PART
I
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 consolidated 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®:
In 2016, the Company acquired the rights to a proprietary technology, embodied in the Company’s medical device,
the MapcatSF®, which 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,
CSV-1000 and CSV-2000: 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(s) are 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 clinics, for researchers to use in clinical trials, for real-world vision evaluation,
and industrial vision testing. The acquisition expands the Company’s technical portfolio.
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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 but was impacted by COVID-19. The
Company plans to put significant focus on sales and marketing efforts of the new CSV-2000, although the CSV-1000 will continue
to be sold. The Company believes the VectorVision product portfolio further establishes the Company’s position at
the forefront of early detection, intervention and monitoring of a range of eye diseases.
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Nutraceuticals:
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NutriGuard
Acquisition: In September 2019, the Company 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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ImmuneSF:
The first new nutraceutical product developed after the acquisition of NutriGuard is
ImmuneSF, a unique proprietary nutraceutical formulation designed to support and maintain
an effective immune system. This formulation contains a synergistic blend of antioxidant
and anti-inflammatory nutrients. The Company has arranged for the manufacture and packaging
of ImmuneSF at contract facilities in the United States and began marketing the product
during the second quarter of 2020. The Company anticipates that ImmuneSF will
also be exported for sales in international markets.
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In
addition to NutriGuard’s ImmuneSF product, a Malaysian company 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
consists of two (2) bottles packaged together, one named Astramern-H and one named Astramern-V. The formula is designed to
provide both immuno-supportive and anti-inflammatory benefits to its users.
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Recent
Developments
January
and February 2021 At the Market Offerings
On
January 8, 2021, we filed a prospectus supplement pursuant to which we could sell up to $10,000,000 worth of shares of
our common stock in an “at the market” offering (the “January 2021 1st ATM Offering”). On January 15,
2021, we completed the January 2021 1st ATM Offering, pursuant to which we sold an aggregate of 2,559,834 shares of our
common stock, raised gross proceeds of approximately $10,000,000 and net proceeds of approximately $9,500,000.
On
January 28, 2021, we filed a prospectus supplement pursuant to which we could sell up to $25,000,000 worth of shares of
our common stock in an “at the market” offering (the “January 2021 2nd ATM Offering”). On February 10,
2021, we completed the January 2021 2nd ATM Offering, pursuant to which we sold an aggregate of 5,006,900 shares of our
common stock, raised gross proceeds of approximately $25,000,000 and net proceeds of approximately $24,100,000.
In
addition, in January and February 2021, the Company issued an aggregate of 1,647,691 shares of common stock upon the exercise
of warrants and received cash proceeds of $3,608,509.
Appointment
of New CEO
Effective
as of January 6, 2021, the Board of Directors appointed Bret Scholtes as President and Chief Executive Officer and as a director
of the Company.
Prior
to his appointment, Mr. Scholtes, age 51, served as the President and Chief Executive Officer of Omega Protein Corporation (“Omega”)
since 2012 and as a director of Omega since 2013. Omega was listed on The New York Stock Exchange until January 2018 when it was
sold. Prior to his selection as Chief Executive Officer of Omega, Mr. Scholtes served as the Omega’s Senior Vice President-Corporate
Development from April 2010 to December 2010 and as Omega’s Executive Vice President and Chief Financial Officer from January
2011 to December 2011. From 2006 to April 2010, Mr. Scholtes served as a Vice President at GE Energy Financial Services, a global
energy investment firm. Prior to that, Mr. Scholtes held positions with two publicly traded energy companies. Mr. Scholtes also
has five years of public accounting experience. Mr. Scholtes holds an MBA degree in Finance from New York University and a degree
in Accounting from the University of Missouri – Columbia.
Reverse
Stock Split and Nasdaq Compliance
On
September 20, 2019, we received notice from the Listing Qualifications staff (the “Staff”) of The Nasdaq Stock
Market LLC (“Nasdaq”) indicating that, based upon the closing bid price of the Company’s
common stock for the previous 30 consecutive business days, the Company no longer satisfied the requirement to maintain
a minimum bid price of $1.00 per share, as required by Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”). In accordance
with the Nasdaq Listing Rules, the Company was afforded 180 days, or until March 18, 2020, to regain compliance with the Bid
Price Rule by evidence of a closing bid price of at least $1.00 per share for a minimum of 10 consecutive business days.
Thereafter, the Company had been afforded a second 180-calendar day compliance period (which 180-day period was extended due to
circumstances related to COVID-19), or until November 30, 2020, to regain compliance with the Bid Price Rule.
The
Company was unable to regain compliance with the Bid Price Rule by November 30, 2020. Accordingly, on December 1, 2020, the Company
received a letter from the Staff notifying it that its Common Stock would be subject to delisting from Nasdaq unless the Company
timely appealed Nasdaq’s determination to a Nasdaq Listing Qualifications Panel (the “Panel”). The Company timely
appealed Nasdaq’s determination to the Panel.
On
January 26, 2021, the Company received written notification that the Panel granted the Company an extension for continued listing
through March 15, 2021.
On
March 1, 2021, 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-six (1:6) 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.
On
March 15, 2021, we received a letter from the Staff notifying us that we had regained compliance with the Bid Price Rule. The
letter stated the staff had determined that for the prior 10 consecutive business days, from March 1, 2021 to March 12, 2021,
the closing bid price of the Company’s common stock had been at $1.00 per share or greater and that accordingly, the Company
had regained compliance under the Bid Price Rule, and that the matter was closed.
Background
Medical
Foods
Medical
foods are regulated as foods under the federal Food, Drug, and Cosmetic Act. 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 sold 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 the lifetime of the formula to improve
the efficacy, taste, and method of delivery. The current formulation has been delivered to patients and used in clinics since
2019.
Lumega-Z
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 has marketed Lumega-Z to patients through ophthalmologists and optometrists. The
Company intends to also market Lumega-Z through direct-to-consumer strategies such as, television, social media and paid search
advertising.
Lumega-Z®
has published two peer-review scientific articles, demonstrating its beneficial efficacy, in 2020. Both articles were published
in the journal Nutrients. The first published study assessed the level of absorption of the carotenoids in Lumega-Z compared
to absorption of the carotenoids in the industry leading eye vitamin, PreserVisionTM (AREDS 2 formula sold by Bausch
and Lomb), and determined whether an elevated level of carotenoid absorption leads to increased MPOD. The study found that despite
only a 2.3-fold higher carotenoid concentration than PreserVisionTM, Lumega-Z supplementation provides approximately
3–4-fold higher absorption, which leads to a significant elevation of MPOD levels (Nutrients 2020, 12, 132: Published
May 2, 2020).The second study evaluated the visual benefits in a group of patients taking Lumega-Z compared to a group of patients
taking AREDS 2 (PreserVisionTM) soft gel supplements, as well as a third control group taking no supplementation..
Each study participant had retinal drusen, significantly delayed dark adaptation recovery time and was at risk of developing vision
loss from AMD. The results showed significant improvements in visual function, as measured by contrast sensitivity, in the group
of patients taking Lumega-Z. The patients taking PreserVisionTM showed a trend toward an improvement, but no statistical
change, while the control group showed no change. (Nutrients 2020, 12, 3271: Published October 26, 2020).
Sales
of Lumega Z remained flat throughout 2020, as many eye doctor offices were closed, or operating with limited capacity, due to
COVID-19 related “shelter at home” orders.
GlaucoCetin
is the Company’s second medical food. It offers a patent-pending formula that is designed to support proper mitochondrial
function in the optic nerve cells of glaucoma patients. Loss of optic nerve cells is thought to be the primary cause of vision
loss in glaucoma patients. Like Lumega-Z, GlaucoCetin has also been distributed primarily through eye doctors, however, the Company
plans to offer direct-to-consumer marketing programs. GlaucoCetin sales grew by 112% during 2020. The Company believes this growth
rate, despite COVID-19 related issues affecting patient access to eye doctor offices, is due to limited competition for glaucoma
related nutritional products and a wider acceptance by clinicians of the potential efficacy of the nutritional therapies.
Vision
loss from eye disease is a rapidly growing problem in the United States and across the globe. 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. According to an
EpiCast Report, the number of glaucoma patents is expected to grow yearly by 15% and for there to be 15.7 million cases worldwide
by 2023, with most of these cases in the United States and Japan.
The
US Food and Drug Administration (FDA) took steps in 1988 to encourage the development of medical foods by creating a regulatory
category for medical foods 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 enterally (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.
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 also distributes its medical foods
products through E-commerce in an online store that is operated at www.guardionhealth.com. The Company plans to expand its
E-commerce capabilities in 2021.
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 or
a condition and cannot claim that they prevent, mitigate or treat a given disease or condition. Dietary supplements do not require
physician supervision and can be self-administered without supervision.
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 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
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 required 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 using automated light calibration systems.
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 or test lighting. Competitive devices do not correct for variations in test
light levels, resulting in variability of test results. The CSV-1000 uses self-calibrated test lighting. The self-calibrated test
lighting is proprietary. For the CSV-2000, the follow-on computerized device for the CSV-1000, the self-calibrated test lighting
technology is a proprietary and patented technology known as AcQviz, which constantly measures the luminance of the CSV-2000 computer
screen and automatically 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. The first sale of the CSV-2000 occurred in Q1, 2020 and
the Company believes this product will also be sold worldwide. There is a training requirement for incorporating the CSV-1000
and the CSV-2000 device into clinical practice, which the Company plans to provide as part of its commercialization strategy.
The
MapcatSF device offers a proprietary technology to effectively evaluate the MPOD, which is a measure of the health of the macular
pigment. The MapcatSF device is used primarily in eye doctor’s offices as a means to demonstrate to patients the current
status of their MPOD and the potential benefits of Lumega-Z after treatment. The first MapcatSF was sold in 2020. No major sales
and marketing strategy is currently planned for the direct sales of the device, as it will be used more as a measurement tool
to educate patients and their eye doctors about the need for taking Lumega-Z to replenish the macular pigment. The MapcatSF will
be sold to doctors or researchers upon request.
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, physicians often recommend Age-Related Eye Disease Study (“AREDS”)-based supplements to early AREDS-based
AMD patients. However, more than 90% of all AREDS-based nutritional products currently on the market are in tablet, capsule or
gel capsule form, which 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. As noted earlier, clinical
studies have shown Lumega-Z offers significantly higher absorption of carotenoids, than the leading AREDS-based formula PreserVisionTM
(Nutrients, 12, 1321: Published May 2, 2020). In a subsequent study, Lumega-Z was also found to provide significantly better
vision benefit than the AREDS-based formula in patients with drusen and at risk of vision loss from AMD, as measured by contrast
sensitivity (Nutrients 12, 3271: Published October 26, 2020). The Company believes we have a competitive advantage with
Lumega-Z because of these two published studies showing superiority over the leading formula, PreserVisionTM, and because
a growing body of evidence, particularly the results from the AREDS studies, that has demonstrated the importance of supplementation
with carotenoids to offset vision loss in patients with macular degeneration. Lumega-Z has demonstrated in studies to have higher
absorption of carotenoids, which the Company believes leads to better visual outcomes, and a superiority over the competitive
formulas.
GlaucoCetin
is a medical food designed to support mitochondrial function in the optic nerve cells of glaucoma patients. For glaucoma, the
primary risk factor for disease progression has been thought to be elevated intraocular pressure which in turn damages the optic
nerve cells leading to vision loss. As such, the primary means for treating the disease, to slow or stop vision loss, is to lower
the intraocular pressure through pharmaceutical or surgical means. However, new studies suggest that many glaucoma patients do
not exhibit elevated intraocular pressure. Further, many patients who have displayed high intraocular pressure and have been treated
to lower the pressure, continue to lose vision. These trends have led clinicians and researchers to suggest that other mechanisms
of disease progression are occurring, one of which is mitochondrial dysfunction of optic nerve cells. The Company believes we
have a competitive advantage with GlaucoCetin because it is the first to market medical food specifically designed to offset the
mitochondrial dysfunction of cells in glaucoma patients.
Medical
Devices
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 has acquired
the exclusive rights to this patent, and its VectorVision CSV-2000 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 acquired the rights
to this patent. The Company’s new AcQviz device embodies this invention, which is now used in conjunction with the VectorVision
CSV-2000 device.
The
Company believes the CSV-1000 is the current standard of care for testing contrast sensitivity in clinical practice. The first
sale of the CSV-2000 was made in February 2020. 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 offer self-calibrated test lighting for vision testing. The self-calibrated test lighting technology for
both instruments is proprietary to the Company. The patented technology known as AcQviz, applies to the CSV-2000. It constantly
measures the luminance of the display monitor of the CSV-2000 and automatically 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 on the new CSV-2000. There can be no assurances that the marketing efforts will be successful, and sales of
the CSV-2000 will be comparable or exceed sales of the CSV-1000. The Company believes we have a competitive advantage because
of the unique and proprietary vision testing luminance standardization technologies employed by the CSV-1000 and CSV-2000. This
standardization has led to the publication of many research studies showing the accuracy of the contrast sensitivity testing protocol
used in both the CSV-1000 and CSV-2000, and to the publication of population normal ranges for contrast sensitivity. The Company
believes that there are no other devices with published normative values for contrast sensitivity.
Nutraceuticals
The
Company intends to build a portfolio, in addition to the current product line, of nutraceutical products under the NutriGuard
brand by developing or acquiring new condition-specific formulations. NutriGuard markets these products to patients directly through
direct-to-consumer (“DTC”) channels. The Company also intends to conduct research and publish papers demonstrating
the efficacy of the NutriGuard products, which the Company believes will also lead to distribution of products 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. Marketing initiatives
will include not only distribution through eye doctor recommendation, but also direct-to-consumer programs. The Company will also
explore acquiring other companies, product lines and intellectual property that may be complementary or supplementary as part
of its efforts to expand the business, which acquisitions could be for cash, stock or a combination thereof.
Sales
Force
The
Company plans to use a combination of digital strategies, virtual communication, direct-to-consumer campaigns and direct sales
activity with eye doctors to promote its products. At the end of 2020, the Company had two highly experienced sales personnel,
both Doctors of Naturopathy. During 2021, the Company intends to add sales team members in the field to conduct direct sales activities
for eye doctors, to perform virtual educational campaigns for practice follow-up with doctors and their staffs and to support
the direct-to-consumer campaigns. The Company also intends to initiate significant follow-on communication activity with patients
who have begun taking the nutritional products, to spur higher compliance and patient retention.
International
Expansion Strategy
The
Company intends to continue to pursue strategies for distribution of its existing products and unique nutritional formulations
in Asian markets. In the quarter ended March 31, 2020, the Company received its first order for a novel immune support product
from the Malaysian company, Ho Wah Genting Berhad “HWGB.” The order was subsequently delivered in the quarter ended
June 30, 2020. The total order value was $890,000. The Company also has several products under development for the U.S. market,
most notably a vision support and energy drink known as EPIQ-V, which the Company believes it may be successfully distributed
in Asia.
Ocular
Care
Based
on management’s knowledge of the industry, the Company believes that Lumega-Z and GlaucoCetin are the only medical foods
in the ocular health space. Thus, with regard to the ocular health market no such data is available regarding medical foods. In
an attempt to illustrate the market potential for Lumega-Z and GlaucoCetin, 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 the Council for Responsible Nutrition, 73% of adults in the
United States reported taking dietary supplements in 2020. According to Global Newswire, worldwide sales of supplements is estimated
to reach $230.73 billion by 2027. Supplementation has recently generated much interest among eye health professionals, due largely
to the publication of the AREDS study, which was supported by the prestigious US National Eye Institute, showing nutrition can
potentially slow 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 CDC, more than 3 million Americans are living with glaucoma, and this number is expected to rise to 6.3 million by
2050.
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According
to the American Glaucoma Society, glaucoma is the second leading cause of blindness and accounts for 9-12% of all cases of
blindness in the U.S.
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According
to BrightFocus Foundation, 11 million Americans have AMD, and the number is expected to double to nearly 22 million by 2050.
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According
to Am Fam Physician, one in three people in the U.S. over age 65 will develop some form of vision-reducing eye disease with
AMD being the top cause of critical vision loss and legal blindness.
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Worldwide
Statistics
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According
to Grand View Research, the “Global Medical Foods Market” was valued at $20.15 billion in 2020. North America
dominated the global market revenue with 29.9% of the 2020 total.
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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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A
meta-analysis by Tham et al. indicated that globally, the number of people with glaucoma was estimated to be 64.3 million
in 2013, increasing to 76.0 million in 2020 and projected to be 111.8 million in 2040.
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According
to Globe Newswire, the global glaucoma therapeutics market was valued at $6.59 billion in 2018 and is projected to reach $7.34
billion by 2026.
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According
to Daxue Consulting, in 2018, approximately 25 million elderly people had AMD in China.
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BrightFocus
Foundation has indicated that globally, 196 million people had AMD in 2020 and the number is expected to increase to 288 million
by 2040.
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In
2020, BrightFocus Foundation estimated the global cost of visual impairment due to AMD was $343 billion, including $255 billion
in direct health care costs. It further estimated 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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In
2020, BrightFocus Foundation estimated 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 estimated 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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Expert
Market Research indicates that the global market for AMD treatments was $1.58 billion in 2020 and is projected to reach $2.64
billion by 2026.
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According
to Sina and Daily Headlines, there are roughly 44,800 Ophthalmologists and 4,000 Optometrists in China, respectively.
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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 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 has primarily marketed Lumega-Z and GlaucoCetin to patients
through ophthalmologists and optometrists. In the U.S. alone, there are more than 19,216 ophthalmologists and over 44,000 optometrists
currently practicing. There are more than 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, as part of its efforts to directly target eye doctors
as part of its marketing strategies, 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.
As
noted earlier, these marketing efforts targeting eye doctors will be supplemented by a variety of direct-to-consumer campaigns
and the use of more efficient and cost-effective virtual strategies for educating and connecting with consumers.
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 and add the CSV-2000 to these marketing efforts. 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 Company
sold its first CSV-2000 in February of 2020 and sold two units for the year ended December 31,
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 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.
The
AcQviz technology, the basis for vision test standardization for the CSV-2000 product line, is protected by two ITUS patents.
The
formulations for Lumega-Z and GlaucoCetin have been submitted for US patent protection.
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 five U.S. registered trademarks on the principal register at the USPTO. These marks are listed below.
The Company has three 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 currently has common law trademark rights for the use of its marks, including common law trademark rights to
the NUTRIGUARD mark. Other trademarks include Lumega-Z, GlaucoCetin, VectorVision, CSV-1000 and CSV-2000.
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.
Products
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
Foods
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 foods, food additives, dietary supplements, GRAS
food components, new drugs, GRAS and Effective (“GRAS/E”) drugs for over the counter use, and GRAS/E drugs 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 is primarily responsible for regulating medical foods. A medical food is defined under the FDCA as a “food which is
formulated to be consumed or administered enterally 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. FDA regulations further describe medical foods as a product that: (i) 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) 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) 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) is intended to be used under medical supervision; and (v) 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.
Medical
foods do not require approval or review by FDA prior to marketing. FDA does not require pre-market safety or efficacy studies
(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 or condition.
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. The Company and its Scientific Advisory Board examine the distinctive nutritional
requirements of a disease.
The
labeling for medical foods must comply with all applicable food labeling requirements, except for those specific requirements
from which medical foods are exempt. Medical foods are exempt, for example, from the labeling requirements for nutrient content
claims and health claims under the Nutrition Labeling and Education Act of 1990 (see 21 U.S.C. 343(r)(5)(A)). As with 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.
All
ingredients in medical foods must be either generally recognized as safe (GRAS) or approved food-additives. 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. Because medical foods are typically taken with prescription drugs, the developer must assess whether any
medical food/drug interactions pose a risk.
Medical
foods manufacturers must register with FDA pursuant to the Bioterrorism Act before producing foods. Manufacturers of foods also
must follow current Good Manufacturing Practice (“cGMP”) regulations. Entities that manufacture, package, label or
hold food products must follow applicable cGMP regulations. These regulations focus on practices that ensure sanitary and cleanly
conditions of manufacturing facilities. The Company engages contract manufacturers to manufactures its medical foods. .
The
Federal Trade Commission has primarily responsibility to regulate the advertising of foods, including medical foods. Under the
FTC Act, all advertising claims, both express and implied, must be truthful, non-misleading, and substantiated.
Enforcement
by the regulators is post-market, mostly via FDA inspections of food facilities, including packaging, distribution facilities,
and fulfillment houses, as well as the manufacturer. The FDA and FTC also gathers material at trade shows and conferences and
examine websites.
Nutraceutical
Regulation
The
FDA regulates nutraceuticals as “dietary supplements” under the Dietary Supplement, Health and Education Act of 1994
(“DSHEA”) as a separate regulatory category of food. 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.
Dietary
supplement manufacturers must register with FDA pursuant to the Bioterrorism Act before producing supplements. Manufacturers of
dietary supplements also must follow current Good Manufacturing Practice (“cGMP”) regulations. Entities that manufacture,
package, label or hold dietary supplement products must follow applicable cGMP regulations. 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.
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 may be 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.” A new dietary ingredient is an ingredient marketed after October 15, 1994. The manufacturer
must demonstrate to FDA that the new ingredient is reasonably expected to be safe for use in a dietary supplement. There is no
authoritative list of dietary ingredients that were marketed before October 15, 1994. Therefore, manufacturers are responsible
for determining if a dietary ingredient is “new.”
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 must meet all applicable regulations for food labeling. The DSHEA also requires certain disclaimers if structure/function
or other health claims are made on the product label.
Medical
Device Regulatory Requirements
To
fall within the purview of the FDA, a product must first meet the definition of a “device” under the FDCA.. 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.”
FDA
categorizes medical devices in three distinct classes based on the potential health risks to the public – Class I, Class
II, and Class III. Device classifications are determined by the FDA based on the risk the medical device presents to the patient
and the level of regulatory control required to ensure the safety and effectives of the device. Medical devices are classified
as Class I, II or III based upon the controls necessary to provide a reasonable assurance of the safety and effectiveness of the
device, and factors relevant to this determination include the device’s intended use, technological characteristics, and
the risk to patients if the device were to fail. Class I devices, which are subject only to general controls, generally represent
the lowest-risk category of devices, while Class III devices, which are subject to general controls and premarket approval, generally
represent the highest-risk devices. Class II devices typically require premarket notification to FDA and clearance under Section
510(k) of the FDCA prior to marketing (unless an exemption applies).
The
FDA also regulates the labeling and manufacturing of medical devices. Medical device manufacturers must register the facilities
and list their devices with the FDA. Manufacturers are subject the current good manufacturing practice (cGMP) regulations, which
govern activities such as the design, processing, testing, packaging, distribution, and storage of devices. Manufacturers are
subject to periodic inspection by the FDA.
While
the FDA governs the labels and labeling of medical devices, the FTC governs the advertising of most devices. Under the FTC Act,
all advertising claims, both express and implied, must be truthful, non-misleading, and substantiated.
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
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 and does not require any premarket approval.
VectorVision
is registered with the FDA as a medical device manufacturer under registration number 1527853. The CSV-1000, CSV-2000 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, CSV-2000 and the ESV-3000
devices do not require 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.
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.
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 foods, Lumega-Z and GlaucoCetin, and medical device, the MapcatSF; and (2) the Company’s performance
of TCD testing.
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.
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 its medical devices, 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
was 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 put in place a fraud and abuse compliance program that was designed to ensure that
the Company’s documentation, coding and billing for TCD tests were 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 food and medical devices 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, product design, manufacturing, labeling, product registration and approval, and sales. Whether or not FDA approval
has been obtained, generally the Company must obtain separate authorization 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 authorization or approval process varies from country to country.
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.
Reverse Stock Split
On
March 1, 2021, 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-six (1:6) 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
and Human Capital Resources
As
of March 25, 2021, we had 13 full-time employees, including 12 full-time employees and one part-time
employee. We consider our relationship with our employees to be good. Our future performance depends significantly upon the
continued service of our key personnel and our ability to attract highly skilled employees. We provide our employees with opportunities
for equity ownership.
Advisory
Boards
The
Company’s research and development efforts are assisted 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 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 and management 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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RISK
FACTORS SUMMARY
Our
business is subject to significant risks and uncertainties that make an investment in us speculative and risky. Below we summarize
what we believe are the principal risk factors, but these risks are not the only ones we face, and you should carefully
review and consider the full discussion of our risk factors in the section titled “Risk Factors”, together with the
other information in this Annual Report on Form 10-K. If any of the following risks actually occurs (or if any of those listed
elsewhere in this Annual Report on Form 10-K occur), our business, reputation, financial condition, results of operations, revenue,
and future prospects could be seriously harmed. Additional risks and uncertainties that we are unaware of, or that we currently
believe are not material, may also become important factors that adversely affect our business.
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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.
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The
COVID-19 global pandemic could adversely impact our business, including the commercialization of our medicines, our supply
chain, our clinical trials, our liquidity and access to capital markets and our business development activities.
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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.
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Our
stock price has fluctuated significantly in the past, has recently been volatile and may be volatile in the future,
and as a result, investors in our common stock could incur substantial losses.
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Additional
risks and uncertainties include:
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Our
ability to integrate a new management team;
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Our
ability to comply with the continued listing requirements of the Nasdaq Capital Market;
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Our
ability to successfully pursue our business plan and execute our strategy, design and implement systems and programs to
develop products and deliver to market on a timely basis; and
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The
effect of economic and political conditions in the United States or other nations that could impact our ability to sell our
products and services or gain customers.
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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 reach and sustain profitability. If it cannot, the Company will be required to secure 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 $8,571,657 for the year ended December 31, 2020 and a net loss
of $10,878,308 for the year ended December 31, 2019. The Company had an accumulated deficit of $54,083,328 as of December 31,
2020. The Company expects to continue to incur net losses and negative operating cash flows in the near-term. At December 31,
2020, the Company had cash on hand of $8,518,732 and working capital of $8,021,152. Subsequent to December 31, 2020, the Company
sold an aggregate of 7,566,733 shares of its common stock for net proceeds of approximately $33,600,000 in two offerings,
one completed in January 2021, and one completed in February 2021. In addition, in January and February 2021, the
Company issued an aggregate of 1,647,691 shares of common stock upon the exercise of warrants and received cash proceeds
of $3,608,509. Notwithstanding the net loss for 2020, management believes that its current cash balance, plus the net
proceeds from issuance of common stock and exercise of warrants in January and February 2021, is sufficient to fund operations
for at least one year from the date the Company’s 2020 financial statements are issued.
The
Company will continue to incur significant expenses related to commercialization of its products and with respect to efforts to
build its infrastructure, expand its operations, and execute on its business plans. The Company may also utilize cash to fund
acquisitions.
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 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
COVID-19 global pandemic could adversely impact our business, including the commercialization of our medicines, our supply chain,
our clinical trials, our liquidity and access to capital markets and our business development activities.
On
March 11, 2020, the World Health Organization made the assessment that a novel strain of coronavirus, which causes the COVID-19
disease, can be characterized as a pandemic. The President of the United States declared the COVID-19 pandemic a national emergency
and many states and municipalities in the Unites States have announced aggressive actions to reduce the spread of the disease,
including limiting non-essential gatherings of people, ceasing all non-essential travel, ordering certain businesses and government
agencies to cease non-essential operations at physical locations and issuing “shelter-in-place” orders which direct
individuals to shelter at their places of residence (subject to limited exceptions). The effects of government actions and our
policies and those of third parties to reduce the spread of COVID-19 may negatively impact productivity and our ability to market
and sell our products, cause disruptions to our supply chain and impair our ability to execute our business development strategy.
These and other disruptions in our operations and the global economy could negatively impact our business, operating results and
financial condition.
The
commercialization of our products may be adversely impacted by COVID-19 and actions taken to slow its spread. For example, patients
may postpone visits to healthcare provider facilities, certain healthcare providers have temporarily closed their offices or are
restricting patient visits, healthcare provider employees may become generally unavailable and there could be disruptions in the
operations of payors, distributors, logistics providers and other third parties that are necessary for our products to be recommended
and administered to patients.
Quarantines,
shelter-in-place and similar government orders, or the perception that such orders, shutdowns or other restrictions on the conduct
of business operations could occur, related to COVID-19 or other infectious diseases could impact personnel at third-party manufacturing
facilities upon which we rely, or the availability or cost of materials, which could disrupt the supply chain for our products.
The
spread of COVID-19 and actions taken to reduce its spread may also materially affect us economically. As a result of the COVID-19
pandemic and actions taken to slow its spread, the global credit and financial markets have recently experienced extreme volatility
and disruptions, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic
growth, increases in unemployment rates and uncertainty about economic stability. If the equity and credit markets continue to
deteriorate, it may make any additional debt or equity financing more difficult, more costly or more dilutive. While the potential
economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, there could be a significant
disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our
liquidity and financial position or our business development activities.
COVID-19
continues to rapidly evolve. The extent to which COVID-19 may impact the commercialization of our products, our supply chain,
our access to capital and our business development activities, will depend on future developments, which are highly uncertain
and cannot be predicted with confidence, such as the ultimate geographic spread of the pandemic, the duration of the pandemic
and the efforts by governments and business to contain it, business closures or business disruptions and the impact on the economy
and capital markets.
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, nutraceuticals, 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. The
Company cannot assure you that it is possible to successfully commercialize the MapcatSF. The Company launched the CSV-2000 in
Q1 2020, 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. 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 with oversight of various aspects of product
manufacture, distribution, sale, and use. The regulations are very complex, have become more stringent over time, and are subject
to changing and varying interpretations. Regulatory restrictions or changes could limit our ability to carry on or expand our
operations or result in higher than anticipated costs or lower than anticipated sales. The FDA and other federal and state governmental
agencies regulate numerous elements of our business, including:
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Product
design and development;
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pre-clinical
and clinical testing;
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labeling,
and storage;
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establishment
registration and product listing;
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product
safety, including product recalls or other field-safety actions;
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marketing,
manufacturing, sales, and distribution;
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premarket
clearance or approval;
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record
keeping procedures;
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advertising
and promotion;
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post-market
surveillance, including reporting of adverse events; and
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product
import and export.
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We
may be subject to similar foreign laws that govern all of the above elements of our business, including pre-market and post marketing
obligations for our medical foods and nutraceuticals. The time required to obtain authorization to sell our products in foreign
countries may be longer or shorter than that required by the FDA, and requirements for licensing a product in a foreign country
may differ significantly from FDA requirements. In the European Union (EU), member states are responsible for enforcing the EU’s
rules and for ensuring that only compliant products are placed on the market in their jurisdictions. Member states have powers
to suspend the marketing and use, or demand the recall, of unsafe or non-compliant medical products. They also have the power
to bring enforcement action against companies or individuals for breaches of the rules governing certain medical products.
The
FDA, states, and other regulatory authorities have broad enforcement powers. Failure to comply with applicable regulatory requirements
could result in enforcement action by the FDA, state, or regulatory authorities, which may include the following:
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untitled
letters or warning letters;
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fines,
disgorgement, restitution, or civil penalties;
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injunctions
(e.g., total or partial suspension of production) or consent decrees;
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product
recalls, administrative detention, or seizure;
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customer
notifications or repair, replacement, or refunds;
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operating
restrictions or partial suspension or total shutdown of production;
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delays
in or refusal to grant requests for future product approvals, new intended uses, or modifications to existing products; and
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criminal
prosecution.
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Any
of these sanctions could result in higher than anticipated costs or lower than anticipated sales and have a material adverse effect
on our reputation, business, financial condition, and results of operations.
Foods
and nutraceuticals do not require premarket approval by FDA before they may be distributed in the United States (with limited
exceptions). Unless an exemption applies, medical devices distributed in the United States must receive either premarket clearance
under Section 510(k) of the FDCA, grant of a de novo classification request, or premarket approval of a premarket application
before they may be commercially distributed. Medical devices are classified into one of three classes - Class I, Class II, or
Class III - depending on the degree of risk associated with the device and the extent of control needed to ensure safety and effectiveness.
Medical devices deemed to pose relatively low risk are placed in Class I, which generally do not require premarket notification
or premarket approval.
In
the US, the FDA and Federal Trade Commission (FTC) largely govern the promotion of food, supplements, and medical devices, and
the Company’s products must be promoted in compliance with the laws and regulations of these and other regulators. FDA defines
a “drug” as an article that is intended for use in the cure, treatment, prevention or mitigation of a disease. A medical
food is defined as “a food which is formulated to be consumed or administered enterally 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.” 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.
The
Company believes the MapcatSF is classified as a Class I medical device that does not require premarket approval. The Company
also believes the CSV-2000 is a Class I medical device that does not require premarket approval. If, however, the FDA were to
determine that the MapcatSF or CSV-2000 is a Class II medical device, the products would be subject to additional regulatory requirements,
including premarket approval.
The
NutriGuard line of products are nutraceuticals and are regulated as dietary supplements under the Dietary Supplement, Health and
Education Act of 1994 (“DSHEA”). DSHEA places dietary supplements in a special regulatory category under the general
umbrella of “foods,” with differing requirements from consumer food products and medical foods. Dietary supplements
are supposed to enhance the diet and not be represented as a conventional food or as the sole item of a meal or diet. Nutraceuticals
are not intended to cure or treat disease, but they may be 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 product claims; product claims are not approved by FDA. Dietary supplements also
are subject to the Nutrition, Labeling and Education Act (“NLEA”), which regulates health claims, ingredient labeling
and nutrient content claims characterizing the level of a nutrient in a product.
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.
If
we or our third-party manufacturers fail to comply with the FDA’s good manufacturing practice regulations or fail to adequately,
timely, or sufficiently respond to an FDA Form 483 or subsequent Warning Letter, this could impair our ability to market our products
in a cost-effective and timely manner and could result in FDA enforcement action.
The
FDA requires facilities that manufacture FDA-regulated products to comply with cGMP regulations, which cover the methods and documentation
of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of our product. The
Company does not manufacture any of its products internally and instead relies on contract manufacturers to manufacture its products.
We and our third-party manufacturers are required to comply with cGMP. The FDA audits compliance with cGMP and related regulations
through periodic announced and unannounced inspections of manufacturing and other facilities. The FDA may conduct these inspections
at any time.
The
Company may be subject to fines, penalties, injunctions or other administrative actions if it is deemed to be promoting its nutritional
or medical foods products as a drug, or if it’s using false or misleading claims in its promotional materials.
The
Company’s business and future growth depend on the development, use and ultimate sale of products that are subject to FDA
regulation. Under the U.S. Federal Food, Drug, and Cosmetic Act and other laws, the Company is prohibited from promoting its nutritional
and medical foods products for treatment of a condition or disease. Our promotional materials and marketing activities must comply
with FDA and other applicable laws and regulations, including laws and regulations prohibiting marketing claims that promote the
off-label use of our products or that make false or misleading statements. FDA also could conclude that a performance claim is
misleading if it determines that there are inadequate non-clinical and/or clinical data supporting the claim.
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,
or that our promotional materials include false or misleading statements. 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. The Company also may have to remove a commercialized product from the market
as consequence of serious adverse events associated with the product. Any serious adverse or undesirable side effects identified
during the development of the Company’s 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.
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, nutraceuticals 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 continue 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.
We
now sell our products to customers outside the U.S. and we intend to continue expansion of our international operations. As a
result, our business is increasingly exposed to risks inherent in international operations. These risks, which can vary substantially
by location, include the following:
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governmental
laws, regulations and policies adopted to manage national economic and macroeconomic conditions, such as increases in taxes,
austerity measures that may impact consumer spending, monetary policies that may impact inflation rates, currency fluctuations
and sustainability of resources;
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changes
in environmental, health and safety regulations, such as the continued implementation of the European Union’s REACH
regulations and similar regulations that are being evaluated and adopted in other markets, and the burdens and costs of our
compliance with such regulations;
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increased
environmental, health and safety regulations or the loss of necessary environmental permits in certain countries, arising
from growing consumer sensitivity concerning the inclusion of flavor additives in food products and the fact that regulators
perceive nutraceuticals, medical foods and functional food products as having medicinal attributes;
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the
imposition of or changes in tariffs, quotas, trade barriers, other trade protection measures and import or export licensing
requirements, by the U.S. or other Countries, which could adversely affect our cost or ability to import raw materials or
export our flavors and fragrance products to surrounding markets;
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risks
and costs arising from language and cultural differences;
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changes
in the laws and policies that govern foreign investment in the countries in which we operate, including the risk of expropriation
or nationalization, and the costs and ability to repatriate the profit that we generate in these countries;
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risks
and costs associated with political and economic instability, bribery and corruption, anti-American sentiment, and social
and ethnic unrest in the countries in which we operate;
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difficulty
in recruiting and retaining trained local personnel;
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natural
disasters, pandemics or international conflicts, including terrorist acts, or national and regional labor strikes in the countries
in which we operate, which could interrupt our operations or endanger our personnel; or
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the
risks of operating in developing or emerging markets in which there are significant uncertainties regarding the interpretation,
application and enforceability of laws and regulations and the enforceability of contract rights and intellectual property
rights.
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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 applicable 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 and dietary supplements 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”). Manufactures of medical devices also are required to be registered with the FDA.
Manufacturers of FDA-regulated products are subject to periodic inspection by the FDA and state health authorities. The manufacture
of our nutraceuticals, medical foods, and devices 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
products have not been reviewed by the FDA. There is no certainty that the FDA will favorably review our 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, 2020 and 2019, the Company’s billings were derived from a limited number of individual customers
and distributors. During the year ended December 31, 2020, the Company had one customer who accounted for approximately
47% of the Company’s sales; and during the year ended December 31, 2019, the Company had one customer who
accounted for approximately 22% of the Company’s sales. 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
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 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.
In
September 2020, California enacted AB 979, which requires that by the end of 2021 California-headquartered public companies have
at least one director on their boards who is from an underrepresented community, defined as “an individual who self-identifies
as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or
who self-identifies as gay, lesbian, bisexual, or transgender.”
In
addition to that initial 2021 requirement, the law mandates that the number of directors from underrepresented communities be
increased by the end of calendar year 2022, depending on the size of the board.
In
addition, NASDAQ has proposed to adopt new listing rules related to board diversity and disclosure. If approved by the SEC, the
new listing rules would require all companies listed on Nasdaq’s U.S. exchanges to publicly disclose consistent, transparent
diversity statistics regarding their board of directors. Additionally, the rules would require most Nasdaq-listed companies to
have, or explain why they do not have, at least two diverse directors, including one who self-identifies as female and one who
self-identifies as either an underrepresented minority or LGBTQ+.
Failure
to achieve designated minimum gender and diversity 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
and diversity quotas as a result of the California laws or future NASDAQ rules, which may expose us to penalties and/or reputational
harm.
Our
acquisition strategy involves a number of risks.
We
are regularly engaged in acquisition discussions with other companies and anticipate that one or more potential acquisition opportunities,
including those that would be material or could involve businesses with operating characteristics that differ from our existing
business operations, may become available in the near future. If and when appropriate acquisition opportunities become available,
we intend to pursue them actively. Acquisitions involve a number of special risks, including:
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failure of the acquired business to achieve expected results, as well as the potential impairment of the acquired assets if
operating results decline after acquisition;
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diversion of management’s attention;
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additional financing, if necessary and available, which could increase leverage and costs, dilute equity, or both;
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the potential negative effect on our financial statements from the increase in goodwill and other intangibles;
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difficulties in integrating the operations, systems, technologies, products and personnel of acquired companies;
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initial dependence on unfamiliar supply chains or relatively small supply partners;
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the potential loss of key employees, customers, distributors, vendors and other business partners of the companies we acquire
after the acquisition;
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the high cost and expenses of identifying, negotiating and completing acquisitions; and
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risks associated with unanticipated events or liabilities.
These
risks could have a material adverse effect on our business, results of operations and financial condition. We have faced, and
expect to continue to face, intense competition for acquisition candidates, which may limit our ability to make acquisitions and
may lead to higher acquisition prices. We cannot assure you that we will be able to identify, acquire or manage profitably any
acquisition opportunity.
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 Alabama, Alaska, 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
Malaysia 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.
For distribution of products in Malaysia,
China and throughout Asia, our nutritional compounds are affected by the regulatory agencies in each country. Each country has
unique requirements related to the amount of ingredients allowed in the product and the labelling of each product. We believe
that by obtaining regulatory approval in advance of marketing and distribution in each country, we will be protected from these
regulatory restrictions affecting our ongoing operations. However, many factors can affect our ability to maintain compliance
that are out of our control, including the availability of approved ingredients and sudden changes in regulatory restrictions
imposed by each country.
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 (including in Malaysia) 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.
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.
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 our sale of medical foods.
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.
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 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 two of the Company’s lines of business: (1) sale of the Company’s medical foods and (2) sale
of the Company’s medical devices.
Medical
foods and medical devices 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.
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 two of the Company’s lines of business: (1) sale
of the Company’s medical foods, and (2) sale of the Company’s 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.
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 (April 2019), 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.
Our
stock price has fluctuated in the past, has recently been volatile and may be volatile in the future, and as a result, investors
in our common stock could incur substantial losses.
Our
stock price has fluctuated in the past, has recently been volatile and may be volatile in the future. Additionally, over the course
of the past year, our shareholder base has increased in size due to the prevalence of new platforms and ease of access to stock
trading brought on by new technologies. We may incur rapid and substantial increases or decreases in our stock price in the foreseeable
future that are unrelated to our operating performance or prospects. In addition, the recent outbreak of the novel strain of coronavirus
(COVID-19) has caused broad stock market and industry fluctuations. The stock market in general and the market for biotechnology
and pharmaceutical companies in particular have experienced extreme volatility that has often been unrelated to the operating
performance of particular companies. As a result of this volatility, investors may experience losses on their investment in our
common stock. The market price for our common stock may be influenced by many factors, including the following:
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investor
reaction to our business strategy;
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investor reaction to our acquisition strategy;
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the
success of competitive products or technologies;
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our
continued compliance with the listing standards of NASDAQ;
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regulatory
or legal developments in the United States and other countries, especially changes in laws or regulations applicable to our
products;
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actions
taken by regulatory agencies with respect to our products, manufacturing process or sales and marketing terms;
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variations
in our financial results or those of companies that are perceived to be similar to us;
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the
success of our efforts to acquire or in-license additional products or product candidates;
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developments
concerning our collaborations or partners;
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declines
in the market prices of stocks generally;
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trading
volume of our common stock;
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sales
of our common stock by us or our stockholders;
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general
economic, industry and market conditions; and
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other
events or factors, including those resulting from such events, or the prospect of such
events, including war, terrorism and other international conflicts, public health issues including health epidemics or pandemics,
such as the recent outbreak of the novel coronavirus (COVID-19), and natural disasters such as fire, hurricanes, earthquakes,
tornados or other adverse weather and climate conditions, whether occurring in the United States or elsewhere, could disrupt
our operations, disrupt the operations of our suppliers or result in political or economic instability; and
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These
broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance.
Further, recent increases are inconsistent with any improvements in actual or expected operating performance, financial condition
or other indicators of value. Since the stock price of our common stock has fluctuated in the past, has been recently volatile
and may be volatile in the future, investors in our common stock could incur substantial losses. In the past, following periods
of volatility in the market, securities class-action litigation has often been instituted against companies. Such litigation,
if instituted against us, could result in substantial costs and diversion of management’s attention and resources, which
could materially and adversely affect our business, financial condition, results of operations and growth prospects. There can
be no guarantee that our stock price will remain at current prices or that future sales of our common stock will not be at prices
lower than those sold to investors.
Additionally,
recently, securities of certain companies have experienced significant and extreme volatility in stock price due short sellers
of shares of common stock, known as a “short squeeze.” These short squeezes have caused extreme volatility in those
companies and in the market and have led to the price per share of those companies to trade at a significantly inflated rate that
is disconnected from the underlying value of the company. Many investors who have purchased shares in those companies at an inflated
rate face the risk of losing a significant portion of their original investment as the price per share has declined steadily as
interest in those stocks have abated. While we have no reason to believe our shares would be the target of a short squeeze, there
can be no assurance that we won’t be in the future, and you may lose a significant portion or all of your investment if
you purchase our shares at a rate that is significantly disconnected from our underlying value.
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 may require additional capital in the future to support its operations, and this capital has not always been readily available.
We
may 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;
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raise
sufficient funds in the capital markets to effectuate our business plan; and
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identify,
acquire or successfully integrate any acquisition candidate.
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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.
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.
Maintaining
effective internal control over financial reporting and effective
disclosure controls and procedures are necessary for us to produce reliable financial statements. As discussed in
Item 9A – “Controls and Procedures” of this Form 10-K, we have re-evaluated our internal control
over financial reporting and our disclosure controls and procedures and concluded that they were not effective as of December
31, 2020.
A material weakness is defined as a
deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable
possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected
on a timely basis. The material weakness we identified was inadequate segregation of duties within accounting processes.
The Company is committed to remediating
its material weaknesses as promptly as possible. Implementation of the Company’s remediation plans has commenced
and is being overseen by the audit committee. However, there can be no assurance as to when these material
weaknesses will be remediated or that additional material weaknesses will not arise in the future. Even effective
internal control can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements.
Any failure to remediate the material weaknesses, or the development of new material weaknesses in our internal control over
financial reporting, could result in material misstatements in our financial statements, which in turn could have a material
adverse effect on our financial condition and the trading price of our common stock and we could fail to meet our
financial reporting obligations.
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, we received notice from the Listing Qualifications staff (the “Staff”) of The Nasdaq Stock
Market LLC (“Nasdaq”) indicating that, based upon the closing bid price of the Company’s common stock for the
previous 30 consecutive business days, the Company no longer satisfied the requirement to maintain a minimum bid price of $1.00
per share, as required by Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”).
In
accordance with the Nasdaq Listing Rules, the Company was afforded 180 days, or until March 18, 2020, to regain compliance with
the Bid Price Rule by evidence of a closing bid price of at least $1.00 per share for a minimum of 10 consecutive business days.
Thereafter, the Company had been afforded a second 180-calendar day compliance period (which 180-day period was extended due to
circumstances related to COVID-19), or until November 30, 2020, to regain compliance with the Bid Price Rule.
The Company was unable to regain compliance with the Bid Price Rule
by November 30, 2020. Accordingly, on December 1, 2020, the Company received a letter from the Staff notifying it that its Common
Stock would be subject to delisting from Nasdaq unless the Company timely appealed Nasdaq’s determination to a Nasdaq Listing
Qualifications Panel (the “Panel”). The Company timely appealed Nasdaq’s determination to the Panel.
On
January 26, 2021, the Company received written notification that the Panel granted the Company an extension for continued listing
through March 15, 2021.
On
March 1, 2021, 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-six (1:6) 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.
On
March 15, 2021, we received a letter from the Staff notifying us that we had regained compliance with the Bid Price Rule. The
letter stated the staff had determined that for the prior 10 consecutive business days the closing bid price of the Company’s
common stock had been at $1.00 per share or greater and that accordingly, the Company had regained compliance under the Bid Price
Rule, and that the matter was now closed.
If
we fail to satisfy the continued listing requirements of Nasdaq in the future, including the Bid Price Rule, 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; and
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regulatory
developments;
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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.
ITEM
1B. UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM
2. PROPERTIES
The
Company’s address is 15150 Avenue of Science, Suite 200, San Diego, California 92128. The Company’s corporate offices
are rented under a five-year lease for approximately 9,605 square feet of space at a current rental of $12,336 per month. We believe
these facilities will be adequate for our needs during the foreseeable future.
In
connection with the VectorVision acquisition, the Company assumed a lease agreement for 5,000 square feet of office and warehouse
space in Greenville Ohio which commenced October 1, 2017 through February 2023.
ITEM
3. LEGAL PROCEEDINGS
The
Company is periodically the subject of various pending or threatened legal actions and claims arising out of its operations in
the normal course of business. Regardless of the outcome, such proceedings or claims can have an adverse impact on the Company
because of defense and settlement costs, diversion of resources and other factors, and there can be no assurances that favorable
outcomes will be obtained. As of March 25, 2021, the Company is not subject to any such proceedings or claims.
ITEM
4. MINE SAFETY DISCLOSURES
Not
applicable.
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2020 and 2019
1.
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Business
and Summary of Significant Accounting Policies
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Business
Guardion
Health Sciences, Inc. (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. The Company has been primarily engaged in research and development, product commercialization
and capital raising activities.
The
Company was formed in December 2009 as a California limited liability company under the name P4L Health Sciences, LLC. On June
30, 2015, the Company converted from a California limited liability company to a Delaware corporation, changing its name from
Guardion Health Sciences, LLC to Guardion Health Sciences, Inc.
Liquidity
The
accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the settlement of liabilities and commitments in the normal course of business. For the year ended December 31,
2020, the Company incurred a net loss of $8,571,657 and used cash in operating activities of $8,013,929. At December 31, 2020,
the Company had cash on hand of $8,518,732 and working capital of $8,021,152. Subsequent to December 31, 2020, the Company sold
an aggregate of 7,566,734 shares of its common stock for net proceeds of approximately $33,600,000 in two offerings, one
completed in January 2021, and one completed in February 2021. In addition, in January and February 2021, the Company
issued an aggregate of 1,647,691 shares of common stock upon the exercise of warrants and received cash proceeds of
$3,608,509. Notwithstanding the net loss for 2020, management believes that its current cash balance, plus net proceeds from
issuance of common stock and exercise of warrants in January and February 2021, is sufficient to fund operations for at least
one year from the date the Company’s 2020 financial statements are issued.
The
Company expects to continue to incur net losses and negative operating cash flows in the near-term, and will continue to incur
significant expenses for development and commercialization of its medical foods and medical devices, and the successful development
and commercialization of any new products or product lines. The Company may also utilize cash to fund acquisitions.
The
Company may seek to raise additional debt and/or equity capital to fund future operations, but there can be no assurances that
the Company will be able to secure such additional financing in the amounts necessary to fully fund its operating requirements
on acceptable terms or at all. Over time, if the Company is unable to access sufficient capital resources on a timely basis,
the Company may be forced to reduce or discontinue its technology and product development programs and curtail or cease operations.
COVID-19
The
Company is subject to risks and uncertainties of the COVID-19 pandemic that could adversely impact our business, including the
commercialization of our medicines, our supply chain, our clinical trials, our liquidity and access to capital markets and our
business development activities. The Company has implemented additional health and safety precautions and protocols in response
to the pandemic and government guidelines, including curtailing employee travel and working from its executive offices, with many
employees continuing their work remotely. During 2020, sales of certain products remained flat, as many eye doctor offices were
closed, or operating with limited capacity, due to COVID-19 related “shelter at home” orders. During 2020, we did
not experience a jeopardization of our supply chain due to the COVID-19 outbreak.
The
extent of the impact of the COVID-19 pandemic has had and will continue to have on the Company’s business is highly uncertain
and difficult to predict and quantify. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s
business, results of operations and financial condition, will depend on future developments that are highly uncertain, including
as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat it, including
vaccination efforts, as well as the economic impact on local, regional, national and international markets.
NASDAQ
Notice and Compliance
On September 20, 2019, the Company received
notice from the Listing Qualifications staff (the “Staff”) of The Nasdaq Stock Market LLC (“Nasdaq”)
indicating that, based upon the closing bid price of the Company’s common stock for the previous 30 consecutive
business days, the Company no longer satisfied the requirement to maintain a minimum bid price of $1.00 per share, as
required by Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”). In accordance with the Nasdaq Listing Rules,
the Company was afforded 180 days, or until March 18, 2020, to regain compliance with the Bid Price Rule by evidence of a closing
bid price of at least $1.00 per share for a minimum of 10 consecutive business days. Thereafter, the Company had been afforded
a second 180-calendar day compliance period (which 180-day period was extended due to circumstances related to COVID-19), or until
November 30, 2020, to regain compliance with the Bid Price Rule.
The Company was unable to regain compliance
with the Bid Price Rule by November 30, 2020. Accordingly, on December 1, 2020, the Company received a letter from the Staff notifying
it that its Common Stock would be subject to delisting from Nasdaq unless the Company timely appealed Nasdaq’s determination
to a Nasdaq Listing Qualifications Panel (the “Panel”). The Company timely appealed Nasdaq’s determination to
the Panel.
On January 26,
2021, the Company received written notification that the Panel granted the Company an extension for continued listing through
March 15, 2021.
On March 1, 2021,
the Company implemented the Reverse Stock Split (as defined below).
On March 15, 2021,
the Company received a letter from the Staff notifying it that it had regained compliance with the Bid Price Rule. The letter
stated the staff had determined that for the prior 10 consecutive business days, from March 1, 2021 to March 12, 2021, the closing
bid price of the Company’s common stock had been at $1.00 per share or greater and that accordingly, the Company had regained
compliance under the Bid Price Rule, and that the matter was closed.
Reverse
Stock Splits
On January 30, 2019, following stockholder
and board approval, the Company effected a 1-for-2 reverse split of its outstanding shares of common stock,
without any change to its par value. The authorized number of shares of common stock were not affected by the reverse
stock split. No fractional shares were issued in connection with the reverse stock split, as all fractional shares
were rounded up to the next whole share.
On March 1, 2021, following stockholder
and board approval, the Company effectuated a 1-for-6 reverse split of its outstanding shares of common stock, without any change
to its par value. The authorized number of shares of common stock were not affected by the reverse stock split. No fractional
shares were issued in connection with the reverse stock split, as all fractional shares were rounded up to the next whole
share.
Accordingly, all share and per share
amounts presented herein with respect to common stock have been retroactively adjusted to reflect the above described reverse
stock splits for all periods presented.
Basis of
presentation
The Company has
prepared its consolidated financial statements in accordance with accounting practices generally accepted in the United States
(“U.S. GAAP”) and has adopted accounting policies and practices which are generally accepted in the industry in which
it operates. The Company’s significant accounting policies are summarized below.
Principles
of consolidation
The
consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, VectorVision Ocular Health,
Inc., NutriGuard Formulations, Inc., and Transcranial Doppler Solutions, Inc. All intercompany balances and transactions have
been eliminated in consolidation.
Use
of Estimates
The
preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America
(“GAAP”) requires management to make certain estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Actual results could differ from
those estimates. On an ongoing basis, management reviews its estimates and if deemed appropriate, those estimates are adjusted.
Significant estimates include those related to assumptions used in valuing inventories at net realizable value, assumptions used
in valuing assets acquired in business acquisitions, impairment testing of goodwill and other long-term assets, assumptions used
in valuing stock-based compensation, the valuation allowance for deferred tax assets, accruals for potential liabilities, and
assumptions used in the determination of the Company’s liquidity. Actual results could differ from those estimates.
Revenue
Recognition
The
Company generates its revenue from two business segments:
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Medical
Foods and Nutraceuticals Segment
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Medical
Devices Segment
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The
Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts
with Customers. Revenue is recognized when control of promised goods or services is transferred to the customer in an amount
that reflects the consideration to which the Company expects to be entitled in exchange for those products or services. The Company
reviews its sales transactions to identify contractual rights, performance obligations, and transaction prices, including the
allocation of prices to separate performance obligations, if applicable.
All
products sold by the Company are distinct individual products and are offered for sale as finished goods only, and there are no
performance obligations required post-shipment for customers to derive the expected value from them. Contracts with customers
contain no incentives or discounts that could cause revenue to be allocated or adjusted over time.
Shipping
and handling activities are performed before the customer obtains control of the goods and therefore represent a fulfillment activity
rather than a promised service to the customer. Payments for sales of medical foods and dietary supplements are generally made
by approved credit cards. Payments for medical device sales are generally made by check, credit card, or wire transfer. Historically
the Company has not experienced any significant payment delays from customers.
The
Company provides a 30-day right of return to its retail customers. A right of return does not represent a separate performance
obligation, but because customers are allowed to return products, the consideration to which the Company expects to be entitled
is variable. Upon evaluation of historical product returns, the Company determined that less than one percent of products is returned,
and therefore believes it is probable that such returns will not cause a significant reversal of revenue in the future. Due to
the insignificant amount of historical returns as well as the standalone nature of the Company’s products and assessment
of performance obligations and transaction pricing for the Company’s sales contracts, the Company does not currently maintain
a contract asset or liability balance at this time. The Company assesses its contracts and the reasonableness of its conclusions
on a quarterly basis.
Revenues
by segment:
|
|
Years
Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Medical Foods and Nutraceuticals
|
|
$
|
1,609,482
|
|
|
$
|
444,657
|
|
Medical Devices
|
|
|
275,862
|
|
|
|
434,010
|
|
Other
|
|
|
4,500
|
|
|
|
24,270
|
|
|
|
$
|
1,889,844
|
|
|
$
|
902,937
|
|
During the year ended
December 31, 2020, the Company recorded a sale to the Malaysian company of approximately $890,000. The remainder of
the Company’s Medical Foods and Nutraceuticals revenues earned during the year ended December 31, 2020 are derived from
individual retail customers in North America. During the year ended December 31, 2019, all the Company’s Medical Foods
and Nutraceuticals revenues are derived from individual retail customers in North America. Medical Devices revenues are derived
from a worldwide customer base consisting of both retail customers and distributors. Sales to distributors were approximately
51% and 62% of total revenues for the years ended December 31, 2020 and 2019, respectively.
Revenues
by geographical area:
|
|
Years
Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
North America
|
|
$
|
891,768
|
|
|
$
|
725,520
|
|
Malaysia
|
|
|
889,508
|
|
|
|
|
|
Other Asia
|
|
|
58,688
|
|
|
|
129,453
|
|
Europe and Other
|
|
|
49,880
|
|
|
|
47,964
|
|
|
|
$
|
1,889,844
|
|
|
$
|
902,937
|
|
Medical Devices revenues
are derived from a worldwide customer base consisting of both retail customers and distributors. Sales to distributors were approximately
51% and 62% of total revenues for the years ended December 31, 2020 and 2019, respectively.
Cash
Cash
consists of cash and demand deposits with banks. The Company holds no cash equivalents as of December 31, 2020 and 2019, respectively.
Accounts
Receivable
Accounts
receivable are recorded at the invoiced amounts. Management evaluates the collectability of its trade accounts receivable and
determines an allowance for doubtful accounts based on historical write-offs, known or expected trends, and the identification
of specific balances deemed uncollectible based on a customer’s financial condition, credit history and the current economic
conditions.
At
December 31, 2020 and 2019, based on management’s assessment, no allowance for doubtful accounts was considered necessary.
Inventories
Inventories
are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out (“FIFO”) basis.
The Company records adjustments to its inventory for estimated obsolescence or diminution in net realizable value equal to the
difference between the cost of the inventory and the estimated net realizable value. When evidence exists that the net realizable
value of inventory is lower than its cost, the difference is recognized as a loss in the period in which it occurs. Once inventory
has been written down, it creates a new cost basis for inventory that may not subsequently written up. For the year ended
December 31, 2020, the Company wrote-down inventory of $971,719, which was recorded in cost of sales (see Note 3). For
the year ended December 31, 2019, there were no write-downs of inventory.
Property
and Equipment
Property
and equipment are recorded at cost less accumulated depreciation. Additions, improvements, and major renewals or replacements
that substantially extend the useful life of an asset are capitalized. Repairs and maintenance expenditures are expensed as incurred.
Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which range from
three to seven years. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful
lives or the remaining lease term.
Management
assesses the carrying value of property and equipment whenever events or changes in circumstances indicate that the carrying value
may not be recoverable. If there is indication of impairment, management prepares an estimate of future cash flows expected to
result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset,
an impairment loss is recognized to write down the asset to its estimated fair value at that time. At December 31, 2020
and 2019, management determined there were no impairments of the Company’s property and equipment.
Leases
The
Company determines whether a contract is, or contains, a lease at inception. Right-of-use assets represent the Company’s
right to use an underlying asset during the lease term, and lease liabilities represent the Company’s obligation to make
lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at lease commencement based upon
the estimated present value of unpaid lease payments over the lease term. The Company uses its incremental borrowing rate based
on the information available at lease commencement in determining the present value of unpaid lease payments.
Intangible
Assets
Finite-lived
intangible assets
Amortizable
identifiable intangible assets are stated at cost less accumulated amortization, and represent customer relationships, technology,
trade names, and noncompetition agreements acquired in business combinations. The Company follows ASC 360 in accounting for intangible
assets, which requires impairment losses to be recorded when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by the assets are less than the assets’ carrying amounts. As of December 31, 2019, the recorded
value of the Company’s finite-lived intangible assets had been fully amortized.
Indefinite-lived
intangible assets
Intangible
assets are comprised of an indefinite-lived trademark acquired, so classified because the Company can renew the underlying rights
to the trademark indefinitely at nominal cost. Indefinite-lived intangible assets are not amortized but are assessed for impairment
annually and evaluated annually to determine whether the indefinite useful life is appropriate. As part of our impairment test,
we first assess qualitative factors to determine whether it is more likely than not the asset is impaired. If further testing
is necessary, we compare the estimated fair value of our asset with its book value. If the carrying amount of the asset exceeds
its fair value, as determined by its discounted cash flows, an impairment loss is recognized in an amount equal to that excess.
For the years ended December 31, 2020 and 2019, the Company determined there were no impairments of its indefinite-lived
brand names (see Note 5).
Goodwill
Goodwill
is the excess of cost of an acquired entity over the fair value of amounts assigned to assets acquired and liabilities assumed
in a business combination. Under the guidance of ASC 350, goodwill is not amortized, rather it is tested for impairment annually,
and will be tested for impairment between annual tests if an event occurs or circumstances change that would indicate the carrying
amount may be impaired. An impairment loss generally would be recognized when the carrying amount of the reporting unit’s
net assets exceeds the estimated fair value of the reporting unit and would be measured as the excess carrying value of goodwill
over the derived fair value of goodwill. The Company’s policy is to perform an annual impairment testing for its reporting
units on December 31 of each fiscal year. During the year ended December 31, 2019, the Company recorded an impairment of its remaining
goodwill of $1,563,520 (see Note 5). Accordingly, at December 31, 2020, the Company did not have any goodwill.
Stock-Based
Compensation
The
Company periodically issues stock-based compensation to officers, directors, contractors and consultants for services rendered.
Such issuances vest and expire according to terms established at the issuance date.
Stock-based
payments to employees, directors, and for acquiring goods and services from nonemployees, which include grants of employee stock
options, are recognized in the financial statements based on their grant date fair values in accordance with ASC 718, Compensation-Stock
Compensation. Stock option grants, which are generally time or performance vested, are measured at the grant date fair
value and depending on the conditions associated with the vesting of the award, compensation cost is recognized on a straight-line
or graded basis over the vesting period. The fair value of stock options granted is estimated using the Black-Scholes option-pricing
model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life, and future dividends.
The assumptions used in the Black-Scholes option pricing model could materially affect compensation expense recorded in future
periods.
Income
Taxes
The
Company uses an asset and liability approach for accounting and reporting for income taxes that allows recognition and measurement
of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability
approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided
for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their
benefits, or that future deductibility is uncertain. The Company’s policy is to recognize interest and/or penalties related
to income tax matters in income tax expense.
Research
and Development Costs
Research
and development costs are expensed as incurred and consist primarily of fees paid to consultants and outside service providers,
patent fees and costs, and other expenses relating to the acquisition, design, development and testing of the Company’s
products. Research and development expenditures, which include stock compensation expense, totaled $160,978 and $194,311 for the
years ended December 31, 2020 and 2019, respectively.
Patent
Costs
The
Company is the owner of three issued domestic patents, three pending domestic patent applications, one issued foreign patent in
Europe, one issued foreign patent in Hong Kong, and three foreign patent applications in Canada, Europe and Hong Kong. Due to
the significant uncertainty associated with the successful development of one or more commercially viable products based on the
Company’s research efforts and any related patent applications, patent costs, including patent-related legal fees, filing
fees and internally generated costs, are expensed as incurred. During the years ended December 31, 2020 and 2019, patent costs
were $124,806 and $137,183, respectively, and are included in general and administrative costs in the statements of operations.
Advertising
Costs
Advertising
costs are expensed as incurred and are included in sales and marketing expense. Advertising costs aggregated $44,429 and
$19,645 for the years ended December 31, 2020 and 2019, respectively.
Loss
per Common Share
Basic
loss per share is computed by dividing net loss by the weighted-average common shares outstanding during a period. Diluted earnings
per share is computed based on the weighted-average common shares outstanding plus the effect of dilutive potential common shares
outstanding during the period calculated using the treasury stock method. Dilutive potential common shares include shares from
unexercised warrants and options. Potential common share equivalents have been excluded where their inclusion would be anti-dilutive.
The Company’s basic and diluted net loss per share is the same for all periods presented because all shares issuable upon
exercise of warrants and options are anti-dilutive.
The
following potentially dilutive shares were excluded from the shares used to calculate diluted earnings per share:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Warrants
|
|
|
2,132,758
|
|
|
|
4,800,456
|
|
Options
|
|
|
778,195
|
|
|
|
493,750
|
|
|
|
|
2,910,953
|
|
|
|
5,294,206
|
|
Fair
Value of Financial Instruments
Accounting
standards require certain assets and liabilities be reported at fair value in the financial statements and provide a framework
for establishing that fair value. Fair value is defined as the price that would be received upon sale of an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement date. When determining fair value, the Company
considers the principal or most advantageous market in which it transacts, and considers assumptions that market participants
would use when pricing the asset or liability. The framework for determining fair value is based on a hierarchy that prioritizes
the inputs and valuation techniques used to measure fair value:
Level
1 - Quoted prices in active markets for an identical asset or liability that the Company has the ability to access as of the
measurement date.
Level
2 - Inputs, other than quoted prices included within Level 1, which are directly observable for the asset or liability or
indirectly observable through corroboration with observable market data.
Level
3 - Unobservable inputs in which there is little or no market data for the asset or liability which requires the reporting
entity to develop its own assumptions.
The
Company determines the level in the fair value hierarchy within which each fair value measurement falls in its entirety, based
on the lowest level input that is significant to the fair value measurement in its entirety. In determining the appropriate levels,
the Company performs an analysis of the assets and liabilities at each reporting period end.
The
Company believes the carrying amount of its financial instruments (consisting of cash, accounts receivable, and accounts payable
and accrued liabilities) approximates fair value due to the short-term nature of such instruments.
As
of December 31, 2020, and 2019, the Company’s balance sheet included Level 2 liabilities comprised of the fair value
of warrant liabilities aggregating $25,978 and $13,323, respectively (see Note 9).
Derivative
Financial Instruments
The
Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify
as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument
is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported
in the consolidated statements of operations. The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities
are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument
could be required within 12 months of the balance sheet date.
Concentrations
Cash
balances are maintained at large, well-established financial institutions. At times, cash balances may exceed federally insured
limits. Insurance coverage limits are $250,000 per depositor at each financial institution. The Company believes that no significant
concentration of credit risk exists with respect to its cash balances because of its assessment of the creditworthiness and financial
viability of the financial institutions.
During
the year ended December 31, 2020, one customer accounted for approximately 47% of the Company’s sales. During the year ended
December 31, 2019, one customer who accounted for approximately 22% of the Company’s sales. No other customer accounted
for more than 10% of sales in either year.
Recent
Accounting Pronouncements
In
August 2020, the FASB issued ASU No. 2020-06 (“ASU 2020-06”) “Debt—Debt with Conversion and Other Options
(Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible
Instruments and Contracts in an Entity’s Own Equity.” ASU 2020-06 will simplify the accounting for convertible instruments
by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting
models will result in fewer embedded conversion features being separately recognized from the host contract as compared with current
GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features
that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify
for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which
the premiums are recorded as paid-in capital. ASU 2020-06 also amends the guidance for the derivatives scope exception for contracts
in an entity’s own equity to reduce form-over-substance-based accounting conclusions. ASU 2020-06 will be effective January
1, 2024, for the Company. Early adoption is permitted, but no earlier than January 1, 2021, including interim periods within that
year. Management is currently evaluating the effect of the adoption of ASU 2020-06 on the consolidated financial statements, but
currently does not believe ASU 2020-06 will have a significant impact on the Company’s financial statements. The
effect will largely depend on the composition and terms of the outstanding financial instruments at the time of adoption.
In December 2019,
the FASB issued ASU 2019-12, Income Taxes (topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”).
ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions and enhances and simplifies various aspects
of the income tax accounting guidance in ASC 740. ASU 2019-12 is not expected to have any impact on the Company’s consolidated
financial statement presentation or disclosures subsequent to its adoption.
In
June 2016, the FASB issued ASU No. 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASC
326”). The standard significantly changes how entities will measure credit losses for most financial assets, including accounts
and notes receivables. The standard will replace today’s “incurred loss” approach with an “expected loss”
model, under which companies will recognize allowances based on expected rather than incurred losses. Entities will apply the
standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting
period in which the guidance is effective. As a smaller reporting company, ASU 2016-13 will be effective for us beginning January
1, 2023, with early adoption permitted. The Company is currently assessing the impact of adopting this standard on the Company’s
financial statements and related disclosures.
The
Company’s management does not believe that any other recently issued, but not yet effective, authoritative guidance, if
currently adopted, would have a material impact on the Company’s financial statement presentation or disclosures.
2.
|
Acquisition
of NutriGuard
|
Effective
September 20, 2019 (the “Effective Date”), the Company’s wholly-owned subsidiary, NutriGuard Formulations, Inc.,
a Delaware corporation, completed an asset purchase agreement (the “Asset Purchase Agreement”) with NutriGuard Research,
Inc., a California corporation (“NutriGuard”), and NutriGuard’s sole shareholder, Mark McCarty.
Pursuant
to the Asset Purchase Agreement, the Company purchased specified assets of the NutriGuard brand and business, consisting primarily
of inventory, trademarks, copyrights and other intellectual property. In exchange, the Company agreed to pay a 3% royalty, payable
quarterly, to NutriGuard based on the operating results of the NutriGuard branded products in future periods, after $500,000 in
gross revenues have been achieved by the Company. The Company was unable to reasonably estimate the timing or amount of future
revenue streams that would generate royalty payments, as the Company will need to develop new product formulations and implement
a marketing and distribution infrastructure, which will require the investment of a significant amount of capital over an extended
period of time. Accordingly, any royalty payments in the future will be charged directly to operations when incurred.
As
the Company did not pay any cash or non-cash consideration, nor did it assume any liabilities, in conjunction with this acquisition,
the Company did not recognize any tangible or intangible assets at closing. All costs related to this transaction, consisting
primarily of legal fees, were charged to operations as incurred. Although NutriGuard conducted limited operations with nominal
revenues prior to its acquisition, the Company has determined that the NutriGuard acquisition qualified as the acquisition of
a business under Accounting Standards Codification (“ASC”) 805: Business Combinations (“ASC 805”). However,
the recent historical operations of NutriGuard did not meet any of the three-element significance level tests (investment, assets
and pre-tax income) with regard to the accounting standards requiring acquisition company financial statements and related pro
forma financial information, and the Company has therefore concluded that the acquisition of NutriGuard was not significant. The
value of the NutriGuard business consists primarily of intangible assets for which no accounting value was attributed in the Company’s
financial statements. The Company intends to utilize these intangible assets to build a nutraceutical brand and product portfolio
based on updated and reformulated compounds, which will require the investment of a significant amount of capital over an extended
period of time.
The operations
of Nutriguard have been included in the Company’s consolidated results of operations starting September 20, 2019.
The
following unaudited pro forma financial information gives effect to the Company’s acquisition of NutriGuard as if the acquisition
had occurred on January 1, 2019:
|
|
Year
Ended
December
31,
|
|
|
|
2019
|
|
Pro forma net revenues
|
|
$
|
963,167
|
|
Pro forma net loss attributable to common
shareholders
|
|
$
|
(10,913,833
|
)
|
Pro forma net loss per share
|
|
$
|
(1.80
|
)
|
On
the Effective Date, Mr. McCarty entered into a consulting agreement with the Company and provides that Mr. McCarty will serve
as the Director of Research of the Company for a period of 3 years at a rate of $7,500 per month for 12 months and $5,000 per
month thereafter. It is intended that Mr. McCarty will assist the Company, among other tasks, in developing new formulations for
distribution under the NutriGuard brand, as well as identifying production sources for such compounds and developing distribution
networks for such products.
Pursuant
to the consulting agreement, the Company granted Mr. McCarty stock options to purchase 16,667 shares of the Company’s
common stock with a grant date fair value of $54,004 and an exercise price of $3.24 per share, which was the closing market
price of the Company’s common stock on the Effective Date. The stock options were granted under the terms of the Company’s
2018 Equity Incentive Plan, and the options vest as follows: 25% on the Effective Date, 25% on the first anniversary following
the Effective Date, 25% on the second anniversary following the Effective Date, and 25% on the third anniversary following the
Effective Date.
Inventories
consisted of the following:
|
|
December
31,
|
|
|
|
2020
|
|
|
2019
|
|
Raw
materials
|
|
$
|
218,307
|
|
|
$
|
246,875
|
|
Finished
goods
|
|
|
166,665
|
|
|
|
64,066
|
|
Inventory
|
|
$
|
384,972
|
|
|
$
|
310,941
|
|
The
Company’s inventories are stated at the lower of cost or net realizable value on a FIFO basis. At December 31, 2020, as
a result of the deterioration of the forecasted marketability of certain of the Company’s inventory, management determined
that the inventory’s revenue-generating ability was diminished, and the net realizable value of this inventory had fallen
below its historical carrying cost. Accordingly, for the year ended December 31, 2020, the Company recorded a write down of inventory
of $971,719, which is included in cost of goods sold. At December 31, 2020, the balance of inventory reflects its new cost basis
after the write down. For the year ended December 31, 2019, there were no write-downs of inventory. At December 31, 2020 and 2019,
inventory has been reduced by cumulative write-downs totaling $1,028,324 and $56,605, respectively.
4.
|
Property
and Equipment, net
|
Property
and equipment consisted of the following:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Leasehold improvements
|
|
$
|
103,255
|
|
|
$
|
98,357
|
|
Testing equipment
|
|
|
348,124
|
|
|
|
394,427
|
|
Furniture and fixtures
|
|
|
197,349
|
|
|
|
185,799
|
|
Computer equipment
|
|
|
68,460
|
|
|
|
68,460
|
|
Office equipment
|
|
|
9,835
|
|
|
|
8,193
|
|
|
|
|
727,023
|
|
|
|
755,236
|
|
Less accumulated depreciation and amortization
|
|
|
(441,347
|
)
|
|
|
(380,598
|
)
|
|
|
$
|
285,676
|
|
|
$
|
374,638
|
|
For
the years ended December 31, 2020 and 2019, depreciation and amortization expense was $65,476 and $71,242, respectively, of which
$35,846 and $33,004 was included in research and development expense, $13,252 and $15,641 was included in sales and marketing
expense, and $16,378 and $22,597 was included in general and administrative expense, respectively. The following table
shows where depreciation expense was recorded for the years ended December 31, 2019 and 2020:
|
|
Years Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Research and development expense
|
|
$
|
35,846
|
|
|
$
|
33,004
|
|
Sales and marketing expense
|
|
|
13,252
|
|
|
|
15,641
|
|
General and administrative expense
|
|
|
16,378
|
|
|
|
22,597
|
|
|
|
$
|
65,476
|
|
|
$
|
71,242
|
|
The
Company’s intangible assets consisted of the following:
|
|
December
31,
|
|
|
|
2020
|
|
|
2019
|
|
Trademark
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
Indefinite-lived
intangible trademark asset
In
January 2018, the Company acquired the rights to the trademark GLAUCO-HEALTH as well as the name “International Eye Wellness
Institute” (together, the “IP Assets”) from an unrelated third party. The purchase included all rights, title,
and interest in and to the IP Assets, including (a) the right to register and use the IP Assets; (b) all goodwill associated with
the IP Assets; (c) all income, royalties, and damages hereafter due or payable with respect to the IP Assets; (d) all rights to
sue for past, present, and future infringements or misappropriations of the IP Assets; and all other intellectual property rights
owned or claimed by the seller or embodied in the IP Assets. In exchange for these rights, the Company paid the seller $50,000
in cash.
The
Company determined that the acquired intangible asset met the definition of a defensive intangible asset under ASC 350, and the
Company accounted for the $50,000 payment as an acquired intangible asset. As the Company can renew the underlying rights to the
IP Assets indefinitely at nominal cost, the assets have been classified as a non-amortizable intangible asset on the Company’s
balance sheet. The Company evaluates the status of the assets for impairment annually or more frequently if warranted. Based on
management’s assessment, there were no indications of impairment at December 31, 2020 or 2019 for the IP Assets.
Identifiable
finite-lived intangible assets and goodwill related to VectorVision
In
September 2017, the Company acquired VectorVision, Inc. (“VectorVision”) in exchange for 508,334 shares of
the Company’s common stock, valued at $2,300,000 million. In accordance with ASC 805, the purchase consideration
was allocated to tangible and intangible assets at their estimated fair values on the date of acquisition. The intangible assets
included $674,400 of finite-lived intangible assets including customer relationships, technology, trade names, and noncompetition,
and $1,563,520 of goodwill. At December 31, 2018, the net book value of the finite-lived intangible assets was $406,104, and the
net book value of the goodwill was $1,563,520. 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.
Although management
believes in the future growth and success of the VectorVision business, development of the CSV-2000 took longer than
expected due to software engineering and other factors. Although we believe we will enjoy a significant market share over
time, there is subjectivity of predicting the amount and timing of that value. Recent changes in the regulatory environment may
cost us more than anticipated to begin marketing the new device in Europe.
Accordingly, management
concluded that as of December 31, 2019, the fair value of the goodwill and finite-lived intangible assets associated
with the VectorVision acquisition were less than their respective carrying amounts. For the year ended December 31, 2019,
the Company recorded a goodwill impairment charge of $1,563,520, and an additional charge of $406,104 to fully amortize
the balance of the finite-lived intangible assets recorded in the VectorVision acquisition.
The
Company leases certain office and warehouse spaces under operating leases. In October 2012, the Company entered into a lease agreement
for 9,605 square feet of office and warehouse space commencing March 1, 2013. The lease (“Lease 1”) was renewed for
an additional five years in 2018 through July 2023. In connection with the VectorVision acquisition (see Note 5), the Company
assumed a lease agreement (“Lease 2”) for 5,000 square feet of office and warehouse space which commenced October
1, 2017 through February 2023.
In
accounting for the leases, the Company adopted ASC 842 Leases on January 1, 2019, which requires a lessee to record a right-of-use
asset and a corresponding lease liability at the inception of the lease initially measured at the present value of the lease payments.
The Company classified the leases as operating leases and at January 1, 2019, determined that the present value of Lease 1 payments
was $639,520 and that the present value of Lease 2 payments was $81,634, or an aggregate of $721,154, using a discount rate of
3.9%. In accordance with ASC 842, the right-of-use assets are being amortized over the life of the underlying leases. During the
year ended December 31, 2020, the Company reflected amortization of right-of-use asset of $154,124. At December 31, 2020, accumulated
amortization of the right-of-use assets was $302,564, resulting in a net asset balance of $418,590.
During
the year ended December 31, 2020, the Company made combined payments on both leases of $151,767 towards the lease liabilities.
As of December 31, 2020, the lease liability for Lease 1 was $388,001, and the lease liability for Lease 2 was $46,746, or an
aggregate of $434,747. ASC 842 requires recognition in the statement of operations of a single lease cost, calculated so that
the cost of the lease is allocated over the lease term, generally on a straight-line basis. Combined rent expense for both leases
for the years ended December 31, 2020 and 2019 was $174,323 and $174,323, respectively.
Maturities
of the Company’s lease liabilities are as follows:
Year ending
|
|
Operating
Leases
|
|
|
|
|
|
2021
|
|
$
|
176,934
|
|
2022
|
|
|
182,249
|
|
2023
|
|
|
98,417
|
|
Total lease payments
|
|
|
457,600
|
|
Less: Imputed
interest/present value discount
|
|
|
(22,852
|
)
|
Present value of lease liabilities
|
|
|
434,748
|
|
Less Current
portion
|
|
|
(162,845
|
)
|
|
|
$
|
271,903
|
|
7.
|
Settlement
with Former Officer
|
Effective
June 15, 2020, Michael Favish resigned as Chief Executive Officer and as an employee of the Company and resigned from the Company’s
Board of Directors. Terms of the settlement agreement between the parties included the continuation of his previous salary of
$325,000 during the twelve months subsequent to his resignation. The $325,000 of aggregate settlement payments was recorded
in costs related to resignation of former officer expense in the accompanying consolidated statements of operations for the year
ended December 31, 2020. As of December 31, 2020, $148,958 of the amount due remains accrued on our consolidated balance sheet
and is payable through June 2021. In addition, 138,889 options previously granted to the former officer were forfeited
(see Note 10).
Promissory
Note
On
March 12, 2019, the Company issued a promissory note with principal in the amount of $100,000, simple interest of 10% annually,
and with a maturity date of June 10, 2019. On April 11, 2019, the Company repaid the promissory note for a total of $100,548 including
accrued interest.
Convertible
Notes
In
March 2019, the Company issued two convertible notes with aggregate principal in the amount of $250,000, simple interest of 5%
annually, and with maturity dates of September 30, 2019. The convertible notes (principal and accrued interest) were mandatorily
convertible upon the consummation of the Company’s IPO. In April 2019, upon the consummation of the IPO, the convertible
notes and accrued interest with an aggregate balance of $250,788 were mandatorily converted into 18,173 shares of common
stock based on a conversion price of $13.80 per share in April 2019. Upon conversion a valuation discount of $250,000 was
recognized as interest expense.
Concurrent
with the issuance of the notes, the Company issued warrants to the note holders equal to the number of shares of common stock
that the holders receive in connection with the converted notes. The per share exercise price of the warrants was set at 125%
of the conversion price of the notes, defined in the note agreements, as the lower of (a) 75% of the price per share of common
stock of the IPO or (b) $13.80. The Company issued 18,173 warrants based upon the completion of the IPO in April
2019.
Due
to the variable terms of both the exercise price and the number of warrants to be issued, the warrants were accounted for as a
derivative liability upon issuance (see Note 9). The aggregate fair value of the warrant derivative liability was determined to
be $436,034 based on a probability effected Black-Scholes option pricing model with a stock price of $24.00, volatility
of 138%, and risk-free rates ranging from 2.34% - 2.39%. The Company recognized a debt discount of $250,000 equal to the face
amount of the convertible notes and recorded a financing cost of $186,034 equal to the difference between the fair value of the
warrants and the debt discount. (see Note 9)
9.
|
Derivative
Warrant Liability
|
Derivative
for warrants issued to underwriter
On
April 9, 2019, the Company issued 10,417 warrants with an exercise price of $30.00 per share to the underwriter
in connection with the Company’s IPO. The Company accounted for these warrants as a derivative liability in the financial
statements at June 30, 2019 because they were associated with the IPO, a registered offering, and the settlement provisions contained
language that the shares underlying the warrants are required to be registered. The fair value of the warrants is remeasured at
each reporting period, and the change in the fair value is recognized in earnings in the accompanying statements of operations.
The fair value of the warrants at the date of issuance was determined to be $229,921 and was recorded as a finance cost. During
the year ended December 31, 2019, a decrease in the fair value of the derivative warrant liability of $216,598 was recorded, and
at December 31, 2019, the fair value of the derivative warrant liability was $13,323. During the year ended December 31, 2020,
an increase in the fair value of the derivative warrant liability of $12,655 was recorded, and at December 31, 2020, the fair
value of the derivative warrant liability was $25,978.
Derivative
for warrants issued with convertible notes in 2019 and reclassified to equity in 2019
In
March 2019, the Company issued warrants to two convertible note holders pursuant to the anticipated completion of the Company’s
IPO (the IPO was completed on April 9, 2019). Due to the variable terms of both the exercise price and the number of warrants
to be issued, the warrants were accounted for as derivative liabilities at the issuance date. The Company estimated that the issuance
of 18,173 warrants with an exercise price of $17.28 per share would correspond to the number of shares of common
stock that the holders would receive in connection with the completion of the IPO. The fair value of the warrants at date of issuance
was determined to be $436,034, of which $250,000 was recorded as a valuation discount and $186,034 was recorded as a finance cost.
Upon completion of the IPO, the exercise price and the number of warrants were fixed, and the warrants are no longer accounted
for as liabilities. The fair value of the warrants at the completion of the IPO was determined to be $359,683, and such amount
was reclassified to equity. This resulted in the Company recognizing a decrease in derivative warrant liability of $76,351 during
the year ended December 31, 2019.
The
fair value of the warrant liability was determined at the following issuance and reporting dates using the Black-Scholes option
pricing model and the following assumptions:
|
|
Convertible Notes issued March 2019
|
|
|
Underwriter warrants issued April 2019
|
|
|
Warrant Liability
December 31, 2019
|
|
|
Warrant Liability
December 31, 2020
|
|
Stock price
|
|
$
|
24.00
|
|
|
$
|
22.08
|
|
|
$
|
1.32
|
|
|
|
2.49
|
|
Risk free interest rate
|
|
|
2.34 – 2.39
|
%
|
|
|
2.29
|
%
|
|
|
1.62
|
%
|
|
|
0.17
|
%
|
Expected volatility
|
|
|
138
|
%
|
|
|
137
|
%
|
|
|
145
|
%
|
|
|
148
|
%
|
Expected life in years
|
|
|
5.00
|
|
|
|
5.00
|
|
|
|
4.3
|
|
|
|
3.8
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Number of warrants
|
|
|
18,173
|
|
|
|
10,417
|
|
|
|
10,417
|
|
|
|
10,417
|
|
Fair value of derivative warrant liability
|
|
$
|
436,034
|
|
|
$
|
229,921
|
|
|
$
|
13,323
|
|
|
|
25,978
|
|
Common
Stock
Sales
of common stock
On
April 9, 2019, the Company closed its initial public offering (the “IPO”) and issued 208,334 shares of its
common stock at a public offering price of $24.00 per share for total gross proceeds of $5.0 million pursuant to an underwriting
agreement by and between the Company, WallachBeth Capital, LLC, and WestPark Capital, Inc., acting as the representatives. On
April 9, 2019, the Company issued 10,417 warrants with an exercise price of $30.00 per share to the underwriters
and affiliates in connection with the IPO. The Company accounted for these warrants as a derivative liability (see Note 9) upon
issuance because they were associated with a registered offering, and the settlement provisions contained language that the shares
underlying the warrants are required to be registered. Net proceeds to the Company were $3,888,000 after deducting underwriting
discounts, commissions, and other offering expenses.
On August 15, 2019,
the Company closed a second public offering consisting of (i) 2,000,000 shares of common stock, par value $0.001 per share,
of the Company, (ii) pre-funded warrants exercisable for 166,667 shares of common stock, and (iii) warrants to purchase
up to an aggregate of 2,166,667 shares of common stock pursuant to an underwriting agreement by and between the Company,
Maxim Group LLC, and WallachBeth Capital LLC, acting as the representatives. On August 16, 2019, the Company sold an additional
325,000 warrants upon exercise of the underwriters’ over-allotment option. The public offering price was $2.64
per share of common stock, $2.58 per pre-funded warrant and $0.06 per accompanying warrant. On August 15, 2019,
the Company issued 173,334 warrants with an exercise price of 3.00 per share to the underwriters in connection with
the offering. Net proceeds to the Company were $4,944,340 after deducting underwriting discounts, commissions, and other offering
expenses.
On October 30, 2019,
the Company completed an underwritten public offering of 3,800,000 shares of its common stock plus 283,334 pre-funded
warrants to purchase common stock in lieu thereof and Series B warrants to purchase up to 4,083,334 shares of the Company’s
common stock. Each share of common stock (or pre-funded warrant) was sold together with one Series B warrant to purchase one share
of common stock at a combined price to the public of $2.05 per share and Series B warrant. The shares of common stock or
pre-funded warrants and the accompanying Series B warrants were sold together but issued separately and were immediately separable
upon issuance. Warrants to purchase 140,000 shares of common stock upon the exercise of the underwriters’ over-allotment
option and warrants to purchase 326,667 shares of common stock were issued to the underwriters as representatives of the
public offering. Net proceeds, after deducting underwriting discounts, commissions and offering expenses, were approximately $7,400,000.
Common
stock issued for services
During
the year ended December 31, 2020, the Company issued 16,667 fully vested shares of common stock for services rendered and
recognized $49,350 in stock compensation expense related to these shares.
Warrants
A
summary of the Company’s warrant activity is as follows:
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
December 31, 2018
|
|
|
210,946
|
|
|
$
|
4.26
|
|
|
|
0.29
|
|
Granted
|
|
|
7,693,590
|
|
|
|
2.52
|
|
|
|
4.81
|
|
Forfeitures
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expirations
|
|
|
(46,572
|
)
|
|
|
(10.98
|
)
|
|
|
-
|
|
Exercised
|
|
|
(3,057,508
|
)
|
|
|
(3.00
|
)
|
|
|
-
|
|
December 31, 2019
|
|
|
4,800,456
|
|
|
|
2.28
|
|
|
|
4.91
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeitures
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expirations
|
|
|
(10,830
|
)
|
|
|
(9.00
|
)
|
|
|
-
|
|
Exercised
|
|
|
(2,656,868
|
)
|
|
|
(2.04
|
)
|
|
|
-
|
|
December 31, 2020, all exercisable
|
|
|
2,132,758
|
|
|
$
|
2.40
|
|
|
|
3.81
|
|
The
exercise prices of warrants outstanding and exercisable as of December 31, 2020 are as follows:
Warrants Outstanding
and
Exercisable (Shares)
|
|
|
Exercise Prices
|
|
|
1,566,466
|
|
|
$
|
2.05
|
|
|
326,668
|
|
|
|
2.67
|
|
|
173,334
|
|
|
|
3.00
|
|
|
37,700
|
|
|
|
3.51
|
|
|
28,590
|
|
|
|
17.25
|
|
|
2,132,758
|
|
|
|
|
|
During the year ended
December 31, 2019, the Company granted a total of 7,693,590 warrants consisting of: (a) 10,417 warrants associated
with our IPO financing in April 2019, (b) 18,173 warrants in connection with the conversion of certain notes (c) 2,831,667
warrants associated with our August public offering, and (d) 4,833,334 warrants associated with our October public
offering. No warrants were granted in the year ended December 31, 2020.
The
August and October 2019 pre-funded warrants were sold to purchasers whose purchase of shares of common stock in the offerings
would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than
4.99% of the Company’s outstanding common stock immediately following the consummation of the offerings, in lieu of shares
of common stock. Each pre-funded warrant represents the right to purchase one share of common stock at an exercise price of $0.01
per share.
The August 2019 public
offering price was $2.64 per share of common stock and $0.01 per accompanying warrant. Each warrant sold with the shares
of common stock represents the right to purchase one share of common stock at an exercise price of $3.51 per share. The
warrants are exercisable immediately, expire five years from the date of issuance and provide that, beginning on the earlier of
(i) 30 days from the effective date of the Registration Statement and (ii) the date on which the Common Stock trades an aggregate
of more than 6,666,667 shares after the announcement of the pricing of the offering, and ending on the twelve month anniversary
thereof, each warrant may be exercised at the option of the holder on a cashless basis at a ratio of one warrant for one share
of common stock, in whole or in part, if the weighted average price of the common stock on the trading day immediately prior to
the exercise date fails to exceed the initial exercise price of the warrant.
The October 2019
public offering price was $1.99 per share of common stock and $0.06 per accompanying warrant. Each warrant sold
with the shares of common stock represents the right to purchase one share of common stock at an exercise price of $2.05
per share.
During the year ended
December 31, 2019, investors exercised a total of 3,057,509 warrants for 3,034,135 shares of common stock, consisting
of (i) 2,559,384 warrants exercised on a cashless basis for 2,536,010 net common shares, and (ii) 498,125
warrants exercised for a total of $171,375 in proceeds to the Company (450,000 of these warrants were exercisable for $0.06
per share, and 48,125 were exercisable for $3.00 per share).
During
the year ended December 31, 2020, investors exercised warrants exercisable into 2,656,868 shares of common stock for total
proceeds of $5,451,892. The warrants were exercisable at $2.05 per share.
As
of December 31, 2020, the Company had an aggregate of 2,132,758 outstanding warrants to purchase shares of its common
stock. The aggregate intrinsic value of warrants outstanding as of December 31, 2020 was $0.
Stock
Options
A
summary of the Company’s stock option activity is as follows:
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
December 31, 2018
|
|
|
227,083
|
|
|
$
|
13.56
|
|
|
|
3.78
|
|
Granted
|
|
|
266,667
|
|
|
|
21.06
|
|
|
|
4.38
|
|
Forfeitures
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expirations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
December 31, 2019
|
|
|
493,750
|
|
|
|
13.56
|
|
|
|
3.64
|
|
Granted
|
|
|
423,333
|
|
|
|
5.58
|
|
|
|
9.51
|
|
Forfeitures
|
|
|
(138,889
|
)
|
|
|
-
|
|
|
|
-
|
|
Expirations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
December 31, 2020, outstanding
|
|
|
778,194
|
|
|
$
|
9.48
|
|
|
|
6.38
|
|
December 31, 2020, exercisable
|
|
|
500,764
|
|
|
$
|
11.64
|
|
|
|
4.74
|
|
The
exercise prices of options outstanding and exercisable as of December 31, 2020 are as follows:
Options Outstanding
(Shares)
|
|
|
Options Exercisable
(Shares)
|
|
|
Exercise Prices
|
|
|
41,667
|
|
|
|
41,667
|
|
|
$
|
1.48
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
1.91
|
|
|
41,667
|
|
|
|
20,833
|
|
|
|
2.34
|
|
|
1,667
|
|
|
|
1,667
|
|
|
|
2.46
|
|
|
16,667
|
|
|
|
8,333
|
|
|
|
3.24
|
|
|
375,000
|
|
|
|
126,738
|
|
|
|
6.00
|
|
|
104,166
|
|
|
|
104,166
|
|
|
|
12.00
|
|
|
10,416
|
|
|
|
10,416
|
|
|
|
13.80
|
|
|
112,500
|
|
|
|
112,500
|
|
|
|
15.00
|
|
|
69,445
|
|
|
|
69,445
|
|
|
|
26.40
|
|
|
778,194
|
|
|
|
500,765
|
|
|
|
|
|
The
Company accounts for share-based payments in accordance with ASC 718 wherein grants are measured at the grant date fair value
and charged to operations over the vesting periods.
During the year ended
December 31, 2020, the Company granted options to purchase 215,000 shares of common stock to six employees with a grant
date fair value determined to be $554,775 using a Black-Scholes option pricing model based on the following assumptions: (i) volatility
rate of 141% to 147%, (ii) discount rate of 0.18%, (iii) zero expected dividend yield, and (iv) expected life of 5.25 to 6 years.
The options have an exercise price of $1.92 to $6.00 per share. Options for 41,667 shares vest on a quarterly basis
over two years and options for 6,667 shares vest in full six months after the grant date. Options for 166,667 shares
vest ratably over three years.
On June 30, 2020,
the Company granted options to purchase 208,334 shares of common stock to the members of the Company’s Board of Directors
with a grant date fair value determined to be $478,735 using a Black-Scholes option pricing model based on the following assumptions:
(i) volatility rate of 142% to 148%, (ii) discount rate of 0.18%, (iii) zero expected dividend yield, and (iv) expected life of
5.25 years. The options have an exercise price of $6.00 per share. The options vest on a quarterly basis over two years
beginning three months after the grant date.
The
Company’s volatility is based on an average volatility of similar companies in the same industry. The risk-free interest
rate was based on rates established by the Federal Reserve Bank. The expected dividend yield was based on the fact that the Company
has not paid dividends to its common stockholders in the past and does not expect to pay dividends to its common stockholders
in the future. The expected life of the stock options granted is estimated using the “simplified” method, whereby
the expected term equals the average of the vesting term and the original contractual term of the stock option.
For
the years ended December 31, 2020 and 2019, the Company recognized aggregate stock-compensation expense of $494,677 and $2,593,730
respectively, related to the fair value of vested options.
As of December 31,
2020, the Company had an aggregate of 230,556 remaining unvested options outstanding, with a remaining fair value of $629,568
to be amortized over an average of 3.0 years, weighted average exercise price of $5.58, and weighted average remaining
life of 9.3 years. Based on the closing price of the Company’s common stock on December 31, 2020 of $2.49, the aggregate
intrinsic value of options outstanding as of December 31, 2020 was zero.
Settlement
of stock options issued to former officer
In
connection with a separation agreement entered into with Michael Favish, the Company’s former CEO (see Note 7), the expiration
date of his vested stock options was extended for twelve months from June 15, 2020. In accordance with ASC 718, the extension
of the exercise period for the vested options constitutes a modification of the original option agreement. In accounting for the
modification, the Company calculated the fair value of the vested options immediately before modification using current valuation
inputs including the Company’s closing stock price of $2.94 on June 15, 2020, volatility of 142%, and discount rate
of 0.22%. The Company also calculated the fair value of the vested options immediately following the modification using the extended
12-month exercise period. An incremental stock compensation charge of $24,359 was recorded in costs related to resignation of
former officer.
Mr.
Favish’s unvested options of 138,889 at the time of his separation were forfeited. All compensation from prior periods
related to these unvested options was reversed, resulting in an adjustment to stock compensation expense during the year ended
December 31, 2020 of $(965,295), which was recorded in costs related to resignation of former officer.
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets
as of December 31, 2020 and 2019 are summarized below.
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Net operating loss carryforwards
|
|
$
|
5,893,000
|
|
|
$
|
3,961,000
|
|
Stock-based compensation
|
|
|
1,362,000
|
|
|
|
1,479,000
|
|
Amortization of intangibles
|
|
|
106,000
|
|
|
|
83,000
|
|
Accrued expenses
|
|
|
12,000
|
|
|
|
12,000
|
|
Right of use
|
|
|
(4,000
|
)
|
|
|
-
|
|
Research and development credit
|
|
|
(13,000
|
)
|
|
|
(7,000
|
)
|
Depreciation
|
|
|
(57,000
|
)
|
|
|
(43,000
|
)
|
Total deferred tax assets
|
|
|
7,299,000
|
|
|
|
5,485,000
|
|
Valuation allowance
|
|
|
(7,299,000
|
)
|
|
|
(5,485,000
|
)
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
In
assessing the potential realization of deferred tax assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon
the Company attaining future taxable income during the periods in which those temporary differences become deductible. As of December
31, 2020, management was unable to determine if it is more likely than not that the Company’s deferred tax assets will be
realized and has therefore recorded an appropriate valuation allowance against deferred tax assets at such dates.
No
federal tax provision has been provided for the years ended December 31, 2020 and 2019, due to the losses incurred during the
periods. Reconciled below is the difference between the income tax rate computed by applying the U.S. federal statutory rate and
the effective tax rates for the years ended December 31, 2020 and 2019:
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
U. S. federal statutory tax rate
|
|
|
(21.0
|
)%
|
|
|
(21.0
|
)%
|
State, net of federal benefit
|
|
|
(7.0
|
)%
|
|
|
(7.0
|
)%
|
Non-deductible goodwill impairment charge
|
|
|
-
|
%
|
|
|
3.0
|
%
|
|
|
|
(28.0
|
)%
|
|
|
(25.0
|
)%
|
Change in valuation allowance
|
|
|
28.0
|
%
|
|
|
25.0
|
%
|
Effective tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
At
December 31, 2020, the Company has available net operating loss carryforwards for federal income tax purposes of approximately
$23,338,000 which, if not utilized earlier, will begin to expire in 2035. Due to restrictions imposed by Internal Revenue Code
Section 382 regarding substantial changes in ownership of companies with loss carryforwards, the utilization of the Company’s
NOLs may be limited as a result of changes in stock ownership.
The
Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized.
In the event the Company determines that it would be able to realize its deferred tax assets in the future in excess of its recorded
amount, an adjustment to the deferred tax assets would be credited to operations in the period such determination was made. Likewise,
should the Company determine that it would not be able to realize all or part of its deferred tax assets in the future, an adjustment
to the deferred tax assets would be charged to operations in the period such determination was made.
The
Company is subject to U.S. federal income taxes and income taxes of various state tax jurisdictions. As the Company’s net
operating losses have yet to be utilized, all previous tax years remain open to examination by Federal authorities and other jurisdictions
in which the Company currently operates or has operated in the past. The Company had no unrecognized tax benefits as of December
31, 2020 and 2019 and does not anticipate any material amount of unrecognized tax benefits within the next 12 months.
The
Company accounts for uncertainty in income tax law under a comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns as prescribed by GAAP.
The tax effects of a position are recognized only if it is “more-likely-than-not” to be sustained by the taxing authority
as of the reporting date. If the tax position is not considered “more-likely-than-not” to be sustained, then no benefits
of the position are recognized. As of December 31, 2020, the Company had not recorded any liability for uncertain tax positions.
In subsequent periods, any interest and penalties related to uncertain tax positions will be recognized as a component of income
tax expense.
12.
|
Related
Party Transactions
|
During
the years ended December 31, 2020 and 2019, the Company incurred and paid $325,000 and $300,000, respectively, of salary
expense to our former CEO, Michael Favish. During the years ended December 31, 2020 and 2019, the Company incurred and
paid salaries of $75,000 and $114,000, respectively, to Karen Favish, spouse of Michael Favish. During the years ended
December 31, 2020 and 2019, the Company incurred and paid salaries of $60,000 and $55,000, respectively, to Kristine Townsend,
spouse of former Controller and Chief Accounting Officer John Townsend.
In
December 2018, the Company had entered into an Employment Agreement (the “Agreement”) with Michael Favish, which agreement
became effective as of January 1, 2019. Pursuant to the Agreement, Mr. Favish was to serve in such positions for a term of three
(3) years and following the expiration of such three (3) year term, Mr. Favish’s employment was to be on an “at-will”
basis, and such post-term employment will be subject to termination by either party at any time, with or without cause or prior
notice.
Pursuant
to the terms of the Agreement, Mr. Favish was entitled to receive an annual base salary of $300,000 in 2019, $325,000 in 2020,
and $350,000 in 2021. Effective June 15, 2020, Mr. Favish resigned as CEO of the Company and resigned from the Company’s
Board of Directors. Terms of the settlement agreement between the parties included the continuation of his previous salary of
$325,000 during the twelve months subsequent to his resignation. The $325,000 of aggregated settlement payments was recorded in
costs related to resignation of former officer expense in the accompanying consolidated statement of operations for the year ended
December 31, 2020. As of December 31, 2020, $148,958 of the settlement amount remains payable on our consolidated balance sheet
and is payable through June 2021.
Dr.
Evans, together with his spouse, wholly owns Ceatus Media Group LLC, a California limited liability company (“Ceatus”),
founded in 2004 specializing in digital marketing in the eye health care sector. The Company paid Ceatus $81,000 in 2019 and $95,750
in 2020, for services related to digital marketing for the Company.
Dr.
Evans, together with his spouse, wholly owns DWT Evans LLC, an Ohio limited liability company (“DWT”), founded in
2000 which holds several pieces of real estate. One of these holdings includes real property in Greenville, Ohio where
the Company’s subsidiary, VectorVision Ocular Health, leases office and warehouse space. The Company paid DWT rent in the
amounts of $19,770 and $20,898 in 2020 and 2019 respectively.
When
the Company acquired VectorVision, it also acquired AcQviz from Dr. Evans, which is a patented methodology for auto-calibrating
and standardizing the testing light level for computer generated vision testing systems. Dr. Evans is entitled to receive a royalty
on net revenue from AcQviz. As part of the development of the CSV-2000, AcQviz was embedded in the product by Radiant Technologies,
Inc. in exchange for a 3% royalty on the sales of AcQviz. Radiant Technologies is owned by Joseph T. Evans, the brother of Dr.
David Evans.
The
Company determined its reporting units in accordance with ASC 280, “Segment Reporting”. The Company currently operate
in two reportable segments: Medical Foods and Nutraceuticals and Medical Devices.
The
Medical Foods and Nutraceuticals segment provides a portfolio of science-based, clinically supported nutrition, medical foods,
and supplements. The Medical Devices segment includes a portfolio of medical diagnostic devices currently focused on the ocular
space and contrast testing. The Company’s medical devices and accessories are used to measure visual function and certain
anatomical features of the eye that detect early disease and monitor changes over time.
The
segments are based on the discrete financial information reviewed by the Chief Executive Officer, who is the Company’s Chief
Operating Decision Maker (“CODM”), to make resource allocation decisions and to evaluate performance. The reportable
segments are each managed separately because they manufacture and distribute distinct products or provide services with different
processes. All reported segment revenues are derived from external customers.
The
accounting policies of the Company’s reportable segments are the same as those described in the summary of significant accounting
policies (see Note 1). Certain corporate general and administrative expenses, including general overhead functions such as information
systems, accounting, human resources, Board of Director fees, corporate legal fees, other compliance costs and certain administrative
expenses, as well as interest and tax expense, are not allocated to the segments. The following tables set forth our results of
operations by segment:
|
|
For the Year Ended December 31, 2020
|
|
|
|
Corporate
|
|
|
Medical Foods and Nutraceuticals
|
|
|
Medical Devices
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
4,500
|
|
|
$
|
1,609,482
|
|
|
$
|
275,862
|
|
|
$
|
1,889,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
2,478
|
|
|
|
1,599,510
|
|
|
|
344,647
|
|
|
|
1,946,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
2,022
|
|
|
|
9,972
|
|
|
|
(68,785
|
)
|
|
|
(56,791
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense
|
|
|
544,127
|
|
|
|
-
|
|
|
|
-
|
|
|
|
544,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
3,757,945
|
|
|
|
3,892,899
|
|
|
|
299,969
|
|
|
|
7,950,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(4,300,050
|
)
|
|
$
|
(3,882,927
|
)
|
|
$
|
(368,754
|
)
|
|
$
|
(8,551,731
|
)
|
|
|
For the Year Ended December 31, 2019
|
|
|
|
Corporate
|
|
|
Medical Foods and Nutraceuticals
|
|
|
Medical Devices
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
24,270
|
|
|
$
|
444,657
|
|
|
$
|
434,010
|
|
|
$
|
902,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
7,288
|
|
|
|
155,212
|
|
|
|
178,815
|
|
|
|
341,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
16,982
|
|
|
|
289,445
|
|
|
|
255,195
|
|
|
|
561,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense
|
|
|
2,717,731
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,717,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment charge
|
|
|
-
|
|
|
|
-
|
|
|
|
1,563,520
|
|
|
|
1,563,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
360,257
|
|
|
|
5,308,508
|
|
|
|
1,108,543
|
|
|
|
6,777,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(3,061,006
|
)
|
|
$
|
(5,019,063
|
)
|
|
$
|
(2,416,868
|
)
|
|
$
|
(10,496,937
|
)
|
The
following tables set forth our total assets by segment. Intersegment balances and transactions have been removed:
|
|
As of December 31, 2020
|
|
|
|
Corporate
|
|
|
Medical Foods and Nutraceuticals
|
|
|
Medical Devices
|
|
|
Total
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
8,518,732
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,518,732
|
|
Inventories, net
|
|
|
-
|
|
|
|
254,879
|
|
|
|
130,093
|
|
|
|
384,972
|
|
Other
|
|
|
-
|
|
|
|
89,333
|
|
|
|
101,846
|
|
|
|
191,179
|
|
Total current assets
|
|
|
8,518,732
|
|
|
|
344,212
|
|
|
|
231,939
|
|
|
|
9,094,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Right of use asset
|
|
|
-
|
|
|
|
374,447
|
|
|
|
44,143
|
|
|
|
418,590
|
|
Property and equipment, net
|
|
|
-
|
|
|
|
135,641
|
|
|
|
150,035
|
|
|
|
285,676
|
|
Intangible assets, net
|
|
|
-
|
|
|
|
50,000
|
|
|
|
-
|
|
|
|
50,000
|
|
Other
|
|
|
-
|
|
|
|
11,751
|
|
|
|
-
|
|
|
|
11,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
8,518,732
|
|
|
$
|
916,051
|
|
|
$
|
426,217
|
|
|
$
|
9,860,900
|
|
|
|
As of December 31, 2019
|
|
|
|
Corporate
|
|
|
Medical Foods and Nutraceuticals
|
|
|
Medical Devices
|
|
|
Total
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
11,115,502
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11,115,502
|
|
Inventories, net
|
|
|
5,003
|
|
|
|
126,708
|
|
|
|
179,230
|
|
|
|
310,941
|
|
Other
|
|
|
7,399
|
|
|
|
219,223
|
|
|
|
214,653
|
|
|
|
441,275
|
|
Total current assets
|
|
|
11,127,904
|
|
|
|
345,931
|
|
|
|
393,883
|
|
|
|
11,867,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Right of use asset
|
|
|
-
|
|
|
|
509,464
|
|
|
|
63,250
|
|
|
|
572,714
|
|
Property and equipment, net
|
|
|
-
|
|
|
|
219,056
|
|
|
|
155,582
|
|
|
|
374,638
|
|
Intangible assets, net
|
|
|
-
|
|
|
|
50,000
|
|
|
|
-
|
|
|
|
50,000
|
|
Other
|
|
|
-
|
|
|
|
11,751
|
|
|
|
-
|
|
|
|
11,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
11,127,904
|
|
|
$
|
1,136,202
|
|
|
$
|
612,715
|
|
|
$
|
12,876,821
|
|
14.
|
Commitments
and Contingencies
|
The Company is
periodically the subject of various pending or threatened legal actions and claims arising out of its operations in the normal
course of business. In the opinion of management of the Company, adequate provision has been made in the Company’s financial
statements at December 31, 2020 with respect to such matters. See notes 6,7, 11 and 13.
The Company performed
an evaluation of subsequent events through the date of filing of these consolidated financial statements with the SEC. Other than
those matters described below, there were no material subsequent events which affected, or could affect, the amounts or disclosures
in the consolidated financial statements.
Sale
of common stock
On
January 8, 2021, we entered into the Sales Agreement and filed a prospectus supplement pursuant to which we could sell up to $10,000,000
worth of shares of our common stock in an “at the market” offering through the Distribution Agent (the “January
2021 1st ATM Offering”). On January 15, 2021, we completed the January 2021 1st ATM Offering, pursuant
to which we sold an aggregate of 2,559,833 shares of our common stock, raised gross proceeds of approximately $10,000,000
and net proceeds of approximately $9,500,000.
On
January 28, 2021, we entered into the Sales Agreement and filed a prospectus supplement pursuant to which we could sell up to
$25,000,000 worth of shares of our common stock in an “at the market” offering through the Distribution Agent
(the “January 2021 2nd ATM Offering”). On February 10, 2021, we completed the January 2021 2nd
ATM Offering, pursuant to which we sold an aggregate of 5,006,900 shares of our common stock, raised gross proceeds of
approximately $25,000,000 and net proceeds of approximately $24,100,000.
In
addition, in January 2021 and February 2021, the Company issued an aggregate of 1,647,691 shares of common stock upon
the exercise of warrants and received $3,608,509.
The
following table sets forth the Company’s assets, liabilities, and stockholders’ equity as December 31, 2020 on:
●
an actual basis; and
●
a pro forma basis giving effect to the January 2021 1st ATM Offering and January 2021 2nd ATM Offering as
well as the exercise of warrants.
|
|
As of December 31, 2020
|
|
|
|
Actual
|
|
|
Pro Forma (unaudited)
|
|
Cash and cash equivalents
|
|
$
|
8,518,732
|
|
|
$
|
45,727,241
|
|
Other current assets
|
|
|
576,151
|
|
|
|
576,151
|
|
Non-current assets
|
|
|
766,017
|
|
|
|
766,017
|
|
Total assets
|
|
$
|
9,860,900
|
|
|
$
|
47,069,409
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
1,073,731
|
|
|
$
|
1,073,731
|
|
Non-current liabilities
|
|
|
271,903
|
|
|
|
271,903
|
|
Total liabilities
|
|
|
1,345,634
|
|
|
|
1,345,634
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
15,171
|
|
|
|
24,427
|
|
Additional paid-in capital
|
|
|
62,583,423
|
|
|
|
99,782,676
|
|
Accumulated deficit
|
|
|
(54,083,328
|
)
|
|
|
(54,083,328
|
)
|
Total stockholders’ equity
|
|
|
8,515,266
|
|
|
|
45,723,775
|
|
Total liabilities and stockholders’ equity
|
|
$
|
9,860,900
|
|
|
$
|
47,069,409
|
|
The Company had
a total of 15,170,628 shares of common stock (actual) and 24,426,993 shares of common stock (pro forma, which includes an addition
of 41,941 shares attributed to the reverse-split fractional share adjustment) issued and outstanding at December 31, 2020.
Appointment
of New CEO
Effective
as of January 6, 2021, the Board of Directors appointed Bret Scholtes as President and Chief Executive Officer and as a director
of the Company.
The Company and
Mr. Scholtes entered into an employment pursuant to which Mr. Scholtes’s annual base salary is $400,000. The Employment
Agreement provides that Mr. Scholtes shall have an annual target cash bonus opportunity of no less than $400,000 (the “Bonus”)
based on the achievement of Company and individual performance objectives to be determined by the Board of Directors.
Mr. Scholtes was
granted an award of a number of stock options equal to one percent (1%) of the issued and outstanding number of shares of the
Company’s common stock (the “Stock Options”) pursuant to the Company’s 2018 Equity Incentive Plan (the
“Incentive Plan”), at an exercise price equal to the closing price of the Company’s common stock on the Effective
Date (152,671 shares, exercise price of $3.95 per share) . One third (1/3) of the Stock Options shall vest and become exercisable
the first anniversary of the Effective Date, and the balance of the Stock Options shall vest ratably in equal installments for
the twenty-four (24) months thereafter, subject to continued service, and shall vest in full upon a Change in Control (as defined
in the Incentive Plan). Additionally, the Company shall grant unvested shares of common stock in an amount equal to one percent
(1%) of the number of shares of Company common stock issued and outstanding on the Effective Date (the “Stock Grant”)
to Mr. Scholtes under the Incentive Plan (152,671 shares). The shares underlying the Stock Grant shall become vested in full on
the first anniversary of the Effective Date. Additionally, Mr. Scholtes shall be granted (i) additional stock options equal to
two percent (2%) of the Company’s issued and outstanding shares of common stock on the date of grant if the Company achieves
specified written performance objectives established by the Board for the Company’s fiscal years ending December 31, 2021
and December 31, 2022 and (ii) additional stock options equal to either two percent (2%) or three percent (3%) of the Company’s
issued and outstanding shares of common stock on the date of grant if the Company meets certain financial objectives during the
first five years following the Effective Date.
If Mr. Scholtes’s
employment is terminated by the Company without cause (as defined in the Employment Agreement), if the Term expires after a notice
of non-renewal is delivered by the Company or if Mr. Scholtes’s employment is terminated following a change of control (as
defined in the Incentive Plan), Mr. Scholtes will be entitled to (a) twelve months’ base salary, (b) the prorated portion
of the Bonus for the year in which the termination occurs, based on actual performance and (c) base salary and benefits accrued
through the date of termination.