warrant will be exercisable upon issuance and will expire when exercised in full. This prospectus also relates to the offering of the shares of common stock issuable upon conversionexercise of Series A, Bthe pre-funded warrants.
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 is being sold together in this offering with each share of common stock and, C Preferred Stock.
No public market currently exists forin 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 Pre-Funded Warrants sold. The shares of common stock or Pre-Funded Warrants, as applicable, and the 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 of common stock that are issuable from time to time upon exercise of the Pre-Funded Warrants, Common Warrants and Placement Agent Warrants (as defined below).
This offering will terminate on February 2, 2024, unless we can give no assurancedecide to terminate the offering (which we may do at any time in our discretion) prior to that adate. We will have one closing for all the securities purchased in this offering. The combined public marketoffering price per share (or Pre-Funded Warrant) and accompanying Common Warrants will developbe fixed for the duration of this offering.
We have engaged H.C. Wainwright & Co., LLC. (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 placement agent fees to the placement agent as set forth in the future.
Wetable 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 securities 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 1,750,000section entitled “Risk Factors” for more information. We will bear all costs associated with the offering. See “Plan of Distribution” on page 45 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 January 18, 2024, as reported by The Nasdaq Capital Market, was $4.00 per share. We filed an amendment to our Fourth Amended and Restated Certificate of Incorporation to effect a one-for-twenty reverse stock split of our issued and outstanding shares of common stock offered by our selling stockholders or from(the “Reverse Stock Split”), effective as of 12:01 am Eastern Time on January 22, 2024. Unless otherwise indicated, all share and per share prices in this prospectus have been adjusted to retroactively reflect the saleReverse Stock Split. However, common stock share and per share amounts in certain of the 6,460,000 sharesdocuments incorporated by reference herein have not been adjusted to give effect to the Reverse Stock Split.
There is no established public trading market for the Pre-Funded Warrants or the Common Warrants, and we do not expect a market to develop. We do not intend to apply for listing of the Pre-Funded Warrants or the Common Warrants on any securities exchange or nationally recognized trading system. Without an active trading market, the liquidity of the Pre-Funded Warrants and the Common Warrants will be limited.
The public offering price per share of common stock issuable upon conversionand accompanying Common Warrant and any Pre-Funded Warrant and accompanying Common Warrant will be determined by us at the time of Series A, Bpricing, may be at a discount to the current market price, and C Preferred Stock and offered by our selling stockholders.
The selling stockholders will sell their stock at $3.00 per share, which is the offeringrecent market price until our shares are quoted on the OTC Markets quotation service and thereafter at prevailing market prices or privately negotiated prices. Actual pricesused throughout this prospectus may vary based on prevailing market prices or privately negotiated prices.
Heatwurx, Inc. is an emerging growth company as defined in Section 2(a)not be indicative of the Securities Act of 1933.final public offering price.
Investing in theseour securities involves a high degree of risk and immediate and substantial dilution.risk. See ‘‘Risk Factors’’“Risk Factors” beginning on page 4.10 of this prospectus before investing. You should also consider the risk factors described or referred to in any documents incorporated by reference in this prospectus, and in any applicable prospectus supplement, before investing in these securities.
We are a “smaller reporting company” as defined under federal securities law and we have elected to comply with certain reduced public company reporting requirements available to smaller reporting companies. See the section titled “Prospectus Summary — Implications of Being a Smaller Reporting Company.”
| 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, officers and certain others). 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 assumed exercise price of $5.00 per share, which represents 125% of the assumed 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.
One or more of our directors and executive officers have indicated interest in participating in this offering at the public offering price and on the same terms as the other purchasers in this offering. However, because indications of interest are not binding, we cannot guarantee if any officer or director will participate in this offering.
Delivery of the shares of common stock is expected to be made on or about January ●, 2024.
H.C. Wainwright & Co.
The date of this prospectusProspectus is January ●, 20132024
TABLE OF CONTENTS
| i |
Prospectus SummaryABOUT THIS PROSPECTUS
Cautionary Note Regarding Forward-Looking Statements
Directors, Executive Officers, Promoters and Control Persons
Security Ownership of Certain Beneficial Owners and Management
Certain Relationships and Related Transactions
Sale of Securities and Plan of Distribution
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 By Reference,” before deciding to 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 nor the selling stockholdersits 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 any related free writing 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 the date when made. Accordingly, such representations, warranties and covenants should not be relied on as accurately representing the current state of our affairs.
For 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 required, other than in the United States of America. Persons outside the U.S. who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of our common stock and the distribution of this prospectus and any such free writing prospectus outside of the U.S.
Unless otherwise indicated, information contained in this prospectus concerning 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 Company,” “our Company,” “we,” “us,” and “our” refer to Processa Pharmaceuticals, Inc., a Delaware corporation, and its date. consolidated subsidiary.
This summary highlights key aspects of theselected information contained elsewhere in this prospectus. Youprospectus 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, carefully, including the financial statementsinformation 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. Unless otherwise indicated, all share and per share prices in this prospectus have been adjusted to retroactively reflect our one-for-twenty reverse stock split (the “Reverse Stock Split”). However, common stock share and per share amounts in certain of the documents incorporated by reference herein have not been adjusted to give effect to the Reverse Stock Split.
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 notesrelated 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 financial statements included elsewhereactual cancer cells.
Our regulatory science approach was conceived in this prospectus.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.
Heatwurx, Inc.
GeneralOur 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.
Heatwurx, Inc. was incorporated under the laws
The FDA has more recently taken steps to define some of the Stateregulatory science required for the FDA approval of Delawareoncology products. Through the FDA’s Project Optimus Oncology Initiative and the related Draft Guidance on March 29, 2011 as Heatwurxaq, Inc. and subsequently changed its namedetermining the “optimal” dosage regimen for an oncology drug, the FDA has chosen to Heatwurx, Inc. on April 15, 2011. Our founders were Larry Griffin and David Eastman,make the principalsdevelopment of Hunter Capital Group, LLC, an investment banking entity, which acquired our technology, equipment designs, trademarks, and patent applications from Richard Giles,oncology drugs more science-based than in the inventor and a founderpast. Since the principles of the Company, in April 2011.
On April 15, 2011, the Company entered into an Asset Purchase Agreement with Mr. Giles, who is still a current stockholder. Pursuant to the agreement, the Company purchasedFDA’s Project Optimus and 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 paidDraft Guidance have been used by our regulatory science approach in a $1,500,000 cash paymentnumber 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 issuance of a senior subordinated note to the seller in the amount of $1,000,000.trials.
The business essentially consisted of the investmentthree NGC treatments in research and development of the technology, the patents applied forour pipeline are 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. As of October 1, 2012, in-process research and development is now classified as developed technology and amortized over its estimated useful life of 7 years. 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.follows:
In conjunction with the Asset Purchase Agreement, the Company granted Mr. Giles 200,000 performance stock options with an exercise price of $0.40 per share and a term of 7 years. Following the 7 for 1 forward stock split 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.
| ● | 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. 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. Following the meeting with the FDA, we decided the next NGC-Cap trial would be a Phase 2 trial in breast cancer. This decision was supported through discussions with the FDA where we agreed with the FDA that the development of NGC-Cap in breast cancer would be a more efficient development program than metastatic colorectal cancer and improve the likelihood of FDA approval. The FDA has agreed that the data from past and existing studies could be used to directly support the Phase 2 trial in breast cancer. Breast cancer is the most diagnosed cancer, representing approximately 15% of all new cancer patients in 2023. It has a prevalence of more than 3.8 million patients, with nearly 300,000 new diagnoses last year. Over 150,000 women are currently living with advanced or metastatic breast cancer. The NGC-Cap potential market for breast, colorectal and other cancers is greater than 250,000 patients per year. |
The performance stock options will vest in full on the occurrence of any the following, determined in accordance with generally accepted accounting principles in the United States: (1) The Company achieves total revenue in year 2013 of $24,750,000; (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.
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 senior secured debt. Subsequent to the sale of our Series B Preferred Stock, our two founders, Messrs. Griffin and Eastman stepped down as officers and directors of the Company and did not retain an ownership interest.
| ● | 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 2024-2025. |
We have limited salescompleted our Phase 2A trial for PCS12852 in gastroparesis patients with positive results. Additionally, in February 2023, due primarily to the inability to identify and a historyenroll 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 operating losses.either the PCS12852 or PCS499 trial. We reported a net operating loss for the period from incorporation on March 29, 2011are currently evaluating options to March 31, 2013.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 also had an accumulated deficit of approximately $4,277,000 at March 31, 2013. We anticipate that we will continue to incur operating lossesbe 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 near termFDA’s Project Optimus Initiative and Draft Optimal Dosage Regimen Oncology Guidance. To date, we mayhave data that suggests our NGC treatments are likely to have a better safety-efficacy profile than the current widely used marketed counterpart drugs, not be ableonly 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 achieve profitable operations. In orderextend the survival and/or quality of life for more patients diagnosed with cancer while decreasing the number of patients who are required to achieve profitable operations we needdose-adjust or discontinue treatment because of side effects or lack of response.
| 3 |
Our Strategy
Our strategy is to secure sufficient salesdevelop our pipeline of NGC proprietary small molecule oncology drugs using our regulatory science approach to determine the optimal dosage regimen of our preservationoncology drugs. By changing either the metabolism, distribution, and/or elimination of already FDA-approved cancer drugs (e.g., capecitabine, gemcitabine, and repair equipment. Our potential customers are federal, state, and local governmental entities, pavement contractors, equipment distributors and original equipment manufacturers. We cannot be certainirinotecan) or their active metabolites, we believe that our business will be successful three new oncology drugs represent the next generation of chemotherapy with an improved safety profile, improved efficacy profile and/or thatpotentially 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 will generate significant revenues and become
- 1 -
profitable. If we are unable to achieve profitability or locate alternate sources of capital, we may be forced to cease operations.
From November 2013 through April 2014, the Company was in the process of completing a proposed initial public offering with a designated underwriter. Due to market timing and other factors, this offering was abandoned in May 2013. As further described throughout this prospectus, management of the company intends to raise additional capital through a private placement of equity or debt securities.
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. 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.
The issues described above raise substantial doubt about our ability to continue as a going concern. Our independent accounting firm has included an explanatory paragraph in its audit opinion for our financial statements for the years ended December 31, 2012 and 2011 describing this condition. Our management intends to address these issues by raising additional capital through a private placement of equity or debt securities. We have no current agreements or arrangements to provide this additional financing and there can be no assuranceanticipate that we will be able raise additional capital throughto increase the successful completionprobability 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 private placement.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.
We have
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 yet commercialized our products andincluded in the pipeline chart above, as we are thereforeexploring 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 developmental stage enterprise.
We are an asphalt preservation and repair equipment company. Our innovative, and eco-friendly hot-in-place recycling process corrects surface distresseschange in the distribution of 5-FU within the top three inchesbody. 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 pavement by heatingcapecitabine.
On August 2, 2021, we enrolled the surface material to a temperature between 300 °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 350° 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 life2A of the roadway. We believe our equipment, technologyongoing clinical trial found no dose-limiting toxicities (DLTs), no drug-related adverse events greater than Grade 1, and processes provide savings over other processesno 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 be more laborkill replicating cancer and equipment intensive.
Our hot-in-place recycling processnormal cells. By administering NGC-Cap to cancer patients, the balance between anabolites and equipment has been selected bycatabolites changes depending on the Technology Implementation Groupdosage 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 American AssociationPCS6422 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 State Highway Transportation Officials (AASHTO TIG) as an “additionally Selected Technology” forPCS6422 and capecitabine may affect the year 2012. We develop, manufacturesystemic and intendtumor exposure 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 information on or accessible through our website does not constitute a part of, and is not incorporated into, this prospectus.
The Offering
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(1)
Preferred stockholders may elect to convert shares of their preferred stock into shares of common stock 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.
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An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this prospectus, before making an investment decision. If any of the following 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 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,anabolites, as well as the significancesystemic exposure to the catabolites, is required. This can be achieved by following the timeline of such statementsDPD 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 contextamended 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 prospectus.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. Following the FDA meeting on December 11, 2023, we have decided the next NGC-Cap trial would be a Phase 2 trial in breast cancer. This decision was supported through discussions with the FDA where we agreed with the FDA that the development of NGC-Cap in breast cancer would be a more efficient development program than metastatic colorectal cancer and improve the likelihood of FDA approval. The FDA has agreed that the data generated from past and existing studies could be used to directly support the Phase 2 trial in breast cancer. Capecitabine is already approved as both monotherapy and combination therapy in breast cancer, which contributes to the logic and efficiency of our current direction. In addition, the FDA’s agreement that our present data would support a Phase 2 trial in breast cancer makes the expansion seamless. The objective for the Phase 2 trial will be to provide safety-efficacy data to preliminarily demonstrate the benefit of NGC-Cap over capecitabine and other treatment options. Based on this expansion to breast cancer, we plan to expand our Oncology Advisory Board with key breast cancer oncologists. We have already determined the Phase 2 study design, which we expect to share with the FDA soon, and plan to use the funding from this offering to begin enrolling patients in the third quarter of 2024.
Risks Relating
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 third quarter of 2024.
| ● | 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. |
Our Business 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.
If
| ● | 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. |
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Going Concern
This offering is being made on a best-efforts basis and we failmay 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 $6.2 million of 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 early 2025 based on our current business plan. In early 2025, we will need to raise additional capital to fund currentour operations we may be unable toand continue our proposed business operationsplanned development of our NGC drugs thereafter.
Reverse Stock Split
On November 14, 2023, we held a special meeting of stockholders (the “Special Meeting”) where our stockholders approved a proposal granting our Board of Directors the discretion to effect a reverse stock split (the “Reverse Stock Split”) of our issued and outstanding common stock through an amendment (the “Amendment”) to our Fourth Amended and Restated Certificate of Incorporation, as currently contemplated.amended to date (the “Charter”), at a ratio of not less than 1-for-5 and not more than 1-for-30, with such ratio to be determined by the Board of Directors.
As discussed in several
On January 18, 2024, we filed the Amendment to our Charter with the Secretary of State of the risk factors below, we will need additional fundsState of Delaware to continue operations. Aseffect a reverse stock split of March 31, 2013, we had approximately $422,000 cash on hand and were spending approximately $250,000 per month,our Common Stock at a ratio of which only a minor amount was satisfied by gross proceeds from operations. Hence, the amount of cash on hand is not adequate to meet our operating expenses over the next twelve months. In addition, we have an obligation to make principal payments of $1,000,000 on our current senior subordinated note payable beginning1-for-20. The Reverse Stock Split becomes effective in October 2013 through April 2014. We currently have no source for the funds necessary to satisfy either our operation cash flow requirements for the next twelve months or to repay the secured debt. We are principally dependent upon obtaining funds from investors to meet our cash flow requirements. If we are unsuccessful in doing so, we would be required to substantially revise our business plan or our business could fail. We anticipate the need to secure funding of up to approximately $4,000,000 over the next twelve months to meet our cash flow requirements and repay our secured debt. We currently have no firm commitments or arrangements to secure the additional funds. We anticipate that these funds would be raised by management through the sale of equity or debt securities. We have not determinedaccordance with the terms of these financingsthe Amendment at 12:01 AM Eastern Time on January 22, 2024, and any terms ultimately securedbegins trading on a split-adjusted basis when the market opened on Monday, January 22, 2024. There is no corresponding reduction in the number of authorized shares of common stock and no change in the par value per share.
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 investors could be less favorableNasdaq 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 than ifthat it granted an extension until March 18, 2024 to regain compliance with the needed financing were to fund expansion or less critical financial needs.minimum closing bid requirement. If we fail to raise all of the funds as needed, or if our ability to raise additional funds is substantially delayed for any reason,evidence compliance by March 18, 2024, we may be requiredsubject to reduce operations, curtail any future growth opportunities, or cease operations all together.delisting. We are effectuating the Reverse Stock Split in order to regain compliance with the minimum closing bid requirement.
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, and the likelihood of our success must be evaluated in light of the problems, expenses, 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 currently 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,satisfy Nasdaq’s continued listing requirements or protection of our intellectual property and 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 our logistics and operations and the distribution of our products and services.
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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 could decline, and you may lose all or part of your investment.
We have incurred operating losses since formation and our independent accountants have issued a going concern opinion with respect to our financial statements as of and for the years ended December 31, 2012 and 2011. 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 March 31, 2013. We also had an accumulated deficit of approximately $4,277,000 at March 31, 2013. 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.
Successful completion of our development program and our transition to profitable operations is dependent upon obtaining additional financing adequate to fulfill our development and commercialization activities, and achieve a level of revenues adequate to support our cost structure. We have no agreements or arrangements byrisk delisting, which we could assure the additional funding. Many of our objectives to establish profitable business operations rely upon the occurrence of events outside its control; there is no assurance that we will be successful in accomplishing these objectives.
The issues described above raise substantial doubt about our ability to continue as a going concern. Our independent accounting firm has included an explanatory paragraph in its audit opinion describing this condition. Our management intends to address these issues by raising additional capital through interim financing commencing with a private placement of our equity securities. There can be no assurance that we will be able raise additional capital through the successful completion of a private placement.
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, Boman Kemp, a Utah-based company. We do not currently have a formal 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 having a 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 mutually agreeable terms, we may be unable to meet commitments to existing customers or attract new ones.
We are developing our warranty policies. If we begin selling a material amount of equipment, we will need to formalize our warranty polices with our suppliers and our customers. If we are unable to negotiate favorable warranty terms with our suppliers or, if our suppliers experience financial difficulties, we may have a material warranty obligation.
We have sold a limited number of units to date. We intend to offer an industry standard one-year limited warranty and provide nationwide service though our OEM partners and resellers. Although we anticipate that the majority of the warranty items will be passed through from the OEM partners and resellers through us and ultimately to the manufacturer, there are some parts on our equipment which will not be the responsibility of the manufacturer such as the heating elements on our HWX-30 electrically powered infrared heaters. We will need to provide industry standard warranties on these parts as well. In addition, if our manufacturing partner experiences financial difficulty
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we may have additional warranty exposure to the end customers. If we have ultimate liability under any warranty claims, our financial position would be impacted and we may not be able to continue operations.
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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determining 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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establishing, managing and maintaining key reseller relationships;
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producing products that meet the quality, performance and price expectations of our customers;
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developing effective sales, advertising and marketing programs; and
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managing 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 material adverse effect on our business, financial condition, and/or results of operations, any future trading pricebusiness. If our common stock is delisted from Nasdaq, it could materially reduce the liquidity of our shares of common stock could decline, and you may lose all or part of your investment.
Our ability to growresult in a corresponding material reduction in 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 may be 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.
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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, any future trading price of our common stock may decline and our investors may lose all oras 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.
Steel is used in 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 reseller network and directly to OEMs. Some of our potential customers are OEMs that currently 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 membersresult of the executive team, the executionloss of our strategic vision. Mr. Garland also has developed and cultivated significant relationships in our industry that are critical to our success. As our company grows and more people are added to the team over time, Mr. Garland will share his knowledge of our company and the industrymarket efficiencies associated with new hires, and we will not be dependent upon Mr. Garland or any other individual. However, until we grow, there is a disproportionate dependence upon Mr. Garland,Nasdaq and the loss of his services would significantly impair our business operations. Some companies reduce the riskfederal preemption of the 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 any future trading price in our stock may decline.
The success of our business depends uponstate securities laws. In addition, delisting could harm our ability to attract, retainraise capital through alternative financing sources on terms acceptable to us, or at all, and motivate highly skilled employees.may result in the potential loss of confidence by investors, suppliers, customers and employees and fewer business development opportunities. If we experience any adverse outcome in such matters,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 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
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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 usraise capital on acceptable terms, if at all,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 state of Delaware on March 29, 2011. Our principal executive offices are located at 7380 Coca Cola Drive, Suite 106, Hanover, Maryland 21076, and our telephone number is (443) 776-3133. Our website address is 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 we would prevail in any contest regarding the issued or pending patentscan be accessed through, our website as part of others. In addition, we could incur substantial costs in defending ourselves in suits brought against us for alleged infringement of another party's patentsthis prospectus or in defendingdeciding whether to purchase our common stock.
Additional Information
For additional information related to our business and operations, please refer to the validity or enforceabilityreports 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.
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| Issuer | Processa Pharmaceuticals, Inc. | |
| Shares of common stock being offered by us | Up to 1,750,000 shares of common stock at an assumed combined public offering price of $4.00 per share which is the last reported sales price of our common stock on The Nasdaq Capital Market on January 18, 2024 and assuming no sale of any Pre-Funded Warrants. | |
| 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 35 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 Pre-Funded Warrant sold. | |
| Common Warrants offered by us | Each 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 equal to 100% of the combined public offering price per share of common stock and accompanying Common Warrant 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. | |
| Placement Agent Warrants | We have agreed to issue to the placement agent or its designees, warrants, or the Placement Agent Warrants, to purchase up to 4.0% 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 an exercise price equal to 125% of the public offering price per share and accompanying Common 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. See “Plan of Distribution” for additional information. |
| Common Stock Outstanding prior to this Offering (1) | 1,231,676 shares | |
| Common Stock to be Outstanding After this Offering (1) | 2,981,676 shares assuming we sell only shares of common stock and no Pre-Funded Warrants. | |
| 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 $6.2 million, 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 $6.2 million of 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 early 2025 based on our current business plan. In 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. | |
| 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. | |
| 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 1,231,676 shares of common stock outstanding as of January 18, 2024. The number of shares outstanding used throughout this prospectus, unless otherwise indicated, excludes: |
| ● | 6,992 shares of our common stock issuable upon exercise of outstanding options, which have a weighted average exercise price of $363.98 per share; | |
| ● | 222,722 shares of common stock issuable for restricted stock units (RSUs) (of which 137,628 are vested) issuable upon meeting distribution restrictions; | |
| ● | 175,507 shares of common stock issuable upon exercise of outstanding common warrants at a weighted-average exercise price of $21.28 per share (of which 168,007 are vested at a weighted-average exercise price of $21.60); and | |
| ● | 26,159 shares of common stock reserved for issuance and available for future grant under our 2019 Omnibus Incentive Plan. |
Except as otherwise indicated, the information in this prospectus gives effect to the 1-for-20 Reverse Stock Split of our patents, if any, or in bringing patent infringement suits against other parties basedcommon stock, effective 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 placeJanuary 22, 2024 and assumes (i) we may not be able to continue our operations.
Because we are smallerissue no Pre-Funded Warrants 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 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
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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(ii) no exercise of the United States and, accordingly,Common Warrants offered hereby.
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An investment in our business will be susceptiblesecurities involves a high degree of risk. Before deciding whether to risks associated with international operations. If we are unable to successfully managepurchase our securities, including the shares of common stock offered by this prospectus, you should carefully consider the risks involvedand uncertainties described under “Risk Factors” 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 restrictionsAnnual Report 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 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 coverageForm 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 which are incorporated by reference herein. If any of these risks associated with our business operations. Accordingly, we may incur significant expenses for uninsured events andactually occur, 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
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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 intend to continue to do so inharmed. In that event, the future, and if it is determined 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, and may do so again in the future, 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, or if any future offering does not so qualify, 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, or do not in the future, in fact qualify for the exemptions upon which we have 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, any future 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 December 31, 2023, we had cash and expenses ascash equivalents totaling $4.7 million and a public company. Complianceprepaid expense with the Sarbanes-Oxley Actclinical research organization of 2002,our Phase 1B trial of $660,000. We expect our net loss for the Dodd-Frank Actyear ended 2023 to be approximately $11.6 million and we used cash of 2010, as well as rules of the Securities and Exchange Commission, for example, will result in significant initial cost to us as well as ongoing increasesapproximately $8.1 million in our legal, audit and financial compliance costs. The Securities Exchange Act of 1934, as amended, will require, among other things,operating activities. Assuming that we file annual, quarterlyreceive a minimum of $6.2 million of net 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 into early 2025 based on our current reports with respect to our business and financial condition. Our management and other personnelplan. In 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; | |
| ● | the results of the clinical trials for our product candidates; | |
| ● | the timing of, and the costs involved in, FDA approval and any foreign regulatory approval of our product candidates, if at all; | |
| ● | the number and characteristics of any additional future product candidates we develop or acquire; | |
| ● | our ability to establish and maintain strategic collaborations, licensing, co-promotion or other arrangements and the terms and timing of such arrangements; | |
| ● | the degree and rate of market acceptance of any approved products; | |
| ● | costs under our third-party manufacturing and supply arrangements for our current and any future product candidates and any products we commercialize; | |
| ● | costs and timing of completion of any additional outsourced commercial manufacturing or supply arrangements that we may establish; | |
| ● | costs of preparing, filing, prosecuting, maintaining, defending and enforcing any patent claims and other intellectual property rights associated with our product candidates; | |
| ● | 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; | |
| ● | costs of operating as a public company; | |
| ● | the emergence, approval, availability, perceived advantages, relative cost, relative safety and relative efficacy of alternative and competing products or treatments; | |
| ● | costs associated with any acquisition or in-license of products and product candidates, technologies or businesses; and | |
| ● | 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 and expect a net loss for the fourth quarter of 2023 of approximately $2.8 million. 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 404delay, reduce or eliminate some or all of our research and development 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 foreseeable future for the clinical development of our product 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 conduct 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 Sarbanes-Oxley Act relating to internal control over financial reporting.securities offered hereby and may receive significantly less in net proceeds from this offering. We expect to incur significant expense and devote substantial management effort toward ensuring compliancebelieve that the net proceeds from this offering, together with Section 404. We currently do not have an internal audit group, andour cash on hand, will satisfy our capital needs into early 2025 under our current business plan. Following this offering, we will need to hireraise additional accountingcapital to fund our operations and financial staffcontinue to support our planned development and commercialization activities.
Risks Related to This Offering and Ownership of Our Common Stock
Because management has broad discretion as to the use of the net proceeds from this offering, you may not agree with appropriate public company experiencehow we use them, and technical accounting knowledge. Implementing any appropriate changessuch 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 research and development efforts. However, our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not necessarily improve our operating results or enhance the value of our securities, or that you otherwise do not agree with. You will be relying on the judgment of our management concerning these uses and you will not have the opportunity, 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 unfavorable returns and uncertainty about our prospects, each of which could cause the price of our 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 favorable return to our internal controlsstockholders. If we do not invest or apply the net proceeds from this offering in ways that enhance stockholder value, we may require specific compliance trainingfail to achieve expected financial results, which could cause our stock price to decline.
If you purchase our securities sold in this offering, you may experience 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.
If you purchase securities in this offering, you could experience dilution in the net tangible book value of the common stock you purchase. The exercise of outstanding stock options and warrants, including those sold in this offering, may also 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 directors, officerscommon stock, our then existing stockholders may experience dilution and employees, entail substantial coststhe new securities may have rights senior to modifythose of our existing accounting systems,common stock offered 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 takewe do not expect such a significantmarket 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 have 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 common 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 the exercise date.
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The Common Warrants are speculative in nature.
The Common Warrants do not confer any rights of common stock ownership on their holders, such as voting rights or the right to receive dividends, but rather merely represent the right to acquire shares of common stock at a fixed price for a limited period of time to complete. Such changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, 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.
For as long as we remain an emerging growth company as defined in the Jumpstart our Business Startups Act of 2012, or the JOBS Act, we intend to take advantage of certain exemptions from various reporting requirements, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our public filings, periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote
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on executive compensation and stockholder approval of any golden parachute payments not previously approved. We intend to take advantage of these reporting exemptions until we are no longer an emerging growth company.
We will remain an emerging growth company for up to five years, although iftime. Moreover, following this offering, the market value of the Common Warrants, if any, will be uncertain and there can be no assurance that the market value of the Common Warrants will equal or exceed their imputed offering price. The Common Warrants will not be listed or quoted for trading on any market or exchange. There can be no assurance that the market price of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time, we would cease to be an emerging growth company as of the following December 31 or if our annual gross revenueswill ever equal or exceed $1 billion, we would ceasethe exercise price of the Common Warrants, and consequently, the Common Warrants may expire valueless.
The Common Warrants being offered may not have value.
The Common Warrants being offered by us in this offering have an exercise price equal to be an emerging growth company100% of the combined public offering price per share of the common stock and accompanying Common Warrant, subject to certain adjustments, and expire on the last dayfive-year anniversary of the year inInitial Exercise Date, upon which date such Common Warrants will expire and have no further value. In the event that occurs. We cannot predict if investors will findthe market price of our common stock less attractive becausedoes 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 rely onnot raise the exemptionsamount 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 certain reporting standardsus or to 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 an emerging growth company. If some investors find our common stock less attractive,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 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 less activerefund 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, which may not be available or available on terms acceptable to us.
Because there is no minimum required for the offering to close, investors in this offering will not receive a refund in the event that we do not sell a sufficient number of securities 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 sale of securities 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 industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock and warrants will depend in part on the research and reports that securities or industry analysts publish about us or our stock price may be more volatile or decline. In addition, as a “Smaller Reporting Company,” we enjoy the same exemptions as “emerging growth companies,”business. We currently have limited research coverage by securities and those exemptions would continue to be available to us even after the emerging growth company status expires if we still are a smaller reporting company at such time.
industry analysts. If we fail to comply withmaintain adequate coverage by securities or industry analysts, the trading price for our public company obligations,stock would be negatively impacted. If one or more of the analysts who cover us downgrades our investorsstock 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 lose confidence in us, any future marketdepress our stock price.
The price of our common stock could be negatively affected, and investigations by stock exchange/regulatory agencies could commence requiring additional management and financial resources.
New accounting pronouncements may impact our reported results of operations and financial position.
The JOBS Act provides that an emerging growth company can take advantage of an extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to opt out of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable. U.S. generally accepted accounting principles, or GAAP, and related implementation guidelines and interpretations can be highly complex and involve subjective judgments. Changes in these rules or their interpretation, the adoption of new pronouncements or the application of existing pronouncements to changes in our business could significantly alter our reported financial statements and results of operations.
Risks Related to our Common Stock:
Any public trading market for our common stock which may develop in the future will likely be a volatile one and will generally result in higher spreads in stock prices.
There is currently no public trading market for our common stock. If a public trading market for our common stock develops in the future, it would likely be in the over-the-counter market by means of OTC Markets, formerly known as the Pink Sheets. The over-the-counter market for securities has historically experienced extreme price and volume fluctuations during certain periods. These broad market fluctuations and other factors, such as our ability to implement our business plan, as well as economic conditions and quarterly variations in our results of operations, may adversely affect the market price of our common stock. In addition, the spreads on stock traded through the over-the-counter market are generally unregulated and higher than on stock exchanges, which means that the difference between the price at which shares could be purchased by investors on the over-the-counter market compared to the price at which they could be subsequently sold would be greater than on these exchanges. Significant spreads between the bid and asked prices of the stock could continue during any period in which a sufficient volume of trading is unavailable or if the stock is quoted by an insignificant number of market makers. We cannot insure that our trading volume will be sufficient to significantly reduce this spread, or that we will have sufficient market makers to affect this spread. These higher spreads could adversely affect investors who purchase the shares at the higher price at which the shares are sold, but subsequently sell the shares at the lower bid prices quoted by the brokers. Unless the bid price for the stock increases and exceeds the price paid for the shares by the investor, plus brokerage commissions or charges, the investor could lose money on the sale. For higher spreads such as those on over-the-counter stocks, this is likely a much greater percentage of the price of the stock than for exchange listed stocks. There is no assurance that at the time the investor wishes to sell the shares, the bid price will have sufficiently increased to create a profit on the sale.
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The exercise of our 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 any future public market which may negatively impact the trading price of our shares of common stock.
The exercise of some or all of our outstanding options could significantly dilute the ownership interests of our existing stockholders. 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 May 1, 2013 will further dilute our existing stockholders’ voting interest. To the extent options are exercised, additional shares of common stock will be issued, and such issuance will dilute existing stockholders.
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 market could adversely affect any future market price of our shares. Substantial increase in the number of common shares available for future resale may negatively impact the trading price of our shares of common stock.
Provisions in our third amended and restated certificate of incorporation, our amended and restated bylaws or Delaware law might discourage, delay or prevent a change-of-control of our company or changes in our management and, therefore, depress the trading price of our common stock.
Provisions of our third amended 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 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:
·
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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limitations on the ability of stockholders to remove directors without cause or amend our bylaws.
The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.
We may seek to raise 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.
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 stock to decline. We may also raise additional funds through the incurrence of debt or the issuance or sale of other securities or instruments senior to our common shares. The holders of any securities or instruments we may issue may have rights superior to the rights of our common stockholders. If we experience dilution from issuance of additional securities 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 you may lose all or part of your investment.
We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging
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growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We cannot predict if investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock.
A total of 8,210,000 of our total outstanding shares are being registered for resale. The large number of shares eligible for public sale could depress any future market price of our common stock.
The market price of our common stockwarrants could decline as a result of sales of a large number of shares of our common stock in the market should a public trading market for our stock develop in the future, 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. All of the shares of common stock of the selling stock holders in this prospectus will be freely tradable in the United States. The availability of these 8,210,000 shares of Common Stock being registered for resale, including the 6,460,000 shares registered for resale and issuable upon conversion of outstanding shares of preferred stock, can cause the price of the Common Stock to fall and investors may suffer a significant and immediate decline in the price of the Common Stock.
In addition, following the effective date of the registration statement of which this prospectus is a part, 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, 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 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
In addition, in the future, we may issue additional shares of common stock, warrants or other equity or debt securities convertible into common stock in connection with a financing, acquisition, litigation settlement, employee arrangement or otherwise. 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 could cause any future stock tradingthe price to fall and make it more difficult for you to sell shares of our common stock and, accordingly, you 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 May 1, 2013, our executive officers, directors, and a small number of investors, beneficially owned an aggregate of 2,277,500 shares of our outstanding common stock and 6,969,689 shares of our outstanding common stock (assuming the conversion of current preferred stock into common stock), representing, respectively, approximately 90% and 77% of the voting power of our then-outstanding capital stock. As a result, our existing officers, directors, and such investors could significantly influence stockholder actions of which you disapprove 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 our shares of common stock 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 on the market price of our common stock.
Any trading market for our common stock which may develop in the future 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. If we are covered by securities analysts, and our stock is downgraded, the price of our stock 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 price and/or trading volume, and, accordingly, you may lose all or part of your investment.
Because our shares are designated as Penny Stock, broker-dealers will be less likely to trade in our stock in the future due to, among other items, the requirements for broker-dealers to disclose to investors the risks inherent in penny stocks and to make a determination that the investment is suitable for the purchaser.
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Our shares are designated as “penny stock” as defined in Rule 3a51-1 promulgated under the Exchange Act and thus, if a public market for the stock develops in the future, it may be more illiquid than shares not designated as penny stock. The SEC has adopted rules which regulate broker-dealer practices in connection with transactions in “penny stocks.” Penny stocks are defined generally as securities with a price of less than $5.00 per share; that are not traded on a “recognized” national exchange; or in issuers with net tangible assets less than $2,000,000, if the issuer has been in continuous operation for at least three years, or $10,000,000, if in continuous operation for less than three years, or with average revenues of less than $6,000,000 for the last three years. The penny stock rules require a broker-dealer to deliver a standardized risk disclosure document prepared by the SEC, to 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, monthly account statements showing the market value of each penny stock held in the customer’s account, to 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 disclosure requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a stock that is subject to the penny stock rules. Since our securities are subject to the penny stock rules, investors in the shares may find it more difficult to sell their shares in any market which may develop in the future. Many brokers have decided not to trade in penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. The reduction in the number of available market makers and other broker-dealers willing to trade in penny stocks may limit the ability of purchasers in this offering to sell their stock in any secondary market which could develop in the future. These penny stock regulations, and the restrictions imposed on the resale of penny stocks by these regulations, could adversely affect our stock price if a public trading market for our stock is established in the future.
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 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 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 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 are effectuating the Reverse Stock Split in order to regain compliance with the minimum closing bid requirement.
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.
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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.
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We estimate that the net proceeds from this offering will be approximately $6.2 million, based on an assumed public offering price of $4.00 per share of common stock, the last reported sale price of our common stock on the Nasdaq Capital Market on January 18, 2024, and assuming no exercise of the 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 Common Warrants, will be sufficient to fund our operations into early 2025. 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 for NGC-Cap; costs associated with our planned Phase 2 trial for NGC-Cap in advanced or metastatic breast cancer; 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.
An $0.80 increase in the assumed public offering price of $4.00 per share, the last reported sale price of our common stock on the Nasdaq Capital Market on January 18, 2024 and accompanying Common Warrant, would increase the gross proceeds to approximately $8.4 million and the net proceeds to us to approximately $7.5 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 the number of shares we are offering. An increase of 350,000 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 the gross proceeds to approximately $8.4 million and the net proceeds to us to approximately $7.5 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.
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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.relevant, and subject to the restrictions contained in any future financing instruments.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTSCAPITALIZATION
This prospectus contains forward looking
The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2023 as follows:
| ● | on an actual basis, as retroactively adjusted for the Reverse Stock Split; and | |
| ● | on as adjusted basis to give effect to the issuance by us of 1,750,000 shares of our common stock in this offering at an assumed public offering price of $4.00 per share, based on the last reported sale price of our common stock on the Nasdaq Capital Market on January 18, 2024, assuming no sale of any Pre-Funded Warrants in this offering, after deducting the placement agent fees and estimated offering expenses payable by us. |
You should read this information in conjunction with our consolidated financial statements that involve risks and uncertainties, principally innotes thereto incorporated by reference into this prospectus.
| As of September 30, 2023 | ||||||||
| Actual | As adjusted | |||||||
| Cash and cash equivalents | $ | 6,860,672 | $ | 13,060,672 | ||||
| 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, 1,236,676 issued and 1,231,676 outstanding, actual; 2,986,676 shares issued and 2,981,676 outstanding, as adjusted(1) | 133 | 308 | ||||||
| Additional paid-in capital | 80,431,896 | 86,631,721 | ||||||
| Treasury stock at cost – 5,000 shares | (300,000 | ) | (300,000 | ) | ||||
| Accumulated equity | (72,964,150 | ) | (72,964,150 | ) | ||||
| Total stockholders’ equity | 7,167,879 | 13,367,879 | ||||||
| Total capitalization | $ | 7,167,879 | $ | 13,367,879 | ||||
(1) The foregoing tables and calculations (other than the sections entitled “ Descriptionhistorical net tangible book value calculation) are based on 1,231,676 shares of Business,” “Risk Factors,”common stock outstanding as of September 30, 2023, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All statements other than statements of historical fact containedexclude:
| ● | 7,097 shares of our common stock issuable upon exercise of outstanding options, which have a weighted average exercise price of $363.49 per share; | |
| ● | 227,791 shares of common stock issuable for restricted stock units (RSUs) (of which 114,621 are vested) issuable upon meeting distribution restrictions; | |
| ● | 165,507 shares of common stock issuable upon exercise of vested outstanding common warrants at a weighted-average exercise price of $26.23 per share; | |
| ● | 23,387 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. |
Except as otherwise indicated, the information in this prospectus including statements regarding future events,gives effect to the 1-for-20 Reverse Stock Split of our future financial performance, business strategy and plans and objectivescommon stock, effective on January 22, 2024. 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 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,” or “ should” or the negative of these termscommon stock 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, includingequity or convertible debt securities in the risks outlined under “ Risk Factors” or elsewherefuture, there will be further dilution to investors participating 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 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 those 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.offering.
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You should not place undue reliance on any forward-looking statement, each of which applies only as of the date of this prospectus. BeforeDILUTION
If 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 affectoffering, your ownership interest is unlikely to be diluted based on the assumed public offering price.
Historical net tangible book value (deficit) per share is determined by dividing our business, operating results, financial conditiontotal tangible assets less our total liabilities by the total number of shares of common stock outstanding. Our historical net tangible book value as of September 30, 2023 was approximately $7.2 million, or $5.34 per share, based on 1,342,420 shares of common stock outstanding (which includes vested but unissued RSUs and excludes unvested restricted stock price. Exceptawards) as required by law, we undertake no obligationof that date.
After giving effect 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.
We will not receive any proceeds from the sale of theshares of common stock and accompanying Common Warrants in this offering, at an assumed sale by us of 1,750,000 shares in this offering at an assumed public offering price of $4.00 per share, based on the sellinglast reported sale price of our common stock on the Nasdaq Capital Market on January 18, 2024, assuming no sale of any Pre-Funded Warrants in this offering, after deducting the placement agent fees and estimated offering expenses payable by us, our as adjusted net tangible book value as of September 30, 2023 would have been approximately $13.4 million, or $4.32 per share, which excludes the Common Warrants to purchase shares of our common stock to be issued to investors in this offering. This represents an immediate decrease in net tangible book value of $1.02 per share to our existing stockholders and an immediate increase of $0.32 per share to new investors purchasing shares 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 | $ | 4.00 | ||||||
| Historical net tangible book value (deficit) per share as of September 30, 2023 | $ | 5.34 | ||||||
| Decrease in net tangible book value per share attributable to new investors participating in this offering | (1.02 | ) | ||||||
| As adjusted net tangible book value per share after this offering | 4.32 | |||||||
| Increase in as adjusted net tangible book value per share to new investors participating in this offering | $ | 0.32 |
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 to our stockholders.
The foregoing tables and calculations (other than the historical net tangible book value calculation) are based on 1,231,676 shares of common stock outstanding as of September 30, 2023, and exclude:
| ● | 7,097 shares of our common stock issuable upon exercise of outstanding options, which have a weighted average exercise price of $363.49 per share; | |
| ● | 227,791 shares of common stock issuable for RSUs (of which 114,621 are vested) issuable upon meeting distribution restrictions; | |
| ● | 165,507 shares of common stock issuable upon exercise of vested outstanding common warrants at a weighted-average exercise price of $26.23 per share; | |
| ● | 23,387 shares of common stock reserved for issuance and available for future grant under our 2019 Omnibus Incentive Plan; and | |
| ● | the exercise of the Pre-Funded Warrants and Common Warrants issued in this offering. |
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Summary Compensation Table for 2023 and 2022
The following table sets forth the compensation awarded to or earned by our Chief Executive Officer and our two other highest paid executive officers for the years ended December 31, 2023 and 2022. In reviewing the table, please note that George Ng joined as our CEO and a director on August 8, 2023. Up until that time, Dr. David Young served as our CEO. Dr. Young, who will continue as a director, transitioned to President, Research and Development to focus on drug development.
| Name and Principal Position | Year | Salary ($) | Stock Awards ($)(2) | Option Awards ($) | All Other Compensation ($)(3) | Total ($) | |||||||||||||||||
| George Ng(1) | 2023 | 159,091 | 312,000 | - | - | 471,091 | |||||||||||||||||
| Chief Executive Officer | 2022 | - | - | - | - | - | |||||||||||||||||
| David Young | 2023 | 160,200 | 26,433 | - | - | 186,633 | |||||||||||||||||
| President, Research and Development and former Chief Executive Officer | 2022 | 93,875 | 1,068,686 | - | - | 1,162,561 | |||||||||||||||||
| Sian Bigora | 2023 | 160,200 | 136,837 | - | 24,665 | 321,702 | |||||||||||||||||
| Chief Development Officer | 2022 | 93,875 | 955,223 | - | 26,434 | 1,075,532 | |||||||||||||||||
| James Stanker | 2023 | 160,200 | 182,399 | - | - | 342,599 | |||||||||||||||||
| Chief Financial Officer | 2022 | 93,875 | 946,344 | - | - | 1,040,219 | |||||||||||||||||
| (1) | Mr. Ng joined the Company on August 8, 2023. | |
| (2) | Reflects the aggregate grant date fair value of RSUs granted calculated in accordance with FASB ASC Topic 718. Assumptions applicable to these valuations and other information can be found in Note 5 of the Notes to Consolidated Financial Statements — Stock-Based Compensation contained in the Processa Pharmaceuticals, Inc. Annual Report on Form 10-K for the year ended December 31, 2022. | |
| (3) | Amounts reflect the dollar value of group health insurance premiums for the named executive officer. |
Narrative to the Summary Compensation Table
Overview of Our Executive Compensation Philosophy and Design
We believe that a skilled, experienced and dedicated executive and senior management team is essential to the future performance of our Company and to building stockholder value. We have sought to establish competitive compensation programs that enable us to attract and retain executive officers with these qualities. The other objectives of our compensation programs for our executive officers are the following:
| ● | to motivate our executive officers to achieve strong financial performance; | |
| ● | to attract and retain executive officers who we believe have the experience, temperament, talents and convictions to contribute significantly to our future success; and | |
| ● | to align the economic interests of our executive officers with the interests of our stockholders. |
Our executive compensation philosophy in 2022 and 2023 centered on providing the majority of each executive officers compensation in common stock. This allowed us to conserve our cash and utilize it in our clinical and other operating activities.
Setting Executive Compensation
Our compensation committee has primary responsibility for, among other things, determining our compensation philosophy, evaluating the performance of our named executive officers, setting the compensation and other benefits of our named executive officers and administering our equity compensation plan.
It is our CEO’s responsibility to provide recommendations to the compensation committee for most compensation matters related to executive compensation. The recommendations are based on a general analysis of market standards and trends and an evaluation of the contribution of each executive officer to our performance. Our compensation committee considers, but retains the right to accept, reject or modify such recommendations and has the right to obtain independent compensation advice. Neither the CEO nor any other members of management is present during executive sessions of the compensation committee. The CEO is not present when decisions with respect to his compensation are made. Our Board of Directors appoints the members of our compensation committee and delegates to the compensation committee the direct responsibility for overseeing the design and administration of our executive compensation program.
We have never declared or paid cash dividends on our common stock. We currently intendnot historically utilized a compensation consultant to retain future earnings to financeset the operation, development and expansioncompensation of our business. named executive officers.
Elements of Executive Compensation
We do not anticipate payingbelieve the most effective compensation package for our named executive officers is one designed to reward achievement of individual and corporate objectives; provide for short-, medium- and long-term financial and strategic goals; and align the interest of management with those of the stockholders by providing incentives for improving stockholder value. To accomplish that objective, our named executive officers have, and it is anticipated will continue to receive a significant portion of their annual compensation in the form of RSUs.
Base Compensation - We pay our named executive officers base compensation to compensate them for services rendered and to provide them with a steady source of income for living expenses throughout the year. In 2023, with the exception of Mr. Ng, our named executive officers received base salaries consisting of cash dividendsand equity ranging from $160,000 to $244,000 depending on their position and responsibilities. Dr. Young requested and the Compensation Committee approved RSUs representing 10,500 shares of our common stock that were originally included in Dr. Young’s compensation to be reallocated to other employees. With the foreseeable future. Paymentexception of futureMr. Ng, we only paid $160,200 to each executive officer’s base compensation in cash, dividends, if any, will bewith the remainder paid in restricted stock units (“salary shortfall RSUs”) vesting on January 1, 2024. Effective January 1, 2024, with the exception of Mr. Ng, our named executive officers/ total base salaries were adjusted to a range from $369,000 to $388,000, still consisting of cash and salary shortfall RSUs. Mr. Ng’s 2024 base salary is based on the employment agreement that was executed in August 2023 upon joining the Company, as described below.
For 2022, our named executive officers received base compensation ranging from $262,000 to $384,000, depending on their position and responsibilities. We paid only $93,875 of each executive officer’s base compensation in cash, with the remainder paid in salary shortfall RSUs that were earned ratably during the year and vested at the discretionend of our Boardeach calendar quarter. We computed the number of Directors and will dependRSUs awarded as part of their base compensation based on our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors that our Board of Directors considers relevant.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. 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 prospectusmonthly average price per share for the period fromof January 1, 2011 through April 15, 2011 (date2022 to June 30, 2022, and thereafter used a floor amount of acquisition$5.00 per share. As a result the price used to compute the number of RSUs awarded was $77.60 which was significantly higher than the Heatwurx business from Mr. Giles’ construction business have been disaggregated, or “carved-out”annual average price quoted on the Nasdaq 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 2012, as of March 31, 2013, and$57.00 for the periods from March 29, 2011 (date of inception) through December 31, 2011, as well as for the periods ended March 31, 2013 and 2012, are referredsame period. This equated 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 statementsour named executive officers receiving fewer shares as a result of various factors, including those discussed in “Risk Factors” and elsewhere in this prospectus.the floor established by the Compensation Committee on July 1, 2022.
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 nameAdjustments to Heatwurx, Inc. on April 15, 2011. We have not yet commercialized our products and webase salaries are therefore classified as a development stage enterprise.
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We are an asphalt preservation and repair equipment company. 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 to a temperature between 300 ° and 350° 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 equipmentexpected to be eco-friendly asdetermined annually and may be increased based on 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 agenciesexecutive officer’s success in meeting or exceeding individual objectives, as well as contractorsto maintain market competitiveness. Additionally, base salaries can be adjusted as warranted throughout the year to reflect promotions or other changes in the scope of breadth of an executive officer’s role or responsibilities.
Equity Awards - In addition to the salary shortfall RSUs awarded to our named executive officer’s for the repairdifference between their base compensation and rehabilitationcash compensation paid, we have used equity awards to align the interest of damaged and deteriorated asphalt surfaces.
Section 107our named executive officers with those of our stockholders, as the value of the JOBS Act provides that an “emerging growth company can take advantage ofawards granted thereunder is linked to the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
Critical Accounting Policies and Estimates
Use of Estimates
Management’s discussion and analysisvalue of our financial condition and resultscommon stock, which, in turn, is indirectly attributable to the performance of operationsour executive officers.
We have traditionally made an annual equity grant to our employees, which include our named executive officers. In 2023, we granted RSUs other than the predecessors’ financial statementssalary shortfall RSUs for 8,435 shares of our common stock to our named executive officers totaling a grant date fair value of $186,000, which vest over the periods throughsubsequent three years from the grant date. Upon joining the Company, we granted Mr. Ng 40,000 RSUs, as described below, with a grant date fair value of $312,000. During 2022, we granted RSUs for 37,179 shares of our common stock to our named executive officers. These RSUs were granted in two tranches, one on April 15, 2011;1, 2022 for 20,658 shares and the successor’s financial statements as of December 31, 2012 and 2011, as of March 31, 2013, forother on July 11, 2022 (the day the year ended December 31, 2012, for the periods ended March 31, 2013 and 2012, and for the period from March 29, 2011 (date of inception) through December 31, 2011. 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. Onstockholders approved 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. We believe the following critical accounting policies involve significant judgments and estimates usedincrease in the preparationnumber of shares available under our financial statements.2019 Omnibus Equity Plan) for 16,521 shares, totaling $2.3 million. These RSUs cliff vested on January 1, 2023.
Revenue Recognition
Equipment sales revenue is recognized when equipment is shipped to our customer and collection is reasonably assured. 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 all of the following criteria are satisfied: (a) persuasive evidence of a sales arrangement exists; (b) price is fixed and determinable; (c) collectability is reasonably assured; and (d) delivery has occurred. Persuasive evidence of an arrangement and a fixed or determinable price exist once we receive an order or contract from a customer. We assess collectability at the time of the sale and if collectability is not reasonably assured, the sale is deferred and not recognized until collectability is probable or payment is received. Typically, title and risk of ownership transfer when the equipment is shipped.
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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 developmeasure compensation expense 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 compensationRSUs in accordance with Accounting Standards Codification (“ASC”)ASC 718, – Compensation – Compensation—Stock Compensation for all share-based payments, based on the grant-date. Stock-based compensation is measured at fair value estimated in accordance with the provisions of ASC 718 ison grant date and recognized as ancompensation 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 For awards with the provisions of ASC 718 which requires that such equity instruments be recorded atonly service-based vesting conditions, we record their fair value onas compensation cost using the measurement date.
All stock options issued to date bystraight-line method over the Company were issued during the period beginning October 2011 and ending in August 2012. During this period, the Company made two private placements of its preferred stock, one on October 21, 2011 and one on August 6, 2012. Both private placements were priced at $2.00 per share and each share of preferred stock converts on a one to one basis into one share of common stock. Givenservice period. For awards that the share price of these private placements represents, in managements view, the best indication ofcontain performance vesting conditions, we do not recognize the fair value of the Company’s commonawards as compensation expense until achieving the performance condition is considered probable.
Retirement and Other Benefits - We maintain a defined contribution employee retirement plan for our employees, including our named executive officers. The plan is intended to qualify as a tax-qualified 401(k) plan so that contributions to the 401(k) plan, and income earned on such contributions, are not taxable to participants until withdrawn or distributed from the 401(k) plan (except in the case of contributions under the 401(k) plan designated as Roth contributions). Under the 401(k) plan, each employee is fully vested in his or her deferred salary contributions. Employee contributions are held and invested by the plan’s trustee as directed by participants. The 401(k) plan provides us with the discretion to match employee contributions. We currently do not match employee contributions.
Employment Agreements
With the exception of an executive employment agreement with Mr. Ng, we do not currently have any executive employment agreements with any of our named executive officers in connection with their employment. Mr. Ng’s executive employment agreement is summarized below.
George Ng Employment Agreement. On August 8, 2023 (the “Effective Date”), we entered into an employment agreement with Mr. Ng that continues until terminated or modified pursuant to the terms of the employment agreement.
Mr. Ng’s employment agreement entitled him to, among other benefits, the following compensation: (i) an annual base salary of at least $400,000, reviewed annually after December 31, 2024; (ii) a bonus of $50,000 upon the achievement of each of the following two milestones: (1) upon the closing stock prior to this offering by selling stockholders, we utilizedprice above $1.00 per share for at least ten consecutive trading days on or before February 28, 2024, and (2) upon enrolling the first patient in a $2.00 estimate of fair valueProcessa-sponsored clinical study for a shareNext Generation Chemotherapy drug; (iii) pursuant to our 2019 Omnibus Incentive Plan, a grant of RSUs for 20,000 shares which shall vest over three years and a grant of RSUs for an additional 20,000 shares delivered in two tranches when certain milestones have been met; (iv) participation in equity-based long-term incentive compensation plans generally available to senior executive officers of the Company (beginning in 2025); and (v) participation in welfare benefit plans, practices, policies and programs (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) made available to other executive officers of the Company.
Potential Payments Upon Termination or Change in Control
Mr. Ng’s employment agreement provides that either party may terminate the agreement at-will, and regardless of the manner in which such executive’s service terminates, he is entitled to receive amounts earned during his or her term of service, including salary and other benefits. In addition, the agreement provides that in the event of the executive’s termination for good reason or if Processa exercises its right to terminate the executive, the executive will be eligible to receive the following severance benefits: (i) an amount equal to one-year’s annual base salary; (ii) 12 months of continued health coverage; and (iii) the vesting in full of all of his RSUs or other equity awards then outstanding and subject to time-based vesting.
The following definition is contained in Mr. Ng’s employment agreement:
| ● | “termination for cause” means a termination of the executive’s employment by Processa due to (i) refusal or inability of executive to perform or observe any of the material duties, responsibilities or obligations set forth in the employment agreement following the Company giving written notice that the specified conduct has occurred and the executive fails to cure the conduct within thirty (30) days after receipt of such notice; (ii) any act involving fraud, theft, misappropriation of funds, or embezzlement; (iii) the executive’s commission of, or being charged with, a felony and/or convicted of any felony or misdemeanor involving dishonesty, violence or moral turpitude, or which in the reasonable judgment of the Company, reflects materially and adversely on the reputation of the Company; (iv) failure to comply with any of the Company’s policies, including but not limited to by engaging in the illegal use of controlled substances, the knowing abuse of prescribed medications, or the misuse of alcohol; or (v) breach of fiduciary duty. |
All severance benefits payable to the executive under his employment agreement are subject to the executive signing, not revoking and complying with a release of claims in favor of Processa.
Employee Non-Competition, Non-Solicitation, Invention and Non-Disclosure Agreements
Each of our named executive officers has entered into standard form agreements with respect to non-competition, non-solicitation, invention and non-disclosure. Under these agreements, each of our named executive officers has agreed not to compete with us during his or her employment and for a period of one year after the termination of his or her employment, not to solicit our employees, consultants, customers, business or prospective customers during his or her employment and for a period of one year after the termination of his or her employment, and to protect our confidential and proprietary information indefinitely. In addition, under these agreements, each named executive officer has agreed that we own all inventions that are developed by such named executive officer during his or her employment with us that (i) are related to our business or our customers or suppliers or any of our products or services being researched, developed, manufactured or sold by us or which may be used with such products or services; (ii) result from tasks assigned to the executive officer by us; or (iii) result from the use of our premises or personal property (whether tangible or intangible) owned, leased or contracted for by us.
Processa Pharmaceuticals, Inc. 2019 Omnibus Incentive Plan
We maintain an Omnibus Plan that currently provides us with the authority to issue up to 300,000 shares of our common stock for all options issued duringto eligible participants. The two complementary goals of the period from October 2011Omnibus Plan are to August 2012.
Other significant assumptions utilized in determiningattract and retain outstanding individuals to serve as our officers, directors, employees and consultants, and to increase stockholder value by providing participants incentives to increase stockholder value by offering the fairopportunity to acquire shares of our common stock, receive monetary payments based on the value of our common stock options includedand receive other incentive compensation on the volatility rate, estimated termpotentially favorable terms that the Plan provides. The following is a summary of the options, risk-free interest rate and forfeiture rate. In order to estimate the volatility rate at each issuance date, given that the Company has not established a historical volatility rate as it has been a private company through the filing date, management reviewed volatility rates for a number of companies with similar manufacturing operations to arrive at an estimated volatility rate for each option grant. The termmaterial provisions of the options was assumed to be five years, whichOmnibus Plan:
Administration. The Omnibus Plan is the contractual term of the options. The risk-free interest rate was determined utilizing the treasury rate with a maturity equal to the estimated term of the option grant. Finally, management assumed a zero forfeiture rate as the options granted were either fully-vested upon the date of grant or had relatively short vesting periods. As such, management does not currently believe that any of the options granted will be forfeited. We will monitor actual forfeiture rates, if any, and make any appropriate adjustments necessary toadministered by our forfeiture rate in the future.
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, during the fourth quarter 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 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
For the Three Months Ended March 31, 2013 and 2012
Our results of operations include the activity of the successor for the quarter ended March 31, 2013 and 2012 and the period from March 29, 2011 (date of inception) through March 31, 2013. For the quarter ended March 31, 2013, our net loss was $816,000, compared to a net loss of $581,000. Further description of these losses is provided below.
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Revenue
Revenue increased to approximately $19,000 for the three months ended March 31, 2013 from approximately $15,000 for the three months ended March 31, 2012. We sold one HWX-30 heating unit and one HWX-AP-40 asphalt processor in each of the three month periods presented.
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 of approximately $12,000 remained consistent for each of the three month periods presented.
Selling, general and administrative
Selling, general and administrative expenses increased to approximately $736,000 for the three months ended March 31, 2013 from approximately $390,000 for the three months ended March 31, 2012. The increase in selling, general and administrative expenses is principally due to increased employee expenses related to the hiring of company employees of approximately $222,000, increased costs of approximately $144,000 in advertising and promotion activities related to business development, increased costs (including legal fees, accounting fees and other items) of approximately $109,000 related to the Company’s preparation for its proposed initial public offering, an increase in depreciation and amortization of approximately $102,000, partially offset by a decrease in stock-based compensation related to stock option grants for directors and officers of approximately $263,000, among other costs.
Research and Development
Research and development decreased to approximately $72,000 for the three months ended March 31, 2013 from approximately $144,000 for the three months ended March 31, 2012. The principal reason for the decrease is due to fewer legal and other intellectual property consulting fees related to certain patent applications on technology and processes that may be patentable.
For the Years Ended December 31, 2012 and 2011
Our results of operations include the activity of the successor for the year ended December 31, 2012 and the period from March 29, 2011 (date of inception) through December 31, 2012 and the activity of our predecessor for the period from January 1, 2011 through 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 year ended December 31, 2012, our net loss was $2,441,000, compared to a net loss of $902,000 (consisting of a loss of $941,000 from the successor and income of $39,000 from the predecessor), for the year ended December 31, 2011, 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 increased to approximately $192,000 for the year ended December 31, 2012 from approximately $159,000 (consisting of $16,000 from the successor and $143,000 from the predecessor) for the year ended December 31, 2011. We sold five HWX-30 heating units and five HWX-AP-40 asphalt processors in each of the years presented at the same price per unit. During 2011, we also had a small amount of rental income related to the rental of our equipment as well as sales related to certain consumables (e.g. rejuvenating oil).
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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 to approximately $133,000 for the year ended December 31, 2012 from $77,000 (consisting of $0 from the successor and $77,000 from the predecessor) for the year ended December 31, 2011, due to the sales of our equipment as described above.
Selling, general and administrative
Selling, general and administrative expenses increased to approximately $1,884,000 for the year ended December 31, 2012 from approximately $625,000 (consisting of $612,000 from the successor and $13,000 from the predecessor) for the year ended December 31, 2011. The increase in selling, general and administrative expenses is principally due to stock-based compensation recorded for the year ended December 31, 2012 related to stock option grants for directors, officers and a consultant of approximately $245,000, increased employee expenses related to the hiring of company employees of approximately $182,000, costs (including legal fees, accounting fees and other items) of approximately $211,000 related to the Company’s preparation for its initial public offering, increased consulting fees to third parties of approximately $304,000 and marketing costs of approximately $100,000 incurred with an outside consulting firm, among other costs.
Research and Development
Research and development increased to approximately $448,000 for the year ended December 31, 2012 from approximately $188,000 (consisting of $174,000 from the successor and $14,000 from the predecessor) for the year ended December 31, 2011. The principal reason for the increase is due to legal and other intellectual property consulting fees related to our research on technology and processes that may be patentable.
Income taxes
Prior to March 29, 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 March 29, 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. For the three months ended March 31, 2013, the Company incurred a net loss of $816,000 a working capital deficit of $546,000 and utilized $593,000 in cash flows from operating activities. The Company had cash on hand of approximately $421,000 as of March 31, 2013. 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. 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. 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
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additional funding when needed, we would be forced to scale back, or terminate our operations, or seek to merge with or be acquired by another company.
The Company has incurred operating losses, accumulated deficit and negative cash flows from operations since inception. As of March 31, 2013, the Company had an accumulated deficit of approximately $4,277,000. The Company had a working capital deficit of approximately $546,000 as of March 31, 2013 and notes payable of $750,000 due within the next 12 months. The issues described above raise substantial doubt about the Company’s ability to continue as a going concern. Management of the Company intends to address these issues by raising additional capital through a through a private placement of equity or debt securities. If we successfully complete these transactions, we believe the proceeds we will receive from them will be sufficient to fund our operations, including our expected capital expenditures, through at least the next twelve months.
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 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.
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 and a founder of the Company 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.
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We are an asphalt preservation and repair equipment company. 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 to a temperature between 300 ° and 350° 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.
We have not yet commercialized our products and we are therefore classified as a development stage enterprise. Although we have had some limited sales for our products, our efforts continue to be principally focused on developing our distribution network and improving our products to make them completely standardized. We believe we will have commercialized our products in or around the first half of 2013 and will be focused at that time on the sale of our products. At such time as that occurs, we will no longer be classified as a development stage company.
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
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Location of pothole
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Weather conditions
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Resources
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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, 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.
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The throw-and-roll method consists of the following steps:
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Shovel the hot asphalt into a pothole (which may or may not be filled with water or debris).
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Drive over the asphalt using the truck tires to compact.
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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:
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Clean the surface of the area to be sealed and let dry.
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Heat the sealing material to 300° to 400 ° Fahrenheit.
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Pour the heated material into the crack.
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Let cool and dry.
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Place a layer of sand over the sealing material to prevent tracking by vehicle tires.
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:
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Blow water and debris from the pothole with a high-pressure air blower.
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Spray a generous layer of binder (asphalt-cement) on the sides and bottom of the pothole.
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Blow heated aggregate (minerals such as sand, gravel or crushed stone) and asphalt-cement (binder) into the pothole.
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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:
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Remove water and debris from the pothole.
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Using a radial saw with a hardened blade, cut the repair area on four sides creating a square or rectangle.
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Remove the material inside the section that was cut.
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Shovel hot asphalt into the repair area. Spread with an asphalt rake to proper grade.
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Compact with a vibrating drum roller or vibrating plate compactor.
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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 between 300° and 350° Fahrenheit through the full depth of the section. Overlap infrared equipment onto existing asphalt a minimum of 12 inches to enable seamless repair.
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Using a skid steer (compact loader), remove heater and move to the next section to be repaired for heating.
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Add recycled asphalt pavement as needed to provide proper volume and grade within the treated area.
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Using the skid steer, attach the asphalt processor and dig up the heated area.
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Apply binder (asphalt-cement) to the asphalt in the repair area.
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Repeat the processing until the material is thoroughly mixed.
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Using the screed (winged spreader) on the processor attachment, spread the asphalt to proper grade in preparation for compaction.
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Use asphalt rake to remove excess material and square up the sides.
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Compact treated area with a double wheel vibrating steel drum roller when treated area reaches a temperature range of 150° to 200° Fahrenheit.
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° to 350° 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:
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Weight 3,550 lbs. (with generator mounted)
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Heats repair area of 30 square feet
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Generator requirement 45 kilowatts
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Custom industrial heating elements
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Cycle times of approximately 20 – 40 minutes depending on depth and weather conditions
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Fuel consumption approximately 2.8 gallons of fuel per hour
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Heavy duty steel constructed frame
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Top wind 7,000 lbs. jacks
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Six inches of heat resistance insulation
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Heavy duty high temperature powder coated finish for maximum durability and visibility
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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:
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One inch wear plate with ability to adjust to desired depth
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Orbital hydraulic motor
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40” working width
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5/16 inch processing blades
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Custom beveled cutting blades tooling to maximize asphalt bonding
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12 gauge wings to funnel material into desired location
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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, Boman Kemp, a family owned business based in Utah, who procures all raw materials and components. See “ Risk Factors” for a discussion on the risk related to having a single manufacturer of equipment.
Disadvantages of Our Products
Although we believe our product offering is superior over other methods described above, there may be situations where methods such as the Throw-and-Roll method, may be more appealing than ours. For example, in emergency situations where roads must be patched as quickly as possible, the Throw-and-Roll method can be applied more quickly than our method and with less training of personnel. Additional disadvantages of our infrared technology relative to other processes and equipment are:
1.
Inability to operate during adverse weather conditions
2.
Heating time increases as ambient temperature decreases
3.
Equipment requires the use of a skid steer
4.
Our equipment and processes require training, whereas some of the other methods require little or no training
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.
Intellectual Property
We currently have five U.S. patent applications pending. Our first patent application, entitled “Infrared Heating System and Method for Heating Surfaces” and filed in December 2009, is currently in the examination process. We have responded to two Office Actions issued by the US Patent and Trademark Office (USPTO) which rejected the application based on prior art referenced by the examiner. Our response argues that the invention as claimed is patentable over the cited prior art. Our second patent application, entitled “Asphalt Repair System and Method” and filed in June 2011, is currently in the examination process. We have responded to one Office Action issued by the US Patent and Trademark Office which rejected the application based on prior art referenced by the examiner. Our response argues that the invention as claimed is patentable over the cited prior art. Our third patent application, entitled, “System and Method for Remote Sensing of Pothole Location and Characteristics” was filed in January 2013; no substantive action has been received from the USPTO. Our fourth patent application, entitled, “System and Method for Controlling an Asphalt Repair Apparatus” was filed in February 2013; no substantive action has been received from the USPTO. Finally, our fifth patent application, entitled, “Asphalt Repair System and Method” was filed in March 2013; no substantive action has been received from the USPTO. We anticipate filing a sixth patent application entitled “Paving Material Object and Method of Making Same” during May 2013.
We intend to develop other technologies for which we will seek patent protection. However, we do not have any assurance that our current pending patent applications will be granted 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.
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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
Employees
As of May 1, 2013, we had seven 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 resellers. 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.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Our directors and executive officers are:
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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 November 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
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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 January 2013, President of Tuscany International Drilling Inc. from April 2010 and President and Chief Executive Officer from June 2011 to January 2013. 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, 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 Chairmancompensation committee of the Board of Directors, directors do not receive cash compensation for service onany other committee of the Board, any subcommittee of Directors. We reimbursethe compensation committee or one or more of our officers to whom the Board or compensation committee has delegated authority, which are collectively referred to as the “Administrator.” The Administrator has the authority to interpret the Omnibus Plan or award agreements entered into with respect to the Omnibus Plan; make, change, and rescind rules and regulations relating to the Omnibus Plan; make changes to, or reconcile any inconsistency in, the Omnibus Plan or any award or agreement covering an award; and take any other action needed to administer the Omnibus Plan.
Eligibility; Participant Award Limits. The Administrator may designate any of the following as a participant under the Omnibus Plan: any officer or employee, or individuals engaged to become an officer or employee, of our company or our affiliates; consultants of our company or our affiliates; and our directors, for their out-of-pocket costs, including travel and accommodations, relatingour non-employee directors.
Types of Awards. The Omnibus Plan permits the Administrator 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 receivegrant stock options, to purchase 75,000stock appreciation rights (SARs), performance units, shares of common stock. stock, restricted stock, restricted stock units, cash incentive awards, dividend equivalent units, or any other type of award permitted under the Omnibus Plan. The Administrator may grant any type of award to any participant it selects, but only our employees or our subsidiaries’ employees may receive grants of incentive stock options within the meaning of Section 422 of the Code. Awards may be granted alone or in addition to, in tandem with, or (subject to the repricing prohibition described below) in substitution for any other award (or any other award granted under another plan of our company or any affiliate, including the plan of an acquired entity).
Director Compensation
Shares Reserved under the Omnibus Plan. We have reserved an aggregate of 300,000 shares of our common stock available for issuance under the Omnibus Plan. We may issue all reserved shares pursuant to the exercise of incentive stock options. The number of shares reserved for issuance under the Omnibus Plan will be reduced on the date of the grant of any award by the maximum number of shares, if any, that may become payable with respect to which such award is granted. However, an award that may be settled solely in cash will not deplete the Omnibus Plan’s share reserve at the time the award is granted. If (a) an award lapses, expires, is canceled, or terminates without issuance of shares or is settled in cash, (b) the Administrator determines that the shares granted under an award will not be issuable because the conditions for issuance will not be satisfied, (c) shares are forfeited under an award, or (d) shares are issued under any award and we reacquire them pursuant to our reserved rights upon the issuance of the shares, then those shares are added back to the reserve and may again be used for new awards under the Omnibus Plan. Shares that are tendered or withheld in payment of the exercise price of a stock option or as a result of the net settlement of an outstanding SAR, shares we purchase using proceeds from stock option exercises and shares tendered or withheld to satisfy any federal, state, or local tax withholding obligations may not be made available for re-issuance under the Omnibus Plan.
Transferability. Awards are not transferable other than by will or the laws of descent and distribution, unless the Administrator allows a participant to (i) designate in writing a beneficiary to exercise the award or receive payment under the award after the participant’s death, (ii) transfer an award to a former spouse as required by a domestic relations order incident to a divorce, or (iii) otherwise transfer an award without receiving any consideration.
Adjustments. If (i) we are involved in a merger or other transaction in which our shares of common stock are changed or exchanged; (ii) we subdivide or combine shares of common stock or declare a dividend payable in shares of common stock, other securities, or other property (other than stock purchase rights issued pursuant to a stockholder rights agreement); (iii) we effect a cash dividend that exceeds 10% of the fair market value of a share of common stock or any other dividend or distribution in the form of cash or a repurchase of shares of common stock that our Board determines is special or extraordinary, or that is in connection with a recapitalization or reorganization; or (iv) any other event occurs that in the Administrator’s judgment requires an adjustment to prevent dilution or enlargement of the benefits intended to be made available under the Omnibus Plan, then the Administrator will, in a manner it deems equitable, adjust any or all of (A) the number and type of shares subject to the Omnibus Plan and which may, after the event, be made the subject of awards; (B) the number and type of shares of common stock subject to outstanding awards; (C) the grant, purchase, or exercise price with respect to any award; and (D) the performance goals of an award.
In any such case, the Administrator may also provide for a cash payment to the holder of an outstanding award in exchange for the cancellation of all or a portion of the award, subject to the terms of the Omnibus Plan.
The following table provides a summaryAdministrator may, in connection with any merger, consolidation, acquisition of annual compensation for our Directors for the year ended December 31, 2012:
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Name | Option awards | All other compensation | Total |
Stephen Garland (1) | $ - | $ 45,000 | $ 45,000 |
Richard Giles (2) | $ 27,913 | $ 196,400 | $ 224,313 |
Don Larson (3) | $ 52,852 | $ - | $ 52,852 |
Reginald Greenslade (4) | $ 52,401 | $ - | $ 52,401 |
Gus Blass III (5) | $ 52,576 | $ - | $ 52,576 |
Hugh Wolff (6) | $ 17,617 | $ 12,000 | $ 29,617 |
Larry Griffin (7) | $ - | $ 12,500 | $ 12,500 |
Justin Yorke (8) | $ - | $ - | $ - |
(8) Mr. Garland received a $45,000 consulting fee, unrelated to his service as a Director, during this period. (2) Mr. Giles received $196,400 in consulting fees and 40,000 common stock options, unrelated to his service as a Director, during this period. He resigned as a director in June 2012. (3) Mr. Larson was issued 75,000 common stock options upon his appointment to the Board. (4) Mr. Greenslade was issued 75,000 common stock options upon his appointment to the Board. (5) Mr. Blass was issued 75,000 common stock options upon his appointment to the Board. (6) Mr. Wolff was issued 25,000 common stock options during the period. He received $12,000 in fees for his position as Chairman of the Board of Directors during this period. He resigned as a Director in June 2012. (7) Mr. Griffin resigned as Chief Executive Officer in November 2011. He received $12,500 in consulting fees for services performed for us during January 2012. Mr. Griffin resigned as a director in January 2012. (8) Mr. Yorke resigned as a Director in June 2012. | |||
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 NASDAQ 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 NASDAQ 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.
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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.
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, 2012. 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 |
| Year | Salary | Option Awards ($) | All other compen- sation | Total | |
Steve Garland – Chief Executive Officer (1) (2) |
| 2012 | $ 139,000 | $ 211,411 | $ 45,000 | $ 395,411 | |
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| 2011 | $ - | $ 52,777 | $ 20,000 | $ 72,777 | |
Allen Dodge – Executive Vice President and Chief Financial Officer (3) (4) |
| 2012 | $75,000 | $ 69,533 | $ - | $ 144,533 | |
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| 2011 | $ - | $ - | $ - | $ - | |
| (1) Mr. Garland served as our interim Chief Executive Officer from November 2011 until March 31, 2012. His monthly compensation was $10,000 per month during 2011 and $15,000 per month during 2012. (2) Mr. Garland received 75,000 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. Mr. Garland received 300,000 options as interim Chief Executive Officer in January 2012. 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. Dodge was hired in August 2012. His annual base salary is $180,000. (4) Upon his acceptance of his position as Chief Financial Officer Mr. Dodge received 100,000 options. The options have an exercise price of $2.00 per share, which was the offering price of our Series C Preferred Stock in August 2012. | ||||||
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, 2012. No other named executive receivedproperty or stock, or stock options. Allreorganization, authorize the issuance or assumption 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 2012.
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Name |
| Number of Shares underlying Unexercised Options | ||
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| Exercisable | Option Exercise Price | Option Expiration Date |
Steve Garland |
| 75,000 300,000 | $2.00 $2.00 | 11/5/16 1/20/17 |
Allen Dodge |
| 100,000 | $2.00 | 8/1/17 |
Equity compensation plan
Our Board of Directorsupon terms and stockholders approved 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 increasedconditions we deem appropriate without affecting the number of shares of common stock otherwise reserved or available under the Omnibus Plan.
Change of Control. To the extent a participant has an employment, retention, change of control, severance, or similar agreement with us or any of our affiliates that discusses the effect of a change of control (as defined in the Omnibus Plan) on the participant’s awards, such agreement will control. Otherwise, unless otherwise provided in an award agreement or by the Administrator prior to the change of control, in the event of a change of control, if the purchaser, successor or surviving entity (or parent thereof) (the “Successor”) agrees, then some or all outstanding awards will be assumed or replaced with the same type of award with similar terms and conditions. If applicable, each award that is assumed must be appropriately adjusted, immediately after such change of control, to apply to the number and class of securities that would have been issuable to a participant upon the consummation of such change of control had the award been exercised, vested, or earned immediately prior to such change of control, and other appropriate adjustment to the terms and conditions of the award may be made.
If a participant is terminated from employment without cause (as defined in the Omnibus Plan) or the participant resigns employment for good reason (as defined in the Omnibus Plan) within 24 months following the change of control, then upon such termination, all of the participant’s awards in effect on the date of such termination will vest in full or be deemed earned in full.
Term of Omnibus Plan. Unless earlier terminated by our Board of Directors, the Omnibus Plan will remain in effect until the date all shares reserved for issuance underhave been issued, except that no incentive stock options may be issued if the term of the Omnibus Plan to a totalextends beyond 10 years from the effective date without stockholder approval of 1,800,000 shares. There are currently 1,022,000such extension.
Outstanding Equity Awards at Fiscal Year-End
The following table lists the outstanding option grants toequity awards held by each of our named executive officers directors, employees and consultants under the Plan. If unexercised options expire or are terminated, the underlying shares will again become available for grants under the Plan.as of December 31, 2023:
Grants under the Plan. The Plan provides
| Stock Option Awards | Restricted Stock Units | |||||||||||||||||||||||
| Name | Grant Date | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Option Exercise Price ($) | Number of Shares of Stock (#) not Vested(5) | Market Value of Shares not Vested ($)(6) | ||||||||||||||||||
| George Ng | 08/08/23 | - | - | - | 40,000 | 268,000 | ||||||||||||||||||
| David Young | 01/01/23(4) | - | - | - | 1,202 | 8,053 | ||||||||||||||||||
| 07/01/21(2) | - | - | - | 215 | 1,441 | |||||||||||||||||||
| Sian Bigora | 01/01/23(4) | - | - | - | 3,796 | 25,433 | ||||||||||||||||||
| 01/01/23(4) | - | - | - | 2,425 | 16,248 | |||||||||||||||||||
| 07/01/21(2) | - | - | - | 215 | 1,441 | |||||||||||||||||||
| 06/20/19(1) | 393 | - | 336.00 | - | - | |||||||||||||||||||
| 06/20/19(1) | 87 | - | 336.00 | - | - | |||||||||||||||||||
| 06/20/19(1) | 87 | - | 336.00 | - | - | |||||||||||||||||||
| 06/20/19(1) | 260 | - | 336.00 | - | - | |||||||||||||||||||
| James Stanker | 01/01/23(4) | - | - | - | 3,484 | 23,343 | ||||||||||||||||||
| 01/01/23(4) | - | - | - | 4,808 | 32,214 | |||||||||||||||||||
| 07/01/21(2) | - | - | - | 215 | 1,441 | |||||||||||||||||||
| 06/20/19(1) | 393 | - | 336.00 | - | - | |||||||||||||||||||
| 06/20/19(1) | 87 | - | 336.00 | - | - | |||||||||||||||||||
| 06/20/19(1) | 87 | - | 336.00 | - | - | |||||||||||||||||||
| 06/20/19(1) | 260 | - | 336.00 | - | - | |||||||||||||||||||
| 09/01/18(3) | 2,260 | - | 397.60 | - | - | |||||||||||||||||||
| 09/01/18(3) | 129 | - | 397.60 | - | - | |||||||||||||||||||
(1) Options for the purchase of 827 shares of our common stock granted to each Dr. Bigora and Mr. Stanker contained either service or performance vesting conditions, have a contractual term of five years and an exercise price equal to the closing price of our common stock on the date of grant of $336.00. Stock options tofor the purchase of 393 shares of common stock ofvested one-third on 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 timefirst anniversary date of the grant, with the remaining options vesting ratably over the subsequent two years. Stock options for the purchase of those434 shares vested upon meeting the following performance criteria: (i) options to purchase 87 shares of our common stock vested on August 29, 2019 when we in-licensed an additional drug asset; (ii) options to purchase 87 shares of our common stock vested on December 31, 2020 when we completed our Phase 2A clinical trial for PCS499; and expire five(iii) options to purchase 260 shares of our common stock vested on October 6, 2020 when we up-listed to the Nasdaq market.
(2) Stock awards in the form of RSUs for 1,074 shares of our common stock granted to each of Dr. Young, Dr. Bigora and Mr. Stanker on July 1, 2021 contained either service or performance vesting conditions and must meet distribution requirements before any shares of common stock will be issued. These stock awards vest (i) 429 shares of our common stock annually over the subsequent two years from the grant date; (ii) 645 shares of our common stock upon meeting the following performance criteria: (a) 215 shares of our common stock when we completed the interim analysis for PCS6422 (which was completed on November 1, 2021); (b) stock awards for 215 of our common stock when we completed the interim analysis for PCS499 (these were cancelled when we stopped enrollment in the trial); and (c) stock awards for 215 of our common stock when we cumulatively raise at least $30 million.
(3) Options for the purchase of 2,389 shares of our common stock granted to Mr. Stanker contained service vesting conditions, have a contractual term of ten years and an exercise price equal to the closing price of our common stock on the date of grant of $397.60. Stock options for the purchase of 2,260 shares of our common stock vested ratably over the subsequent four years from the grant date. Stock options for the purchase of 129 shares of our common stock vested on the first anniversary date of the grant.
(4) On January 1, 2023, stock awards in the form of RSUs were granted to Dr. Young, Dr. Bigora and Mr. Stanker. These stock awards vest (i) 7,280 shares of our common stock on January 1, 2024 and (ii) 8,435 shares of our common stock ratably over the subsequent three years from the date of issuance. Options issued to directorsgrant.
(5) Not included in the above table for each of our named executive officers are fullyRSUs representing 54,174 shares of our common stock that have vested upon grant. Exceptbut have not met the distribution requirements as otherwise specified atof December 31, 2023.
(6) Market value is based on $6.70 per share, which was the timeclosing market price of grant, all other options vest over a period of four years.
Administrationour common stock on December 29, 2023, the last trading day of the Plan.year.
The Plan provides that it will be administered by the Board or a Committee designated by the Board. Our
Director Compensation
On March 8, 2023, our compensation committee recommended, and our Board of Directors appointed a Compensation Committee, which administers the Plan. The Compensation Committee has complete discretion to:
determine who should receiveapproved, 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 relatingamendment 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 equityour compensation plan may not be less than 100%for non-employee directors. Each non-employee director will receive annual compensation for serving as a director totaling $80,000, consisting of an annual cash retainer of $28,000, payable in quarterly installments and an annual RSU award representing 5,069 shares of our common stock equal to $52,000 total value, which was based on the fair market valueclosing price of theour 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
- 29 -
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 award. These RSUs vest on 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 corporationearlier of June 27, 2024 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.
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 byof our Board of Directors and approved by our Stockholders.2024 annual meeting.
Our directors are also reimbursed for any reasonable out-of-pocket expenses incurred in connection with service as a director.
The table below provides informationshows all compensation paid or earned to our non-employee directors during the year ended December 31, 2023.
| Name | Fees Earned or Paid in Cash ($) | Stock Awards($)(1) | Total ($) | |||||||||
| Khoso Baluch | 32,000 | 51,000 | 83,000 | |||||||||
| Jim Neal | 32,000 | 51,000 | 83,000 | |||||||||
| Geraldine Pannu | 28,000 | 26,000 | 54,000 | |||||||||
| Justin Yorke | 28,000 | 26,000 | 54,000 | |||||||||
| (1) | Reflects the aggregate grant date fair value of RSUs granted in 2023 calculated in accordance with FASB ASC Topic 718. |
| 27 |
Outstanding Equity Awards at Fiscal Year-End
The following table lists the outstanding equity awards held by each of our directors as of December 31, 2023:
| Stock Option Awards (1) | Restricted Stock Units | ||||||||||||||||||||||
| Name | Grant Date | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Option Exercise Price ($) | Number of Shares of Stock (#) not Vested | Market Value of Shares not Vested ($)(3) | |||||||||||||||||
| Khoso Baluch | 06/27/23(2) | - | - | - | 5,069 | 33,962 | |||||||||||||||||
| James Neal | 06/27/23(2) | - | - | - | 5,069 | 33,962 | |||||||||||||||||
| Geraldine Pannu | 06/27/23(2) | - | - | - | 5,069 | 33,962 | |||||||||||||||||
| Justin Yorke | 06/27/23(2) | - | - | - | 5,069 | 33,962 | |||||||||||||||||
| 06/20/19 | 55 | - | 336.00 | - | - | ||||||||||||||||||
| 06/20/19 | 10 | - | 336.00 | - | - | ||||||||||||||||||
| 06/20/19 | 10 | - | 336.00 | - | - | ||||||||||||||||||
| 06/20/19 | 30 | - | 336.00 | - | - | ||||||||||||||||||
(1) Options for the purchase of 105 shares of our common stock granted to Mr. Yorke contained either service or performance vesting conditions, have a contractual term of five years and an exercise price equal to the numberclosing price of our common stock on the date of grant of $336.00. Stock options outstandingfor the purchase of 55 shares of common stock vested one-third on the first anniversary date of the grant, with the remaining options vesting ratably over the subsequent two years. Stock options for the purchase of 50 shares vested upon meeting the following performance criteria: (i) options to purchase 10 shares of our common stock vested on August 29, 2019 when we in-licensed an additional drug asset; (ii) options to purchase 10 shares of our common stock vested on December 31, 2020 when we completed our Phase 2A clinical trial for PCS499; and (iii) options to purchase 30 shares of our common stock vested on October 6, 2020 when we up-listed to the Nasdaq market.
(2) On June 27, 2023, RSU awards were granted to each director. These RSU awards vest on the earlier of June 27, 2024 or the next annual shareholder meeting. These RSUs also have distribution requirements, such that they will be distributed on the earlier of: the end of their weighted average exerciseappointment or reappointment as a director; the third anniversary of the grant date; a change of control; or their death.
(3) Market value is based on $6.70 per share, which was the closing market price at May 1, 2013. of our common stock on December 29, 2023, the last trading day of the year.
SECURITY
| 28 |
BENEFICIAL OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTCOMMON STOCK
The following table sets forth certain information regardingwith respect to the beneficial ownership of our common stock at January 18, 2024 for:
| ● | Each of our directors; | |
| ● | Each of our named executive officers; | |
| ● | All of our current directors and executive officers as a group; and | |
| ● | Each person, or group of affiliated persons, who beneficially owned more than 5% of our common stock. |
The number of May 1, 2013, by:
·
eachshares 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 anby each entity, person, director or executive officer is determined in accordance with the rules of the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares over which the individual has sole or shared voting power or investment power as well as any shares that the individual has the right to acquire within 60 days of January 18, 2024, through the exercise of any stock option, warrants or other rights. Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock held by that person.
The percentage of shares beneficially owned is computed on the basis of 1,231,676 shares of our common stock outstanding (including 2,500 outstanding but unvested shares of restricted stock) as of January 18, 2024. Shares of our common stock that a person has the right to acquire within 60 days including shares issuable upon conversion of preferred stock,January 18, 2024, are treated asdeemed outstanding when determiningfor purposes of computing the amount and percentage ownership of common stock owned by that individual and bythe person holding such rights but are not deemed outstanding for purposes of computing the percentage ownership of any other person, except with respect to the percentage ownership of all directors and executive officers as a group.
| Shares beneficially owned | ||||||||
| Shares | Percent | |||||||
| Name and address of beneficial owner (1) | ||||||||
| Officers and Directors | ||||||||
| Sian Bigora (2), | 49,630 | 4.0 | % | |||||
| Wendy Guy (3) | 39,525 | 3.2 | % | |||||
| Patrick Lin (4) | 44,541 | 3.6 | % | |||||
| George Ng | 10,000 | * | ||||||
| James Stanker (5) | 30,471 | 2.4 | % | |||||
| David Young (6) | 118,693 | 9.5 | % | |||||
| Khoso Baluch (7) | 1,398 | * | ||||||
| James Neal (8) | 721 | * | ||||||
| Geraldine Pannu (9) | 2,882 | * | ||||||
| Justin Yorke (10) | 27,074 | 2.2 | % | |||||
| Total for all Officers and Directors | 324,935 | 24.2 | % | |||||
| 5% Stockholders: | ||||||||
| Yuhan Corporation and affiliates(11) | 62,500 | 5.1 | % | |||||
* represents less than 1%
(1) Unless otherwise indicated, the address for each beneficial owner listed is c/o Processa Pharmaceuticals, Inc., 7380 Coca Cola Drive, Suite 106, Hanover, Maryland 21076.
(2) Consists of (i) 20,152 shares of common stock held directly by Dr. Bigora; (ii) 6,668 shares held by CorLyst; (iii) restricted stock units representing 21,983 shares of common stock issuable within 60 days of January 18, 2024; and (iv) stock options for the purchase of 827 shares of common stock exercisable within 60 days of January 18, 2024.
(3) Consists of (i) 10,127 shares of common stock held directly by Ms. Guy; (ii) 8,335 shares held by CorLyst; (iii) restricted stock units representing 20,236 shares of common stock issuable within 60 days of January 18, 2024; and (iv) stock options for the purchase of 827 shares of common stock exercisable within 60 days of January 18, 2024.
(4) Consists of (i) 23,478 shares of common stock held by Mr. Lin; (ii) restricted stock units representing 20,236 shares of common stock issuable within 60 days of January 18, 2024; and (iii) stock options for the purchase of 827 shares of common stock exercisable within 60 days of January 18, 2024.
(5) Consists of (i) 4,963 shares of common stock held directly by Mr. Stanker; (ii) restricted stock units representing 22,292 shares of common stock issuable within 60 days of January 18, 2024; and (iii) stock options for the purchase of 3,216 shares of common stock exercisable within 60 days of January 18, 2024.
(6) Consists of (i) 38,386 shares of common stock held directly by Dr. Young; (ii) 18,851 shares held by family entities; (iii) 41,464 shares held by CorLyst, LLC (“CorLyst”) (22,920 shares held on behalf of entities controlled by Dr. Young and 18,544 shares held on behalf of other stockholders); and (iv) restricted stock units for 19,992 shares of our common stock issuable within 60 days of January 18, 2024. Dr. Young is the Chief Executive Officer and Managing Member of CorLyst. Dr. Young disclaims beneficial ownership of a portion of CorLyst shares.
(7) Consists of 1,398 shares of common stock held directly by Mr. Baluch.
(8) Consists of 721 shares of common stock held directly by Mr. Neal.
(9) Consists of 2,882 shares of common stock held directly by Ms. Pannu.
(10) Justin Yorke is a manager of the Richland Fund, LLC. The shares of common stock reported for Mr. Yorke include (i) 3,737 shares of common stock held directly by Mr. Yorke; (ii) the shares held by the Richland Fund, LLC which total 23,232 shares; and (iii) stock options for the purchase of 105 shares of common stock exercisable within 60 days of January 18, 2024.
(11) The address for Yuhan Corporation is 74 Noryangjin-ro, Dongjak-gu, Seoul 06927, Republic of each executive officerKorea.
| 30 |
The following description of the material terms of our capital stock and director is 6041 South Syracuse Way, Suite 315, Greenwood Village, Colorado 80111. The addressthe provisions of other beneficial owners is set forth below.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 registration statement of which this prospectus forms a part.
- 30 -
The percentageWe have the authority to issue an aggregate of 100,000,000 shares beneficially owned shown in the table is based upon 1,900,000of $0.0001 par value common stock and 1,000,000 shares of $0.0001 par value preferred stock. As of January 18, 2024, there were 1,231,676 shares of common stock outstanding as of May 1, 2013. In addition, we have shown the percentage of shares beneficially owned on an “as if converted” basis, assuming 8,360,000 shares of common stock outstanding as of May 1, 2013, after giving effect to the conversion of all of our outstanding preferred stock into 6,460,000 shares of common stock, as these shares may be converted at any time by the preferred shareholders.
Name of beneficial owner |
| Actual | As if converted | ||||||
Amount and nature of beneficial ownership |
| Percent of class | Amount and nature of beneficial ownership (1) |
| Percent of class (1) |
| |||
Executive officers and directors: |
|
|
|
|
|
|
|
| |
Stephen Garland (2) |
| 375,000 |
| 16.48% | 375,000 |
| 4.29% |
| |
Allen Dodge (3) |
| - |
| - | - |
| - |
| |
Gus Blass III (4) |
| 175,000 |
| 8.86% | 356,130 |
| 4.22% |
| |
Reginald Greenslade (5) |
| 75,000 |
| 3.80% | 181,065 |
| 2.15% |
| |
Donald Larson (6) |
| 150,000 |
| 7.59% | 150,000 |
| 1.78% |
| |
All executive officers and directors as a group(5) persons) |
| 775,000 |
| 40.79% | 1,062,195 |
| 12.71% |
| |
Stockholders owning more than 5%: |
|
|
|
|
|
|
|
| |
JMW Fund LLC (7) 4 Richland Place Pasadena, California 91103 Manager: Justin Yorke |
| - |
| - | 1,575,000 |
| 18.84% |
| |
San Gabriel Fund LLC (7) 4 Richland Place Pasadena, California 91103 Manager: Justin Yorke |
| - |
| - | 1,575,000 |
| 18.84% |
| |
Justin Yorke (7) 4 Richland Place Pasadena, California 91103 |
| - |
| - | 3,362,994 |
| 40.23% |
| |
Charles F. Kirby (8) PO Box 3087 Greenwood Village, Colorado 80155 |
| - |
| - | 1,117,000 |
| 13.36% |
| |
Kirby Enterprise Fund LLC (8) PO Box 3087 Greenwood Village, Colorado 80155 Manager: Charles Kirby |
| - |
| - | 605,000 |
| 7.24% |
| |
- 31 -
Charles F. Kirby Roth IRA (8) PO Box 3087 Greenwood Village, Colorado 80155 |
| - |
| - | 482,000 |
| 5.77% |
| |
Richard Giles (9) 6300 Sagewood Dr. Suite 400 Park City, Utah 84098 |
| 1,427,500 |
| 73.58% | 1,427,500 |
| 16.99% |
| |
(1)
Assumes 8,360,000 shares of common stock outstanding as of May 1, 2013, after giving effect to the conversion of all of our outstanding preferred stock into 6,460,000 shares of common stock, as these shares may be converted at any time by the preferred shareholders.
(2)
Consists of 375,000 shares of common stock issuable upon exercise of vested stock options.
(3)
Does not include 100,000 shares of common stock issuable upon exercise of unvested stock options.
(4)
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.
(5)
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.
(6)
Includes 75,000 shares of common stock underlying vested stock options and 75,000 shares of common stock.
(7)
Mr. 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 stockholdings of 87,494 shares of common stock, he may be deemed to own beneficially 3,362,994 shares of common stock.
(8)
Mr. 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, Mr. Kirby may be deemed to own beneficially 1,117,000 shares of common stock.
(9)
Includes 40,000 shares of common stock underlying vested stock options and 1,387,500 shares of common stock. Excludes 1,400,000 unvested performance stock options which vest based on meeting certain future revenue goals.
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, a founder and the former Chief Executive Officer of Heatwurx and David Eastman, a founder and former Secretary of Heatwurx, were also executive officers of Hunter Capital LLC. The Company leased office
- 32 -
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 $43,226 during that period.
In connection with our Series A Preferred Stock Offering on April 15, 2011, Messrs. Griffin and Eastman entered into a voting agreement, pledge agreements, and a right of first offer and co-sale agreement. These agreements terminated on January 26, 2012 when Messrs. Griffin and Eastman severed their ties with us upon execution of a settlement agreement with us. At the time of their departure from the Company, each returned 525,000 shares of common stock to the Company for cancellation to assist the company and provide for a better capitalization to all the investors, and sold their remaining shares to other persons. The settlement agreement did not provide for payment by us or Messrs. Griffin and/or Eastman. Messrs. Eastman and Griffin left the Company to pursue other interests.
Transactions with Richard Giles
Mr. Giles owns more than 5% of the outstanding shares of Company common stock. Mr. Giles is a founder and was a director of the Company from April 2011 to June 2012. He has also been a consultant of the Company from April 2011 to the present. His compensation as a consultant from April 2011 through March 2013 was $296,800. He continues to be paid $15,800 a month for his consulting services.
On April 15, 2011, the Company entered into an Asset Purchase Agreement with Mr. Giles. 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. The Company has paid Mr. Giles $110,500 for interest on the senior subordinated note through May 1, 2013. As of May 1, 2013, the full $1,000,000 remains outstanding.
In conjunction with the Asset Purchase Agreement, the Company granted 200,000 performance stock options to Mr. Giles 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. In order for the options to vest, as described above, the Company must achieve certain revenue targets within three years from December 31, 2012. In order to determine the fair value of the options granted, the Company prepared a forecast of the probability that the targets would be achieved, with a focus on the 2013 revenue given the uncertainty of forecasting revenue for years 2014 and 2015 given the Company’s development stage. The Company prepared three scenarios only one of which resulted in the options vesting. The Company’s forecasts indicated a 95% probability that the options would not vest and therefore would have no value. Although the third scenario did result in the options vesting, as the probability was only 5%, the value associated with this scenario was immaterial.
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.
- 33 -
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 description of our capital stock and certain provisions of our certificate of incorporation, our bylaws as well as certain provisions of applicable law. Other than the ability 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 23,000,000 shares of capital stock, $0.0001 par value per share, consisting of 20,000,000 shares of common stock and 3,000,000 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.
The following is a summary of
Dividend Rights. Subject to the rights associated with our common stock and preferred stock.
Common stock
As of May 1, 2013, 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 of any series that may be issued and 2,462,000 shares reserved for issuance upon exercise of outstanding options.
Our Certificate of Incorporation does not provide for cumulative voting and the holders of our common stock are entitledfrom time 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 May 1, 2013, 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 1,750,000 shares of Series A Preferredour common stock at an assumed combined public offering price of $4.00 per share and accompanying Common Warrants (the last reported sale price of our common stock on Nasdaq on January 18, 2024). 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 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 following the consummation of this offering in lieu of the shares of common stocks that would result in such excess ownership. For each Pre-Funded Warrant we sell, the number of shares of common stock we sell in this offering will be decreased on a one-for-one basis. Each share of our common stock or Pre-Funded Warrant is being sold together with one Common Warrant to purchase one share of common stock. The shares of our common stock and/or Pre-Funded Warrants and related Common Warrants will be issued separately. We are also registering the shares of our common stock issuable from time to time upon exercise of the Pre-Funded Warrants and Common Warrants offered hereby.
Common Stock outstanding.
The Seriesmaterial 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 registration statement of which this prospectus forms a part. Prospective investors should carefully review the terms and provisions of the form of Common Warrant for a complete description of the terms and conditions of such warrant.
Duration and Exercise Price
The Common Warrants will have an exercise price equal to 100% of the combined public offering price per share of common stock and accompanying Common Warrant 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 Initial Exercise Date. The Common Warrants will expire on the five-year anniversary of the Initial Exercise Date. The exercise price and number of 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 and the 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 us a duly executed exercise notice accompanied by payment in full for the number of shares of our common stock purchased upon such exercise (except in the case of a cashless exercise as discussed below). A Preferred Stock hasholder (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 common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Common Warrants.
Cashless Exercise
If, at the time a holder exercises its Common Warrants, a registration statement registering 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 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 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 same consideration receivable as a result of such transaction by a holder of the number of shares of our common stock for which the Common Warrant is exercisable immediately prior to such 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 five days following terms:the consummation of a fundamental transaction.
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annual dividendHowever, in the event of $0.066664 cumulative dividend per share;
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dividends accrue but area fundamental transaction which is not payable unless declaredin our control, including a fundamental transaction not approved by theour Board of Directors, the holders of the Common Warrants will only be entitled to receive from us or unless dividends areour 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 be paid on common stock;
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liquidation preferencethe holders of $0.8333 per share with priority over common stock;
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convertible intoour common stock at $0.119047 per share for a totalin connection with the fundamental transaction, whether that consideration is in the form of 4,200,000 shares;
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voting rights equal tocash, stock or any combination of cash and stock, or whether the holders of our common stock on an as-converted basis;are given the choice to receive alternative forms of consideration in connection with the fundamental transaction.
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convertible at any timeTransferability
Subject to applicable laws, a Common Warrant may be transferred at the option of the ownerholder upon surrender of the preferred stock; andCommon Warrant to us together with the appropriate instruments of transfer.
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automatically converts to 4,200,000Fractional Shares
No fractional shares of common stock will be issued upon the closingexercise 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 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 “qualified IPO”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 gross proceedsour consent and the consent of $5,000,000the 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 forms a part. 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 uponsimilar events affecting our shares of common stock and the exercise price.
Exercisability
The Pre-Funded Warrants will be exercisable, 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 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 senior secured promissory notes and the senior subordinated promissory notes.
Series B Preferred Stock. As of May 1, 2013, there were 1,500,000 shares of Series B Preferred Stock 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 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.
The Series B Preferred Stock has
Cashless Exercise
In lieu of making the following terms:
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annual dividend of $0.16 cumulative dividend per share;
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dividends accrue but are not payable unless declared by the Board of Directors or unless dividends arecash payment otherwise contemplated to be paid on common stock;
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liquidation preferencemade to us upon such exercise in payment of $2.00 per share with priority over common stock;
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convertible intothe 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 at $2.00 per share fordetermined according to a totalformula set forth in the Pre-Funded Warrants.
Fundamental Transactions
In the event of 1,500,000 shares;
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voting rights equal toa fundamental transaction, as described in the Pre-Funded Warrants and generally including any reorganization, recapitalization or reclassification of our shares of common stock, on an as-converted basis;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 Pre-Funded 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 same consideration receivable upon or as a result of such transaction by a holder of the number of shares of our common stock for which the Pre-Funded Warrant is exercisable immediately prior to such event.
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convertible at any timeTransferability
Subject to applicable laws, a Pre-Funded Warrant may be transferred at the option of the ownerholder upon surrender of the preferred stock; andPre-Funded Warrants to us together with the appropriate instruments of transfer.
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automatically converts to 1,500,000
Fractional Shares
No fractional shares of common stock will be issued upon the closing of a “qualified IPO” with gross proceeds of $5,000,000 or upon payment in fullexercise of the outstanding senior secured promissory notes andPre-Funded Warrants. Rather, the senior subordinated promissory notes.
Series C Preferred Stock. Asnumber of May 1, 2013, there were 760,000 shares of Series C Preferred Stock outstanding.
The Series C Preferred Stock has the following terms:
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annual dividend of $0.16 cumulative dividend per share accrues and is payable quarterly;
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liquidation preference of $2.00 per share with priority over common stock;
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convertible into common stock at $2.00 per share for a total of 760,000 shares;
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voting rights equal to common stock on an as-converted basis;
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convertible at any time at the option of the owner of the preferred stock; and
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automatically converts to 760,000 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 an amount equal to such fraction multiplied by the exercise price.
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 extremely limited.
Right as a Shareholder
Except as otherwise provided in the Pre-Funded Warrants or by virtue of such holder’s ownership of shares of common stock, the holders of the Pre-Funded Warrants do not have the rights or privileges of holders of our shares of common stock, including any 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.
Placement Agent Warrants
We have also agreed to issue to the placement agent (or its designees) Placement Agent Warrants to purchase up to 70,000 shares of common stock. The Placement Agent Warrants will be exercisable upon issuance and will have substantially the same terms as the Common Warrants described above, except that the Placement Agent Warrants will have an assumed exercise price of $5.00 per share (representing 125% of the assumed offering price per share and accompanying Common Warrant) and a termination date three years from the commencement of the sales 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 are 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 contrary position regarding the tax consequences of the acquisition, ownership or disposition of our common stock, pre-funded warrants or common warrants, or that any such contrary position would not be sustained by a court.
We 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 primary supervision of a court within the United States and one 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 “investment unit” consisting of one share of common stock or one pre-funded warrant, as applicable, and a warrant to acquire 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 the 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 fractional share that would otherwise have been issuable upon exercise of 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 U.S. Holder will take a tax basis in the shares acquired on the exercise of a warrant equal to the exercise price of the warrant, increased by the 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 U.S. Holder’s holding period in the shares of our common stock acquired 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 the exercise of a 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.
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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 Non-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 recognized 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 Backup 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; | |
| ● | 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.
We have engaged H.C. Wainwright & Co., LLC, 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 “qualified IPO”securities purchase agreement with gross proceedsus. Investors who do not enter into a securities purchase agreement shall rely solely on this prospectus in connection with the purchase of $5,000,000 or upon paymentour securities in fullthis 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 one year following the closing of the outstanding senior secured promissory notesoffering, subject to exceptions; and (ii) a covenant to not enter into any equity financings for 60 days from closing of the senior subordinated promissory notes..offering, subject to certain exceptions.
Indemnification
The nature of directorsthe representations, warranties and officerscovenants in the securities purchase agreements shall include, but are not limited to:
Our certificate
| ● | 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 a period of sixty (60) days. |
Delivery of incorporationthe shares of common stock, pre-funded warrants and bylaws provide thatcommon stock purchase warrants offered hereby is expected to occur on January ●, 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 indemnifypay to the placement agent in connection with the sale of 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 assumed exercise price of $5.00 per share, which represents 125% of the assumed 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 $310,000. 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 Common Warrants offered hereby, we expect the net proceeds from this offering will be approximately $6.2 million.
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 in 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 on the registration statement of which this prospectus is a part. The form of the placement agent warrant is included as an exhibit to this registration statement of which this prospectus forms a part.
Tail
We have also agreed to pay the placement agent a tail fee equal to the maximum extentcash 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 engagement 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 60 days 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 our common stock or any securities convertible into, or exercisable or exchangeable for, shares of our common stock. Certain limited transfers are permitted by Delaware law, includingduring 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 60 days following the closing of this offering, subject to certain exceptions. The placement agent may, in circumstancesits 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 or upon a specified or contingent event in which indemnification is otherwise discretionary under Delaware law. the future, or enter into any agreement to issue securities at a future determined price for a period of one year following the closing date of this offering.
Indemnification
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.
These indemnification provisions may be sufficiently broad to permit indemnification of our directors, officers and controlling persons forplacement agent against certain liabilities, including reimbursement of expenses incurred, arisingcertain liabilities under the Securities Act, or to contribute to payments that the placement agent may be required to make in respect of those liabilities.
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1933, as amended. ToIn addition, we will indemnify the extent that our directors, officers and controlling persons are indemnified under the provisions containedpurchasers of securities in our certificate of incorporation, bylaws, Delaware law or contractual arrangementsthis offering against liabilities arising underout of or relating to (i) any breach of any of the Securities Act, we have been advised thatrepresentations, warranties, covenants or agreements made by us in the opinion ofsecurities 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 Securitiessecurities purchase agreement or related documents and Exchange Commission such indemnification is against public policy as expressedthe transactions contemplated thereby, subject to certain exceptions
Other Relationships
The placement agent and its affiliates have engaged, and may in the Securities Actfuture engage, in investment banking transactions and is therefore unenforceable. 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.
Transfer
In addition, in the ordinary course of their business activities, the placement agent and registrarits 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 this website 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
The following officers and directors have expressed interest in purchasing shares of our common stock being offered for investment purposes. However, because indications of interest are not binding, we cannot guarantee if any officer or director will participate in this offering. Such purchases, if any, would be made at the public offering price.
| Purchaser | Purchaser’s Role | Anticipated Purchase Amount ($) | Number of shares of common stock | |||||||
| George Ng | Chief Executive Officer and a director | $ | 50,000 | 12,500 | ||||||
| David Young | President, Research and Development and a director | 100,000 | 25,000 | |||||||
| Sian Bigora | Chief Development Officer | 20,000 | 5,000 | |||||||
| James Stanker | Chief Financial Officer | 10,000 | 2.500 | |||||||
| Justin Yorke (1) | Director | 25,000 | 6,250 | |||||||
| Total | $ | 205,000 | 51,250 | |||||||
| (1) | Mr. Yorke is the manager of the Richland Fund which will be purchasing the shares of common stock. |
Transfer Agent
The transfer agent and registrar for our common stock is CorporateContinental Stock Transfer Inc., Denver, Colorado.
Shares eligible& Trust Company, LLC (“Continental”). Continental will act as the registrar and transfer agent for future sale
There has been no public market for any of our securities. Future sales of substantial amounts ofthe common stock inpurchase warrants and the public market, or the perception that such sales may occur, could adversely affect the market prices of our common stock.pre-funded warrants.
We are registering in this prospectus:
·Nasdaq Listing
6,460,000
Our shares of common stock underlying our Series A, B and C Preferred Stock; and
·
1,750,000 outstanding shares of common stock.
Accordingly, up to 8,210,000 shares of common stock may be sold under this prospectus.
Stock options
We intend to file a registration statementare listed on Form S-8the NASDAQ Capital Market under the Securities Act to register shares of common stock issuable under our equity compensation plan. At May 1, 2013 there were 1,022,000 stock options outstanding under the plan to purchase an equal number of shares of common stock at $2.00 per share. At May 1, 2013 there were an additional 1,440,000 nonqualified performance stock options outstanding that were not issued under our equity compensation plan.symbol “PCSA.”
The registration statement on Form S-8 is expected to be filed not sooner than 90 days following the effective date of the registration statement of which this prospectus is a part and will be effective upon filing. Shares issued upon the exercise of stock options after the effective date of the Form S-8 registration statement will be eligible for resale in the public market without restriction, subject to limitations applicable to affiliates under Rule 144 of the Securities Act.
SELLING STOCKHOLDERSLEGAL MATTERS
This prospectus relates to:
·
the resale by our common stockholders of 1,750,000 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.
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·
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 May 1, 2013, 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.
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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 (2) | 1,575,000 | 1,575,000 | - | - | |
San Gabriel Fund LLC (3) | 1,575,000 | 1,575,000 | - | - | |
Richard Giles (4) | 1,387,500 | 1,387,500 | - | - | |
Kirby Enterprise Fund LLC (5) | 605,000 | 605,000 | - | - | |
Charles F Kirby Roth 401k (6) | 525,000 | 525,000 | - | - | |
Gus Blass II | 156,065 | 156,065 | - | - | |
The Richland Fund LLC | 135,500 | 135,500 | - | - | |
Capital Properties LLC | 125,065 | 125,065 | - | - | |
Gus Blass III (7) | 125,065 | 125,065 | - | - | |
Jay R Kuhne | 125,065 | 125,065 | - | - | |
West Hampton Special Situations Fund, LLC | 125,000 | 125,000 | - | - | |
Reg Greeenslade (8) | 106,065 | 106,065 | - | - | |
Echo Capital Growth Corporation | 87,565 | 87,565 | - | - | |
Buddy Walker | 75,000 | 75,000 | - | - | |
W D Larson (9) | 75,000 | 75,000 | - | - | |
W Douglas Moreland | 75,000 | 75,000 | - | - | |
Buddy & Linda Walker Comm. Prop. | 70,000 | 70,000 | - | - | |
High Speed Aggregate | 52,532 | 52,532 | - | - | |
Daryl & Stacy Monday Comm. Prop. | 50,043 | 50,043 | - | - | |
William J. Gordica | 50,043 | 50,043 | - | - | |
James T Galvin | 50,032 | 50,032 | - | - | |
The Russell Trust dtd 6/23/97 | 50,022 | 50,022 | - | - | |
Underwood Family Partners | 45,000 | 45,000 | - | - | |
Goldstein Family Associates, a Colorado LLP | 40,022 | 40,022 | - | - | |
William F Hubble | 37,522 | 37,522 | - | - | |
John Paulson | 33,766 | 33,766 | - | - | |
Linda G McGrain | 32,500 | 32,500 | - | - | |
Alex Conner Blass Trust #3 | 31,000 | 31,000 | - | - | |
Wayne T Grau | 31,000 | 31,000 | - | - | |
Donald P Wells | 30,013 | 30,013 | - | - | |
Stephen C Ball | 27,500 | 27,500 | - | - | |
88 Lapis Investments, LLC | 25,022 | 25,022 | - | - | |
Reuben Sandler | 25,022 | 25,022 | - | - | |
Wayne T. & Maria A. Grau, Joint Ten. | 25,022 | 25,022 | - | - | |
Macquarie Private Wealth ITF Trevor | 25,000 | 25,000 | - | - | |
Mason Family Trust | 25,000 | 25,000 | - | - | |
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Volcano Fund LLC | 25,000 | 25,000 | - | - | |
Jerry Donahue | 22,511 | 22,511 | - | - | |
Shuster Family Trust dtd 4/4/80 | 22,511 | 22,511 | - | - | |
Joseph W Skeehan | 20,000 | 20,000 | - | - | |
Kirby Enterprise Capital Management, LLC (10) | 20,000 | 20,000 | - | - | |
Pamela A Pryor | 20,000 | 20,000 | - | - | |
Michael A Schneider | 17,500 | 17,500 | - | - | |
Georgette Pagano | 16,000 | 16,000 | - | - | |
Cecelia Yorke | 15,000 | 15,000 | - | - | |
Jeff P. Ploen | 15,000 | 15,000 | - | - | |
Bruce Stewart | 12,511 | 12,511 | - | - | |
Lee & Janet Keyte Comm Pro. | 12,511 | 12,511 | - | - | |
Linda Waitsman & Kenton Spuehler Jt. Ten. | 12,511 | 12,511 | - | - | |
Aaron A. & Patricia Grunfeld Jt. Ten. | 12,500 | 12,500 | - | - | |
Chad K Kirby | 12,500 | 12,500 | - | - | |
David Erickson | 12,500 | 12,500 | - | - | |
Growth Ventures Inc Roth 401 K | 12,500 | 12,500 | - | - | |
James R Colburn | 12,500 | 12,500 | - | - | |
Kelsey Kirby | 12,500 | 12,500 | - | - | |
Lee Keyte | 12,500 | 12,500 | - | - | |
Mary Schneider | 12,500 | 12,500 | - | - | |
Justin & Jannina Yorke Comm. Prop. | 12,494 | 12,494 | - | - | |
Aaron A Grunfeld | 10,000 | 10,000 | - | - | |
Arthur Kassoff | 10,000 | 10,000 | - | - | |
Dennis J. Gordica | 10,000 | 10,000 | - | - | |
Fisk Investments LLC | 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 | - | - | |
Thomas E. Manoogian | 10,000 | 10,000 | - | - | |
Weston P Munselle | 10,000 | 10,000 | - | - | |
Barbara J Chambers | 7,500 | 7,500 | - | - | |
Beverly Yorke | 7,500 | 7,500 | - | - | |
Brian R Cullen | 7,500 | 7,500 | - | - | |
Jim Williams | 7,500 | 7,500 | - | - | |
Pole Creek Associates LLC | 7,500 | 7,500 | - | - | |
Horst H Engel | 7,000 | 7,000 | - | - | |
Darlyne Garofalo | 6,000 | 6,000 | - | - | |
Andrew Elliot | 5,000 | 5,000 | - | - | |
Antonio & Boliva Castaneda Jt. Ten. | 5,000 | 5,000 | - | - | |
Chris Antonsen | 5,000 | 5,000 | - | - | |
Edward A. Cerkovnik. Sr. | 5,000 | 5,000 | - | - | |
Hillary Ridland | 5,000 | 5,000 | - | - | |
International Card Services, LLC | 5,000 | 5,000 | - | - | |
John Kennedy | 5,000 | 5,000 | - | - | |
Kimberly Stump | 5,000 | 5,000 | - | - | |
Mccall Kuhne | 5,000 | 5,000 | - | - | |
Stacey Mercer | 5,000 | 5,000 | - | - | |
Steve Jackson | 5,000 | 5,000 | - | - | |
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Susan Cooper | 5,000 | 5,000 | - | - | |
Taylor Keyte | 5,000 | 5,000 | - | - | |
Teddy Keyte | 5,000 | 5,000 | - | - | |
William Hoover | 5,000 | 5,000 | - | - | |
Frank Guiltinan | 4,000 | 4,000 | - | - | |
Fred M. & Virginia Rusk Comm. Rop. | 3,000 | 3,000 | - | - | |
Monica F Burman | 2,500 | 2,500 | - | - | |
Ximena Blanca Proano | 2,500 | 2,500 | - | - | |
Amy Antonsen | 1,000 | 1,000 | - | - | |
Joanna Antonsen | 1,000 | 1,000 | - | - | |
Sarah B Trainotti | 1,000 | 1,000 | - | - | |
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 | 8,210,000 | 8,210,000 | - | - | |
(1)
Amount gives effect to the 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 outstanding stock options and performance stock options, respectively.
(2)
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.
(3)
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.
(4)
Mr. Giles owns more than 16.90% 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.
(5)
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.
(6)
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.
(7)
Mr. Blass III is a director of our company.
(8)
Mr. Greenslade is a director of our company.
(9)
Mr. Larson 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:
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·
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.
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 supplementCertain legal matters relating to this prospectus to disclose those arrangements.
The selling stockholders 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 atoffering and the time of sale, at prices related to such market prices or at negotiated prices. The selling stockholders 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.
In addition, the selling stockholders 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 stockholders 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 stockholders 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 stockholders 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
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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.
The validity of the securities offered hereby is beingby this prospectus will be passed upon for us by The Law Office of Ronald N. VanceFoley & Associates, P.C., South Jordan, Utah. Lardner, LLP. Ellenoff, Grossman & Schole LLP is acting as counsel for the placement agent in connection with this offering.
EXPERTS
The predecessorconsolidated financial statements as of Heatwurx, Inc. for the period from January 1, 2009 (date of inception) to April 15, 2011 and for the period from January 1, 2011 to April 15, 2011 and the financial statements of the successor entity, Heatwurx, Inc. as offiscal years ended December 31, 20122022 and 2011 and2021, incorporated by reference into this prospectus from the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 and for the period from March 29, 2011 (date of inception) 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, which report expresses an unqualified opinion and includes an explanatory paragraph relating to the Company’s ability to continue as a going concern and are includedhas been so incorporated in reliance upon such report and upon the authority of such firm as experts in accounting and auditing.
INFORMATION 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; November 15, 2023 and January 18, 2024; | |
| ● | 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
We have
This prospectus is part of a registration statement we filed with the SEC a registration statement on Form S-1 (File Number 333-184948) under the Securities Act with respect to the shares of common stock 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 securities offered hereby, reference is madewe 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 that is filed as an exhibit to the registration statement are not necessarily complete, andincorporated by reference in each instance we refer you to the copy of such contract or other document filed as an exhibit to the registration statement. We currently do not file periodic reports with the SEC. Upon the effective date of the registration statement of which this prospectus, is a part, we will be required toaccurate only as of the date of those respective documents, regardless of the time of delivery of this prospectus or any sale of our securities.
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, Suite 315, Greenwood Village, Colorado 80111.
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