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Hesperos, Inc. – IPO: ‘S-1/A’ on 8/14/23

On:  Monday, 8/14/23, at 2:03pm ET   ·   Accession #:  1493152-23-28255   ·   File #:  333-266124

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  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 8/14/23  Hesperos, Inc.                    S-1/A                  9:4.8M                                   M2 Compliance LLC/FA

Document/Exhibit                   Description                      Pages   Size 

 1: S-1/A       Pre-Effective Amendment to Registration Statement   HTML   1.99M 
                (General Form)                                                   
 2: EX-3.1      Articles of Incorporation/Organization or Bylaws    HTML     46K 
 3: EX-10.20    Material Contract                                   HTML      6K 
 4: EX-10.21    Material Contract                                   HTML     31K 
 5: EX-10.22    Material Contract                                   HTML     19K 
 6: EX-10.23    Material Contract                                   HTML    404K 
 7: EX-10.24    Material Contract                                   HTML     20K 
 8: EX-23.1     Consent of Expert or Counsel                        HTML      7K 
 9: EX-FILING FEES  Filing Fees                                     HTML     42K 

As filed with the United States Securities and Exchange Commission on August 14, 2023.

Registration No. 333-266124

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 1

to

FORM S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

HESPEROS, INC.

(Exact Name of Registrant as Specified in Its Charter)

12501 Research Parkway Suite 100

Orlando, FL 32826

(407) 900-5915

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

James F. Kronauge, Jr., Ph.D.

Chief Executive Officer

12501 Research Parkway Suite 100

Orlando, FL 32826

(407) 900-5915

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

Copies to:

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

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

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

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

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

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

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

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

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

       Shares

Common Stock

Hesperos, Inc.

This is a firm commitment initial public offering of shares of common stock of Hesperos, Inc. We anticipate that the initial public offering price of our shares will be between $          and $          per share.

Prior to this offering, there has been no public market for our common stock. We have applied to list our shares of common stock on The Nasdaq Capital Market under the symbol “HESP.” Completion of this offering is contingent on the approval of our listing application for trading on the Nasdaq Capital Market. No assurance can be given that our application will be approved.

We are an “emerging growth company” and a “smaller reporting company,” each as defined under the federal securities laws and, as such, have elected to comply with certain reduced reporting requirements for this prospectus and may elect to do so in future filings. See the section titled “Implications of Being an Emerging Growth Company and a Smaller Reporting Company.”

Upon completion of this offering, we will be a “controlled company” as defined in the corporate governance rules of the Nasdaq Capital Market and, therefore, we will qualify for, and intend to rely on, exemptions from certain Nasdaq corporate governance requirements.

Investing in our common stock involves a high degree of risk. Please read “Risk Factors” beginning on page 11 of this prospectus for a discussion of factors you should consider before buying shares of our common stock.

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

We have granted a 30-day option to the representative of the underwriters to purchase up to            additional shares of common stock from us solely to cover over-allotments, if any, at the public offering price, less underwriting discounts and commissions.

The underwriters expect to deliver the shares to purchasers on or about           , 2023.

ThinkEquity

The date of this prospectus is            , 2023

TABLE OF CONTENTS

We and the underwriters have not authorized anyone to provide you any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you, and you should rely only on the information contained in this prospectus or in any such free writing prospectus. We and underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the underwriters are not making an offer to sell nor a solicitation of any offer to buy these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

For investors outside of the United States: we have not, and the underwriters have not, taken any action that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. Persons outside of the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the United States.

Our logo and some of our trademarks and tradenames are used in this prospectus, including our trademarks “Human-on-a-Chip” and “Human-on-a-Chip Company.” This prospectus also includes trademarks, tradenames and service marks that are the property of other organizations. Solely for convenience, trademarks, tradenames and service marks referred to in this prospectus may appear without the ®, TM and SM symbols, but those references are not intended to indicate in any way that we will not assert to the fullest extent under applicable law our rights or the rights of the applicable licensor to these trademarks, tradenames and service marks.

We obtained the statistical data, market data and other industry data and forecasts described in this prospectus from market research, publicly available information and industry publications. Industry publications generally state that they obtain their information from sources that they believe to be reliable, but they do not guarantee the accuracy and completeness of the information. Similarly, while we believe that the statistical data, industry data and forecasts and market research are reliable, we have not independently verified the data, and we do not make any representation as to the accuracy of the information. We have not sought the consent of the sources to refer to their reports appearing or incorporated by reference in this prospectus.

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, before making a decision to invest in our common stock. The risks and uncertainties described below may not be the only ones we face. If any of the risks actually occur, our business, results of operations, financial condition and prospects could be harmed. In that event, the trading price of our common stock could decline, and you could lose part or all of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.

Risks Related to the Development of our Human-on-a-Chip System

Our success depends upon market acceptance of our platform, our ability to develop and commercialize new services and generate revenues and our ability to identify new markets for our technology.

We have had limited commercial sales of our Human-on-a-Chip systems to date. Our success will depend on the acceptance of our Human-on-a-Chip systems and services in the pharmaceutical and cosmetics markets. We are faced with the risk that the marketplace will not be receptive to our systems and services over competing systems and services and that we will be unable to compete effectively. We cannot assure that our current systems or any future systems, products, and services, will successfully support the services we envision offering or gain broad market acceptance. If the market for our currently contemplated services fails to develop or develops more slowly than expected, or if any of the services and standards supported by us do not achieve or sustain market acceptance, our business and operating results would be materially and adversely affected.

We have historically achieved limited profitability.

To date, we generate revenue primarily through the receipt of grants from the NIH. For the year ended December 31, 2022, our net loss was approximately $736,000, and for the three months ended March 31, 2023 our net loss was approximately $68,000. We have limited profitable operations and have generated minimal cash flow from operations since incorporation. We believe that the net proceeds from this offering, together with our existing cash and cash equivalents and the availability of future grants from the NIH, will be sufficient to fund our operations through at least the next 12 months. Our estimate as to how long we expect the net proceeds from this offering, together with our existing cash and cash equivalents, to be able to continue to fund our operations is based on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. There is no assurance that profitable operations, if achieved, could be sustained on a continuing basis. Further, our future operations are dependent on the success of our efforts to raise additional capital, our research and commercialization efforts, regulatory acceptance, and, ultimately, the market acceptance of our products. If such efforts are unsuccessful or if we are unable to complete this offering, and if we sustain losses over an extended period of time, we may be unable to continue our business.

Our Human-on-a-Chip systems represent new approaches that could result in heightened regulatory scrutiny, including for our customers’ regulatory submissions, or our inability to achieve regulatory acceptance or commercialization of our services.

Our future success is dependent on the continued development of our Human-on-a-Chip systems. Because these systems represent a new approach to determining individualized responses to pharmacological agents, developing and commercializing our systems subject us to a number of unique challenges, including:

The regulatory acceptance for novel systems such as ours that will be used to support FDA regulatory approvals can be more expensive and take longer than for other, better known or extensively studied products. Although our services are not currently subject to regulation by the FDA, we are developing novel methods of research and testing for drug efficacy in which there is little clinical experience with new endpoints and methodologies, and there is a heightened risk that our future services may be subject to the FDA, European Medicines Agency (EMA), or comparable foreign regulatory bodies. There is no guarantee that these regulatory bodies would consider our systems to provide meaningful results, or accept them as part of the drug approval process, and that could materially affect our ability to commercialize our technology.

The development of new biopharmaceutical products and services that are used to support FDA regulatory approvals involves a lengthy and complex process and we may be unable to obtain regulatory acceptance for any of the platforms we are currently developing.

Each of our Human-on-a-Chip systems continue to be further developed and will require additional financial resources, testing, manufacturing scale-up and regulatory acceptance prior to being ready for wide-spread use in connection with certain of the applications of our services. This process can take years of effort without any assurance of ultimate success. Our development efforts could be delayed or could fail for many reasons, including:

We cannot provide any assurance that the preclinical studies we perform using our systems will receive regulatory acceptance. Even if our systems did receive the required regulatory acceptance, there can no assurance that we could provide for the effective marketing and sale of such services, either by ourselves or in partnership with others. Accordingly, our prospects must be considered in light of the risks, expenses, and difficulties frequently encountered by companies in an early stage of drug development research services.

Our experience manufacturing our Human-on-a-Chip systems is limited. Manufacturing issues, including technical or quality issues, may arise that could cause delays in our development programs or increase costs.

Manufacturing our Human-on-a-Chip systems is complicated and presents novel technical challenges. We may encounter problems achieving adequate quantities and quality of clinical-grade materials, especially in the future if we determine it is necessary to meet FDA, EMA or other applicable standards or specifications with consistent and acceptable production yields and costs.

To date, we have not yet scaled up manufacturing processes beyond the scale used for research and nonclinical studies. The time and efforts required for us to develop and validate our manufacturing process to support clinical use may delay or impair our ability to move beyond pre-clinical feasibility studies.

In order to manufacture any of our Human-on-a-Chip systems on a commercial scale in the future, we will need to bolster our quality control and quality assurance capabilities, including by augmenting our manufacturing processes and adding personnel. We also may encounter problems hiring and retaining the experienced scientific and manufacturing personnel needed to operate our manufacturing process, which could result in delays in our production or difficulties in maintaining compliance with applicable regulatory requirements. As we engage in scale-up manufacturing of any approved devices and services, we may encounter unexpected issues relating to the manufacturing processes, stem cell availability, or the quality, purity or stability of the cells in the platform, and we may be required to refine or alter our manufacturing processes to address these issues. Resolving these issues could result in significant delays and may result in significantly increased costs.

It is often the case that early stage research is conducted with materials that are not manufactured pursuant to the FDA’s current Good Manufacturing Practice (cGMP) regulations and which are not subject to the same level of analysis that would be required for clinical grade material. We may encounter difficulties in translating the manufacturing processes used to produce research grade materials to cGMP compliant processes, and any changes in the manufacturing process may affect the efficacy profile of our systems. In addition, because early stage, pilot manufacturing is often done on a small scale, we may face challenges scaling up any early stage manufacturing to the scale necessary to support supply for future demand of our services. If we are not able to establish manufacturing or related processes in a manner required for further development of our systems, our development plans may be delayed or stalled, and our business may be materially harmed.

Any problems in our manufacturing process could make us a less attractive collaborator for potential partners, including pharmaceutical companies, cosmetics companies, non-profits and academic research institutions, which could limit our access to additional attractive development programs.

Our Human-on-a-Chip systems are novel, complex, and can be difficult to manufacture. We could experience manufacturing problems that result in delays in our development or commercialization programs or otherwise harm our business.

The manufacturing processes used to produce our Human-on-a-Chip systems can be complex, are novel, and have not been extensively validated for commercial use. Several factors could cause production interruptions, including equipment malfunctions, facility contamination, raw material shortages or contamination, natural disasters, disruption in utility services, human error, or disruptions in the operations of our suppliers.

Even if the FDA does accept the data produced by our Human-on-a-Chip system, regulatory agencies in foreign jurisdictions may never accept such data and we may never commercialize our system in such jurisdictions, which would limit our ability to realize the full market potential of our Human-on-a-Chip system.

In order to eventually market our Human-on-a-Chip systems in any particular foreign jurisdiction, we must establish and comply with numerous and varying regulatory requirements on a jurisdiction-by-jurisdiction basis regarding efficacy and utility of the platform. The FDA’s willingness to accept the scientific viability of our technology in the United States, which is demonstrated by the FDA issuing an IND to an industry partner that uses our technology to support such a submission, does not ensure that regulatory authorities in other countries or jurisdictions would also accept the scientific viability of our technology. Although the FDA has approved an IND using data from our systems, there is no assurance that the FDA will give similar treatment to future studies that use our systems. In the future, if the FDA ever decides that our technology does not produce data capable of supporting our partners’ IND submissions, our target market would be limited and our ability to achieve the full market potential of our platform will be unrealized. In addition, services conducted in one country may not be considered scientifically viable by regulatory authorities in other countries, and acceptance of the scientific viability of our technology by a regulatory agency in one country does not guarantee such acceptance in any other country. Regulatory processes vary among countries and can involve additional product testing and validation. Seeking foreign acceptance of the scientific viability of our technology could result in additional costs and require additional preclinical studies or validation. We do not have any platform or services that have been accepted as scientifically valid by regulatory authorities for regulatory evaluation in any jurisdiction, including international markets, and we do not have experience in obtaining regulatory acceptance in international markets. If we fail to obtain regulatory acceptance of the scientific validity of our technology in international markets, our target market would be limited and our ability to achieve the full market potential of our platform will be unrealized.

We may expend our limited resources to pursue certain organ systems and fail to capitalize on organ systems that may be more profitable or for which there is a greater likelihood of success.

Because we have limited financial and managerial resources, we have focused our development program on certain organ systems to date. As a result, we may forego, limit, or delay pursuit of opportunities relating to other tissues or organ systems that may later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to timely capitalize on viable services or profitable market opportunities. Our spending on current and future research and development programs and tissues or organ systems may not yield commercially viable services.

The biopharmaceutical technology industry in which we operate is highly competitive and subject to rapid technological change. If our competitors are better able to develop and market products or services that are more effective, less costly, easier to use, or are otherwise more attractive, we may be unable to compete effectively with other companies.

The biopharmaceutical technology industry is characterized by intense competition and rapid technological change, and we will face competition on the basis of platform or service features, price, and other factors. Future competitors may include large medical device companies, academic institutions, pharmaceutical or cosmetic companies and other companies, some of which have significantly greater financial and marketing resources than we do, and firms that are more specialized than we are with respect to particular markets. Our competition may respond more quickly to new or emerging technologies, undertake more extensive marketing campaigns, have greater financial, marketing and other resources than ours or may be more successful in attracting potential customers, employees and strategic partners.

Our competitive position will depend on multiple, complex factors, including our ability to achieve regulatory clearance and market acceptance for our platforms and services, develop new services, implement production and marketing plans, secure regulatory approvals for devices under development and protect our intellectual property. In some instances, competitors may also offer, or may attempt to develop, alternative systems that may be delivered without a with a device superior to ours. The development of new or improved products, processes or technologies by other companies may render proposed services less competitive. The entry into the market of manufacturers located in low-cost manufacturing locations may also create pricing pressure, particularly in developing markets. Our future success depends, among other things, upon our ability to compete effectively against current technology, as well as to respond effectively to technological advances or changing regulatory requirements, and upon our ability to successfully implement our marketing strategies and execute our research and development plan. Our research and development efforts are aimed, in part, at solving increasingly complex problems, as well as creating new technologies, and we do not expect that all of our projects will be successful. If our research and development efforts are unsuccessful, our future results of operations could be materially harmed.

Our success will be dependent on acceptance of our platform and services by the medical community and cosmetics community.

Market acceptance of our devices will depend on our ability to demonstrate that the use of our devices is an attractive cost-effective alternative to existing methods of drug and cosmetic development, such as animal testing. Our ability to do so will depend on our customers’ evaluations of pre-clinical efficacy, ease of use, reliability, and cost-effectiveness of our devices.

Risks Related to Managing and Growing our Business

Our business will be adversely impacted if we are unable to successfully attract, hire and integrate additional key employees or contractors.

Our future success depends in part on our ability to successfully attract and then retain additional executive officers and other key employees and contractors to support and scale our research, development and services. Recruiting and retaining qualified scientific and clinical personnel is critical to our success. Competition to hire qualified personnel in our industry is intense, and we may be unable to hire, train, retain or motivate these key personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. If we are unable to attract and retain high quality personnel, our ability to pursue our research and development strategies and continue to commercialize our services will be limited, and our business, prospects, financial condition and results of operations may be adversely affected. Further, we are highly dependent on the research and development expertise of Dr. Hickman, our Chief Scientist, who is employed by us only part-time and who serves as a Professor at the University of Central Florida. If we lose the services of Dr. Hickman, our ability to implement our business strategy successfully could be seriously harmed. Further, the unavailability of Dr. Hickman to us may impair our ability to grow our business.

We may require additional funding. Raising additional capital would cause dilution to our existing stockholders and may restrict our operations or require us to relinquish rights to our technologies or to our systems.

Other than certain limited SBIR grants from the NIH, we currently do not have any committed external source of funds and it is uncertain whether our projected revenues will be sufficient to meet our operating requirements in the future. We have based our capital needs on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect if our operating plans change. If our board of directors decides that we should pursue additional research and development activities than already contemplated, we will require additional funding to operate our proposed business, including expanding our facilities and hiring additional qualified personnel, and we would expect to finance these cash needs through a combination of equity offerings, debt financings, government or other third-party funding and licensing or collaboration arrangements.

We have been funded in part by government grant awards, which is not a guaranteed source of funding.

The funding of government programs is dependent on budgetary limitations, Congressional appropriations and administrative allotment of funds, and changes in national health and welfare priorities, all of which are inherently uncertain and may be affected by changes in U.S. government policies resulting from various political and military developments. Our continued receipt of government funding is also dependent on the ability to adhere to the terms and provisions of the original grant and contract documents and other regulations. We can provide no assurance that we will receive or continue to receive funding for grants and contracts that we have been awarded. The loss of government funds could have a material adverse effect on our business, financial condition, and results of operations.

If we are not able to enhance our reputation and brand recognition, we may not be able to execute our business strategy as planned.

We believe that enhancing our reputation and brand recognition is critical to maintaining our relationships and to our ability to attract new customers and strategic partners. The promotion of our brand may require us to make substantial investments and we anticipate that, as our market becomes increasingly competitive, these marketing initiatives may become increasingly difficult and expensive. Our marketing activities may not be successful or yield increased revenue, and to the extent that these activities yield increased revenue, the increased revenue may not offset the expenses we incur and our results of operations could be harmed. In addition, any factor that diminishes our reputation or that of our management, including failing to meet the expectations of our customers, or any adverse publicity surrounding one of our investors or customers, could make it substantially more difficult for us to attract new customers. If we do not successfully enhance our reputation and brand recognition, our business may not grow and we could lose our relationships with existing customers, which would harm our business, results of operations, and financial condition.

The loss of any of, or a material reduction in orders or grants from, our largest customers or the NIH would materially and adversely affect our results of operations and financial condition.

We are reliant on a limited number of customers and the NIH for our revenue. As of March 31, 2023, 85% of our total revenue came from four sources, and the NIH accounted for 46% of our total revenue. The loss of any of these revenue sources, a material reduction in their purchases from us or spending activities generally, or the loss of grant funding from the NIH would have a material adverse effect on our financial condition, liquidity and results of operations. Further, due to our limited number of customers, the breach, cancellation, or amendment of any sales or purchase agreement with our current or future customers may have an outsized effect on our revenue, cash on hand, and profitability. In addition, we may have an increased interest in accepting less favorable terms of any amendment as a result.

We may acquire other companies or technologies, which could divert our management’s attention, result in dilution to our stockholders, and otherwise disrupt our operations and we may have difficulty integrating any such acquisitions successfully or realizing the anticipated benefits therefrom, any of which could have an adverse effect on our business, financial condition, and results of operations.

We may seek to acquire or invest in businesses, applications, and services, or technologies that we believe could complement or expand our service offerings, enhance our capabilities, or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating, and pursuing suitable acquisitions, whether or not they are consummated. We may have difficulty integrating other technologies or other team members, and we may not be able to achieve the intended benefits from any such acquisition.

In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our results of operations based on this impairment assessment process, which could adversely affect our results of operations.

Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our results of operations. In addition, if an acquired business fails to meet our expectations, our business, financial condition, and results of operations may suffer.

Improper performance of our services will negatively impact our reputation.

The performance of clinical development services is complex and time-consuming. For example, we may make mistakes in conducting a pre-clinical developmental plan that could negatively impact or obviate the usefulness of the services or cause the results of the pre-clinical evaluation to be reported improperly. If the platform results are compromised, we could be subject to significant costs or liability, which could have an adverse impact on our ability to perform our services. Improper performance of our services could have an adverse effect on our financial condition, damage our reputation and result in the cancellation of current contracts by or failure to obtain future contracts from the affected client or other clients.

Investigation of clients could result in liability to us.

From time to time, one or more of our clients may be audited or investigated by regulatory authorities or enforcement agencies with respect to regulatory compliance of their clinical trials, programs or the marketing and sale of their drugs. In these situations, we would have provided services to our clients with respect to the pre-clinical evaluation, programs or activities being audited or investigated, and we would be called upon to respond to requests for information by the authorities and agencies. There is a risk that either our clients or regulatory authorities could claim that we performed our services improperly. If our clients or regulatory authorities make such claims against us and prove them, we could be subject to damages, fines or penalties. In addition, negative publicity regarding regulatory compliance of our clients’ clinical trials, programs or drugs could have an adverse effect on our business and reputation.

Our business may be materially and adversely impacted by factors affecting the biopharmaceutical and healthcare industries.

We expect that the majority of our commercial revenue is generated from sales to the biopharmaceutical and healthcare industries. The clients we serve in these industries are subject to financial pressures, including, but not limited to, increased costs, reduced demand for their products, reductions in pricing and reimbursement for products and services, formulary approval and placement, government approval to market their products and limits on the manner by which they market their products, loss of patent exclusivity (whether due to patent expiration or as a result of a successful legal challenge) and the proliferation of or changes to regulations applicable to these industries. To the extent our clients face such pressures, or they change how they utilize our offerings, the demand for our services, or the prices our clients are willing to pay for those services, may decline. Any such decline could have a material adverse effect on our business, operating results and financial condition.

Global or regional health pandemics or epidemics could negatively impact our business operations, financial performance and results of operations.

Our business and financial results could be negatively impacted by pandemics or epidemics. The severity, magnitude and duration of pandemics are uncertain, rapidly changing and hard to predict. The COVID-19 pandemic significantly impacted economic activity and markets around the world. COVID-19 and its variants or other pandemics could negatively impact our future business in numerous ways, including but not limited to those outlined below:

While we believe the economic impact brought by COVID-19 has not materially impacted our results of operations, the widespread pandemic and resulting impact upon supply chains and inflation has resulted in significant disruption of global financial markets, which could reduce our ability to access capital and negatively affect our future liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 and related government orders and restrictions could materially affect our business and the value of our common stock. If the NIH should divert research funding to other areas or if the cosmetics industry or pharmaceutical industry reduced funding for their studies and pre-clinical feasibility trials, it would have a material affect our business, financial condition and results of operations. The ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change.

These and other impacts of the COVID-19 or other global or regional health pandemics or epidemics could have the effect of heightening many of the other risks described in this “Risk Factors” section. We might not be able to predict or respond to all impacts on a timely basis to prevent near- or long-term adverse impacts to our results. The ultimate impact of these disruptions also depends on events beyond our knowledge or control, including the duration and severity of any outbreak and actions taken by parties other than us to respond to them. Any of these disruptions could have a negative impact on our business operations, financial performance and results of operations, which impact could be material.

Global, market and economic conditions may negatively impact our business, financial condition and share price.

Concerns over inflation, geopolitical issues, global financial markets and the COVID-19 pandemic have led to increased economic instability, diminished expectations for the global economy and expectations of slower global economic growth. Our general business may be adversely affected by any such economic instability or unpredictability. Trade sanctions and disruptions to the global economy have led to additional inflation which may negatively impact the global supply chain and could have a material adverse effect on our ability to secure supplies. These conditions will likely increase our costs in the form of higher wages, more expensive supplies and equipment necessary to operate our business. If conditions worsen or do not improve, it may become more difficult for us to complete debt or equity financings which may be necessary for us to operate our business. Such financings may become more costly, difficult to complete, and more dilutive. In addition, there is a risk that one or more of our suppliers or other partners could be negatively affected by global economic instability, which could adversely affect our ability to operate efficiently and timely complete our operational goals. We intend to mitigate the impact of inflation by further automating our processes and by passing our costs on to our customers through higher charges for future projects. There can be no assurance that we will succeed in further automating our processes or be able to charge more for our future services.

Risks Related to Protecting Our Technology and Intellectual Property

Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand.

Our success and ability to compete depend largely upon our intellectual property. To date, we have 15 patents issued and three patent applications pending in the U.S., with two of the pending applications jointly owned by us and the University of Central Florida. We also have 17 patents issued and three patent applications pending outside the U.S., with three of the pending applications jointly owned by us and the University of Central Florida. All of the issued patents, with the exception of one patent solely owned by Cornell University and licensed to us, are solely owned by the University of Central Florida and licensed to us. We take reasonable steps to protect our intellectual property, especially when working with third parties. However, the steps we take to protect our intellectual property rights may be inadequate. For example, other parties, including our competitors, may independently develop similar technology, duplicate our services, or design around our intellectual property and, in such cases, we may not be able to assert our intellectual property rights against such parties. Further, our contractual arrangements may not effectively prevent disclosure of our confidential information or provide an adequate remedy in the event of unauthorized disclosure of our confidential information, and we may be unable to detect the unauthorized use of, or take appropriate steps to enforce, our intellectual property rights.

We make business decisions about when to seek patent protection for a particular technology and when to rely upon trade secret protection, and the approach we select may ultimately prove to be inadequate. Even in cases where we seek patent protection, there is no assurance that the resulting patents will effectively protect every significant feature of our technology or proprietary information, or provide us with any competitive advantages. Moreover, we cannot guarantee that any of our pending patent applications will issue or be approved. The United States Patent and Trademark Office and various foreign governmental patent agencies also require compliance with a number of procedural, documentary, fee payment, and other similar provisions during the patent application process and after a patent has issued. There are situations in which noncompliance can result in abandonment or lapse of the patent, or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. If this occurs, our competitors might be able to enter the market, which would have a material adverse effect on our business. Effective trademark, copyright, patent, and trade secret protection may not be available in every country in which we conduct business. Further, intellectual property law, including statutory and case law, particularly in the United States, is constantly developing, and any changes in the law could make it harder for us to enforce our rights.

In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming, and distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims, and countersuits attacking the validity and enforceability of our intellectual property rights. An adverse determination of any litigation proceedings could put our intellectual property at risk of being invalidated or interpreted narrowly and could put our related pending patent applications at risk of not issuing. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential or sensitive information could be compromised by disclosure in the event of litigation. In addition, during the course of litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Negative publicity related to a decision by us to initiate such enforcement actions against a client or former client, regardless of its accuracy, may adversely impact our other client relationships or prospective client relationships, harm our brand and business, and could cause the market price of our common stock to decline. Our failure to secure, protect, and enforce our intellectual property rights could adversely affect our brand and our business.

We rely on licenses from third parties to certain technology and intellectual property rights for some of our services and the licenses we currently have could terminate or expire.

Some of our business services rely on technology or intellectual property rights owned and controlled by others. Our licenses to this technology or these intellectual property rights could be terminated or could expire. We may be unable to replace these licenses in a timely manner. Failure to renew these licenses, renewals of these licenses on less advantageous terms, or termination of these licenses may limit the amount and type of services that we may provide depending on the intellectual property rights relied upon by our services and could harm our operating results and financial condition.

Intellectual property discovered through government funded programs may be subject to federal regulations such as “march-in” rights, certain reporting requirements and a preference for U.S.-based companies. Compliance with such regulations may limit our exclusive rights and limit our ability to contract with non-U.S. manufacturers.

We have patent applications that were generated through the use of U.S. government funding or grants, including grants from the NIH, and may acquire or license in the future intellectual property rights that have been generated through the use of U.S. government funding or grants. Pursuant to the Bayh-Dole Act of 1980, the U.S. government has certain rights in inventions developed with government funding. These U.S. government rights include a non-exclusive, non-transferable, irrevocable worldwide license to use inventions for any governmental purpose. In addition, the U.S. government has the right, under certain limited circumstances, to require us to grant exclusive, partially exclusive, or non-exclusive licenses to any of these inventions to a third-party if it determines that: (1) adequate steps have not been taken to commercialize the invention; (2) government action is necessary to meet public health or safety needs; or (3) government action is necessary to meet requirements for public use under federal regulations (also referred to as “march-in rights”). If the U.S. government exercised its march-in rights in our future intellectual property rights that are generated through the use of U.S. government funding or grants, we could be forced to license or sublicense intellectual property developed by us or that we license on terms unfavorable to us, and there can be no assurance that we would receive compensation from the U.S. government for the exercise of such rights. The U.S. government also has the right to take title to these inventions if the grant recipient fails to disclose the invention to the government or fails to file an application to register the intellectual property within specified time limits. Intellectual property generated under a government funded program is also subject to certain reporting requirements, compliance with which may require us to expend substantial resources. In addition, the U.S. government requires that any products embodying any of these inventions or produced through the use of any of these inventions be manufactured substantially in the United States. This preference for U.S. industry may be waived by the federal agency that provided the funding if the owner or assignee of the intellectual property can show that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States or that under the circumstances domestic manufacture is not commercially feasible. This preference for U.S. industry may limit our ability to contract with non-U.S. product manufacturers for products covered by such intellectual property.

We may not be able to adequately defend against piracy of intellectual property in foreign jurisdictions.

Considerable research in drug research and development is being performed in countries outside of the United States, and a number of potential competitors are located in these countries. The laws protecting intellectual property in some of those countries may not provide adequate protection to prevent our competitors from misappropriating our intellectual property. Several of these potential competitors may be further along in the process of product or service development and also operate large, company-funded research and development programs. As a result, our competitors may develop more competitive or affordable products, or achieve earlier patent protection or device commercialization than we are able to achieve. Competitive devices may render any services that we develop obsolete.

We may be sued by third parties for alleged infringement of their proprietary rights or misappropriation of intellectual property.

There is considerable patent and other intellectual property development activity in our industry. Our future success depends in part on not infringing upon the intellectual property rights of others. Our competitors, as well as a number of other entities and individuals, may own or claim to own intellectual property relating to our business. From time to time, third parties may claim that we are infringing upon their intellectual property rights or that we have misappropriated their intellectual property. For example, in some cases, very broad patents are granted that may be interpreted as covering a wide field of drug development systems. As competition in our market grows, the possibility of patent infringement, trademark infringement, and other intellectual property claims against us increases. In the future, others may claim that our Human-on-a-Chip systems and underlying technology infringe or violate their intellectual property rights. In a patent infringement claim against us, we may assert, as a defense, that we do not infringe the relevant patent claims, that the patent is invalid or both. The strength of our defenses will depend on the patents asserted, the interpretation of these patents, and our ability to invalidate the asserted patents. However, we could be unsuccessful in advancing non-infringement and/or invalidity arguments in our defense. In the United States, issued patents enjoy a presumption of validity, and the party challenging the validity of a patent claim must present clear and convincing evidence of invalidity, which is a high burden of proof. Conversely, the patent owner need only prove infringement by a preponderance of the evidence, which is a lower burden of proof. We may be unaware of the intellectual property rights that others may claim cover some or all of our technology or services. Because patent applications can take years to issue and are often afforded confidentiality for some period of time there may currently be pending applications, unknown to us, that later result in issued patents that could cover one or more aspects of our technology and services. Any claims or litigation could cause us to incur significant expenses and, whether or not successfully asserted against us, could require that we pay substantial damages, ongoing royalty or license payments, or settlement fees, prevent us from offering our services or using certain technologies, require us to re-engineer all or a portion of our models, or require that we comply with other unfavorable terms. We may also be obligated to indemnify our clients or business partners or pay substantial settlement costs, including royalty payments, in connection with any such claim or litigation and to obtain licenses, modify applications, or refund fees, which could be costly. Even if we were to prevail in such a dispute, any litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations.

Risks Related to Governmental Regulations

Government regulation of healthcare creates risks and challenges with respect to our compliance efforts and our business strategies.

The healthcare and pharmaceutical industries are highly regulated and are subject to changing political, legislative, regulatory, and other influences. Laws and regulations affecting the healthcare and pharmaceutical industries, or changes to existing laws and regulations, including the possible enactment of federal or state health care reforms and possible changes to other federal, state or local laws or regulations affecting the health care and pharmaceutical industries, could create unexpected liabilities for us, cause us to incur additional costs, and restrict our operations. Reforming the healthcare and pharmaceutical industries has been a priority for U.S. politicians, and key members of the legislative and executive branches have proposed a wide variety of potential changes and policy goals. Certain changes to laws could affect our business and results of operations.

On December 29, 2022, President Biden signed into law the FDA Modernization Act 2.0. The bill eliminates the requirement that new drugs undergo animal testing prior to human trials. While for the past century, the mandate was intended to ensure certain quality and safety standards for drugs and medical devices, recent advancements in science have begun to offer increasingly viable alternatives to animal testing. Under this bill, these alternative methods may include cell-based assays, organ chips and microphysiological systems, sophisticated computer modeling, and other human biology-based test methods. With the passage of this law we expect our commercial business to benefit as microphysiological systems gain further acceptance. However, there is no assurance that our microphysiological systems will gain further acceptance with the passage of this law.

Many healthcare and pharmaceutical laws are complex, and their application to specific products, services and relationships may not always be clear. In particular, many existing or future healthcare laws and regulations may be applied to our systems and service offerings in ways that we do not anticipate, particularly as we develop and release new and more sophisticated solutions. Our failure to accurately anticipate the application of these laws and regulations, or our other failure to comply with them, could create significant liability for us, result in adverse publicity, and negatively affect our business.

Health Data Privacy Laws. There are numerous federal and state laws related to health information privacy. In particular, the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”) and their implementing regulations, which we collectively refer to as “HIPAA,” include privacy standards that protect individual privacy by limiting the uses and disclosures of personal health information (PHI) and implementing data security standards that require covered entities to implement administrative, physical, and technological safeguards to ensure the confidentiality, integrity, availability, and security of PHI in electronic form. In addition to enforcement actions initiated by regulatory bodies under HIPAA, violations or breaches caused by us or our contractors may result in related claims against us by our clients. If we were to process and maintain PHI on behalf of our covered entity clients, we may be a HIPAA business associate and mandated by HIPAA to enter into written agreements with our covered entity clients — known as Business Associate Agreements (“BAAs”) — that require us to safeguard PHI. BAAs typically include:

In addition, we may also be required to maintain BAAs, which contain similar provisions, with our subcontractors that access or otherwise process PHI on our behalf.

We may not be able to adequately address the business risks created by HIPAA implementation, and meet the requirements imposed by HIPAA. Furthermore, we are unable to predict what changes to HIPAA or other laws or regulations might be made in the future or how those changes could affect our business or the costs of compliance.

In addition to the HIPAA privacy and security standards, most states have enacted patient confidentiality laws that protect against the disclosure of confidential medical and other personally identifiable information (“PII”) and many states have adopted or are considering new privacy laws, including legislation that would mandate new privacy safeguards, security standards, and data security breach notification requirements. Such state laws, if more stringent than HIPAA requirements, are not preempted by the federal requirements, and we are required to comply with them. In addition, the Federal Trade Commission, and analogous state agencies, may apply consumer protection laws to the context of data privacy. For example, the Federal Trade Commission has sanctioned companies for unfair trade practices when they failed to implement adequate security protection measures for sensitive personal information.

Failure by us to comply with any of the federal and state standards regarding patient privacy and/or privacy more generally may subject us to penalties, including significant civil monetary penalties and, in some circumstances, criminal penalties. In addition, such failure may injure our reputation and adversely affect our ability to retain clients and attract new clients.

The FDA can also impose extensive requirements governing pre- and post-market conditions, such as service investigation and others relating to approval, labeling, and manufacturing. In addition, the FDA can impose extensive requirements governing software development controls and quality assurance processes.

We cannot predict the ultimate form of any regulation and the potential impact on our tests or materials used to perform our tests. If pre-market clearance or approval is required, our business could be negatively impacted until such review is completed and clearance or approval to market is obtained. The FDA could require that we seek pre-market clearance or approval for our analytical services or require that we stop selling our analytical services until we have successfully secured such pre-market clearance or approval. If our analytical services are allowed to remain on the market but there is regulatory uncertainty about our analytical services, e.g., if they are labeled investigational by the FDA, or if labeling claims the FDA allows us to make are limited, orders may decline. The regulatory clearance or approval process may involve, among other things, successfully completing trials and submitting a pre-market clearance notice or filing an application with the FDA. If pre-market clearance or approval is required by the FDA, there can be no assurance that our analytical services will be cleared or approved on a timely basis, if at all, nor can there be assurance that labeling claims will be consistent with our current claims or adequate to support continued use of our analytical services. An increase in FDA regulatory compliance burdens would increase the cost of conducting our business, and subject us to inspection by the FDA and potentially penalties for failure to comply with these regulatory requirements. We may also decide to voluntarily pursue FDA pre-market clearance or approval of our analytical services if we determine that doing so would be appropriate or competitively advantageous.

In the event we are required to or voluntarily choose to become subject to FDA clearance or approval, we may become subject to compliance with significant FDA regulatory requirements.

Risks Related to Operating as a Public Company

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain executive management and qualified board members.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934 (the Exchange Act), the listing standards of Nasdaq and other applicable securities rules and regulations. We expect that the requirements of these rules and regulations will increase our legal, accounting, and financial compliance costs, make some activities more difficult, time-consuming, and costly, and place significant strain on our personnel, systems, and resources. As a result of the complexity involved in complying with the rules and regulations applicable to public companies, our management’s attention may be diverted from other business concerns, which could harm our business, results of operations, and financial condition.

We also expect that being a public company will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

As a result of disclosure of information in filings required of a public company, our business and financial condition is more visible, which may result in an increased risk of threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and results of operations could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business, results of operations, and financial condition.

The individuals who now constitute our senior management team have limited experience managing a publicly-traded company and limited experience complying with the increasingly complex laws pertaining to public companies. Our senior management team may not successfully or efficiently manage our transition to a public company that is subject to significant regulatory oversight and reporting obligations.

We are an emerging growth company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

We are an emerging growth company, and, for as long as we continue to be an emerging growth company, we expect to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including:

We could be an emerging growth company for up to five years following the completion of this offering. Our status as an emerging growth company will end as soon as any of the following takes place:

We cannot predict if investors will find our common stock less attractive if we choose to rely on the exemptions afforded emerging growth companies. If some investors find our common stock less attractive because we rely on any of these exemptions, there may be a less active trading market for our common stock and the market price of our common stock may be more volatile.

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies.

If we are unable to implement and maintain effective internal control over financial reporting in the future, our ability to produce accurate financial statements could be impaired, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may decline.

As a result of this offering, we will become subject to the information and reporting requirements of the Securities Exchange Act and, in accordance with this law, we will file periodic reports (Form 10-K’s, Form 10-Q’s and Form 8-K’s), proxy statements and other information with the Securities and Exchange Commission. Upon becoming a public reporting company, we will be required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. We will also be required to establish and maintain effective disclosure controls. In addition, beginning with our second annual report on Form 10-K following this offering, we will be required to furnish a report by management on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We are in the process of designing, implementing and testing the internal control over financial reporting required to comply with this obligation, which process is time consuming, costly and complicated. In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting beginning with our annual report on Form 10-K following the date on which we are no longer an “emerging growth company,” which may be up to five full years following the date of this offering. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting when required, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.

Risks Related to Investing in Our Common Stock

An active trading market may not develop for our securities, and you may not be able to sell your common stock at or above the offering price per share.

This is the initial public offering of our securities and there is currently no public market for our common stock.

We have applied to list our common stock on the Nasdaq Capital Market. However, we cannot predict the extent to which investor interest in our Company will lead to the development of an active trading market in our common stock or how liquid that market might become. If such a market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at the time you wish to sell them, at a price that is attractive to you, or at all.

The trading market for our common stock in the future could be subject to wide fluctuations in response to several factors, including, but not limited to:

Furthermore, our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our common stock. Additionally, moving forward we anticipate having a limited number of shares in our public float, and as a result, there could be extreme fluctuations in the price of our common stock. The offering price per share has been determined through negotiation between us and representatives of the underwriter and may not be indicative of the market prices that prevail after this offering. You may not be able to sell your common stock at or above the offering price per share.

Our management has broad discretion in the use of proceeds from our offering and our use may not produce a positive rate of return.

The principal purposes of our offering are to increase our capitalization and financial flexibility, create a public market for our stock and thereby enable access to the public equity markets by our employees and stockholders, obtain additional capital, and strengthen our position in the market. We will utilize the funds to strengthen our management team, invest heavily in automation of our system to decrease cost and increase reliability and increase our intellectual capital at the Company by hiring experienced personnel. We plan to use the remaining net proceeds for working capital, other general corporate purposes and potential acquisitions. Our management has broad discretion over the specific use of the net proceeds we received in our offering and might not be able to obtain a significant return, if any, on investment of these net proceeds. Investors will need to rely upon the judgment of our management with respect to the use of proceeds. If we do not use the net proceeds that we received in our offering effectively, our business, results of operations, and financial condition could be harmed.

The issuance of additional capital stock in connection with financings, acquisitions, investments, our Omnibus Incentive Plan or otherwise will dilute all other stockholders.

We may need to raise additional capital through equity and debt financings in order to fund our operations. If we raise capital through equity financings in the future, that will result in dilution to all other stockholders. We also expect to grant equity awards to employees, directors, and consultants under our Omnibus Incentive Plan. As part of our business strategy, we may acquire or make investments in complementary companies, platforms, or technologies and issue equity securities to pay for any such acquisition or investment. Any such issuances of additional capital stock may cause stockholders to experience significant dilution of their ownership interests and the per-share value of our common stock to decline.

We do not currently intend to pay dividends on our common stock and, consequently, the ability of common stockholders to achieve a return on investment will depend on appreciation, if any, in the price of our common stock.

You should not rely on an investment in our common stock to provide dividend income. We do not plan to declare or pay any dividends on our capital stock in the foreseeable future. Instead, we intend to retain any earnings to finance the operation and expansion of our business. As a result, common stockholders may only receive a return on investment if the market price of our common stock increases.

One of our founding stockholders will continue to own a significant percentage of our common stock and will be able to exert significant control over matters subject to stockholder approval.

Dr. Hickman beneficially owns 84.6% of our total voting power and after this offering is completed the Company will continue to be controlled by Dr. Hickman. Upon the closing of this offering, Dr. Hickman will beneficially own approximately              % of the voting power of our outstanding Common Stock, or approximately          % if the underwriter exercises its option to purchase additional shares of Common Stock from us in full. After this offering, Dr. Hickman will have the ability to substantially influence us through this ownership position. For example, Dr. Hickman may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. The interests of Dr. Hickman may not always coincide with our corporate interests or the interests of other stockholders, and Dr. Hickman may act in a manner with which you may not agree or that may not be in the best interests of our other stockholders. So long as Dr. Hickman continues to beneficially own a significant amount of our equity, he will continue to be able to strongly influence or effectively control our decisions.

As a “controlled company” under the rules of the Nasdaq Capital Market, we may choose to exempt our Company from certain corporate governance requirements that could have an adverse effect on our public stockholders;

One of our founding shareholders, Dr. Hickman, beneficially owns more than 50% of our total voting power. Upon the closing of this offering, Dr. Hickman will continue to own a controlling interest in us and we will meet the definition of a “controlled company” under the corporate governance standards for Nasdaq listed companies and we will be eligible to utilize certain exemptions from the corporate governance requirements of the Nasdaq Stock Market. We are a “controlled company” within the meaning of Nasdaq Listing Rule 5615(c). As a controlled company, we qualify for, and intend to rely upon, several of Nasdaq’s corporate governance requirements, including requirements that:

As long as Dr. Hickman owns at least 50% of the voting power of our Company, we are a “controlled company” as defined under Nasdaq Marketplace Rules.

Accordingly, to the extent that we may choose to rely on one or more of these exemptions, our stockholders would not be afforded the same protections generally as stockholders of other Nasdaq-listed companies for so long as these stockholders are collectively able to control the composition of our board and our board determines to rely upon one or more of such exemptions.

If you purchase our securities in this offering, you will incur immediate and substantial dilution in the book value of your investment.

The initial public offering price is substantially higher than the net tangible book value per share of our securities. Investors purchasing shares of common stock in this offering will pay a price per share that substantially exceeds the book value of our tangible assets after subtracting our liabilities. As a result, investors purchasing shares in this offering will incur immediate dilution of $          per share, based on the assumed initial public offering price of $          per share, which is the midpoint of the price range set forth on the cover of this prospectus.

We might not be able to maintain the listing of our common stock on the Nasdaq Capital Market.

We have applied to list our common stock on the Nasdaq Capital Market in connection with this offering. We will not consummate this offering if our application is not approved. However, there can be no assurance that we will be able to maintain the listing standards of that exchange, which includes requirements that we maintain our stockholders’ equity, total value of shares held by unaffiliated stockholders, and market capitalization above certain specified levels. If we fail to conform to the Nasdaq listing requirements on an ongoing basis, our common stock might cease to trade on the Nasdaq Capital Market exchange, and may move to the OTCQB or OTC Pink Markets operated by OTC Markets Group, Inc. These quotation services are generally considered to be markets that are less efficient, and to provide less liquidity in the shares, than the Nasdaq Capital Market.

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

Sales of substantial amounts of our common stock in the public market after this offering, or the perception that these sales may occur, could materially and adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. The shares of common stock sold in this offering will be freely tradable, without restriction, in the public market, except for any shares sold to our affiliates.

Approximately 8,470,000 shares of common stock may be sold in the public market by our directors and executive officers on or about 366 days after the date of this prospectus, subject to volume and other limitations imposed under the federal securities laws. Approximately 901,000 shares of common stock may be sold in the public market by our other stockholders on or about 181 days after the date of this prospectus, subject to volume and other limitations imposed under the federal securities laws. Sales of substantial amounts of our common stock in the public market after the completion of this offering, or the perception that such sales could occur, could adversely affect the market price of our common stock and could materially impair our ability to raise capital through offerings of our common stock. See the section entitled “Shares Eligible for Future Trading” for a more detailed description of the restrictions on selling shares of our common stock after this offering.

In addition, as of March 31, 2023, we had 596,680 shares of unvested restricted common stock that, if fully vested and exercised, would result in the issuance of shares of common stock. All of the shares of common stock and the shares reserved for future issuance under our Omnibus Incentive Plan will be registered for public resale under the Securities Act. Accordingly, these shares will be able to be freely sold in the public market upon issuance, subject to existing lock-up or market standoff agreements, volume limitations under Rule 144 for our executive officers and directors, and applicable vesting requirements.

A possible “short squeeze” due to a sudden increase in demand of our common stock that largely exceeds supply may lead to price volatility in our common stock.

Following this offering, investors may purchase our common stock to hedge existing exposure in our common stock or to speculate on the price of our common stock. Speculation on the price of our common stock may involve long and short exposures. To the extent aggregate short exposure exceeds the number of shares of our common stock available for purchase in the open market, investors with short exposure may have to pay a premium to repurchase our common stock for delivery to lenders of our common stock. Those repurchases may in turn, dramatically increase the price of our common stock until investors with short exposure are able to purchase additional common stock to cover their short position. This is often referred to as a “short squeeze.” A short squeeze could lead to volatile price movements in our common stock that are not directly correlated to the performance or prospects of our common stock and once investors purchase the shares of common stock necessary to cover their short position the price of our common stock may decline.

If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on our Company. If no securities or industry analysts commence coverage of our Company, the trading price for our common stock would likely be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. In addition, if our operating results fail to meet the forecast of analysts, our stock price would likely decline. If one or more of these analysts cease coverage of our Company or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our stock price and trading volume to decline.

Provisions in our charter documents and under Delaware law could make an acquisition of our Company more difficult, limit attempts by our stockholders to replace or remove our current board of directors and limit the market price of our common stock.

Provisions in our Second Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our Second Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws, include provisions that:

Moreover, Section 203 of the Delaware General Corporation Law may discourage, delay, or prevent a change in control of our Company. Section 203 imposes certain restrictions on mergers, business combinations, and other transactions between us and holders of 15% or more of our common stock.

Our Second Amended and Restated Certificate of Incorporation and our Amended and Restated Bylaws provide that derivative actions brought on our behalf, actions against our directors, officers, employees or agent for breach of fiduciary duty and certain other actions may be brought only in the Court of Chancery in the State of Delaware (or, if the Court of Chancery lacks jurisdiction, the federal district court for the District of Delaware unless said court lacks subject matter jurisdiction in which case the Superior Court of the State of Delaware) and the stockholders shall be deemed to have consented to this choice of forum provision, which may have the effect of discouraging lawsuits against our directors, officers, other employees or agents.

Our Second Amended and Restated Certificate of Incorporation and our Amended and Restated Bylaws provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if the Court of Chancery lacks jurisdiction, the federal district court for the District of Delaware unless said court lacks subject matter jurisdiction in which case the Superior Court of the State of Delaware) will be the sole and exclusive forum for any stockholder for (a) any derivative action or proceeding brought on our behalf, (b) any action asserting a claim of breach of a fiduciary duty owed by, or other wrongdoing by, any director, officer, employee or agent of the Company to the Company or the Company’s stockholders, (c) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law (“DGCL”) or the Company’s Certificate of Incorporation or Bylaws, (d) any action to interpret, apply, enforce or determine the validity of the Company’s Certificate of Incorporation or Bylaws, or (e) any action asserting a claim governed by the internal affairs doctrine. The federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint, claim or proceeding asserting a cause of action arising under the Exchange Act or the Securities Act. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Stockholders cannot waive compliance with the federal securities laws and the rules and regulations thereunder. Any person or entity purchasing or otherwise acquiring or holding any interest in shares of our capital stock shall be deemed to have notice of and consented to the forum provision in our Second Amended and Restated Certificate of Incorporation.

The choice-of-forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with the Company or its directors, officers or other employees, and may result in increased costs to a stockholder who has to bring a claim in a forum that is not convenient to the stockholder, which may discourage such lawsuits. Although under Section 115 of the DGCL, exclusive forum provisions may be included in a company’s certificate of incorporation, the enforceability of similar forum provisions in other companies’ certificates or incorporation or bylaws has been challenged in legal proceedings, and it is possible that a court could find these types of provisions to be inapplicable or unenforceable. If a court were to find the exclusive forum provision of our Second Amended and Restated Certificate of Incorporation and our Amended and Restated Bylaws inapplicable or unenforceable with respect to one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could materially and adversely affect our business, financial condition and results of operations and result in a diversion of the time and resources of our management and board of directors.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These forward-looking statements involve a number of risks and uncertainties. Many of the following risks are, and will be, exacerbated by the COVID-19 pandemic and any worsening of the global business and economic environment as a result. We caution readers that any forward-looking statement is not a guarantee of future performance and that actual results could differ materially from those contained in the forward-looking statement. These statements are based on current expectations of future events. Such statements include, but are not limited to, statements about future financial and operating results, plans, objectives, expectations and intentions, costs and expenses, interest rates, outcome of contingencies, financial condition, results of operations, liquidity, cost savings, objectives of management, business strategies, success of competing technologies, financing, potential growth and market opportunities, product candidates, clinical trial timing and plans, clinical and regulatory pathways for our development programs, the achievement of clinical and commercial milestones, the advancement of our technologies and our products, and other statements that are not historical facts.

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “would,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” “possible” or “continue” or the negative of these terms or other similar expressions. Forward-looking statements contained in this prospectus include, but are not limited to, statements about:

We have based these forward-looking statements largely on our current expectations and projections about our business, the industry in which we operate, and financial trends that we believe may affect our business, prospects, financial condition and results of operations, and these forward-looking statements are not guarantees of future performance or development. These forward-looking statements speak only as of the date of this prospectus and are subject to a number of risks, uncertainties and assumptions described in the section titled “Risk Factors” and elsewhere in this prospectus. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. The forward-looking statements in this prospectus represent our views as of the date of this prospectus. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this prospectus.

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

All subsequent written or oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of this prospectus or to reflect the occurrence of unanticipated events, except as may be required under applicable law. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

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

USE OF PROCEEDS

We estimate that the net proceeds from our issuance and sale of            shares of our common stock in this offering will be approximately $            million, based on an assumed initial public offering price of $           per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their option to purchase additional shares in full to cover overallotments, if any, we estimate that our net proceeds will be approximately $               .

A $1.00 increase in the assumed initial public offering price of $           per share would increase the aggregate net proceeds to us from this offering by approximately $              , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase of 1.0 million shares in the number of shares offered by us would increase the net proceeds to us from this offering by approximately $             , assuming that the assumed initial public offering price remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this offering are to obtain additional capital to support our operations, establish a public market for our common stock and facilitate our future access to the public capital markets. We currently anticipate that we will use the net proceeds from this offering, together with our existing resources, as follows:

We have assumed the holder of our $200,000 convertible note will elect to convert this note into shares of our common stock, but the holder may elect for the note to be repaid in cash. 

We believe that our existing cash and cash equivalents, together with the net proceeds from this offering, will be sufficient to fund our operating expenses and capital expenditure requirements for at least the next 36 months . The amount and timing of our actual expenditures will depend upon numerous factors, and other factors described under “Risk Factors” in this prospectus, as well as the amount of cash used in our operations. We may find it necessary or advisable to use the net proceeds for other purposes, and we will have broad discretion in the use of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our stock. Pending their use, we plan to invest the net proceeds from this offering in money market funds short- and intermediate-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.

DIVIDEND POLICY

We have never declared or paid dividends on our common stock and we do not anticipate paying any cash dividends on our common stock in the foreseeable future. Payment of cash dividends, if any, in the future will be at the discretion of our board of directors and will depend on applicable law and then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business.

CAPITALIZATION

The following table sets forth our cash and cash equivalents as well as capitalization as of March 31, 2023 as follows:

The information below is illustrative only, and our capitalization following the closing of this offering will change based on the actual initial public offering price and other terms of this offering determined at pricing. You should read the information in this table, together with our financial statements and the related notes appearing elsewhere in this prospectus and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are included elsewhere in this prospectus by us.

Each $1.00 increase in the assumed initial public offering price of $           per share, would increase our cash, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $           million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

The number of shares of our common stock to be outstanding after this offering is based on 9,230,685 shares of common stock outstanding as of March 31, 2023 and excludes the following:

DILUTION

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

Our historical net tangible book value (deficit) as of March 31, 2023 was ($1,806,785), or ($0.20) per share of our common stock. Our historical net tangible book value (deficit) is the amount of our total tangible assets less our deferred offering costs and our total liabilities. Historical net tangible book value per share represents historical net tangible book value (deficit) divided by the number of shares of our common stock outstanding as of March 31, 2023.

After giving effect to our issuance and sale of shares of              common stock in this offering, assuming no exercise of the Representative’s over-allotment option, at an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions, estimated offering expenses payable by us, the as adjusted net tangible book value as of March 31, 2023 would have been approximately $           , or approximately $          per share. This represents an immediate increase in as adjusted net tangible book value per share of $          to our existing stockholders and an immediate dilution in as adjusted net tangible book value per share of approximately $          to new investors purchasing common stock in this offering. Dilution per share to new investors purchasing common stock in this offering is determined by subtracting as adjusted net tangible book value per share after this offering from the assumed initial public offering price per share paid by new investors.

The following table illustrates this dilution on a per share basis to new investors:

Each $1.00 increase in the assumed initial public offering price of $            per share would increase the net tangible book value per share after this offering by $            per share and the dilution to new investors purchasing common stock in this offering by $            per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their option in full to purchase an additional             shares of common stock in this offering, the as adjusted net tangible book value per share after the offering would be $            per share, the increase in the net tangible book value per share to existing stockholders would be $            per share and the dilution to new investors purchasing our common stock in this offering would be $            per share.

The number of shares of common stock to be outstanding after this offering is based on 9,230,685 shares of common stock outstanding as of March 31, 2023, and excludes:

We may choose to raise additional capital due to market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans. To the extent that we raise additional capital by issuing equity securities or convertible debt, your ownership will be further diluted.

After completion of this offering and assuming no exercise of the Representative’s over-allotment option, our existing stockholders would own approximately              % and our new investors would own approximately           % of the total number of shares of our common stock outstanding after this offering.

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

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our audited financial statements, and the related notes and other financial information included elsewhere in this prospectus. You should carefully read the “Risk Factors” section of this prospectus to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements.

Overview

Hesperos, Inc., operating as a CRO, has developed a disruptive technology that provides safety and efficacy testing of chemicals and novel therapeutics for the pharmaceutical, cosmetic, and food industries for drug discovery and development using its Human-on-a-Chip® multi-organ, microphysiological system. We are a socially-conscious company that uses our non-invasive, serum-free, multi-organ chip platform (Human-on-a-Chip) systems to provide pre-clinical analytical services with the goal of accelerating drug discovery and general toxicology testing and reducing the use of animal testing.

Our services primarily focus on systems composed of human cells representing select organs, which can be configured based on customer needs. Our technology and services provide research teams the opportunity to determine how the human body will respond when new drug compounds or drug combinations are introduced for both efficacy and toxicity in the same platform that interlinks organs or organ systems, including: heart, liver, lung, brain, skin, muscle, kidney, GI tract, immune, neuromuscular and more. We currently offer four basic validated Human-on-a-Chip systems for disease modeling and drug testing: Heart-Liver two-organ model, NMJ two-organ model, Heart-Liver-Cancer three-organ model and Heart-Liver Skeletal Muscle Neuron four-organ model. Our platform can target rare diseases (of the over 7,000 known rare diseases, approximately 95 percent have no treatment because of a lack of animal models). We have licensed patents from Cornell University and the University of Central Florida to support our systems.

We have funded our operations primarily from grant funding from the NIH and, to a lesser extent, from revenue generated from services provided to our pharmaceutical and cosmetic industry clients. As of March 31, 2023, we have received approximately $21.5 million in funding from SBIR grants from the NIH, with approximately an additional $3.7 million available for use through 2024, subject to availability of funds and satisfactory progress of each project as determined by the NIH. Dr. James Hickman, Chairman of our Board of Directors and one of our founders, has been our primary source of capital other than the grants from the NIH.

Results of Operations

Comparison of the three months ended March 31, 2023 to the three months ended March 31, 2022

Our financial results for the three months ended March 31, 2023 are summarized as follows in comparison to the three months ended March 31, 2022:

Revenues

Revenues during the three months ended March 31, 2023 were $1,668,291, as compared to revenues of $1,103,181 during the three months ended March 31, 2022, an increase of $565,110, or 51%. This growth was primarily driven by the expanding acceptance of our commercial offerings which we believe was fueled by the passage of the FDA Modernization Act. However, a decline in grant revenues partially offset this growth. Moving forward, we remain focused on growing our commercial revenues while maintaining a relatively consistent level of grant revenue.

Grant Revenue

During the three months ended March 31, 2023 and 2022, revenues included grant revenue of $840,634 and $885,444, respectively, reflecting a decrease of approximately 5% when compared to the prior period. During the three months ended March 31, 2023 and 2022, we recognized $759,598 and $706,179, respectively, as revenue in relation to the grants received from NIH. The decrease in grant revenue is attributed to the completion of certain grant-funded projects as scheduled. Looking ahead, we remain committed to seeking and obtaining grants from reputable organizations, such as the NIH, to support our research and development efforts. These grants play a vital role in advancing our scientific capabilities and expanding our product portfolio.

Commercial Revenue

During the three months ended March 31, 2023 and 2022, revenues included commercial revenue of $827,657 and $217,737, respectively, an increase of $609,920 or 280%. During the three months ended March 31, 2023, we continued to make an effort to diversify our revenues by allocating more resources towards commercial contracts, resulting in the increase in commercial revenue.

Cost of Revenues

Cost of revenues for the three months ended March 31, 2023 were $1,140,835 as compared to $839,954 during the three months ended March 31, 2022. The increase of $300,881, or 36%, was due to a shift in focus from grants to commercial development projects.

Cost of Revenues – Grants

Grant cost of revenues for the three months ended March 31, 2023 were $575,664 as compared to $634,145 during the three months ended March 31, 2022. The decrease of $58,481 is due to the decrease in grant revenue.

Cost of Revenues – Commercial Contracts

Commercial cost of revenues for the three months ended March 31, 2023 were $565,171 as compared to $205,809 during the three months ended March 31, 2022. The increase of $359,362 or 175% is due to allocating more resources to commercial development projects and is consistent with the increase in commercial revenue.

Gross Profit

Gross profit for the three months ended March 31, 2023 was $527,456 as compared to gross profit of $263,227 for the three months ended March 31, 2022. The increase of $264,229, or 100%, was primarily due to our continued efforts to diversify away from our historic reliance on grant revenue to more commercial projects, which has allowed us to generate additional revenue and gross profit.

General and Administrative Expenses

General and administrative decreased by $38,933, or 7%, to $549,515 for the three months ended March 31, 2023 from $588,448 for the three months ended March 31, 2022. The decrease was primarily the result of lower administrative costs.

Other Income (Expense)

We recognized interest expense of $45,629 during the three months ended March 31, 2023 and $22,958 during the three months ended March 31, 2022, representing an increase of $22,671, or 99%, in interest expense, which is primarily related to interest expense associated with new notes issued in 2022 and the deferred interest period on the EIDL loan lapsing. We recorded other income of $6 and $247 in the three months ended March 31, 2023 and 2022, respectively.

Net loss

Net loss for the three months ended March 31, 2023 was $67,682 as compared to net loss of $347,932 for the three months ended March 31, 2022.

Results of Operations

Comparison of the year ended December 31, 2022 to the year ended December 31, 2021

Our financial results for the year ended December 31, 2022 are summarized as follows in comparison to the year ended December 31, 2021:

Revenues

Our revenues during the year ended December 31, 2022 were $5,691,231, as compared to revenues of $5,197,370 during the year ended December 31, 2021, an increase of $493,861, or 10%, due to an increase in commercial revenue of 113%. The increase in commercial revenue was primarily driven by the expanding acceptance of our commercial offerings and was partially offset by a decrease in grant revenues.

Grant Revenue

During the years ended December 31, 2022 and 2021, revenues included grant revenue of $3,917,938 and $4,363,010, respectively, a decrease of $445,072 or 10%. During the years ended December 31, 2022 and 2021, we recognized $3,380,159 and $3,615,387, respectively, as revenue in relation to the grants received from NIH.

Commercial Revenue

During the year ended December 31, 2022 and 2021, revenues included commercial revenue of $1,773,293 and $834,360, respectively, an increase of $938,933 or 113%. During the year ended December 31, 2022, we continued to diversify our revenues by allocating more resources towards commercial contracts, resulting in the increase in commercial revenue and decrease in grant revenue.

Cost of Revenues

Our cost of revenues for the year ended December 31, 2022 were $4,040,822 as compared to $3,724,316 during the year ended December 31, 2021. The increase of $316,506, or 8.5%, was due to the increase in materials and labor required to support growth in our commercial business.

Gross Profit

Gross profit for the year ended December 31, 2022 was $1,650,409 as compared to gross profit of $1,473,054 for the year ended December 31, 2020. The increase of $177,355, or 12%, was due to growth in our commercial business.

General and Administrative Expenses

General and administrative increased by $477,397, or 26%, from $1,848,928 for the year ended December 31, 2021 to $2,326,325 for the year ended December 31, 2022. The increase was primarily a result of an increase in payroll expenses as we increased the number of employees as we expanded operations in 2022.

Interest and Other Income

We recognized interest expense of $152,663 in 2022 and $115,866 in 2021, representing an increase of $36,797, or 32%, in interest expense for 2022, which is primarily related to interest expense associated with new notes issued in 2022. We recorded other income of $6,775 and $8,196 in the years ended December 31, 2022 and 2021, respectively. In 2022, we also recorded $85,800 of income in relation to the forgiveness of the PPP loan. In 2021 there was no loan foregiveness.

Net Loss

Our net loss for the year ended December 31, 2022 was $736,004 as compared to $483,544 for the year ended December 31, 2021.

Liquidity and Capital Resources

At March 31, 2023 we had cash and cash equivalents of approximately $87,000. During the years ended December 31, 2021 and 2022, we generated cash flows from operations of approximately $187,000 and $69,000, respectively, and for the three months ended March 31, 2023, we experienced negative cash flow from our operating activities of approximately $7,000. Negative cash flow from operations for the three months ended March 31, 2023 is due to a net loss for the quarter of approximately $68,000, adjusted for the add back of non-cash items including depreciation and amortization, stock based compensation and changes in operating assets and liabilities. As of March 31, 2023, we had an accumulated deficit of $1,876,446 and a working capital deficit of $909,274. Since inception, we have funded our operations primarily from revenue generated from NIH and other governmental grants, commercial revenues, and, to a lesser extent, through debt financing, including loans provided by Dr. Hickman.

At March 31, 2023, December 31, 2022 and December 31, 2021, we had a working capital deficit as shown below:

Included in our current liabilities are amounts totaling $186,356, $151,939, and $364,950 that are due to related parties at March 31, 2023, December 31, 2022 and December 31, 2021, respectively. Also, included in our current liabilities is deferred revenue from commercial customers and government grants totaling $555,674, $928,064 and $414,823 at March 31, 2023, December 31, 2022 and December 31, 2021, respectively

Notes payable – related party

The related party notes’ obligation totaled $437,384 as of March 31, 2023; $446,854 and $358,597 as of December 31, 2022 and December 31, 2021, respectively.

Note payable – financed asset – equipment

In 2020, we financed the acquisition of certain research equipment with a third-party note. The sixty month note bears interest at 5.83 % per annum, and payments began in May 2022. The loan obligation totaled $87,769, $92,514 and $104,780 as of March 31, 2023, December 31, 2022 and December 31, 2021, respectively.

Finance leases obligations

We currently have finance lease obligations for research equipment with interest rates between 6.20% and 9.70%, per annum. Monthly payments range from $306 to $7,860. All leases have a term between three and six years. The finance leases obligations totaled approximately $990,000, $979,700 and $1,233,500 as of March 31, 2023, December 31, 2022 and December 31, 2021, respectively. All finance lease obligations are guaranteed by Dr. James Hickman, our Chief Scientist and Board Chairman.

Convertible Promissory Note

On March 28, 2022, we issued a $200,000 convertible promissory note (the “Convertible Note”) to a third party (the “Holder”) in exchange for $200,000. The Convertible Note bears interest at 12%, per annum. All unpaid principal and accrued interest under the Convertible Note were due and payable in full six months from issuance, which was originally September 28, 2022. During the year ended December 31, 2022, per agreement between the Company and the Holder, the maturity date of the convertible promissory note was extended to the date in which the Company completes its initial public offering. In the event that we issue and sell shares of our common stock, par value $0.0001 per share, to the public in a firm-commitment underwritten public offering pursuant to an effective registration statement under the Act, resulting in at least $5,000,000 of aggregate proceeds, net of the underwriting discount and commissions, to us (a “Qualified Initial Public Offering”), then at the closing of such Qualified Initial Public Offering, the Holder may elect that either: (i) we will pay Holder an amount equal to the sum of (a) all accrued and unpaid interest due on this Convertible Note and (b) the outstanding principal balance of this Convertible Note; or (ii) this Convertible Note will convert into that number of shares of common stock equal to the quotient obtained by dividing the outstanding principal balance and unpaid accrued interest under this Note as of the date of the closing of the Qualified Initial Public Offering by the amount equal to the public offering price per share in the Qualified Initial Public Offering multiplied by seventy percent (70%).

Economic Injury Disaster Loan

Entities negatively impacted by the coronavirus (“COVID-19”) pandemic were eligible to apply for loans sponsored by the United States Small Business Administration (“SBA”) Economic Injury Disaster Loan (“EIDL Loan”) program. On July 17, 2020, we received cash proceeds of $150,000 under this program. The proceeds can be used to fund payroll, healthcare benefits, rent and other qualifying expenses, and the loan is not subject to loan forgiveness provisions. The standard EIDL Loan repayment terms include interest accruing at 3.75% per annum effective July 17, 2020; the payment schedule contains a one-year deferral period on initial principal and interest payments; the loan term is thirty years; and there is no prepayment penalty or fees. We pledged all of our assets as collateral for the loan. On July 22, 2021, the EIDL amount was increased to $500,000. Installment payments increased to $2,526 per month. There were no additional amendments to the EIDL. As of both March 31, 2023 and December 31, 2022, the amounts outstanding totaled $519,026 and $519,758, respectively and is classified as part of notes payable and finance lease obligations – current portion and net of current portion on the condensed balance sheets. On January 6, 2021, the SBA announced a one-year extension of the deferral period for loans that commenced in 2020 delaying payments of principal and interest to July 2022 at which time we began making payments. As of March 31, 2023, December 31, 2022 and 2021, accrued interest on this note was approximately $19,000, $20,000 and $0, respectively, and is included in notes payable.

Paycheck Protection Program

On March 16, 2021, we entered into a loan agreement with a financial institution for a loan of $85,800 pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act enacted on March 27, 2020 (the “CARES Act”). In July 2022, we received notice from the SBA that the PPP loan was forgiven on July 1, 2022. The Company recognized approximately $85,800 in other income on the statement of operations for the year ended December 31, 2022.

Cash Flows

The following table sets forth the primary sources and uses of cash and cash equivalents for the three months ended March 31, 2023 and 2022.

Net cash (used in) provided by operating activities

Net cash used in operating activities was $6,762 and $61,921 for the three months ended March 31, 2023 and 2022, respectively. Net cash used in operating activities of $6,762 primarily consists of a net loss of $67,682, offset by non-cash expenses of depreciation and amortization of $130,518, stock-based compensation of $12,460, and non-cash lease expense of $1,865, as well as working capital items in the amount of $83,923, principally related to the decrease in accounts and grants receivable of $191,087, an increase in accounts payable of $157,037, an increase in accounts payable – related parties of $34,416, decrease in prepaid expenses and other current assets of $49,566, a decrease in deferred revenue of $372,390, a decrease in payroll liabilities and other current liabilities of $44,507.

Net cash used in investing activities

Net cash used in investing activities was $1,723 and $0 for the three months ended March 31, 2023 and 2022, respectively, as a result of the purchase of property and equipment.

Net cash used in financing activities

Net cash used in financing activities was $195,503 and $3,006 for the three months ended March 31, 2023 and 2022, respectively. The $195,503 used in financing activities in 2023 consists of the repayment of notes, finance obligations and related party notes as well as payment of deferred offering costs. The $3,006 used in financing activities in 2022 consists of proceeds from notes payable of $200,000 offset by repayments of notes payable and finance lease obligations of $203,006.

The following table sets forth the primary sources and uses of cash and cash equivalents for the years ended December 31, 2022 and 2021.

Net cash provided by operating activities

Net cash provided by operating activities was approximately $69,259 and $186,988 for the years ended December 31, 2022 and 2021, respectively. For the year ended December 31, 2022, net cash provided by operating activities of $69,259 primarily consists of a net loss of $736,004 and a non-cash gain related to forgiveness of notes payable (PPP loan) of $85,800, offset by non-cash expenses of depreciation and amortization of $483,097 , stock-based compensation of $43,132, and non-cash lease expense of $9,835 , as well as working capital items in the amount of $354,399 , principally related to an increase in deferred revenue of $513,241, payroll liabilities and other current liabilities of $88,363, accounts payable of $63,007, and a decrease in other assets of $74,999, offset by a decrease in accounts payable – related parties of $213,011 , an increase prepaid expenses and other current assets of $107,869 and accounts receivable of $64,331.

For the year ended December 31, 2021, net cash provided by operating activities was approximately $186,988 primarily consists of a net loss of $483,544, offset by non-cash expenses of depreciation and amortization of $456,978, stock-based compensation of $43,439, and non-cash lease expense of $16,866, as well as working capital items in the amount of $153,249, principally related to the increase in accounts payable – related parties of $278,526, increase in deferred revenue of $137,645, the decrease in other assets of $75,000, and the increase in accrued expenses of $44,083, offset by the increase in accounts and grants receivable of $289,180 and decrease in accounts payable of $136,613.

Net cash used in investing activities

Net cash used in investing activities was $17,598 and $37,036 for the years ended December 31, 2022 and 2021 as a result of the purchase of property and equipment in both years.

Net cash provided by (used in) financing activities

Net cash (used in) provided by financing activities was $(107,992) for the year ended December 31, 2022, compared to net cash used by financing activities of $84,616 for the year ended and December 31, 2021. The $107,992 used in financing activities in 2022 consists of proceeds from notes payable and related party notes of $400,000, offset by the repayment of notes payable, finance obligations and related party notes in the amount of $507,992. The $84,616 provided by financing activities in 2021 consists of proceeds from notes payable and related party notes of $635,800, offset by the repayment of notes payable, finance obligations and related party notes in the amount of $551,184.

Critical Accounting Estimates

Critical Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results and outcomes may differ from management’s estimates and assumptions. Included in these estimates are assumptions used to estimate collection of accounts receivable, fair value of intangible assets, valuation of lease liabilities and related right of use assets, deferred income tax asset valuation allowances, and valuation of stock-based compensation expense.

Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. We periodically evaluate whether events and circumstances have occurred that indicate possible impairment. When impairment indicators exist, we estimate the future undiscounted net cash flows of the related asset or asset group over the remaining life of the asset in measuring whether or not the asset values are recoverable.

Stock-based Compensation

Our share-based compensation program grant awards include restricted stock awards. The fair value of restricted stock awards is based on the fair value of our common stock on the date of the grant. The fair value of the stock-based awards are then expensed over the requisite service period, generally the vesting period, for each award.

We have periodically granted restricted stock awards to consultants for services, pursuant to our stock plans at the fair market value on the respective dates of grant. Should we terminate any of our consulting agreements, the unvested awards underlying the agreements would be cancelled. For awards granted to consultants and non-employees, compensation expense is recognized over the vesting period of the awards, which is generally the period services are rendered by such consultants and non-employees.

Revenue Recognition

Our revenue is expected to be generated primarily from the sale of research services, including revenue from our Human-on-a-Chip systems and research grant revenue.

We recognize revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). Under ASC 606, we recognize revenue when control of our services is transferred to our customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those services. To determine the appropriate amount of revenue to be recognized for arrangements determined to be within the scope of ASC 606, we perform a five-step process. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when (or as) the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. We only apply the five-step process to contracts when it is probable that the entity will collect consideration it expects to be entitled to in exchange for the goods or services it transfers to the customer.

We recognize revenue when (i) evidence of an arrangement exists, (ii) fees are fixed and determinable, (iii) services have been delivered, and (iv) collectability is reasonably assured. We currently generate revenue primarily from government grants and commercial contracts. Government grants are agreements that provide us with payments for certain types of expenditures in return for research and development activities over a contractually defined period. We recognize revenue when performance obligations related to respective revenue streams are met. For Grant Revenue, we consider the performance obligation met when the grant related expenses are incurred, or supplies and materials are received, provided that the applicable conditions under the government grants have been met. Revenues and related expenses are presented gross in the statements of operations as we determined that it is the primary obligor under the arrangements relative to the research and development services performed by us as lead technical expert. These revenues are not viewed as “incidental” or “peripheral.” Grant revenue for the three months ended March 31, 2023 and 2022 were for research and development related activities that provide for payments for reimbursed costs, which may include overhead and general and administrative costs as well as a related profit margin. For commercial revenue from Contract Research Services, the Company recognizes revenue over time as the Company does not create an asset that has an alternative use to the Company and the Company has the right to be paid for performance to date. Costs of the commercial contract’s revenue are recorded as cost of revenues in the Company’s statements of operations.

Grant Revenue

Our grant revenues are derived from research programs by various departments of the National Institute of Health (“NIH”).

Grants awarded to us for research and development by government entities are outside the scope of the contracts with customers and contributions guidance. This is because these granting entities are not considered to be customers and are not receiving reciprocal value for their grant support provided to us. These grants provide us with payments for certain types of expenditures in return for research and development activities over a contractually defined period.

We recognize NIH grant revenue as reimbursable grant costs that are incurred up to pre-approved award limits within the budget period. The costs associated with these reimbursements are reflected as a component of cost of revenue expense in the accompanying statements of operations.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as defined in the rules and regulations of the SEC. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for any other contractually narrow or limited purpose.

Related Party Transactions

The related party notes’ obligation totaled $446,854 and $358,597 as of December 31, 2022 and December 31, 2021, respectively.

Dr. Hickman is also a professor at the Nanoscience Technology Center at the University of Central Florida (“UCF”), and Dr. Shuler is a professor at Meinig School of Biomedical Engineering at Cornell. UCF owns 281,250 of our common stock, received in exchange for a number of patent licensing rights granted by UCF for Dr. Hickman’s inventions. Additionally, we have several sub-contracts with UCF, as well as Cornell, for research and development services provided by such universities to fulfill our obligations under the NIH grants. During the three months ended March 31, 2023 and 2022, we incurred no expenses with regards to sub-contracts from Cornell, and approximately $179,000 and $150,000, respectively, with regards to subcontracts from UCF. These expenses are included in cost of revenues on the condensed statements of operations. During the three months ended March 31, 2023 and 2022 we incurred operating expenses from UCF of approximately $14,000 and $60,000 , respectively. These costs are included in general and administrative expenses on the condensed statements of operations. As of March 31, 2023 and December 31, 2022, we owed UCF approximately $186,000 and $152,000, respectively. These payables are included in accounts payable – related parties on the condensed balance sheets.

JOBS Act

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 new or revised accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

For as long as we remain an emerging growth company under the recently-enacted JOBS Act, we will, among other things:

Although we are still evaluating the JOBS Act, we currently intend to take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us so long as we qualify as an “emerging growth company.” Among other things, this means that our independent registered public accounting firm will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting so long as we qualify as an emerging growth company, which may increase the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected.

Likewise, so long as we qualify as an emerging growth company, we may elect not to provide certain information, including certain financial information and certain information regarding compensation of our executive officers, that we would otherwise have been required to provide in filings we make with the SEC, which may make it more difficult for investors and securities analysts to evaluate our company. As a result, investor confidence in our company and the market price of our common stock may be materially and adversely affected.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (“ASU 2016-13”), which requires the measurement of expected credit losses for financial instruments carried at amortized cost, such as accounts receivable, held at the reporting date based on historical experience, current conditions and reasonable forecasts. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financing Instruments—Credit Losses. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019. On November 15, 2019, the FASB delayed the effective date of FASB ASC Topic 326 for certain small public companies and other private companies. As amended, the effective date of ASC Topic 326 was delayed until fiscal years beginning after December 15, 2022 for SEC filers that are eligible to be smaller reporting companies under the SEC’s definition. Adoption of this update did not have a significant impact on the Company’s financial statements.

In August 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU also removes certain settlement conditions that are required for equity-linked contracts to qualify for the derivative scope exception, and it simplifies the diluted earnings per share calculation in certain areas. The ASU is effective for fiscal years beginning after December 15, 2021. The Company adopted ASU 2020-06 on January 1, 2022, which did not have a material impact on the financial statements.

In October 2021, the FASB issued ASU 2021-07—Compensation—Stock Compensation (Topic 718): Determining the Current Price of an Underlying Share for Equity-Classified Share-Based Awards. The measurement objective in Topic 718 for share-based awards is fair value based, and the current price input is measured at fair value. This input is used in determining an award’s fair value. The practical expedient in this Update allows a non-public entity to determine the current price of a share underlying an equity classified share-based award using the reasonable application of a reasonable valuation method. The practical expedient in this Update is effective prospectively for all qualifying awards granted or modified during fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early application, including application in an interim period, is permitted for financial statements that have not yet been issued or made available for issuance as of October 25, 2021. Adoption of this update did not have a significant impact on the Company’s financial statements.

In November 2021, the Financial Accounting Standards Board issued ASU 2021-10, “Government Assistance (Topic 832), Disclosures by Business Entities about Government Assistance,” which requires annual disclosures that increase the transparency of transactions involving government assistance, including (1) the types of transactions, (2) the accounting for those transactions, and (3) the effect of those transactions on an entity’s financial statements. The amendments in this update are effective for all entities within the ASU’s scope for financial statements issued for annual periods beginning after December 15, 2021. This ASU was effective for the Company for fiscal year 2022 and did not have a material impact on the Company’s financial statements.

Except as noted above, the guidance issued by the FASB during the current year is not expected to have a material effect on the company’s financial statements. A variety of proposed or otherwise potential accounting standards are currently under consideration by standard setting organizations and regulatory agencies. Because of the tentative and preliminary nature of such proposed standards, management has not yet determined the effect if any that the implementation of such proposed standards would have on the Company’s financial statements.

Controls and Procedures

Historically, as a privately held company, we have maintained internal controls over financial reporting. However, these internal controls have not been subject to the testing required under the standards of publicly traded companies by Section 404 of Sarbanes-Oxley. We are not currently required to comply with SEC rules that implement Sections 302 and 404 of the Sarbanes-Oxley Act, and are therefore not required to make a formal assessment of the effectiveness of our internal controls over financial reporting for that purpose. However, at such time as Section 302 of the Sarbanes-Oxley Act is applicable to us, we will be required to evaluate our internal controls over financial reporting.

Limitations on the Effectiveness of Controls

Our management, including the Chief Executive Officer and the Chief Financial Officer, recognizes that any set of controls and procedures, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, with us have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of controls. For these reasons, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In June 2022, the Company established a Chief Financial Officer position in order to add an additional layer of oversight on the financial reporting process.

BUSINESS

Overview

Hesperos, Inc., operating as a CRO, has developed a disruptive technology that provides safety and efficacy testing of chemicals and novel therapeutics for the pharmaceutical, cosmetic, and food industries for drug discovery and development using its Human-on-a-Chip® multi-organ, microphysiological system. Our systems mimic the process of initial patient evaluation during a clinical trial, where functional human in vitro tissues would be evaluated in the same manner as a human undergoes medical testing to determine baseline performance metrics. Our services allow research teams, including teams at pharmaceutical companies, to leverage our Human-on-a-Chip systems to determine initially how drug compounds and drug combinations will respond in the human body for both efficacy and off-target toxicity. Our services can provide guidance on the choice of which drug to take into clinical trials without the use of costly and time-consuming animal testing and as models for rare diseases that do not have animal models.

The pre-clinical testing our Human-on-a-Chip system provides is customarily carried out through animal testing. Our system uses an in vitro device, in which human organ mimics composed of cells obtained or derived from various human organs and tissues are embedded and maintained in culture conditions (akin to growing cells in a sophisticated petri dish). Our systems are unique in that we have functional readouts that utilize electrical, force and barrier integrity measurements that monitor organ health non-invasively without cell death to mimic clinical function observations such as walking, talking, cardiac function and other non-invasive clinical observations. The ability to link all these organ mimics together in the same recirculating serum-free media (a blood substitute) for up to 28 days with circulated immune cells establishes a platform where diseases such as diabetes, cancer, neurological diseases and a host of rare diseases can be evaluated. We can also provide information on drug-drug interactions for both efficacy and toxicity that is clinically relevant, especially for cancer treatment.

We believe our Human-on-a-Chip systems provide a compelling value proposition to pharmaceutical companies and other entities, including the cosmetic industry. We believe that our technologies benefit drug discovery in human disease areas that are difficult to address using current methodologies, help eliminate animal testing, accelerate preclinical drug discovery and development, reduce risk of clinical failure, predict with greater degrees of confidence and ultimately, significantly reduce the cost of discovering new drugs and especially for repurposing existing drugs. These platforms are uniquely positioned to also tackle development of drugs to treat rare diseases as there are over 7,000 rare diseases but approximately 95 percent have no treatment due to a lack of animal models. Our systems can be utilized to create phenotypic models for efficacy for the rare disease CIPD¹ which led to an IND that the FDA used to allow a Phase II clinical trial to proceed (clinical trial NCT04658472 available at https://clinicaltrials.gov/ct2/show/NCT04658472). This IND utilized safety data from an ongoing clinical trial for another rare disease combined with our efficacy data, at substantially reduced cost and time compared to standard protocols. This creates a significant opportunity to work with large and small pharmaceutical companies to repurpose drugs for other rare disease when animal models do not exist.

Although the majority of our revenue has been derived from SBIR grants from the NIH, we are experiencing increasing revenues from pharmaceutical and cosmetic industry clients. As of March 31, 2023, we have received approximately $21.5 million in funding from SBIR grants from the NIH, with approximately an additional $3.7 million available for use through 2024, subject to availability of funds and satisfactory progress of each project as determined by the NIH.

Market Opportunity

Drug discovery is complex, capital intensive and is prone to high failure rates. Many current pre-clinical and clinical testing methodologies fail to identify drug liabilities early and cheaply in the drug development process. According to the Journal of the American College of Cardiology (JACC): Basic to Translational Science, 89% of novel drugs fail human clinical trials, with approximately half of those failures being due to unanticipated human toxicity since results from animal tests are highly inconsistent predictors of toxic responses in humans.

It takes many years and very large financial investments to develop a new drug. Although there are many factors that contribute to this inefficiency, we believe one major problem is low correlation in many cases between animal models and human response. In particular, the translation of pre-clinical studies based on animal testing often fails to inform successful clinical trials. Nine out of ten drugs that appear safe and effective in animals subsequently fail in human trials.

We are not aware of any other platform that has created multi-organ systems to predict pharmacokinetics and pharmacodynamics which we now offer as a service.² Of the over 7,000 known rare diseases, approximately 95 percent have no treatment because of a lack of animal models. Our systems were utilized to create phenotypic models for efficacy for the rare disease CIPD³ which led to an IND that the FDA used to allow a Phase II clinical trial to proceed (clinical trial NCT04658472 available at https://clinicaltrials.gov/ct2/show/NCT04658472). This IND utilized safety data from an ongoing clinical trial for another rare disease combined with our efficacy data, at substantially reduced cost and time compared to standard protocols. This creates a significant opportunity to work with large and small pharmaceutical companies to repurpose drugs for other rare disease when animal models do not exist. However, there is no assurance that the FDA will give similar treatment to future studies that use our systems.

To date, we have worked with 19 clients, 18 of which operate within the pharmaceutical industry and one of which operates within the cosmetic industry. Currently, we work with 6 clients in the pharmaceutical industry. Services provided to these clients include efficacy studies, toxicology studies, and model development. We have worked with one client to provide efficacy data in connection with their investigational new drug (“IND”) application which the FDA allowed to proceed to a Phase II clinical trial application in December 2020 and which was authorized and began recruiting patients in April of 2021. However, there is no assurance that the FDA will give similar treatment to future studies that use our systems.

The market for human-based safety and efficacy testing covers a number of fields, including: pharmaceutical development, food safety, general chemical testing, and cosmetics. We believe that each of these industries can be supported by our platforms. According to Global Industry Analysts, the global market for Absorption, Distribution, Metabolism, Excretion (ADME) Toxicology Testing was estimated at $7.7 billion in the year 2022. This market is projected to grow to $11.1 billion by 2026, growing at a compound annual growth rate (“CAGR”) of 10.9% over the analysis period. Currently, the Organ-on-a-Chip market is primarily a subset of ADME Toxicology Testing. The global Organ-on-a-Chip market was estimated to be $82.2 million in 2023 and is forecast to reach $388.2 million by 2028, growing at a CAGR of 36.4% according to a 2022 report by Valuates Reports, and outpacing the growth of other larger markets, including ADME Toxicology Testing.

¹ Rumsey et al.,Classical Complement Pathway Inhibition in a “Human-On-A-Chip” Model of Autoimmune Demyelinating Neuropathies, Advanced Therapeutics, 2022:2200030, (2022).

² McAleer et al., On the potential of in vitro organ-chip models to define temporal pharmacokinetic-pharmacodynamic relationships, Scientific Reports 9:9619 (2019).

³ Rumsey et al, Classical Complement Pathway Inhibition in a “Human-On-A-Chip” Model of Autoimmune Demyelinating Neuropathies, Advanced Therapeutics, 2022:2200030, (2022).

Our Solution for Drug Development

Our Human-on-a-Chip system is designed to enable rapid and efficient screening of drug candidates that would otherwise fail later in the drug development process, which can save a pharmaceutical company years and millions of dollars by identifying preclinical failures early in the development process. Our systems mimic the process of initial patient evaluation during a clinical trial, where functional human in vitro tissues would be evaluated in the same manner as a human undergoes medical testing to determine baseline performance metrics. Specific screens for heart rate, respiration, basic cognitive function, reflex tests on muscle and nerve, elimination, and chemical screens for liver, kidney and hematopoietic function are reproduced for integration in our unique pumpless platform. If anything abnormal is observed in these simple, yet high information functional evaluations, additional biomarkers are then evaluated much like a blood test administered to a patient. If a chip ceases to function, a “post mortem” examination of the tissue is completed. This approach enables the platform to be utilized not only for acute but also chronic evaluation of drugs non-invasively for periods of up to several months at a time. The number and frequency of biomarker assays would be reduced due to the use of the functional readouts which mimic heart rate, muscle function, barrier integrity and brain activities, thus reducing costs and increasing efficiency during pre-clinical evaluations. Because of our more holistic approach to the process of pre-clinical evaluation, more subtle effects, not just cell death, can be detected in our kind of system. When new drugs advance from preclinical testing to clinical trials, the ability to view results in real time and correlate the in vivo results to clinical predictions utilizing our pharmacokinetic/pharmacodynamics simulation is valuable because it enhances a drug developer’s ability to iterate without the time and cost associated with more traditional methods.

We have successfully completed projects with a number of pharmaceutical companies where the results are detailed in peer-reviewed scientific journals, including Roche Pharmaceuticals, for both efficacy and off-target toxicity determination for cancer drugs;⁴ AstraZeneca, for developing a pharmacokinetic (PK)/pharmacodynamics (PD) model of our heart-liver system that predicted in vivo outcomes for drugs in guinea pigs and dogs as well as resolved issues for one of the drugs that passed their standard preclinical screen but failed in an animal model;⁵ and Sanofi, for providing efficacy data for their investigational new drug application for the rare diseases chronic inflammatory demyelinating polyneuropathy (CIDP), which the FDA allowed to proceed to a Phase II clinical trial application (NCT04658472) in December 2020, and where the clinical trial was authorized and began recruiting patients in April of 2021 where the data from our system is described in a recently-published peer-reviewed article.⁶ This IND utilized safety data from an ongoing clinical trial for another rare disease combined with our efficacy data, at substantially reduced cost and time compared to standard protocols. This creates a significant opportunity to work with large and small pharmaceutical companies to repurpose drugs for other rare disease when animal models do not exist.

Human-on-a-Chip Systems

Our Human-on-a-Chip models are multi-organ microphysiological platforms composed of interconnected chambers for each cell type or barrier tissue of interest. These human organ mimics use either primary (from patient donors) or induced pluripotent stem cell (iPSC) derived. Currently consisting of up to six different organ types, microelectrode arrays (MEA) and microcantilevers are used to monitor the real time function including force generation and electrical activity of cells representing the organ mimic over time as compounds are dosed and circulate throughout the system. These non-invasive readouts of tissue function are direct indicators of cell health and reduce reliance on biomarkers that rely on cell death. Each organ model is monitored for up to 28-days in a single system allowing real time tracking of functional changes in response to treatments.

Our Human-on-a-Chip system is capable of multiple applications that can be customized to fit the customer’s needs. Our services can utilize phenotypic cellular assays to filter the vast number of hits and leads evaluated on a daily basis by pharmaceutical companies or be customized to address other specific needs. As a platform technology, there are many drug discovery applications that can be developed. We plan to initially focus on toxicology studies as well as analytic drug development services for the pharmaceutical industry.

Our Human-on-a-Chip systems could transmit massive amounts of data in very short amounts of time utilizing communication systems that are currently in the market. We plan to develop the ability to display the actual recordings synchronous with each functional readout. We believe that the ability to view results in real time would be valuable to our end-user customers because it enhances a drug developer’s ability to iterate in collaboration with our scientists without the time and cost associated with more traditional methods.

⁴ McAleeer et al., Multi-organ system for the evaluation of efficacy and off-target toxicity of anticancer therapeutics,

Science Translational Medicine. 11:eaav1386 (2019).

⁵ McAleer et al., On the potential of in vitro organ-chip models to define temporal pharmacokinetic-pharmacodynamic relationships, Sci. Rep. 9:9619 (2019).

⁶ Rumsey et al., Classical Complement Pathway Inhibition in a “Human-On-A-Chip” Model of Autoimmune Demyelinating Neuropathies, Advanced Therapeutics 2022:2200030 (2022).

The primary business focus of Hesperos is on customized systems composed of select organs that can be configured based on customer needs. Our technology and services provide research teams the opportunity to determine how the human body will respond when new drug compounds or drug combination are introduced for both efficacy and toxicity in the same platform that enables interlinked organs, including: heart, liver, lung, brain, skin, muscle, kidney, GI tract, immune, neuromuscular and more.

We currently also offer four basic Human-on-a-Chip models, including: (i) Heart-Liver two-organ model, (ii) Neuromuscular (NMJ) junction two organ model, (iii) Heart-Liver-Cancer three organ model and (iv) Heart-Liver Skeletal Muscle neuron four organ, each as described below:

Heart-Liver Two-Organ Model. Our two-organ Human-on-a-Chip heart-liver model is well-suited for investigations into the efficacy and safety of novel chemicals and biologics as well as their metabolites. The system combines sophisticated, noninvasive functional readouts of cardiomyocyte syncytium contractile force generation, beat frequency, and field potential duration (QT interval surrogate). In its current configuration, this model strives to replace the FDA-ICH approved whole-heart perfusion animal models in drug discovery and development. Additionally, our cardiomyocyte models adhere to the Comprehensive in vitro Proarrhythmia Assay (CiPA) Initiative guidelines concerning torsadogenic potential (TdP) risk. This two-organ model has been characterized for acute cardiotoxicity and hepatotoxicity using noninvasive and endpoint functional and biomarker readouts. This model has been routinely operated for 14 days, and therefore, is well-suited for acute and chronic dosing studies for drug efficacy and safety.

Neuromuscular (NMJ) Junction Two-Organ Model. Our Human-on-a-Chip, two-organ NMJ model is uniquely-suited for investigations into the physiology of NMJ formation, stability and synchronous activity between motoneuron (MN) neurotransmitter release and skeletal muscle (myotubes) contraction. Our microtunnel barrier system (MBS) separates the medium compartments of the MNs and myotubes while facilitating axonal outgrowth and innervation. This unique design allows for drugs to be tested on one or both sides to determine site of action. We have extensively characterized this model’s response to common NMJ disrupting toxins, even reproducing the biphasic dose response of tubocurarine toxin. Additionally, our healthy patient iPSC-derived MNs can easily be substituted for disease patient iPSCs carrying genetic mutations for common NMJ diseases such as amyotrophic lateral sclerosis (ALS).

Heart-Liver-Cancer Three-Organ Model. Our human cancer cell modules are well-suited for investigations into novel chemotherapeutic efficacy and, when integrated with a multi-organ system, for therapeutic index determination. We have characterized a heart-liver-cancer three-organ Human-on-a-Chip model and shown drug efficacy, safety and metabolite formation for monotherapy and combinatorial therapy approaches using multi-drug resistant (MDR) and non-MDR cancer cells.

Heart-Liver Skeletal Muscle Neuron Four-Organ Model. Our four-organ Human-on-a-Chip model has been extensively characterized for baseline physiology using MEA and cantilever-based functional readouts along-side standard biomarker readouts. In this model, we noninvasively monitor cardiomyocyte syncytium contractile force generation, beat frequency, and field potential duration (QT interval surrogate). We also noninvasively monitor skeletal muscle force generation and neuron spontaneous action potential generation. Endpoint assays for liver physiology include albumin and urea production. We also monitor industry standard metrics including cell viability and a range of biomarker readouts based on customer experimental design. This model has been routinely operated for 28 days, and therefore, is well-suited for acute and chronic dosing studies for drug efficacy and safety.

Barrier Tissue Modules

We also offer barrier tissue models that are easily integrated with our standard housing designs. Adding these modules to our platforms enables determination of transport characteristics of novel compounds as well as their responses as toxicity targets. Additional information regarding drug safety for barrier tissues and first-pass metabolism in gastrointestinal tract can also be determined. In the context of disease models, barrier tissues composed of mutant iPSC-derived cells can be incorporated to investigate the role these diseased tissues play in disease pathology and etiology in a controlled, human-based model.

Blood-Brain Barrier (BBB Model). Our BBB model, composed of human iPSC-derived and primary cells, has been extensively characterized for tight junction-mediated barrier formation and paracellular (passive) and transcellular (active) transport mechanisms. This module is well-suited for investigating the transport rates, transport mechanisms and barrier effects of novel chemicals and biologics.

Gastrointestinal Tract (GI Tract Model). Using either iPSC-derived enterocytes, or immortalized patient biopsy intestinal epithelial cells (hiECs), the absorption and first-pass metabolism characteristics of a novel compound can be determined. Our hiEC model has been characterized for CYP activity and barrier formation.

Kidney Renal Proximal Tubule (RPT Model). Using primary renal proximal tubule cells, the tubular reabsorption or secretion profile of a novel compound can be determined for excretion purposes. Additional data regarding the kidney safety profile of a drug can be collected in the form of barrier integrity changes (noninvasive TEER measurements) and release of the biomarker kidney injury marker-1 (KIM-1).

Skin. Using Strat-M® membranes, a synthetic human skin module, integrated into our multi-organ systems, we can determine the transdermal diffusion of novel compounds applied topically and monitor the effects of the absorbed drugs on organ physiology in the system. We have characterized a heart-liver-skin HoaC model for the effects of topically-applied drugs including hydrocortisone, ketoconazole and diclofenac.

Monocytes/Macrophages. Monocytes can be added to the recirculating medium in our multi-organ systems. These cells (THP-1 monocytes) have been characterized in systems for expression of the lineage markers CCR5, CD14 and CD16 as well as markers of activation including CD11b, CD69 and CD86 following exposure to lipopolysaccharide (LPS) and interferon-gamma (IFN-γ). Additionally, following exposure to LPS and IFN-γ the monocytes have been shown to differentiation into macrophages and adhere to damaged tissue modules. Differential cytokine release profiles have also been characterized in the context inactivated, tissue damage-activated and cytokine storm activated conditions.

Pharmacokinetic/Pharmacodynamic Modeling (CFD Modeling). Our recirculating medium allows for complex pharmacokinetic profiles of compounds and metabolic products through absorption, distribution, metabolism, and elimination (ADME) depending on the organ systems incorporated. We have extensive experience coupling HPLC-MS data with modeling of these systems through computational fluid dynamics (CFD) and other numerical methods to produce pharmacokinetic profiles both in different medium compartments and accumulated in the cells. Coupled with our functional measurements, we have the capabilities to generate Pharmacokinetic-Pharmacodynamic (PK-PD) relationships.

High-Performance Liquid-Chromatography Mass Spectroscopy (HPLC-MS). Using our Agilent Technologies HPLC-MS, we can quantify the concentration of drug in systems at any point during an experiment. Additionally, in any liver-containing HoaC system, we can determine concurrent depletion of parent compound and metabolite generation.

Grant Funding

To date, the majority of funding for our operations has come through NIH grants. As of March 31, 2023, we have received approximately $21.5 million in funding from SBIR grants from the NIH, since our inception, with approximately an additional $3.7 million available for use through 2024, subject to availability of funds and satisfactory progress of each project as determined by the NIH.

Each of the grants awarded to us relate to agreed-upon direct and indirect costs for specific research and development activities, which may include personnel and consulting costs, costs paid to CROs and research institutions, and administrative costs, among others. We receive the right to receive funds under the grant on a cost reimbursement basis up to the maximum amount of each specific grant award and we are under no obligation to achieve any identified results or conclusions just to file the appropriate progress reports on an annual basis. Only costs that are allowable under the grant award, certain government regulations, and the NIH’s supplemental policy and procedure manual may be claimed for reimbursement, and the reimbursements are subject to routine audits from governmental agencies from time to time. While these NIH grants do not contain payback provisions or milestone requirements, the NIH or another government agency may review our performance, cost structures and compliance with applicable laws, regulations, policies and standards and the terms and conditions of the applicable NIH grant. If any of our expenditures are found to be unallowable or allocated improperly of if we have otherwise violated terms of any NIH grant, the expenditures may not be reimbursed or we may be required to repay funds already disbursed. To date, we have not been found to have breached the terms of any NIH grant and have successfully passed NIH audits for the years 2017-2021 with no adverse findings.

Strengths and Competitive Advantages

We believe that our Human-on-a-Chip systems have the potential to disrupt the current infrastructure in the pre-clinical phase of drug development and address a major unmet need for rare diseases. We believe that our Human-on-a-Chip system should deliver the following key advantages over other competing systems:

Single Integrated System

Our system determines efficacy and off-target toxicity for both single compound treatments and drug combinations in interconnected, multi-organ human based systems. Many of our competitors focus on single organ toxicity. To our knowledge, our device is the only system on the only multi-organ system on the market that maintains physiological relationships among components allowing research teams to determine the effectiveness of a drug compound (and its metabolites) while monitoring the effect on other organs in one system.

Flexibility

Our systems may include up to six different organ types, which can each be interchanged to investigate various reactions and types of diseases. Current organ models can include the cardiac system, liver, muscle, kidney and brain in addition to barrier tissues such as the blood-brain barrier, intestine and skin as well as recirculating immune cells.

Scalability

The patented, pumpless system better represents in vivo conditions by providing a low volume environment so metabolites can be generated at significant concentrations if a liver is present. By only requiring milligrams of candidate compounds (compared to kilograms required for animal models), our systems allow medicinal chemists to investigate several options prior to scaling development for animal testing or clinical applications. It also allows recirculating cells that normally would be damaged by pumped systems.

Superior Interaction among Components

Our systems recirculate serum-free media, which represents a blood surrogate circulation while maintaining cell viability and differentiation for up to 28-days while maintaining defined components. Serum-free media allow for better definition of mechanistic interactions among organs than serum-containing media.

Proven Experience of our Founders

Our founders, Drs. Shuler and Hickman, both have over 30 years of experience with microphysiological systems. Dr. Shuler is recognized in the industry as the founder of the organ-on-a-chip field, and Dr. Hickman is the founding director of the NanoScience Technology Center at the University of Central Florida.

Growth Strategies

Our goal is to pursue greater commercial adoption of our human-based preclinical models to facilitate pharmaceutical companies in selecting which drug will be most likely to succeed in clinical trials at the medicinal chemistry stage. A modest increase in success in clinical trials will greatly reduce the cost of drug development. We believe that our services will allow pharmaceutical companies to better determine which drug candidates will likely fail and which will likely succeed which in turn should lead to more life-saving or life-enhancing drugs at lower costs of discovery. We believe our services will be a significant resource to the rare disease community.

As a platform technology, our services can be used to develop many drug discovery applications for both efficacy and safety evaluations. As a small company, we have limited resources to address the multitude of applications suitable for our platform technology and will initially focus on efficacy studies and analytic drug development services for the pharmaceutical industry, especially for rare diseases. Thus, our near term business strategy is to continue technology development of the Hesperos platform to decrease the cost of each evaluation, demonstrate its utility in specific services that the Company will offer, optimize the platform for reproducibility and scalability and develop other applications in collaboration with a limited number of long-term corporate partners.

We intend to use the proceeds from this offering to further enhance functionality and expand applications. We may expand the number of organ types and organ combinations in our systems, as well as increase the actual number of our systems in order to serve a greater number of customers, which we believe is the primary factor limiting our revenue growth. Our systems are assembled manually and, during operation, they need to be removed from the constant temperature and atmospheric incubators for functional measurements. In addition, surface modifications of the organ chips and subsequent plating of cells on the modified surfaces is done manually. We intend to use the proceeds from this offering to enhance the repeatability and reliability of our system by improving the automation of the fabrication and measurement processes. In addition, we intend to build additional platforms and systems to allow us to further diversify the components for our platforms and to conduct additional projects based upon anticipated demand from our existing and new customers. However, our ability to develop and implement the automation of our fabrication and measurement processes which will enable increased efficacy and reliability may face implementation challenges that may not all be addressed with proceeds from this offering. Further, the continued development of our technology may be more expensive or take longer than we expect and we may not be successful in such efforts.

Properties

Our Company’s offices are in a 13,970 square foot facility located in Central Florida Research Park at 12501 Research Pkwy #100, Orlando, FL 32826. We have leased the facility through February 1, 2028.

Competition

We are subject to general competition from pharmaceutical and biotechnology companies; academic and research institutions; and government or other publicly-funded agencies that are pursuing the development of tissue models and therapeutic products targeted to our potential customers and market opportunities. We believe our success will depend, in large part, on our ability to maintain a first mover advantage and competitive lead in our industry by focusing on customization for customer needs.

The drug discovery industry is dominated by a handful of large global multilateral corporations complemented by hundreds of small to medium sized biotechnology companies while organ-on-a-chip service companies are a newly created market niche. We believe this science has reached a tipping point and has generated a number of niche-focused competitors, most of which have emerged from the University setting.

Competition arises mainly from two sources, traditional cell-based in vitro culture approaches and traditional in vivo animal models and testing from companies like TissUs, Emulate, HuREL, Mimetas, Hepregan, InSphero, CN Bio Innovations, Nortis, Organovo, TARA Biosystems, Scikon, 4Design Bioscience and RegeneMed.

Intellectual Property

Our success will depend in large part on our ability to: