Background
Entia Biosciences, Inc. (“Entia”) develops patented, pharmaceutical-grade organic compounds, including a foundational compound called ErgoD2
®
. We believe that ErgoD2 improves iron homeostasis and mitigates iron-related disorders presenting in anemia, chronic kidney disease and select neurodegenerative diseases. Our goal is to clinically validate and commercialize ErgoD2 through the medical food and OTC supplement channels. We also develop and market health-related nutraceuticals and cosmeceuticals.
We have licensed a patent that gives us the exclusive worldwide rights to the methods for identifying and obtaining compounds, such as ErgoD2, capable of modulating the genetic transporter for L-ergothioneine (“Ergo”). Ergo is a powerful amino acid that is essential to life. Ergo cannot be synthesized by mammals but is acquired exclusively from the diet and, most importantly, must be carried by this unique and specific ergothioneine transporter (human gene symbol SLC22A4) to cells throughout the body. We have also licensed the exclusive rights to UV light enrichment technology for ergocalciferol, the food-based version of vitamin D2. Vitamin D deficiency, has been linked to a variety of serious medical conditions. We believe that both of our patent licenses and patents pending, along with several other elements of our intellectual property portfolio that address a variety of diseases, give us a competitive advantage in the use of ErgoD2 as a medical food, a nutraceutical and a cosmeceutical.
Since 2011, we have been conducting pre-clinical and clinical pilot studies evaluating proprietary organic compounds, such as ErgoD2, that contain elevated concentrations of these two nutrients and other important co-factors found in mushrooms. These and other research studies have confirmed significant transporter activity in anemia/diabetes, arthritis, alopecia areata (hair loss) and other serious non-communicable chronic conditions. These studies have also revealed significant observable improvements in symptoms and disease-associated biomarkers in patients with anemia/diabetes, Parkinson’s disease, and chronic kidney disease. We have also conducted several immunohistochemistry (“IHC”) studies that have confirmed significant ergothioneine transporter ("ETT") activity at the sites of rapidly dividing cells (macrophages and stem cells), suggesting that Ergo is genetically required to prevent/repair damage from free radicals and oxidative stress as well as to support the production/maintenance of healthy cells. All of these results suggest an important physiologic role for Ergo in chronic diseases, particularly iron-related disorders and auto-immune conditions that afflict millions of people worldwide.
We have filed patent applications on the use of ErgoD2 in several therapeutic and non-therapeutic applications and have commenced or will commence follow-on studies to confirm our positive initial clinical results in larger patient populations, with the objective of releasing our branded medical foods for the treatment of a variety of afflictions. We anticipate these afflictions to include chronic kidney disease, autism, Parkinson's disease, multiple sclerosis and psoriasis, to name a few. We plan to explore other important potential therapies as our funding allows. OTC-strength versions of these formulations and other consumer-oriented products for the general wellness and beauty markets are currently being offered online and through a limited number of resellers by our wholly owned subsidiary, Total Nutraceutical Solutions (“TNS”). In 2014, the Company signed its first national distribution agreement for GROH
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, a boutique medical luxury line of hair and skin care products being distributed through professional high-end salons and day spas.
Our Business
ErgoD2 is a proprietary pharmaceutical-grade organic compound created from whole foods that contain the micro-nutrients L-ergothioneine, an amino acid that has a dedicated transporter (SLC22A4) in every human being, and vitamin D2 that has been naturally enriched using our licensed patent technology. These genetically required nutrients have recently been implicated by independent scientists in metabolic iron regulation and intracellular iron chelation/transportation, indicating their therapeutic potential. We believe that our ErgoD2 platform may play an essential role in achieving iron homeostasis in various disease states and will be the core of our innovative medical food therapies. Our clinical studies aim to evaluate the nutritional effects of ErgoD2 in iron homeostasis, red blood cell production, neuronal function, and the immune system. We hope to further prove that our medical foods containing ErgoD2 are applicable to and will aid in the nutritional management of diseases such as chronic kidney disease, autism, Parkinson’s disease, multiple sclerosis, psoriasis and others.
Chronic kidney disease.
During 2015, we have undertaken our first major clinical study focused on a particular disease – chronic kidney disease (“CKD”). In the United States alone, more than one in ten adults or approximately 25 million persons suffer from early to late-stage CKD. Most CKD patients only see a primary care physician and have limited access to therapy beyond suggested lifestyle modifications (dietary restrictions and iron supplementation). The prevalence of anemia is approximately 16% in CKD or four million people. In addition, more than 600,000 U.S. patients are being treated for end-stage renal disease by dialysis or kidney transplantation. We believe that our medical food product will become a widely used, cost-effective companion therapy in treating this disease, reducing mortality risks and improving quality of life. This combinational approach also seeks to reduce the amount of erythropoiesis-stimulating agents ("ESAs") and other expensive drugs needed for treatment, dramatically increasing the bottom line for dialysis providers that are subject to capped reimbursement rates. According to the National Kidney Foundation, about $68 billion was spent in treating CKD patients in 2013, not including prescription medications. Accordingly, we believe that CKD offers a significant opportunity for Entia.
Other diseases.
Several additional market opportunities in which ErgoD2 may apply are available to Entia in the form of other diseases. For example, autism affects over three million individuals in the U.S. and tens of millions worldwide and U.S. government autism statistics suggest that prevalence rates have increased ten to 17 percent annually in recent years. As other examples, there are more than one million people living with Parkinson’s disease in the U.S. and another 300,000 with multiple sclerosis. In our opinion, ErgoD2 does not just apply in CKD, autism or Parkinson’s, but also potentially in a number of auto-immune conditions in which iron is a factor, including diabetes, rheumatoid arthritis (joints), psoriasis (skin/nails), and alopecia (hair).
Medical Foods
We intend to integrate into these existing market opportunities by leveraging the regulatory advantages contained in the Orphan Drug Act (21 U.S.C. 360ee (b) (3)) and the 1988 Orphan Drug Act Amendments related to medical foods. Medical foods are foods that are specially formulated and intended for the dietary management of a disease that has distinctive nutritional needs that cannot be met by normal diet alone. Unlike common OTC supplements for general wellness, which are not allowed to make claims of efficacy, medical foods are used under medical supervision to tackle nutritional deficiencies related to a specific medical condition or disease being treated. When used in conjunction with existing medical therapies, medical foods may also reduce required medication dosages and can be effective in preventing or reducing the associated side effects. Although medical foods are regulated by the U.S. Food and Drug Administration (“FDA”) under the Food Drug and Cosmetic Act regulations 21 CFR 101.9(j) (8), they are not required to undergo premarket review or approval by the FDA. Additionally, they are exempted from the labeling requirements for health claims and nutrient content claims under the Nutrition Labeling and Education Act of 1990. Also, this significantly decreases the overall timing, investment, and risks typically associated with bringing a new pharmaceutical to market.
A medical food, as defined in the Orphan Drug Act, is "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." A food is subject to this exemption only if:
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It is a specially formulated and processed product (as opposed to a naturally occurring foodstuff used in its natural state) for the partial or exclusive feeding of a patient by means of oral intake or enteral feeding by tube;
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It is intended for the dietary management of a patient who, because of therapeutic or chronic medical needs, has limited or impaired capacity to ingest, digest, absorb, or metabolize ordinary foodstuffs or certain nutrients, or who has other special medically determined nutrient requirements, the dietary management of which cannot be achieved by the modification of the normal diet alone;
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It provides nutritional support specifically modified for the management of the unique nutrient needs that result from the specific disease or condition, as determined by medical evaluation;
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It is intended to be used under medical supervision; and
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It is intended only for a patient receiving active and ongoing medical supervision wherein the patient requires medical care on a recurring basis for, among other things, instructions on the use of the medical food.
To bring our ErgoD2-based medical foods to market, we plan to clinically validate their efficacy through independent studies that will comprehensively evaluate disease-associated biomarkers and their relationship with markers of iron regulation, and assess the ability to improve quality of life and health. Our upcoming follow-on clinical studies will focus on neurodegenerative and auto-immune conditions, as funding allows.
ErgoD2
Our ErgoD2 formulations utilize organically cultivated specialty mushrooms available from a number of domestic and international suppliers. These mushroom-based products are a food and are generally regarded as safe ("GRAS"). Our market and scientific research has identified mushroom species and suppliers to provide the superior nutritional profiles for our ErgoD2 formulations. We systematically test our raw and finished ingredients to ensure quality control and confirm that these nutritional profiles are maintained.
The mushroom fruit bodies are dried, milled into powder, blended, and then enhanced using a patented UV light enrichment process that naturally increases vitamin D2 content by over 2000% within seconds. We have also developed extraction methods that separate the Ergo and other water-soluble cofactors from the D2, chitin-glucans and other solids contained in the UV-enriched powder. These functional ingredients can then be encapsulated or used in medical foods and other branded products. Our manufacturing processes for ErgoD2 are 100% USDA certified organic and are currently being performed in-house by Entia technicians. We intend to expand our manufacturing capacity and efficiency as funding allows.
Functional Ingredients
L-ergothioneine
(Ergo) is a naturally occurring amino acid and master antioxidant that mammals are incapable of producing. Acquired exclusively from the diet, Ergo is carried to cells throughout the body by a unique and specific genetic transporter (human gene symbol SLC22A4). Research studies and peer-reviewed articles have reported that Ergo has the ability to act as a chelator and/or regulator for iron and is a potent cytoprotectant that is required for normal cell physiology and DNA protection from free radicals.
Working with Lifespan Biosciences in 2011 and 2012, we identified an antibody that detects Ergo transporter activity in both human and animal tissues using immunohistochemistry (IHC). Our research has confirmed high concentrations of the Ergo transporter in a number of serious non-communicable chronic conditions and at the sites of rapidly dividing cells (macrophages and stem cells) suggesting the body genetically requires Ergo to prevent and/or repair damage from inflammation and free radicals and to support the production and maintenance of healthy cells.
Vitamin D
is an essential antioxidant that is frequently called the “sunshine vitamin.” Vitamin D can be manufactured in mammals through skin exposure to sunlight or ingested from the diet. Like Ergo, sufficient levels of vitamin D are vital to upkeep of a strong immune system and cell proliferation and differentiation. Deficiency has been linked to various health problems including CKD, hair loss, obesity, diabetes, cancer, heart disease, inflammatory illnesses, depression, multiple sclerosis, and other neurodegenerative diseases.
Vitamin D is primarily available in two active forms, ergocalciferol (vitamin D2) and cholecalciferol (vitamin D3), and is an important food additive currently used in a variety of fortified food products including milk, margarine, cereal, orange juice, and vitamin supplements. Vitamin D2 is plant-based and produced in naturally high concentrations within mushrooms. Ingestible forms of vitamin D3 are typically non-vegan and extracted from animal lanolin or chemically synthesized. Entia’s patented UV light enrichment technology naturally increases the D2 content in mushrooms by more than 2000% within seconds.
Our Products
We have been developing and studying the application of our ErgoD2 platform technology and functional ingredients in medical foods and other consumer health and wellness brands that address significant, high dollar-value market opportunities. Although our primary focus will be on medical foods, we have developed and market both nutraceuticals (supplements) and cosmeceuticals.
Patent License and Acquisition Agreements
In March, 2010, Entia acquired from the University of Cologne, Cologne, Germany, an exclusive license to the patent application entitled; “Identification of Ergothioneine Transporter and Therapeutic Uses Thereof.” Patent application No. PCT/EP 2005/005613 entitled; “Identification of Ergothioneine Transporter and Therapeutic Uses Thereof.” Filed on May 24, 2005, U.S. Patent Application No. 11/569,451 filed on June 25, 2007. On March 9, 2010 Entia acquired from the University of Cologne, Cologne, Germany, an exclusive license agreement to this patent application. Issued in the Nation of Canada in 2012.; Issued in the U.S. and Israel in 2013.
In June 2010, Entia acquired from The Penn State Research Foundation (PSRF) an exclusive license to U.S. patent application No. 12/386,810 entitled “Methods of Use and Rapid Generation of Vitamin D2 from Mushrooms and Fungi Using Pulsed UV-light.” filed on April 23, 2009 and based on 61/047,268 entitled “Methods and Compositions for Improving the Nutritional Content of Mushrooms and Fungi” filed April 23, 2008. Issued in the United States in 2013 and issued in Canada in 2014.
Under the Exclusive License Agreement with PSRF, Entia undertook to pay a royalty on net sales of dietary supplements and nutraceutical or medical foods, functional ingredients and other products -utilizing the patented technology. Entia also undertook to pay the costs of filing, prosecuting and maintaining and defending the licensed patent and undertook to obtain and carry commercial general liability insurance for not less than $1 million per occurrence for personal injury or death once it begins to manufacture products based on the patented technology.
The following patent applications were assigned to us by our Chief Science and Technology Officer, Marvin S. Hausman, MD, and where applicable, other inventors:
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U.S. patent application No. 61/277,150, filed September 21, 2009, entitled “Vitamin Fortified Mushrooms and Fungi for Increasing Survivability and Longevity."
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U.S. patent application No. 61/280,578, filed November 5, 2009, entitled “Vitamin Fortified Mushrooms and Fungi for Increasing Resistance to Oxidative Stress."
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U.S. patent application No. 61/335,394, filed January 6, 2010, entitled “Vitamin D Enriched Mushrooms and Fungi for Treating Alzheimer’s Disease, Taupathies, and Other Disease States Associated with Amyloid Precursor Protein.”
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U.S. patent application No. 12/887,276, PCT US10/49684, filed on September 21, 2010, entitled: “Vitamin D2 Enriched Mushrooms and Fungi for Treatment of Oxidative Stress, Alzheimer’s Disease and Associated Disease States.”
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U.S. patent application No. 61/496,321, filed on June 13, 2011, entitled “A Nutritional Approach to the Control of Anemia and Prevention of Associated Comorbid States with the Use of Ergothioneine.”
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International application published on December 20,2012, PCT/US2012/042131; Entitled: “A Nutritional Approach to the Control of Anemia, Diabetes and Other Diseases or Conditions and Prevention of Associated Comorbid States with the Use of Ergothioneine.”
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U.S. patent application No. 61/581,480, filed on December 29, 2011, entitled “A Nutritional Approach to the use of Ergothioneine for Hair and Nail Growth.”
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International application filed December 21,2012, PCT/U.S.12/71170; Entitled: “A Nutritional Approach to the Use of Ergothioneine and Vitamin D2 for Hair, Nail and Skin Growth.”
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PCT/U.S. 2008/056234, Serial number 12/529,859, entitled “Use of Ergothioneine as a Preservative in Foods and Beverages,” issued in Canada in 2011.
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U.S. patent application No. 13/363,579, filed on February 1, 2012, entitled “Anti-inflammatory Approach to Prevention and Suppression of Post-Traumatic Stress Disorder, Traumatic Brain Injury, Depression, and Associated Disease States.”
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PCT/U.S. 13/47853, filed on June 26,2013, entitled “A Nutritional Approach to Improving Athletic Performance and Reducing Injury with L-Ergothioneine and/or Vitamin D2.”
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On November 10, 2009, we acquired rights to the patent application PCT/U.S. 2008/056234 Serial number 12/529,859 entitled “Use of Ergothioneine as a Preservative in Foods and Beverages.” The transfer of the patent to Entia was subject to an “Assignment and Assumption” agreement between Dr. Philip Sobol, Dr. Robert Beelman, and Dr. Marvin Hausman. Under that agreement, Entia agreed to issue a maximum of 150,000 shares of common stock to the assignors upon the first to occur of the following events: upon issuance of the patent in the U.S. (100,000 shares), upon issuance of the patent in the first European Union jurisdiction (50,000 shares), if Entia enters into a license agreement for the patent with any third party (150,000 shares), or upon the successful commercialization of any product or technology covered by the patent (50,000 shares). Upon the successful commercialization of any product or technology covered by the patent, we will pay the assignors a royalty equal to 3% of net sales of any such product or technology and/or 20% of any sublicensing payments if the patent is sublicensed. The patent was issued in Canada in February 2011 and 100,000 shares were issued on April 27, 2011.
Production, Distribution and Marketing
In 2012, Entia began to integrate the enrichment, encapsulation and bottling process of its supplement products into its manufacturing, fulfillment and operation center located in Sherwood, Oregon. During 2013, we expanded our production capabilities to include the manufacturing & bottling process related to our GROH-branded soaps, lotions and conditioners.
We utilize several methods of marketing and distribution for our branded products. Consumer products are marketed direct to the consumer primarily through the internet utilizing a variety of e-commerce channels, such as, direct email marketing, social media outlets and e-commerce sites like Totalnutraceutical.com and Amazon.com. Our GROH line of products are primarily marketed to reseller networks made up of high-end salons and day spas. We have also engaged several distribution partners to accelerate the launch of the products within the salon and spa industry.
Competitive Environment
The medical foods, dietary supplements and beauty markets are highly competitive, with many well-known and established suppliers. The biotechnology industry is subject to rapid change. New products are constantly being introduced to the market. Our ability to remain competitive depends on our ability to develop and manufacture new products in a timely and cost effective manner, to accurately predict market transitions, and to effectively market our products. Our future financial results will depend to a great extent on the successful introduction of several new products. We cannot be certain that we will be successful in selecting, developing, contract manufacturing and marketing new products.
The success of new product introductions depends on various factors, including, but not limited to the following:
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availability of raw materials;
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pricing of raw materials;
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timely delivery of new products;
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regulatory allowance of the products; and
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customer acceptance of new products
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We face challenges in developing new products, primarily those of funding development costs and diversion of management time. On a regular basis, we evaluate opportunities to develop new products through product line extensions and product modifications. There is no assurance that we will successfully develop product line extensions or integrate newly developed products into our business. In addition, there are no assurances that newly developed products will contribute favorably to our operations and financial condition. Our failure to develop and introduce new products on a timely basis could adversely affect our future operating results.
Industry
Our markets, particularly the nutritional supplements and beauty industries are intensely competitive.
Nutritional supplements (nutraceuticals) - includes companies that manufacture and distribute products which are generally intended to enhance the body's performance as well as to enhance well-being. Nutritional supplements include vitamins, minerals, dietary supplements, herbs, botanicals and compounds derived therefrom. Opportunities in the nutritional supplements industry were enhanced by the enactment of the Dietary Supplement Health and Education Act of 1994 ("DSHEA"). Under DSHEA, vendors of dietary supplements are now able to educate consumers regarding the effects of certain component ingredients. However, they are subject to many existing and proposed new regulations regarding labeling and advertising of such products. See “Government Regulation” below.
Beauty (cosmeceuticals) - The beauty industry today encompasses far more than cosmetics and skin care products, though they are still a significant portion of the sector. A wide range of services and products are available and the beauty industry now also encompasses hair styling and hair removal, nail and tanning salons, massage parlors, shower and shaving products, perfumes, colognes and more.
Competition
Nutritional supplements industry.
The nutritional supplements industry (which includes nutraceutical and medical foods) is quite fragmented, with many small and large companies participating. The fragmented nature of the industry offers scope for mergers, acquisitions and new companies to rise to leadership positions provided they bring new innovative products to the market. The major players in the global nutritional supplements industry include Atrium Innovations, Glanbia Plc, NBTY Inc., and Herbalife Ltd.
These companies market and distribute their products through various channels including: retail, multi-level marketing, e-commerce, and direct to consumer marketing (direct mail, TV & Radio infomercials, and email).
The market is highly sensitive to the introduction of new products and management has positioned Entia as an emerging nutraceuticals company with collaborative research projects at major universities, including but not limited to Massachusetts General Hospital, Pennsylvania State University, and the University of Cologne. This position has allowed us to license and build upon a significant portfolio of intellectual property, which is being utilized to secure proprietary nature of our manufacturing process and our intended new products applications. Furthermore, we will align our products, when advantageous, to take advantage the protection granted under the Orphan Drug Act, which allows for the development of medical foods to treat specific disease conditions. This approach will aid us in introducing specific, innovative medical foods products rapidly to market.
Beauty industry.
The beauty industry is characterized by the skin care, makeup, fragrance and hair care products and undergoes vigorous competition throughout the world. Brand recognition, quality, performance and price have a significant impact on consumers’ choices among competing products and brands. Advertising, promotion, merchandising, the pace and timing of new product introductions, line extensions and the quality of in-store demonstrations also have a significant impact on consumers’ buying decisions.
The GROH brand is a boutique medical luxury line which seeks to align itself within the ‘Beauty of Wellness’ category of professional products. The Beauty of Wellness category is becoming more attractive to high-end salons and day spas seeking to increase revenue growth through retail product offerings without having to replace their existing hair and skincare products lines. Consumers within this category are seeking to support their healthy lifestyle changes and are seeking products that are natural and effective but free of dyes, chemicals, parabens, and the like. We compete against a number of companies, some of which have substantially greater resources than we do.
Our principal competitors consist of large, well-known, multinational manufacturers and marketers of skin care, makeup, fragrance and hair care products, most of which market and sell their products under multiple brand names. They include, among others, L’Oreal S.A.; Shiseido Company, Ltd.; LVMH Moët Hennessey Louis Vuitton; Coty, Inc.; The Procter & Gamble Company; and Avon Products, Inc. We also face competition from a number of independent brands, as well as some retailers that have developed their own beauty brands.
Government Regulation
The term “medical food” means a food which is formulated to be consumed or administered 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.
In the Nutrition Labeling and Education Act of 1990 (“NLEA”), Congress incorporated the definition of medical foods contained in the Orphan Drug Amendments of 1988 into 21 U.S.C. § 343(q)(5)(A)(iv) of the Federal Food, Drug and Cosmetic Act (“FDCA”) and exempted medical foods from the nutrition labeling, health claim, and nutrient content claim requirements applicable to most other foods. The final rule on mandatory labeling (58 FR 2079 at 2151, January 6, 1993) exempted medical foods from the nutrition labeling requirements and incorporated the statutory definition of a medical food into the agency’s regulations in regulation 21 C.F.R. § 101.9(j)(8). The FDA enumerated criteria that were intended to clarify the characteristics of medical foods. The regulation provides that a food may claim the exemption from nutrition labeling requirements only if it meets the following criteria:
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It is a specially formulated and processed product (as opposed to a naturally occurring foodstuff used in its natural state) for the partial or exclusive feeding of a patient by means of oral intake or enteral feeding by tube;
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It is intended for the dietary management of a patient who, because of therapeutic or chronic medical needs, has limited or impaired capacity to ingest, digest, absorb, or metabolize ordinary foodstuffs or certain nutrients, or who has other special medically determined nutrient requirements, the dietary management of which cannot be achieved by the modification of the normal diet alone;
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It provides nutritional support specifically modified for the management of the unique nutrient needs that result from the specific disease or condition, as determined by medical evaluation;
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It is intended to be used under medical supervision; and
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It is intended only for a patient receiving active and ongoing medical supervision wherein the patient requires medical care on a recurring basis for, among other things, instructions on the use of the medical food.
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Medical Foods are Protected Under the Proxmire Amendments and DSHEA
Congress enacted legislation (Pub. L. 94-278, Title V, April 22, 1976) that became section 411 of the act (21 USC 350) (known as the “Proxmire Amendment”). This amendment prevents the FDA from classifying any vitamin or mineral as a drug solely because it exceeds a potency level that is deemed to have a nutritionally sound rationale. In order to be excluded from regulation as a "drug" under the provisions of 21 USC § 350(a) and 21 USC § 350(b) or, in other words, in order to be a food to which 21 USC § 350 applies, a product must, under the definition of that phrase in 21 USC § 350(c), be a food for humans which is a food for special dietary use, (A) which is [a] vitamin . . . , and (B) which – (i) is intended for ingestion in tablet, capsule, powder, softgel, gelcap, or liquid form, or (ii) if not intended for ingestion in such a form, is not represented as conventional food and is not represented for use as a sole item of a meal or of a diet. (See United States v. Ten Cartons, 888 F. Supp. 381, 1995 U.S. Dist. LEXIS 3925 (E.D.N.Y.1995)).
Compliance with Environmental Laws
We are not aware of any environmental laws that have been enacted, nor are we aware of any such laws being contemplated for the future, that impact issues specific to our business. In our industry, environmental laws are anticipated to apply directly to the owners and operators of companies.
Employees
We currently have six full-time employees and one part-time employee. Depending upon demand, we occasionally utilize a number of additional part-time employees to manufacture and produce products.
Risk Factors Relating to Our Company
We have significant outstanding interest-bearing debt which we must repay from limited operating and financing cash flows.
We currently have aggregate convertible debt in the principal amount of $185,000 at annual interest rates ranging from 6% to 10%. Of this aggregate principal debt, $50,000 plus accrued interest at 8% per annum is due on November 25, 2018 and $50,000 plus accrued interest is in litigation ($85,000 of this debt has been rolled over to maturities ranging from one to three years.) Much of the debt is convertible into shares of our Company at the option of the payee and, under certain circumstances, at our option. Given that our revenues have not been sufficient to allow for repayment of this debt, we will likely have to undertake financings involving new debt or equity securities to repay these obligations as they come due or further extend their maturities.
We may not be able to raise sufficient capital or generate adequate revenue to meet our obligations and fund our operating expenses.
Failure to raise adequate capital and generate adequate sales revenues to meet our obligations, including our debt, pay our significant accounts payable and accrued expenses of $1,018,752 and develop and sustain our operations could result in reducing or ceasing our operations. Additional financing may not be available on acceptable terms, if at all, and our failure to raise sufficient capital in a timely manner could negatively impact our growth strategy or otherwise materially adversely affect our business. Additional equity financing may be dilutive to the holders of our common stock, and debt financing may involve significant cash payment obligations and financial or other business covenants that restrict our ability to operate our business as we might otherwise choose. If we are unable to raise sufficient funds from additional borrowing, private placements or public offerings to meet our debt obligations, we may default on that debt, leaving us unable to continue in business. If we do not pay certain creditors of our accounts payable, we may lose crucial services rendered to our Company. Additionally, even if we do raise sufficient capital and generate revenues to support our operating expenses, there can be no assurances that the revenue will be sufficient to enable us to develop business to a level where it will generate profits and cash flows from operations. These matters raise substantial doubt about our ability to continue as a going concern.
We expect losses in the future.
We have generated limited revenues and we expect losses over the next year since we have modest revenues to offset the expenses associated in executing our business plan. As disclosed in this annual report on Form 10-K for the year ended December 31, 2015, our revenues decreased substantially from $656,342 for the fiscal year ended December 31, 2014 to $346,910 for the fiscal year ended December 31, 2015 with a net loss decreasing from $(2,296,591) for the fiscal year ended December 31, 2014 to $(2,260,050) for the fiscal year ended December 31, 2015. We are unable to give any assurance that we will ever be successful in generating substantial revenues in the future or becoming profitable. We recognize that if we are unable to generate substantial revenues, we will not be able to earn profits or continue operations as a going concern.
There is only a limited corporate history upon which to base any assumption as to the likelihood that we will be successful, and we can provide investors with no assurance that we will generate substantial operating revenues or ever achieve profitable operations.
As discussed in the Notes to the Consolidated Financial Statements included in this annual report for our fiscal year ended December 31, 2015 we had a working capital deficit of $(1,111,458). We had a net loss of $(2,260,050) for the year ending December 31, 2015 and an accumulated deficit of $(13,076,992) from inception (on July 19, 2007) through December 31, 2015.
These factors raise substantial doubt that we will be able to continue operations as a going concern, and our independent auditors included an explanatory paragraph regarding this uncertainty in their audit report. Our ability to continue as a going concern is dependent upon our generating sufficient operating cash flow from operations and other financing activities. We may not be successful in addressing these issues. If we cannot continue as a going concern, our stockholders may lose their entire investment in the Company.
Our future profitability is uncertain.
We cannot predict our ability to achieve profitability. Our research and development expenses are expected to increase as we develop and clinically test new potential products. As evidenced by the substantial net losses during 2015 and 2014, losses and expenses may increase and fluctuate from year to year. There can be no assurance that we will ever achieve profitable operations.
To date, we have been unable to operate profitably. In order to establish our business, we will likely incur additional expenses for additional personnel, marketing and advertising, information systems, rent and other overhead to support these activities. We therefore expect to incur substantial operating losses for the foreseeable future. Our ability to become profitable depends on our ability to successfully develop and market our products and operations, while maintaining reasonable expense levels, all of which are uncertain in light of our absence of any prior profitable operating history.
We may not be able to successfully put in place the necessary financial, administrative, and managerial structure and the development of such structure will require a significant amount of management's time and other resources.
Our financial results have fluctuated in the past and may fluctuate in the future, which may cause volatility in our valuation.
Our operating results have fluctuated in the past and we expect our future quarterly and annual operating results to fluctuate as we focus on increasing healthcare provider and consumer demand for our products. These fluctuations could cause the value of our enterprise and, accordingly, the value of our common and preferred stock or other securities to decline or significantly fluctuate. Some of the factors that could cause our operating results to fluctuate include:
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limited visibility into and difficulty predicting the level of activity in individual health care providers’ practices from quarter to quarter;
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weakness in consumer spending as a result of the slowdown in the United States economy and global economies;
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changes in relationships with distributors;
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changes in the timing of receipt of product orders during a given quarter which, given our cycle time and the delay between case receipts and case shipments, could have an impact on which quarter revenue can be recognized;
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fluctuations in currency exchange rates against the U.S. dollar;
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changes in product mix;
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our inability to predict from period to period the number of healthcare professionals recommending or otherwise depending on our products as part of a treatment regimen, which may impact the timing of when revenue is recognized;
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seasonal fluctuations in the number of doctors in their offices and their availability to take appointments;
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success of or changes to our marketing programs from quarter to quarter;
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timing of industry tradeshows;
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changes in the timing of when revenue is recognized, including as a result of the introduction of new products or promotions or as a result of changes to critical accounting estimates or new accounting pronouncements;
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changes to our effective tax rate;
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unanticipated delays in production caused by insufficient capacity or availability of raw materials;
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any disruptions in the manufacturing process (external to us), including unexpected turnover in the labor force or the introduction of new production processes, power outages or natural or other disasters beyond our control;
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the development and marketing of directly competitive products by existing and new competitors;
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major changes in available technology or the preferences of customers may cause our current product offerings to become less competitive or obsolete;
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aggressive price competition from competitors;
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costs and expenditures in connection with litigation;
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the timing of new product introductions by us and our competitors, as well as customer order deferrals in anticipation of enhancements or new products;
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disruptions to our business due to political, economic or other social instability, including the impact of an epidemic any of which results in changes in consumer spending habits, consumers unable or unwilling to visit health care professionals, as well as any impact on workforce absenteeism;
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inaccurate forecasting of net revenues, production and other operating costs; and
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investments in research and development to develop new products and enhancements.
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To respond to these and other factors, we may need to make business decisions that could adversely affect our operating results such as modifications to our pricing policy, business structure or operations. Most of our expenses, such as employee compensation and lease payment obligations, are relatively fixed in the short term. Moreover, our expense levels are based, in part, on our expectations regarding future revenue levels. As a result, if our net revenues for a particular period fall below our expectations, whether caused by changes in consumer spending, consumer preferences, weakness in the U.S. or global economies, changes in customer behavior related to advertising and prescribing our product, or other factors, we may be unable to adjust spending quickly enough to offset any shortfall in net revenues. Due to these and other factors, we believe that period-to-period comparisons, particularly quarter-to-quarter comparisons, of our operating results may not be meaningful. You should not rely on our results for any one quarter or other period as an indication of our future performance.
Our future success may depend on our ability to develop, gain regulatory approval for and successfully introduce and achieve market acceptance of new products.
Although we are now only subject to limited amounts of government regulation, our future success may depend on our ability to develop, manufacture, market, and obtain regulatory approval or clearance of new products. Complying with future government regulation may be an expensive and time-consuming process, and failure to comply could result in substantial penalties. There can be no assurance that we will be able to successfully develop, sell and achieve market acceptance of these and other new products and applications and enhanced versions of our existing product, related technology and intellectual property. The extent of, and rate at which, market acceptance and penetration are achieved by future products, related technologies and intellectual property is a function of many variables, which include, among other things, our ability to:
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correctly identify customer needs and preferences and predict future needs and preferences;
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include functionality and features that address customer requirements;
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allocate our research and development funding to products with higher growth prospects;
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anticipate and respond to our competitors’ development of new products and technological innovations;
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effectively differentiate our product offerings from our competitors’ product offerings;
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innovate and develop new technologies and applications;
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if and when applicable, effectively communicate the availability of third-party reimbursement of procedures using our products;
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obtain adequate intellectual property rights; and
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encourage customers to adopt new product technologies.
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If we fail to accurately predict customer needs and preferences or fail to produce viable technologies, we may invest heavily in research and development of products, related technologies and intellectual property that do not lead to significant revenue. Even if we successfully innovate and develop new products and produce enhancements, the related clinical studies are expensive and time consuming and we may incur substantial costs in undertaking such studies, and our profitability may suffer.
Our ability to market and sell new products may also become subject to government regulation, including approval or clearance by the United States Food and Drug Administration (“FDA”), and foreign government agencies. Any failure in our ability to successfully develop and introduce or achieve market acceptance of our new products or enhanced versions of existing products could have a material adverse effect on our operating results and could cause our net revenues to decline.
A disruption in the operations of freight carriers or higher shipping costs could cause a decline in our net revenues or a reduction in our earnings.
Indirectly, we are dependent on commercial freight carriers to deliver our products. If the operations of these carriers are disrupted for any reason, delivery of our products to our customers may be disrupted or untimely. If our products cannot be delivered in an efficient and timely manner, our net revenues and operating profits could materially decline. In a rising fuel cost environment, freight costs will increase. If freight costs materially increase, our gross margin and financial results could be adversely affected.
Our business is sensitive to perceptions of the public and of the medical community.
Our business is sensitive to public perception. If any product we develop proves to be harmful to consumers or if scientific studies provide unfavorable findings regarding their safety or effectiveness, then our image in the marketplace would be negatively impacted. Additionally, inasmuch as our medical foods target specific diseases whose sufferers are under the care of general practitioners and/or specialists, should our medical foods fail to win the confidence of those health care professionals, our image and operating results could suffer.
Our results of operations may be significantly affected by the public’s perception of our Company and similar companies. In addition, our business could be adversely affected if any of our future products prove to be harmful to consumers or if scientific studies provide unfavorable findings regarding the safety or effectiveness of our products or any similar products. Moreover, the U.S. FDA, FTC or other government agencies could potentially regulate our industry in the future and adversely affect our marketing ability and success. While quality control testing is conducted on the ingredients in such products, we are highly dependent upon consumers' perception of the overall integrity of the dietary supplements business. The safety and quality of products made by competitors in our industry may not adhere to the same quality standards that ours do, and may result in a negative consumer perception of the entire industry. If our products suffer from negative consumer perception, it is likely our sales will slow and we will have difficultly generating revenues.
If our products do not have the healthful effects intended, our business may suffer.
In general, our products consist of regulated medical foods and certain consumer products which are classified in the United States as “dietary supplements” which we believe do not require approval from the FDA or other regulatory agencies prior to sale. Although many of the ingredients in such products are vitamins, minerals, herbs and other substances for which there is a long history of human consumption, they may also contain innovative ingredients or combinations of ingredients. Although we believe all of such products and the combinations of ingredients in them are safe when taken as directed, there is little long-term experience with human or other animal consumption of certain of these innovative product ingredients or combinations thereof in concentrated form. The products could have certain side effects if not taken as directed or if taken by a consumer that has certain medical conditions. In addition, such products have been proven to be more effective when taken in accordance with certain instructions which include certain dietary restrictions. Therefore, such products may not be effective if such instructions are not followed. Furthermore, there can be no assurance that any of the products, even when used as directed, will have the effects intended or will not have harmful side effects. If any of such products were shown to be harmful or negative publicity resulted from an individual who was allegedly harmed by one product, it could hurt our business, profitability and growth prospects.
We may not be able to compete with larger entities, the majority of whom have greater resources and experience than we do.
The market for nutraceutical and medical food products is highly competitive. Numerous manufacturers and distributors compete with us for customers throughout the United States, Canada and internationally in the packaged nutritional supplement industry selling products to retailers such as mass merchandisers, drug store chains, independent pharmacies, and health food stores. Many of our competitors are substantially larger and more experienced than we are. In addition, they have longer operating histories and have materially greater financial and other resources than we do. They therefore have the advantage of having established reputations, brand names, track records, back office and managerial support systems and other advantages that we may be unable to duplicate in the near future. Many of these competitors are private companies, and therefore, we cannot compare our revenues with respect to the sales volume of each competitor. If we cannot compete in the marketplace, we may have difficulty selling our products and generating revenues. Additionally, competition may drive down the prices of our products, which could adversely affect our profitability, if any.
We are also subject to competition from many drug companies due to the fact that some of our products have what we believe to be health benefits that certain drugs are created to produce. We are also subject to competition in the attraction and retention of employees. Many of our competitors have greater financial resources and can offer employees compensation packages with which it is difficult for us to compete.
As we grow, we are subject to growth-related risks, including risks related to capacity constraints at our existing facilities.
We are subject to growth-related risks, including capacity constraints and pressure on our internal systems and personnel. In order to manage current operations and future growth effectively, we will need to continue to implement and improve our operational, financial and management information systems and to hire, train, motivate, manage and retain employees. We may be unable to manage such growth effectively. Any such failure could have a material adverse impact on our business, operations and prospects. Expansion can inherently include additional costs and start-up inefficiencies, as well as the inability to successfully integrate additional facilities, equipment, systems or incremental capacity and to realize anticipated synergies, economies of scale or other value. Periods of contraction or reduced net sales, or other factors, create other challenges. Because we cannot always immediately adapt our capacity and related cost structures to changing market conditions, our systems capacity may at times exceed or fall short of our requirements. Any or all of these problems could result in the loss of customers, provide an opportunity for competing products to gain market acceptance and otherwise harm our business and financial results.
We depend upon our executive officers and key personnel.
Our performance depends substantially on the performance of our executive officers. Our Chief Executive Officer, Carl Johnson oversees all Company-related operations. Our Chief Science and Technology Officer, Marvin S. Hausman, M.D., is the inventor of the process and formulas used to manufacture the future products to be sold by us. We anticipate that he will be the developer of any additional products that we plan to add to our product line. Our Chief Operating and Financial Officer, Timothy Timmins, is responsible for our day-to-day operations. The loss of services of our executives could have a material adverse effect on our business, revenues, and results of operations or financial condition. We do not maintain key person life insurance on the lives of our officers or key employees but have agreed to do so when our financial condition allows.
The success of our business in the future will depend on our ability to attract, train, retain and motivate high quality personnel. Competition for talented personnel is intense, and we may not be able to continue to attract, train, retain or motivate other highly qualified technical and managerial personnel in the future. In addition, market conditions may require us to pay higher compensation to qualified management and technical personnel than we currently anticipate. Any inability to attract and retain qualified management and technical personnel in the future could have a material adverse effect on our business, prospects, financial condition, and/or results of operations.
Our success is dependent upon our ability to protect and promote our proprietary rights.
Our success will depend in part on our ability to maintain existing intellectual property, both licensed and owned, and to obtain and maintain further intellectual property protection for our products, both in the U.S. and in other countries. Our success will further depend in large part on our ability to protect and promote our proprietary rights to our formulas and proprietary processes and ingredients.
Our ability to compete effectively depends, to a significant extent, on our ability to maintain the proprietary nature of our intellectual property. There can be no assurance that the scope of the steps we take to protect all of our interests cannot be circumvented, or that it will not violate the proprietary rights of others, or that we will not be prevented from using our product if challenged. In fact, even if broad enough, others may still infringe upon our rights, which will be costly to protect. Furthermore, the laws of other countries may less effectively protect our proprietary rights than U.S. laws. Infringement of our rights by a third party could result in uncompensated lost markets and revenue opportunities.
We are at risk for product liability claims and require adequate insurance to protect us against such claims. If we are unable to secure the necessary insurance coverage at affordable cost to protect our business against any claims, then our exposure to liability will greatly increase and our ability to market and sell our products will be more difficult since certain customers rely on this insurance in order to distribute our products.
We are also constantly at risk that consumers and users of our products will bring lawsuits alleging product liability. We are not aware of any consumer claims threatened or pending against us that would adversely affect our business. While we will continue to attempt to take what we consider to be appropriate precautions, these precautions may not protect us from significant product liability exposure in the future. Although we presently are protected by product liability insurance, there can be no assurance that we will be able to retain coverage in the future and, if not, there can be no assurance that we would be able to replace lost coverage on a cost-justified basis, in a sufficient amount or at all. We may not have sufficient resources to defend against or pay damages from a material lawsuit; this could negatively impact our business.
If we infringe the patents or proprietary rights of other parties or are subject to a patent infringement claim, or if we are required to initiate litigation against others in order to protect or assert our intellectual property rights, our ability to grow our business may be severely limited.
Extensive litigation over patents and other intellectual property rights is common in the healthcare industry. We may be the subject of patent or other litigation in the future. From time to time, we may in the future receive letters from third parties drawing our attention to their patent rights. While we do not believe that we infringe upon any valid and enforceable rights, whether or not these have been brought to our attention, there may be other more pertinent rights of which we are presently unaware. In addition, because patent applications in the United States are maintained in secrecy until patents issue, and because publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain that we and our licensors are the first creators of inventions covered by any licensed patent applications or patents or that we or they are the first to file. The Patent and Trademark Office may commence interference proceedings involving patents or patent applications, in which the question of first inventorship is contested. Accordingly, the patents owned or licensed to us may not be valid or may not afford us protection against competitors with similar technology, and the patent applications licensed to us may not result in the issuance of patents. The defense and prosecution of intellectual property suits, interference proceedings and related legal and administrative proceedings could result in substantial expense to us and significant diversion of effort by our technical and management personnel. An adverse determination of any litigation or interference proceeding to which we may become a party or which we initiate could subject us to significant liabilities. An adverse determination of this nature could also put our patents at risk of being invalidated or interpreted narrowly or require us to seek licenses from third parties. Licenses may not be available on commercially reasonable terms or at all, in which event, our business would be materially adversely affected.
From time to time, we may maintain single-supply relationships for certain of our business elements and materials technologies, and our business and operating results could be harmed if supply is restricted or ends or the price of raw materials (generally wire) used in our manufacturing process increases.
We purchase substantially all of our key raw material, mushrooms (in various forms), from a single source. If this or other suppliers encounter financial, operating or other difficulties or if our relationship with them changes, we might not be able to quickly establish or qualify replacement sources of supply and could face production interruptions, delays and inefficiencies. Although the bulk of the mushrooms we use are not rare, we cannot give any assurance that they will remain available in plentiful supply or at economically viable prices. Although the raw materials we use are not subjected to extraordinary regulation over and above that normally required by regulatory agencies such as the FDA, nor are unusual environmental legal considerations weighing directly upon our product, we cannot give any assurance that this regulatory status will continue. Our growth may exceed the capacity of one or more of our suppliers to produce the needed materials in sufficient quantities to support our growth. We may in the future, in order to secure supplies for production of our products, enter into non-cancelable purchase commitments with vendors, which could impact our ability to adjust our inventory to reflect declining market demands. If demand for our products is less than we expect, we may experience additional excess and obsolete inventories and be forced to incur additional charges and our profitability may suffer. In the event of technology changes, delivery delays, or shortages of or increases in price for these items, our business and growth prospects may be harmed.
Risks Relating to Our Common Shares and Other Securities
We have incurred significant costs as a result of being a public company.
As a public company, we have incurred significant legal, accounting and other expenses that we would not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as related rules adopted by the Securities and Exchange Commission, has imposed substantial requirements on public companies, including certain corporate governance practices and requirements relating to internal control over financial reporting. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. In addition, in the future we may be required to document, evaluate, and test our internal control procedures under Section 404 of the Sarbanes-Oxley Act and the related rules of the Securities and Exchange Commission which will be costly and time consuming. Effective internal controls are necessary for us to produce reliable financial reports and are important in helping prevent financial fraud. If we are unable to achieve and maintain adequate internal controls, our business and operating results could be harmed.
We may issue shares of preferred stock in the future that may adversely impact rights of holders of our existing classes of common and preferred stock.
Our articles of incorporation, as consented to and ratified by our recently completed consent solicitation, authorize us to issue up to 5,000,000 shares of preferred stock. To date, we have issued an aggregate of 306,969 shares of Series A Preferred Stock, of which 191,307 shares remain unconverted and outstanding, with each preferred share convertible into 10 shares of common stock. Our board of directors has the authority to fix and determine the relative rights and preferences of preferred shares, as well as the authority to issue such shares, without further stockholder approval. As a result, our board of directors could authorize the issuance of additional series of preferred stock that would grant to holders of such preferred shares preferred rights to our assets upon liquidation, the right to receive dividends before dividends are declared to holders of other classes of our stock, and the right to the redemption of such preferred shares, together with a premium, prior to the redemption of other classes of our stock. To the extent that we do issue such additional shares of preferred stock, rights of holders of other classes of our stock could be impaired thereby, including, without limitation, dilution of ownership interests in the Company. In addition, shares of preferred stock could be issued with terms calculated to delay or prevent a change in control or make removal of management more difficult, which may not be in the interests of holders of other classes of our stock.
We may, in the future, issue additional common shares, which would reduce investors' percent of ownership and may dilute our share value.
Our Articles of Incorporation authorize the issuance of 150,000,000 shares of common stock. The future issuance of common stock may result in substantial dilution in the percentage of our common stock held by our then existing shareholders. We may value any common stock issued in the future on an arbitrary basis. The issuance of common stock for future services or acquisitions or other corporate actions may have the effect of diluting the value of the shares held by our investors, and might have an adverse effect on any trading market for our common stock.
Our officers/directors own a significant interest in our voting stock which could limit the ability of the other shareholders to express their voice and result in decisions adverse to the interests of our general shareholders.
Our officers and directors, in the aggregate, beneficially own approximately or have the right to vote approximately 20.2% of our outstanding common stock. As a result of potential future bonuses and other equity awards, these officers and directors could, in the aggregate, beneficially own or have the right to vote even more of our outstanding common stock. As a result, these stockholders, acting together, could influence matters submitted to our stockholders for approval including:
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election of our board of directors;
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removal of any of our directors;
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significant corporate transactions;
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amendment of our Articles of Incorporation or bylaws; and
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adoption of measures that could delay or prevent a change in control or impede a merger, takeover or other business combination involving us.
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In addition, the future prospect of sales of significant amounts of shares held by our directors and executive officers could affect the market price of our common stock if the marketplace does not orderly adjust to the increase in shares in the market and the value of your investment in the Company may decrease. Management's stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price.
Additionally, our officers/directors, in the aggregate, beneficially own a significant amount of our outstanding preferred stock. As a result, these preferred stockholders, acting together, could influence matters related to our preferred stock including, but not limited to the following:
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Rights and privileges of the preferred class, including anti-dilution provisions; and
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Existence of the class itself, in the case of mandatory or forced conversion to our common shares.
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There is
a limited
public market for our
common stock
. Historically, the market value for our company has been
difficult to
determin
e
.
There is a limited public market for our common stock. We cannot assure our investors that a robust public market for our shares will develop in the future. As a result, investors may not be able to realize any return on their investment for a considerable period of time, if ever. Therefore, any investment in our securities should be considered a long-term investment and may be illiquid for an indefinite period of time. Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”) currently requires that the Shares must be held a minimum of six months, and there is no assurance that the Shares will be available for resale under Rule 144 in six months or ever. To effect a sale, all certificates evidencing the common shares that bear a legend restricting transfer, except upon registration under the Securities Act or pursuant to a valid exemption from such registration, must be supported by an opinion of counsel to the Company or a no-action letter issued by the Commission.
If it can at all be determined, the market value of our company and its securities could be subject to wide valuation fluctuations in response to various factors, many of which are beyond our control. The factors include:
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Periodic variations in our results of operations and liquidity;
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Speculation in the press or investment community concerning our business and results of operations;
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Strategic actions by our competitors, such as product announcements or acquisitions;
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Announcements of technological innovations or new products by us, our customers or competitors; and
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General economic market conditions.
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In addition, the stock market in general, and the market for healthcare companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated to or disproportionate to the operating performance of those companies. Although only a limited public market for our common stock currently exists, these broad market and industry factors may seriously harm the market value of our company in a private financing or sale, regardless of our operating performance.
Our common shares are subject to the "Penny Stock" Rules of the SEC and the trading market in our securities is limited, which makes transactions in our stock cumbersome and may reduce the value of an investment in our stock.
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions.
For any transaction involving a penny stock, unless exempt, the rules require: (a) that a broker or dealer approve a person's account for transactions in penny stocks; and (b) the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the broker or dealer must: (a) obtain financial information and investment experience objectives of the person; and (b) make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form: (a) sets forth the basis on which the broker or dealer made the suitability determination; and (b) that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common shares and cause a decline in the market value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
Because we do not intend to pay any cash dividends on our common stock, our stockholders will not be able to receive a return on their shares unless they sell them.
We intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. Unless we pay dividends, our stockholders will not be able to receive a return on their shares unless they sell them. There is no assurance that stockholders will be able to sell shares when desired.
It
em 1B. Unresolved Staff Comments.
None.
Our corporate headquarters are located at 13565 SW Tualatin-Sherwood Road, Suite #800, Sherwood, Oregon 97140. We believe our current office space is adequate for our immediate needs; however, as our operations expand, we may need to relocate and/or secure additional office space.
Ite
m 3. Legal Proceedings.
From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
At December 31, 2015, we were and continue to be a party to litigation with respect to a note payable, with a face amount of $50,000 and the accrued interest thereon. Additionally, we are involved in arbitration with a former employee who has made claims against us, along with other potential allegations seeking approximately $93,000, plus punitive damages. In both cases, the Company will defend itself vigorously and reserves the right to make counter claims against the adversarial parties. Although we believe that these situations will be settled in due time, without material effect to the Company or its future operations, we can offer no assurance to that effect.
Ite
m 4. Mine Safety Disclosures.
Not Applicable