ITEM
1. BUSINESS
Throughout
this Annual Report on Form 10-K, the terms “we,” “us,” “our,” “our company,” “Guardion”
the “Company” and the “Registrant” refer to Guardion Health Sciences, Inc. and its subsidiaries.
Overview
The Company is a specialty health sciences
company (1) that has developed medical foods and medical devices in the ocular health space and (2) that is developing nutraceuticals
that the Company believes will provide supportive health benefits to consumers.
Medical
Foods:
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Lumega-Z®:
The Company formulates and distributes Lumega-Z®, which 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 adult
dry macular degeneration (“AMD”) and computer vision syndrome (“CVS”). The Company believes
this risk may be modified by taking Lumega-Z to maintain a healthy macular protective pigment. Additionally, early
research has shown a depleted macular protective pigment to be a biomarker for neurodegenerative diseases such as Alzheimer’s
disease and dementia.
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GlaucoCetinTM :
In November 2018, the Company launched its second medical food product, GlaucoCetinTM. 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.
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Medical
Devices:
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MapcatSF®:
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 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. The Company’s focus
is to deploy the MapcatSF in clinics accompanied by trained technicians to conduct the MPOD measurements and collaborate with
the physicians treating their patients. The Company maintains ownership and possession of the MapcatSF when used in this fashion
but will sell the device to physicians upon request.
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VectorVision
and CSV-1000: 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 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.
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CSV-2000:
In September 2019, the Company announced that it completed development of its new proprietary, digital CSV-2000 standardized
contrast sensitivity testing device. 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, embodied in its own device, that automatically and constantly measures
and adjusts screen luminance to a fixed standard light level for vision testing. The Company began selling the new CSV-2000 and
AcQviz devices at the end of the first quarter of 2020.
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Nutraceuticals:
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NutriGuard
Acquisition: In September 2019, the Company, through its wholly owned subsidiary NutriGuard Formulations, Inc., acquired
NutriGuard Research, Inc. 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 direct to consumer (“DTC”)
channels and through recommendations by their physicians.
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acuMMUNE:
The first new nutraceutical product under development is acuMMUNE, designed
with the objective of supporting effective immune function. acuMMUNE has been specially
formulated with ingredients that have been shown in studies to support interferon-mediated
anti-viral mechanisms, which are important components of the body’s immune response
during viral infections.* The Company is currently in the process of arranging for the
manufacture and packaging of acuMMUNE at contract facilities in the United States and
expects that this product will be available for sale beginning in approximately April
2020. The Company anticipates that acuMMUNE will also be available for export to various
international markets shortly thereafter.
*This statement has not been evaluated by the FDA. This product
is not intended to diagnose, treat, cure or prevent any disease.
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In
addition to NutriGuard’s acuMMUNE product, a Malaysian company has contracted with NutriGuard to develop a proprietary
formula to meet the demands of the Malaysian company’s customers for an immune-supportive product. Each unit of the
product will consist of two (2) bottles packaged together, one named Astramune-H and one named Astramune-V. The formula will
be designed to provide both immuno-supportive and anti-inflammatory benefits to its users.
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Transcranial
Doppler Ultrasound Services:
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TDSI:
In August 2018, the Company created a wholly owned subsidiary, Transcranial Doppler Solutions, Inc. (“TDSI”).
TDSI is dedicated to the pursuit of early predictors of eye diseases. The Company believes the ultrasound diagnosis
of the vasculature of the brain is a valuable therapeutic intervention for practitioners and their patients, and the Company
hopes that this business line will result in additional revenue streams generated from the testing and sale of Company products
to appropriate customers. TDSI has established operations with selected clinics and is sending trained sonographers to conduct
transcranial doppler ultrasound (“TCD”) services on the physicians’ patients at these initial facilities.
The Company is working on expanding its client base by contacting and visiting new facilities to educate physicians on the
benefits of the TCD service to facilitate scheduling additional facilities. The Company intends to target more fee-for-service
practices that cater to cash paying patients.
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Background
Medical
Foods
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 manage 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 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.
Lumega-Z
is 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.
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.
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 studies 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. Data was also
presented at ARVO on a separate study that showed patients with drusen and at risk of vision loss from macular degeneration who
were treated with Lumega-Z for 6 months showed improvements in vision, as measured by contrast sensitivity. Similar
patients treated with standard over-the-counter AREDS2 gel caps showed no change.
The number of patients regularly ordering
Lumega-Z continues to increase 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. 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. The Company has determined that the value of the MapcatSF is
through this utilization. The Company intends to continue to deploy the MapcatSF in this fashion, with a focus of assigning the
MapcatSF to clinics to build and maintain relationships with the clinics rather than selling the MapcatSF devices.
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 believes that there is an increasing level of acceptance of medical foods as a primary therapy by patients and healthcare
providers to manage 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.
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. Information about NutriGuard Formulations
products can be found at www.nutriguard.com.
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.
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 claims for which there is scientific evidence that nutrient deficiencies cannot be
corrected by normal diet. 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.
Medical
Devices - 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 device offers 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. The Company’s research has revealed there are no competing products that offer 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 uses self-calibrated test lighting. The self-calibrated
test lighting is proprietary. The self-calibrated test lighting technology is a proprietary and patented technology known as AcQviz,
which tests the faces of the CSV-1000 and CSV-2000 and automatically and constantly measures and adjusts screen luminance to a
fixed standard light level for vision testing. The test faces of the CSV-1000 are proprietary and their intellectual property
is protected under copyright and trade secret law. CSV-1000 is currently sold worldwide, and the Company expects this global distribution
to continue. There is a training requirement in incorporating the CSV-1000 and the CSV-2000 device into clinical practice, which
the Company plans to provide as part of its commercialization strategy.
Nutraceutical
Industry Overview
A dietary supplement is a defined in the
Dietary Supplement Health and Education Act, enacted in 1994 (“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. Dietary
supplements are intended to be taken orally and are labeled on the front panel as being a dietary supplement.
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.” The terms “dietary supplement” and “nutraceutical” are often used interchangeably.
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, although “new dietary ingredients” do require premarket review by FDA. This allows
companies to bring products to market in less time and with less cost than is required for drug approval from the FDA.
Competitive
Advantage and Strategy
Medical
Foods
There
are no research-validated pharmaceutical solutions for slowing the progression of adult dry 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.
Lumega-Z is a medical food
designed to enhance the bioavailability of “difficult to absorb” ingredients like carotenoids. In contrast to
other formulations, Lumega-Z is a liquid formulated using a proprietary molecular micronization process (“MMP”)
to maximize efficiency of absorption and to minimize compatibility issues. The MMP is a proprietary homogenization process
whereby the particle size of the ingredients is reduced to facilitate more efficient absorption into the body. In clinical
studies, Lumega-Z has been shown to deliver nearly four times times more carotenoid into the bloodstream compared to standard
supplements (See Richard Bone, Pinakin G Davey, David Evans. Serum, macular pigment and visual function response to
commercially available supplements: IOVS (Investigative Ophthalmology and Vision Science) ARVO).
Medical
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. The Company’s focus is to deploy
the MapcatSF in clinics accompanied by trained technicians to conduct the MPOD measurements and collaborate with the physicians
treating their patients.
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 device embodies 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. The Company’s new AcQviz device embodies
this invention, which is now used in conjunction with the VectorVision CSV-1000 device.
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 new CSV-2000, which is an enhanced, electronic version of the CSV-1000. 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.
The
CSV-1000 and CSV-2000 use self-calibrated test lighting. The self-calibrated test lighting technology is a proprietary and patented
technology known as AcQviz, which tests the faces of the CSV-1000 and CSV-2000 and automatically and constantly measures and adjusts
screen luminance to a fixed standard light level for vision testing. 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 in the first quarter of 2020. 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.
Nutraceuticals
The
Company intends to build a portfolio of nutraceutical products under the NutriGuard brand by developing new condition-specific
formulations and marketing the NutriGuard products to patients directly through direct to consumer (“DTC”) channels
and make the NutriGuard products available to patients through recommendations by their physicians.
NutriGuard intends to formulate high
quality scientifically credible nutraceuticals with a goal to become a globally respected and physician-preferred nutraceuticals
brand. The Company believes its nutraceuticals can play an important role in optimizing, preserving and restoring health.
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.
Sales
Force
The Company has made a number of recent changes
to its sales force and sales efforts. The Company now has new sales leadership with extensive industry experience. The
Company currently has a sales force of account managers who are trained healthcare providers including NDs and physician
assistants. The last of the new sales staff was put in place mid-March 2020.
While
the Company has been developing the NutriGuard website, the Company is currently promoting the NutriGuard line.
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. The Company is also looking to expand the NutriGuard line to international markets.
Ocular
Care
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 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
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According
to Ocular Surgery News, there are 4 million cataract surgeries in the United States each year.
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According
to the BrightFocus Foundation, more than three million Americans are living with glaucoma, 2.7 million whom are aged 40 and
older.
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According
the American Glaucoma Society, over 27 million people are affected with glaucoma in the U.S. alone.
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According
to the American Society of Retina Specialists an estimated 15 million Americans had AMD as of 2016.
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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.
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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
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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.
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According
to the International Council of Ophthalmology, AMD is the third leading cause of blindness throughout the world, exceeded
only by cataracts and glaucoma.
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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.
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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.
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According
to South China Morning Post, 22 million AMD patients are Chinese patients which account for approximately 18% of global Glaucoma
patients.
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BrightFocus
Foundation has indicated that globally, AMD is expected to reach 196 million people worldwide by 2020 and increase to 288
million by 2040.
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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.
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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.
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GlobalData
indicates that the potential global market of AMD is currently estimated at $5 billion and expected to reach $11.5 billion
by 2026.
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According
to Sohu, in China there are 36,342 Ophthalmologists and 3,950 Optometrists.
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According
to Springer approximately 25 to 30 million people are affected worldwide by AMD.
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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.
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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.
The MapcatSF® has demonstrated
itself to be an effective tool to promote Lumega-Z. The Company has determined that the value of the MapcatSF is through this
utilization. The Company intends to continue to deploy the MapcatSF in this fashion, with a focus of assigning the MapcatSF to
clinics to build and maintain relationships with the clinics and assist the physicians in making a determination to recommend
Lumega-Z to their patients. The Company believes that continued deployment of MapcatSF devices in this fashion will build effective
relationships with physicians and their clinics, expand the awareness of the Company’s products and increase sales of Lumega-Z.
Marketing
the CSV-1000 and CSV-2000 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.
The
Company expects to continue to sell the CSV-1000 for the foreseeable future. The CSV-2000 is not yet approved by the local organizations
equivalent to the FDA in many countries, and this process can take up to one or more years. The CSV-1000 will continue to be sold
exclusively in those countries during that time period. The first unit of the CSV-2000 was shipped in the first quarter of 2020.
Proprietary
Technology and Intellectual Property
Patents
The
Company currently owns and has exclusive rights to 4 U.S. patents and 2 U.S. patent applications and 5 foreign patents and 3 foreign
patent applications covering its products and product candidates.
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.
Copyrights
In
addition to patent and trademark protection, VectorVision has three copyrights registered with the U.S. Copyright Office relating
to the CSV-1000 and CSV-2000 medical devices. VectorVision also has common law copyright protection on the testing charts contained
in the CSV-1000 and CSV-2000 medical devices, 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.
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, label
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. Dietary supplements that contain structure/function claims on their labels must bear the disclaimer: “This statement
has not been evaluated by the FDA. This product is not intended to diagnose, treat, cure, or prevent any disease.” The manufacturer
is responsible for ensuring the accuracy and truthfulness of these claims; they are not approved by FDA. 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, among other things, it or an ingredient in it presents a “significant or unreasonable
risk of illness or injury” when used as directed or contains a new ingredient for which 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 including requiring information on the label such as: (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.
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.
The
Company is registered with the FDA as a medical device manufacturer under registration number 3010367547. The MapcatSF is listed
with the FDA as a Class I medical device. 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. As
a Class I medical device, the MapcatSF is a safe medical device with a very low potential risk of injury to a patient. This device
does not require any premarket approval.
VectorVision
is registered with the FDA as a medical device manufacturer under registration number 1527853. The CSV-1000 and the ESV-3000 medical
devices are listed with the FDA as Class I medical devices. The applicable product code for these devices is HOX and the applicable
Code of Federal Regulation is 886.1150. 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.
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 Foods, and Medical Devices. 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, purchase the CSV-1000, CSV-2000 or ESV-3000, or recommend its medical foods, Lumega-Z and GlaucoCetin, 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.
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 Foods, and Medical Devices. 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.
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.
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.
Employees
As
of March 27, 2020, the Company, including its subsidiaries, had a total of 22 employees, including 21 full-time employees
and one part-time employee.
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:
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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.
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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.
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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.
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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 faculty at the Illinois College of Optometry (ICO) in 2004 and has been an Associate Professor for the past
5 years. He is currently the Chair of the ICO Institutional Review Board.
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Mark
F. McCarty
Mr.
McCarty is a nutritionist and a researcher who obtained his undergraduate education in biochemistry at the University
of California San Diego, Revelle College. He has published over three hundred articles on a wide range of biomedical topics
in the peer-reviewed medical literature. He has been awarded seven U.S. patents for a variety of applied nutritional measures.
McCarty co-founded NutriGuard Research and previously worked as the research director for Nutrition 21. Mr. McCarty also
serves as the Director of Research of NutriGuard Formulations, Inc.
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In
memoriam of:
Sheldon
Saul Hendler, M.D., Ph.D., FACP, FACN, FAIC – (1936-2012)
Dr.
Hendler was the principal author and editor of the PDR for Nutritional Supplements. Dr. Hendler passed away suddenly in
November 2012. He was the founding head of the Company’s Science Advisory Board. Dr. Hendler supervised and completed
the formulas for Lumega-Z for the Company in 2011.
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Medical
Advisory Board
The
Company’s Medical Advisory Board is composed of clinicians who are active medical practitioners. Members of the Medical
Advisory Board consult with the Scientific Advisory Board on the current standards of care in relevant medical practices. Members
of the Medical Advisory Board objectively advise on trends, needs, and issues of concern within their specialties. Their input
helps shape the direction of the Company’s research and product development efforts. The Medical Advisory Board currently
consists of:
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Robert
Ritch, M.D.
Dr.
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 & Ear Infirmary, New York City and Professor of Ophthalmology at The New
York Medical College, Valhalla, New York.
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John
A. Hovanesian, M.D., FACS
Dr.
Hovanesian is faculty member at the UCLA Jules Stein Eye Institute, a board-certified ophthalmologist, and an internationally
recognized leader in the field of corneal, cataract, refractive, and laser surgery. He is the chairman of the American
Academy of Ophthalmology’s online cataract surgery education committee and an editorial board member for five other
eye journals.
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Richard
Rosen, M.D.
Dr.
Rosen is a vitreoretinal surgeon and consultant at the New York Eye and Ear Infirmary where he serves as Vice Chairman
and Director of Ophthalmology Research, as well as Surgeon Director and Chief of Retinal Services. Dr. Rosen is Professor
of Ophthalmology at the Icahn School of Medicine at Mount Sinai and Visiting Professor in Applied Optics at the University
of Kent in Canterbury, UK.
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William
Trattler, M.D.
Dr.
Trattler received the “Outstanding Young Ophthalmologist Leadership Award” from the Florida Society of Ophthalmology
(FSO) and was elected President of the Miami Ophthalmology Society for 2006. In March 2006, Dr. Trattler was selected
as one of the top 50 opinion leaders in Ophthalmology, as voted by his peers in a National survey.
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James
A. Davies, M.D.
Dr.
Davies is a Fellow of the American College of Surgeons, the American Academy of Ophthalmology and the American Society
of Cataract and Refractive Surgery. He serves on the Medical Advisory Board of Bausch + Lomb Surgical, Inc., and is a
consultant for Glaukos, Inc., Optovue, Inc., and Guardion Health Sciences. He also serves as an advisor to the Charity
Vision Foundation.
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P.
Dee Stephenson, M.D.
Dr.
Stephenson is a Board Certified Ophthalmic Surgeon with extensive expertise in micro-incisional cataract surgery and implantation
of premium intra-ocular lenses, as well as custom femto cataract techniques. Dr. Stephenson has been recognized by numerous
institutions for her expertise. She is also the current president (2015-2017) of the American College of Eye Surgeons
(ACES).
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Bridgitte
Shen Lee, O.D.
Dr.
Lee is the cofounder of Vision Optique. She also founded iTravelCE in 2010 and serves as a consultant and a speaker for
various optical industry companies to introduce eye care professionals in the U.S. and Asia to the latest innovations.
She served on the Houston Miller Theatre Advisory Board, and she currently serves on the Houston Ballet Foundation Board
of Trustees.
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Joseph
S. Andrews, M.D.
Dr.
Andrews is a member of the Private Internal Medicine Center (PIMC) at Scripps Clinic Torrey Pines, San Diego and has diplomate
board certification from the American Board of Internal Medicine. He is currently a clinical mentor at St. Vincent de
Paul Clinic. In 2009, he was listed among San Diego’s Top Doctors by San Diego magazine.
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John
E. Wanebo, M.D., FACS
Dr.
Wanebo is the Director of Neurotrauma at the Scottsdale Healthcare System. Additionally, he serves as a staff neurosurgeon
and Director of the Moyamoya Center at Barrow Neurological Institute, St. Joseph’s Medical Center, in Phoenix, where
he is also an assistant professor within the Division of Neurological Surgery. He is board certified by the American Board
of Neurological Surgery.
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ITEM
1A. RISK FACTORS
Investing
in the Company’s common stock 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 Form 10-K, before purchasing shares
of the Company’s common stock. There are numerous and varied risks that may prevent the Company from achieving its goals.
If any of these risks actually occurs, the business, financial condition or results of operations may be materially adversely
affected. In such case, the trading price of the Company’s 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 $10,878,308 for the year ended December 31, 2019 and a net loss
of $7,767,407 for the year ended December 31, 2018. The Company had an accumulated deficit of $45,511,671 as of December 31, 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 medical foods Lumega-Z®
and Glauco-CetinTM, its nutraceuticals product line, the MapcatSF® medical device and the CSV-1000
and CSV-2000 medical devices, 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 Annual Report 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, 2019. 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. 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.
The
Company’s future success is largely dependent on the successful commercialization of Lumega-Z® and GlaucoCetinTM
medical foods, its line of nutraceuticals, the MapcatSF® medical device, and the CSV-1000 and CSV-2000 medical
devices.
The
future success of the Company’s business is largely dependent upon the successful commercialization of its medical foods,
nutraceuticals and medical devices. 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. 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 from sales. If this occurs, it will
have an adverse impact on operations and the Company’s ability to fund future development and commercialization efforts.
The
Company may fail to realize all of the anticipated benefits of the VectorVision acquisition 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.
During
the fourth quarter of 2019, the Company conducted its annual impairment analysis, considering multiple qualitative observations
and indicators, including our customer relationships, the regulatory environment as it impacts medical devices, market penetration
expectations and barriers, and our anticipated competitive environment. In addition, we assessed the operating results of our
VectorVision reporting unit against the quantitative assumptions we used when determining the initial fair values associated with
the 2017 business combination. Accordingly, the Company has recorded a goodwill impairment charge of $1,563,520 and has accelerated
the remaining amortization expense of $191,468 on its identifiable intangible assets as of December 31, 2019.
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. 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.
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. 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, 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. If, however, the FDA were to determine that the MapcatSF or
CSV-2000 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.
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.
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 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.
While
the Company believes that these collaborative relationships help further validate our products, 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.
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.
The
Company’s long-term success may depend upon the successful development and commercialization of products other than its
current products.
The
Company’s long-term viability and growth may depend upon the successful development and commercialization of products other
than its current line of products. 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.
We
could be negatively impacted by the recent outbreak of coronavirus (COVID-19).
In
light of the uncertain and rapidly evolving situation relating to the spread of the coronavirus (COVID-19), this public health
concern could pose a risk to our customers, our employees, our vendors and the communities in which we operate, which could negatively
impact our business. Additionally, the State of California issued a Statewide Executive Order on March 19, 2020, which could impact
our operations materially in the short term. The extent to which the coronavirus (COVID-19) may impact our business will depend
on future developments, which are highly uncertain and cannot be predicted at this time. We could experience customer or widespread
shutdowns to prevent spread of the virus, employee impacts from illness, school closures and other community response measures,
all of which could negatively impact our business. We intend to continue to monitor the situation and may adjust our current policies
and practices as more information and guidance become available.
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.
The
Company’s competitors may develop products similar to the Company’s medical foods, medical devices and nutraceuticals,
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 our products. Such similar products marketed by larger competitors could
hinder the Company’s efforts to penetrate the market.
Many
large competitors have substantially greater financial, research and development, manufacturing and marketing experience and resources
than we do and represent substantial long-term competition for us. Such companies may develop products that are safer, more effective
or less costly than any that we may develop. Such companies also may be more successful than we are in manufacturing, sales and
marketing.
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.
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 a sales force consisting of a sales manager and four salespeople. 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.
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.
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:
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decreased
demand for any product candidates or products that we develop;
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injury
to our reputation and significant negative media attention;
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significant
costs to defend the related litigation;
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loss
of revenue; and
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reduced
time and attention of our management to pursue our business strategy.
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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.
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.
Additionally, our supply chain may be jeopardized for a period of time due to the COVID-19 outbreak.
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 annual report titled “Business - Government Regulation.”
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, 2019 and 2018, the Company’s billings were derived from a limited number of individual customers
and distributors. During the year ended December 31, 2019, the Medical Devices segment had one customer who accounted for
approximately 22% of the Company’s sales; and during the year ended December 31, 2018, the Medical Devices segment
had one customer who accounted for approximately 47% of the Company’s sales. No other customer accounted for more than 10%
of sales in either year. 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 and
GlaucoCetin and nutraceuticals in order to recommend them to their patients, and to understand the benefits of visual acuity testing
using the CSV-2000 device. 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, we may be unable to meet our commitments to our customers.
Additionally, if our suppliers are impacted by the recent outbreak of coronavirus (COVID-19), 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.
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.
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:
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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;
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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
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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.
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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 must attract and retain quality management and employees 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 and attract and retain quality employees. 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 and employees, the growth of our business may be adversely impacted.
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 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 jurisdictions, 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 Lumega-Z® and Glauco-CetinTM to be medical foods and not drugs, they are only available under
the supervision of a physician. While 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, particularly as we expand our sales and operations to foreign markets. 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.
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 or selling nutraceuticals.
The
Company’s ability to realize the anticipated benefits of the new Transcranial Doppler Solutions, Inc. business or NutriGuard
line of products 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 limited experience, which may be a complex, costly and time-consuming process. The Company
may be required to devote significant management attention and resources to develop these businesses. 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 two lines of business of the Company: (1) our sale
of medical foods, and (2) our performance of Trans Cranial Doppler ultrasound (“TCD”) testing.
1.
Medical Foods: Lumega-Z and GlaucoCetin. When a physician recommends one or more of the Company’s medical foods 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.
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 three of the Company’s lines of business: (1) sale of the Company’s medical
foods, (2) sale of the Company’s medical devices; and (3) the Company’s performance of TCD testing.
1.
Medical Foods and Medical Devices. 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 devices or recommend its medical foods 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.
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 three of the Company’s lines of business: (1) sale
of the Company’s medical foods, (2) sale of the Company’s medical devices, and (2) the Company’s performance
of TCD testing.
1.
Medical Foods and Medical Devices. 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 nutraceuticals line of business, any failure to comply with applicable federal and state laws, rules and regulations, including
the DSHEA, may result in fines and other liabilities, which may adversely affect the Company’s results of operations and
reputation.
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. 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. Dietary
supplements that contain structure/function claims on their labels must bear the disclaimer: “This statement has not been
evaluated by the FDA. This product is not intended to diagnose, treat, cure, or prevent any disease.” The manufacturer is
responsible for ensuring the accuracy and truthfulness of these claims; they are not approved by FDA. 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.
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.
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
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 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. 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.
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 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.
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:
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implement
or execute our current business plan, which may or may not be sound;
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maintain
our anticipated management and advisory team; and
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raise
sufficient funds in the capital markets to effectuate our business plan.
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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 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.
We
have identified a material weakness in our internal control over financial reporting. Failure to maintain effective internal controls
could cause our investors to lose confidence in us and adversely affect the market price of our common stock. If our internal
controls are not effective, we may not be able to accurately report our financial results or prevent fraud.
Effective
internal control over financial reporting is necessary for us to provide reliable financial reports in a timely manner. In connection
with the preparation of our financial statements for the year ended December 31, 2019, we concluded that there was material weakness
in our internal control over financial reporting. A material weakness is a significant deficiency, or a combination of significant
deficiencies, in internal control over financial reporting such that it is reasonably possible that a material misstatement of
the annual or interim financial statements will not be prevented or detected on a timely basis. We have identified a material
weakness in our internal controls resulting from:
Segregation
of Duties – The Company did not maintain effective policies to ensure adequate segregation of duties within its accounting
processes. Specifically, due to the size of the Company and the smaller nature of department teams, opportunities are limited
to segregate duties, resulting in one individual having almost complete responsibility for the processing of certain financial
information.
While
we have designed and implemented, or expect to implement, measures that we believe address or will address this control weakness,
we continue to develop our internal controls, processes and reporting systems by, among other things, hiring qualified personnel
with expertise to perform specific functions, and designing and implementing improved processes and internal controls, including
ongoing senior management review and audit committee oversight. We plan to remediate the identified material weakness through
the redistribution of job responsibilities, by hiring additional senior accounting staff, and through the design and implementation
of additional internal controls in order to promote adequate segregation of duties. We expect to complete the remediation by the
end of 2020. We expect to incur additional costs to remediate this weakness, primarily personnel costs. We may not be successful
in implementing these changes or in developing other internal controls, which may undermine our ability to provide accurate, timely
and reliable reports on our financial and operating results. Further, we will not be able to fully assess whether the steps we
are taking will remediate the material weakness in our internal control over financial reporting until we have completed our implementation
efforts and sufficient time passes in order to evaluate their effectiveness. In addition, if we identify additional material weaknesses
in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may
be materially misstated. Moreover, in the future we may engage in business transactions, such as acquisitions, reorganizations
or implementation of new information systems that could negatively affect our internal control over financial reporting and result
in material weaknesses.
If
we identify new material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements
of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we are unable to assert that our internal control over financial
reporting is effective, we may be late with the filing of our periodic reports, investors may lose confidence in the accuracy
and completeness of our financial reports, and the market price of our common stock could be negatively affected. As a result
of such failures, we could also become subject to investigations by the stock exchange on which our securities are listed, the
SEC, or other regulatory authorities, and become subject to litigation from investors and stockholders, which could harm our reputation,
financial condition or divert financial and management resources from our core business.
The
Company’s failure to meet the continued listing requirements of Nasdaq could result in a delisting of its common stock.
On
September 20, 2019, the Company received a 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 provided an initial compliance period of 180 calendar days, or
until March 18, 2020, to regain compliance with the minimum bid price requirement.
On
March 19, 2020, the Company received a written notification from Nasdaq that the Company has been granted an additional 180 calendar
days, or until September 14, 2020, to regain compliance with the minimum bid price requirement.
If
at any time before September 14, 2020, the bid price of the Company’s common stock closes at or above $1.00 per share for
a minimum of 10 consecutive business days, Nasdaq will provide written notification that the Company has achieved compliance with
the Rule. If compliance with the minimum bid price requirement cannot be demonstrated by September 14, 2020, Nasdaq will provide
written notification that the Company’s common stock will be delisted. At that time, the Company may appeal Nasdaq’s
determination to a Hearings Panel.
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’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:
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our
ability to execute our business plan;
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changes
in our industry;
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competitive
pricing pressures;
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our
ability to obtain working capital financing;
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additions
or departures of key personnel;
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sales
of our common stock;
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operating
results that fall below expectations;
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regulatory
developments;
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economic
and other external factors;
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period-to-period
fluctuations in our financial results;
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the
public’s response to press releases or other public announcements by us or third parties, including filings with the
SEC;
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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;
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the
development and sustainability of an active trading market for our common stock; and
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any
future sales of our common stock by our officers, directors and significant stockholders.
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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.