Preferred stockholders may elect to convert shares of their preferred stock into shares of common stock as follows:
Series A 600,000 shares of Series A Preferred Stock are convertible into 4,200,000 shares of common stock at $0.12 per share;
Series B 1,500,000 shares of Series B Preferred Stock are convertible into 1,500,000 shares of common stock at $2.00 per share; and
Series C 760,000 shares of Series 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, as well as the significance of such statements in the context of this prospectus.
Risks Relating to Our Business
If we fail to raise additional capital to fund current operations, we may be unable to continue our proposed business operations as currently contemplated.
As discussed in several of the risk factors below, we will need additional funds to continue operations. As of March 31, 2013, we had approximately $422,000 cash on hand and were spending approximately $250,000 per month, 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 beginning in October 2013 through April 2014, and to repay $1,000,000 in outstanding loans from lenders on September 15, 2013. 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 $4,500,000 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 determined the terms of these financings and any terms ultimately secured from investors could be less favorable to us than if the needed financing were to fund expansion or less critical financial needs. 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, we may be required to reduce operations, curtail any future growth opportunities, or cease operations all together.
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:
the markets acceptance of our equipment;
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;
our ability to maintain any competitive advantage via patents, if attainable, or protection of our intellectual property and trade secrets;
our ability to attract customers who require the products we offer;
our ability to generate revenues through the sale of our products to potential customers; and
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 by 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 partners 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:
retention and hiring of appropriate operational, research and development personnel;
determining the products technical specifications;
successful completion of the development process;
successful marketing of the preservation and repair equipment and achieving customer acceptance;
establishing, managing and maintaining key reseller relationships;
producing products that meet the quality, performance and price expectations of our customers;
developing effective sales, advertising and marketing programs; and
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 price of our shares of common stock could decline, and you may lose all or part of your investment.
Our ability to grow the business depends on being able to demonstrate our equipment to potential customers and distributors and train them on proper usage. If we do not add more demonstration teams, our growth 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 or a part of their investment.
Commodity or component price increases and/or significant shortages of component products may erode our expected gross profit on sales and adversely impact our ability to meet commitments to customers.
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 members of the executive team, the execution of our strategic vision. Mr. Garland also has developed and cultivated significant relationships in our industry that are critical to our success. As our company grows and more people are added to the team over time, Mr. Garland will share his knowledge of our company and the industry with new hires, and we will not be dependent upon Mr. Garland or any other individual. However, until we grow, there is a disproportionate dependence upon Mr. Garland, and the loss of his services would significantly impair our business operations. Some companies reduce the risk of the 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. Garlands 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 upon our ability to attract, retain and motivate highly skilled employees. If we experience any adverse outcome in such matters, our ability to grow and manage our business may suffer.
We currently rely upon outside consultants for many aspects of our operations. Our ability to execute our business plan and be successful depends upon our ability to attract, retain and motivate highly skilled employees. As we expand our business, we will need to hire additional personnel to support our operations. We may be unable to
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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:
the patents of others will not have an adverse effect on our ability to conduct our business;
our patents will be issued;
our patents, if issued, will provide us with competitive advantages;
patents, if issued, will not be challenged by third parties;
we will develop additional proprietary technology that is patentable; or
others will not independently develop similar or superior technologies, duplicate elements of our preservation and repair equipment or design around it.
In the future, we may be accused of patent infringement by other companies. To defend and/or settle such claims, we may need to acquire licenses to use, or to contest the validity of, issued or pending patents. We cannot assure you that any license acquired under such patents would be made available to us on acceptable terms, if at all, or that we would prevail in any contest regarding the issued or pending patents of others. In addition, we could incur substantial costs in defending ourselves in suits brought against us for alleged infringement of another party's patents or in defending the validity or enforceability of our patents, if any, or in bringing patent infringement suits against other parties based on our patents. Any negative outcome of a patent infringement case or failure to obtain license agreements would necessitate the need to redesign our products, which creates added expense. Such redesigned products may not be accepted in the market place and we may not be able to continue our operations.
Because we are smaller and have fewer financial and other resources than many other companies that manufacture and sell equipment for road repair work, we may not be able to successfully compete in the very competitive road repair work equipment industry.
There are over eleven million miles of paved roadways throughout the world. There is significant competition among companies that manufacture and sell equipment to repair existing roadways. Our business faces competition from companies that are much more connected to the decision-makers, have been in business for a longer period of time, and have the financial and other resources that would enable them to invest in new technologies if they chose to. These companies may be able to achieve substantial economies of scale and scope, thereby substantially reducing 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 of the United States and, accordingly, our business will be susceptible to risks associated with international operations. If we are unable to successfully manage the risks involved in international operations, the expected growth of our business may be negatively impacted.
We have no experience operating in foreign jurisdictions. We continue to explore opportunities outside of North America. Our lack of experience in operating our business outside of North America increases the risk that our current and any future international expansion efforts will not be successful. Conducting international operations subjects us to new risks that, generally, we do not face in the United States, including:
fluctuations in currency exchange rates;
unexpected changes in foreign regulatory requirements;
longer accounts receivable payment cycles and difficulties in collecting accounts receivable;
difficulties in managing and staffing international operations;
potentially adverse tax consequences, including the complexities of foreign value added tax systems and restrictions on the repatriation of earnings;
localization of our solutions, including translation into foreign languages and associated expenses;
the burdens of complying with a wide variety of foreign laws and different legal standards, including laws and regulations related to privacy;
increased financial accounting and reporting burdens and complexities;
political, social and economic instability abroad, terrorist attacks and security concerns in general; and
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 coverage for the risks associated with our business operations. Accordingly, we may incur significant expenses for uninsured events and our business, financial condition and results of operations could be materially and adversely affected.
Risks associated with 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. Any of these risks may result in significant losses. We do not carry 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, 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 operations could be materially and adversely affected.
We have raised substantial amounts of capital in private placements and intend to continue to do so in 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 could be negatively affected.
We will face increased legal, accounting, administrative and other costs and expenses as a public company. Compliance with the Sarbanes-Oxley Act of 2002, the Dodd-Frank Act 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 increases in our legal, audit and financial compliance costs. The Securities Exchange Act of 1934, as amended, will require, among other things, that we file annual, quarterly and current reports with respect to our business and financial condition. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain the same or similar coverage.
As a public company, we will be subject to Section 404 of the Sarbanes-Oxley Act relating to internal control over financial reporting. We expect to incur significant expense and devote substantial management effort toward ensuring compliance with Section 404. We currently do not have an internal audit group, and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Implementing any appropriate changes to our internal controls may require specific compliance training for our directors, officers and employees, entail substantial costs to modify our existing accounting systems, and take a significant period of time to complete. Such changes may not, however, be effective in maintaining the 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 if the market value 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 revenues equal or exceed $1 billion, we would cease to be an emerging growth company on the last day of the year in which that occurs. We cannot predict if investors will find our common stock less attractive because we may rely on the exemptions from certain reporting standards as an emerging growth company. If some investors find our common stock less attractive, there may be a less active trading market for our common stock, and 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, 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.
If we fail to comply with our public company obligations, our investors may lose confidence in us, any future market 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;
the inability of stockholders to call special meetings; and
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 stock 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, and the perception that these sales could 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 making it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. These sales also could cause any future stock trading 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 customers account, to make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchasers 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, investors 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 should not purchase our common stock. Any determination to pay dividends in the future will be made at the discretion of our Board of Directors and will depend on our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our Board of Directors deems relevant.
MANAGEMENTS 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 prospectus for the period from January 1, 2011 through April 15, 2011 (date of acquisition of the Heatwurx business from Mr. Giles construction business have been disaggregated, or carved-out of the financial statements of Mr. Giles construction business, as our predecessor. These carved-out financial statements form what we refer to herein as the financial statement of our predecessor, and include both direct and indirect expenses. The historical direct expenses consist primarily of the various cost of development of the Heatwurx equipment (technology, design, etc.), incurred by Mr. Giles construction business on behalf of Heatwurx. Indirect expenses represent principally the estimated time Mr. Giles spent on Heatwurx activities. In addition, the net intercompany activities between predecessor and Mr. Giles construction business have been accumulated in a single caption entitled, Divisional Net Equity.
The Heatwurx financial information as of December 31, 2011 and 2012, as of March 31, 2013, and 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 referred to in this prospectus as the financial information of the successor.
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of various factors, including those discussed in Risk Factors and elsewhere in this prospectus.
Overview and Basis of Presentation
Heatwurx, Inc. was incorporated under the laws of the State of Delaware on March 29, 2011 as Heatwurxaq, Inc. and subsequently changed its name to Heatwurx, Inc. on April 15, 2011. We have not yet commercialized our products and we 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 equipment to be eco-friendly as the Heatwurx process reuses and rejuvenates distressed asphalt, uses recycled asphalt pavement for filler material, eliminates travel to and from asphalt batch plants, and extends the life of the roadway. We believe our equipment, technology and processes provide savings over other processes that can be more labor and equipment intensive.
Our hot-in-place recycling process and equipment has been selected by the Technology Implementation Group of the American Association of State Highway Transportation Officials (AASHTO TIG) as an additionally Selected Technology for the year 2012. We develop, manufacture and intend to sell our unique and innovative and eco-friendly equipment to federal, state and local agencies as well as contractors for the repair and rehabilitation of damaged and deteriorated asphalt surfaces.
Section 107 of the JOBS Act provides that an emerging growth company can take advantage of 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
Managements discussion and analysis of our financial condition and results of operations include the predecessors financial statements for the periods through April 15, 2011; and the successors financial statements as of December 31, 2012 and 2011, as of March 31, 2013, for 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. On an ongoing basis, management evaluates its estimates, including those related to impairment of long-lived assets, accrued liabilities and certain expenses. We base our estimates about the carrying values of assets and liabilities that are not readily apparent from other sources on historical experience and on other assumptions believed to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We believe the following critical accounting policies involve significant judgments and estimates used in the preparation of our financial statements.
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 develop for use in our products is expensed as incurred until technological feasibility has been established after which it is capitalized and depreciated.
We account for stock-based compensation in accordance with Accounting Standards Codification (ASC) 718 Compensation Stock Compensation for all share-based payments, based on the grant-date fair value estimated in accordance with the provisions of ASC 718 is recognized as an expense over the requisite service period.
The fair value of each option grant is estimated using the Black-Scholes option-pricing model. We account for equity instruments issued to non-employees in accordance with the provisions of ASC 718 which requires that such equity instruments be recorded at their fair value on the measurement date.
All stock options issued to date by 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. Given that the share price of these private placements represents, in managements view, the best indication of the fair value of the Companys common stock prior to this offering by selling stockholders, we utilized a $2.00 estimate of fair value for a share of our common stock for all options issued during the period from October 2011 to August 2012.
Other significant assumptions utilized in determining the fair value of our stock options included the volatility rate, estimated term 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 term of the options was assumed to be five years, which 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 to 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 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 Companys 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 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 Companys 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.
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 Companys 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 Companys cost structure. Many of the Companys 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 Companys 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.
Management anticipates that the Company will require additional funds to continue operations. As of March 31, 2013, we had approximately $422,000 cash on hand and were spending approximately $250,000 per month, 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 beginning in October 2013 through April 2014, and to repay on September 15, 2013, the $1,000,000 for our senior secured promissory notes issued in May 2013. We anticipate the need to secure funding of up to approximately $4,500,000 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. Without these additional funds, we may be required to reduce operations, curtail any future growth opportunities, or cease operations all together.
In May 2013, we raised an additional $1,000,000 pursuant to the terms of a Senior Loan Agreement and the issuance of Senior Secured Promissory Notes. In connection with these loans, we have agreed to pay each investor an origination fee of 1.5%, for a maximum of $15,000, of the amount loaned to us within 10 days following the date of the loan. These promissory notes mature on September 15, 2013, and bear interest at 12% per annum. Interest is payable monthly commencing on the first day of the month following the issuance date of the notes. The loans are secured by all of our assets, except for certain equipment we have previously financed. Mr. Giles has agreed to subordinate to these lenders his security interest in our assets granted under the Subordinated Security Agreement dated April 15, 2011, between us and Mr. Giles entered into in connection with the senior subordinated note issued to him in the amount of $1,000,000.
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 Companys 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 Companys 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, IntangiblesGoodwill 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 Companys financial statements or disclosures.
companies and his strong educational background give him the skills and expertise to serve as a director of our company.
Our Board of Directors is comprised of four directors. Our directors serve one-year terms, or until an earlier resignation, death or removal, or their successors are elected. There are no family relationships among any of our directors or officers.
Other than fees paid to the Chairman of the Board of Directors, directors do not receive cash compensation for service on the Board of Directors. We reimburse our directors for their out-of-pocket costs, including travel and accommodations, relating to their attendance at any Board of Directors meeting. Directors are entitled to participate in our equity compensation plan. Upon their election to the Board of Directors, directors receive options to purchase 75,000 shares of common stock.
The following table provides a summary of annual compensation for our Directors for the year ended December 31, 2012:
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.
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.
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 Boards regarding other compensation issues.
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.
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.
The following table provides information about outstanding stock options held by our named executive officers at December 31, 2012. No other named executive received stock or stock options. All of these options were granted under our 2011 Stock Incentive Plan. Our named executive officers did not hold any restricted stock or other stock awards at the end of 2012.
Our Board of Directors and stockholders approved the Amended and Restated Heatwurx, Inc. 2011 Equity Incentive Plan (the Plan) in October 2012.
determine the type, the number shares, vesting requirements and other terms and conditions of options;
make all other decisions relating to the operation and administration of the Plan and the options granted under the Plan.
under which vesting may be accelerated, and other terms and conditions of the options granted. Options can have a term of no more than ten years from the grant date except for incentive stock options granted to 10%-Stockholders which can have a term of no more than five years from the grant date.
The Plan authorizes the Compensation Committee to provide for accelerated vesting of options upon a Change in Control, as defined in the Plan. All of the options currently outstanding provide that if there is a Change in Control, (i) immediately prior to the effective date of the Change in Control, an unvested award will become fully exercisable as to all shares subject to the award and (ii) unless the option is assumed by a successor corporation or parent thereof, immediately following the Change in Control any unexercised options will terminate and cease to be outstanding. A Change in Control includes:
any Person (as such term is used in Sections 13(b) and 14(b) of the 1934 Act) is or becomes the beneficial owner (" Beneficial Owner") (as defined in Rule 13d-3 promulgated under the 1934 Act), directly or indirectly, of securities representing fifty percent (50%) or more of the combined voting power of the Companys 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 Companys then current stockholders own less than 50% of the surviving corporation; or
a sale of all or substantially all of the Companys assets.
The table below provides information as to the number of options outstanding and their weighted average exercise price at May 1, 2013.
The following table sets forth information regarding beneficial ownership of our common stock as of May 1, 2013, by:
each person who is known by us to beneficially own more than 5% of our outstanding common stock.
Shares of common stock not outstanding but deemed beneficially owned because an individual has the right to acquire the shares of common stock within 60 days, including shares issuable upon conversion of preferred stock, are treated as outstanding when determining the amount and percentage of common stock owned by that individual and by all directors and executive officers as a group. The address of each executive officer and director is 6041 South Syracuse Way, Suite 315, Greenwood Village, Colorado 80111. The address of other beneficial owners is set forth below.
The percentage of shares beneficially owned shown in the table is based upon 1,900,000 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.
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.
Consists of 375,000 shares of common stock issuable upon exercise of vested stock options.
Does not include 100,000 shares of common stock issuable upon exercise of unvested stock options.
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.
Includes 75,000 shares of common stock underlying vested stock options and 75,000 shares of common stock.
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.
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
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 Preferred Stock, respectively, in separate private placements.
The following is a summary of the rights associated with our common stock and preferred 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 conversion of preferred stock 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 entitled to one vote per share on all matters to be voted upon by the stockholders. Our preferred stockholders are entitled to cast the number of votes equal to the number of whole shares of common stock which they are convertible into. The holders of our common stock are entitled to receive ratably such common stock dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available for that purpose. 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 our affairs. The holders of our common stock have no preemptive or conversion rights.
All outstanding shares of common stock and all shares of common stock when issued by us will be fully paid and nonassessable. Our board is authorized to issue additional shares of common stock within the limits authorized by our Certificate of Incorporation without stockholder approval.
Our certificate of incorporation authorizes the issuance of up to 3,000,000 shares of preferred stock in one or more series. To date we have issued a total of 2,860,000 shares of preferred stock in series A, B and C as detailed below. Any further issuance will require amendment of our certificate of incorporation and stockholder approval.
Series A Preferred Stock. As of May 1, 2013, there were 600,000 shares of Series A Preferred Stock outstanding.
The Series A Preferred Stock has the following terms:
annual dividend of $0.066664 cumulative dividend per share;
dividends accrue but are not payable unless declared by the Board of Directors or unless dividends are to be paid on common stock;
liquidation preference of $0.8333 per share with priority over common stock;
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convertible into common stock at $0.119047 per share for a total of 4,200,000 shares;
voting rights equal to common stock on an as-converted basis;
convertible at any time at the option of the owner of the preferred stock; and
automatically converts to 4,200,000 shares of common stock upon the closing of a qualified IPO with gross proceeds of $5,000,000 or upon payment in full 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.
The Series B Preferred Stock has the following terms:
annual dividend of $0.16 cumulative dividend per share;
dividends accrue but are not payable unless declared by the Board of Directors or unless dividends are to be paid on common stock;
liquidation preference of $2.00 per share with priority over common stock;
convertible into common stock at $2.00 per share for a total of 1,500,000 shares;
voting rights equal to common stock on an as-converted basis;
convertible at any time at the option of the owner of the preferred stock; and
automatically converts to 1,500,000 shares of common stock upon the closing of a qualified IPO with gross proceeds of $5,000,000 or upon payment in full of the outstanding senior secured promissory notes and the senior subordinated promissory notes.
Series C Preferred Stock. As of May 1, 2013, there were 760,000 shares of Series C Preferred Stock outstanding.
The Series C Preferred Stock has the following terms:
annual dividend of $0.16 cumulative dividend per share accrues and is payable quarterly;
liquidation preference of $2.00 per share with priority over common stock;
convertible into common stock at $2.00 per share for a total of 760,000 shares;
voting rights equal to common stock on an as-converted basis;
convertible at any time at the option of the owner of the preferred stock; and
automatically converts to 760,000 shares of common stock upon the closing of a qualified IPO with gross proceeds of $5,000,000 or upon payment in full of the outstanding senior secured promissory notes and the senior subordinated promissory notes..
Indemnification of directors and officers
Our certificate of incorporation and bylaws provide that we will indemnify our directors and officers to the maximum extent permitted by Delaware law, including in circumstances in which indemnification is otherwise discretionary under Delaware law. We have agreed to indemnify our executive officers and directors for all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by them in respect of any civil, criminal or administrative action or proceeding to which they are made a party by reason of being or having been a director or officer, if (a) they acted honestly and in good faith with a view to our best interests, and (b) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, they had reasonable grounds for believing that their conduct was lawful.
These indemnification provisions may be sufficiently broad to permit indemnification of our directors, officers and controlling persons for liabilities, including reimbursement of expenses incurred, arising under the Securities Act of
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1933, as amended. To the extent that our directors, officers and controlling persons are indemnified under the provisions contained in our certificate of incorporation, bylaws, Delaware law or contractual arrangements against liabilities arising under the Securities Act, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Transfer agent and registrar
The transfer agent and registrar for our common stock is Corporate Stock Transfer, Inc., Denver, Colorado.
Shares eligible for future sale
There has been no public market for any of our securities. Future sales of substantial amounts of common stock in the public market, or the perception that such sales may occur, could adversely affect the market prices of our common stock.
We are registering in this prospectus:
6,460,000 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.
We intend to file a registration statement on Form S-8 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.
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.
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.
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.
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.
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.
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.
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.
Mr. Blass III is a director of our company.
Mr. Greenslade is a director of our company.
Mr. Larson is a director of our company.
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.