424B4 1 form424b4.htm

 

Filed Pursuant to Rule 424(b)(4)

Registration No. 333-234322

 

 

22,800,000 Shares of Common Stock

Pre-funded Warrants to Purchase 1,700,000 Shares of Common Stock

Series B Warrants to Purchase up to 24,500,000 Shares of Common Stock

1,700,000 Shares of Common Stock Underlying the Pre-Funded Warrants

24,500,000 Shares of Common Stock Underlying the Series B Warrants

 

Guardion Health Sciences, Inc. (the “Company”, “GHS”, “we”, “us” or “our”) is offering 22,800,000 shares of common stock, par value $0.001 per share, of the Company and Series B warrants to purchase 24,500,000 shares of common stock (the “Series B Warrants” or the “Warrants”) (and the shares of common stock that are issuable from time to time upon exercise of the Warrants).

 

We are also offering pre-funded warrants (the “Pre-Funded Warrants”) to purchase 1,700,000 shares of common stock to each purchaser whose purchase of shares of common stock in this offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election of the holder, 9.99%) of our outstanding common stock immediately following the consummation of this offering, in lieu of shares of common stock. Each Pre-Funded Warrant will be exercisable for one share of our common stock.

 

The purchase price of each Pre-Funded Warrant will equal the price per share at which the shares of common stock are being sold to the public in this offering, minus $0.01, and the exercise price of each Pre-Funded Warrant will be $0.01 per share. This prospectus also relates to the shares of common stock issuable upon exercise of any Pre-Funded Warrants sold in this offering. For each Pre-Funded Warrant that we sell, the number of shares of common stock that we are offering will be decreased on a one-for-one basis. Each share of common stock and Pre-Funded Warrant is being sold together with a Warrant exercisable into one share of common stock. Each Warrant will have an exercise price of $0.342 per share. The Series B Warrants become exercisable only after we have effectuated a Charter Amendment (as defined herein), and will expire five (5) years from the date they first become exercisable. The shares of common stock or Pre-Funded Warrants, and the accompanying Warrants, can only be purchased together in this offering but will be issued separately and will be immediately separable upon issuance.

 

Our common stock is listed on The Nasdaq Capital Market (“Nasdaq”) under the symbol “GHSI.” The last reported sale price for our common stock on Nasdaq on October 25, 2019 was $0.4336 per share. The public offering price is $0.332 per share of common stock and $0.01 per accompanying Warrant and $0.322 per Pre-Funded Warrant and $0.01 per accompanying Warrant. There is no established public trading market for the Pre-Funded Warrants or the Warrants, and we do not expect a market to develop. In addition, we do not intend to apply for a listing of the Pre-Funded Warrants or the Warrants on any national securities exchange. Without an active trading market, the liquidity of the Pre-Funded Warrants and Warrants will be limited.

 

Investing in our securities involves a high degree of risk. See “Risk Factors” beginning on page 8 of this prospectus.

 

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

 

  

Per
Share and

Accompanying

Warrant

  

Per Pre-
Funded
Warrant and

Accompanying

Warrant

   Total(1) 
Public offering price(2)  $0.342   $0.332   $8,379,000 
Underwriting discounts and commissions(3)  $0.02736   $0.02656   $670,320 
Proceeds, before expenses, to us  $0.31464   $0.30544   $7,708,680 

 

(1) Assumes no sale of Pre-Funded Warrants.
   
(2)

The public offering price is $0.332 per share of common stock and $0.01 per accompanying Warrant and $0.322 per Pre-Funded Warrant and $0.01 per accompanying Warrant.

   
(3) We have agreed to issue to the representative of the underwriters, as a portion of the underwriting compensation, warrants to purchase shares of our common stock and to reimburse the underwriters for certain expenses. See the section entitled “Underwriting” beginning on page 72 of this prospectus for additional information on the compensation payable to the underwriters.

 

We have also granted an option to the underwriters to purchase up to 3,675,000 additional shares of common stock (to the extent such shares are available for issuance) and/or Warrants on the same terms and conditions set forth above from us within 45 days after the date of this prospectus to cover over-allotments, if any.

 

The underwriters expect to deliver the Company’s securities to the purchasers on or about October 30, 2019.

 

Maxim Group LLC   WallachBeth Capital, LLC

 

The date of this prospectus is October 28, 2019.

 

   
 

 

ABOUT THIS PROSPECTUS

 

In this prospectus, unless the context suggests otherwise, references to “the Company,” “GHS,” “we,” “us,” and “our” refer to Guardion Health Sciences, Inc. and its consolidated subsidiaries.

 

This prospectus describes the specific details regarding this offering, the terms and conditions of the securities being offered hereby and the risks of investing in the Company’s securities. You should read this prospectus, any free writing prospectus and the additional information about the Company described in the section entitled “Where You Can Find More Information” before making your investment decision.

 

Neither the Company, nor any of its officers, directors, agents, representatives or underwriters, make any representation to you about the legality of an investment in the Company’s common stock. You should not interpret the contents of this prospectus or any free writing prospectus to be legal, business, investment or tax advice. You should consult with your own advisors for that type of advice and consult with them about the legal, tax, business, financial and other issues that you should consider before investing in the Company’s common stock.

 

ADDITIONAL INFORMATION

 

You should rely only on the information contained in this prospectus and in any accompanying prospectus supplement. No one has been authorized to provide you with different or additional information. The shares of common stock are not being offered in any jurisdiction where the offer is not permitted. You should not assume that the information in this prospectus or any prospectus supplement is accurate as of any date other than the date on the front of such documents.

 

TRADEMARKS AND TRADE NAMES

 

This prospectus includes trademarks that are protected under applicable intellectual property laws and are the Company’s property or the property of one of the Company’s subsidiaries. This prospectus also contains trademarks, service marks, trade names and/or copyrights of other companies, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that the Company will not assert, to the fullest extent under applicable law, its rights or the right of the applicable licensor to these trademarks and trade names.

 

INDUSTRY AND MARKET DATA

 

Unless otherwise indicated, information contained in this prospectus concerning the Company’s industry and the markets in which it operates, including market position and market opportunity, is based on information from management’s estimates, as well as from industry publications and research, surveys and studies conducted by third parties. The third-party sources from which the Company has obtained information generally state that the information contained therein has been obtained from sources believed to be reliable, but the Company cannot assure you that this information is accurate or complete. The Company has not independently verified any of the data from third-party sources nor has it verified the underlying economic assumptions relied upon by those third parties. Similarly, internal company surveys, industry forecasts and market research, which the Company believes to be reliable, based upon management’s knowledge of the industry, have not been verified by any independent sources. The Company’s internal surveys are based on data it has collected over the past several years, which it believes to be reliable. Management estimates are derived from publicly available information, its knowledge of the industry, and assumptions based on such information and knowledge, which management believes to be reasonable and appropriate. However, assumptions and estimates of the Company’s future performance, and the future performance of its industry, are subject to numerous known and unknown risks and uncertainties, including those described under the heading “Risk Factors” in this prospectus and those described elsewhere in this prospectus, and the other documents the Company files with the Securities and Exchange Commission, or SEC, from time to time. These and other important factors could result in its estimates and assumptions being materially different from future results. You should read the information contained in this prospectus completely and with the understanding that future results may be materially different and worse from what the Company expects. See the information included under the heading “Forward-Looking Statements.”

 

REVERSE STOCK SPLIT

 

On January 30, 2019, the Company filed a Certificate of Amendment to its Certificate of Incorporation, as amended, with the Secretary of State of the State of Delaware to effectuate a one-for-two (1:2) reverse stock split (the “Reverse Stock Split”) of its common stock without any change to its par value. All share and per share numbers in this prospectus reflect proportional adjustments for the Reverse Stock Split which adjustments were made to the Company’s outstanding common stock, stock options, and warrants as if the split occurred at the beginning of the earliest period presented in this prospectus.

 

   
 

 

TABLE OF CONTENTS

 

    Page No.
PROSPECTUS SUMMARY   3
     
RISK FACTORS   8
     
USE OF PROCEEDS   28
     
DIVIDEND POLICY   29
     
CAPITALIZATION   30
     
DILUTION   31
     
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   32
     
BUSINESS   43
     
MANAGEMENT   59
     
EXECUTIVE COMPENSATION   64
     
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE   69
     
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT   70
     
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF SECURITIES   71
     
UNDERWRITING   72
     
DESCRIPTION OF SECURITIES   77
     
DESCRIPTION OF SECURITIES WE ARE OFFERING   80
     
LEGAL MATTERS   82
     
EXPERTS   82
     
WHERE YOU CAN FIND MORE INFORMATION   82
     
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE   83
     
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS   F-1

 

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PROSPECTUS SUMMARY

 

The following summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that may be important to you. You should read this entire prospectus carefully, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s historical financial statements and related notes included elsewhere in this prospectus. In this prospectus, unless otherwise noted, the terms “the Company,” “GHS,” “we,” “us,” and “our” refer to Guardion Health Sciences, Inc. and its consolidated subsidiaries.

 

The Company

 

Overview

 

The Company is a specialty health sciences company formed to develop, formulate and distribute condition-specific medical foods with an initial medical food product on the market under the brand name Lumega-Z® that is designed to replenish and restore the macular protective pigment. A depleted macular protective pigment is a modifiable risk factor for retina-based diseases such as age-related macular degeneration (“AMD”), computer vision syndrome (“CVS”) and diabetic retinopathy. The Company believes this risk may be modified by taking Lumega-Z to maintain a healthy macular protective pigment. Additional research has also shown a depleted macular protective pigment to be a biomarker for neurodegenerative diseases such as Alzheimer’s disease and dementia.

 

In September 2017, the Company, through its wholly-owned subsidiary VectorVision Ocular Health, Inc., acquired substantially all of the assets and certain liabilities of VectorVision, Inc., a company that specializes in the standardization of contrast sensitivity, glare sensitivity, low contrast acuity, and early treatment diabetic retinopathy study (“ETDRS”) visual acuity testing. VectorVision’s standardization system is designed to provide the practitioner or researcher with the ability to delineate very small changes in visual capability, either as compared to the population or from visit to visit. VectorVision develops, manufactures and sells equipment and supplies for standardized vision testing for use by eye doctors in clinical trials, for real-world vision evaluation, and industrial vision testing. The acquisition expands the Company’s technical portfolio. The Company believes the acquisition of VectorVision, through which it added the CSV-1000 and ESV-3000 to its product portfolio, further establishes its position at the forefront of early detection, intervention and monitoring of a range of eye diseases. The Company has had limited commercial operations to date. Until recently with the acquisition of VectorVision and development of the Company’s sales force, the Company has primarily been engaged in research, development, commercialization, and capital raising. On September 3, 2019, the Company announced that it completed development of its new proprietary CSV-2000 standardized contrast sensitivity test. The Company believes that the CSV-2000 is the only computer-generated vision testing instrument available that will provide the optical marketplace with the Company’s proprietary, industry-standard contrast sensitivity test, along with a full suite of standard vision testing protocols. The proprietary standardization methodology incorporated into the CSV-2000 includes a patented technology known as AcQviz that automatically and constantly measures and adjusts screen luminance to a fixed standard light level for vision testing.

 

The Company invented a proprietary technology, embodied in the Company’s medical device, the MapcatSF®, that accurately measures the macular pigment optical density (“MPOD”). On November 8, 2016, the United States Patent and Trademark Office (“USPTO”) issued patent number 9,486,136 for the MapcatSF invention. Using the MapcatSF to measure the MPOD allows one to monitor the increase in the density of the macular protective pigment after taking Lumega-Z. The MapcatSF is a non-mydriatic, non-invasive device that accurately measures the MPOD, the lens optical density and lens equivalent age, thereby creating an evidence-based protocol that is shared with the patient. A non-mydriatic device is one that does not require dilation of the pupil for it to function. The MapcatSF is the first medical device using a patented “single fixation” process and “automatic lens density correction” that produces accurate serialized data.

 

For the past three years, the clinical prototypes of the MapcatSF have been tested on patients, allowing for frequent modifications of the device’s algorithms and retesting for accuracy, as well as to provide the inclusion of additional features not previously found in the initial prototype. The alpha prototype, which is the pre-commercial production version, was unveiled for the first time in July 2013 in Cambridge, United Kingdom, to researchers and scientists from around the world. The MapcatSF is manufactured and assembled in Irvine, California, and will be distributed from the Company’s national headquarters in San Diego. The marketing of the device will be implemented through continuing education presentations conducted by key opinion leaders in the industry. The MapcatSF device is a Class I medical device under the U.S. Food and Drug Administration (“FDA”) classification scheme for medical devices, which the Company has determined does not require pre-market approval.

 

Lumega-Z is a medical food product that has a patent-pending formula that is designed to replenish and restore the macular protective pigment simultaneously delivering critical and essential nutrients to the eye. Management believes, based on review of products on the market and knowledge of the industry, that Lumega-Z is the first liquid ocular health formula to be classified as a medical food (as defined in Section 5(b) of the “Orphan Drug Act”). However, the FDA has not monitored nor approved Lumega-Z as a medical food. Formulated by Dr. Sheldon Hendler in 2010, modifications were made over a two-year period to improve the taste and method of delivery. The current formulation has been delivered to patients and used in clinics since 2014.

 

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Medical foods are not considered to be either dietary or nutritional supplements. The Company believes that there is an increasing level of acceptance of medical foods as a primary therapy by patients and healthcare providers to treat pain syndromes, sleep and cognitive disorders, obesity, hypertension, and viral infection. In clinical practice, medical foods are being prescribed as both a standalone therapy and as an adjunct therapy to low doses of commonly prescribed drugs. The Company believes that medical foods will continue to grow in importance over the coming years.

 

Lumega-Z is a regulated medical food and therefore must be administered under the supervision of a physician or professional healthcare provider. In order to reach the large, expanding AMD patient population, the Company primarily markets Lumega-Z to patients through ophthalmologists and optometrists.

 

Over 1,900 patients have been treated with Lumega-Z since the Company began selling the formulation in October 2011. The patients come from a combination of the three initial testing sites, healthcare provider sites where the MapcatSF has been demonstrated, patients that have found Lumega-Z online and through other patient referrals, healthcare provider sites administering Lumega-Z to their patients without use of the MapcatSF, and MapcatSF devices recently placed in additional healthcare facilities. Patients take Lumega-Z under the supervision of their physician. Lumega-Z is typically ingested by the patient on a daily basis. Patients are typically between 50 and 80 years old. Patients are mixed ethnically and socioeconomically. Patients typically have insurance, whether private insurance or Medicare. Physicians have determined that the patient is experiencing or is at a high risk of developing retinal disease and decide based on their medical determination that the patient is a candidate for Lumega-Z.

 

Nearly half of Americans have low MPOD, a risk factor for AMD. As the MapcatSF is specifically designed to measure the MPOD, the Company and the physicians that utilize the MapcatSF are able to observe changes in that macular protective pigment density in patients who are taking Lumega-Z. The Company encourages sites using the MapcatSF® to provide the Company anonymized data on the MPOD readings. Anecdotal reports from physicians indicate improvements in their patients such as increased visual function, a noticeable halt in the progression of the patient’s AMD, improvement in glare and contrast sensitivity, and stabilization and improvement of vision. No adverse effects of taking Lumega-Z have been reported by any of the physicians administering Lumega-Z to their patients.

 

The number of patients regularly ordering Lumega-Z has increased as new healthcare providers have begun working with the Company, with a concurrent rise in patients set on an auto-ship program for delivery every four weeks. Automatic shipment has an added benefit in that it aids physicians because it increases patient compliance in using Lumega-Z on a regular basis. The Company’s operations, to date, indicate that each MapcatSF deployed in a clinic can generate an average of 75 new customers for its Lumega-Z product over a period of approximately 90 days when a MapcatSF is deployed in a small, low volume clinic. A larger, higher volume clinic is expected to generate a larger number of patients in a shorter period of time. All of the Company’s medical food revenue is derived from a limited number of individual customers.

 

AMD is the third leading cause of blindness in the world. More than 10 million people in the United States suffer from various forms of this incurable disease, according to the American Macular Degeneration Foundation. As the population ages, that number is expected to triple by 2025. Congress, the Food and Drug Administration, the Center for Medicare & Medicaid Services and private insurance companies are focusing increased efforts on pharmacovigilance (the branch of the pharmaceutical industry which assesses and monitors the safety of drugs either in the development pipeline or which have already been approved for marketing) to measure and reduce these adverse health consequences.

 

The Company believes that there is an increasing level of acceptance of medical foods as a primary therapy by patients and healthcare providers to treat pain syndromes, sleep and cognitive disorders, obesity, hypertension, and viral infection. In clinical practice, medical foods are being prescribed as both a standalone therapy and as an adjunct therapy to low doses of commonly prescribed drugs. From a regulatory standpoint, the FDA took steps in 1988 to encourage the development of medical foods by regulating this product category under the Orphan Drug Act. The term “medical food” as defined in Section 5(b) of the Orphan Drug Act is a “food which is formulated to be consumed or administered internally (by mouth) under the supervision of a physician and which is intended for the specific dietary management of a disease or condition for which distinctive nutritional requirements, based on recognized scientific principles, are established by medical evaluation.” This definition was incorporated by reference into the Nutrition Labeling and Education Act of 1990.

 

These regulatory changes have reduced the costs and time associated with bringing medical foods to market. Until 1972, medical foods were categorized as drugs and then until 1988 as “foods for special dietary purposes.” The field of candidates for development into medical foods is expanding due to continuing advances in the understanding of the science of nutrition and disease, coupled with advances in food technology thereby increasing the number of products that can be formulated and commercialized.

 

In addition to its medical food products, the Company, through its wholly owned subsidiary NutriGuard Formulations, Inc., recently acquired NutriGuard Research, Inc. See “Recent Developments” below. Pursuant to the Asset Purchase Agreement, the Company agreed to purchase specified assets of the NutriGuard brand and business, primarily consisting of inventory, trademarks, copyrights and other intellectual property. Once developed, the NutriGuard Formulations nutraceutical product line should provide the Company a new direct-to-consumer (“DTC”) capability. The Company intends to build a portfolio of nutraceutical products under the NutriGuard brand by developing new formulations and marketing its products to patients directly through DTC channels and through recommendations by their physicians.

 

The Company distributes its medical food products through E-commerce in an online store that is operated at www.guardionhealth.com. Information about VectorVision products can be found at www.vectorvision.com.

 

Recent Developments

 

Operating Results

 

We are in the process of preparing our results for our fiscal quarter ended September 30, 2019. Based on currently available information, we estimate that, for the third fiscal quarter, total revenue will be in the range of approximately $150,000 to $160,000.

 

The decrease in total revenue as compared to approximately $261,000 in the second quarter of 2019 and $294,000 in the third quarter of 2018 can be attributed primarily to a reduction in sales of the Vector Vision CSV-1000 product in the third quarter of 2019 as compared to the prior periods, which we believe resulted from the Company’s announcement in the third quarter of 2019 that it is releasing the new CSV-2000 product. Although the CSV-1000 will continue to be sold, the Company plans to put a greater focus on sales and marketing efforts of the new CSV-2000 beginning in the fourth quarter of 2019.

 

This unaudited preliminary financial information for the fiscal quarter ended September 30, 2019 is based upon our estimates and subject to completion of our quarter end financial results. Moreover, this data has been prepared solely on the basis of currently available information by, and is the responsibility of, management. The unaudited preliminary financial information for the fiscal quarter ended September 30, 2019 has not been reviewed or audited by our independent public accounting firm in accordance with PCAOB standards. This preliminary financial information is not a comprehensive statement of our financial results for this period, and our actual results may differ materially from these estimates due to the completion of our financial closing procedures, final adjustments, and other developments that may arise between now and the time the closing procedures for the fiscal quarter are completed. Therefore, you should not place undue reliance upon these preliminary financial results. There can be no assurance that these estimates will be realized, and estimates are subject to risks and uncertainties, many of which are not within our control. See “Cautionary Note Regarding Forward-Looking Statements.”

 

Initial Public Offering

 

On April 9, 2019, the Company closed its initial public offering (the “IPO”) of 1,250,000 shares of common stock, par value $0.001 per share, at an IPO price to the public of $4.00 per share resulting in net proceeds to the Company of $3,888,000 after all costs and expenses. The shares began trading on the NASDAQ Capital Market on April 5, 2019 under the symbol “GHSI.”

 

 -4- 

 

 

Follow-On Public Offering

 

On August 15, 2019, the Company consummated an underwritten public offering (the “August Offering”) of (i) 12,000,000 shares of common stock, (ii) pre-funded warrants exercisable for 1,000,000 shares of common stock (the “August Pre-Funded Warrants”), and (iii) warrants to purchase up to an aggregate of 13,000,000 shares of common stock (the “August Warrants”). The August Offering was conducted pursuant to an Underwriting Agreement, dated August 13, 2019 by and between the Company and Maxim Group LLC and WallachBeth Capital, LLC. On August 16, 2019, the Company sold an additional 1,950,000 August Warrants upon exercise of the underwriters’ over-allotment option. The net proceeds to the Company from the August Offering, after deducting underwriting discounts and commissions and other estimated expenses was approximately $4.9 million.

 

The public offering price was $0.44 per share of common stock and $0.01 per accompanying August Warrant. Each August Warrant represents the right to purchase one share of common stock at an exercise price of $0.585 per share. The August Warrants are exercisable immediately, expire five years from the date of issuance and provide that, beginning on the earlier of (i) September 11, 2019 and (ii) the date on which the common stock traded an aggregate of more than 40,000,000 shares after the announcement of the pricing of the August Offering, and ending on the twelve (12) month anniversary thereof, each August Warrant may be exercised at the option of the holder on a cashless basis at a ratio of one August Warrant for one share of common stock, in whole or in part, if the weighted average price of the Common Stock on the trading day immediately prior to the exercise date fails to exceed the initial exercise price of the August Warrant. As of October 25, 2019, 1,000,000 August Pre-Funded Warrants have been exercised for proceeds of $10,000 and 14,723,800 August Warrants have been exercised on a cashless basis, and the Company has issued an aggregate of 15,723,800 shares of common stock upon such exercises.

 

NutriGuard Acquisition

 

Effective September 20, 2019 (the “Effective Date”), the Company’s newly-formed wholly-owned subsidiary, NutriGuard Formulations, Inc., a Delaware corporation (“Buyer”), entered into an asset purchase agreement (the “Asset Purchase Agreement”) with NutriGuard Research, Inc., a California corporation (“NutriGuard”), and NutriGuard’s sole shareholder, Mark McCarty (the “NutriGuard Acquisition”). The NutriGuard Acquisition closed on the Effective Date.

 

Pursuant to the Asset Purchase Agreement, Buyer agreed to purchase from NutriGuard specified assets of the NutriGuard brand and business, primarily consisting of inventory, trademarks, copyrights and other intellectual property. In exchange, Buyer agreed to pay a royalty fee to NutriGuard subsequent to meeting certain financial performance metrics based on the operating results of the NutriGuard brand of products following the Effective Date. NutriGuard and Mr. McCarty also agreed, among other terms, to no longer use the “NutriGuard” name upon the Effective Date.

 

Pursuant to the terms of the Asset Purchase Agreement, Mr. McCarty entered into a consulting agreement (the “Consulting Agreement”) with Buyer pursuant to which Mr. McCarty will provide consulting services to, and serve as the Director of Research of, Buyer. Additionally, the Company agreed to grant to Mr. McCarty stock options to purchase 100,000 shares of the Company’s common stock, exercisable at a price of $0.5411 per share (which was the closing price of the Company’s common stock on the Effective Date). The options were granted under the terms of the Company’s 2018 Equity Incentive Plan, which options vest as follows: 25% on the Effective Date, 25% on the first anniversary following the Effective Date, 25% on the second anniversary following the Effective Date, and 25% on the third anniversary following the Effective Date. The vested portion of the options may be exercised at any time prior to the earliest to occur of: (a) the 5th anniversary of the Effective Date; (b) 90 days following the termination of the Consulting Agreement for any reason other than “for cause”; (c) 6 months following termination of the Consulting Agreement due to Mr. McCarty’s death or disability; or (iv) in the event of a termination of Mr. McCarty “for cause” under the Consulting Agreement.

 

NASDAQ Notice

 

On September 20, 2019, the Company received a notification letter from the Nasdaq Listing Qualifications Staff (the “Staff”) of the Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that, for the last 30 consecutive business days, the closing bid price for the Company’s common stock was below the minimum $1.00 per share requirement for continued listing on The Nasdaq Capital Market as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”). The Nasdaq letter has no immediate effect on the listing of the Company’s common stock on the Nasdaq Capital Market.

 

In accordance with Nasdaq listing rules, the Company has been provided an initial period of 180 calendar days, or until March 18, 2020 (the “Compliance Date”), to regain compliance with the Minimum Bid Price Requirement. If, at any time during this 180-day period, the closing bid price of the Company’s common stock is at least $1.00 for a minimum of 10 consecutive business days, the Staff will provide the Company written confirmation of compliance with the Minimum Bid Price Requirement and the matter will be closed. If the Company does not regain compliance by the Compliance Date, the Company may be eligible for an additional 180 calendar day compliance period. To qualify for such additional compliance period, the Company would have to meet the continued listing requirements of the NASDAQ Capital Market, except for the Minimum Bid Price Requirement, and the Company would need to provide written notice of its intention to cure the deficiency during the additional compliance period. If the Company is not eligible for the additional compliance period or it appears to the Staff that the Company will not be able to cure the deficiency or if the Staff exercises its discretion to not provide such additional compliance period, the Staff will provide written notice to the Company that its common stock will be subject to delisting. At that time, the Company may appeal the Staff’s delisting determination to a Nasdaq Hearing Panel.

 

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Risk Factors Summary

 

An investment in the Company’s common shares involves a high degree of risk. You should carefully consider the risks summarized below. The risks are discussed more fully in the “Risk Factors” section of this prospectus immediately following this prospectus summary. These risks include, but are not limited to, the following:

 

  As we have incurred recurring losses and negative cash flows since our inception, there is no assurance that we will be able to continue as a going concern absent additional financing, which we may not be able to obtain on favorable terms or at all.
  On September 20, 2019, the Company received a written notice from Nasdaq that we were not in compliance with Nasdaq Listing Rule 5550(a)(2), as the minimum bid price of our common stock had been below $1.00 per share for 30 consecutive business days. In accordance with Nasdaq listing rules, the Company has been provided an initial period of 180 calendar days, or until March 18, 2020, to regain compliance with the minimum bid price requirement. The failure to meet the continued listing requirements of the NASDAQ Capital Market, including the minimum bid price requirement, could result in the delisting of our common stock, which could result in the lack of a trading market and lack of liquidity for our common stock, cause a decrease in the value of our common stock, adversely affect our business, financial condition and results of operations, and negatively impact our ability to raise additional capital.
  Currently, the Company does not have a sufficient number of authorized shares of common stock to cover the shares of common stock issuable upon exercise of the Series B Warrants, and therefore the Series B Warrants may never become exercisable.
 

The Company’s future success is dependent on the successful commercialization of Lumega-Z®, the MapcatSF® medical device, the CSV-1000, CSV-2000 and ESV-3000 testing devices, and the continued successful integration of VectorVision and the NutriGuard brand into the Company’s business.

  The Company may fail to realize all of the anticipated benefits of the VectorVision acquisition and the NutriGuard Acquisition or those benefits may take longer to realize than expected.
  The Company has limited experience in developing medical foods, medical devices and nutraceuticals, and it may be unable to commercialize some of the products and services it develops or acquires.
  The Company and its suppliers and manufacturers are subject to a number of existing laws, regulations and industry initiatives and the regulatory environment of the healthcare industry is continuing to change.
  Lumega-Z may not qualify as a medical food as defined by the FDA.
  The Company’s products may cause undesirable side effects or have other properties that could delay or prevent any required regulatory approval, limit the commercial potential or result in significant negative consequences following any potential marketing approval.
  The Company’s competitors may develop products similar to Lumega-Z, and the Company may therefore need to modify or alter its business strategy, which may delay the achievement of its goals.
  The Company may be unsuccessful in expanding its product distribution outside the United States.
  The Company’s billings and revenues are derived from a limited number of customers and the loss of any of them may have an immediate adverse effect on its financial results.

 

Implications of Being an Emerging Growth Company

 

The Company is an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012, as amended (the “JOBS Act”). It will remain an emerging growth company until the earlier of (1) the last day of the fiscal year following the fifth anniversary of the completion of our initial public offering, (2) the last day of the fiscal year in which it has total annual gross revenue of at least $1.07 billion, as such amount is indexed for inflation every five years by the Securities and Exchange Commission to reflect the change in the Consumer Price Index for All Urban Consumers during its most recently completed fiscal year, (3) the last day of the fiscal year in which the Company is deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which would occur if the market value of the Company’s common stock held by non-affiliates exceeded $700 million as of the last business day of the second fiscal quarter of such fiscal year, or (4) the date on which the Company has issued more than $1 billion in non-convertible debt securities during the prior three-year period. An emerging growth company may take advantage of specified reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. As an emerging growth company:

 

  the Company may present only two years of audited financial statements, plus unaudited condensed financial statements for any interim period, and related management’s discussion and analysis of financial condition and results of operations in its initial registration statement;
     
  the Company may avail itself of the exemption from the requirement to obtain an attestation and report from its auditors on the assessment of the Company’s internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”);
     
  the Company may provide reduced disclosure about its executive compensation arrangements; and
     
  the Company may not require stockholder non-binding advisory votes on executive compensation or golden parachute arrangements.

 

In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. The Company has elected to take advantage of the benefits of this extended transition period. Its financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.

 

Corporate History and Information

 

Guardion Health Sciences, Inc. was formed under the name P4L Health Sciences, LLC in December, 2009 in California as a limited liability company. The Company changed its name to Guardion Health Sciences, LLC (“GHS”) in December 2009. In June 2015, GHS converted into a Delaware “C” corporation. The Company’s address is 15150 Avenue of Science, Suite 200, San Diego, California 92128. The Company’s telephone number is 858-605-9055. Its website is: www.guardionhealth.com. The information on, or that can be accessed through, this website is not part of this prospectus, and you should not rely on any such information in making the decision whether to purchase the Company’s common stock.

 

 -6- 

 

 

THE OFFERING

 

Common stock offered by us  

22,800,000 shares (26,475,000 shares if the underwriters exercise their over-allotment option in full).

     
Pre-Funded Warrants offered by us  

We are also offering Pre-Funded Warrants to purchase 1,700,000 shares of common stock to certain purchasers whose purchase of shares of common stock in this offering would otherwise result in such purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding common stock immediately following the consummation of this offering, the opportunity to purchase, if any such purchaser so chooses, Pre-Funded Warrants, in lieu of shares of common stock that would otherwise result in such purchaser’s beneficial ownership exceeding 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding common stock. Each Pre-Funded Warrant will be exercisable for one share of common stock. The purchase price of each Pre-Funded Warrant will be equal to the price per share at which shares of common stock are sold to the public in this offering, minus $0.01, and the exercise price of each Pre-Funded Warrant will be $0.01 per share. This offering also relates to the shares of common stock issuable upon exercise of any Pre-Funded Warrant sold in this offering. The Pre-Funded Warrants will be exercisable immediately and may be exercised at any time until all of the Pre-Funded Warrants are exercised in full. For each Pre-Funded Warrant that we sell, the number of shares of common stock that we are offering is decreased on a one-for-one basis.

     
Warrants offered by us  

We will issue Series B Warrants exercisable into an aggregate of 24,500,000 shares of common stock in this offering. Each share of common stock and each Pre-Funded Warrant is being sold together with a Series B Warrants exercisable into one share of common stock. Each Series B Warrant will have an exercise price of $0.342 per share.

 

Currently, the Company does not have a sufficient number of authorized shares of common stock to cover the shares of common stock issuable upon the exercise of the Series B Warrants. As a result, the Series B Warrants will become exercisable only after the Company effectuates an amendment to its Charter to either (i) increase the number of authorized shares of common stock or (ii) implement a reverse stock split with respect to the shares of common stock (either, a “Charter Amendment”). There can be no assurances that the Company’s stockholders will approve a Charter Amendment. Therefore, you may not ever be able to exercise the Series B Warrants.

 

This offering also relates to the shares of common stock issuable upon exercise of the Series B Warrants. The Series B Warrants may be exercised on a cashless basis if there is no effective registration statement registering the shares of common stock underlying the Series B Warrants.

     
Option to purchase additional securities  

The underwriters have a 45-day option to purchase up to an additional 3,675,000 shares of common stock (to the extent such shares are available for issuance) and/or Warrants to purchase up to an additional 3,675,000 shares of our common stock, in any combination thereof, from us at the public offering price, less underwriting discounts and commissions.

     
Common stock outstanding prior to this offering (1)  

50,482,562 shares.

     
Common Stock to be outstanding after this offering  

74,982,562 shares, assuming exercise of all of the Pre-Funded Warrants and no exercise of the Warrants issued in this offering, and no exercise of the underwriters’ over-allotment option.

     
Use of Proceeds  

We estimate that the net proceeds from this offering will be approximately $7,195,000, or $8,352,000 if the underwriters’ option to purchase additional shares of common stock is exercised in full, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds from this offering for commercialization and product development, sales and marketing efforts, developing the new NutriGuard brand, working capital and general corporate purposes. See “Use of Proceeds” on page 28 of this prospectus.

     
Underwriters’ Warrants  

The registration statement of which this prospectus is a part also registers for sale warrants to purchase 1,960,000 shares of our common stock to Maxim Group LLC and WallachBeth Capital, LLC, as the representatives of the underwriters (the “Underwriters’ Warrants”), as a portion of the underwriting compensation payable to the underwriters in connection with this offering. The Underwriters’ Warrants will be exercisable at the later of (a) 180 days following the effective date of the registration statement of which this prospectus is a part or (b) the date on which the Company effectuates a Charter Amendment, and will be exercisable for a period five (5) years from the effective date of this registration statement. The Underwriters’ Warrants will have an exercise price equal to $0.4446. Please see “Underwriting — Underwriters’ Warrants” for a description of these warrants.

     
Risk Factors  

See “Risk Factors” beginning on page 8 and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our securities.

     
Market Symbol and Trading  

Our common stock is listed on the Nasdaq Capital Market under the symbol “GHSI.” There is no established trading market for the Warrants or the Pre-Funded Warrants, and we do not expect a trading market for such securities to develop. We do not intend to list the Warrants or the Pre-Funded Warrants on any securities exchange or other trading market. Without a trading market, the liquidity of the Warrants or the Pre-Funded Warrants will be extremely limited.

 

(1) The number of shares of common stock outstanding is based on 50,482,562 shares of common stock issued and outstanding as of October 25, 2019 and excludes the following:

 

  2,712,500 shares of common stock issuable upon the exercise of outstanding stock options as of that date having a weighted average exercise price of $3.18 per share;
     
  1,276,538 shares of common stock issuable upon the exercise of outstanding warrants (excluding the August Warrants) as of that date having a weighted average exercise price of $0.97 per share;
     
 

226,200 of common stock issuable upon the exercise of outstanding August Warrants having an exercise price of $0.585 per share; and

     
  2,900,000 shares of our common stock reserved for future issuance under the Guardion Health Sciences 2018 Equity Incentive Plan, or the 2018 Plan.

 

 -7- 

 

 

RISK FACTORS

 

Investing in the Company’s securities involves a high degree of risk. Prospective investors should carefully consider the risks described below, together with all of the other information included or referred to in this prospectus, before purchasing Company securities. There are numerous and varied risks that may prevent the Company from achieving its goals. If any of these risks actually occurs, the Company’s business, financial condition or results of operations may be materially adversely affected. In such case, the trading price of its common stock could decline and investors in the Company’s common stock could lose all or part of their investment.

 

Risks Related to the Company’s Business

 

As the Company has incurred recurring losses and negative cash flows since our inception, there is no assurance that the Company will be able to continue as a going concern absent additional financing, which the Company may not be able to obtain on favorable terms or at all.

 

The Company has incurred net losses since inception in 2009 and cannot be certain if or when the Company will produce sufficient revenue from operations to support costs. The Company had a net loss of $7,767,407 for the year ended December 31, 2018 and a net loss of $5,305,169 for the year ended December 31, 2017. The Company had a net loss of $4,437,177 for the six months ended June 30, 2019. The Company had an accumulated deficit of $39,070,540 as of June 30, 2019. The Company expects to continue to incur net losses and negative operating cash flows in the near-term.

 

The Company will continue to incur significant expenses for commercialization activities related to its lead product Lumega-Z, the MapcatSF medical device, the CSV-1000, CSV-2000 and ESV-3000 devices, the new NutriGuard nutraceuticals product line, and with respect to efforts to build its infrastructure and expand its operations.

 

Even if profitability is achieved in the future, the Company may not be able to sustain profitability on a consistent basis. The Company expects to continue to incur substantial losses and negative cash flow from operations for the foreseeable future. The Company’s financial statements included in this registration statement have been prepared assuming that the Company will continue as a going concern. The Company’s auditors have made reference to the substantial doubt as to our ability to continue as a going concern in their audit report on its audited financial statements for the year ended December 31, 2018. Because the Company has been issued an opinion by its auditors that substantial doubt exists as to whether the Company can continue as a going concern, it may be more difficult for the Company to attract investors. The Company’s future is dependent upon its ability to obtain financing and upon future profitable operations.

 

The Company does not have any credit facilities as a source of present or future funds, and there can be no assurance that the Company will be able to raise sufficient additional capital on acceptable terms, or at all. The Company may seek additional capital through a combination of private and public equity offerings and debt financings, including through this offering. If the Company raises additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders. Debt financing, if obtained, may involve agreements that include covenants limiting or restricting the ability to take specific actions, such as incurring additional debt, would increase expenses and require that Company assets secure such debt. Moreover, any debt the Company incurs must be repaid regardless of our operating results.

 

The Company’s ability to obtain additional financing in the future will be subject to a number of factors, including market conditions, operating performance and investor sentiment. If the Company is unable to raise additional capital when required or on acceptable terms, the Company may have to significantly delay, scale back or discontinue our operations or obtain funds by entering into agreements on unattractive terms, which would likely have a material adverse effect on its business, stock price and relationships with third parties, at least until additional funding is obtained. If the Company does not have sufficient funds to continue operations, the Company could be required to seek other alternatives that would likely result in our stockholders losing some or all of their investment.

 

 -8- 

 

 

The Company’s future success is largely dependent on the successful commercialization of Lumega-Z®, GlaucoCetin, the MapcatSF® medical device, the VectorVision CSV-1000 and ESV-3000 testing devices, and the newly acquired NutriGuard nutraceuticals business.

 

The future success of the Company’s business is largely dependent upon the successful commercialization of its medical foods, Lumega-Z and GlaucoCetin, its medical device, the MapcatSF, the VectorVision CSV-1000, CSV-2000 and ESV-3000 testing devices and its newly acquired NutriGuard nutraceuticals business. The Company is dedicating a substantial amount of its resources to advance the Lumega-Z and GlaucoCetin medical foods, the MapcatSF, CSV-1000 and ESV-3000 medical devices and is now starting to direct resources at developing the NutriGuard product line and the launch of the CSV-2000. If the Company encounters difficulties in the commercialization of its medical foods, medical devices and/or nutraceuticals, the Company will not have the resources necessary to continue its business in its current form. If the Company is unable to establish and maintain adequate sales, marketing and distribution capabilities or enter into or maintain agreements with third parties to do so, it may be unable to successfully commercialize its products. The Company believes it is creating an efficient commercial organization and taking advantage of outsourcing options where prudent to maximize the effectiveness of its commercial expenditures. However, it may not be able to correctly judge the size and experience of the sales and marketing force and the scale of distribution necessary to be successful. Establishing and maintaining sales, marketing, and distribution capabilities are expensive and time-consuming. Such expenses may be disproportionate compared to the revenues the Company may be able to generate on sales of Lumega-Z, GlaucoCetin or the NutriGuard products or licensing fees or sales of the MapcatSF device or the CSV-1000, CSV-2000 and ESV-3000 testing devices. If this occurs, it will have an adverse impact on operations and the Company’s ability to fund any future development.

 

The Company may fail to realize all of the anticipated benefits of the VectorVision acquistion and NutriGuard Acquisition or those benefits may take longer to realize than expected. The Company may also encounter significant difficulties in integrating VectorVision and NutriGuard into the existing business and VectorVision and NutriGuard may underperform relative to the Company’s expectations.

 

The Company may not fully realize the anticipated benefits of the VectorVision acquisition and NutriGuard Acquisition. The Company has integrated the business of VectorVision and begun to integrate NutriGuard with its legacy businesses, and the Company may continue to devote significant management attention and resources to operate and grow these businesses. The failure to realize the anticipated benefits of the VectorVision acquisition and the NutriGuard Acquisition could cause an interruption of, or a loss of momentum in, the Company’s operations and could adversely affect its business, financial condition and results of operations. In addition, continued operation of VectorVision and NutriGuard may result in material unanticipated problems, expenses, liabilities, competitive responses, loss of customers and other business relationships, and diversion of management’s attention. Additional challenges may include, among other things, difficulties in achieving anticipated cost savings, synergies, business opportunities and growth prospects and the impact of potential liabilities the Company may be assuming from VectorVision or NutriGuard.

 

The Company has limited experience in developing medical foods, medical devices and nutraceuticals and it may be unable to commercialize some of the products and services it develops or acquires.

 

Development and commercialization of medical foods and medical devices involves a lengthy and complex process. The Company has limited experience in developing products and has only two commercialized medical food products on the market, Lumega-Z and GlaucoCetin. In addition, no one has ever developed or commercialized a medical device like the MapcatSF. The Company cannot assure you that it is possible to further develop or successfully commercialize the MapcatSF or that it will be successful in doing so. While the CSV-1000 and ESV-3000 visual acuity testing devices are commercialized, there is no guarantee that they will continue to be marketable or enjoy commercial success. The Company is preparing to launch the CSV-2000, but there is no assurance the introduction of the instrument will be successful. Furthermore, there is no guarantee that the NutriGuard nutraceuticals will be marketable or that the Company will achieve commercial success with the product line.

 

Even if the Company develops or acquires products for commercial use, these products may not be accepted by the medical and pharmaceutical marketplaces or be capable of being offered at prices that will enable the Company to become profitable. The Company cannot assure you that its products will be approved by regulatory authorities, if required, or ultimately prove to be useful for commercial markets, meet applicable regulatory standards, or be successfully marketed.

 

 -9- 

 

 

The Company’s ongoing investment in new businesses and new products, services, and technologies is inherently risky, and could disrupt its current operations.

 

The Company has invested and expects to continue to invest in new businesses, products, services, and technologies. The expansion into the transcranial doppler testing business is a reflection of its ongoing efforts to innovate and provide useful products and services. Such endeavors involve significant risks and uncertainties, including insufficient revenues from such investments to offset any new liabilities assumed and expenses associated with these new investments, inadequate return of capital on the Company’s investments, distraction of management from current operations, and unidentified issues not discovered in its due diligence of such strategies and offerings that could cause the Company to fail to realize the anticipated benefits of such investments and incur unanticipated liabilities. Because these new ventures are inherently risky, no assurance can be given that such strategies and offerings will be successful and will not adversely affect the Company’s reputation, financial condition, and operating results.

 

The Company and its suppliers and manufacturers are subject to a number of existing laws, regulations and industry initiatives and the regulatory environment of the healthcare industry is continuing to change. If it is determined that the Company or its suppliers or manufacturers are not in compliance with the laws and regulations to which they are respectively subject, the Company’s business, financial condition and results of operations may be adversely affected.

 

As a participant in the healthcare industry, the Company’s operations and relationships, and those of the Company’s customers, are regulated by a number of federal, state, local, and foreign governmental entities, and the Company’s products must be capable of being used by its customers in a manner that complies with those laws and regulations. Because of its business relationships with physicians and professional healthcare providers, and since its products Lumega-Z and GlaucoCetin are believed to be medical foods and the MapcatSF and the CSV-1000, CSV-2000 and ESV-3000 are medical devices, a number of regulations are implicated. For example, from the FDA’s perspective, a drug cures, treats, or mitigates the effects or symptoms of a specific disease. A medical food manages a specific disease or condition for which distinctive nutritional requirements, based on recognized scientific principles, are established by medical evaluation. While the Company believes Lumega-Z and GlaucoCetin are medical foods, if the FDA determines Lumega-Z or GlaucoCetin to be a drug, the Company and the product would be subject to considerable additional FDA regulation. Similarly, while the Company believes the MapcatSF is a safe medical device, with a very low potential risk of injury to a patient, the Company believes the MapcatSF is correctly classified as a Class I medical device, which does not require any premarket approval. The Company also believes the CSV-2000 is a Class I medical device. The CSV-1000 and ESV-3000 are currently classified with the FDA as Class I medical devices. If, however, the FDA were to determine that the MapcatSF, the CSV-1000, CSV-2000 or ESV-3000 is a Class II medical device, the Company and the particular product or products would be subject to considerable additional regulatory requirements.

 

The NutriGuard line of products are nutraceuticals and are regulated as dietary supplements under the Dietary Supplement, Health and Education Act of 1994 (“DSHEA”). Although dietary supplements are considered a separate regulatory category of food from consumer food products and medical foods, the FDA requires facilities that manufacture nutraceuticals to comply with regulations for current good manufacturing practices (“cGMP”). The Company does not manufacture any of the medical foods or nutraceuticals internally. The Company relies on contract manufacturers to manufacture the products. The FDA cGMP regulations largely are applicable to the site where the product is manufactured. Thus, the Company depends on the contract manufacturers to maintain cGMP compliance.

 

In addition, the Company cannot anticipate how changes in regulations or determinations by regulatory agencies may evolve. Thus, application of many foreign, state and federal regulations to the Company’s business operations is uncertain. Further, there are federal and state fraud and abuse laws, including anti-kickback laws and limitations on physician referrals and laws related to off-label promotion of prescription drugs that may or may not be directly or indirectly applicable to the Company’s operations and relationships or the business practices of its customers. It is possible that a review of its business practices or those of its customers by courts or regulatory authorities could result in a determination that may adversely affect the Company. In addition, the healthcare regulatory environment may change in a way that restricts existing operations or growth. The healthcare industry is expected to continue to undergo significant changes for the foreseeable future, which could have an adverse effect on the Company’s business, financial condition and results of operations. The Company cannot predict the effect of possible future legislation and regulation.

 

The Company may be subject to fines, penalties, injunctions and other sanctions if it is deemed to be promoting the use of its products as a drug.

 

The Company’s business and future growth depend on the development, use and ultimate sale of products that are subject to FDA regulation, clearance and approval. Under the U.S. Federal Food, Drug, and Cosmetic Act and other laws, the Company is prohibited from promoting its products for treatment of a condition or disease. This means that the Company may not make claims about the usefulness or effectiveness or expected outcome of use of its products for any particular condition or disease and may not proactively discuss or provide information on the use of its products, except as allowed by the FDA.

 

There is a risk that the FDA or other federal or state law enforcement authorities could determine that the nature and scope of our sales and marketing activities may constitute the promotion of our products for use as a drug in violation of applicable law. The Company also faces the risk that the FDA or other regulatory authorities might pursue enforcement based on past activities that the Company discontinued or changed, including sales activities, arrangements with institutions and doctors, educational and training programs and other activities.

 

 -10- 

 

 

Government investigations are typically expensive, disruptive, burdensome and generate negative publicity. If its promotional activities are found to be in violation of applicable law or if the Company agrees to a settlement in connection with an enforcement action, the Company would likely face significant fines and penalties and would likely be required to substantially change its sales, promotion and educational activities. In addition, were any enforcement actions against the Company or its senior officers to arise, the Company could be excluded from participation in U.S. government healthcare programs such as Medicare and Medicaid.

 

Lumega-Z or GlaucoCetin may not qualify as a medical food as defined by the FDA.

 

If the FDA makes a determination that Lumega-Z or GlaucoCetin should not be defined as a medical food (and does not qualify as a drug), the Company would need to relabel and rebrand that product. While reclassification and the subsequent relabeling and rebranding would be an added cost to operations, it would not change the use or effectiveness of Lumega-Z or GlaucoCetin. Although, management believes it is unlikely the FDA would make such a determination, there is a chance that certain physicians may choose not to recommend Lumega-Z or GlaucoCetin to their patients or that certain consumers may choose not to buy Lumega-Z or GlaucoCetin if it is not classified as a medical food. While there is no insurance coverage for Lumega-Z or GlaucoCetin as a medical food, if insurance companies would otherwise pay for Lumega-Z or GlaucoCetin because of it being a medical food, a determination by the FDA that Lumega-Z or GlaucoCetin should not be defined as a medical food could limit or eliminate such potential insurance coverage which might adversely impact the sales of Lumega-Z or GlaucoCetin.

 

The Company’s products may cause undesirable side effects or have other properties that could delay or prevent any required regulatory approval, limit the commercial potential or result in significant negative consequences following any potential marketing approval.

 

If the Company’s products, including Lumega-Z, GlaucoCetin or the recently acquired NutriGuard line of products, are associated with undesirable side effects or have characteristics that are unexpected, the Company may need to abandon its development or limit development to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. Any serious adverse or undesirable side effects identified during the development of its products, could interrupt, delay or halt commercialization and/or could result in the additional regulatory requirements by the FDA or other regulatory authorities, and in turn prevent the Company from commercializing its product candidates and generating revenues from their sale.

 

A key part of the Company’s business strategy is to establish collaborative relationships to commercialize and develop its product candidates. The Company may not succeed in establishing and maintaining collaborative relationships, which may significantly limit its ability to develop and commercialize its products successfully, if at all.

 

A key part of the Company’s business strategy is to establish collaborative relationships to commercialize and fund development of its product candidates. The Company is currently a party to several collaborative relationships. The Illinois College of Optometry, for example, has included the MapcatSF prototype in its curriculum to instruct students on how to measure the macular pigment. The New York Eye and Ear Infirmary is currently evaluating Lumega-Z on glaucoma patients. The Rosenberg School of Optometry at the University of the Immaculate Word is conducting research on patients with a MapcatSF prototype. Moreover, the Company’s Science Advisory Board, each member of whom is displayed on the Company website, includes world renowned experts in macular carotenoids who are developing the peer review markets by conducting research and furthering the understanding of the relevance of the macular pigment in ocular health. The Company’s Medical Advisors includes thought-leading clinicians in retina, glaucoma and the anterior segment of the eye, providing guidance on understanding the clinical applications of Lumega-Z and the MapcatSF and understanding the market opportunities and assisting in driving our strategic goals. However, there is no guarantee that the Company will be successful in negotiating similar collaborative relationships with regard to the VectorVision medical devices.

 

While the Company believes that these collaborative relationships help further validate the MapcatSF and Lumega-Z, these relationships are not material to the Company because none of these relationships is exclusive, there are many potential collaborative partners available, and the Company and each collaborator is free to enter into other collaborative relationships as needed. No sales of Lumega-Z are generated directly from Illinois College of Optometry because the MapcatSF is part of its teaching curriculum, not used for direct patient care. However, the other collaborative partners, as a result of using the MapcatSF on patients, periodically put patients on Lumega-Z if a physician determines it appropriate to do so. The majority of sales of Lumega-Z primarily come from clinicians outside of these collaborative relationships.

 

The Company may not be able to negotiate collaborations on acceptable terms, if at all, and if it does enter into collaborations, these collaborations may not be successful. The Company’s current and future success depends in part on its ability to enter into successful collaboration arrangements. If the Company is unable to establish and maintain collaborative relationships on acceptable terms or to successfully transition terminated collaborative agreements, the Company may have to delay or discontinue further development of one or more of its product candidates, undertake development and commercialization activities at its own expense or find alternative sources of capital. Consequently, if it is unable to enter into, maintain or extend successful collaborations, the Company’s business may be harmed.

 

 -11- 

 

 

The Company’s long-term success may depend upon the successful development and commercialization of products other than Lumega-Z, GlaucoCetin, the MapcatSF medical device, the VectorVision medical devices and the newly acquired NutriGuard nutraceutical business.

 

The Company’s long-term viability and growth may depend upon the successful development and commercialization of products other than Lumega-Z, GlaucoCetin, the MapcatSF, the CSV-1000, CSV-2000 and ESV-3000 medical devices and the NutriGuard product line. Product development and commercialization is very expensive and involves a high degree of risk. Only a small number of research and development programs result in the commercialization of a product. Product development is a complex and time-consuming process. If the Company fails to adequately manage the research, development, execution and regulatory aspects of new product development it may fail to launch new products altogether.

 

Government agencies may establish usage guidelines that directly apply to the Company’s products or proposed products or change legislation or regulations to which the Company is subject.

 

Government usage guidelines typically address matters such as usage and dose, among other factors. Application of these guidelines could limit the use of the Company’s products and products that the Company may develop. In addition, there can be no assurance that government regulations applicable to the Company’s products or proposed products or the interpretation thereof will not change and thereby prevent the marketing of some or all of its products for a period of time or permanently. The FDA’s policies may change and additional government regulations may be enacted that could modify, prevent, delay or change the regulatory approval required of the Company’s products. The Company cannot predict the likelihood, nature or extent of adverse government regulation that may arise from future legislation or administrative action, either in the U.S. or in other countries.

 

Patent litigation is common in the pharmaceutical and biopharmaceutical industries. Any litigation or claim against the Company may cause it to incur substantial costs and could place a significant strain on its financial resources, divert the attention of management from its business and harm the Company’s reputation.

 

While the Company is not a pharmaceutical or a biopharmaceutical company, as a health sciences company, the Company’s medical foods or its medical devices may come into competition with products in the medical foods and related industries, such as pharmaceuticals, biologics or dietary supplements. There has been substantial litigation in the pharmaceutical and biopharmaceutical industries with respect to the manufacture, use and sale of new products that are the subject of conflicting patent rights. For the most part, these lawsuits relate to the validity, enforceability and infringement of patents. The Company expects it will rely upon patents, trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain its competitive position. The Company may find it necessary to initiate claims to defend its intellectual property rights as a result. Other parties may have issued patents or be issued patents that may prevent the sale of the Company’s products or know-how or require the Company to license such patents and pay significant fees or royalties to produce its products. In addition, future patents may issue to third parties which the Company’s technology may infringe. Because patent applications can take many years to issue, there may be applications now pending of which the Company is unaware that may later result in issued patents that the Company’s products may infringe.

 

Intellectual property litigation, regardless of outcome, is expensive and time-consuming, and could divert management’s attention from our business and have a material negative effect on our business, operating results or financial condition. If such a dispute were to be resolved against us, the Company may be required to pay substantial damages, including treble damages and attorney’s fees to the party claiming infringement if the Company were to be found to have willfully infringed a third party’s patent. The Company may also have to develop non-infringing technology, stop selling any products it develops, cease using technology that contains the allegedly infringing intellectual property or enter into royalty or license agreements that may not be available on acceptable or commercially practical terms, if at all. The Company’s failure to develop non-infringing technologies or license the proprietary rights on a timely basis could harm its business. Modification of any products the Company develops or development of new products thereafter could require the Company to become subject to other requirements of the FDA and other regulatory bodies, which could be time-consuming and expensive. In addition, parties making infringement claims may be able to obtain an injunction that would prevent the Company from selling any products it develops, which could harm its business.

 

 -12- 

 

 

The Company’s competitors may develop products similar to the Company’s medical foods, and the Company may therefore need to modify or alter its business strategy, which may delay the achievement of its goals.

 

Competitors may develop products with similar characteristics to Lumega-Z or GlaucoCetin. Such similar products marketed by larger competitors could hinder the Company’s efforts to penetrate the market. As a result, the Company may be forced to modify or alter its business and regulatory strategy and sales and marketing plans, as a response to changes in the market, competition and technology limitations, among others. Such modifications may pose additional delays in achieving the Company’s goals.

 

The Company’s competitors may develop products similar to the MapcatSF medical device, and the Company may therefore need to modify or alter its business strategy, which may delay the achievement of its goals.

 

While the Company believes the MapcatSF is the only device available that can accurately measure the density of the macular pigment, competitors may develop products with similar characteristics to the Company’s MapcatSF medical device. Such similar products marketed by larger competitors could hinder the Company’s efforts to develop the market. As a result, the Company may be forced to modify or alter its business and regulatory strategy and sales and marketing plans, as a response to changes in the market, competition and technology limitations, among others. Such modifications may pose additional delays in achieving the Company’s goals.

 

The Company’s competitors may develop products similar to the VectorVision medical devices, and the Company may therefore need to modify or alter its business strategy, which may delay the achievement of its goals.

 

While the Company believes that VectorVision is the only company that offers fully standardized vision testing products that ensure consistent, repeatable and highly accurate results, its competitors may introduce similar products that may compete with the CSV-1000, CSV-2000 and ESV-3000 devices. These devices offer auto-calibrated tests to ensure the correct testing luminance and contrast levels for consistent, highly accurate and repeatable results, which is why the VectorVision instruments can detect and quantify subtle changes in vision, and why the VectorVision CSV-1000 instrument is used by eye doctors in more than 60 countries to accomplish contrast sensitivity testing. The Company believes the CSV-2000 will be received well in the marketplace, although there is no assurance introduction of the instrument will be successful. For the same reasons, the Company believes that the ESV-3000 ETDRS testing device will become the worldwide standard for ETDRS visual acuity testing. The Company’s research has revealed no competing products that offers auto-calibration of ambient illumination. Competitive devices do not allow for variations in ambient light levels, resulting in variability of test results due to the environment in which the testing is performed. The CSV-1000, CSV-2000 and ESV-3000 use self-calibrated test lighting. The self-calibrated test lighting is proprietary, and the test faces of the CSV-1000 are proprietary and the intellectual property is protected under copyright and trade secret law. Both CSV-1000 and ESV-3000 are currently sold worldwide, and the Company expects this global distribution to continue. The Company is preparing to launch the CSV-2000. There is a training requirement in incorporating the CSV-1000 and CSV-2000 devices into clinical practice, which the Company plans to provide as part of its commercialization strategy. Competitors currently exist, and while the Company believes its market penetration and intellectual property protection are barriers to entry, competitors may invent around the Company’s intellectual property or otherwise overcome barriers to entry and introduce similar products to compete with these VectorVision devices.

 

The Company’s competitors may develop products similar to the NutriGuard product line, and the Company may therefore need to modify or alter its business strategy, which may delay the achievement of its goals.

 

Competitors may develop products with similar characteristics to NutriGuard products. In fact, the dietary supplement and nutraceutical markets characteristically have many companies with several similar products competing for the same market share. Such similar products marketed by larger competitors could hinder the Company’s efforts to penetrate the market. As a result, the Company may be forced to modify or alter its business and regulatory strategy and sales and marketing plans, as a response to changes in the market, competition and technology limitations, among others. Such modifications may pose additional delays in achieving the Company’s goals.

 

The Company’s failure to compete successfully could cause its revenue or market share to decline.

 

The market for our products and services is competitive and is characterized by rapidly evolving industry standards, technology and user needs and the frequent introduction of new products and services. Some of our competitors, which include major pharmaceutical companies with alternatives to our products, may be more established, benefit from greater name recognition and have substantially greater financial, technical and marketing resources than us. We compete on the basis of several factors, including distribution of products, reputation, scientific validity, reliability, client service, price, and industry expertise and experience. There can be no assurance that we will be able to compete successfully against current and future competitors or that the competitive pressures that we face will not materially adversely affect our business, financial condition and results of operations.

 

If the Company is unable to develop its own sales, marketing and distribution capabilities, or if it is not successful in contracting with third parties for these services on favorable terms, or at all, revenues from product sales could be limited.

 

The Company currently has limited sales, marketing and distribution capabilities. To commercialize our products successfully, we have to develop more robust capabilities internally or collaborate with third parties that can perform these services for us. In the process of commercializing our products, we may not be able to hire the necessary experienced personnel and build sales, marketing and distribution operations capable of successfully launching new products and generating sufficient product revenues. In addition, establishing such operations takes time and involves significant expense.

 

 -13- 

 

 

If the Company decides to enter into co-promotion or other licensing arrangements with third parties, we may be unable to identify acceptable partners because the number of potential partners is limited and because of competition from others for similar alliances with potential partners. Even if we are able to identify one or more acceptable partners, we may not be able to enter into any partnering arrangements on favorable terms, or at all. If we enter into any partnering arrangements, our revenues are likely to be lower than if we marketed and sold our products ourselves.

 

In addition, any revenues the Company receives would depend upon our partners’ efforts which may not be adequate due to lack of attention or resource commitments, management turnover, and change of strategic focus, further business combinations or other factors outside of our control. Depending upon the terms of our agreements, the remedies we have against an under-performing partner may be limited. If we were to terminate the relationship, it may be difficult or impossible to find a replacement partner on acceptable terms, or at all.

 

If the Company cannot compete successfully for market share against other companies, it may not achieve sufficient product revenues and its business will suffer.

 

The market for our products and product candidates is characterized by competition and technological advances. If our products are unable to capture and maintain market share, we may not achieve sufficient product revenues and our business will suffer.

 

We will compete for market share against fully integrated medical food and medical device companies or other companies that develop products independently or collaborate with larger pharmaceutical companies, academic institutions, government agencies and other public and private research organizations. In addition, many of these competitors, either alone or together with their collaborative partners, have substantially greater capital resources, larger research and development staffs and facilities, and greater financial resources than we do, as well as significantly greater experience in:

 

  developing medical foods and medical devices;
     
  conducting product testing and studies;
     
  complying with regulatory requirements;
     
  formulating and manufacturing products; and
     
  launching, marketing, distributing and selling products.

 

Our competitors may:

 

  develop and patent processes or products earlier than we will;
     
  develop and commercialize products that are less expensive or more efficient than our products;
     
  comply with regulatory requirements more rapidly than us; or
     
  improve upon existing technological approaches or develop new or different approaches that render our technology or products obsolete or uncompetitive.

 

If we are unable to compete successfully against current or future competitors, we may be unable to obtain market acceptance for any product candidates that we create, which could prevent us from generating revenues or achieving profitability and could cause the market price of our common stock to decline.

 

Product liability lawsuits against the Company could divert its resources and could cause it to incur substantial liabilities and to limit commercialization of Company products.

 

We face a risk of product liability exposure related to the use of our products, including Lumega-Z, GlaucoCetin and the NutriGuard product line of nutraceuticals. If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

  decreased demand for any product candidates or products that we develop;
     
  injury to our reputation and significant negative media attention;
     
  significant costs to defend the related litigation;
     
  loss of revenue; and
     
  reduced time and attention of our management to pursue our business strategy.

 

Our insurance policies may not fully cover liabilities that we may incur in the event of a product liability lawsuit. We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise.

 

 -14- 

 

 

The Company may be unsuccessful in expanding its product distribution outside the United States.

 

To the extent we begin to offer our products outside the United States, we expect that we may be dependent on third-party distribution relationships. Distributors may not commit the necessary resources to market and sell our products to the level of our expectations. If distributors do not perform adequately, or we are unable to locate distributors in particular geographic areas, our ability to realize long-term international revenue growth would be materially adversely affected.

 

Additionally, our products may require regulatory clearances and approvals from jurisdictions outside the United States. We expect that we will be subject to and required to comply with local regulatory requirements before selling our products in those jurisdictions. We are not certain that we will be able to obtain these clearances or approvals or compliance requirements on a timely basis, or at all.

 

Manufacturing risks and inefficiencies may adversely affect the Company’s ability to produce products.

 

We engage third parties to manufacture our products in sufficient quantities and on a timely basis, while maintaining product quality, acceptable manufacturing costs and complying with regulatory requirements. In determining the required quantities of our products and the manufacturing schedule, we must make significant judgments and estimates based on historical experience, inventory levels, current market trends and other related factors. Because of the inherent nature of estimates, there could be significant differences between our estimates and the actual amounts of products we require. If we are unable to obtain from one or more of our vendors the needed materials or components that meet our specifications on commercially reasonable terms, or at all, we may not be able to meet the demand for our products. While we have not arranged for alternate suppliers, and it may be difficult to find alternate suppliers in a timely manner and on terms acceptable to us, we believe that there are multiple alternative sources, suppliers and manufacturers available for our products and devices in the event of a termination or a disagreement with any current vendor.

 

Security breaches and other disruptions could compromise the Company’s information and expose it to liability, which would cause its business and reputation to suffer.

 

In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our customers and business partners, including personally identifiable information of our customers, some of which is stored on our network and some of which is stored with our third-party E-commerce vendor. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to operator error, malfeasance or other disruptions. Any such breach could compromise our network and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, disrupt our operations, and damage our reputation, which could adversely affect our business.

 

The Company’s products and facility and the facilities of its manufacturers are subject to federal laws and regulations and certain requirements in the State of California. Failure to comply with any law or regulation could result in penalties and restrictions on the Company’s manufacturers’ ability to manufacture and the Company’s ability to distribute products. If any such action were to be imposed, it could have a material adverse effect on the Company’s business and results of operations.

 

Although medical foods do not require pre-market approval by the FDA, manufacturers of medical foods must be registered with the FDA under a provision promulgated by the Public Health Security and Bioterrorism Preparedness and Response Act of 2002 (the “Bioterrorism Act”). Manufacturers of medical foods are subject to periodic inspection by the FDA. The manufacture of our medical foods is outsourced in its entirety to three third-party manufacturers. We are evaluating additional manufacturers for selection as second source or back-up providers. Our medical foods have not been reviewed by the FDA. There is no certainty that the FDA will favorably review our medical food products or our manufacturers’ facilities. If the outcome of an inspection is negative or if we or our manufacturers fail to comply with any law or regulation, we could be subject to penalties and restrictions on our manufacturers’ ability to manufacture and distribute products. Any such action may result in a material adverse effect on our business and results of operations. For a more complete discussion of the laws and regulations to which we are subject, see the section of this prospectus titled “Business - Government Regulation.”

 

Prior to the acquisition of VectorVision, all of the Company’s billings and revenues have been derived from the sale of a single product.

 

For the years ended December 31, 2018 and 2017, the Company derived a portion of its revenues from the sale of Lumega-Z®. While we continue to see an increasing demand for Lumega-Z from our customers, we cannot assure you that the demand will continue. A decline in sales of Lumega-Z to our customers may have an immediate adverse effect on our financial results. The Company began recognizing revenue from our VectorVision acquisition in the fourth quarter of 2017. Although the Company expects to continue to realize revenues from sales of the CSV-1000 and ESV-3000 products, there is no assurance that such sales will continue at historical levels or that any of our products will otherwise continue to be commercially viable and in fact they are expected to be less than revenue from the prior quarter and prior year similar quarter. Although the CSV-1000 will continue to be sold, the Company plans to put a greater focus on sales and marketing efforts of the new CSV-2000 beginning in the fourth quarter of 2019. There can be no assurances that the marketing efforts will be successful and sales of the CSV-2000 will be comparable or exceed sales of the CSV-1000. The Company recently launched its second medical food, GlaucoCetin. The Company recently acquired the NutriGuard business.

 

 -15- 

 

 

The Company’s billings and revenues are derived from a limited number of customers and the loss of any one or more of them may have an immediate adverse effect on its financial results.

 

In the years ended December 31, 2018 and 2017, the Company’s billings were derived from a limited number of individual customers and distributors. Customers may stop purchasing our products with little or no warning. Loss of customers may have an immediate adverse effect on our financial results.

 

If the Company is forced to reduce its prices, its business, financial condition and results of operations may suffer.

 

The Company may be subject to pricing pressures with respect to its future sales arising from various sources, including practices of health insurance companies, healthcare providers and competition in the marketplace. If the Company’s pricing experiences significant downward pressure, our business could be less profitable and our results of operations may be adversely affected. In addition, because cash from sales funds our working capital requirements, reduced profitability could require us to raise additional capital to support our operations.

 

If the Company is unable to successfully introduce new products or fails to keep pace with medical advances and developments, its business, financial condition and results of operations may be adversely affected.

 

The successful implementation of our business model depends on our ability to adapt to evolving technologies and industry standards and introduce new products and services. We cannot assure you that we will be able to introduce new products on schedule, or at all, or that such products will achieve market acceptance. Moreover, competitors may develop competitive products that could adversely affect our results of operations. A failure by us to introduce planned products or other new products or to introduce these products on schedule may have an adverse effect on our business, financial condition and results of operations.

 

In addition, introduction of a new product that has similar or advances features over a current product may reduce interest and sales in the current product. There is no assurance that a new product will achieve the same or greater sales levels of a current product or that sales of a new product will replace or exceed the sales of a current product.

 

If we cannot adapt to changing technologies, our products and services may become obsolete, and our business could suffer. Because the healthcare industry is characterized by rapid technological change, we may be unable to anticipate changes in our current and potential customers’ requirements that could make our existing technology obsolete. Our success will depend, in part, on our ability to continue to enhance our existing products, develop new technology that addresses the needs of our prospective customers, license leading technologies and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis. The development of our proprietary technology entails significant technical and business risks. We may not be successful in using new technologies effectively or adapting our proprietary technology to evolving customer requirements or emerging industry standards, and, as a result, our business may suffer.

 

If customers do not accept the Company’s products or delay in deciding whether to recommend the Company’s products and services, its business, financial condition and results of operations may be adversely affected.

 

Our business model depends on our ability to sell our products. Acceptance of our products requires physicians to use our MapcatSF to measure the macular protective pigment in their patients’ eyes, understand and appreciate the benefits of Lumega-Z in order to recommend it to their patients, and to understand the benefits of visual acuity testing using the CSV-1000, CSV-2000 and ESV-3000 devices. We cannot assure you that physicians will integrate our products into their treatment plans or patient recommendations. Achieving market acceptance for our products and services will require substantial sales and marketing efforts and the expenditure of significant financial and other resources to create awareness and demand by participants in the healthcare industry. If we fail to achieve broad acceptance of our products by physicians, and other healthcare industry participants or if we fail to position our products as an ocular health remedy, our business, financial condition and results of operations may be adversely affected.

 

If the Company’s principal suppliers fail or are unable to perform their contracts with the Company, it may be unable to meet its commitments to its customers. As a result, the Company’s reputation and its relationships with its customers may be damaged and its business and results of operations may be adversely affected.

 

We currently purchase all our medical food ingredients and products from three vendors – one for carotenoids, one for Omega 3, and one for all other supplements. All of the ingredients for the nutraceutical products are sourced by the contract manufacturer that produces the NutriGuard products. These companies are subject to FDA regulation and they are responsible for compliance with current Good Manufacturing Practices (“cGMP” as defined by the FDA). Although our agreements provide that our suppliers will abide by the FDA manufacturing requirements, we cannot control their compliance. If they fail to comply with FDA manufacturing requirements, the FDA could prevent our vendors from manufacturing our ingredients and products. Although we believe that there are a number of other sources of supply of ingredients and manufacturers of medical food products, if these suppliers are unable to perform under our agreements, particularly at certain critical times such as when we add new physician clients that will require a large production of one or more products, we may be unable to meet our commitments to our customers. If this were to happen, our reputation as well as our relationships with our customers may suffer and our business and results of operations may be adversely affected. We are evaluating several additional manufacturers for selection as second source or back-up providers.

 

 -16- 

 

 

If the Company incurs costs exceeding its insurance coverage in lawsuits that are brought against it in the future, such incident may adversely affect the Company’s business, financial condition and results of operations.

 

If we were to become a defendant in any lawsuits involving the manufacture and sale of our products and if our insurance coverage were inadequate to satisfy these liabilities, it would be expected to have an adverse effect on our business, financial condition and results of operations.

 

If the Company is deemed to infringe on the proprietary rights of third parties, it could incur unanticipated expense and be prevented from providing its products and services.

 

We could be subject to intellectual property infringement claims as the number of our competitors grows and if our products or the functionality of our products overlap with patents of our competitors. While we do not believe that we have infringed or are infringing on any proprietary rights of third parties, we cannot assure you that infringement claims will not be asserted against us or that those claims will be unsuccessful. We could incur substantial costs and diversion of management resources defending any infringement claims whether or not such claims are ultimately successful. Furthermore, a party making a claim against us could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief that could effectively block our ability to provide products or services. In addition, we cannot assure you that licenses for any intellectual property of third parties that might be required for our products or services will be available on commercially reasonable terms, or at all.

 

The Company’s business depends on its intellectual property rights, and if it is unable to protect them, its competitive position may suffer.

 

Our business plan is predicated on our proprietary technology. Accordingly, protecting our intellectual property rights is critical to our continued success and our ability to maintain our competitive position. Our goal is to protect our proprietary rights through a combination of patent, trademark, trade secret and copyright law, confidentiality agreements and technical measures. We generally enter into non-disclosure agreements with our employees and consultants and limit access to our trade secrets and technology. We cannot assure you that the steps we have taken will prevent misappropriation of our technology. Misappropriation of our intellectual property would have an adverse effect on our competitive position.

 

The Company has four issued patents and five pending patent applications related to its products. There currently are no issued patents relating to Lumega-Z. Our success, competitive position, and future revenues will depend, in part, on our ability to obtain and maintain patent protection for our products, methods, processes, and other technologies; to preserve our trade secrets; to obtain trademarks for our name, logo and products; to prevent third parties from infringing our proprietary rights; and to operate without infringing the proprietary rights of third parties. To counter infringement or unauthorized use by third parties, we may be required to file infringement claims, which can be expensive and time-consuming.

 

The patent process is subject to numerous risks and uncertainties, and there can be no assurance that we will be successful in protecting our products by obtaining and defending patents. These risks and uncertainties include the following:

 

  Claims of issued patents, and the claims of any patents which may be issued in the future and be owned by or licensed to the Company may be challenged by third parties, resulting in patents being deemed invalid, unenforceable, or narrowed in scope, a third party may circumvent any such issued patents, or such issued patents may not provide any significant commercial protection against competing products;
     
  Our competitors, many of which have substantially greater resources than we do and many of which have made significant investments in competing technologies, may seek, or may already have obtained, patents that will limit, interfere with, or eliminate our ability to make, use, and sell our potential products either in the United States or in international markets; and
     
  The legal systems of some foreign countries do not encourage the aggressive enforcement of patents, and countries other than the United States may have less restrictive patent laws than those upheld by United States courts, allowing foreign competitors the ability to exploit these laws to create, develop, and market competing products. Thus, the Company’s foreign patents may not be enforceable to the same extent as the counterpart U.S. patents.

 

 -17- 

 

 

In addition, the USPTO, and patent offices in other jurisdictions have often required that patent applications concerning pharmaceutical and/or biotechnology-related inventions be limited or narrowed substantially to cover only the specific innovations exemplified in the patent application, thereby limiting the scope of protection against competitive challenges. Thus, even if we or any of our licensors are able to obtain patents, the patents may be substantially narrower than anticipated.

 

The Company’s business depends in part on and will continue to depend in part on its ability to establish and maintain additional strategic collaborative relationships. Failure to establish and maintain these relationships could make it more difficult to expand the reach of the Company’s products, which may have a material adverse effect on its business.

 

To be successful, we must continue to maintain our existing strategic relationships, such as our relationship with our vendors who manufacture our medical food products. We also must continue to establish additional strategic relationships with healthcare leaders. This is critical to our success because we believe that these relationships contribute towards our ability to extend the reach of our products and services to a larger number of physicians, professional healthcare providers and physician groups and to other participants in the healthcare industry; develop and deploy new products and services; and generate additional revenue and cash flows. Entering into strategic relationships is complicated because strategic partners may decide to compete with us in some or all of our markets. In addition, we may not be able to maintain or establish relationships with key participants in the healthcare industry if we conduct business with their competitors.

 

The Company must attract quality management in order to manage its growth. Failure to do so may result in slower expansion.

 

In order to support the growth of our business and the additional obligations that come with being an exchange-listed company, we will need to expand our senior management team. We plan to recruit additional personnel, including a Chief Financial Officer and a Chief Operating Officer in the near future. There is no assurance that we will be capable of attracting and retaining quality executives and integrating those individuals into our management system. Without experienced and talented management, the growth of our business may be adversely impacted.

 

Competition for qualified employees is intense. The Company may not be able to attract and retain the highly skilled employees needed to support its business. Without skilled employees, the quality of its product development and services could diminish and the growth of its business may be slowed, which could have a material adverse effect on the Company’s business, financial condition and results of operations.

 

Our ability to provide high-quality products and services to our clients depends, in large part, upon our employees’ experience and expertise. We must attract and retain highly qualified personnel with a deep understanding of the pharmaceutical and healthcare information technology industries. In addition, we will invest significant time and expense in training our employees, increasing their value to clients as well as to competitors who may seek to recruit them, which will increase the cost of replacing them. If we fail to retain our employees, the quality of our product development and services could diminish and the growth of our business may be slowed. This may have a material adverse effect on our business, financial condition and results of operations.

 

If the Company loses the services of its Chief Executive Officer and other key personnel, it may be unable to replace them, and the Company’s business, financial condition and results of operations may be adversely affected.

 

Our success largely depends on the continued skills, experience, efforts and policies of our management team and other key personnel and our ability to continue to attract, motivate and retain highly qualified employees. In particular, the services of Michael Favish, our founder, President and Chief Executive Officer, and David Evans, director and Chief Science Officer, are integral to the execution of our business strategy. We believe that the loss of the services of Mr. Favish or Dr. Evans could adversely affect our business, financial condition and results of operations. We cannot assure you that Mr. Favish, Dr. Evans or our other executive officers will continue to provide services to the Company. We do not maintain key man insurance for any of our key personnel.

 

The Company’s ability to attract and retain qualified members of our board of directors may be impacted due to new state laws, including recently enacted gender quotas.

 

In September 2018, California enacted SB 826 requiring public companies headquartered in California to maintain minimum female representation on their boards of directors as follows: by the end of 2019, at least one woman on its board, by the end of 2020, public company boards with five members will be required to have at least two female directors, and public company boards with six or more members will be required to have at least three female directors. Failure to achieve designated minimum levels in a timely manner exposes such companies to financial penalties and reputational harm. We cannot assure that we can recruit, attract and/or retain qualified members of the board and meet gender quotas as a result of the California law, which may expose us to penalties and/or reputational harm.

 

The Company’s future success depends upon its ability to grow. If the Company is unable to manage its growth effectively, it may incur unexpected expenses and be unable to meet its customers’ requirements.

 

We will need to expand our operations if we successfully achieve market acceptance for our products and services. We cannot be certain that our systems, procedures, controls and existing space will be adequate to support expansion of our operations. Our future operating results will depend on the ability of our officers and key employees to manage changing business conditions and to implement and improve our technical, administrative, financial control and reporting systems. We may not be able to expand and upgrade our systems and infrastructure to accommodate these increases or we may not have the qualified personnel to implement them. Difficulties in managing any future growth could have a significant negative impact on our business, financial condition and results of operations because we may incur unexpected expenses and be unable to meet our customers’ requirements.

 

 -18- 

 

 

The Company may consider acquiring other companies or product lines in an effort to expand its business in exchange for cash and/or stock of the Company (or a combination thereof), which may not be successful or which may cause dilution to investors.

 

The Company will consider acquiring other companies or product lines that may be complementary or supplementary as part of our future efforts to expand the business, which acquisitions could be for cash, stock or a combination thereof. There is no guarantee that any such acquisition will be successful or that an acquired company’s products, operations or corporate culture will mesh with our Company, integrate well, or that any economies of scale will be realized. In addition, any such transaction that involves the Company’s stock would cause dilution to investors. In addition, any such transaction that involves cash would result in a reallocation of funds on hand that would be needed to support an acquired company or acquired product line.

 

In order to expand the Company’s business into additional states, it may need to comply with regulatory requirements specific to such states and there can be no assurance that it will be able to initially meet such requirements or that it will be able to maintain compliance on an on-going basis.

 

While we believe our product, Lumega-Z®, to be a medical food and not a drug, it is only available under the supervision of a physician. While it is not available in pharmacies, we are mindful that the act of physicians prescribing, particularly if conducted across state lines, could potentially be subject to certain pharmacy regulations. Each state has its own regulations concerning physician dispensing, restrictions on the corporate practice of medicine, anti-kickback and false claims. In addition, each state has a board of pharmacy that regulates the sale and distribution of drugs and other therapeutic agents. Some states require a physician to obtain a license to dispense prescription products. While we do not believe these pharmacy requirements are applicable should a pharmacy board or medical board determine otherwise, there can be no assurance that we will be able to comply with the regulations of particular states into which we may expand or that we will be able to maintain compliance with the states in which we currently distribute our products. We currently have Lumega-Z customers in California, Massachusetts, Connecticut, New York, Pennsylvania, New Jersey, Georgia, North Carolina, South Carolina, Florida, Kentucky, Tennessee, Kansas, Indiana, Illinois, Minnesota, Oklahoma, Texas, New Mexico, Mississippi, Idaho, Utah, Nevada, Arizona, Washington, Hawaii and Alberta, Canada. Our inability to maintain compliance with the regulations of California and these other jurisdictions or expand our business into additional states may adversely affect our results of operations.

 

The Company is subject to anti-corruption laws, as well as export control laws, customs laws, sanctions laws and other laws governing our operations. If it fails to comply with these laws, it could be subject to civil or criminal penalties, other remedial measures and legal expenses, be precluded from developing manufacturing and selling certain products outside the U.S. or be required to develop and implement costly compliance programs, which could adversely affect its business, results of operations and financial condition.

 

Our operations are subject to anti-corruption laws, including the U.K. Bribery Act 2010, or Bribery Act, the U.S. Foreign Corrupt Practices Act, or FCPA, and other anti-corruption laws that apply in countries where we do business and may do business in the future. The Bribery Act, FCPA and these other laws generally prohibit us, our officers, and our employees and intermediaries from bribing, being bribed or making other prohibited payments to government officials or other persons to obtain or retain business or gain some other business advantage. Compliance with the FCPA, in particular, is expensive and difficult, particularly in countries in which corruption is a recognized problem. In addition, the FCPA presents particular challenges in the pharmaceutical industry, because, in many countries, hospitals are operated by the government, and doctors and other hospital employees are considered foreign officials. Certain payments to hospitals in connection with clinical trials and other work have been deemed to be improper payments to government officials and have led to FCPA enforcement actions.

 

We may in the future operate in jurisdictions that pose a high risk of potential Bribery Act or FCPA violations, and we may participate in collaborations and relationships with third parties whose actions could potentially subject us to liability under the Bribery Act, FCPA or local anti-corruption laws. In addition, we cannot predict the nature, scope or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing laws might be administered or interpreted. If we expand our operations outside of the U.S., we will need to dedicate additional resources to comply with numerous laws and regulations in each jurisdiction in which we plan to operate.

 

We are also subject to other laws and regulations governing our international operations, including regulations administered by the governments of the United Kingdom and the U.S., and authorities in the European Union, including applicable export control regulations, economic sanctions on countries and persons, customs requirements and currency exchange regulations, collectively referred to as the Trade Control laws. In addition, various laws, regulations and executive orders also restrict the use and dissemination outside of the U.S., or the sharing with certain non-U.S. nationals, of information classified for national security purposes, as well as certain products and technical data relating to those products. If we expand our presence outside of the U.S., it will require us to dedicate additional resources to comply with these laws, and these laws may preclude us from developing, manufacturing, or selling certain products and product candidates outside of the U.S., which could limit our growth potential and increase our development costs.

 

 -19- 

 

 

We may not be completely effective in ensuring our compliance with all applicable anti-corruption laws, including the Bribery Act, the FCPA or other legal requirements, including Trade Control laws. If we are not in compliance with the Bribery Act, the FCPA and other anti-corruption laws or Trade Control laws, we may be subject to criminal and civil penalties, disgorgement and other sanctions and remedial measures, and legal expenses, which could have an adverse impact on our business, financial condition, results of operations and liquidity. The Securities and Exchange Commission also may suspend or bar issuers from trading securities on U.S. exchanges for violations of the FCPA’s accounting provisions. Any investigation of any potential violations of the Bribery Act, the FCPA, other anti-corruption laws or Trade Control laws by U.K., U.S. or other authorities could also have an adverse impact on our reputation, our business, results of operations and financial condition.

 

The Company’s Second Amended and Restated Bylaws designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of state law actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents.

 

Article XI of our Second Amended and Restated Bylaws, or our Bylaws, dictates that the Delaware Court of Chancery is the sole and exclusive forum for certain state law based actions including certain derivative actions or proceedings brought on behalf of the Company; an action asserting a breach of fiduciary duty owed by an officer, a director, employee or to the shareholders of the Company; any claim arising under Delaware corporate law; and any action asserting a claim governed by the internal affairs doctrine.

 

This exclusive forum provision does not apply to suits brought to enforce any liability or duty created by the Securities Act or the Exchange Act or other federal securities laws for which there is exclusive federal or concurrent federal and state jurisdiction.

 

This choice of forum provision may limit our stockholders’ ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, employees or agents, which may discourage such lawsuits against us and our directors, officers, employees and agents even though an action, if successful, might benefit our stockholders. Stockholders who do bring a claim in the Court of Chancery could face additional litigation costs in pursuing any such claim, particularly if they do not reside in or near Delaware. The Court of Chancery may also reach different judgments or results than would other courts, including courts where a stockholder considering an action may be located or would otherwise choose to bring the action, and such judgments or results may be more favorable to us than to our stockholders. Alternatively, if a court were to find this provision of our Bylaws inapplicable to, or unenforceable in respect of, 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 have a material adverse effect on our business, financial condition or results of operations.

 

The Company has no experience in conducting transcranial doppler ultrasound studies.

 

The Company’s ability to realize the anticipated benefits of the new Transcranial Doppler Solutions, Inc. business will depend on its ability to attract qualified personnel and to successfully launch, market and advance a new service in an area where the Company has no experience, which may be a complex, costly and time-consuming process. The Company currently employs one individual who has experience in this area to lead the business, the loss of whom would affect the prospects of a successful launch and operation. The Company may be required to devote significant management attention and resources to develop the Transcranial Doppler Solutions, Inc. business. The initiation process may disrupt its business and, if implemented ineffectively, could restrict the realization of the full expected benefits of the new business service. The failure to meet the challenges involved in the initiation process and to realize the anticipated benefits of the new business could cause an interruption of, or a loss of momentum in, the Company’s operations and could adversely affect its business, financial condition and results of operations.

 

Risks Related to the Company’s Industry

 

Any failure to comply with all applicable federal and state privacy and security requirements for the protection of patient information may result in fines and other liabilities, which may adversely affect the Company’s results of operations and reputation.

 

The Health Insurance Portability and Accountability Act of 1996, Pub. L. No. 104-191 (“HIPAA”), the Health Information Technology for Economic and Clinical Health Act, Title XIII of the American Recovery and Reinvestment Act of 2009 (the “HITECH Act”), and related regulations promulgated by the Secretary (“HIPAA Regulations”) grant a number of rights to individuals as to their identifiable confidential medical information (called “Protected Health Information”) and restrict the use and disclosure of Protected Health Information. Failure to comply with these confidentiality requirements may result in penalties and sanctions. In addition, certain state laws may impose independent obligations upon us with respect to patient-identifiable medical information. Moreover, various new laws relating to the acquisition, storage and transmission of patient medical information have been proposed at both the federal and state level. These laws (collectively, the “State and Federal Privacy and Security Laws”) present different risks as to the Company’s two lines of business: (1) our sale of medical food, Lumega-Z; and (2) our performance of Trans Cranial Doppler (“TCD”) testing.

 

1. Medical Food, Lumega-Z. When a physician recommends the Company’s medical food, Lumega-Z, to a patient, the Company typically receives an order from the customer, but does not usually receive medical information. As part of the operation of its business, it is possible, however, that during communication with customers or with physicians the Company might receive patient-identifiable medical information. To the extent the Company obtains access to Protected Health Information, it must ensure it complies with the State and Federal Privacy and Security Laws. Any failure to comply may result in fines and other liabilities, which may adversely affect its results of operations.

 

 -20- 

 

 

2. The TCD Testing Business. In the TCD Testing line-of-business, the Company will go into physicians’ offices and, as a vendor to the physicians, perform TCD tests on patients, as ordered by and under the supervision of the patients’ treating physicians. Radiologists will read and report on the results of the tests, and the results will be reported back to the ordering/treating physician. The treating physician who orders the tests bill for the TCD tests to third party payors. During this process, the Company directly interacts with patients and has access to, processes and transmits Protected Health Information. As a result, the State and Federal Privacy and Security Laws will fully apply to the TCD Testing business. As required by federal law, the Company has been putting into place a HIPAA compliance program, including providing training to staff, instituting appropriate Business Associate Agreements, implementing required policies and procedures, and conducting regular risk assessments. Any failure to comply with the requirements of the State and Federal Privacy and Security Laws – or any loss of Protected Health Information, whether inadvertent or not – may result in fines and other liabilities, which may adversely affect the Company’s results of operations.

 

Any failure to comply with all applicable federal and state physician self-referral law (the “Stark Law”) may result in fines and other liabilities, which may adversely affect the Company’s results of operations and reputation.

 

Congress enacted significant prohibitions against physician self-referrals in the Omnibus Budget Reconciliation Act of 1993. This law and its supporting regulations, which have been amended and expanded substantially, are commonly referred to as the “Stark Law,” and prohibit a physician from making any referral of a Stark Designated Health Service (“DHS”) to an entity with which the physician has any kind of financial relationship, unless all of the requirements of a statutory or regulatory exception are met. Stark covered DHS include both outpatient prescription drugs and diagnostic testing that are reimbursable by Medicare or Medicaid. Many states have similar laws, some of which can apply to all payors and not just governmental payors. While the Company believes that its arrangements with its customers are in compliance with the federal and any state Stark Laws, the Stark Laws present different levels of risks as to the Company’s two lines of business: (1) sale of the Company’s medical food, Lumega-Z, and medical device, the MapcatSF; and (2) the Company’s performance of TCD testing.

 

1. Medical Food, Lumega-Z, and Medical Device, the MapcatSF. These products are neither prescription drugs nor are they reimbursable under any federal program at present. Therefore, the Company believes that the federal Stark Law is not applicable. Further, the Company’s believes that these products are also not covered under any potentially applicable state Stark Laws. The federal Stark Law, however, includes an exception for the provision of in-office ancillary services, including a physician’s dispensing of outpatient prescription drugs, provided that the physician meets specified requirements. To the extent that the products might become reimbursable under a federal program, or otherwise become covered under the Stark Law, the Company believes that the physicians who use the Company’s medical device, the MapcatSF, or recommend its medical food, Lumega-Z, to their patients are aware of these requirements. However, the Company does not monitor their compliance and has no assurance that the physicians are in material compliance with the Stark Law. If it were determined that the physicians who use the Company’s medical device or prescribe medical foods purchased from the Company were not in compliance with Stark II, it could potentially have an adverse effect on the Company’s business, financial condition and results of operations.

 

2. The TCD Testing Business. The TCD tests performed by the Company can be reimbursed by Medicare or Medicaid and otherwise constitute a Stark covered DHS, which include diagnostic testing. In conducting TCD tests, the Company will be providing the tests to the ordering physician, who will be paying TCD as a vendor to perform the test on behalf of the physician; and the physician will then be billing for the test to third party payers, including potentially Medicare and Medicaid. As a result, the tests will be considered to be an in-office ancillary service covered under Stark. The Stark Law, however, includes an exception for the provision of such in-office ancillary services, provided that the physician meets specified requirements. The Company believes that the physicians who engage the Company as a vendor to perform the TCD tests are aware of these requirements. However, the Company does not monitor the physicians’ compliance and has no assurance that the physicians are in material compliance with the Stark Law. If it were determined that the physicians were not in compliance with Stark, such could potentially have an adverse effect on the Company’s business, financial condition and results of operations.

 

The Company believe its current structure of its relationships with the ordering physicians to be in compliance with all of the requirements of applicable Stark Law exceptions. Any failure to comply the requirements of the Stark Law, however, may result in fines and other liabilities, which may adversely affect the Company’s results of operations, and the future operations of the TCD business could be adversely affected.

 

 -21- 

 

 

Any failure to comply with all applicable federal and state anti-kickback laws may result in fines and other liabilities, which may adversely affect the Company’s results of operations and reputation.

 

The federal anti-kickback statute (the “AKS”) applies to Medicare, Medicaid and other state and federal programs. AKS prohibits the solicitation, offer, payment or receipt of remuneration in return for referrals or the purchase, or in return for recommending or arranging for the referral or purchase, of goods, including drugs, covered by the federal health care programs. At present, the Company does not participate in any federal programs and its products are not reimbursed by Medicare, Medicaid or any other state or federal program. The AKS is a criminal statute with criminal penalties, as well as potential civil and administrative penalties. The AKS, however, provides a number of statutory exceptions and regulatory “safe harbors” for particular types of transactions. Many states have similar fraud and abuse laws and their own anti-kickback laws, some of which can apply to all payors, and not just governmental payors. While the Company believes that it is in material compliance with both federal and state AKS laws, the AKS laws present different levels of risks as to the Company’s two lines of business: (1) sale of the Company’s medical food, Lumega-Z, and medical device, the MapcatSF; and (2) the Company’s performance of TCD testing.

 

1. Medical Food, Lumega-Z, and Medical Device, the MapcatSF. At present, the Company’s products are not reimbursable under any federal program. If, however, that changes in the future and it were determined that the Company was not in compliance with the AKS, the Company could be subject to liability, and its operations could be curtailed, which could have a material adverse effect on the Company’s business, financial condition and results of operations. Moreover, if the activities of its customers or other entity with which the Company has a business relationship were found to constitute a violation of the AKS and the Company, as a result of the provision of products or services to such customer or entity, were found to have knowingly participated in such activities, the Company could be subject to sanctions or liability under such laws, including civil and/or criminal penalties, as well as exclusion from government health programs. As a result of exclusion from government health programs, neither products nor services could be provided to any beneficiaries of any federal healthcare program.

 

2. The TCD Testing Business. The TCD tests performed by the Company can be reimbursed by Medicare or Medicaid. As a result, the federal AKS (and potentially any applicable state anti-kickback law) will be implicated to the extent the financial relationships between the physician customers and the Company are (1) not set at a fair market value amount unrelated to the volume or value of TCD tests being ordered; or (2) were found to be a circumvention of the AKS through the creation of a suspect contractual joint venture. If the Company’s arrangements with ordering physicians were found to constitute a violation of the federal AKS, or any applicable state anti-kickback law, we could be subject to sanctions or liability under such laws, including civil and/or criminal penalties, as well as exclusion from government health programs. As a result of exclusion from government health programs, neither products nor services could be provided to any beneficiaries of any federal healthcare program.

 

As to the TCD Testing line of business, any failure to comply with applicable federal and state documentation, coding and billing laws, rules and regulations, including the federal False Claims or similar state laws, may result in fines and other liabilities, which may adversely affect the Company’s results of operations and reputation.

 

The Federal False Claims Act provides for the imposition of extensive financial penalties (including treble damages and fines of over $22,000 for every false claim) if a provider submits false claims to any governmental health program either knowingly or in reckless disregard or in deliberate ignorance of the truth or falsity of the claims at issue. Liability under the False Claims Act can arise from patterns of deficient documentation, coding and billing, as well as for billing for services that are deemed not to have been medically necessary for the treatment of the patient. Many states have their own False Claims Acts as well. The Company intends to bill governmental health care programs for the TCD testing, and the False Claims Act is thus potentially applicable to the Company’s operations. Here, the Company will not be billing for the performance of the tests to governmental health care plans; the treating and ordering physician will. As a result, any patterns of uncorrected deficiencies in coding and billing for TCD tests by the physician could result in fines or other liabilities imposed on the physician. The imposition of such fines and penalties or an investigation into any alleged deficiencies by the physician could adversely affect the Company’s business, financial condition and results of operations.

 

Any failure to comply with all state laws relating to the Corporate Practice of Medicine or fee splitting may result in fines and other liabilities, which may adversely affect the Company’s business, financial condition and results of operations and reputation.

 

Many states prohibit or otherwise regulate under Corporate Practice of Medicine (“CPOM”) rules the extent to which non-licensed personnel may be involved in the practice of medicine or otherwise employ licensed personnel. Related state rules further limit the extent to which fees for professional services may be shared or “split” between parties. Under the TCD Testing line of business, such rules in some states my impact the Company’s relationship with the radiologists who will be reading and interpreting the results of the TCD tests, and thereby providing the “professional component” of such tests. In order to avoid such a potential impact, the Company is structuring its financial and billing relationships with such radiologists to be in compliance with applicable state rules by providing that the Company will not be billing for the “professional component,” which will be billed instead either by the treating and ordering physician or the radiologists themselves. Failure to comply with state CPOM and fee splitting rules, however, may result in fines and other liabilities, which may adversely affect the Company’s business, financial condition and results of operations.

 

 -22- 

 

 

Increased government involvement in healthcare could adversely affect the Company’s business.

 

U.S. healthcare system reform under the Medicare Prescription Drug, Improvement and Modernization Act of 2003, the Patient Protection and Affordable Care Act of 2010 and other initiatives at both the federal and state level, could increase government involvement in healthcare, lower reimbursement rates and otherwise change the business environment of our customers and the other entities with which we have a business relationship. While no federal price controls are included in the Medicare Prescription Drug, Improvement and Modernization Act, any legislation that reduces physician incentives to dispense medications in their offices could adversely affect physician acceptance of our products. We cannot predict whether or when future healthcare reform initiatives at the federal or state level or other initiatives affecting our business will be proposed, enacted or implemented or what impact those initiatives may have on our business, financial condition or results of operations. Our customers and the other entities with which we have a business relationship could react to these initiatives and the uncertainty surrounding these proposals by curtailing or deferring investments, including those for our products. Additionally, government regulation could alter the clinical workflow of physicians, hospitals and other healthcare participants, thereby limiting the utility of our products and services to existing and potential customers and curtailing broad acceptance of our products and services. Additionally, new safe harbors to the federal Anti-Kickback Statute and corresponding exceptions to such law may alter the competitive landscape.

 

Risks Related to The Company’s Common Stock

 

Following this offering, we will have a limited number of authorized shares of common stock available for issuance and will need to seek stockholder approval to amend our Certificate of Incorporation to either effect an increase in our authorized shares of common stock or a reverse split.

 

Immediately following this offering, we will have only 15,017,438 authorized but unissued shares of our common stock, of which 7,115,238 are currently reserved for issuance of outstanding options and warrants. We will not have a sufficient number of authorized shares to permit exercise of the Series B Warrants. We will seek stockholder approval of an amendment to our certificate of incorporation to effect either an increase in the number of authorized shares of common stock or a reverse split, in either case, in an amount sufficient to permit the exercise in full of the Series B Warrants and fund our business. If we do not receive the requisite stockholder approval to enable us to issue equity in the future, our operations will likely be materially adversely impacted.

 

In addition, an increase in the authorized number of shares of common stock and the subsequent issuance of such shares could have the effect of delaying or preventing a change in control of our company without further action by our stockholders. Shares of authorized and unissued common stock could, within the limits imposed by applicable law, be issued in one or more transactions which would make a change in control of our company more difficult, and therefore less likely. Furthermore, there are risks associated with effecting a reverse stock split, including a decline in the market price of our common stock and the possibility of certain shareholders owning “odd lots” of less than 100 shares, which may be more difficult to sell, or require greater transaction costs per share to sell, than shares in “round lots” of even multiples of 100 shares. In addition, because holders of our common stock have no preemptive rights to purchase or subscribe for any unissued stock of our company, the availability of a greater number of authorized shares, whether as a result of a reverse split or an increase in the authorized number, could result in additional dilution to existing stockholders and investors in this offering.

 

You will be unable to exercise the Series B Warrants immediately and they may have no value under certain circumstances.

 

We will not have authorized shares available to permit exercise of the Series B Warrants and such warrants will not be exercisable if we do not obtain stockholder approval to either increase the number of authorized shares of common stock or effect a reverse stock split, in either case, in an amount sufficient to permit exercise in full of the Series B Warrants. If we are unable to obtain such approval, the Series B Warrants will have no value.

 

The Company is an “emerging growth company” and it has elected to comply with certain reduced reporting and disclosure requirements which could make its common stock less attractive to investors.

 

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, (the “JOBS Act”). For as long as we continue to be an emerging growth company, we have elected to take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including (1) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which we refer to as the Sarbanes-Oxley Act, (2) reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements and (3) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In addition, as an emerging growth company, we are only required to provide two years of audited financial statements and two years of selected financial data in this prospectus. As a result of these reduced reporting and disclosure requirements our financial statements may not be comparable to SEC registrants not classified as emerging growth companies. We may be an emerging growth company for up to five years following the first sale our equity securities in a public offering, although circumstances could cause us to lose that status earlier, including if the market value of our common stock held by non-affiliates exceeds $700.0 million before that time or if we have total annual gross revenue of $1.07 billion or more during any fiscal year before that time, in which cases we would no longer be an emerging growth company as of the following December 31 or, if we issue more than $1.0 billion in non-convertible debt during any three-year period before that time, we would immediately cease to be an emerging growth company. Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company” which would allow us to take advantage of many of the same exemptions from disclosure requirements, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

Our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting until the later of our second annual report or the first annual report required to be filed with the SEC following the date we are no longer an “emerging growth company” as defined in the JOBS Act. We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal controls in the future.

 

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. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, will not be subject to the same new or revised accounting standards as other SEC registrants that are not emerging growth companies.

 

Investors may find our common stock less attractive as a result of our election to utilize these exemptions, which could result in a less active trading market for our common stock and/or the market price of our common stock may be more volatile.

 

The Company’s directors and executive officers beneficially own a significant number of shares of the Company’s common stock. Their interests may conflict with our outside stockholders, who may be unable to influence management and exercise control over the business.

 

As of the date of this prospectus, our executive officers and directors beneficially own approximately 13% of our shares of common stock. As a result, our executive officers and directors may be able to affect the election or defeat the election of our directors, amend or prevent amendment to our certificates of incorporation or Bylaws, effect or prevent a merger, sale of assets or other corporate transaction, and control the outcome of any other matter submitted to the shareholders for vote. Accordingly, our outside stockholders may be unable to influence management and exercise control over our business.

 

 -23- 

 

 

The Company does not intend to pay cash dividends to its stockholders, so you may not receive any return on your investment in the Company prior to selling your interest in the Company.

 

We have never paid any dividends to our common stockholders and do not foresee doing so as a public company. We currently intend to retain any future earnings for funding growth and, therefore, do not expect to pay any cash dividends in the foreseeable future. If we determine that we will pay cash dividends to the holders of our common stock, we cannot assure that such cash dividends will be paid on a timely basis. The success of your investment in the Company will likely depend entirely upon any future appreciation. As a result, you will not receive any return on your investment prior to selling your shares in our Company and, for the other reasons discussed in this “Risk Factors” section, you may not receive any return on your investment even when you sell your shares in our Company.

 

The Company will require additional capital in the future to support its operations, and this capital has not always been readily available.

 

After this offering (even if the underwriter exercises its over-allotment option), in the future, we will likely require additional debt or equity financing to fund our operations, including, but not limited to, working capital. Our limited operating history makes it difficult to evaluate our current business model and future prospects. Accordingly, investors should consider our prospects in light of the costs, uncertainties, delays and difficulties frequently encountered by companies in the early stages of development, as we have, in fact, encountered. Potential investors should carefully consider the risks and uncertainties that a new company with a limited operating history and with limited funds, will face. In particular, while we do not have current plans to re-prioritize our business plan, potential investors should consider that there is a significant risk that we will not be able to:

 

  implement or execute our current business plan, which may or may not be sound;
  maintain our anticipated management and advisory team; and
  raise sufficient funds in the capital markets to effectuate our business plan.

 

If we raise additional funds through further issuances of equity or convertible debt securities, our existing shareholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our existing capital stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our current operations and to respond to business challenges would be significantly limited. If we cannot access the capital necessary to support our business, we would be forced to curtail our business activities or even shut down operations. If we cannot execute any one of the foregoing or similar matters relating to our business, the business may fail, in which case you would lose the entire amount of your investment in the Company.

 

The obligations associated with being a public company require significant resources and management attention, which may divert from the Company’s business operations.

 

We are subject to the reporting requirements of the Exchange Act, and the Sarbanes-Oxley Act. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition, proxy statement, and other information. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting. Our Chief Executive Officer and Chief Accounting Officer need to certify that our disclosure controls and procedures are effective in ensuring that material information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. We will need to hire additional financial reporting, internal controls and other financial personnel in order to develop and implement appropriate internal controls and reporting procedures. As a result, we will incur significant legal, accounting and other expenses. Furthermore, the need to establish the corporate infrastructure demanded of a public company may divert management’s attention from implementing our growth strategy, which could prevent us from improving our business, results of operations and financial condition. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a public company. However, the measures we take may not be sufficient to satisfy our obligations as a public company. In addition, we cannot predict or estimate the amount of additional costs we may incur in order to comply with these requirements. We anticipate that these costs will materially increase our selling, general and administrative expenses.

 

Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting. In connection with the implementation of the necessary procedures and practices related to internal control over financial reporting, we may identify deficiencies. If we are unable to comply with the internal controls requirements of the Sarbanes-Oxley Act, then we may not be able to obtain the independent account certifications required by that act, which may preclude us from keeping our filings with the SEC current, and interfere with the ability of investors to trade our securities and our shares to be quoted or our ability to list our shares on any national securities exchange.

 

 -24- 

 

 

If the Company fails to establish and maintain an effective system of internal controls, it may not be able to report its financial results accurately or prevent fraud. Any inability to report and file its financial results accurately and timely could harm the Company’s reputation and adversely impact the trading price of its common stock.

 

Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment existed, and our business and reputation with investors may be harmed. We plan to recruit additional personnel in order to achieve our financial reporting obligations. Notwithstanding our diligence, certain internal controls deficiencies may not be detected. As a result, any internal control deficiencies may adversely affect our financial condition, results of operations and access to capital. We have not performed an in-depth analysis to determine if historical undiscovered failures of internal controls exist, and may in the future discover areas of our internal controls that need improvement

 

Risks Related to The Company’s Securities and this Offering

 

The Company’s failure to meet the continued listing requirements of Nasdaq could result in a delisting of our common stock.

 

On September 20, 2019, the Company received a notice (the “Notice”) from Nasdaq notifying the Company that the closing bid price of our common stock had been below $1.00 per share for 30 consecutive business days and that we no longer complied with the minimum bid price requirement for continued listing on The Nasdaq Capital Market.

 

The Notice has no immediate effect on the listing of our common stock on The Nasdaq Capital Market. Pursuant to Nasdaq Marketplace Rule 5810(c)(3)(A), we have been provided an initial compliance period of 180 calendar days, or until March 18, 2020, to regain compliance with the minimum bid price requirement. During the compliance period, our shares of common stock will continue to be listed and traded on The Nasdaq Capital Market. To regain compliance, the closing bid price of our common stock must meet or exceed $1.00 per share for a minimum of 10 consecutive business days during the 180 calendar day grace period.

 

In the event we are not in compliance with the minimum bid price requirement by March 18, 2020, we may be afforded a second 180 calendar day grace period. To qualify, we would be required to meet the continued listing requirements for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the minimum bid price requirement. In addition, we would be required to provide written notice of our intention to cure the minimum bid price deficiency during this second 180 day compliance period by effecting a reverse stock split, if necessary.

 

If we fail to satisfy the continued listing requirements of the NASDAQ Capital Market, including the minimum bid price requirement, Nasdaq may take steps to delist our common stock. Such a delisting would likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when you wish to do so. A delisting would adversely affect the liquidity, trading volume and likely the price of our common stock, causing the value of an investment in us to decrease and having an adverse effect on our business, financial condition and results of operations.

 

The Company will have broad discretion in the use of the net proceeds from this offering and may fail to apply these proceeds effectively.

 

The Company’s management will have broad discretion in the application of the net proceeds of this offering, including using the proceeds to conduct operations, expand and implement the Company’s business lines and for general working capital. The Company may also use the net proceeds of this offering to acquire or invest in complementary businesses, products, or technologies, or to obtain the right to use such complementary technologies. We have no commitments with respect to any acquisition or investment, however we do seek opportunities and transactions that management believes will be advantageous to the Company and its operations or prospects. We cannot specify with certainty the actual uses of the net proceeds of this offering. You may not agree with the manner in which our management chooses to allocate and spend the net proceeds. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value. The failure by our management to apply these funds effectively could harm our business, financial condition and results of operations.

 

The Company’s stock price may be volatile, and you may not be able to resell your shares at or above the purchase price.

 

The market price of our common stock is volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including the following:

 

  our ability to execute our business plan;
  changes in our industry;
  competitive pricing pressures;
  our ability to obtain working capital financing;
  additions or departures of key personnel;
  sales of our common stock;
  operating results that fall below expectations;
  regulatory developments;
  economic and other external factors;
  period-to-period fluctuations in our financial results;
  the public’s response to press releases or other public announcements by us or third parties, including filings with the SEC;
  changes in financial estimates or ratings by any securities analysts who follow our common stock, our failure to meet these estimates or failure of those analysts to initiate or maintain coverage of our common stock;
  the development and sustainability of an active trading market for our common stock; and
  any future sales of our common stock by our officers, directors and significant stockholders.

 

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.

 

 -25- 

 

 

Our share price may decline due to the large number of shares recently eligible for sale.

 

The market price of our common stock could decline as a result of sales of a large number of shares of common stock in the market after the recent expiration of certain lock-up restrictions imposed on our shareholders in connection with our initial public offering, or the perception that such sales could occur. All of our executive officers, directors and holders of substantially all of our outstanding capital stock were subjected to lock-up agreements that restrict their ability to transfer shares of our capital stock for 180 days from the date of the underwriting agreement that was executed in connection with our initial public offering. Such lock-up restrictions expired on September 26, 2019. In connection with this offering, our directors, officers and certain stockholders will be subject to additional lock-up restrictions for a period of 180 days following this offering. Future sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

 

There is no public market for the Pre-Funded Warrants or the Warrants being offered in this offering.

 

There is no established public trading market for the Pre-Funded Warrants or the Warrants being offered in this offering, and we do not expect a market to develop. In addition, we do not intend to apply to list the Pre-Funded Warrants or the Warrants on any securities exchange or nationally recognized trading system, including Nasdaq. Without an active market, the liquidity of the Pre-Funded Warrants and the Warrants will be limited.

 

The Warrants are speculative in nature.

 

The Warrants offered hereby do not confer any rights of common stock ownership on their holders, such as voting rights or the right to receive dividends, but rather merely represent the right to acquire shares of common stock at a fixed price. Specifically, commencing on the date of issuance, holders of the Warrants may exercise their right to acquire the common stock and pay an exercise price of $0.342. Moreover, following this offering, the market value of the Warrants is uncertain and there can be no assurance that the market value of the Warrants will equal or exceed their public offering price. Furthermore, each Warrant will expire five years from the original issuance date.

 

In the event our common stock price does not exceed the exercise price of the Warrants during the period when the Warrants are exercisable, the Warrants may not have any value.

 

Holders of Pre-Funded Warrants or Warrants purchased in this offering will have no rights as common stockholders until such holders exercise such warrants and acquire our common stock.

 

Until holders of Pre-Funded Warrants or Warrants acquire shares of our common stock upon exercise thereof, holders of such warrants will have no rights with respect to the shares of our common stock underlying such warrants. Upon exercise of the Pre-Funded Warrants or Warrants, such holders will be entitled to exercise the rights of a common stockholder only as to matters for which the record date occurs after the exercise date.

 

Exercise of our outstanding options and warrants which may cause significant dilution to our shareholders.

 

We have a number of outstanding options and warrants, including outstanding August Warrants. We will also be issuing Warrants to purchase an aggregate of 24,500,000 shares of common stock in this offering. The August Warrants to purchase 226,200 shares of common stock are currently exercisable. These options and warrants provide the right to purchase additional shares of common stock at a price that may be less than the then prevailing market price per share of common stock, which therefore may cause additional dilution to our shareholders.

 

If we are deemed a “penny stock” issuer, you may have difficulty selling shares of our common stock.

 

The Company’s common stock is subject to the provisions of Section 15(g) and Rule 15g-9 of the Exchange Act, commonly referred to as the “penny stock rules.” Section 15(g) sets forth certain requirements for transactions in penny stock, and Rule 15g-9(d) incorporates the definition of “penny stock” that is found in Rule 3a51-1 of the Exchange Act. The SEC generally defines a penny stock to be any equity security that has a market price less than $5.00 per share (other than securities registered on certain national securities exchanges or quoted on the NASDAQ Stock Market), subject to certain exceptions. There can be no assurance that our shares of common stock will continue to qualify for exemption from the penny stock rules.

 

Public company compliance may make it more difficult to attract and retain officers and directors.

 

The Sarbanes Oxley Act and rules implemented by the SEC have required changes in corporate governance practices of public companies. As a public company, these rules and regulations increase our compliance costs and make certain activities more time consuming and costly. As a public company, these rules and regulations may make it more difficult and expensive for us to maintain our director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our Board of Directors or as executive officers, and to maintain insurance at reasonable rates, or at all.

 

 -26- 

 

 

Forward Looking Statements

 

This prospectus contains forward-looking statements. These forward-looking statements contain information about our expectations, beliefs or intentions regarding our product development and commercialization efforts, business, financial condition, results of operations, strategies or prospects, and other similar matters. These forward-looking statements are based on management’s current expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. These statements may be identified by words such as “may”, “should”, “could”, “predict”, “potential”, “believe”, “will likely result”, “expect”, “continue”, “will”, “anticipate”, “seek”, “estimate”, “intend”, “plan”, “projection”, “would” and “outlook”, or the negative version of those words or phrases or other comparable words or phrases of a future or forward-looking nature.

 

Actual results could differ materially from those contained in forward-looking statements. Many factors could cause actual results to differ materially from those in forward-looking statements, including those matters discussed below, as well as those listed in the section titled “Risk Factors” above.

 

Other unknown or unpredictable factors that could also adversely affect our business, financial condition and results of operations may arise from time to time. Given these risks and uncertainties, the forward-looking statements discussed in this prospectus may not prove to be accurate. Accordingly, you should not place undue reliance on these forward-looking statements, which only reflect the views of the Company’s management as of the date of this prospectus. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results or expectations, except as required by law.

 

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 forms a part completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by the cautionary statements contained in this section and elsewhere in this prospectus.

 

 -27- 

 

 

USE OF PROCEEDS

 

The Company estimates that the net proceeds from the issuance and sale of common stock, Warrants and Pre-Funded Warrants in this offering will be approximately $7,195,000 after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company and assuming exercise of all of the Pre-Funded Warrants, assuming no exercise of the over-allotment option and excluding the proceeds, if any, from the exercise of any Warrants issued in this offering. We will only receive additional proceeds from the exercise of the Warrants issuable in this offering if such warrants are exercised at their exercise price of $0.342 per share of common stock and the holders of such Warrants pay the exercise price in cash.

 

The Company intends to use the net proceeds from this offering to conduct operations, increase marketing efforts, increase investment in the Company’s existing business initiatives and products, developing the new NutriGuard brand and related product line, a focused, on-going review of potential acquisition opportunities and for general working capital.

 

The Company may also use a portion of the net proceeds of this offering to invest in or acquire complementary businesses, products, or technologies, or to obtain the right to use such complementary technologies. The Company has no commitments with respect to any acquisition or investment and is not currently involved in any negotiations with respect to any such transactions.

 

As of the date of this prospectus, the Company cannot specify with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering. The amounts and timing of its actual expenditures will depend on numerous factors, including the status of its product development efforts, sales and marketing activities, technological advances, amount of cash generated or used by its operations and competition. Accordingly, the Company’s management will have broad discretion in the application of the net proceeds and investors will be relying on the judgment of its management regarding the application of the proceeds of this offering.

 

 -28- 

 

 

DIVIDEND POLICY

 

The Company has not declared nor paid any cash dividend on its common stock, and it currently intends to retain future earnings, if any, to finance the expansion of its business, and the Company does not expect to pay any cash dividends in the foreseeable future. The decision whether to pay cash dividends on the common stock will be made by its board of directors, in their discretion, and will depend on the Company’s financial condition, results of operations, capital requirements and other factors that its board of directors considers significant.

 

 -29- 

 

 

CAPITALIZATION

 

The following table sets forth the Company’s cash and capitalization as of June 30, 2019 on:

 

an actual basis;

 

● a pro-forma basis giving effect to (i) the August Offering and the receipt of approximately $4.9 million in net proceeds and (ii) (a) the exercise of 25,000 warrants by an investor for cash of $12,500, (b) the exercise of 1,000,000 August Pre-Funded Warrants into 1,000,000 shares of common stock and receipt of $10,000 upon such exercise and (c) the exercise, on a cashless basis, of 14,723,800 August Warrants and the issuance upon exercise thereof of 14,723,800 shares of common stock;

 

● a pro-forma, as adjusted basis giving further effect to the issuance and sale of 22,800,000 shares of our Common Stock, Pre-Funded Warrants to purchase 1,700,000 shares of common stock and Warrants to purchase 24,500,000 shares of common stock, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, and assuming all Pre-Funded Warrants are exercised.

 

You should read this table in conjunction with the information contained in “Use of Proceeds,” “Summary Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” as well as the financial statements and the notes included elsewhere in this prospectus.

 

   As of June 30, 2019 
   Actual   As Adjusted   Pro Forma,
As Adjusted
 
Cash and cash equivalents  $2,368,645   $7,259,993   $14,454,883 
Other current assets   486,912    486,912    486,912 
Non-current assets   2,842,584    2,842,584    2,842,584 
Total assets  $5,698,141   $10,589,489   $17,784,379 
                
Current liabilities  $528,916   $528,916   $528,916 
Lease liability – long term   481,137    481,137    481,137 
Total liabilities   1,010,053    1,010,053    1,010,053 
                
Stockholders’ equity:               
Common stock   22,734    50,483    74,983 
Additional paid-in capital   43,735,894    48,599,493    55,769,883 
Accumulated deficit   (39,070,540)   (39,070,540)   (39,070,540)
Total stockholders’ equity   4,688,088    9,579,436    16,774,326 
Total liabilities and stockholders’ equity  $5,698,141   $10,589,489   $17,784,379 

 

Except as otherwise indicted herein, the number of shares of our common stock to be outstanding after this offering is based on 50,482,562 shares of common stock issued and outstanding as of October 25, 2019 and excludes the following:

 

  2,712,500 shares of common stock issuable upon the exercise of outstanding stock options as of that date having a weighted average exercise price of $3.18 per share;
     
  1,276,538 shares of common stock issuable upon the exercise of outstanding warrants (excluding the August Warrants) as of that date having a weighted average exercise price of $0.97 per share;
     
  226,200 of common stock issuable upon the exercise of outstanding August Warrants having an exercise price of $0.585 per share; and
     
  2,900,000 shares of our common stock reserved for future issuance under the Guardion Health Sciences 2018 Equity Incentive Plan, or the 2018 Plan.
      
  the exercise by the underwriters of their over-allotment option to purchase additional shares of common stock and/or Warrants; and
     
  the exercise of any warrants issued in connection with this offering.

 

 -30- 

 

 

DILUTION

 

If you invest in the Company’s common stock in this offering, your ownership interest will be diluted to the extent of the difference between the offering price per share of its common stock and the as adjusted net tangible book value per share of its common stock immediately after the offering. Historical net tangible book value per share represents the amount of the Company’s total tangible assets less total liabilities, divided by the number of shares of its common stock outstanding.

 

The historical net tangible book value (deficit) of the Company’s common stock as of June 30, 2019 was approximately $2,775,782 or $0.122 per share based upon shares of common stock outstanding on such date. Historical net tangible book value per share represents the amount of its total tangible assets reduced by the amount of its total liabilities, divided by the total number of shares of common stock outstanding.

 

On a pro-forma basis, after giving effect to (i) the August Offering and issuance of 12,000,000 common shares and the receipt of approximately $4.9 million in net proceeds and (ii) (a) the exercise of 25,000 warrants by an investor for cash of $12,500, (b) the exercise of 1,000,000 August Pre-Funded Warrants into 1,000,000 shares of common stock and receipt of $10,000 upon such exercise and (c) the exercise, on a cashless basis, of 14,723,800 August Warrants and the issuance upon exercise thereof of 14,723,800 shares of common stock, the Company’s pro forma net tangible book value as of June 30, 2019 would have been $7,667,130 or $0.152 per share.

 

On a pro-forma, as adjusted basis, after giving effect to the Company’s giving further effect to the issuance and sale of 22,800,000 shares of our Common Stock, Pre-Funded Warrants to purchase 1,700,000 shares of common stock and Warrants to purchase 24,500,000 shares of common stock, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, and assuming all Pre-Funded Warrants are exercised, the Company’s pro forma as adjusted net tangible book value as of June 30, 2019 would have been $14,862,020 or $0.198 per share. This represents an immediate increase in net tangible book value of $0.046 per share to the Company’s existing stockholders, and an immediate dilution in net tangible book value of $0.144 per share to new investors. The following table illustrates this per share dilution:

 

Public offering price per share and accompanying warrant

          $ 0.342  
Pro Forma Net tangible book value per share as of June 30, 2019   $

0.152

         
Increase in pro forma net tangible book value per share attributable to new investors in this offering     0.046          
                 
Pro-forma, As adjusted net tangible book value, after this offering             0.198  
                 
Dilution per share to new investors in this offering           $ 0.144  

 

Except as otherwise indicted herein, the number of shares of our common stock to be outstanding after this offering is based on 50,482,562 shares of common stock issued and outstanding as of October 25, 2019 and excludes the following:

 

  2,712,500 shares of common stock issuable upon the exercise of outstanding stock options as of that date having a weighted average exercise price of $3.18 per share;
     
  1,276,538 shares of common stock issuable upon the exercise of outstanding warrants (excluding the August Warrants) as of that date having a weighted average exercise price of $0.97 per share;
     
  226,200 of common stock issuable upon the exercise of outstanding August Warrants having an exercise price of $0.585 per share; and
     
  2,900,000 shares of our common stock reserved for future issuance under the Guardion Health Sciences 2018 Equity Incentive Plan, or the 2018 Plan.

 

  the exercise by the underwriters of their over-allotment option to purchase additional shares of common stock and/or Warrants; and
     
  the exercise of any Warrants issued in connection with this offering.

 

 -31- 

 

 

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

 

Presentation of Information

 

As used in this prospectus, the terms “we,” “us” “our” and the “Company” mean Guardion Health Sciences, Inc. and its subsidiaries unless the context requires otherwise. The following discussion and analysis should be read in conjunction with the Company’s audited (and unaudited) financial statements and the related notes thereto. All dollar amounts in this registration statement refer to U.S. dollars unless otherwise indicated.

 

Overview

 

Guardion Health Sciences, Inc. (the “Company” or “we”) was formed in December 2009 in California as a limited liability company under the name P4L Health Sciences, LLC, and it subsequently changed its name to Guardion Health Sciences, LLC. On June 30, 2015, the Company converted from a California limited liability company to a Delaware corporation, changing its name to Guardion Health Sciences, Inc.

 

The Company is a specialty health sciences company formed to develop, formulate and distribute condition-specific medical foods with an initial medical food product on the market under the brand name Lumega-Z® that is designed to replenish and restore the macular protective pigment. A depleted macular protective pigment is a modifiable risk factor for retina-based diseases such as age-related macular degeneration (“AMD”), computer vision syndrome (“CVS”) and diabetic retinopathy. The Company believes this risk may be modified by taking Lumega-Z to maintain a healthy macular protective pigment. Additional research has also shown a depleted macular protective pigment to be a biomarker for neurodegenerative diseases such as Alzheimer’s disease and dementia.

 

The Company invented a proprietary technology, embodied in the Company’s medical device, the MapcatSF® that accurately measures the macular pigment optical density (“MPOD”). On November 8, 2016, the United States Patent and Trademark Office (“USPTO”) issued patent number 9,486,136 for the MapcatSF invention. Using the MapcatSF to measure the MPOD allows one to monitor the increase in the density of the macular protective pigment after taking Lumega-Z. The MapcatSF is a non-mydriatic, non-invasive device that accurately measures the MPOD, the lens optical density and lens equivalent age, thereby creating an evidence-based protocol that is shared with the patient. A non-mydriatic device is one that does not require dilation of the pupil for it to function. The MapcatSF is the first medical device using a patented “single fixation” process and “automatic lens density correction” that produces accurate serialized data.

 

In September 2017, the Company, through its wholly-owned subsidiary VectorVision Ocular Health, Inc. (“VectorVision”), acquired substantially all of the assets and certain liabilities of VectorVision, Inc., a company that specialized in the standardization of contrast sensitivity, glare sensitivity, low contrast acuity, and early treatment diabetic retinopathy study (“ETDRS”) visual acuity testing. VectorVision’s standardization system is designed to provide the practitioner or researcher with the ability to delineate very small changes in visual capability, either as compared to the population or from visit to visit. VectorVision develops, manufactures and sells equipment and supplies for standardized vision testing for use by eye doctors in clinical trials, for real-world vision evaluation, and industrial vision testing. The acquisition expanded the Company’s technical portfolio. CSV-1000 and CSV-3000 instruments offer auto-calibrated tests to ensure correct testing luminance and contrast levels for consistent, highly accurate and repeatable results. Recently issued patents the Company received for continuously calibrating the light source, an automated standardization technology the Company refers to as AcQvizTM, are expected to be incorporated into the new CSV-2000, in which the proprietary standardized contrast sensitivity test patterns can be presented to the patient using a computer monitor as opposed to the current calibrated backlit system. The Company believes the acquisition of VectorVision further establishes its position at the forefront of early detection, intervention and monitoring of a range of eye diseases.

 

In August 2018, the Company created a wholly owned subsidiary, Transcranial Doppler Solutions, Inc. (“TDSI”). TDSI is dedicated to the pursuit of early predictors resulting in, the Company believes, valuable therapeutic intervention for practitioners and their patients, and additional revenue streams generated from the testing and sale of Company products to appropriate customers. The Company has established operations with selected clinics and is focusing on expanding its client base.

 

In November 2018, the Company launched a new medical food product, GlaucoCetinTM, which the Company believes is the first vision-specific medical food designed to support and protect the mitochondrial function of optic nerve cells and improve blood flow in the ophthalmic artery in patients with glaucoma.

 

In September 2019, the Company, through its wholly owned subsidiary NutriGuard Formulations, Inc., acquired the nutraceuticals business from NutriGuard Research, Inc. See “Recent Developments” below. Pursuant to the Asset Purchase Agreement, the Company agreed to purchase specified assets of the NutriGuard brand and business, primarily consisting of inventory, trademarks, copyrights and other intellectual property. Once developed, the NutriGuard Formulations nutraceutical product line should provide the Company a new direct-to-consumer (“DTC”) capability. The Company intends to build a portfolio of nutraceutical products under the NutriGuard brand by developing new formulations and marketing its products to patients directly through DTC channels and through recommendations by their physicians.

 

The Company has had limited operations to date and has been primarily engaged in research and development, product commercialization and capital raising activities.

 

 -32- 

 

 

By combining the MapcatSF medical device, the VectorVision standardized vision testing technology and Lumega-Z medical food, the Company has developed, based on Management’s knowledge of the industry, what it believes to be the only reliable three-pronged, evidence-based protocol for replenishing and restoring the macular protective pigment, increasing overall retinal health and measuring the related improvements in visual function.

 

Recent Developments

 

Initial Public Offering

 

On April 9, 2019, the Company closed its initial public offering (the “IPO”) of 1,250,000 shares of common stock, par value $0.001 per share, at an IPO price to the public of $4.00 per share resulting in net proceeds to the Company of $3,888,000 after all costs and expenses. The shares began trading on the NASDAQ Capital Market on April 5, 2019 under the symbol “GHSI.”

 

Follow-On Public Offering

 

On August 15, 2019, the Company consummated an underwritten public offering (the “August Offering”) of (i) 12,000,000 shares of common stock, (ii) pre-funded warrants exercisable for 1,000,000 shares of common stock (the “Pre-Funded Warrants”), and (iii) warrants to purchase up to an aggregate of 13,000,000 shares of common stock (the “August Warrants”). The August Offering was conducted pursuant to an Underwriting Agreement, dated August 13, 2019 by and between the Company and Maxim Group LLC and WallachBeth Capital, LLC. On August 16, 2019, the Company sold an additional 1,950,000 August Warrants upon exercise of the underwriters’ over-allotment option. The net proceeds to the Company from the August Offering, after deducting underwriting discounts and commissions and other estimated expenses was approximately $4.9 million.

 

The public offering price was $0.44 per share of common stock and $0.01 per accompanying August Warrant. Each August Warrant represents the right to purchase one share of common stock at an exercise price of $0.585 per share. The August Warrants are exercisable immediately, expire five years from the date of issuance and provide that, beginning on the earlier of (i) September 11, 2019 and (ii) the date on which the common stock traded an aggregate of more than 40,000,000 shares after the announcement of the pricing of the August Offering, and ending on the twelve (12) month anniversary thereof, each August Warrant may be exercised at the option of the holder on a cashless basis at a ratio of one August Warrant for one share of common stock, in whole or in part, if the weighted average price of the Common Stock on the trading day immediately prior to the exercise date fails to exceed the initial exercise price of the August Warrant. As of October 25, 2019, 1,000,000 August Pre-Funded Warrants have been exercised for proceeds of $10,000 and 14,723,800 August Warrants have been exercised on a cashless basis, and the Company has issued an aggregate of 15,723,800 shares of common stock upon such exercises.

 

NutriGuard Acquisition

 

Effective September 20, 2019 (the “Effective Date”), the Company’s newly-formed wholly-owned subsidiary, NutriGuard Formulations, Inc., a Delaware corporation (“Buyer”), entered into an asset purchase agreement (the “Asset Purchase Agreement”) with NutriGuard Research, Inc., a California corporation (“NutriGuard”), and NutriGuard’s sole shareholder, Mark McCarty (the “NutriGuard Acquisition”).

 

Pursuant to the Asset Purchase Agreement, Buyer agreed to purchase from NutriGuard specified assets of the NutriGuard brand and business, primarily consisting of inventory, trademarks, copyrights and other intellectual property. In exchange, Buyer agreed to pay a royalty fee to NutriGuard subsequent to meeting certain financial performance metrics based on the operating results of the NutriGuard brand of products following the Effective Date. NutriGuard and Mr. McCarty also agreed, among other terms, to no longer use the “NutriGuard” name upon the Effective Date.

 

Pursuant to the terms of the Asset Purchase Agreement, Mr. McCarty entered into a consulting agreement (the “Consulting Agreement”) with Buyer pursuant to which Mr. McCarty will provide consulting services to, and serve as the Director of Research of, Buyer. Additionally, the Company agreed to grant to Mr. McCarty stock options to purchase 100,000 shares of the Company’s common stock, exercisable at a price of $0.5411 per share (which was the closing price of the Company’s common stock on the Effective Date). The options were granted under the terms of the Company’s 2018 Equity Incentive Plan, which options vest as follows: 25% on the Effective Date, 25% on the first anniversary following the Effective Date, 25% on the second anniversary following the Effective Date, and 25% on the third anniversary following the Effective Date. The vested portion of the options may be exercised at any time prior to the earliest to occur of: (a) the 5th anniversary of the Effective Date; (b) 90 days following the termination of the Consulting Agreement for any reason other than “for cause”; (c) 6 months following termination of the Consulting Agreement due to Mr. McCarty’s death or disability; or (iv) in the event of a termination of Mr. McCarty “for cause” under the Consulting Agreement.

 

Going Concern

 

The financial statements have been prepared assuming the Company will continue as a going concern. The Company had a net loss of $4,437,177 and utilized cash in operating activities of $2,493,696 during the six months ended June 30, 2019. The Company expects to continue to incur net losses and negative operating cash flows in the near-term. As a result, management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the consolidated financial statements were issued.

 

The Company’s independent registered public accounting firm has also included explanatory language in their opinion accompanying the Company’s audited financial statements for the year ended December 31, 2018. The Company’s financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.

 

The Company will continue to incur significant expenses for continued commercialization activities related to Lumega-Z, the MapcatSF® medical device, and VectorVision products. Development and commercialization of medical foods and medical devices involves a lengthy and complex process. Additionally, the Company’s long-term viability and growth may depend upon the successful development and commercialization of new complementary products or product lines. On April 9, 2019, the Company completed the IPO, resulting in net cash proceeds of $3,888,000 to the Company. On August 15, 2019, the Company completed the August Offering resulting in gross cash proceeds of approximately $5.8 million to the Company. The Company is seeking to raise debt and/or equity capital to fund future operations, including via this offering, but there can be no assurances that the Company will be able to secure such additional financing in the amounts necessary to fully fund its operating requirements on acceptable terms or at all. If the Company is unable to access sufficient capital resources on a timely basis, the Company may be forced to reduce or discontinue its technology and product development programs and curtail or cease operations.

 

Reverse Stock Split

 

On January 30, 2019, following stockholder and Board approval, the Company filed a Certificate of Amendment to its Amended Certificate of Incorporation, as amended (the “Amendment”), with the Secretary of State of the State of Delaware to effectuate a one-for-two (1:2) reverse stock split (the “Reverse Stock Split”) of its common stock, par value $0.001 per share, without any change to its par value. The Amendment became effective on the filing date. The number of shares authorized for common and authorized and outstanding preferred stock were not affected by the Reverse Stock Split. No fractional shares were issued in connection with the Reverse Stock Split as all fractional shares were “rounded up” to the next whole share. Proportional adjustments for the Reverse Stock Split were made to the Company’s outstanding common stock, stock options, and warrants as if the split occurred at the beginning of the earliest period presented.

 

 -33- 

 

 

Recent Accounting Pronouncements

 

See Note 2 to the condensed consolidated financial statements for the period ended June 30, 2019 for management’s discussion of recent accounting pronouncements.

 

Concentration of Risk

 

Cash balances are maintained at large, well-established financial institutions. At times, cash balances may exceed federally insured limits. Insurance coverage limits are $250,000 per depositor at each financial institution. The Company has never experienced any losses related to these balances.

 

Critical Accounting Policies and Estimates

 

The Company’s financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of its financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Actual results could differ from those estimates. The Company’s financial statements included herein include all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows.

 

The following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s financial statements.

 

Intangible Assets

 

In connection with the VectorVision transaction, the Company identified and allocated estimated fair values to intangible assets including goodwill and customer relationships.

 

In accordance with Accounting Standard Codification (“ASC”) 350 – Intangibles – Goodwill and Other, the Company determined whether these assets are expected to have indefinite (such as goodwill) or limited useful lives, and for those with limited lives, the Company established an amortization period and method of amortization. The Company’s goodwill and other intangible assets are subject to periodic impairment testing.

 

The Company utilized the services of an independent third-party valuation firm to assist it in identifying intangible assets and in estimating their fair values. The useful lives for its intangible assets other than goodwill were estimated based on Management’s consideration of various factors, including assumptions that market participants might use about sales expectations as well as potential effects of obsolescence, competition, technological progress and the regulatory environment. Because the future pattern in which the economic benefits of these intangible assets may not be reliably determined, amortization expense is generally calculated on a straight-line basis.

 

The Company reviews all intangible assets for impairment when circumstances indicate that their carrying values may not be recoverable. If the carrying value of an asset group is not recoverable, the Company recognizes an impairment loss for the excess carrying value over the fair value in its consolidated statements of operations. As of June 30, 2019 and December 31, 2018, the Company was not aware of the existence of any indicators of impairment of its intangibles at such dates.

 

Goodwill

 

Goodwill represents the excess of the purchase consideration over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. The Company evaluates goodwill for impairment on an annual basis or whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. The Company conducts its annual impairment analysis in the beginning of the fourth quarter of each fiscal year. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. Estimations and assumptions regarding the number of reporting units, future performances, results of the Company’s operations and comparability of its market capitalization and net book value will be used. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and an impairment loss is measured by the resulting amount. As of June 30, 2019 and December 31, 2018, the Company was not aware of the existence of any indicators of impairment of its goodwill at such dates.

 

 -34- 

 

 

Stock-Based Compensation

 

The Company periodically issues stock-based compensation to officers, directors, contractors and consultants for services rendered. Such issuances vest and expire according to terms established at the issuance date.

 

Stock-based payments to officers, directors, and employees, which include grants of employee stock options, are recognized in the financial statements based on their fair values. Stock option grants, which are generally time vested, will be measured at the grant date fair value and charged to operations on a straight-line basis over the vesting period. The fair value of stock options is determined utilizing the Black-Scholes option-pricing model, which is affected by several variables, including the risk-free interest rate, the expected dividend yield, the expected life of the equity award, the exercise price of the stock option as compared to the fair market value of the common stock on the grant date and the estimated volatility of the common stock over the term of the equity award.

 

In prior periods, the Company accounted for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the FASB whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. On January 1, 2019, the Company adopted Accounting Standards Update (ASU) 2018-07 which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. Non-employee stock-based compensation charges generally are amortized over the vesting period using a graded vesting basis. In certain circumstances where there are no future performance requirements by the non-employee, grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

 

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Until the Company has established a trading market for its common stock, estimated volatility is based on the average historical volatilities of comparable public companies in a similar industry. The expected dividend yield is based on the current yield at the grant date. The Company has never declared or paid dividends on its common stock and has no plans to do so for the foreseeable future.

 

The fair value of common stock was determined based on management’s judgment. Due to the availability of historical data from the Company’s recent preferred stock sales, Management used a valuation of $2.30 for accounting purposes during the first quarter of 2018. Management used a valuation $4.00 for the first quarter of 2019. Management considered business and market factors affecting the Company during these periods, including capital raising efforts, its proprietary technology, and other factors. Based on this evaluation, management believes that its valuations are appropriate for accounting purposes at June 30, 2019 and 2018, respectively.

 

The Company recognizes the fair value of stock-based compensation within its statements of operations with classification depending on the nature of the services rendered.

 

Plan of Operations

 

General Overview

 

Based on the availability of sufficient funding, the Company intends to increase its commercialization activities and:

 

  further the commercial production of the MapcatSF;
  expand the Company’s domestic sales and marketing efforts;
  explore sales and marketing opportunities in foreign markets such as Asia and Europe;
  increase production of Lumega-Z and GlaucoCetinTM to support the additional sales resulting from the deployment of additional MapcatSF units and increased marketing and promotional activity;
  commence certain FDA electrical safety testing of the MapcatSF;
  increase focus on intellectual property protection and strategy;
  expand the sales and marketing of the VectorVision product line;
  develop the TDSI business and operations;
  explore opportunities and channels to enter the expansive market opportunity in China for non-pharmacologic treatments of macular degeneration, glaucoma and diabetic retinopathy; and
  increase the existing NutriGuard customer base through NutriGuard Formulations, Inc. and build on its product platform by making NutriGuard products available to customers directly through direct-to-consumer (DTC) channels and through recommendations by their physicians.

 

The FDA and other regulatory bodies require electronic medical devices to comply with IEC 60601 standards. The International Electrical Commission (“IEC”) established technical standards for the safety and effectiveness of medical electrical equipment. Adherence to these standards is required for commercialization of electrical medical equipment. As a medical device powered by electricity, the MapcatSF will need to undergo testing to demonstrate compliance with the IEC 60601 standards. This testing is typically conducted by a Nationally Recognized Testing Laboratory (“NRTL”), which is an independent laboratory recognized by the Occupational Safety and Health Administration (“OSHA”) to test products to the specifications of applicable product safety standards. The Company is in discussions with its contract manufacturer of the MapcatSF to engage an NRTL at the appropriate juncture prior to commercialization of the MapcatSF. The relevant predicate device for the MapcatSF is the MPS II, the applicable Class I product code for the MapcatSF is HJW and the applicable Code of Federal Regulation is 886.1050. The FDA does not require test documents to be submitted to the FDA for a Class I medical device, but that the evidence of such testing be placed in a Design History file and be kept internally at the company or manufacturer and readily available should the FDA or other regulatory bodies request to review the testing documents. While the FDA does not require that a Class I medical device have formal validation, the Company expects to complete applicable IEC 60601-1 testing prior to commercialization because the Company believes in marketing a product that has evidence that it is safe and effective.

 

 -35- 

 

 

Results of Operations

 

Through June 30, 2019, the Company had limited operations and has primarily been engaged in product development, commercialization, and raising capital. The Company has incurred and will continue to incur significant expenditures for the development of its products and intellectual property, which includes both medical foods and medical diagnostic equipment for the treatment of various eye diseases. The Company had limited revenue during the six months ended June 30, 2019 and 2018.

 

Comparison of Six Months Ended June 30, 2019 and 2018

 

  

Six Months Ended

June 30,

   
   2019  2018  Change
Revenue  $503,508   $413,818   $89,690    22%
Cost of goods sold   190,548    167,055    23,493    14%
Gross Profit   312,960    246,763    66,197    27%
Operating Expenses:                    
Research and development   106,716    194,708    (87,992)   (45)%
Sales and marketing   764,028    984,464    (220,436)   (22)%
General and administrative   3,439,633    2,714,680    724,953    27%
Total Operating Expenses   4,310,377    3,893,852    416,525    11%
Loss from Operations   (3,997,417)   (3,647,089)   (350,328)   10%
Other Expense:                    
Interest expense   251,637    1,545    250,092    16,187%
Finance cost upon issuance of warrants   415,955    -    415,955    100%
Change in fair value of derivative warrants   (227,832)   -    (227,832)   100%
Costs associated with extension of warrant expiration dates   -    494,391    (494,391)   (100)%
Net Loss  $(4,437,177)  $(4,143,025)  $(294,152)   7%

 

Revenue

 

For the six months ended June 30, 2019, revenue from product sales was $503,508 compared to $413,818 for the six months ended June 30, 2018, resulting in an increase of $86,690 or 22%. The increase reflects both an increased customer base for Lumega-Z as the Company expands into new clinics and increased sales of VectorVision products. The Company also earned $6,300 in revenue from its TDSI business during the three months ended June 30, 2019.

 

Cost of Goods Sold

 

For the six months ended June 30, 2019, cost of goods sold was $190,548 compared to $167,055 for the six months ended June 30, 2018, resulting in an increase of $23,493 or 14%. The increase results primarily from costs associated with the additional sales recorded in 2019 as compared to 2018.

 

Gross Profit

 

For the six months ended June 30, 2019, gross profit was $312,960 compared to $246,763 for the six months ended June 30, 2018, resulting in an increase of $66,197 or 27%. Gross profit represented 62% of revenues for the six months ended June 30, 2019, versus 60% of revenue for the six months ended June 30, 2018. The increase in gross profit in 2019 was due primarily to pricing and product mix changes in 2019.

 

Research and Development

 

For the six months ended June 30, 2019, research and development costs were $106,716 compared to $194,708 for the six months ended June 30, 2018, resulting in a decrease of $87,992 or 45%. The decrease was due to reduced engineering development costs associated with the Company’s MapcatSF medical device during 2019 partially offset by engineering costs associated with the Company’s CSV-2000 product.

 

 -36- 

 

 

Sales and Marketing

 

For the six months ended June 30, 2019, sales and marketing expenses were $764,028 compared to $984,464 for the six months ended June 30, 2018. The decrease in sales and marketing expenses of $220,436 or 22% compared to the prior period was primarily due to costs associated with engagement of a third-party contract sales organization in 2018. The contract sales agreement was cancelled during the second quarter of 2018.

 

General and Administrative

 

For the six months ended June 30, 2019, general and administrative expenses were $3,439,633 compared to $2,714,680 for the six months ended June 30, 2018. The increase of $724,953 or 27% compared to the prior period was primarily due to an increase in non-cash stock compensation costs during the current period of approximately $254,000. Additionally, expenses for corporate insurance, investor relations, labor, legal and professional fees, and travel have increased versus the prior period.

 

Interest Expense

 

For the six months ended June 30, 2019, interest expense was $251,637 compared to $1,545 for the six months ended June 30, 2018. The increase of $250,092 compared to the prior period was due primarily to the amortization of the valuation of the March 2019 convertible notes of $250,000 that was reflected as an expense when the notes were converted. There were no such costs for the comparable period in 2018.

 

Finance Cost Upon Issuance of Warrants

Finance costs for the six months ended June 30, 2019 of $415,955 include the following; (I) In March 2019, the Company issued warrants to two convertible note holders pursuant to the anticipated completion of the Company’s IPO (the IPO was completed on April 9, 2019). Due to the variable terms of both the exercise price and the number of warrants to be issued, the warrants were accounted for as derivative liabilities at March 31, 2019.  The fair value of the warrants at the closing of the IPO was determined to be $436,034, of which $250,000 was recorded as a valuation discount, and $186,034 was recorded as a finance cost. (II) On April 4, 2019, the Company issued 62,500 warrants with an exercise price of $5.00 per share to the Underwriter in connection with the Company’s IPO. The Company accounted for these warrants as a derivative liability in the financial statements at June 30, 2019 because they were associated with the IPO, a registered offering, and the settlement provisions contained language that the shares underlying the warrants are required to be registered. The fair value of the warrants at the date of issuance was determined to be $229,291 and was recorded as a finance cost. There were no such costs for the comparable period in 2018.

Change in Fair Value of Derivative Warrants

 

The change in fair value of the derivative warrant liability was a decrease of $227,832 for the six months ended June 30, 2019. There were no such costs for the comparable period in 2018. In March 2019, the Company issued warrants to two convertible note holders pursuant to the anticipated completion of the Company’s IPO (the IPO was completed on April 9, 2019). Due to the variable terms of both the exercise price and the number of warrants to be issued, the warrants were accounted for as derivative liabilities at March 31, 2019 with a fair value of $436,034. Upon completion of the IPO on April 9, 2019, the exercise price and the number of warrants were fixed and the warrants no longer accounted for as liabilities. As such the fair value of the warrant liability of $359,683 was reclassified to equity and the remaining liability of $76,351 was recorded as a change in fair value of derivative liabilities in the Statements of Operations.

 

On April 4, 2019, the Company issued 62,500 warrants with an exercise price of $5.00 per share to the Underwriter in connection with the Company’s IPO. The Company accounted for these warrants as a derivative liability in the financial statements at June 30, 2019 because they were associated with the IPO, a registered offering, and the settlement provisions contained language that the shares underlying the warrants are required to be registered. The fair value of the warrants will be remeasured at each reporting period, with the change in the fair value recognized in earnings in the accompanying Statements of Operations. The fair value of the warrants at the date of issuance was determined to be $229,291 and was recorded as a finance cost. As of June 30, 2019, the fair value of the warrant liability was determined to be $78,440 and the Company recorded a change in fair value of derivative warrants of $151,481 in the Statements of Operations.

 

Costs associated with extension of warrant expiration dates

 

During April and May of 2018, the Company offered exercise period extensions to stockholders who held warrants to purchase shares of common stock of the Company that were scheduled to expire on May 1, 2018. The Company recognized expense of $494,391 relating to the extension of the exercise period of the warrants using a Black-Scholes option-pricing model to estimate fair value.

 

Net Loss

 

For the six months ended June 30, 2019, the Company incurred a net loss of $4,437,177, compared to a net loss of $4,143,025 for the six months ended June 30, 2018. The increase in net loss of $294,152 or 7% compared to the prior year period was primarily due to an increase in non-cash stock compensation costs of approximately $254,000. In addition, expenses for corporate insurance, investor relations, labor, legal and professional fees, and travel have increased versus the prior period but were offset by the elimination of costs associated with engagement of a third-party contract sales organization in 2018.

 

 -37- 

 

 

Segment Information

 

The following tables set forth our results of operations by segment (results allocated to Other consist of non-cash stock compensation expense, depreciation and amortization, corporate legal fees, and the TDSI operations):

 

   For the Six Months Ended June 30, 2019 
   Other   Medical Foods   Vision Testing
Diagnostics
   Total 
                 
Revenue  $6,300   $204,382   $292,826   $503,508 
                     
Cost of goods sold   2,559    78,953    109,036    190,548 
                     
Gross profit   3,741    125,429    183,790    312,960 
                     
Operating expenses   1,959,838    2,003,320    347,219    4,310,377 
                     
Loss from operations  $(1,956,097)  $(1,877,891)  $(163,429)  $(3,997,417)

 

   For the Six Months Ended June 30, 2018 
   Other   Medical Foods   Vision Testing
Diagnostics
   Total 
                 
Revenue  $-   $154,294   $259,524   $413,818 
                     
Cost of goods sold   -    72,238    94,817    167,055 
                     
Gross profit   -    82,056    164,707    246,763 
                     
Operating expenses   1,523,133    2,206,967    163,752    3,893,852 
                     
Loss from operations  $(1,523,133)  $(2,124,911)  $955   $(3,647,089)

 

For the six months ended June 30, 2019, revenue from our Medical Foods segment was $204,382 compared to $154,294 for the six months ended June 30, 2018, resulting in an increase of $50,088 or 32%. The increase reflects an increased customer base for Lumega-Z as the Company expands into new clinics. For the six months ended June 30, 2019, revenue from our Vision Testing Diagnostics segment was $292,826 compared to $259,524 for the six months ended June 30, 2018, resulting in an increase of $33,302 or 13%. The increase was due to increased distributor sales in 2019. The Company also earned $6,300 in diagnostic imaging services revenue from its TDSI business during the three months ended June 30, 2019, as shown in the Other category above.

 

Cost of Goods Sold

 

For the six months ended June 30, 2019, cost of goods sold from our Medical Foods segment was $78,953 compared to $72,238 for the six months ended June 30, 2018, resulting in an increase of $6,715 or 9%. For the six months ended June 30, 2019, cost of goods sold from our Vision Testing Diagnostics segment was $109,036 compared to $94,817 for the six months ended June 30, 2018, resulting in an increase of $14,219 or 15%. The increase for both segments results primarily from costs associated with the additional sales recorded in 2019 as compared to 2018.

 

Gross Profit

 

For the six months ended June 30, 2019, gross profit from the Medical Foods segment was $125,429 compared to $82,056 for the six months ended June 30, 2018, resulting in an increase of $43,373 or 53%. For the six months ended June 30, 2019, gross profit from the Vision Testing Diagnostics segment was $183,790 compared to $164,707 for the six months ended June 30, 2018, resulting in an increase of $19,083 or 12%. The increase is due to the additional sales recorded for both segments in the current year. Gross profit overall represented 62% of revenues for the six months ended June 30, 2019, versus 60% of revenue for the six months ended June 30, 2018. The increase in 2019 was due increased sales and to pricing and product mix changes in 2019.

 

 -38- 

 

 

Comparison of Years Ended December 31, 2018 and 2017

 

   Year Ended December 31,     
   2018   2017   Change 
Revenue  $942,153   $437,349   $504,804    115%
Cost of goods sold   398,179    175,470    222,709    127%
Gross Profit   543,974    261,879    282,095    108%
Operating Expenses:                    
Research and development   231,847    259,463    (27,616)   (11)%
Sales and marketing   1,520,862    599,926    920,936    154%
General and administrative   4,934,986    4,683,932    251,054    5%
Total Operating Expenses   6,687,695    5,543,321    1,144,374    21%
Loss from Operations   (6,143,721)   (5,281,442)   (862,279)   16%
Other Expense:                    
Interest expense   2,289    23,727    (21,438)   (90)%
Warrants - extension of expiration dates   1,621,397    -    1,621,397    100%
Net Loss  $(7,767,407)  $(5,305,169)  $(2,462,238)   46%

 

Revenue

 

For the year ended December 31, 2018, revenue from product sales was $942,153 compared to $437,349 for the year ended December 31, 2017, resulting in an increase of $504,804 or 115%. The increase reflects both an increased customer base for Lumega-Z as the Company expands into new clinics and increased sales of VectorVision products.

 

Cost of Goods Sold

 

For the year ended December 31, 2018, cost of goods sold was $398,179 compared to $175,470 for the year ended December 31, 2017, resulting in an increase of $222,709 or 127%. The increase reflects the additional sales recorded in 2018.

 

Gross Profit

 

For the year ended December 31, 2018, gross profit was $543,974 compared to $261,879 for the year ended December 31, 2017, resulting in an increase of $282,095 or 108%. The increase is primarily due to the sales of VectorVision products, which did not begin until the fourth quarter of 2017. Gross profit represented 58% of revenues the year ended December 31, 2018, versus 60% of revenue for the year ended December 31, 2017. The decrease in gross profit in 2018 was due to pricing and product mix changes in 2018.

 

Research and Development

 

For the year ended December 31, 2018, research and development costs were $231,847 compared to $259,463 for the year ended December 31, 2017, resulting in a decrease of $27,616 or 11%. The decrease was due to reduced engineering development costs associated with the Company’s MapcatSF® medical device during 2018.

 

Sales and Marketing

 

For the year ended December 31, 2018, sales and marketing expenses were $1,520,862 compared to $599,926 for the year ended December 31, 2017. The increase in sales and marketing expenses of $920,936 or 154% compared to the prior period was primarily due to costs associated with engagement of a third-party contract sales organization, increased amortization expense, and increased costs associated with trade shows and marketing.

 

General and Administrative

 

For the year ended December 31, 2018, general and administrative expenses were $4,934,986 compared to $4,683,932 for the year ended December 31, 2017. The increase of $251,054 or 5% compared to the prior period was primarily due to increased labor costs related to new employees, benefits expenses, and the inclusion of the VectorVision employees in our consolidated financials. Legal and professional services costs also increased during the period.

 

Interest Expense

 

For the year ended December 31, 2018, interest expense was $2,289 compared to $23,727 for the year ended December 31, 2017. The decrease of $21,438, or 90%, was due to the repayment or conversion of promissory notes and convertible debt that had been outstanding during 2017.

 

 -39- 

 

 

Warrants – Extension of Expiration Dates

 

During April, May and September of 2018, the Company and certain stockholders who held warrants to purchase shares of common stock of the Company that were scheduled to expire at various dates in 2018 and early 2019 extended the termination dates of such warrants. The Company recognized expense of $1,621,397 relating to the extension of the exercise period of the warrants using a Black-Scholes option-pricing model to estimate fair value.

 

Net Loss

 

For the year ended December 31, 2018, the Company incurred a net loss of $7,767,407, compared to a net loss of $5,305,169 for the year ended December 31, 2017. The increase in net loss of $2,462,238 or 46% compared to the prior year period was due to the non-cash expense related to amortization expense and the extension of warrant expiration dates, as well as to the increased costs associated with the sales team, professional services, marketing and promotional activities, trade show visibility, and the internal labor force. Expenses were offset in part by increased revenue and gross profit.

 

Segment Information

 

As of December 31, 2018, Management reported its operating results in two operating segments: Medical Foods, and Vision Testing Diagnostics. As of December 31, 2018, the TDSI subsidiary does not yet earn revenues or meet the required criteria to be considered a reportable operating segment.

 

  i. Medical Foods – Our Medical Foods segment develops, formulates and distributes condition-specific medical foods with an initial medical food product on the market under the brand name Lumega-Z® that replenishes and restores the macular protective pigment. We have also invented a proprietary technology, embodied in a medical device, the MapcatSF,® that accurately measures the macular pigment optical density (“MPOD”). Using the MapcatSF to measure the MPOD allows one to monitor the increase in the density of the macular protective pigment after taking Lumega-Z. The Company has also developed a new medical food product, GlaucoCetinTM, which the Company believes is the first vision-specific medical food designed to support and protect the mitochondrial function of optic nerve cells and improve blood flow in the ophthalmic artery in patients with glaucoma. GlaucoCetinTM combines a unique set of ingredients, specifically designed to stop or potentially reverse the underlying cause of optic nerve loss, and ultimately vision loss, in patients with glaucoma.
     
  ii. Vision Testing Diagnostics – Our Vision Testing Diagnostics segment, under the brand name VectorVision, specializes in the standardization of contrast sensitivity, glare sensitivity, low contrast acuity, and early treatment diabetic retinopathy study (“ETDRS”) visual acuity testing. VectorVision’s standardization system is designed to provide the practitioner or researcher with the ability to delineate very small changes in visual capability, either as compared to the population or from visit to visit. VectorVision develops, manufactures and sells equipment and supplies for standardized vision testing for use by eye doctors in clinical trials, for real-world vision evaluation, and industrial vision testing.

 

The following tables set forth our results of operations by segment (expenses allocated to Corporate consist of non-cash stock compensation expense, depreciation and amortization, and corporate legal fees):

 

   For the Year Ended December 31, 2018 
   Corporate   Medical Foods   Vision Testing
Diagnostics
   Total 
                 
Revenue  $-   $332,795   $609,358   $942,153 
                     
Cost of goods sold   -    161,023    237,156    398,179 
                     
Gross profit   -    171,772    372,202    543,974 
                     
Operating expenses   2,707,924    3,566,835    412,936    6,687,695 
                     
Loss from operations  $(2,707,924)  $(3,395,063)  $(40,734)  $(6,143,721)

 

 -40- 

 

 

   For the Year Ended December 31, 2017 
   Corporate   Medical Foods   Vision Testing
Diagnostics
   Total 
                 
Revenue  $-   $245,217   $192,132   $437,349 
                     
Cost of goods sold   -    110,993    64,477    175,470 
                     
Gross profit   -    134,224    127,655    261,879 
                     
Operating expenses   2,865,513    2,595,776    82,032    5,543,321 
                     
Loss from operations  $(2,865,513)  $(2,461,552)  $45,623   $(5,281,442)

 

For the year ended December 31, 2018, revenue from our Medical Foods segment was $332,795 compared to $245,217 for the year ended December 31, 2017, resulting in an increase of $87,577 or 36%. The increase reflects an increased customer base for Lumega-Z as the Company expands into new clinics. For the year ended December 31, 2018, revenue from our Vision Testing Diagnostics segment was $609,358 compared to $192,132 for the year ended December 31, 2017, resulting in an increase of $417,227 or 217%. The increase is due to both the timing of our acquisition of VectorVision in September of 2017 and increased distributor sales in 2018. As of December 31, 2018, the Company had a sales backlog of approximately $105,000 in VectorVision products that are expected to be delivered during the first quarter of 2019.

 

Cost of Goods Sold

 

For the year ended December 31, 2018, cost of goods sold from our Medical Foods segment was $161,023 compared to $110,993 for the year ended December 31, 2017, resulting in an increase of $50,030 or 45%. For the year ended December 31, 2018, cost of goods sold from our Vision Testing Diagnostics segment was $237,156 compared to $64,477 for the year ended December 31, 2017, resulting in an increase of $172,679 or 268%. The increase for both segments reflects the additional sales recorded in 2018. Additionally, cost of sales for the Vision Testing Diagnostics segment reflects twelve months of activity in 2018, versus only three months in 2017.

 

Gross Profit

 

For the year ended December 31, 2018, gross profit from the Medical Foods segment was $171,772 compared to $134,224 for the year ended December 31, 2017, resulting in an increase of $37,548 or 28%. For the year ended December 31, 2018, gross profit from the Vision Testing Diagnostics segment was $372,202 compared to $127,655 for the year ended December 31, 2017, resulting in an increase of $244,547 or 192%. The increase is due to the additional sales recorded for both segments in the current year as well as the timing of the VectorVision acquisition from September 2017. Gross profit overall represented 58% of revenues the year ended December 31, 2018, versus 60% of revenue for the year ended December 31, 2017. The modest decrease in gross profit in 2018 was due to pricing and product mix changes in 2018.

 

Liquidity and Capital Resources

 

Since its formation in 2009, the Company has devoted substantial effort and capital resources to the development and commercialization activities related to its lead product Lumega-Z and its MapcatSF medical device. As a result of these and other activities, the Company utilized cash in operating activities of $2,493,696 during the six months ended June 30, 2019. The Company had working capital of $2,326,641 at June 30, 2019, as compared to $609,584 at December 31, 2018. As of June 30, 2019, the Company had cash in the amount of $2,368,645 and no available borrowings, as compared to $670,948 and no available borrowings at December 31. 2018. The Company’s financing has historically come primarily from the issuance of convertible notes, promissory notes and from the sale of common and preferred stocks.

 

 -41- 

 

 

The financial statements have been prepared assuming the Company will continue as a going concern. The Company expects to continue to incur net losses and negative operating cash flows in the near-term. As a result, management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued.

 

The Company’s independent registered public accounting firm has also included explanatory language in their opinion accompanying the Company’s audited financial statements for the year ended December 31, 2018. The Company’s financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.

 

The Company will continue to incur significant expenses for continued commercialization activities related to Lumega-Z, the MapcatSF medical device, VectorVision products, the TDSI business and with respect to efforts to continue to build the Company’s infrastructure. Development and commercialization of medical foods and medical devices involves a lengthy and complex process. Additionally, the Company’s long-term viability and growth may depend upon the successful development and commercialization of new complementary products or product lines. On April 9, 2019, the Company completed the IPO, resulting in net cash proceeds of $3,888,000 to the Company. The Company is seeking to raise debt and/or equity capital to fund future operations, but there can be no assurances that the Company will be able to secure such additional financing in the amounts necessary to fully fund its operating requirements on acceptable terms or at all. If the Company is unable to access sufficient capital resources on a timely basis, the Company may be forced to reduce or discontinue its technology and product development programs and curtail or cease operations.

 

Sources and Uses of Cash

 

The following table sets forth the Company’s major sources and uses of cash for each of the following periods:

 

  

Six Months Ended

June 30,
 
   2019   2018 
Net cash used in operating activities  $(2,493,696)  $(2,424,058)
Net cash used in investing activities   (58,934)   (187,073)
Net cash provided by (used in) financing activities   4,250,327    (57,734)
Net increase (decrease) in cash  $1,697,697   $(2,668,865)

 

Operating Activities

 

Net cash used in operating activities was $2,493,696 during the six months ended June 30, 2019, versus $2,424,058 used during the comparable prior year period. Cash in both periods was used for used for engineering, corporate insurance, investor relations, labor, legal and professional fees, travel and other operating costs.

 

Investing Activities

 

Net cash used in investing activities was $58,934 for the six months ended June 30, 2019 and $187,073 for the six months ended June 30, 2018. In June 2019, we purchased medical imaging equipment for use in our TDSI business. In January 2018, we acquired the rights to a trademark portfolio for $50,000. In addition, we purchased a trade show booth in February 2018 and have invested in MapCatSF equipment and internal-use software development.

 

Financing Activities

 

Net cash provided by financing activities was $4,250,327 for the six months ended June 30, 2019 was due primarily to the completion of our IPO, which resulted in net proceeds of $3,888,000. In addition, in March 2019, the Company issued $350,000 in promissory and convertible promissory notes and received cash of $131,875 from the exercise of warrants. These proceeds were partially offset by payment of $100,000 to settle a promissory note. Net cash used in financing activities was $57,734 for the six months ended June 30, 2018 was due primarily to our payoff of a line of credit balance that had been assumed during our 2017 VectorVision acquisition.

 

The following table sets forth the Company’s major sources and uses of cash for each of the following periods:

 

   Years Ended
December 31,
 
   2018   2017 
Net cash used in operating activities  $(4,173,831)  $(3,403,696)
Net cash used in investing activities   (310,243)   (32,385)
Net cash provided by financing activities   419,792    8,108,791 
Net (decrease) increase in cash  $(4,064,282)  $4,672,710 

 

Operating Activities

 

Net cash used in operating activities was $4,173,831 during the year ended December 31, 2018, versus $3,403,696 used during the comparable prior year period. The increase in 2018 was due primarily to higher sales, marketing, professional services, and labor costs.

 

Investing Activities

 

Net cash used in investing activities was $310,243 for the year ended December 31, 2018 and $32,385 for the year ended December 31, 2017. In January 2018, we acquired the rights to a trademark portfolio for $50,000. In addition, we purchased a trade show booth in February 2018 and have invested in MapCat equipment and internal-use software development.

 

Financing Activities

 

Net cash provided by financing activities was $419,792 for the year ended December 31, 2018 was due to the sale in November and December of $850,000 in common stock and the exercise of warrants for proceeds of $16,460. These proceeds were partially offset by the payoff of a $30,535 line of credit balance that had been assumed from the VectorVision transaction as well as payment of $146,133 due to related parties. Net cash provided by financing activities was $8,108,791 for the year ended December 31, 2017, consisting of $5,000,001 in proceeds from the issuance of common stock, $3,105,000 in proceeds from the issuance of preferred stock, and proceeds of $100,000 from the issuance of a note payable. Partially offsetting proceeds received were $150,860 of payments on notes payable and $54,650 of payments due to related parties.

 

Off-Balance Sheet Arrangements

 

At June 30, 2019 and December 31, 2018, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.

 

 -42- 

 

 

BUSINESS

 

The Company is a specialty health sciences company formed to develop, formulate and distribute condition-specific medical foods with an initial medical food product on the market under the brand name Lumega-Z® that is designed to replenish and restore the macular protective pigment. A depleted macular protective pigment is a modifiable risk factor for retina-based diseases such as age-related macular degeneration (“AMD”), computer vision syndrome (“CVS”) and diabetic retinopathy. The Company believes this risk may be modified by taking Lumega-Z to maintain a healthy macular protective pigment. Additional research has also shown a depleted macular protective pigment to be a biomarker for neurodegenerative diseases such as Alzheimer’s disease and dementia.

 

In September 2017, the Company, through its wholly-owned subsidiary VectorVision Ocular Health, Inc., acquired substantially all of the assets and certain liabilities of VectorVision, Inc., a company that specializes in the standardization of contrast sensitivity, glare sensitivity, low contrast acuity, and early treatment diabetic retinopathy study (“ETDRS”) visual acuity testing. VectorVision’s standardization system is designed to provide the practitioner or researcher with the ability to delineate very small changes in visual capability, either as compared to the population or from visit to visit. VectorVision develops, manufactures and sells equipment and supplies for standardized vision testing for use by eye doctors in clinical trials, for real-world vision evaluation, and industrial vision testing. The acquisition expands the Company’s technical portfolio. The Company believes the acquisition of VectorVision, through which it added the CSV-1000 and ESV-3000 to its product portfolio, further establishes its position at the forefront of early detection, intervention and monitoring of a range of eye diseases. The Company has had limited commercial operations to date. Until recently with the acquisition of VectorVision and development of the Company’s sales force, the Company has primarily been engaged in research, development, commercialization, and capital raising. On September 3, 2019, the Company announced that it completed development of its new proprietary CSV-2000 standardized contrast sensitivity test. The Company believes that the CSV-2000 is the only computer-generated vision testing instrument available that will provide the optical marketplace with the Company’s proprietary, industry-standard contrast sensitivity test, along with a full suite of standard vision testing protocols. The proprietary standardization methodology incorporated into the CSV-2000 includes a patented technology known as AcQviz that automatically and constantly measures and adjusts screen luminance to a fixed standard light level for vision testing.

 

The Company invented a proprietary technology, embodied in the Company’s medical device, the MapcatSF,® that accurately measures the macular pigment optical density (“MPOD”). On November 8, 2016, the United States Patent and Trademark Office (“USPTO”) issued patent number 9,486,136 for the MapcatSF invention. Using the MapcatSF to measure the MPOD allows one to monitor the increase in the density of the macular protective pigment after taking Lumega-Z. The MapcatSF is a non-mydriatic, non-invasive device that accurately measures the MPOD, the lens optical density and lens equivalent age, thereby creating an evidence-based protocol that is shared with the patient. A non-mydriatic device is one that does not require dilation of the pupil for it to function. The MapcatSF is the first medical device using a patented “single fixation” process and “automatic lens density correction” that produces accurate serialized data.

 

For the past three years, the clinical prototypes of the MapcatSF have been tested on patients, allowing for frequent modifications of the device’s algorithms and retesting for accuracy, as well as to provide the inclusion of additional features not previously found in the initial prototype. The alpha prototype, which is the pre-commercial production version, was unveiled for the first time in July 2013 in Cambridge, United Kingdom, to researchers and scientists from around the world. The MapcatSF is manufactured and assembled in Irvine, California, and will be distributed from the Company’s national headquarters in San Diego. The marketing of the device will be implemented through continuing education presentations conducted by key opinion leaders in the industry. The MapcatSF device is a Class I medical device under the U.S. Food and Drug Administration (“FDA”) classification scheme for medical devices, which the Company has determined does not require pre-market approval.

 

Lumega-Z is a medical food product that has a patent-pending formula that is designed to replenish and restore the macular protective pigment simultaneously delivering critical and essential nutrients to the eye. Management believes, based on review of products on the market and knowledge of the industry, that Lumega-Z is the first liquid ocular health formula to be classified as a medical food (as defined in Section 5(b) of the “Orphan Drug Act”). However, the FDA has not monitored nor approved Lumega-Z as a medical food. Formulated by Dr. Sheldon Hendler in 2010, modifications were made over a two-year period to improve the taste and method of delivery. The current formulation has been delivered to patients and used in clinics since 2014.

 

Medical foods are not considered to be either dietary or nutritional supplements. The Company believes that there is an increasing level of acceptance of medical foods as a primary therapy by patients and healthcare providers to treat pain syndromes, sleep and cognitive disorders, obesity, hypertension, and viral infection. In clinical practice, medical foods are being prescribed as both a standalone therapy and as an adjunct therapy to low doses of commonly prescribed drugs. The Company believes that medical foods will continue to grow in importance over the coming years.

 

 -43- 

 

 

Lumega-Z is a regulated medical food and therefore must be administered under the supervision of a physician or professional healthcare provider. In order to reach the large, expanding AMD patient population, the Company primarily markets Lumega-Z to patients through ophthalmologists and optometrists.

 

Over 1,900 patients have been treated with Lumega-Z since the Company began selling the formulation in October 2011. The patients come from a combination of the three initial testing sites, healthcare provider sites where the MapcatSF has been demonstrated, patients that have found Lumega-Z online and through other patient referrals, healthcare provider sites administering Lumega-Z to their patients without use of the MapcatSF, and MapcatSF devices recently placed in additional healthcare facilities. Patients take Lumega-Z under the supervision of their physician. Lumega-Z is typically ingested by the patient on a daily basis. Patients are typically between 50 and 80 years old. Patients are mixed ethnically and socioeconomically. Patients typically have insurance, whether private insurance or Medicare. Physicians have determined that the patient is experiencing or is at a high risk of developing retinal disease and decide based on their medical determination that the patient is a candidate for Lumega-Z.

 

Nearly half of Americans have low MPOD, a risk factor for AMD. As the MapcatSF is specifically designed to measure the MPOD, the Company and the physicians that utilize the MapcatSF are able to observe changes in that macular protective pigment density in patients who are taking Lumega-Z. The Company encourages sites using the MapcatSF® to provide the Company anonymized data on the MPOD readings. Anecdotal reports from physicians indicate improvements in their patients such as increased visual function, a noticeable halt in the progression of the patient’s AMD, improvement in glare and contrast sensitivity, and stabilization and improvement of vision. No adverse effects of taking Lumega-Z have been reported by any of the physicians administering Lumega-Z to their patients.

 

Lumega-Z has been used in Institutional Review Board (“IRB”)-approved patient study to examine its effectiveness. The study was conducted by research scientists at the Western University College of Optometry to evaluate the visual benefits of Lumega-Z in one group of patients as compared to a group of patients taking AREDS 2 soft gel supplements. Each patient has retinal drusen and was at risk of developing AMD. The results of the study were presented at the Association for Research in Vision and Ophthalmology (“ARVO”) 2019 annual meeting and showed improvements in visual function (“CSF”) in the group of patients taking Lumega-Z that were statistically significant. The patients taking AREDS 2 showed no statistical change.

 

The number of patients regularly ordering Lumega-Z has increased as new healthcare providers have begun working with the Company, with a concurrent rise in patients set on an auto-ship program for delivery every four weeks. Automatic shipment has an added benefit in that it aids physicians because it increases patient compliance in using Lumega-Z on a regular basis. The Company’s operations, to date, indicate that each MapcatSF deployed in a clinic can generate an average of 75 new customers for its Lumega-Z product over a period of approximately 90 days when a MapcatSF is deployed in a small, low volume clinic. A larger, higher volume clinic is expected to generate a larger number of patients in a shorter period of time. All of the Company’s medical food revenue is derived from a limited number of individual customers.

 

The National Academics of Sciences, Engineering, and Medicine projects that “every four minutes, one American will experience partial or complete loss of sight.” According to The Lancet, AMD cases in the US are projected to pass 18 million in 2017, and 20 million by 2022. AMD is the third leading cause of blindness in the world. More than 10 million people in the United States suffer from various forms of this incurable disease, according to the American Macular Degeneration Foundation. As the population ages, that number is expected to triple by 2025. Cataract patients are operated on earlier and younger. After surgery, the long-term damage from oxidative stress & high energy light exposure to the retina becomes more important to address. Protecting the retina after surgery maintains better visual outcomes for the long term. the Company is targeting this unattended market opportunity. Congress, the Food and Drug Administration, the Center for Medicare & Medicaid Services and private insurance companies are focusing increased efforts on pharmacovigilance (the branch of the pharmaceutical industry which assesses and monitors the safety of drugs either in the development pipeline or which have already been approved for marketing) to measure and reduce these adverse health consequences.

 

The Company’s second medical food product, GlaucoCetinTM, was launched in November 2018. The Company believes GlaucoCetinTM is the first vision-specific medical food designed to support and protect the mitochondrial function of optic nerve cells and improve blood flow in the ophthalmic artery in patients with glaucoma. The parent compound of GlaucoCetinTM, called “GlaucoHealth,” was designed by Robert Ritch, M.D., one of the Company’s Medical Advisory Board members. Dr. Robert Ritch holds the Shelley and Steven Einhorn Distinguished Chair in Ophthalmology and is surgeon Director Emeritus and Chief of Glaucoma Services at the New York Eye and Ear Infirmary. Dr. Ritch has devoted his career to broadening the understanding of the underlying etiologies and mechanisms of glaucoma. The Company now owns the GlaucoHealth formula. On June 4, 2019, the Company announced in a press release that the formula was used in an IRB-approved patient study conducted at the New York Eye and Ear Infirmary and successfully reversed mitochondrial dysfunction in the optic nerve cells in patients with glaucoma. GlaucoCetinTM is an enhanced formulation of GlaucoHealth. The Company owns both formulas and has a patent application pending on the GlaucoCetinTM formula. The application describes an invention that provides a micro-nutrient composition for a human subject suffering from a glaucomatous disease, wherein the micro-nutrient composition comprises a formulation for reversing mitochondrial dysfunction in glaucomatous disease.

 

The Company believes that there is an increasing level of acceptance of medical foods as a primary therapy by patients and healthcare providers to treat pain syndromes, sleep and cognitive disorders, obesity, hypertension, and viral infection. In clinical practice, medical foods are being prescribed as both a standalone therapy and as an adjunct therapy to low doses of commonly prescribed drugs. From a regulatory standpoint, the FDA took steps in 1988 to encourage the development of medical foods by regulating this product category under the Orphan Drug Act. The term “medical food” as defined in Section 5(b) of the Orphan Drug Act is a “food which is formulated to be consumed or administered internally (by mouth) under the supervision of a physician and which is intended for the specific dietary management of a disease or condition for which distinctive nutritional requirements, based on recognized scientific principles, are established by medical evaluation.” This definition was incorporated by reference into the Nutrition Labeling and Education Act of 1990.

 

These regulatory changes have reduced the costs and time associated with bringing medical foods to market. Until 1972, medical foods were categorized as drugs and then until 1988 as “foods for special dietary purposes.” The field of candidates for development into medical foods is expanding due to continuing advances in the understanding of the science of nutrition and disease, coupled with advances in food technology thereby increasing the number of products that can be formulated and commercialized.

 

In addition to its medical food products, the Company, through its wholly owned subsidiary NutriGuard Formulations, Inc., recently acquired NutriGuard Research, Inc. See “Recent Developments” above. Pursuant to the Asset Purchase Agreement, the Company agreed to purchase specified assets of the NutriGuard brand and business, primarily consisting of inventory, trademarks, copyrights and other intellectual property. Once developed, the NutriGuard Formulations nutraceutical product line should provide the Company a new direct-to-consumer (“DTC”) capability. The Company intends to build a portfolio of nutraceutical products under the NutriGuard brand by developing new formulations and marketing its products to patients directly through DTC channels and through recommendations by their physicians.

 

The Company distributes its medical food products through E-commerce in an online store that is operated at www.guardionhealth.com. Information about VectorVision products can be found at www.vectorvision.com.

 

 -44- 

 

 

Medical Foods Products Industry Overview

 

The Company believes that the science of nutrition was long overlooked and underdeveloped. The Company believes that the sick and elderly have special nutritional needs that cannot be met by traditional adult diets. Medical nutrition has emerged as a large and attractive segment in the food industry today.

 

A number of diseases are associated with metabolic imbalances, and patients in treatment for such diseases have specific nutritional requirements. Some examples are ocular health, pain syndromes, insomnia, cognitive disorders, IBS, and heart disease. Many older Americans have or will develop chronic diseases that are amenable to the dietary management benefits of medical foods. Medical foods help address these diseases and conditions in a drug-free way with food-based ingredients yet are still considered a medical product that should be taken under supervision by a physician. The term “medical foods” does not pertain to all foods fed to sick patients. Medical foods are foods that are specially formulated and processed (as opposed to a naturally occurring foodstuff used in a natural state) for patients who are seriously ill or who require the product as a major treatment modality according to FDA regulations.

 

Medical foods consist of food-based ingredients that are part of the normal human diet and are Generally Recognized as Safe (“GRAS”) under FDA standards. Medical foods must make disease claims for which there is scientific evidence that nutrient deficiencies cannot be corrected by normal diet. Medical foods are intended for a vulnerable population suffering from a particular chronic disease and therefor have special, extra-rigorous guarantees of safety. All ingredients must be designated GRAS and used in therapeutic concentrations to address the particular nutritional needs of the patient. Medical foods are taken under the supervision of a physician or professional healthcare provider who monitors and adjusts the food ‘dosage.’ In addition, under FDA guidelines and congressionally approved laws, medical foods do not require FDA preapproval but undergo continuous FDA monitoring and approval of label claims. Even though pre-market FDA approval is not required for a medical food, the official requirements and responsibilities for the manufacturer, in terms of safety, are greater than for dietary supplements, including solid scientific support for the formula as a whole. For these reasons, medical foods have greater guarantees of efficacy. In contradistinction, dietary supplements, such as vitamins, minerals and botanicals, do not require FDA preapproval, cannot make disease claims, are intended for normal people without disease and cannot claim that they prevent, mitigate or treat a given disease. Dietary supplements do not require physician supervision and can be administered to a person that can self-administer the supplement without supervision.

 

Based on the advice of intellectual property counsel and regulatory affairs consultants, the Company believes that Lumega-Z and GlaucoCetin are properly categorized as medical foods. While the Company believes it is unlikely the FDA would conclude otherwise, if the FDA determines Lumega-Z or GlaucoCetin should not be defined as a medical food, the Company would need to relabel and rebrand that product. The Company believes there would be minimal impact on its operations and financial condition if it were required to change labeling and packaging back to that of a dietary supplement. While reclassification and the subsequent relabeling and rebranding would be an added cost to operations, it would not change the use or effectiveness of Lumega-Z or GlaucoCetin, although there is a chance that certain physicians may choose not to recommend Lumega-Z or GlaucoCetin to their patients or that certain consumers may choose not to buy Lumega-Z or GlaucoCetin if they are not classified as medical foods.

 

Vision Testing Industry Overview

 

The Company believes that consistent, repeatable and accurate results for visual acuity testing are of paramount importance for effective eye health care and for accurately establishing and enforcing the vision performance criteria for certain professions. Variance in test lighting is a major cause of inconsistency in vision testing results. Standards for testing luminance, have been in place for more than three decades. However, recently, vision testing has evolved from the use of projection systems and charts to the use of digital displays. The Company believes that the variance in luminance provided by digital displays is large, and clinicians are now obtaining highly inconsistent results from practice to practice. Conservatively, the Company believes more than 250,000 eye care examination rooms are in use in the United States today.

 

The variability described above has caused the FDA and other agencies to require standardized test lighting for vision tests. Because VectorVision specializes in the standardization of vision tests, VectorVision is the only company that offers fully standardized vision testing products that ensure consistent, repeatable and highly accurate results. The CSV-1000 and ESV-3000 devices offer auto-calibrated tests to ensure the correct testing luminance and contrast levels for consistent, highly accurate and repeatable results, which is why the VectorVision instruments can detect and quantify subtle changes in vision. Consistency, repeatability and accuracy are also why the VectorVision CSV-1000 instrument is used worldwide by eye doctors in more than 60 countries to accomplish contrast sensitivity testing. For the same reasons, the Company believes that the ESV-3000 ETDRS testing device will become the worldwide standard for ETDRS visual acuity testing. The Company’s research has revealed no competing products that offers auto-calibration of ambient illumination. Competitive devices do not allow for variations in ambient light levels, resulting in variability of test results due to the environment in which the testing is performed. The CSV-1000 and ESV-3000 use self-calibrated test lighting. The self-calibrated test lighting is proprietary, and the test faces of the CSV-1000 are proprietary and the intellectual property is protected under copyright and trade secret law. Both CSV-1000 and ESV-3000 are currently sold worldwide, and the Company expects this global distribution to continue. There is a training requirement in incorporating the CSV-1000 device into clinical practice, which the Company plans to provide as part of its commercialization strategy.

 

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Competitive Advantage and Strategy

 

There are no research-validated pharmaceutical solutions for slowing the progression of adult macular degeneration (“AMD”). As a result, it is necessary for physicians to recommend Age-Related Eye Disease Study (“AREDS”)-based supplements to AREDS-based AMD patients. However, more than 90% of all AREDS-based nutritional products currently on the market are in tablet, capsule and gel capsule form. As previously discussed, tablets, capsules and gel capsules have a low efficiency of absorption. For this reason, some doctors may hesitate to prescribe tablet, capsule and gel capsule form AREDS-based nutraceuticals despite the fact that these are currently the only options available to them.

 

The competitive landscape of supplements is crowded and confusing for physicians and patients looking to obtain an appropriate product for eye care. In October 2017, while searching walgreens.com for “AREDS,” the Company found 10 results, all of which are in tablet, capsule or gel capsule form. When searching the same website for “Eye Health Supplements” (a common search term for this category of product), the Company found 204 products, of which 196 (96%) are in tablet, capsule or gel capsule form. The same search term on cvs.com returned over 110 products. These supplement products all have varying ingredients, varying levels of similar ingredients, varying claims regarding their effects, and varying price points.

 

Lumega-Z is designed to address this concern. In contrast, Lumega-Z is a liquid formulated using a proprietary molecular micronization process (“MMP”) to maximize efficiency of absorption and safety and to minimize compatibility issues. The MMP is a proprietary homogenization process whereby the molecular structure of the ingredients is reduced in size to facilitate more efficient absorption in the body.

 

By combining the MapcatSF medical device, the VectorVision standardized vision testing technology and Lumega-Z medical food, the Company has developed, based on Management’s knowledge of the industry, what it believes to be the only reliable three-pronged, evidence-based protocol for replenishing and restoring the macular protective pigment, increasing overall retinal health and measuring the related improvements in visual function. The MapcatSF is the first medical device to use a patented “single fixation” process and “automatic lens density correction” that produces accurate serialized data. Historically, a number of specialized densometers used by research groups within the medical community have been known to produce unreliable data; due in part to the fact that they are not Troxler-free. The Troxler effect is an optical illusion affecting visual perception where an unchanging stimulus away from a fixation point will fade away and disappear as one stares at a fixation point consistently. A device that is Troxler-free does not have this fading of images that otherwise would occur as a result of the Troxler effect. Being Troxler-free is thought to be an important function in being able to accurately complete the testing using these devices.

 

The MapcatSF has been installed in several teaching and ocular research facilities, such as the Illinois College of Optometry (“ICO”), the New York Eye and Ear Infirmary, and the Rosenberg School of Optometry at the University of the Immaculate Word. While these collaborative relationships help further validate the MapcatSF and Lumega-Z, these relationships are not material to the Company because none of these relationships is exclusive. There are many potential collaborative partners available. The Company is free to enter into other collaborative relationships as needed. No sales of Lumega-Z are generated directly from Illinois College of Optometry because the MapcatSF is part of its teaching curriculum and not used for direct patient care. However, the other collaborative partners, as a result of using the MapcatSF on patients, periodically put patients on Lumega-Z if a physician determines it appropriate to do so. The majority of sales of Lumega-Z primarily come from clinicians outside of these collaborative relationships.

 

VectorVision specializes in the standardization of vision tests, specifically, contrast sensitivity, glare testing and early treatment diabetic retinopathy study, or ETDRS, acuity. The variability in test lighting has caused the FDA and other agencies to require standardized test lighting for vision tests. Contrast sensitivity testing measures how people see in the real world. A depleted macular pigment greatly affects contrast sensitivity. Research suggests that contrast sensitivity is a better measure than standard acuity tests for real-world vision applications such as military pilots and highway driving. The Company believes that VectorVision is the only company that offers fully standardized vision testing products that ensure consistent, repeatable and highly accurate results. These qualities are why the VectorVision instruments can detect and quantify subtle changes in vision, and why the VectorVision CSV-1000 instrument is used worldwide by eye doctors in more than 60 countries to accomplish contrast sensitivity testing. On July 10, 2018, the USPTO issued US Patent No. 10,016,128, titled Method and Apparatus for Visual Acuity Testing. This patent describes an invention pertaining to automatic light calibration of the display screens used for vision testing. The Company owns this patent, and its VectorVision CSV-1000 and ESV-3000 devices each embody this invention. On July 17, 2018, the USPTO issued US Patent No. 10,022,045, also titled Method and Apparatus for Visual Acuity Testing, which describes a methodology to continuously calibrate display monitors to automatically hold display luminance constant for vision testing. This second patent also covers a methodology to compensate for other testing factors, such as room illumination and when patients view the vision test through a mirror, which is a common practice in eye doctors’ offices worldwide. The Company also owns this patent, and its VectorVision CSV-1000 and ESV-3000 devices each embody this invention.

 

 -46- 

 

 

The Company believes the CSV-1000 is the current standard of care for clinical practice. The Company recently announced it is preparing to launch the CSV-2000. There is a training requirement in incorporating the CSV-1000 and CSV-2000 device into clinical practice, which the Company plans to provide as part of its commercialization strategy.

 

Similarly, the Company believes that its ESV-3000 device will become the worldwide standard for ETDRS visual acuity testing. The CSV-1000, CSV-2000 and ESV-3000 use self-calibrated test lighting. The self-calibrated test lighting is proprietary, and the test faces of the CSV-1000 and CSV-2000 are proprietary and protected intellectual property. Both CSV-1000 and ESV-3000 are currently sold worldwide, and the Company expects this global distribution to continue. The Company believes the acquisition of VectorVision, through which it added the CSV-1000 and ESV-3000 to its product portfolio, further establishes its position at the forefront of early detection, intervention and monitoring of a range of eye diseases. Although the CSV-1000 will continue to be sold, the Company plans to put a greater focus on sales and marketing efforts of the new CSV-2000 beginning in the fourth quarter of 2019. There can be no assurances that the marketing efforts will be successful and sales of the CSV-2000 will be comparable or exceed sales of the CSV-1000.

 

An important part of the Company’s competitive strategy lies in combining Lumega-Z with technology to demonstrate its effects. The Company’s proprietary MapcatSF medical device measures MOPD, thereby showing changes in macular pigment density from the use of Lumega-Z. In addition, the VectorVision CSV-1000 and CSV-2000 provide a second opportunity to baseline the vision of patients, and monitor changes in vision performance over time while administering Lumega-Z. The Company believes that the VectorVision CSV-1000 is, and that the CSV-2000 will be, a highly accurate means of measuring and monitoring contrast sensitivity, a vision performance parameter that can be improved by increasing the level of macular pigment in the eye.

 

Growth Strategy

 

The Company believes that marketing its products is critical in ensuring its success. The Company has several marketing initiatives and will implement them according to the success and product feedback that the Company and products create. The Company will also consider acquiring other companies, product lines and intellectual property that may be complementary or supplementary as part of its future efforts to expand the business, which acquisitions could be for cash, stock or a combination thereof.

 

Management believes that there is a significant unmet need in everyday clinical practice to provide a vision assessment protocol that improves upon the current standard of visual acuity. Contrast sensitivity with the VectorVision CSV-1000 is a highly sensitive and repeatable method of measuring vision performance and can be utilized to monitor the vision performance of patients undergoing treatment with Lumega-Z, as well as for the general patient population. The CSV-1000 is currently the worldwide standard for contrast sensitivity testing in clinical trials, and there is a growing understanding of the importance of contrast sensitivity in general clinical practice. The Company recently announced it is preparing to launch the CSV-2000. The Company’s intention is to penetrate the market by promotion of the CSV-2000 as the leading contrast sensitivity device available. The Company believes it can grow its business using the following sales and marketing strategies:

 

Sales and Marketing

 

Based on management’s knowledge of the industry, the Company believes that Lumega-Z is the only medical food in the ocular health space. The most analogous products on the market are dietary supplements. While the medical food category is well established and growing for certain diseases or disorders (for example, inborn errors of metabolism, metabolic syndrome, gastrointestinal disorders, and neurological disorders), there are currently no medical foods other than Lumega-Z specifically addressing ocular health. Thus, with regard to the ocular health market no such data is available regarding medical foods. The most comparable industry is dietary supplements. In an attempt to effectively illustrate the market potential for Lumega-Z, the Company has examined ocular health products in the dietary supplement market as the closest appropriate data set available. The use of dietary supplements to enhance health and well-being is a longstanding and increasing trend. According to industry sources, up to 52% of adults in the United States have reported taking nutritional supplements. Worldwide sales of supplements surpassed $132 billion in 2016. Supplementation has recently generated much interest among health professionals in a relatively new area, the prevention and slowing of the AMD epidemic.

 

U.S. Statistics

 

  According to Ocular Surgery News, there are 4 million cataract surgeries in the United States each year.
  According to the BrightFocus Foundation, more than three million Americans are living with glaucoma, 2.7 million whom are aged 40 and older.
  According the American Glaucoma Society, over 27 million people are affected with glaucoma in the U.S. alone.
  According to the American Society of Retina Specialists an estimated 15 million Americans had AMD as of 2016.
  According to Am Fam Physician, one in three people in the U.S. over age 65 will develop AMD or some vision-reducing eye disease.
  MarketScope indicates that US ophthalmology practices are comprised of approximately 18,000 individual optometrists, approximately 10,000 individual ophthalmologists, and approximately 7,000, 5,000, and 2,000 optometrist groups, ophthalmologist groups, and retail establishments, respectively.

 

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Worldwide Statistics

 

  According to Bekryl Market Analysts, the “Global Medical Foods Market” was valued at $11.1 billion in 2018 and will exceed $17.5 billion by 2028. North America was expected to account for 33% of global sales in 2018.
  According to the International Council of Ophthalmology, AMD is the third leading cause of blindness throughout the world, exceeded only by cataracts and glaucoma.
  BrightFocus Foundation has indicated that globally, 60.5 million people had glaucoma in 2010. Due to the aging of the world’s population, BrightFocus Foundation has indicated that this number may increase to almost 80 million by 2020.
  According to Transparency Market Research, the global glaucoma therapeutics market was valued at over $5.9 billion in 2017 and is projected to expand at a compound annual growth rate of 2.9% from 2018 to 2026.
  According to South China Morning Post, 22 million AMD patients are Chinese patients which account for approximately 18% of global Glaucoma patients.
  BrightFocus Foundation has indicated that globally, AMD is expected to reach 196 million people worldwide by 2020 and increase to 288 million by 2040.
  BrightFocus Foundation estimates the global cost of visual impairment due to AMD is $343 billion, including $255 billion in direct health care costs, and estimates the direct health care costs of visual impairment due to AMD in the U.S., Canada and Cuba to be approximately $98 million.
  BrightFocus Foundation estimates the global cost of vision loss due to all causes to be nearly $3 trillion for the 733 million people living with low vision and blindness worldwide. BrightFocus Foundation also estimates the direct costs for vision loss due to all causes was $512.8 billion in North America alone, with indirect costs of $179 billion.
  GlobalData indicates that the potential global market of AMD is currently estimated at $5 billion and expected to reach $11.5 billion by 2026.
  According to Sohu, in China there are 36,342 Ophthalmologists and 3,950 Optometrists.
  According to Springer approximately 25 to 30 million people are affected worldwide by AMD.
  The prevalence of AMD appears to be lower and more variable in the developing nations as compared to more developed countries. Healthcare experts believe this will likely change for the worse with increasing life expectancy, changing lifestyles and increase in viewing computer monitors and other devices.

 

Due to an aging population, the AMD, Glaucoma and Cognitive Decline epidemics are global and growing, creating a significant market for the Company’s products.

 

Marketing Lumega-Z to Practitioners

 

In order to reach the large, expanding AMD patient population, the Company will primarily market Lumega-Z to the patients through ophthalmologists and optometrists. In the U.S. alone, there are more than 18,515 ophthalmologists and over 34,000 optometrists currently practicing. There are over 213,000 ophthalmologists worldwide. This marketing reach will be achieved through a combination of collaboration with industry-specific publishers, peer-to-peer promotion using key opinion leader clinicians, organic and paid search engine optimization and marketing, and other content-driven & educational approaches.

 

Marketing the CSV-1000 to Practitioners

 

Contrast sensitivity is currently one of the standard tests for clinical trials relating to ocular surgeries and treatments, and the CSV-1000 is considered the benchmark for these applications. In addition, there is an increasing need for functional vision assessment in everyday clinical practice, as a means of measuring the effect of disorders such as cataract and macular degeneration on the patient’s functional vision, and the impact of treatment of these conditions on the patient’s vision. The Company will concentrate its efforts on increasing the use of contrast sensitivity in everyday clinical practice, as a means of targeting the optometry and ophthalmology markets, which consists of over 34,000 and over 18,000 doctors, respectively, in the United States.

 

 -48- 

 

 

Sales Channel

 

Lumega-Z is a regulated medical food and therefore must be administered under the supervision of a physician or professional healthcare provider. Once the healthcare provider has determined that the patient requires Lumega-Z, they follow the following procedures:

 

  The Company provides all clinicians a DAC number (Doctor Authorization Code).
  Patients are given a customized recommendation from the clinician, including the DAC number; this enables patients to order Lumega-Z either online or by calling the 800 number.
  Patients are able to use their Health Care Flexible Spending Accounts (“FSA”) or Health Savings Account (“HSA”) dollars to pay for Lumega-Z.

 

The Company will support the clinicians by making available Online Ocular Nutrition courses to train their technicians.

 

Sales Force

 

The Company hired and trained a direct sales force in March 2018 consisting of a field-based team of account managers located in key geographical locations based on high population density areas with demographics that match the Company’s target markets. Each account manager is responsible for a defined geographical area and is expected to travel extensively to support the needs of customers. The account managers are tasked with prospecting for new accounts, closing leads generated by the Company’s marketing efforts, and generating revenue through account management activities including physician and staff training, and implementation of patient education resources. The account managers are expected to participate in national and regional trade shows and events, including supporting professional optometric and ophthalmological societies at a state level. Each account manager is assigned a quota that includes units of Lumega-Z sold, as well as sales of the MapcatSF, CSV-1000 and ESV-3000. Commissions are paid based on performance and achievement of quota.

 

International Expansion Strategy

 

Retinal diseases that include macular degeneration, glaucoma and diabetic retinopathy are not exclusive to the United States. The Company believes there is great interest internationally to find non-pharmacologic treatments for these diseases. The largest market opportunity is China where some of these diseases are at substantial levels. The Company intends to explore opportunities and channels to enter this expansive market.

 

Transcranial Doppler Solutions

 

In August 2018, the Company created a wholly owned subsidiary, Transcranial Doppler Solutions, Inc. (“TDSI”), to further the Company’s position at the forefront of early detection, intervention and monitoring of a range of eye diseases. TDSI will be dedicated to the pursuit of early predictors resulting in, the Company believes valuable therapeutic intervention for practitioners and their patients, and additional revenues stream generated from the testing and sale of Company products to appropriate customers. TDSI will provide a service that makes TCD (as defined below) testing convenient by being in various medical facilities. A Transcranial Doppler ultrasound (“TCD”) has been accepted as a safe, non-invasive, and lower-cost technique that uses a low-frequency transducer probe to assess intracerebral blood flow, within the brain and to the eyes. Studies have shown the ability of TCD to predict stroke risks as well as other potential cardiovascular events. TCD also plays an important role in detecting changes in the ophthalmic artery blood flow, which is important to help evaluate the course of common eye disorders. Blood velocities and intensities can be measured using TCD, which provides an effective way to determine more accurately the state of pathology in early stages of common eye disorders such as glaucoma and other eye diseases that cause visual field defects. Published medical resources indicate a strong relationship between ocular circulation and visual function in patients with glaucoma, diabetes, and macular disease, which are the three leading causes of acquired irreversible blindness throughout the world. A TCD is also highly repeatable, the results of which provide an effective tool for ophthalmologists to treat their patients. Through the monitoring of blood flow in the intracranial vessels, including the ophthalmic artery, the TCD results will in turn provide an evidence-based protocol for Guardion’s medical foods. The Company is currently setting up the operations of TDSI and hopes to launch its services in upcoming quarters.

 

 -49- 

 

 

Proprietary Technology and Intellectual Property

 

Patents

 

The Company currently owns and has exclusive rights to the following patent and pending patent applications:

 

DOMESTIC

 

Number   Title   Owner   Product   File Date   Expiration Date

Patent

9,486,136

  APPARATUS FOR USE IN THE MEASUREMENT OF MACULAR PIGMENT OPTICAL DENSITY AND/OR LENS OPTICAL DENSITY OF AN EYE   GHS   MapcatSF®   08/11/14   09/18/33
                     

Patent Application

15/346,010

  APPARATUS FOR USE IN THE MEASUREMENT OF MACULAR PIGMENT OPTICAL DENSITY AND/OR LENS OPTICAL DENSITY OF AN EYE   GHS   MapcatSF®   11/08/16    
                     

Patent

Application

14/028,104

  EMULSION OF CAROTENOIDS AND OCULAR ANTIOXIDANTS   GHS   Lumega-Z®   09/16/13    
                     

Patent

Application

62/859,885

  COMPOSITION FOR IMPORVED NEUROPROTECTIVE EFFECT AND METHODS OF MAKING SAME   GHS   GlaucoCetinTM   06/11/19    
                     

Patent

10,016,128

 

METHODAND APPARATUS FOR VISION ACUITY TESTING

  VectorVision  

CSV-1000

And

ESV-3000

  09/27/16   10/31/36
                     

Patent

10,022,045

 

METHODAND APPARATUS FOR VISION ACUITY TESTING

  VectorVision  

CSV-1000

and

ESV-3000

   02/28/17   02/28/37

 

FOREIGN

 

Country /
Number
  Title   Owner   Product   File Date   Expiration Date

CANADA

Patent

Application

2,864,154

  APPARATUS FOR USE IN THE MEASUREMENT OF MACULAR PIGMENT OPTICAL DENSITY AND/OR LENS OPTICAL DENSITY OF AN EYE   GHS   MapcatSF®   08/08/14    
                     

EUROPE

Patent

2811892

  APPARATUS FOR USE IN THE MEASUREMENT OF MACULAR PIGMENT OPTICAL DENSITY AND/OR LENS OPTICAL DENSITY OF AN EYE   GHS   MapcatSF®   09/09/14    02/11/33
                     

EUROPE

Patent

Application

18176935.7

  APPARATUS FOR USE IN THE MEASUREMENT OF MACULAR PIGMENT OPTICAL DENSITY AND/OR LENS OPTICAL DENSITY OF AN EYE   GHS   MapcatSF®   06/11/18    
                     

HONG KONG

Patent

Application

15105364.0

  APPARATUS FOR USE IN THE MEASUREMENT OF MACULAR PIGMENT OPTICAL DENSITY AND/OR LENS OPTICAL DENSITY OF AN EYE   GHS   MapcatSF®   06/05/15    
                     

HONG KONG

Patent

1204758

  APPARATUS FOR USE IN THE MEASUREMENT OF MACULAR PIGMENT OPTICAL DENSITY AND/OR LENS OPTICAL DENSITY OF AN EYE   GHS   MapcatSF®   06/14/19   02/11/33

 

The MapcatSF® patent, Patent 9,486,136, describes an apparatus for use in the measurement of the optical density of the macular protective pigment in the human eye, as well as an apparatus for the use in measuring the lens optical density of a human eye. The apparatus is particularly applicable to flicker photometers, which are used to measure the macular protective pigment in the human eye. The foreign counterpart patent applications describe the same invention.

 

Prior to the issuance of US Patent No. 9,486,136, the Company filed a continuation application, Patent Application 15/346,010, covering new embodiments around the MapcatSF® device. These new embodiments contain improvements related to the accuracy of intensity measurements made with the device, as well as new patentably distinct features around photodiode detector calibrations. On October 15, 2019, the Company received an Issue Notification from the USPTO informing the Company that the USPTO will issue this patent on October 29, 2019 as US Patent No. 10,456,028.

 

The Lumega-Z® patent filing, Patent Application 14/028,104, describes a daily liquid supplement for ocular and body health containing at least one of the following: lutein, zeaxanthin, meso-zeaxanthin and astaxanthin for a human subject and for nutritionally supplementing macular pigments in the human eye. The micronized nutrients in a lipid-based emulsion described in the patent application are more efficiently absorbed into the bloodstream than conventional supplement formulations resulting in higher serum levels and increased macular protective pigment.

 

 -50- 

 

 

The Company recently filed Patent Application 62/859,885 for its new GlaucoCetinTM medical food product. A proprietary formulation was developed, which combined a cocktail of mitochondrial protectants with specific antioxidants to arrive at the final micro-nutrient composition for use in the treatment of glaucoma patients. The invention relates to micronutrient formulations for improving outcomes based on resolving conditions at the cellular response level in certain individuals suffering from particular diseases. More particularly, the invention relates to compositions affecting the eye, such as glaucoma. This application describes an invention that provides a micro-nutrient composition for a human subject suffering from a glaucomatous disease, wherein the micro-nutrient composition comprises a formulation for reversing mitochondrial dysfunction in glaucomatous disease.

 

Patent 10,016,128 describes a methodology to calibrate display monitors to automatically hold display luminance constant for vision testing. The method includes a measurement device that is placed on the peripheral areas of the display monitor and feedback software to communicate with a computer and automatically control display luminance. Manual control of luminance based on the output of the measurement device is also included. This invention is embodied in the CSV-1000 and ESV-3000 devices.

 

Patent 10,022,045 describes a methodology to continuously calibrate display monitors to automatically hold display luminance constant for vision testing. The method includes a measurement device that is placed on the peripheral areas of the display monitor and feedback software to communicate with a computer and automatically control display luminance. Manual control of luminance based on the output of the measurement device is also included. Calibration of the luminance provided by mirrors, if patients view the display monitors through mirrors, is also embodied in the invention. This invention is also embodied in the CSV-1000 and ESV-3000 devices.

 

Trade Secrets

 

The MapcatSF® device employs a proprietary algorithm for correcting macular pigment optical density measurements with respect to lens density effects. More particularly, the proprietary algorithm adjusts the photopic luminosity function for the age equivalence of the subject’s lens using a relationship disclosed by Sagawa and Takahashi (J. Opt. Soc. Am. 18, 2659-2667). The algorithm is embedded in an integrated circuit block designed in such a way as to make it difficult to reverse engineer.

 

VectorVision’s CSV-1000 has proprietary testing charts that are not only copyright protected but can only be reproduced accurately by using special lithographs. These lithographs are kept secure, with very limited access, and are closely guarded trade secrets.

 

Trademarks

 

The Company utilizes trademarks on all current products and believes that having distinguishing marks is an important factor in marketing its products. The Company has six U.S. registered trademarks on the principal register at the USPTO. These marks are listed below. The Company has two foreign registered trademarks for its products and product candidates at this time and is evaluating whether additional foreign trademark protection is appropriate. U.S. trademark registrations are generally for fixed, but renewable, terms. The Company also has common law trademark rights for the use of its marks, including common law trademark rights to the NUTRIGUARD mark.

 

The Company currently owns and has exclusive rights to the following registered trademarks:

 

DOMESTIC

 

Registration No.   Mark   Owner   Product
5,025,658   GUARDION   GHS   Guardion Health Sciences, Inc.
5,757,377   LUMEGA-Z   GHS   Lumega-Z
4,997,319   MAPCAT SF   GHS   MapcatSF
4,341,403   VECTORVISION   VectorVision   VectorVision
4,500,241   CSV-1000   VectorVision   CSV-1000
5,092,549   GLAUCO-HEALTH   GHS   Glauco-Health

 

FOREIGN

 

Country/Registration No.   Mark   Owner   Product
China 27151643   LUMEGA-Z   GHS   Lumega-Z
China 27151644   MAPCAT SF   GHS   MapcatSF

 

 -51- 

 

 

Copyrights

 

In addition to patent and trademark protection, VectorVision relies on copyright protection and has common law copyright protection on the testing charts contained in the CSV-1000, which includes Vision Testing Chart #1, Vision Testing Chart #2 and Vision Testing Chart #3.

 

Medical Foods, Medical Device and Nutraceuticals Manufacturing and Sources and Availability of Raw Materials

 

The Company outsources the manufacturing of its medical food products, nutraceutical product line and medical devices to contract manufacturers. The Company processes orders through purchase orders and invoices with each manufacturer. The Company believes that there are multiple alternative sources, suppliers and manufacturers available for its products in the event of a termination or a disagreement with any current vendor.

 

Government Regulation

 

Medical Food Statutory Definition and One FDA Regulation

 

Under the Federal Food, Drug, and Cosmetic Act of 1938 (“FDCA”), products are regulated on the basis of their intended use. Their intended use is determined by the objective factors surrounding their use. Numerous categories and subcategories of products exist under the FDCA that could relate to the Company’s products, such as food, food additive, dietary supplement, GRAS food component, new drug, GRAS and Effective (“GRAS/E”) drug for over the counter use, and GRAS/E drug for use under the supervision of a physician. The categories overlap and products can fall within more than one category depending on their intended use.

 

The FDA has provided little guidance on the regulation of medical foods, as it is still a relatively new and evolving category of product under the FDCA.

 

The Company’s medical food products are defined and regulated by the FDA. The term medical food is a “food which is formulated to be consumed or administered enterally, or by mouth, under the supervision of a physician and which is intended for the specific dietary management of a disease or condition for which distinctive nutritional requirements, based on recognized scientific principles, are established by medical evaluation.” The FDA advises that it considers the statutory definition of medical foods to “narrowly” constrain the types of products that fit within the category of food (see May 2007 Guidance, and Food Labeling; Reference Daily Intakes and Daily Reference Values; Mandatory Status of Nutrition Labeling and Nutrition Content Revision proposed rule). This is a Final Rule and binding regulation on nutrition labeling for conventional foods.

 

The only FDA regulation pertaining to medical foods exempts them from the nutrition labeling requirements that apply to conventional foods, but they are subject to special labeling requirements, as noted in the following excerpt:

 

(j) The following foods are exempt from this section or are subject to special labeling requirements:

 

(8) Medical foods as defined in section 5(b) of the Orphan Drug Act. A medical food is a food which is formulated to be consumed or administered enterally, or by mouth, under the supervision of a physician and which is intended for the specific dietary management of a disease or condition for which distinctive nutritional requirements, based on recognized scientific principles, are established by medical evaluation. A food is subject to this exemption only if: (i) It is a specially formulated and processed product (as opposed to a naturally occurring foodstuff used in its natural state) for the partial or exclusive feeding of a patient by means of oral intake or enteral feeding by tube; (ii) It is intended for the dietary management of a patient who, because of therapeutic or chronic medical needs, has limited or impaired capacity to ingest, digest, absorb, or metabolize ordinary foodstuffs or certain nutrients, or who has other special medically determined nutrient requirements, the dietary management of which cannot be achieved by the modification of the normal diet alone; (iii) It provides nutritional support specifically modified for the management of the unique nutrient needs that result from the specific disease or condition, as determined by medical evaluation; (iv) It is intended to be used under medical supervision; and (v) It is intended only for a patient receiving active and ongoing medical supervision wherein the patient requires medical care on a recurring basis for, among other things, instructions on the use of the medical food.

 

Unlike regulation for drugs and for dietary supplements, there is no overall regulatory scheme for medical foods, or even a pending proposed rule, meaning that no FDA rulemaking is in progress. However, a very detailed Advanced Notice of Proposed Rulemaking (“ANPR”) entitled “Regulation of Medical Foods,” was published in the Federal Register on Nov. 29, 1996 (“ANPR 1996”). This ANPR never progressed to a proposed rule, or through the Notice and Comment procedure, or to an eventual Final Rule (binding regulation). However, the ANPR, in conjunction with the May 2007 and August 2013 Draft Guidance still represents the FDA’s position and policy on medical foods. This ANPR was in effect withdrawn, because on April 22, 2003, the FDA published a proposal to withdraw numerous long-pending proposed rules, including this ANPR. The FDA cited as its reasons for withdrawal, first, that the subjects are not a regulatory priority, and agency resources are limited; second, the proposed rules have become outdated due to advances in science or changes in the products or the industry regulated, or changes in legal or regulatory contexts; and, third, to eliminate uncertainty, so that the FDA or the private sector may resolve underlying issues in ways other than those in the proposals. In May 2007, the FDA issued its Guidance to Industry relating to medical foods (“2007 Guidance”), presumably because the medical foods sector was growing, but it did not engage in a formal rulemaking procedure, either because it did not have the resources and/or because the medical foods category is still lower priority than drugs and medical devices. A third draft guidance was issued in August 2013 further attempting to clarify the FDA’s position on medical foods (“August 2013 Draft Guidance”). Although the guidance has not been formalized, the Company maintains compliance with this draft guidance.

 

Medical Food Regulatory Requirements

 

Overview: Medical foods are FDA-regulated, but there is no complete set or scheme of regulations. There is no pre-market approval, or even pre-market notification required. Rather, it is the responsibility of the manufacturer and marketer to test for safety and efficacy before marketing and selling. The developer of a medical food must adhere closely to the statutory definition, and to the descriptions of a medical food in the sole FDA regulation regarding exemption from nutrition labeling, and in the 2007 Guidance and the August 2013 Draft Guidance.

 

 -52- 

 

 

Threshold Issue: The manufacturer must demonstrate that the disease or condition to be targeted, scientifically and medically, is a disease with distinctive or unique nutritional requirements. The FDA has stated that this is a “narrow category,” and that whether a product is valid for this category depends on the published medical science of the disease and its origins. The targeted disease or condition may be, or caused by, a metabolic imbalance or deficiency or the accelerated requirements for a certain nutrient caused by a disease state. The Company and its Scientific Advisory Board examine the distinctive nutritional requirements of a disease.

 

Formulation: A medical food may not be a single ingredient formula. Otherwise, that product would be a dietary supplement for a nutrient deficiency. A medical food formula must go beyond a mere modification of the diet. The formula must meet and satisfy the distinctive nutritional requirements, not merely ameliorate the symptoms. For example, Glucosamine or MSM, or an herb’s “active” constituent may indeed help osteoarthritis. One must demonstrate that these nutrients are the distinctive nutritional requirements for osteoarthritis.

 

Safety: There is no particular or mandated FDA pre-market safety studies required of the formula as a whole. However, all ingredients must be either GRAS or approved food-additives. Since medical foods are typically taken with prescription drugs, the developer must assess whether any medical food/drug interactions pose a risk. Many ingredients have been determined by the FDA to be GRAS and are listed as such by regulation. Other ingredients may achieve self-affirmed GRAS status through a panel of experts on that particular substance that author a GRAS Report. The standard for an ingredient to achieve GRAS status requires not only technical demonstration of non-toxicity and safety, but also general recognition and agreement on that safety by experts in the field. All ingredients used in the Company’s medical foods are either FDA-approved food additives or have GRAS status. The GRAS requirement for ingredients is arguably a higher safety standard than the risk/benefit analysis required for pharmaceuticals. Like any evolving area, especially where no premarket approval is required, the FDA reserves the right to raise questions about the qualification of products within any category as well as the labeling and manufacturing safety of those products.

 

Efficacy: No particular FDA pre-market efficacy studies are required by the FDA or by statute, similar to or comparable to Phase 2 & 3 trials for prescription drugs. However, a company must have data to demonstrate that the formula, when taken as directed, meets the distinctive nutritional requirements of the particular disease.

 

Manufacturing: There are no GMP regulations for medical foods in particular. Drug GMPs are not required, nor are the relatively new dietary supplement GMPs required; only food GMPs are required. The manufacture of the Company’s medical foods is outsourced in its entirety. The Company engages state of the art facilities that manufacture only nutritional supplements and medical foods.

 

Labeling: As for all food labels, printing must be legible, and many required elements must be conspicuous, such as a statement of identity, which is the name of the food; the statement: “Must be administered under the supervision of a physician or professional healthcare provider;” the quantity; the ingredients listing; the name and address of the distributor among other requirements.

 

Marketing: A medical food is a food product, thus the FDA does not regulate advertisements and promotional activities according to the pharmaceutical statutes and regulations; there is no side effects disclaimer or fair balancing required, as in direct to consumer (“DTC”) advertising of drugs on television. However, the FDA has a very broad definition of “labeling”; thus, all promotional materials, including websites, are under the authority, monitoring and enforcement of FDA. The Federal Trade Commission (“FTC”) also has joint jurisdiction with the FDA over food products, per a 1983 Memorandum of Understanding. Thus, all advertising claims, both express and implied, must be true, accurate, well-substantiated, and not misleading.

 

Enforcement: Enforcement is post-market, mostly via annual FDA inspections of food facilities, including packaging, distribution facilities, and fulfillment houses, as well as the manufacturer. The FDA also gathers material at trade shows and conferences and examines websites. The FTC has joint jurisdiction, and performs sophisticated Internet searches, both randomly and at the request of the FDA or of a competitor.

 

Nutraceutical Regulation

 

The FDA regulates foods, food additives, drugs and cosmetics. Unlike pharmaceutical drugs and conventional foods, nutraceuticals are regulated as “dietary supplements” under the Dietary Supplement, Health and Education Act of 1994 (“DSHEA”) as a separate regulatory category of food. Before the DSHEA, dietary supplements were subject to the same regulatory requirements as were other foods. DSHEA amended the FDCA to create a new regulatory framework for the safety and labeling of dietary supplements. Under DSHEA, a company is responsible for determining that the dietary supplements it manufactures or distributes are safe and that any representations or claims made about them are substantiated by adequate evidence to show that they are not false or misleading. Dietary supplements do not need approval from FDA before they are marketed. Except in the case of a “new dietary ingredient,” where pre-market review for safety data and other information is required by law, a firm does not have to provide FDA with the evidence it relies on to substantiate safety or effectiveness before or after marketing a product. In addition, there is a requirement for manufacturers to register pursuant to the Bioterrorism Act with FDA before producing or selling supplements. In June 2007, FDA published regulations for Current Good Manufacturing Practices (“cGMP”) for those who manufacture, package or hold dietary supplement products. These regulations focus on practices that ensure the identity, purity, quality, strength and composition of dietary supplements.

 

Congress defined the term “dietary supplement” in DSHEA as “a product (other than tobacco) intended to supplement the diet that bears or contains one or more of the following dietary ingredients: vitamins, minerals, amino acids, herbs or other botanicals; a concentrate, metabolite, constituent, extract or combination of the ingredients listed above.” A dietary supplement is a product taken by mouth that contains a “dietary ingredient” intended to supplement the diet. The “dietary ingredients” in these products may include vitamins, minerals, herbs or other botanicals, amino acids, and substances such as enzymes, organ tissues, glandulars, and metabolites and can also be extracts or concentrates. Dietary supplements are produced in the form of tablets, capsules, softgels, gelcaps, liquids, or powders. Dietary supplements can also be in other forms, such as a nutrition bar, but if they are in another form, information on their label must not represent the product as a conventional food or a sole item of a meal or diet. Regardless of form, DSHEA places dietary supplements in a special category under the general umbrella of “foods,” not drugs, and requires the product to be labeled as a “dietary supplement.”

 

According to the FDA, a drug is an article intended to diagnose, cure, mitigate, treat or prevent disease. While nutraceuticals are not intended to cure or treat disease, both dietary supplements and drugs are intended to affect the structure or function of the body. Moreover, dietary supplements are supposed to enhance the diet, not be used as a conventional food or as the sole item of a meal or diet, and not supposed to be taken alone as a substitute for any food or medicine.

 

The DSHEA requires that a manufacturer or distributor notify FDA if it intends to market a dietary supplement in the U.S. that contains a “new dietary ingredient.” The manufacturer and distributor must demonstrate to FDA why the ingredient is reasonably expected to be safe for use in a dietary supplement, unless it has been recognized as a food substance and is present in the food supply. A new dietary ingredient is an ingredient marketed after October 15, 1994. There is no authoritative list of dietary ingredients that were marketed before October 15, 1994. Therefore, manufacturers and distributors are responsible for determining if a dietary ingredient is “new,” and if it is not, for documenting that the dietary supplements its sells, containing the dietary ingredient, were marketed before October 15, 1994. The DSHEA states that the manufacturer is responsible for the safety evaluation of the product. If the dietary supplement contains a new ingredient, the manufacturer must inform FDA that the new ingredient “can reasonably be expected to be safe” within 75 days of going to market. This notice must provide information that supports the manufacturer’s conclusion that the ingredient is safe. It is up to the FDA to prove that a dietary supplement is unsafe after it is marketed.

 

A dietary supplement is adulterated if it or an ingredient in it presents a “significant or unreasonable risk of illness or injury” when used as directed. If the dietary supplement contains a new ingredient, a disclaimer it to be given on the product as follows: “There is insufficient information to provide assurance that the ingredient does not present any significant or unreasonable risk of illness or injury.” The DSHEA also has labeling requirements for dietary supplements where the label must include (1) name of each ingredient; (2) quantity of each ingredient; (3) total weight of all ingredients, if a blend; (4) identity of the plant part used; (5) the term “Dietary Supplement;” (6) nutritional labelling information (calories, fat, sodium, etc.).

 

Medical Device Regulatory Requirements

 

To fall within the purview of the FDA, a product must first meet the definition of a medical device, whereby it is then subject to regulation before and after it is marketed. Section 201(h) of the FDCA defines a device as “an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including any component, part, or accessory, which is ... intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals.” If the product in question is not a medical device, then no regulation applies. If it is a medical device, then one must evaluate applicable regulation.

 

 -53- 

 

 

Since 1976, the FDA’s paradigm has categorized medical devices in three distinct classes based on the potential health risks to the public – Class I, Class II, and Class III. Medical devices are assigned a classification based on the level of control needed in order to provide the FDA reasonable assurance of the product’s safety and effectiveness. If a device represents a very low risk of injury, it is considered Class I and does not require any premarket approval. While most Class I devices are exempt from premarket notification requirements and regulations for good manufacturing practices, there are some general controls that companies must conduct such as registering the company with the FDA, listing the device, paying an annual registration fee and tracking device activity.

 

Devices that present an intermediate level of risk of injury to people are considered Class II. The FDA’s perspective is that for Class II devices “general controls alone are insufficient to assure safety and effectiveness.” In addition to general controls, Class II devices also require special controls such as specified content on labels, adherence to performance standards and surveillance of the product in the marketplace. Some medical devices are also subject to a “Premarket Notification” under Section 510(k) of the FDCA. Most Class I and some Class II devices are exempt from the 510(k) Premarket Notification requirement. If a Class II device is subject to the 510(k) requirement, the manufacturer must file a premarket notification with the FDA to demonstrate that the device is “substantially similar” to another Class II device already on the market. Establishing substantial similarity provides the FDA reasonable assurance that the device is safe and effective.

 

High risk devices are Class III. These are devices that either sustain human life or present an unreasonable risk of injury to humans. Because of the risks involved, the FDA does not believe that general or special controls are sufficient to assure safety and effectiveness. The FDA requires general controls and premarket approval (“PMA”) for Class III devices.

 

VectorVision is registered with the FDA and the CSV-1000 and the ESV-3000 medical devices are listed with the FDA as Class I medical devices. As Class I medical devices, the CSV-1000 and the ESV-3000 are safe medical devices each with a very low potential risk of injury to a patient. These devices do not require any premarket approval.

 

With the assistance of regulatory affairs consultants, the Company has determined the relevant predicate device for the MapcatSF is the MPS II, the applicable product code for the MapcatSF is HJW and the applicable Code of Federal Regulation is 886.1050. The FDA has determined that this particular predicate device, and related product code, is a Class I medical device. Based on this, the Company believes the MapcatSF is correctly classified as a Class I medical device, is a safe medical device with a very low potential risk of injury to a patient and does not require any premarket approval.

 

Stark Law

 

Congress enacted significant prohibitions against physician self-referrals in the Omnibus Budget Reconciliation Act of 1993. This law and its supporting regulations, which have been amended and expanded substantially, are commonly referred to as the “Stark Law,” and prohibit a physician from making any referral of a Stark Designated Health Service (“DHS”) to an entity with which the physician has any kind of financial relationship, unless all of the requirements of a statutory or regulatory exception are met. Stark covered DHS include both outpatient prescription drugs and diagnostic testing that are reimbursable by Medicare or Medicaid. Many states have similar laws, some of which can apply to all payors and not just governmental payors. While the Company believes that its arrangements with its customers are in compliance with the federal and any state Stark Laws, the Stark Laws present different levels of risks as to the Company’s two lines of business: (1) sale of the Company’s medical food, Lumega-Z, and medical device, the MapcatSF; and (2) the Company’s performance of TCD testing.

 

1. Medical Food, Lumega-Z, and Medical Device, the MapcatSF. These products are neither prescription drugs nor are they reimbursable under any federal program at present. The federal Stark Law is thus inapplicable. Further, the Company’s believes that these products are also not covered under any potentially applicable state Stark Laws. The federal Stark Law, however, includes an exception for the provision of in-office ancillary services, including a physician’s dispensing of outpatient prescription drugs, provided that the physician meets specified requirements. To the extent that the products might become reimbursable under a federal program, or otherwise become covered under the Stark Law, the Company believes that the physicians who use the Company’s medical device, the MapcatSF, or recommend its medical food, Lumega-Z, to their patients are aware of these requirements. However, the Company does not monitor their compliance and has no assurance that the physicians are in material compliance with Stark II. If it were determined that the physicians who use the Company’s medical device or prescribe medical foods purchased from the Company were not in compliance with Stark II, it could potentially have an adverse effect on the Company’s business, financial condition and results of operations.

 

2. The TCD Testing Business. The TCD tests performed by the Company can be reimbursed by Medicare or Medicaid and otherwise constitute a Stark covered DHS, which include diagnostic testing. In conducting TCD tests, the Company will be providing the tests to the ordering physician, who will be paying TCD as a vendor to perform the test on behalf of the physician; and the physician will then be billing for the test to third party payers, including potentially Medicare and Medicaid. As a result, the tests will be considered to be an in-office ancillary service covered under Stark. The Stark Law, however, includes an exception for the provision of such in-office ancillary services, provided that the physician meets specified requirements. The Company believes that the physicians who engage the Company as a vendor to perform the TCD tests are aware of these requirements. However, the Company does not monitor the physicians’ compliance and has no assurance that the physicians are in material compliance with the Stark Law. If it were determined that the physicians were not in compliance with Stark, such could potentially have an adverse effect on the Company’s business, financial condition and results of operations.

 

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Anti-Kickback Statute and HIPAA Criminal Laws

 

The federal anti-kickback statute (the “AKS”) applies to Medicare, Medicaid and other state and federal programs. AKS prohibits the solicitation, offer, payment or receipt of remuneration in return for referrals or the purchase, or in return for recommending or arranging for the referral or purchase, of goods, including drugs, covered by the federal health care programs. At present, the Company does not participate in any federal programs and its products are not reimbursed by Medicare, Medicaid or any other state or federal program. The AKS is a criminal statute with criminal penalties, as well as potential civil and administrative penalties. The AKS, however, provides a number of statutory exceptions and regulatory “safe harbors” for particular types of transactions. Many states have similar fraud and abuse laws and their own anti-kickback laws, some of which can apply to all payors, and not just governmental payors. While the Company believes that it is in material compliance with both federal and state AKS laws, the AKS laws present different levels of risks as to the Company’s two lines of business: (1) sale of the Company’s medical food, Lumega-Z, and medical device, the MapcatSF; and (2) the Company’s performance of TCD testing.

 

1. Medical Food, Lumega-Z, and Medical Device, the MapcatSF. At present, the Company’s products are not reimbursable under any federal program. If, however, that changes in the future and it were determined that the Company was not in compliance with the AKS, the Company could be subject to liability, and its operations could be curtailed. Moreover, if the activities of its customers or other entity with which the Company has a business relationship were found to constitute a violation of the AKS and the Company, as a result of the provision of products or services to such customer or entity, were found to have knowingly participated in such activities, the Company could be subject to sanctions or liability under such laws, including civil and/or criminal penalties, as well as exclusion from government health programs. As a result of exclusion from government health programs, neither products nor services could be provided to any beneficiaries of any federal healthcare program.

 

2. The TCD Testing Business. The TCD tests performed by the Company can be reimbursed by Medicare or Medicaid. As a result, the federal AKS (and potentially any state anti-kickback law) will be implicated to the extent the financial relationships between the physician customers and the Company are (1) not set at a fair market value amount unrelated to the volume or value of TCD tests being ordered; or (2) were found to be a circumvention of the AKS through the creation of a suspect contractual joint venture. If the Company’s arrangements with ordering physicians were found to constitute a violation of the federal AKS, or any applicable state anti-kickback law, we could be subject to sanctions or liability under such laws, including civil and/or criminal penalties, as well as exclusion from government health programs. As a result of exclusion from government health programs, neither products nor services could be provided to any beneficiaries of any federal healthcare program.

 

HIPAA Compliance and Privacy Protection

 

HIPAA established comprehensive federal protection for the privacy and security of health information. The HIPAA standards apply to three types of organizations, or “Covered Entities”: (1) health plans, (2) health care clearing houses, and (3) health care providers who conduct certain health care transactions electronically. Covered Entities must have in place administrative, physical and technical standards to guard against the misuse of individually identifiable health information. Additionally, some state laws impose privacy protections more stringent than HIPAA’s. There are also international privacy laws, such as the European Data Directive, that impose restrictions on the access, use, and disclosure of health information. All of these laws may impact the Company’s business in the future.

 

HITECH Act

 

The Health Information Technology for Economic and Clinical Health (“HITECH”) Act promotes the adoption and meaningful use of health information technology. The HITECH Act addresses the privacy and security concerns associated with the electronic transmission of health information, in part, through several provisions that strengthen the civil and criminal enforcement of the HIPAA rules.

 

Physician Sunshine Act

 

Health Care Reform Law provision, generally referred to as the Physician Payment Sunshine Act or Open Payments Program, has imposed new reporting and disclosure requirements for drug and device manufacturers with regard to payments or other transfers of value made to certain practitioners (including physicians, dentists and teaching hospitals), and for such manufacturers and for group purchasing organizations, with regard to certain ownership interests held by physicians in the reporting entity. The Centers for Medicine and Medicaid Services (“CMS”) publishes information from these reports on a publicly available website, including amounts transferred and physician, dentist and teaching hospital identities.

 

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Under the Physician Payment Sunshine Act applicable organizations are required to collect and report detailed information regarding certain financial relationships they have with physicians, dentists and teaching hospitals. The Physician Payment Sunshine Act preempts similar state reporting laws, although some companies may also be required to report under certain state transparency laws that address circumstances not covered by the Physician Payment Sunshine Act, and some of these state laws, as well as the federal law, are ambiguous. Because the Company’s medical devices are Class I, not subject to premarket approval, and not reimbursable under Medicare, Medicaid, or the Children’s Health Insurance Program the Company believes it is not currently subject to the Physician Payment Sunshine Act requirements. As the Company pursues commercialization of the MapcatSF® and considers introducing new products, these requirements will be reevaluated to determine their applicability to the Company’s activities.

 

The Federal False Claims Act

 

The Federal False Claims Act provides for the imposition of extensive financial penalties (including treble damages and fines of over $22,000 for every false claim) if a provider submits false claims to any governmental health program either knowingly or in reckless disregard or in deliberate ignorance of the truth or falsity of the claims at issue. Liability under the False Claims Act can arise from patterns of deficient documentation, coding and billing, as well as for billing for services that are deemed not to have been medically necessary for the treatment of the patient. Many states have their own False Claims Acts as well. The Company will be billing governmental health care programs for the TCD testing, and the False Claims Act is thus potentially applicable to the Company’s operations. The Company is putting in place a fraud and abuse compliance program that is designed to ensure that the Company’s documentation, coding and billing for TCD tests are accurate and compliant. Any patterns of uncorrected deficiencies in documenting, coding and billing for TCD tests, however, may result in fines and other liabilities, which may adversely affect the Company’s results of operations.

 

State Regulatory Requirements

 

Each state has its own regulations concerning physician dispensing, restrictions on the Corporate Practice of Medicine (“CPOM”), anti-kickback and false claim regulations. In addition, each state has a board of pharmacy that regulates the sale and distribution of drugs and other therapeutic agents. Some states require that a physician obtain a license to dispense prescription products. When considering the commencement of business in a new state, the Company consults with healthcare counsel regarding the expansion of operations and utilizes local counsel when necessary.

 

Many states prohibit or otherwise regulate under CPOM rules the extent to which non-licensed personnel may be involved in the practice of medicine or otherwise employ licensed personnel. Related state rules further limit the extent to which fees for professional services may be shared or “split” between parties. Under the TCD Testing line of business, such rules in some states my impact the Company’s relationship with the radiologists who will be reading and interpreting the results of the TCD tests, and thereby providing the “professional component” of such tests. The Company is structuring its financial and billing relationships with such radiologists to be in compliance with applicable state rules. Failure to comply with state CPOM and fee splitting rules, however, may result in fines and other liabilities, which may adversely affect the Company’s results of operations.

 

Other United States Regulatory Requirements

 

In the United States, the research, manufacturing, distribution, sale, and promotion of drug and biological products are subject to regulation by various federal, state, and local authorities in addition to the FDA, including the Centers for Medicare and Medicaid Services (formerly the Health Care Financing Administration), other divisions of the United States Department of Health and Human Services (e.g., the Office of Inspector General), the United States Department of Justice and individual United States Attorney offices within the Department of Justice, and state and local governments. Pricing and rebate programs must comply with the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990 and the Veterans Health Care Act of 1992, each as amended. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. All of these activities are also potentially subject to federal and state consumer protection, unfair competition, and other laws. In addition, the Company may be subject to federal and state laws requiring the disclosure of financial arrangements with health care professionals.

 

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Foreign Regulatory Requirements

 

The Company may eventually be subject to widely varying foreign regulations, which may be quite different from those of the FDA, governing clinical trials, manufacturing, product registration and approval, and sales. Whether or not FDA approval has been obtained, generally the Company must obtain a separate approval for a product by the comparable regulatory authorities of foreign countries prior to the commencement of product marketing in those countries. In certain countries, regulatory authorities also establish pricing and reimbursement criteria. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval.

 

Corporate History

 

Guardion Health Sciences, Inc. was formed under the name P4L Health Sciences, LLC in December 2009 in California as a limited liability company. The Company changed its name to Guardion Health Sciences, LLC in December 2009. In June 2015, the Company converted into a Delaware “C” corporation.

 

On January 30, 2019, the Company filed a Certificate of Amendment to its Certificate of Incorporation, as amended, with the Secretary of State of the State of Delaware to effectuate a one-for-two (1:2) reverse stock split (the “Reverse Stock Split”) of its common stock without any change to its par value. Proportional adjustments for the Reverse Stock Split were made to the Company’s outstanding common stock, stock options, and warrants as if the split occurred at the beginning of the earliest period presented in this Annual Report.

 

Property

 

The Company’s address is 15150 Avenue of Science, Suite 200, San Diego, California 92128. The Company’s corporate offices are rented under a five-year lease for approximately 9,605 square feet of space at a current rental of $12,816 per month. We believe these facilities will be adequate for our needs during the foreseeable future.

 

Employees

 

As of October 25, 2019, the Company had a total staff of twelve, consisting of four officers and eight full-time employees. VectorVision had a staff of three, consisting of one officer, one full-time employee and one part-time employee, and Transcranial Doppler Solutions, Inc. had a staff of five, consisting of three officers and two full-time employees.

 

Advisory Boards

 

The Company’s research and development efforts are shaped by a Science Advisory Board with advice from a Medical Advisory Board consisting of practicing physicians. Both teams are committed to revealing and validating the connections between health and nutrition and then developing products based on these findings. Their joint goal is the integration of a medical model incorporating nutritional therapy into clinical practice.

 

Science Advisory Board

 

The Company’s Science Advisory Board is a product development and research team of esteemed experts in the fields of biochemistry, biophysics, and clinical nutrition. In addition to developing products based on scientific studies in the public domain, members of the Science Advisory Board conduct and publish their own evidence. Their expertise and the evidence they develop guide the formulation of all of the Company’s products. As an elite team of scientists and researchers, members of the Science Advisory Board contribute a high level of experience and judgment to the field of retinal health and nutrition. The Science Advisory Board currently consists of:

 

 

Richard A. Bone, BSc, PhD, FARVO

Dr. Bone is an experimental biophysicist and professor in the department of physics at Florida International University in Miami. Bone was just awarded The Presidential Award for achievement in macular pigment research and dedicated service to the carotenoid field.

     
 

John T. Landrum, BS, MS, PhD, FARVO

Dr. Landrum is a research scientist and professor of Chemistry and Biochemistry at Florida International University (FIU). Dr. Landrum was just appointed president of the International Carotenoid Society for the next 3 years.

     
 

William E. Sponsel, M.D., M.B., Ch.B., F.R.A.N.Z.C.O., F.A.C.S.

Dr. Sponsel established the Glaucoma Research and Diagnostic Laboratory at Indiana University in 1991, and was later recruited to the University of Texas Health Science Center at San Antonio in 1994, where he became Professor and Director of Clinical Research. He is presently Professor of Vision Sciences at UIW and Adjunct Professor of Biomedical Engineering at UTSA in San Antonio, Texas.

     
 

Robert J. Donati, PhD.

Dr. Donati has a PhD in Anatomy and Cell Biology with a minor in Neuroscience from the University of Illinois at Chicago (UIC). He joined the fa