Attached files
Registration Statement No. 333-
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 2016
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
GUARDION HEALTH SCIENCES, INC.
(Exact name of Registrant as specified in its charter)
| Delaware | 3851 | 47-4428421 | ||
|
(State or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification No.) |
15150 Avenue of Science, Suite 200
San Diego, California 92128
Telephone: 858-605-9055
Telecopier: (858) 630-5543
(Address and telephone number of principal executive offices)
Michael Favish, Chief Executive Officer
15150 Avenue of Science, Suite 200
San Diego, California 92128
Telephone: 858-605-9055
Telecopier: (858) 630-5543
(Name, address and telephone number of agent for service)
Copy to:
| Elliot H. Lutzker, Esq. | |
| Davidoff Hutcher & Citron, LLP | |
| 605 Third Avenue, 34th Floor | |
| New York, New York 10158 | |
| Telephone: (212) 557-7200 | |
| Telecopier: (212) 286-1884 |
Approximate Date of Proposed Sale to the Public: As soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. þ
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ¨ | Accelerated filer | ¨ |
| Non-accelerated filer | ¨ | Smaller reporting company | þ |
| (Do not check if a smaller reporting company) |
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to be Registered | Shares to be Registered | Proposed Maximum Aggregate Offering Price per Security(1) | Proposed Maximum Aggregate Offering Price (1) | Amount of Registration Fee (1) | ||||||||||||
| Common Stock, par value $.001 | 21,906,396 shs | $ | 0.60 | (2) | $ | 13,143,837.60 | $ | 1,323.58 | ||||||||
| Shares of Common Stock, par value $.001 underlying Warrants | 1,435,166 shs | (3)(4) | $ | 0.54 | (5) | $ | 777,989.51 | $ | 78.34 | |||||||
| Shares of Common Stock, par value $.001 underlying promissory notes | 1,264,997 shs | (4)(6) | $ | 0.47 | (5) | $ | 595,689.32 | $ | 59.99 | |||||||
| TOTAL | 24,606,559 shs | $ | — | $ | 14,517,516.43 | $ | 1,461.91 | |||||||||
| (1) | This offering price is solely for the purpose of calculating the registration fee in accordance with Rule 457 under the Securities Act of 1933, as amended (the “Act”) and is based, in part, upon the last private sale of the Company’s common stock. |
| (2) | Based on the last sale price of the Company’s common stock. |
| (3) | Shares issuable upon exercise of warrants held by Selling Securityholders. |
| (4) | Pursuant to Rule 416 under the Securities Act of 1933, this registration statement shall be deemed to cover additional securities (i) to be offered or issued in connection with any provision of any securities purported to be registered hereby pursuant to terms which provide for a change in the amount of securities being offered or issued to prevent dilution resulting from stock splits, stock dividends, or similar transactions and (ii) of the same class as the securities covered by this registration statement issued or issuable prior to completion of the distribution of the securities covered by this registration statement as a result of a split of, or a stock dividend on, the registered securities. |
| (5) | Pursuant to Rule 457(g) under the Act, the offering price is based upon the respective, average exercise or conversion price. |
| (6) | Shares issuable upon conversion of promissory notes, and related interest, held by Selling Securityholders, one note of which was sold on April 1, 2015 for $500,000 convertible upon certain going public events, and four notes that were sold during the current private placement each of different amounts that are automatically convertible upon going public events. |
This Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
SUBJECT TO COMPLETION, DATED FEBRUARY 11, 2016
The information in this prospectus is not complete and may be changed. The Selling Securityholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Prospectus
24,606,559 Shares of Common Stock
GUARDION HEALTH SCIENCES, INC.
This prospectus relates to the sale by the selling securityholders (the “Selling Securityholders”) of Guardion Health Sciences, Inc. (the “Company” or “Guardion”) as identified in this prospectus of up to 21,906,396 shares of common stock issued and outstanding, 1,435,166 shares issuable upon exercise of common stock purchase warrants and 1,264,997 shares issuable upon conversion of promissory notes. See “Selling Securityholders.” This is the initial public offering of Guardian Health Sciences, Inc.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Selling Securityholders and any broker-dealers that participate in the distribution of the securities may be deemed to be “underwriters” as that term is defined in Section 2(11) of the Securities Act of 1933, as amended.
Prior to this offering, there has been no public market for our shares of common stock.
We are an “emerging growth company” under the Federal Securities laws and will be subject to reduced public company reporting requirements as set forth on page 4 of this prospectus. The shares will be sold by the Selling Securityholders on an immediate and continuing basis. We intend to seek a listing of our common stock on the OTCQB, which is maintained by OTC Markets Group.
Investing in our common stock is highly speculative and involves a high degree of risk. You should carefully consider the risks and uncertainties described under the heading “Risk Factors” beginning on page 7 of this prospectus before making a decision to purchase our common stock.
The Date of this prospectus is _______________, 2016
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The prices at which the Selling Securityholders may sell shares will be determined by the prevailing market price for the shares or in negotiated transactions. We will not receive any proceeds from the sale of these shares by the Selling Securityholders. However, we will receive proceeds from the exercise of the warrants if they are exercised for cash by the Selling Securityholders.
ADDITIONAL INFORMATION
You should rely only on the information contained or incorporated by reference in this prospectus and in any accompanying prospectus supplement. No one has been authorized to provide you with different information. The shares are not being offered in any jurisdiction where the offer is not permitted. You should not assume that the information in this prospectus or any prospectus supplement is accurate as of any date other than the date on the front of such documents.
TABLE OF CONTENTS
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The following summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that may be important to you. You should read this entire prospectus carefully, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical financial statements and related notes included elsewhere in this prospectus. In this prospectus, unless otherwise noted, the terms “the Company,” “GHS,” “we,” “us,” and “our” refer to Guardion Health Sciences, Inc.
The Company
Overview
We are a specialty health sciences company that develops, formulates and distributes condition-specific medical foods with an initial medical food product that addresses a depleted macular protective pigment, which is a biomarker and leading cause of age-related macular degeneration (“AMD”), as well as computer vision syndrome (“CVS”). We have also developed a proprietary medical device that accurately measures the macular pigment density.
We currently develop and distribute a line of medical foods that restores the macular protective pigment to address AMD and CVS under the brand name Lumega-Z®. We are using our own proprietary patent-pending technology embodied in a medical device called the MapcatSFTM that measures the macular pigment. The MapcatSF is a patent-pending, non-mydriatic, non-invasive device that accurately measures the macular protective pigment density, thereby creating an evidence-based protocol that is shared with the patient. For the past three years, the clinic prototypes have been fully tested on patients, allowing for frequent modifications of the device’s algorithms and retesting for accuracy, as well as to provide the inclusion of additional features not previously considered in the initial prototype. The alpha prototype, which is the pre-commercial production version, was unveiled for the first time in July 2013 in Cambridge, United Kingdom, to all the researchers and scientists from around the world. The MapcatSF is manufactured and assembled in Irvine, California, and will be distributed from our national headquarters in San Diego. The marketing of the device will be implemented through continuing education presentations conducted by our key opinion leaders. The device is currently classified by the U.S. Food and Drug Administration (“FDA”) as a Class I medical device which does not require pre-market approval.
Lumega-Z is now the first liquid ocular health formula to be classified as a medical food (as defined in Section 5(b) of the “Orphan Drug Act”). Lumega-Z has a patent-pending, critical ingredient that replenishes and restores the macular protective pigment simultaneously delivering critical and essential nutrients to the eye. Formulated by Dr. Sheldon Hendler in 2010, modifications were made over a two-year period to improve the taste and method of delivery. The current formulation has been delivered to patients and used in clinics for the past three years. Patients who have taken Lumega-Z for a minimum period of three months have usually experienced an increase in their Macular Protective Pigment and noticeable halt in the progression of their AMD. Testimonials have been reported weekly regarding a noticeable improvement in their glare and contrast sensitivity. Over 250 patients have been set–up on an auto ship program for delivery every four weeks, which is primarily generated from three beta clinics. Our operations, to date, indicate that each MapcatSF deployed in a clinic generates an average of 75 new customers for our Lumega-Z product over a period of approximately 90 days when a MapcatSF is deployed in a small, low volume clinic. A larger, higher volume clinic is expected to generate a larger number of patients in a shorter period of time.
AMD is the leading cause of blindness in the world. More than 11 million people in the United States suffer from various forms of this incurable disease, according to the American Macular Degeneration Foundation. As the population ages, that number is expected to triple by 2025. Congress, the Food and Drug Administration (“FDA”), the Center for Medicare & Medicaid Services and private insurance companies are focusing increased efforts on pharmacovigilance (the branch of the pharmaceutical industry which assesses and monitors the safety of drugs either in the development pipeline or which have already been approved for marketing) to measure and reduce these adverse health consequences. We believe that there is an increasing level of acceptance of medical foods as a primary therapy by patients and healthcare providers to treat pain syndromes, sleep and cognitive disorders, obesity, hypertension, and viral infection. In clinical practice, medical foods are being prescribed as both a standalone therapy and as an adjunct therapy to low doses of commonly prescribed drugs.
Medical foods are neither dietary nor nutritional supplements. We believe that medical foods will continue to grow in importance over the coming years. From a regulatory standpoint, the FDA took steps in 1988 to encourage the development of medical foods by regulating this product category under the Orphan Drug Act. The term “medical food” as defined in Section 5(b) of the Orphan Drug Act is a “food which is formulated to be consumed or administered internally (by mouth) under the supervision of a physician and which is intended for the specific dietary management of a disease or condition for which distinctive nutritional requirements, based on recognized scientific principles, are established by medical evaluation.” This definition was incorporated by reference into the Nutrition Labeling and Education Act of 1990.
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These regulatory changes have reduced the costs and time associated with bringing medical foods to market. Until 1972, medical foods were categorized as drugs and then as “foods for special dietary purposes” until 1988. The field of candidates for development into medical foods is always expanding due to continuing advances in the understanding of the science of nutrition and disease, coupled with advances in food technology increasing the number of products that can be formulated and commercialized.
Corporate Strategy
Since there are no research-validated pharmaceutical offerings for slowing the progression of adult macular degeneration (“AMD”), it is necessary for physicians to recommend Age-Related Eye Disease Study (“AREDS”)-based supplements to their AMD patients. However, more than 90% of all AREDS-based nutritional products currently on the market are in tablet form. As previously discussed, tablets are difficult to administer and have a low efficiency of absorption. For this reason, some doctors may hesitate to prescribe tablet form AREDS-based nutraceuticals despite the fact that is all they have available to them.
Lumega-Z addresses this concern. In contrast, Lumega-Z is formulated using a proprietary molecular micronization process (“MMP”) to maximize efficiency of absorption and safety and to minimize compatibility issues.
Medical Foods Products Industry Overview
The science of nutrition was long overlooked and underdeveloped and has now shown that the sick and elderly have special nutritional needs that cannot be met by traditional adult diets. Medical nutrition has emerged as an attractive segment in the food industry today.
A number of diseases are associated with metabolic
imbalances and that patients in treatment have specific nutritional requirements. Some examples are ocular health, pain syndromes,
insomnia, cognitive disorders, IBS, and heart disease. Many older Americans have or will develop chronic diseases that are amenable
to the dietary management benefits of medical foods. Medical foods help address these diseases and conditions in a drug-free way
with food-based ingredients, yet are a medical product taken under supervision by a physician. The term “medical foods”
does not pertain to all foods fed to sick patients. Medical foods are foods that are specially formulated and processed (as opposed
to a naturally occurring foodstuff used in a natural state) for patients who are seriously ill or who requires
the product as a major treatment modality according to FDA regulations.
Medical foods consist of food-based ingredients that are part of the normal human diet and are Generally Recognized as Safe (“GRAS”) under FDA standards. Medical foods must make disease claims for which there is scientific evidence for the nutrient deficiencies that cannot be corrected by normal diet. Medical foods are intended for a vulnerable population suffering from a particular chronic disease and so have special, extra-rigorous guarantees of safety. All ingredients must be designated GRAS and used in therapeutic concentrations to address the particular nutritional needs of the patient. Medical foods are taken under the supervision of a physician or professional healthcare provider who monitors and adjusts the food ‘dosage.’ In addition, under FDA guidelines and congressionally approved laws medical foods do not require FDA preapproval but undergo continuous FDA monitoring and approval of label claims. Even though pre-market FDA approval is not required for a medical food, the official requirements and responsibilities for the manufacturer, in terms of safety, are greater than for dietary supplements, including solid scientific support for the formula as a whole. For these reasons, medical foods have greater guarantees of efficacy. In contradistinction, dietary supplements, such as vitamins, minerals and botanicals, do not require FDA preapproval, cannot make disease claims, are intended for normal people without disease and cannot claim that they prevent, mitigate or treat a given disease. Dietary supplements do not require physician supervision and can be administered to a person that can self-administer the supplement without supervision.
Implications of Being an Emerging Growth Company
As a company with less than $1.0 billion in revenue during our most recently completed fiscal year, we qualify as an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended, which we refer to as the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable, in general, to public companies that are not emerging growth companies. These provisions include:
| · | Reduced disclosure about our executive compensation arrangements; |
| · | No non-binding shareholder advisory votes on executive compensation or golden parachute arrangements; |
| · | Exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting; and |
| · | Reduced disclosure of financial information in this prospectus, limited to two years of audited financial information and two years of selected financial information. |
As a smaller reporting company, each of the foregoing exemptions is currently available to us. We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.0 billion in annual revenues as of the end of a fiscal year, if we are deemed to be a large-accelerated filer under the rules of the Securities and Exchange Commission (“SEC”), or if we issue more than $1.0 billion of non-convertible debt over a three-year-period.
The JOBS Act permits an emerging growth company to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. Therefore, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
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Corporate Information
Guardion Health Sciences, Inc. was formed under the name P4L Health Sciences, LLC in December, 2009 in California as a limited liability company. The Company changed its name to Guardion Health Sciences, LLC (“GHS”) in December 2009. In June 2015, GHS became a Delaware “C” corporation. The Company’s address is 15150 Avenue of Science, Suite 200, San Diego, California 92128. Our telephone number is 858-605-9055. Our website is: www.guardionhealth.com. The information on, or that can be accessed through, our website is not part of this prospectus, and you should not rely on any such information in making the decision whether to purchase our common stock.
The Offering
| Common Stock Offered |
An aggregate of 24,606,559 shares are being offered by the Selling Securityholders; consisting of 21,906,396 shares issued and outstanding; 1,435,166 shares underlying common stock purchase warrants, and 1,264,997 shares underlying promissory notes.
|
| Common Stock Outstanding (1) | 21,906,396. |
| Use of Proceeds | We will not receive any of the proceeds from the sale of shares by the Selling Securityholders. Any proceeds received from the exercise of warrants by Selling Securityholders will be used for working capital purposes. See “Use of Proceeds.” |
| Dividend Policy | We have never declared any cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in financing the growth of our business and do not anticipate paying any cash dividends for the foreseeable future. See “Dividend Policy.” |
| Trading Symbol | We intend to seek a listing of our common stock on the OTCQB, which is maintained by OTC Markets Group under the symbol “GHSC” if available. |
| Risk Factors | You should carefully consider the information set forth in this prospectus and, in particular, the specific factors set forth in the “Risk Factors” section beginning on page 6 of this prospectus before deciding whether or not to invest in our common stock. |
(1) Does not include 1,435,166 shares issuable upon exercise of outstanding warrants and 1,264,997 shares issuable upon conversion of promissory notes.
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Summary Financial Information
The following summary financial and operating data set forth below should be read in conjunction with our financial statements, the notes thereto and the other information contained in this prospectus. The summary statement of operations data for the years ended December 31, 2014 and 2013 have been derived from our audited financial statements appearing elsewhere in this prospectus. The summary balance sheet data as of September 30, 2015, and the statement of operations data for the nine months ended September 30, 2015 and 2014, have been derived from our unaudited consolidated financial statements appearing elsewhere in this prospectus The unaudited financial statements were prepared on a basis consistent with our audited financial statements and include, in the opinion of management, all adjustments necessary for the fair presentation of the financial information contained in those statements. The historical results presented below are not necessarily indicative of financial results to be achieved in future periods.
Statement of Operations Data:
| Nine Months Ended September 30, | Years Ended December 31, | |||||||||||||||
| 2015 | 2014 | 2014 | 2013 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| Revenue | $ | 86,802 | $ | 132,655 | $ | 164,582 | $ | 260,356 | ||||||||
| Cost of goods sold | 36,865 | 121,203 | 145,529 | 168,878 | ||||||||||||
| Gross profit | 49.937 | 11,452 | 19,053 | 91,478 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development (including $342,000 of stock-based compensation for the nine months ended September 30, 2015) | 386,673 | 46,711 | 43,436 | 259,786 | ||||||||||||
| Sales and marketing | 40,574 | 30,442 | 46,768 | 51,600 | ||||||||||||
| General and administrative (including $3,937,233 of stock-based compensation for the nine months ended September 30, 2015, of which $464,557 was to related parties) | 4,662,643 | 462,365 | 638,002 | 616,703 | ||||||||||||
| Total operating expenses | 5,089,890 | 539,518 | 728,206 | 928,089 | ||||||||||||
| Loss from operations | (5,039,953 | ) | (528,066 | ) | (709,153 | ) | (836,611 | ) | ||||||||
| Other expenses: | ||||||||||||||||
| Interest expense | 640,351 | 443,457 | 611,339 | 406,067 | ||||||||||||
| Cost to induce conversion of notes payable | 1,699,609 | - | - | - | ||||||||||||
| Loss on settlement of debt | 258,606 | - | - | - | ||||||||||||
| Total other expenses | 2,598,566 | 443,457 | 611,339 | 406,067 | ||||||||||||
| Net loss | $ | (7,638,519 | ) | $ | (971,523 | ) | $ | (1,320,492 | ) | $ | (1,242,678 | ) | ||||
| Basic and diluted net loss per common share | $ | (0.51 | ) | $ | (0.09 | ) | $ | (0.12 | ) | $ | (0.12 | ) | ||||
| Basic and diluted weighted average common shares outstanding | 14,894,883 | 10,821,827 | 10,821,827 | 10,711,515 | ||||||||||||
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Balance Sheet Data:
| As of September 30, | As of December 31, | |||||||||||
| 2015 | 2015 | 2014 | ||||||||||
| Balance Sheet Data: | ||||||||||||
| Cash | $ | 24,497 | $ | 6,160 | $ | 22,877 | ||||||
| Property, plant, and equipment, net | 185,827 | 214,166 | 249,121 | |||||||||
| Working capital | (508,727 | ) | (1,554,609 | ) | (236,480 | ) | ||||||
| Total assets | 290,881 | 273,876 | 462,645 | |||||||||
| Current portion of convertible note payable | 40,584 | 693,133 | 36,850 | |||||||||
| Current portion of convertible notes payable related party | 347,645 | 38,570 | ||||||||||
| Current portion of promissory notes payable | 3,762 | 35,000 | ||||||||||
| Convertible notes payable | 510,274 | 382,109 | 685,828 | |||||||||
| Convertible notes payable related party | - | 104,996 | 258,062 | |||||||||
| Promissory notes payable | - | 3,762 | - | |||||||||
| Stockholders’ deficit | (812,704 | ) | (1,812,633 | ) | (902,141 | ) | ||||||
WHERE YOU CAN FIND MORE INFORMATION
We will distribute annual reports to our stockholders, including financial statements audited and reported on by a registered public accounting firm. Any or all reports and other documents we will file with the SEC, as well as any or all of the documents incorporated by reference in this prospectus or the registration statement we filed with the SEC registering for resale the shares of our common stock being offered pursuant to this prospectus, are available at the SEC’s website www.sec.gov, as well as our website www.guardionhealth.com. If you do not have Internet access, requests for copies of such documents should be directed to Vincent J. Roth, the Company’s General Counsel, at Guardion Health Sciences, Inc., 15150 Avenue of Science, Suite 200, San Diego, CA 92128; Tel: 858-605-9055.
Statements contained in this prospectus concerning the provisions of any documents are summaries of those documents, and we refer you to the documents filed with the SEC for more information. This registration statement and any of its amendments, including exhibits filed as a part of this registration statement or an amendment to this registration statement are available for inspection and copying as described above.
Investing in our 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 prospectus, before purchasing shares of our common stock. There are numerous and varied risks that may prevent us from achieving our goals. If any of these risks actually occurs, our business, financial condition or results of operations may be materially adversely affected. In such case, the trading price of our common stock could decline and investors in our common stock could lose all or part of their investment.
Risks Related to Our Business
Our recurring operating losses have raised substantial doubt regarding our ability to continue as a going concern.
The Company has sustained recurring operating losses, which raises substantial doubt about its ability to continue as a going concern. The perception of our ability to continue as a going concern may make it more difficult for us to obtain financing for the continuation of our operations and could result in the loss of confidence by investors, suppliers and employees. Our audited financial statements for the year ended December 31, 2014 have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the Financial Statements the continuation of the Company as a going concern is dependent upon the Company raising additional debt and equity financing to fund future operations and to provide additional working capital. Our independent registered public accounting firm has included an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern in their audit report for the year ended December 31, 2014. If we are unable to raise additional capital, the Company will be forced to suspend or terminate operations and, in all likelihood, cause investors to lose their entire investment.
We have significant working capital requirements and have historically experienced negative working capital balances. If we continue to experience such negative working capital balances in the future, it could have a material adverse effect on our business, financial condition and results of operations.
As a result of our continued losses, the Company’s current liabilities significantly exceed current assets, resulting in negative working capital of approximately $508,727 at September 30, 2015. The Company is dependent upon obtaining additional financing to meet working capital needs and repay outstanding debt. Since our formation, the Company has relied on convertible notes from unrelated parties to fund its operating cash flow deficits. There is no assurance that we will generate the necessary net income or operating cash flows to meet our working capital requirements and pay our debt as it becomes due in the future due to a variety of factors and other factors discussed in this “Risk Factors” section. There can be no assurance, however, that we will be able to successfully take any of these actions, including adjusting expenses sufficiently or in a timely manner, or raising additional equity, increasing borrowings or completing a refinancing on any terms or on terms that are acceptable to us. Our inability to take these actions as and when necessary would materially adversely affect our liquidity, results of operations, financial condition and ability to operate.
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Our future success is largely dependent on the successful commercialization of Lumega-Z and the MapcatSF.
The future success of our business is largely dependent upon the successful commercialization of our medical food, Lumega-Z, and our medical device, the MapcatSF. We are dedicating a substantial amount of our resources to advance Lumega-Z and certain resources to advance MapcatSF as aggressively as possible over the next twelve months. If we encounter difficulties in the commercialization of Lumega-Z or the MapcatSF, we will not have the resources necessary to continue our business in its current form. If we are unable to establish and maintain adequate sales, marketing and distribution capabilities or enter into or maintain agreements with third parties to do so, we may be unable to successfully commercialize our products. We believe we are creating an efficient commercial organization, taking advantage of outsourcing options where prudent to maximize the effectiveness of our commercial expenditures. However, we may not be able to correctly judge the size and experience of the sales and marketing force and the scale of distribution necessary to be successful. Establishing and maintaining sales, marketing, and distribution capabilities are expensive and time-consuming. Such expenses may be disproportionate compared to the revenues we may be able to generate on sales of Lumega-Z or licensing fees or sales of the MapcatSF. If this occurs, it will have an adverse impact on operations and ability to fund any future development.
We have limited experience in developing medical foods and medical devices, and we may be unable to commercialize some of the products we develop.
Development and commercialization of medical foods and medical devices involves a lengthy and complex process. We have limited experience in developing products and have only one commercialized product on the market. In addition, no one has ever developed or commercialized a medical device like the MapcatSF, and we cannot assure you that it is possible to develop or commercialize Lumega-Z or the MapcatSF or that we will be successful in doing so.
Even if we develop 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 us to become profitable. We cannot assure you that our 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.
We and our 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 we or our suppliers or manufacturers are not in compliance with the laws and regulations to which we are subject, our business, financial condition and results of operations may be adversely affected.
As a participant in the healthcare industry, our operations and relationships, and those of our customers, are regulated by a number of federal, state and local governmental entities and our products must be capable of being used by our customers in a manner that complies with those laws and regulations. Inability of our customers to do so could affect the marketability of our products or our compliance with our customer contracts, or even expose us to direct liability on a theory that we had assisted our customers in a violation of healthcare laws or regulations. Because of our business relationships with physicians and professional healthcare providers, and since our product, Lumega-Z is a medical food and our product, the MapcatSF, is a medical device, a number of regulations are implicated. For example, from FDA’s perspective, a drug cures, treats, or mitigates the effects or symptoms of a specific disease. A medical food manages a specific disease or condition for which distinctive nutritional requirements, based on recognized scientific principles, are established by medical evaluation. While we believe Lumega-Z is a medical food, if the FDA was to determine Lumega-Z to be a drug, the Company and the product would be subject to additional FDA regulation. Similarly, while we believe the MapcatSF is a safe medical device, with a very low potential risk of injury to a patient, we believe the MapcatSF is correctly classified as a Class I medical device, which does not require any premarket approval. If, however, the FDA were to determine that the MapcatSF is a Class II medical device, the Company and the product would be subject to additional regulatory requirements. We cannot anticipate how changes in regulation or determinations by regulatory agencies may evolve. Thus, application of many state and federal regulations to our 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 our operations and relationships or the business practices of our customers. It is possible that a review of our business practices or those of our customers by courts or regulatory authorities could result in a determination that may adversely affect us. In addition, the healthcare regulatory environment may change in a way that restricts our existing operations or our growth. The healthcare industry is expected to continue to undergo significant changes for the foreseeable future, which could have an adverse effect on our business, financial condition and results of operations. We cannot predict the effect of possible future legislation and regulation.
We may be subject to fines, penalties, injunctions and other sanctions if we are deemed to be promoting the use of our products as a drug.
Our business and future growth depend on the development, use and ultimate sale of products that are subject to FDA regulation, clearance and approval. Under the U.S. Federal Food, Drug, and Cosmetic Act and other laws, we are prohibited from promoting our products for treatment of a condition or disease. This means that we may not make claims about the usefulness or effectiveness or expected outcome of use of our products for any particular condition or disease and may not proactively discuss or provide information on the use of our products, except as allowed by the FDA.
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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. We also face the risk that the FDA or other regulatory authorities might pursue enforcement based on past activities that we have discontinued or changed, including sales activities, arrangements with institutions and doctors, educational and training programs and other activities.
Government investigations are typically expensive, disruptive and burdensome and generate negative publicity. If our promotional activities are found to be in violation of applicable law or if we agree to a settlement in connection with an enforcement action, we would likely face significant fines and penalties and would likely be required to substantially change our sales, promotion and educational activities. In addition, were any enforcement actions against us or our senior officers to arise, we could be excluded from participation in U.S. government healthcare programs such as Medicare and Medicaid.
A key part of our business strategy is to establish collaborative relationships to commercialize and develop our product candidates. We may not succeed in establishing and maintaining collaborative relationships, which may significantly limit our ability to develop and commercialize our products successfully, if at all.
A key part of our business strategy is to establish collaborative relationships to commercialize and fund development of our product candidates. We may not be able to negotiate additional collaborations on acceptable terms, if at all, and if we do enter into collaborations, these collaborations may not be successful. Our current and future success depends in part on our ability to enter into successful collaboration arrangements. If we are unable to establish and maintain collaborative relationships on acceptable terms or to successfully transition terminated collaborative agreements, we may have to delay or discontinue further development of one or more of our product candidates, undertake development and commercialization activities at our own expense or find alternative sources of capital. Consequently, if we are unable to enter into, maintain or extend successful collaborations, our business may be harmed.
Our long-term success may depend upon the successful development and commercialization of products other than Lumega-Z and the MapcatSF.
Our long-term viability and growth may depend upon the successful development and commercialization of products other than Lumega-Z and the MapcatSF. 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, time-consuming and expensive process. If we fail to adequately manage the research, development, execution and regulatory aspects of new product development we may fail to launch new products altogether.
Government agencies may establish usage guidelines that directly apply to our products or proposed products or change legislation or regulations to which we are subject.
Government usage guidelines typically address matters such as usage and dose, among other factors. Application of these guidelines could limit the use of our products and products that we may develop. In addition, there can be no assurance that government regulations applicable to our products or proposed products or the interpretation thereof will not change and thereby prevent the marketing of some or all of our products for a period of time or permanently. The FDA’s policies may change and additional government regulations may be enacted that could modify, prevent, delay or change the regulatory approval required of our products. We cannot predict the likelihood, nature or extent of adverse government regulation that may arise from future legislation or administrative action, either in the U.S. or in other countries.
The pharmaceutical and biopharmaceutical industries are characterized by patent litigation and any litigation or claim against us may cause us to incur substantial costs, and could place a significant strain on our financial resources, divert the attention of management from our business and harm our reputation.
While we are not a pharmaceutical or a biotechnology company, as a health sciences company, our medical foods or our medical device 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. We expect that we will rely upon patents, trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain our competitive position. We may find it necessary to initiate claims to defend our intellectual property rights as a result. Other parties may have issued patents or be issued patents that may prevent the sale of our products or know-how or require us to license such patents and pay significant fees or royalties to produce our products. In addition, future patents may issue to third parties which our technology may infringe. Because patent applications can take many years to issue, there may be applications now pending of which we are unaware that may later result in issued patents that our products may infringe.
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Intellectual property litigation, regardless of outcome, is expensive and time-consuming, 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, we may be required to pay substantial damages, including treble damages and attorney’s fees if we were to be found to have willfully infringed a third party’s patent, to the party claiming infringement, develop non-infringing technology, stop selling any products we develop, 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. Our failure to develop non-infringing technologies or license the proprietary rights on a timely basis could harm our business. Modification of any products we develop or development of new products thereafter could require us 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 us from selling any products we develop, which could harm our business.
Our competitors may develop products similar to Lumega-Z, and we may therefore need to modify or alter our business strategy, which may delay the achievement of our goals.
Competitors may develop products with similar characteristics to Lumega-Z. Such similar products marketed by larger competitors could hinder our efforts to penetrate the market. As a result, we may be forced to modify or alter our 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 our goals.
If we are unable to develop our own sales, marketing and distribution capabilities, or if we are not successful in contracting with third parties for these services on favorable terms, or at all, revenues from any products we develop could be limited.
We currently have limited sales, marketing and distribution capabilities. To commercialize our products successfully, we have to develop more robust capabilities internally or collaborate with third parties that can perform these services for us. In the process of commercializing our products, we may not be able to hire the necessary experienced personnel and build sales, marketing and distribution operations capable of successfully launching new products and generating sufficient product revenues. In addition, establishing such operations takes time and involves significant expense.
If we decide 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 we receive would depend upon our partners’ efforts which may not be adequate due to lack of attention or resource commitments, management turnover, and change of strategic focus, further business combinations or other factors outside of our control. Depending upon the terms of our agreements, the remedies we have against an under-performing partner may be limited. If we were to terminate the relationship, it may be difficult or impossible to find a replacement partner on acceptable terms, or at all.
If we cannot compete successfully for market share against other companies, we may not achieve sufficient product revenues and our business will suffer.
The market for our products and product candidates is characterized by competition and technological advances. If our products are unable to capture and maintain market share, we may not achieve sufficient product revenues and our business will suffer.
We will compete for market share against fully integrated medical food and medical device companies or other companies that develop products independently or collaborate with larger pharmaceutical companies, academic institutions, government agencies and other public and private research organizations. In addition, many of these competitors, either alone or together with their collaborative partners, have substantially greater capital resources, larger research and development staffs and facilities, and greater financial resources than we do, as well as significantly greater experience in:
| ● | developing medical foods and medical devices; | |
| ● | conducting product testing and studies; | |
| ● | complying with regulatory requirements; | |
| ● | formulating and manufacturing products; and | |
| ● | launching, marketing, distributing and selling products. | |
Our competitors may:
| ● | develop and patent processes or products earlier than we will; | |
| ● | develop and commercialize products that are less expensive or more efficient than our products; | |
| ● | Comply with regulatory requirements more rapidly than us; or | |
| ● | improve upon existing technological approaches or develop new or different approaches that render our technology or products obsolete or uncompetitive. |
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If we are unable to compete successfully against current or future competitors, we may be unable to obtain market acceptance for any product candidates that we create, which could prevent us from generating revenues or achieving profitability and could cause the market price of our common stock to decline.
We may be unsuccessful in expanding our product distribution outside the United States.
To the extent we begin to offer our products outside the United States, we expect that we may be dependent on third-party distribution relationships. Distributors may not commit the necessary resources to market and sell our products to the level of our expectations. If distributors do not perform adequately, or we are unable to locate distributors in particular geographic areas, our ability to realize long-term international revenue growth would be materially adversely affected.
Additionally, our products may require regulatory clearances and approvals from jurisdictions outside the United States. We expect that we will be subject to and required to comply with local regulatory requirements before selling our products in those jurisdictions. We are not certain that we will be able to obtain these clearances or approvals or compliance requirements on a timely basis, or at all.
Manufacturing risks and inefficiencies may adversely affect our ability to produce products.
We engage third parties to manufacture our products in sufficient quantities and on a timely basis, while maintaining product quality and 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. 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.
Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our 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.
Our products and facility and the facilities of our manufacturers are subject to federal laws and regulations and certain requirements in the State of California. Failure to comply with any law or regulation could result in penalties and restrictions on our manufacturers’ ability to manufacture and our ability to distribute products. If any such action were to be imposed, it could have a material adverse effect on our business and results of operations.
Although medical foods do not require pre-market approval by the FDA, manufacturers of medical foods must be registered with the FDA under a provision promulgated by the Public Health Security and Bioterrorism Preparedness and Response Act of 2002 (the “Bioterrorism Act”). Manufacturers of medical foods are subject to periodic inspection by the FDA. The manufacture of our medical foods is outsourced in its entirety to a third party manufacturer. We are evaluating additional manufacturers for selection as second source or back-up providers. Our medical foods have not been reviewed by the FDA. There is no certainty that the FDA will favorably review our medical food products or our manufacturers’ facilities. If the outcome of an inspection is negative or if we or our manufacturers fail to comply with any law or regulation, we could be subject to penalties and restrictions on our manufacturers’ ability to manufacture and distribute products. Any such action may result in a material adverse effect on our business and results of operations. For a more complete discussion of the laws and regulations to which we are subject, see the section of this report titled “Description of Business - Government Regulation.”
A significant portion of the Company’s billings and revenues are derived from the sale of a single product.
In the nine months ended September 30, 2015, the Company derived 100% of its revenues from the sale of Lumega-Z®. While we continue to see an increasing demand for Lumega-Z from our customers, we cannot assure you that the demand will continue. A decline in sales of Lumega-Z to our customers may have an immediate adverse effect on our financial results.
A substantial portion of 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 our financial results.
In the nine months ended September 30, 2015, the Company’s billings were derived from a limited number of individual customers. The Company does not receive volume commitments from its customers. Customers may stop purchasing our products with little or no warning. Loss of customers may have an immediate adverse effect on our financial results.
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If we are forced to reduce our prices, our business, financial condition and results of operations may suffer.
We may be subject to pricing pressures with respect to our future sales arising from various sources, including practices of health insurance companies, healthcare providers and competition in the marketplace. If our pricing experiences significant downward pressure, our business could be less profitable and our results of operations may be adversely affected. In addition, because cash from sales funds our working capital requirements, reduced profitability could require us to raise additional capital to support our operations.
If we are unable to successfully introduce new products or fail to keep pace with medical advances and developments, our business, financial condition and results of operations may be adversely affected.
The successful implementation of our business model depends on our ability to adapt to evolving technologies and industry standards and introduce new products and services. We cannot assure you that we will be able to introduce new products on schedule, or at all, or that such products will achieve market acceptance. Moreover, competitors may develop competitive products that could adversely affect our results of operations. A failure by us to introduce planned products or other new products or to introduce these products on schedule may have an adverse effect on our business, financial condition and results of operations.
If we cannot adapt to changing technologies, our products and services may become obsolete, and our business could suffer. Because the healthcare industry is characterized by rapid technological change, we may be unable to anticipate changes in our current and potential customers’ requirements that could make our existing technology obsolete. Our success will depend, in part, on our ability to continue to enhance our existing products, develop new technology that addresses the needs of our prospective customers, license leading technologies and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis. The development of our proprietary technology entails significant technical and business risks. We may not be successful in using new technologies effectively or adapting our proprietary technology to evolving customer requirements or emerging industry standards, and, as a result, our business may suffer.
If customers do not accept our products, or delay in deciding whether to recommend our products and services, our 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 and understand and appreciate the benefits of Lumega-Z in order to recommend it to their patients. 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 our principal suppliers fail or are unable to perform their contracts with us, we may be unable to meet our commitments to our customers. As a result, our reputation and our relationships with our customers may be damaged and our business and results of operations may be adversely affected.
We currently purchase all our medical food ingredients and products from three vendors – one for carotenoids, one for Omega 3, and one for all other supplements. These companies are subject to FDA regulation and they are responsible for compliance with current Good Manufacturing Practices. Although our agreements provide that our suppliers will abide by the FDA manufacturing requirements, we cannot control their compliance. If they fail to comply with FDA manufacturing requirements, the FDA could prevent our vendors from manufacturing our products. Although we believe that there are a number of other sources of supply of ingredients and manufacturers of medical food products, if these suppliers are unable to perform under our agreements, particularly at certain critical times such as when we add new physician clients that will require a large production of one or more products, we may be unable to meet our commitments to our customers. If this were to happen, our reputation as well as our relationships with our customers may suffer and our business and results of operations may be adversely affected. We have evaluated several additional manufacturers for selection as second source or back-up providers.
If we incur costs exceeding our insurance coverage in lawsuits that are brought against us in the future, it could adversely affect our business, financial condition and results of operations.
If we were to become a defendant in any lawsuits involving the manufacture and sale of our products and if our insurance coverage were inadequate to satisfy these liabilities, it may have an adverse effect on our business, financial condition and results of operations.
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Our business depends on our intellectual property rights, and if we are unable to protect them, our 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. We protect our proprietary rights through a combination of patents, 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. In addition, we may have to engage in litigation in the future to enforce or protect our intellectual property rights or to defend against claims of invalidity, and we may incur substantial costs and the diversion of management’s time and attention as a result.
If we are deemed to infringe on the proprietary rights of third parties, we could incur unanticipated expense and be prevented from providing our products and services.
We could be subject to intellectual property infringement claims as the number of our competitors grows and our products and applications’ functionality overlaps with competitive products. 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.
We may not be able to protect our Intellectual Property.
The Company has two pending patent applications related to its products. 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. If we infringe the rights of third parties, we could be prevented from selling our products, forced to pay damages, and forced to incur substantial costs in defending litigations.
The patent process is subject to numerous risks and uncertainties, and there can be no assurance that we will be successful in protecting our products by obtaining and defending patents. These risks and uncertainties include the following:
| ● | Claims of issued patents, and the claims of any patents which may issue in the future and be owned by or licensed to the Company may be challenged by third parties, resulting in patents being deemed invalid, unenforceable, or narrowed in scope, a third party may circumvent any such issued patents, or such issued patents may not provide any significant commercial protection against competing products. | |
| ● | Our competitors, many of which have substantially greater resources than we do and many of which have made significant investments in competing technologies, may seek, or may already have obtained, patents that will limit, interfere with, or eliminate our ability to make, use, and sell our potential products either in the United States or in international markets. | |
| ● | 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. |
In addition, the United States Patent and Trademark Office, 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.
Our business depends in part on and will continue to depend in part on our ability to establish and maintain additional strategic relationships. Our failure to establish and maintain these relationships could make it more difficult to expand the reach of our products, which may have a material adverse effect on our business.
To be successful, we must continue to maintain our existing strategic relationships, such as our relationship with our vendors who manufacture our medical food products. We also must continue to establish additional strategic relationships with healthcare leaders. This is critical to our success because we believe that these relationships contribute towards our ability to extend the reach of our products and services to a larger number of physicians, professional healthcare providers and physician groups and to other participants in the healthcare industry; develop and deploy new products and services; enhance the Lumega-Z® brand in the U.S. and potentially the Lumega-Z brand internationally; and generate additional revenue and cash flows. Entering into strategic relationships is complicated because strategic partners may decide to compete with us in some or all of our markets. In addition, we may not be able to maintain or establish relationships with key participants in the healthcare industry if we conduct business with their competitors.
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We must attract quality management in order to manage our growth. Failure to do so may result in slower expansion.
In order to support the growth of our business, we will need to expand our senior management team. There is no assurance that we will be capable of attracting quality managers and integrating those individuals into our management system. Without experienced and talented management, the growth of our business may be adversely impacted.
Competition for qualified employees is intense, and we may not be able to attract and retain the highly skilled employees we need to support our business. Without skilled employees, the quality of our product development and services could diminish and the growth of our business may be slowed, which could have a material adverse effect on our business, financial condition and results of operations.
Our ability to provide high-quality products and services to our clients depends, in large part, upon our employees’ experience and expertise. We must attract and retain highly qualified personnel with a deep understanding of the pharmaceutical and healthcare information technology industries. In addition, we will invest significant time and expense in training our employees, increasing their value to clients as well as to competitors who may seek to recruit them, which will increase the cost of replacing them. If we fail to retain our employees, the quality of our product development and services could diminish and the growth of our business may be slowed. This may have a material adverse effect on our business, financial condition and results of operations.
If we lose the services of our Chief Executive Officer and other key personnel, we may be unable to replace them, and our business, financial condition and results of operations may be adversely affected.
Our success largely depends on the continued skills, experience, efforts and policies of our management and other key personnel and our ability to continue to attract, motivate and retain highly qualified employees. In particular, the services of Michael Favish, our President and Chief Executive Officer, are integral to the execution of our business strategy. We believe that the loss of the services of Mr. Favish could adversely affect our business, financial condition and results of operations. We cannot assure you that Mr. Favish or our other executive officers will continue to provide services to the Company. We do not maintain key man insurance for any of our key personnel. We intend to enter into employment contracts with Michael Favish and other key personnel before the effective date of this prospectus.
Our failure to compete successfully could cause our revenue or market share to decline.
The market for our products and services is competitive and is characterized by rapidly evolving industry standards, technology and user needs and the frequent introduction of new products and services. Some of our competitors, which include major pharmaceutical companies with alternatives to our products, may be more established, benefit from greater name recognition and have substantially greater financial, technical and marketing resources than us. We compete on the basis of several factors, including distribution of products, reputation, scientific validity, reliability, client service, price, and industry expertise and experience. There can be no assurance that we will be able to compete successfully against current and future competitors or that the competitive pressures that we face will not materially adversely affect our business, financial condition and results of operations.
Our future success depends upon our ability to grow, and if we are unable to manage our growth effectively, we may incur unexpected expenses and be unable to meet our customers’ requirements.
We will need to expand our operations if we successfully achieve market acceptance for our products and services. We cannot be certain that our systems, procedures, controls and existing space will be adequate to support expansion of our operations. Our future operating results will depend on the ability of our officers and key employees to manage changing business conditions and to implement and improve our technical, administrative, financial control and reporting systems. We may not be able to expand and upgrade our systems and infrastructure to accommodate these increases. Difficulties in managing any future growth could have a significant negative impact on our business, financial condition and results of operations because we may incur unexpected expenses and be unable to meet our customers’ requirements.
We may consider acquiring other companies or product lines in an effort to expand our business in exchange for cash or stock of the Company, which may not be successful or which may cause dilution to investors.
The Company will also consider acquiring other companies or product lines that may be complimentary or supplementary as part of our future efforts to expand the business, which acquisitions could be for cash, stock or a combination thereof. In either event, there is no guarantee that any such acquisition will be successful or that an acquired company’s products, operations or corporate culture will mesh with our Company, integrate well, or that any economies of scale will be realized. In addition, any such transaction that involves the Company’s stock would cause dilution to investors. Moreover, any such transaction that involves cash would result in a reallocation of funds on hand that would be needed to support an acquired company or acquired product line.
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In order to expand our business into additional states, we may need to comply with regulatory requirements specific to such state and there can be no assurance that we will be able to initially meet such requirements or that we will be able to maintain compliance on an on-going basis.
While our product, Lumega-Z®, is a medical food and not a drug, it is only available under the supervision of a physician. While it is not yet 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. Our inability to maintain compliance with the regulations of states into which we currently ship our products or expand our business into additional states may adversely affects our results of operations.
Risks Related to our Industry
Any failure to comply with all applicable federal and state confidentiality requirements for the protection of patient information may result in fines and other liabilities, which may adversely affect our results of operations.
When a physician recommends to a patient to take our medical food, Lumega-Z, we typically receive an order from the customer, but we do not usually receive medical information. As part of the operation of our business, it is possible, however, that during communication with customers or with physicians we might receive patient-identifiable medical information. 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. Any failure to comply may result in fines and other liabilities, which may adversely affect our results of operations.
Congress enacted significant prohibitions against physician self-referrals in the Omnibus Budget Reconciliation Act of 1993. This law, commonly referred to as “Stark II,” applies to physician dispensing of outpatient prescription drugs that are reimbursable by Medicare or Medicaid. Our products are neither prescription drugs nor are they reimbursable under any federal program at present. Stark II, 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. We believe that the physicians who use our medical device, the MapcatSF, or recommend our medical food, Lumega-Z, to their patients are aware of these requirements, but we do not monitor their compliance and have no assurance that the physicians are in material compliance with Stark II. If it were determined that the physicians who use our medical device or prescribe medical foods purchased from us were not in compliance with Stark II, it could potentially have an adverse effect on our business, financial condition and results of operations.
The federal anti-kickback statute applies to Medicare, Medicaid and other state and federal programs. At present, our products are not prescription drugs, nor are they reimbursable under any federal program. The federal anti-kickback statute 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 programs. The federal anti-kickback statute provides a number of statutory exceptions and regulatory “safe harbors” for particular types of transactions. We believe that our arrangements with our customers are in material compliance with the anti-kickback statute and relevant safe harbors. Many states have similar fraud and abuse laws, and we believe that we are in material compliance with those laws. At present, we do not participate in any federal programs and our products are not reimbursed by Medicare, Medicaid or any other state or federal program. If, however, that changes in the future and it were determined that we were not in compliance with the federal anti-kickback statute, we could be subject to liability, and our operations could be curtailed. Moreover, if the activities of our customers or other entity with which we have a business relationship were found to constitute a violation of the federal anti-kickback law and we, as a result of the provision of products or services to such customer or entity, were found to have knowingly participated in such activities, we could be subject to sanction 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 our 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.
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Risks Related to Our Common Stock
We are eligible to be treated as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including (1) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which we refer to as the Sarbanes-Oxley Act, (2) reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements and (3) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In addition, as an emerging growth company, we are only required to provide two years of audited financial statements and two years of selected financial data in this prospectus. We could be an emerging growth company for up to five years, 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 as of any June 30 before that time or if we have total annual gross revenue of $1.0 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 Commission following the date we are no longer an “emerging growth company” as defined in the JOBS Act. We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal controls in the future.
Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
Our directors and executive officers beneficially own a significant number of shares of our common stock. Their interests may conflict with our outside stockholders, who may be unable to influence management and exercise control over our business.
As of the date of this prospectus, our executive officers and directors beneficially own approximately 38.3% of our shares of Common Stock. As a result, our executive officers and directors may be able to: affect the election or defeat the election of our directors, amend or prevent amendment to our certificates of incorporation or bylaws, effect or prevent a merger, sale of assets or other corporate transaction, and control the outcome of any other matter submitted to the shareholders for vote. Accordingly, our outside stockholders may be unable to influence management and exercise control over our business.
We do not intend to pay cash dividends to our stockholders, so you will not receive any return on your investment in our Company prior to selling your interest in the Company.
We have never paid any dividends to our common stockholders 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.
We may require additional capital to support business growth, and this capital might not be available.
We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges or opportunities, including the need to develop new products. Accordingly, we expect to engage in equity or debt financings in the future to secure additional funds. In addition, we do not expect that our existing capital will be sufficient to enable us to fund our operations and we will need to raise additional capital to fund our operations. 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. Potential investors should carefully consider the risks and uncertainties that a new company with no operating history will face. In particular, 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; | |
| ● | maintain our anticipated management and advisory team; and | |
| ● | raise sufficient funds in the capital markets to effectuate our business plan. |
If we raise additional funds through further issuances of equity or convertible debt securities, our existing shareholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our existing capital stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited. If we cannot access the capital necessary to support our business, we could be forced to curtail our business activities or even shut down operations. If we cannot execute any one of the foregoing or similar matters relating to our business, the business may fail, in which case you would lose the entire amount of your investment in the Company.
The obligations associated with being a public company require significant resources and management attention, which may divert from our business operations.
Upon the effective date of this prospectus, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and The Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition, proxy statement, and other information. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting. Our Chief Executive Officer and Principle Accounting Officer will need to certify that our disclosure controls and procedures are effective in ensuring that material information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. We will need to hire additional financial reporting, internal controls and other financial personnel in order to develop and implement appropriate internal controls and reporting procedures. As a result, we will incur significant legal, accounting and other expenses. Furthermore, the need to establish the corporate infrastructure demanded of a public company may divert management’s attention from implementing our growth strategy, which could prevent us from improving our business, results of operations and financial condition. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a public company. However, the measures we take may not be sufficient to satisfy our obligations as a public company. In addition, we cannot predict or estimate the amount of additional costs we may incur in order to comply with these requirements. We anticipate that these costs will materially increase our selling, general and administrative expenses.
Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting. In connection with the implementation of the necessary procedures and practices related to internal control over financial reporting, we may identify deficiencies. If we are unable to comply with the internal controls requirements of the Sarbanes-Oxley Act of 2002, then we may not be able to obtain the independent account certifications required by that act, which may preclude us from keeping our filings with the SEC current, and interfere with the ability of investors to trade our securities and our shares to be quoted or our ability to list our shares on any national securities exchange.
If we fail to establish and maintain an effective system of internal controls, we may not be able to report our financial results accurately or prevent fraud. Any inability to report and file our financial results accurately and timely could harm our reputation and adversely impact the trading price of our common stock.
Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment existed, and our business and reputation with investors may be harmed. With each prospective acquisition we may make we will conduct whatever due diligence is necessary or prudent to assure us that the acquisition target can comply with the internal controls requirements of the Sarbanes-Oxley Act. Notwithstanding our diligence, certain internal controls deficiencies may not be detected. As a result, any internal control deficiencies may adversely affect our financial condition, results of operations and access to capital. We have not performed an in-depth analysis to determine if historical undiscovered failures of internal controls exist, and may in the future discover areas of our internal controls that need improvement.
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Risks Related to our Securities
Public company compliance may make it more difficult to attract and retain officers and directors.
The Sarbanes-Oxley Act and rules implemented by the SEC have required changes in corporate governance practices of public companies. As a public company, these rules and regulations increase our compliance costs and make certain activities more time consuming and costly. As a public company, these rules and regulations may make it more difficult and expensive for us to maintain our director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers, and to maintain insurance at reasonable rates, or at all.
Our 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 likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including the following:
| · | our ability to execute our business plan; |
| · | changes in our industry; |
| · | competitive pricing pressures; |
| · | our ability to obtain working capital financing; |
| · | additions or departures of key personnel; |
| · | sales of our common stock (particularly following effectiveness of this resale registration statement); |
| · | operating results that fall below expectations; |
| · | regulatory developments; |
| · | economic and other external factors; |
| · | period-to-period fluctuations in our financial results; |
| · | the public’s response to press releases or other public announcements by us or third parties, including filings with the SEC; |
| · | changes in financial estimates or ratings by any securities analysts who follow our common stock, our failure to meet these estimates or failure of those analysts to initiate or maintain coverage of our common stock; |
| · | the development and sustainability of an active trading market for our common stock; and |
| · | any future sales of our common stock by our officers, directors and significant stockholders. |
In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.
Our shares of common stock are not publicly traded and there can be no assurance that there will be an active market for our shares of common stock in the future.
Our shares of common stock are not currently publicly traded. There can be no assurance that there will be an active market for our shares of common stock in the future. If we are able to establish a public market for our securities, the market liquidity will be dependent on the perception of our operating business, among other things. We will take certain steps including utilizing investor awareness campaigns and firms, press releases, road shows and conferences to increase awareness of our business. Any steps that we might take to bring us to the awareness of investors may require that we compensate consultants with cash and/or stock. There can be no assurance that there will be any awareness generated or the results of any efforts will result in any impact on our trading volume. Consequently, investors may not be able to liquidate their investment or liquidate it at a price that reflects the value of the business, and trading may be at an inflated price relative to the performance of the Company due to, among other things, the availability of sellers of our shares.
If an active market should develop, the price may be highly volatile. If there is a low price for our shares of common stock, many brokerage firms or clearing firms may not be willing to effect transactions in the securities or accept our shares for deposit in an account. Many lending institutions will not permit the use of low priced shares of common stock as collateral for any loans.
We are subject to penny stock regulations and restrictions and you may have difficulty selling shares of our common stock.
Our common stock will be subject to the provisions of Section 15(g) and Rule 15g-9 of the Exchange Act, commonly referred to as the “penny stock rules.” Section 15(g) sets forth certain requirements for transactions in penny stock, and Rule 15g-9(d) incorporates the definition of “penny stock” that is found in Rule 3a51-1 of the Exchange Act. The SEC generally defines a penny stock to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions. We will be subject to the SEC’s penny stock rules.
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Since our common stock will be deemed to be penny stock, trading in the shares of our common stock will be subject to additional sales practice requirements on broker-dealers who sell penny stock to persons other than established customers and accredited investors. ”Accredited investors” are persons with assets in excess of $1,000,000 (excluding the value of such person’s primary residence) or annual income exceeding $200,000 or $300,000 together with their spouse. For transactions covered by these rules, broker-dealers must make a special suitability determination for the purchase of such security and must have the purchaser’s written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt the rules require the delivery, prior to the first transaction of a risk disclosure document, prepared by the SEC, relating to the penny stock market. A broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information for the penny stocks held in an account and information to the limited market in penny stocks. Consequently, these rules may restrict the ability of broker-dealer to trade and/or maintain a market in our common stock and may affect the ability of the Company’s stockholders to sell their shares of common stock.
There can be no assurance that our shares of common stock will qualify for exemption from the Penny Stock Rules. In any event, even if our common stock was exempt from the Penny Stock Rules, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of penny stock if the SEC finds that such a restriction would be in the public interest.
Forward Looking Statements
This prospectus contains forward-looking statements within the meaning of the Federal securities laws. These statements relate to future events or future predictions, including events or predictions relating to our future financial performance, and are based on current expectations, estimates, forecasts and projections about us, our future performance, our beliefs and management’s assumptions. They are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “feel,” “confident,” “estimate,” “intend,” “predict,” ”forecast,” “potential” or “continue” or the negative of such terms or other variations on these words or comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks described under “Risk Factors” that may cause the Company’s or its industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In addition to the risks described in Risk Factors, important factors to consider and evaluate in such forward-looking statements include: (i) general economic conditions and changes in the external competitive market factors which might impact the Company’s results of operations; (ii) unanticipated working capital or other cash requirements including those created by the failure of the Company to adequately anticipate the costs associated with acquisitions and other critical activities; (iii) changes in the Company’s corporate strategy or an inability to execute its strategy due to unanticipated changes; and (iv) the failure of the Company to complete any or all of the transactions described herein on the terms currently contemplated. In light of these risks and uncertainties, many of which are described in greater detail elsewhere in this Risk Factors discussion, there can be no assurance that the forward-looking statements contained in this prospectus will in fact transpire.
Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither the Company nor any other person assumes responsibility for the accuracy and completeness of such statements. We do not undertake any duty to update any of the forward-looking statements after the date of this prospectus to conform such statements to actual results or changes in our expectations.
Emerging Growth Company Status
The Jumpstart Our Business Startups Act of 2012, or the JOBS Act, permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. As a result, we will not need to comply with new or revised accounting standards as required when they are adopted.
The Selling Securityholders are selling all of the shares of common stock being sold in this offering. Accordingly, we will not receive any proceeds from the sale of common stock by the Selling Securityholders. The principal purposes of this offering are to facilitate an orderly distribution of shares for the Selling Securityholders in the offering. We will not receive any proceeds from the sale of these shares by the Selling Securityholders. However, we will receive proceeds from the exercise of the warrants if they are exercised for cash by the Selling Securityholders.
MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is currently no public market for our shares of common stock.
We intend to seek a listing of our common stock on the OTCQB maintained by OTC Markets Group, however, we cannot assure you that our application will be approved.
Dividend Policy
Guardion Health Sciences, Inc. has not declared nor paid any cash dividend on our common stock, and we currently intend to retain future earnings, if any, to finance the expansion of our business, and we do not expect to pay any cash dividends in the foreseeable future. The decision whether to pay cash dividends on our common stock will be made by our board of directors, in their discretion, and will depend on our financial condition, results of operations, capital requirements and other factors that our board of directors considers significant.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Information
The statements in this registration statement that are not reported financial results or other historical information are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These statements appear in a number of different places in this prospectus and can be identified by words such as “estimates,” “projects,” “expects,” “intends,” “believes,” “plans,” or their negatives or other comparable words. Also look for discussions of strategy that involve risks and uncertainties. Forward-looking statements include, among others, statements regarding our business plans and availability of financing for our business.
You are cautioned that any such forward-looking statements are not guarantees and may involve risks and uncertainties. Our actual results may differ materially from those in the forward-looking statements due to risks facing us or due to actual facts differing from the assumptions underlying our estimates. Some of these risks and assumptions include, but are not limited to, those set forth under the heading “Risk Factors.” We advise you that these cautionary remarks expressly qualify in their entirety all forward-looking statements attributable to us or persons acting on our behalf. Unless required by law, we do not assume any obligation to update forward-looking statements based on unanticipated events or changed expectations. However, you should carefully review the reports and other documents we will file from time to time with the Securities and Exchange Commission (“SEC”).
Actual results may differ materially from those discussed in these forward-looking statements due to a number of factors, including those set forth in the section entitled “Risk Factors” and elsewhere in this prospectus.
Presentation of Information
As used in this prospectus, the terms “we,” “us” “our” and the “Company” mean Guardion Health Sciences, Inc. unless the context requires otherwise. The following discussion and analysis should be read in conjunction with our audited (and unaudited) financial statements and the related notes that appear elsewhere in this prospectus. All dollar amounts in this registration statement refer to US dollars unless otherwise indicated.
Overview
Guardion Health Sciences, Inc. (the “Company” or “we”) was formed in December 2009 in California as a limited liability company under the name P4L Health Sciences, LLC and we subsequently changed our name to Guardion Health Sciences, LLC. On June 30, 2015 we converted from a California limited liability company to a Delaware corporation, changing our name to Guardion Health Sciences, Inc.
We are a specialty health sciences company that develops, formulates and distributes condition-specific medical foods with an initial medical food product that addresses a depleted macular protective pigment, which is a biomarker and leading cause of age-related macular degeneration (“AMD”), as well as computer vision syndrome (“CVS”). We have also developed a proprietary medical device that accurately measures the macular pigment density.
We currently develop and distribute a line of medical foods that restores the macular protective pigment to address AMD and CVS under the brand name Lumega-Z®. We are using our own proprietary patent-pending technology embodied in a medical device call the MapcatSFTM that measures the macular pigment. The MapcatSF is a patent-pending, non-mydriatic, non-invasive device that accurately measures the macular protective pigment density, thereby creating an evidence-based protocol that is shared with the patient.
Lumega-Z has a patent-pending, critical ingredient that replenishes and restores the macular protective pigment simultaneously delivering critical and essential nutrients to the eye. Formulated by Dr. Sheldon Hendler in 2010, modifications were made over a two year period to improve the taste and method of delivery. Medical foods are neither dietary nor nutritional supplements. We believe that there is an increasing level of acceptance of medical foods as a primary therapy by patients and healthcare providers to treat pain syndromes, sleep and cognitive disorders, obesity, hypertension, and viral infection. In clinical practice, medical foods are being prescribed as both a standalone therapy and as an adjunct therapy to low doses of commonly prescribed drugs. We believe that medical foods will continue to grow in importance over the coming years.
By combining our cutting edge technology with our MapcatSF medical device and Lumega-Z medical food, we have developed the only reliable two-pronged evidence-based protocol for replenishing and restoring the Macular Protective Pigment (“MPP”), which affects AMD, cataracts and CVS. The MapcatSF is intended to be the first device using a patented “single fixation” process and “automatic lens density correction” that produces accurate serialized data.
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Lumega-Z is a regulated Medical Food and therefore must be administered under the supervision of a physician or professional healthcare provider. Our ingredients and formulas are well-researched and supported by voluminous scientific literature, in-house monographs, and clinical trials. In order to reach the large, expanding AMD patient population, we primarily market Lumega-Z to patients through ophthalmologists and optometrists.
Recent Developments
In January 2016, we engaged Gordon Bethwaite as our Vice President of Sales and Marketing. Mr. Bethwaite is a senior figure in the ophthalmic space, with over 15 years of experience in the sales and marketing of diagnostic, surgical and optical products. Through his collaborations with thought-leading doctors in cataract, refractive, retina and glaucoma specialties, Mr. Bethwaite brings a wealth of expertise and knowledge to the Company.
We recently further improved the taste of Lumega-Z. Based on feedback from customers, we had our manufacturer produce sample batches of Lumega-Z with slightly modified tastes. We then conducted taste tests with a sample population to select the most popular taste. While the taste change is only slight, we believe customers will like the new flavor better and new customers will be introduced to an already improved tasting product.
Going Concern
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has utilized cash in operating activities of $779,108, $543,378 and $506,299 during the nine months ended September 30, 2015 and the years ended December 31, 2014 and 2013, respectively, and had a total stockholders’ deficiency of $812,704, $1,812,633 and $902,141 as of September 30, 2015 and December 31, 2014 and 2013, respectively. The Company expects to continue to incur net losses and negative operating cash flows at least through 2016. As a result, management and the Company’s auditors believe that there is substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.
We will continue to incur significant expenses for commercialization activities related to our lead product Lumega-Z, the MapcatSF medical device, and with respect to efforts to build our infrastructure. Development and commercialization of medical foods and medical devices involves a lengthy and complex process. Additionally, our long-term viability and growth will depend upon the successful development and commercialization of products other than Lumega-Z and the MapcatSF. We are continuing attempts to raise additional debt and/or equity capital to fund future operations, but there can be no assurances that we will be able to secure such additional financing in the amounts necessary to fully fund our operating requirements on acceptable terms or at all. If we are unable to access sufficient capital resources on a timely basis, we may be forced to reduce or discontinue our technology and product development programs and curtail or cease operations.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. ASU 2014-09 also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. Based on the FASB’s Exposure Draft Update issued on April 29, 2015, and approved in July 2015, Revenue from Contracts With Customers (Topic 606): Deferral of the Effective Date, ASU 2014-09 is now effective for reporting periods beginning after December 15, 2017, with early adoption permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The adoption of ASU 2014-09 is not expected to have any impact on our financial statement presentation or disclosures.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15 (ASU 2014-15), Presentation of Financial Statements – Going Concern (Subtopic 205-10). ASU 2014-15 provides guidance as to management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued (or at the date that the financial statements are available to be issued when applicable). Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The adoption of ASU 2014-15 is not expected to have any impact on our financial statement presentation or disclosures.
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In February 2015, the FASB issued Accounting Standards Update No. 2015-02 (ASU 2015-02), Consolidation (Topic 810). ASU 2015-02 changes the guidance with respect to the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. All legal entities are subject to reevaluation under the revised consolidation mode. ASU 2015-02 affects the following areas: (1) limited partnerships and similar legal entities; (2) evaluating fees paid to a decision maker or a service provider as a variable interest; (3) the effect of fee arrangements on the primary beneficiary determination; (4) the effect of related parties on the primary beneficiary determination; and (5) certain investment funds. ASU 2015-02 is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the guidance in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. A reporting entity may apply the amendments in this guidance using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A reporting entity also may apply the amendments retrospectively. The adoption of ASU 2015-02 is not expected to have any impact on our financial statement presentation or disclosures.
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.
Concentration of Risk
Cash balances are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances. All of the non-interest bearing cash balances were fully insured at September 30, 2015, and December 31, 2014 and 2013. Insurance coverage limits are $250,000 per depositor at each financial institution. There were no interest-bearing amounts on deposit in excess of federally insured limits at September 30, 2015, or at December 31, 2014 and 2013.
Critical Accounting Policies and Estimates
Our financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of the accompanying financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
As discussed above, on June 30, 2015 we converted from a California limited liability company to a Delaware corporation and LLC units were converted to Common Stock on a one-for-one basis.
Our financial statements for the nine months ended September 30, 2015 and 2014 are unaudited. In the opinion of management, these financial statements have been prepared on the same basis as the audited financial statements included herein and include all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the Company's financial position, results of operations and cash flows. The information disclosed in the notes to the financial statements for such interim period is also unaudited. Actual results may differ from these estimates as a result of different assumptions or conditions.
The following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements.
Patent Costs
We are the owner of several domestic patents. Due to the significant uncertainty associated with the successful development of one or more commercially viable products based on our research efforts and any related patent applications, all patent costs, including patent-related legal fees, filing fees and other costs, including internally generated costs, are expensed as incurred. During the nine months ended September 30, 2015 and 2014, and the years ended December 31, 2014 and 2013, patent costs were $22,698, $14,433, $32,783 and $20,483, respectively, and are included in total research and development costs in the statements of operations.
Convertible Notes Payable
When conventional convertible debt is issued with detachable warrants, the proceeds from issuance are allocated to the two instruments based on their relative fair values. This method is generally appropriate if debt is issued with any other freestanding instrument that is classified in equity.
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When the convertible debt instrument includes both detachable instruments such as warrants, and a beneficial conversion option, the proceeds of issuance are allocated among the convertible instrument and the other detachable instruments based on their relative fair values as indicated above, and the amount allocated to the convertible instrument is further analyzed to determine if the embedded conversion option has intrinsic value. If the conversion features of conventional convertible debt provide for a rate of conversion that is below market value, then the conversion option has intrinsic value and this feature is characterized as a beneficial conversion feature (“BCF”). We calculate an effective conversion price based on the fair value allocated to the convertible instrument divided by the number of conversion shares based upon the conversion terms of the instrument. The resulting calculation or effective conversion price is used to measure the intrinsic value, if any, of the embedded conversion option. Stated differently, intrinsic value is calculated at the commitment date as the difference between the conversion price (effective or otherwise) and the fair value of the common stock or other securities into which the security is convertible, multiplied by the number of shares into which the security is convertible.
The fair value of members’ units or common stock was determined based on management’s judgment. In order to assist management in calculating such fair value, we retained a third party valuation firm in determining the value our Company. The third party valuation firm’s input was utilized in determining the related per unit or share valuations of our equity used at September 30, 2015, and December 31, 2014 and 2013. Management made the final determination as to valuation based on various inputs, including the valuation report prepared by the third party valuation firm.
If the intrinsic value of the BCF is greater than the proceeds allocated to the convertible instrument, the amount of the discount assigned to the BCF is limited to the amount of the proceeds allocated to the convertible instrument. We record a BCF as a debt discount and in those circumstances, the convertible debt will be recorded net of the discount related to the BCF. The Company amortizes the discount to interest expense over the life of the debt using the effective interest rate method or the straight-line method, as an approximation of effective interest amortization.
Stock-Based Compensation
We periodically issue stock-based compensation to officers, directors, employees and consultants for services rendered. Such issuances vest and expire according to terms established at the issuance date.
Stock-based payments to officers and directors, and to employees in the future which will include grants of employee stock options, are recognized in the financial statements based on their fair values. Stock option grants, which are generally time vested, will be measured at the grant date fair value and charged to operations on a straight-line basis over the vesting period. The fair value of stock options is determined utilizing the Black-Scholes option-pricing model, which is affected by several variables, including the risk-free interest rate, the expected dividend yield, the expected life of the equity award, the exercise price of the stock option as compared to the fair market value of the common stock on the grant date and the estimated volatility of the common stock over the term of the equity award.
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Until we have established a trading market for our common stock, estimated volatility is based on the average historical volatilities of comparable public companies in a similar industry. The expected dividend yield is based on the current yield at the grant date; we have never declared or paid dividends and have no plans to do so for the foreseeable future.
The fair value of members’ units or common stock was determined based on management’s judgment. In order to assist management in calculating such fair value, we retained a third party valuation firm in determining the value our Company. The third party valuation firm’s input was utilized in determining the related per unit or share valuations of our equity used at September 30, 2015, and December 31, 2014 and 2013. Management made the final determination as to valuation based on various inputs, including the valuation report prepared by the third party valuation firm.
The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the FASB whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.We recognize stock compensation expense on stock or unit purchases at a price less than fair value, and for fully-vested stock issued to consultants and other service providers, for the excess of fair value of the stock or units over the price paid for the stock or units.
We recognize the fair value of stock-based compensation within our statements of operations with classification depending on the nature of the services rendered. We issue new shares to satisfy stock option exercises.
During the nine months ended September 30, 2015, we recognized aggregate stock-compensation expense based upon a stock price of $1.14 per share of $4,279,233, of which $3,937,233 was recorded in general and administrative expense and $342,000 was recorded in research in development expense. There was no stock-based compensation expense during the nine months ended September 30, 2014 or the years ended December 31, 2014 or 2013.
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Income Taxes
As of September 30, 2015, we were subject to U.S. federal income taxes and California state income taxes. Prior to June 30, 2015, we were a limited liability company and taxed as a pass through entity whereby substantially all income tax attributes were passed through to the individual members except the minimum state income tax and an LLC fee based on revenues.
We currently account for income taxes under an asset and liability approach for financial accounting and reporting for income taxes. Accordingly, we recognize deferred tax assets and liabilities for the expected impact of differences between the financial statements and the tax basis of assets and liabilities.
We account for uncertainties 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 September 30, 2015, we 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.
We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. In the event we determine that we would be able to realize our 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 we determine that we would not be able to realize all or part of our 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. We have not yet filed a tax return as a corporate entity.
Plan of Operations
General Overview
Upon receipt of sufficient funding we intend to increase our commercialization activities and:
| · | further the commercial production of our MapcatSF, starting with the manufacture of ten new units for sale to our customers and for use in our internal clinics; |
| · | expand our domestic sales and marketing efforts, which include revamping our web site and new promotional materials; |
| · | increase production of Lumega-Z as is necessary to support the additional sales resulting from the deployment of additional MapcatSF units and increased marketing and promotional activity; |
| · | commence certain FDA safety testing of the MapcatSF; and |
| · | increase our focus on intellectual property protection and strategy. |
Our enhanced sales and marketing messaging will include the announcement of three new medical food products we are staging for introduction during the summer of 2016, which address:
| · | Glaucoma |
| · | Dry-eye syndrome |
| · | Prenatal nutrition |
In preparation for these activities, our plan necessitates the build-up of our infrastructure at our San Diego facility. In addition, further development of internal processes and procedures as part of us becoming a public reporting company, which includes the development of internal controls and a compliance program.
Results of Operations
Through September 30, 2015, we had limited operations and have primarily been engaged in research and development and raising capital. We have incurred significant expenditures for the development of the Company's products and intellectual property, which includes research and development of both medical foods and medical diagnostic equipment for the treatment of various eye diseases. We had limited revenue during the nine months ended September 30, 2015 and during the years ended December 31, 2014 and 2013.
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Comparison of Nine Months Ended September 30, 2015 and September 30, 2014
| Nine Months Ended | ||||||||||||||||
| September 30, 2015 | September 30, 2014 | Change | ||||||||||||||
| Revenue | $ | 86,802 | $ | 132,655 | $ | (45,853 | ) | (35 | )% | |||||||
| Cost of goods sold | 36,865 | 121,203 | (84,338 | ) | (70 | )% | ||||||||||
| Gross profit | 49,937 | 11,452 | 38,485 | 336 | % | |||||||||||
| Operating Expenses: | ||||||||||||||||
| Research and development (including $342,000 of stock-based compensation for the nine months ended September 30, 2015) | 386,673 | 46,711 | 339,962 | 728 | % | |||||||||||
| Sales and marketing | 40,574 | 30,442 | 10,132 | 33 | % | |||||||||||
| General and administrative (including $3,937,233 of stock-based compensation for the nine months ended September 30, 2015, of which $464,557 was to related parties) | 4,662,643 | 462,365 | 4,200,278 | 908 | % | |||||||||||
| Total operating expenses | 5,089,890 | 539,518 | 4,550,372 | 843 | % | |||||||||||
| Loss from operations | (5,039,953 | ) | (528,066 | ) | (4,511,887 | ) | 854 | % | ||||||||
| Other expense: | ||||||||||||||||
| Interest expense | 640,351 | 443,457 | 196,894 | 44 | % | |||||||||||
| Cost to induce conversion of notes payable | 1,699,609 | - | 1,699,609 | - | % | |||||||||||
| Loss on settlement of debt | 258,606 | - | 258,606 | - | % | |||||||||||
| Net loss | $ | (7,638,519 | ) | $ | (971,523 | ) | $ | (6,666,996 | ) | 686 | % | |||||
Revenue
For the nine months ended September 30, 2015, revenue from the sale of Lumega-Z was $86,802 compared to $132,655 during the nine months ended September 30, 2014. The decrease in sales of $45,853 or 35% compared to the prior comparable period was primarily a result of the Company shifting its attention from sales to FDA compliance, which included reformulation and repackaging of our product to move Lumega-Z into a medical food category rather than a dietary supplement category and satisfy related medical food requirements.
Cost of Goods Sold
For the nine months ended September 30, 2015, cost of goods sold from the sale of Lumega-Z was $36,865 compared to $121,203 during the nine months ended September 30, 2014. The decrease in cost of goods sold for the nine months ended September 30, 2015 of $84,338 or 70% compared to the prior period was primarily the result of moving Lumega-Z from the Dietary Supplement category into the Medical Food Category and the resulting shift in focus discussed above. In addition, in 2014 we repackaged our product from daily to weekly dosages which decreased product cost and increased margins.
Research and Development
For the nine months ended September 30, 2015, research and development costs were $386,673 compared to $46,711 for the nine months ended September 30, 2014. The increase in research and development costs of $339,962 or 728% for the nine months ended September 30, 2015 was due to stock-based compensation of $342,000 issued to a consultant for services rendered in 2015 and no stock-based compensation in the comparable period in 2014.
Sales and Marketing
For the nine months ended September 30, 2015, sales and marketing expenses were $40,574 compared to $30,442 for the nine months ended September 30, 2014. The increase in sales and marketing expenses of $10,132 or 33% for the nine months ended September 30, 2015 was due to the additional costs for repackaging our product and resulting changes in website design and marketing materials compared to the comparable period in 2014.
General and Administrative
For the nine months ended September 30, 2015, general and administrative expenses were $4,662,643 compared to $462,365 for the nine months ended September 30, 2014. The increase in general and administrative expenses of $4,200,278 or 908% for the nine months ended September 30, 2015 compared to that comparable prior year period was largely due to the fair value of stock issued to consultants and service providers of $3,937,233 and legal fees of $259,145 related primarily to our 2015 financing activities.
Interest Expense
For the nine months ended September 30, 2015, interest expense was $640,351 compared to $443,457 for the nine months ended September 30, 2014. The increase in interest expense of $196,894 or 44% for the nine months ended September 30, 2015 was due to non-cash interest expense of $260,806 resulting from the amortization of debt discount related to the beneficial conversion features and warrants issued with our convertible notes. The non-cash amortization was partially offset by a decrease in interest expense of $63,912, due to conversion of the related notes into common stock in May and August 2015.
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Cost to induce conversion of notes payable
For the nine months ended September 30, 2015, costs to induce conversion of our notes payable was $1,699,609 compared to $0 for the nine months ended September 30, 2014.
In connection with the May 1, 2015 conversion of notes payable, we issued 995,926 membership units valued at $1,135,356 or $1.14 per share to the holders of the notes as an inducement to convert their notes payable. In addition, we offered certain holders 146,000 warrants valued at $165,072 to acquire membership units. The fair value of the warrants was based on a Black-Scholes option pricing model with a stock price of $1.14, volatility of 113% and risk-free rate of 0.97%. In connection with the May 1, 2015 conversion of related party notes payable, we issued 350,001 warrants valued at $341,785 to certain holders to acquire membership units as inducement to convert the notes. The fair value of the warrants was based on a Black-Scholes option pricing model with a stock price of $1.14, volatility of 113% and risk-free rate of 0.97%. In connection with the August 10, 2015 conversion of notes payable, the Company issued 50,348 shares of its common stock valued at $57,396 to the holders of the notes as an inducement to convert their notes payable.
Loss on settlement of debt
For the nine months ended September 30, 2015, loss on settlement of debt was $258,606 compared to $0 for the nine months ended September 30, 2014.
On August 10, 2015, the Company issued 441,358 shares of its Common Stock valued at $503,149 upon the conversion of $260,900 of outstanding principal and interest. The Company recognized a loss on settlement of the promissory notes of $242,249.
On August 10, 2015, the Company issued warrants to purchase 28,176 shares of its Common Stock at an exercise price of $0.01 per share and a 3 year term in settlement of $15,497 of accounts payable. The warrants were valued at $31,853, based upon the Black-Scholes option pricing model with a stock price of $1.14, volatility of 105% and a risk free rate of 1.09%. The Company recognized a loss on settlement of accounts payable of $16,357.
Net Loss
For the nine months ended September 30, 2015, the Company incurred a net loss of $7,638,519, compared to a net loss of $971,523 for the nine months ended September 30, 2014. The increase in net loss of $6,666,996 or 686% for the nine months ended September 30, 2015, was primarily due to the increase in stock-based compensation of $4,279,233, inducement to convert notes payable of $1,699,609, loss on conversion of promissory notes and accounts payable of $258,606 and amortization of debt discount of $196,894.
Comparison of Years Ended December 31, 2014 and 2013
| Year Ended | ||||||||||||||||
| December 31, 2014 | December 31, 2013 | Change | ||||||||||||||
| Revenue | $ | 164,582 | $ | 260,356 | $ | (95,774 | ) | (37 | )% | |||||||
| Cost of goods sold | 145,529 | 168,878 | (23,349 | ) | (14 | )% | ||||||||||
| Gross profit | 19,053 | 91,478 | (72,425 | ) | (79 | )% | ||||||||||
| Operating Expenses: | ||||||||||||||||
| Research and development | 43,436 | 259,786 | (216,350 | ) | (83 | )% | ||||||||||
| Sales and marketing | 46,768 | 51,600 | (4,832 | ) | (9 | )% | ||||||||||
| General and administrative | 638,002 | 616,703 | 21,299 | 3 | % | |||||||||||
| Total operating expenses | 728,206 | 928,089 | (199,883 | ) | 22 | )% | ||||||||||
| Loss from operations | (709,153 | ) | (836,611 | ) | 127,458 | (15 | )% | |||||||||
| Other expense: | ||||||||||||||||
| Interest expense | 611,339 | 406,067 | 205,272 | 51 | % | |||||||||||
| Cost to induce conversion of notes payable | - | - | - | - | % | |||||||||||
| Loss on settlement of debt | - | - | - | - | % | |||||||||||
| Net loss | $ | (1,320,492 | ) | $ | (1,242,678 | ) | $ | (77,814 | ) | 6 | % | |||||
Revenue
For the year ended December 31, 2014, revenue from the sale of Lumega-Z was $164,582 compared to $260,356 during year ended December 31, 2013. The decrease in sales of $95,774 or 37% compared to the 2013 period was the result of running four beta clinics in 2013, which included the measurement of macular pigment density with our MapcatSF device and subsequent sales of Lumega-Z subscriptions. In 2014 we had two clinics sign-up for our program and two clinics were discontinued due to proximity and resulting costs involved in supporting those clinics.
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Cost of Goods Sold
For the year ended December 31, 2014, cost of goods sold from the sale of Lumega-Z was $145,529 compared to $168,878 during the year ended December 31, 2013. The decrease in cost of goods sold for the year ended December 31, 2014 of $23,349 or 14% compared to the 2013 period was the result of our decrease in sales, which was partially offset by a $10,165 inventory scrappage charge associated with the Lumega-Z packaging changes from daily to weekly supply.
Research and Development
For the year ended December 31, 2014, research and development expenses were $43,436 compared to $259,786 for the year ended December 31, 2013. The decrease in research and development costs of $216,350 or 83% for the year ended December 31, 2014 compared to the 2013 period was due to engineering and development costs associated with the prototype design of the MapcatSF device in 2013.
Sales and Marketing
For the year ended December 31, 2014, sales and marketing expenses were $46,768 compared to $51,600 for the year ended December 31, 2013. The decrease in sales and marketing expenses of $4,832 or 9% for the year ended December 31, 2014 compared to the prior comparable period was largely due to website development costs of $4,404, printing costs of $1,717 and other general marketing expenses of $4,025 and offset by an increase in advertising and promotion costs of $5,314.
General and Administrative
For the year ended December 31, 2014, general and administrative expenses were $638,002 compared to $616,703 for the year ended December 31, 2013. The increase in general and administrative expenses of $21,299 or 3% for the year ended December 31, 2014 compared to prior year comparable period was due largely to increases in related party management fees of $90,808 and depreciation of $34,389, and partially offset by a decrease in professional fees of $86,237 and other expenses.
Interest Expense
For the year ended December 31, 2014, interest expense was $611,339 compared to $406,067 for the year ended December 31, 2013. The increase in interest expense of $205,272 or 51% for the year ended December 31, 2014 compared to the comparable prior year period was due to incremental non-cash interest expense of $141,116 resulting from the amortization of debt discount related to the beneficial conversion features and warrants issued with our convertible notes, and incremental interest expense of $64,156 resulting from additional financing in the form of convertible and promissory notes.
Net Loss
For the year ended December 31, 2014, the Company incurred a net loss of $1,320,492, as compared to a net loss of $1,242,678 for the year ended December 31, 2013. The increase in net loss of $77,814 or 6% for the year ended December 31, 2014, was primarily due to the increase in interest expense of $205,272, the decrease in sales activity and related gross margin of $72,425, and an increase in general and administrative expense of $21,299, and was partially offset by the decrease in research and development expenses of $216,350.
Liquidity and Capital Resources
Since our formation in 2009, we have devoted substantial effort and capital resources to the development and commercialization activities related to our lead product Lumega-Z and MapcatSF medical device. As a result of our activities we utilized cash in operating activities of $779,108, $543,378 and $506,299 during the nine months ended September 30, 2015 and the years ended December 31, 2014 and 2013, respectively. We had negative working capital of $508,727, $1,554,609 and $236,480 at September 30, 2015, and December 31, 2014 and 2013, respectively. As of September 30, 2015, we had cash in the amount of $24,497 and no available borrowings. During the nine months ended September 30, 2015 we converted $2,412,809 in outstanding principal and interest on our convertible notes payable and promissory notes into 3,987,640 units or shares of our common stock. Our financing has historically come from the issuance of convertible and promissory notes and to a lesser extent from the sale of common stock and exercise of warrants.
Our financial statements have been prepared assuming we will continue as a going concern (see “Going Concern” above). Our current sources of liquidity, including cash and our anticipated cash from operating activities, will not be sufficient to fund our operations and working capital needs based on current expected sales volumes, marketing expenses and infrastructure development. We will require additional financing to continue as a going concern. We will continue to incur significant expenses for commercialization activities related to our lead product Lumega-Z and MapcatSF medical device and building the Company’s infrastructure.
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Recent Financing Activity
Subsequent to September 30, 2015, we borrowed an aggregate of $250,000 under unsecured notes payable, with interest at the rate of 12% per annum and 90 day terms (the “Loans”). The note holder received warrants with a term of three years to purchase 500,000 shares of our common stock at an exercise price of $0.25 per share (the “Loan Warrants”). On January 26, 2016, we entered into an addendum to the Loans which includes additional post-maturity interest in the form of warrants to purchase shares of our common stock as follows:
| • | in the event the Loans are not paid by maturity, we will grant a warrant to purchase 1/10th of the number of shares and under the same terms as set forth in the Loan Warrants; |
| • | each month thereafter, if the Loan is not paid in full, we will grant a warrant to purchase 1/10th of the number of shares and under the same terms as set forth in the Loan Warrants; |
| • | the Loans continue to accrue interest at the rate of 12% until paid in full; and |
| • | upon repayment of the Loans, the holder shall receive an additional warrant to purchase shares our common stock at $0.25 per share for the number of shares equivalent to the amount of post-maturity interest paid on each of the Loans upon repayment under the same terms as set forth in the Loan Warrants. |
On November 30, 2015, we entered into a $100,000 promissory note with an investor. The note carries simple interest at 5% and is due and payable on the earlier of (i) May 1, 2016, (ii) upon default, or (iii) upon receipt of an aggregate of $1,000,000 from an equity placement that generates gross proceeds of at least $1,000,000. In connection with the issuance of the promissory note, the Company issued a warrant with a three year term to purchase 100,000 shares of the Company’s common stock at an exercise price of $0.25 per share.
Sources and Uses of Cash
The following table sets forth our major sources and uses of cash for each of the following periods:
| Nine Months Ended | Years Ended | |||||||||||||||
| September 30, | September 30, | December 31, | December 31, | |||||||||||||
| 2015 | 2014 | 2014 | 2013 | |||||||||||||
| Net cash used in operating activities | $ | (779,108 | ) | $ | (421,838 | ) | $ | (543,378 | ) | $ | (506,299 | ) | ||||
| Net cash used in investing activities | (2,164 | ) | (5,550 | ) | (7,450 | ) | (176,273 | ) | ||||||||
| Net cash provided by financing activities | 799,609 | 404,511 | 534,111 | 675,388 | ||||||||||||
| Net increase (decrease) in cash | $ | 18,337 | $ | (22,877 | ) | $ | (16,717 | ) | $ | (7,184 | ) | |||||
Operating Activities
Nine Months Ended September 30, 2015 and 2014
Net cash used in operating activities was $779,108 during the nine months ended September 30, 2015. The largest component of our cash used during this period was a net loss of $7,638,519, which included non-cash charges of $6,930,607 related to stock-based compensation, inducement expense on note conversions to equity, amortization of debt discount, loss on settlement of promissory notes and accounts payable, accrued interest expense and depreciation and amortization. Additional cash outflows were related to decreases in accounts payable and accrued expenses of $30,619 and accrued and deferred rent costs of $5,363. These outflows were partially offset by decreases in deposits and prepaid expenses of $20,902 and inventories of $14,111. Net cash used in operating activities was $421,838 for the nine months ended September 30, 2014. The largest component of our cash used during this period was a net loss of $971,523, which included non-cash charges of $469,177 related to amortization of debt discount, accrued interest expense and depreciation and amortization. Additional cash outflows were related to a decrease in accounts payable and accrued expense of $98,491, which were partially offset by increases in accrued and deferred rent costs of $94,900, inventories of $73,787 and deposits and prepaid expenses of $9,317.
Years Ended December 31, 2014 and 2013
Net cash used in operating activities was $543,378 during the year ended December 31, 2014. The largest component of our cash used during this period was a net loss of $1,320,492, which included non-cash charges of $649,412 related to amortization of debt discount, accrued interest expense and depreciation and amortization. Additional cash outflows were related to a decrease in accounts payable and accrued expenses of $38,167, and increases in inventories of $69,541 and deposits and prepaid expenses of $9,317. These outflows were partially offset by an increase in accrued and deferred rent costs of $86,474. Net cash used in operating activities was $506,299 for the year ended December 31, 2013. The largest component of our cash used during this period was a net loss of $1,242,678, which included non-cash charges of $414,908 related to amortization of debt discount, accrued interest expense and depreciation and amortization. Additional cash outflows were related to an increase in deposits and prepaid expenses of $18,057. These outflows were partially offset by increases in accounts payable and accrued expenses of $258,930 and accrued and deferred rent costs of $45,144. Increases in accounts payable and accrued expenses included costs related to the prototype builds of our MapcatSF and related engineering and development expenses.
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Investing Activities
Nine Months Ended September 30, 2015 and 2014
Net cash used in investing activities was $2,164 for the nine months ended September 30, 2015 and $5,550 for the nine months ended September 30, 2014, and consisted of investments in property and equipment for both years.
Years Ended December 31, 2014 and 2013
Net cash used in investing activities was $7,450 for the year ended December 31, 2014 and $176,273 for the year ended December 31, 2013 and consisted of investments in property and equipment for both years. Expenditures in 2013 included build-out costs associated with our current leased facilities.
Financing Activities
Nine Months Ended September 30, 2015 and 2014
Net cash provided by financing activities was $799,609 for the nine months ended September 30, 2015. Financing activities for the 2015 period provided proceeds of $542,500 from the issuance of convertible notes payable, $182,109 in short-term loans from related parties and $75,000 in proceeds from the exercise of warrants. Net cash provided by financing activities was $404,511 for the nine months ended September 30, 2014. Financing activities for the 2014 period provided proceeds of $200,000 from the issuance of promissory notes, $135,000 from the issuance of convertible notes payable and $69,511 in amounts received from related parties on a net basis.
Years Ended December 31, 2014 and 2013
Net cash provided by financing activities was $534,111 for the year ended December 31, 2014. Financing activities for 2014 provided proceeds of $222,500 from the issuance of convertible notes payable, $200,000 from the issuance of promissory notes and $111,611 in amounts received from related parties on a net basis. Net cash provided by financing activities was $675,388 for the year ended December 31, 2013. Financing activities for 2013 provided proceeds of $465,000 from the issuance of convertible notes, $87,000 from the issuance of common stock, $100,000 from the issuance of convertible notes to related parties and $35,000 from the issuance of promissory notes.
Principal Commitments
The following table sets forth the Company’s principal cash obligations and commitments for the next five fiscal years as of September 30, 2015 aggregating $550,858, of which $40,584 is included in current liabilities in the Company’s balance sheet at September 30, 2015.
| Payments Due By Year | ||||||||||||||||||||||||
| Total | (remaining 3 months) 2015 | 2016 | 2017 | 2018 | 2019 | |||||||||||||||||||
| Convertible notes payable, currently due | 40,584 | 40,584 | — | — | — | — | ||||||||||||||||||
| Convertible notes payable, long-term | 510,274 | — | — | 510,274 | — | — | ||||||||||||||||||
| Operating lease commitments | 331,372 | 28,815 | 108,248 | 121,599 | 72,710 | |||||||||||||||||||
| Total | $ | 882,230 | $ | 69,399 | $ | — | $ | 631,873 | $ | 72,710 | $ | — | ||||||||||||
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Off-Balance Sheet Arrangements
At September 30, 2015, and December 31, 2014 and 2013, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.
Overview
We are a specialty health sciences company that develops, formulates and distributes condition-specific medical foods with an initial medical food product that addresses a depleted macular protective pigment, which is a biomarker and leading cause of age-related macular degeneration (“AMD”), as well as computer vision syndrome (“CVS”). We have also developed a proprietary medical device that accurately measures the macular pigment density.
We currently develop and distribute a line of medical foods that restores the macular protective pigment to address AMD and CVS under the brand name Lumega-Z®. We are using our own proprietary patent-pending technology embodied in a medical device called the MapcatSFTM that measures the macular pigment. The MapcatSF is a patent-pending, non-mydriatic, non-invasive device that accurately measures the macular protective pigment density, thereby creating an evidence-based protocol that is shared with the patient. For the past three years, the clinic prototypes have been fully tested on patients, allowing for frequent modifications of the device’s algorithms and retesting for accuracy, as well as to provide the inclusion of additional features not previously considered in the initial prototype. The alpha prototype, which is the pre-commercial production version, was unveiled for the first time in July 2013 in Cambridge, United Kingdom, to researchers and scientists from around the world. The MapcatSF is manufactured and assembled in Irvine, California, and will be distributed from our national headquarters in San Diego. The marketing of the device will be implemented through continuing education presentations conducted by our key opinion leaders. This device is currently classified by the FDA as a Class I medical device which does not require any pre-market approval.
Lumega-Z is now the first liquid ocular health formula to be classified as a medical food (as defined in Section 5(b) of the “Orphan Drug Act”). Lumega-Z has a patent-pending, critical ingredient that replenishes and restores the macular protective pigment simultaneously delivering critical and essential nutrients to the eye. Formulated by Dr. Sheldon Hendler in 2010, modifications were made over a two-year period to improve the taste and method of delivery. The current formulation has been delivered to patients and used in clinics for the past three years. Patients who have taken Lumega-Z for a minimum period of three months have usually experienced an increase in their Macular Protective Pigment and noticeable halt in the progression of their AMD. Testimonials have been reported weekly regarding a noticeable improvement in their glare and contrast sensitivity. Over 250 patients have been set–up on an auto ship program for delivery every four weeks, which is primarily generated from three beta clinics. Our operations, to date, indicate that each MapcatSF deployed in a clinic generates an average of 75 new customers for our Lumega-Z product over a period of approximately 90 days when a MapcatSF is deployed in a small, low volume clinic. A larger, higher volume clinic is expected to generate a larger number of patients in a shorter period of time.
AMD is the leading cause of blindness in the world. More than 11 million people in the United States suffer from various forms of this incurable disease, according to the American Macular Degeneration Foundation. As the population ages, that number is expected to triple by 2025. Congress, the Food and Drug Administration (“FDA”), the Center for Medicare & Medicaid Services and private insurance companies are focusing increased efforts on pharmacovigilance (the branch of the pharmaceutical industry which assesses and monitors the safety of drugs either in the development pipeline or which have already been approved for marketing) to measure and reduce these adverse health consequences. We believe that there is an increasing level of acceptance of medical foods as a primary therapy by patients and healthcare providers to treat pain syndromes, sleep and cognitive disorders, obesity, hypertension, and viral infection. In clinical practice, medical foods are being prescribed as both a standalone therapy and as an adjunct therapy to low doses of commonly prescribed drugs.
Medical foods are neither dietary nor nutritional supplements. We believe that medical foods will continue to grow in importance over the coming years. From a regulatory standpoint, the FDA took steps in 1988 to encourage the development of medical foods by regulating this product category under the Orphan Drug Act. The term “medical food” as defined in Section 5(b) of the Orphan Drug Act is a “food which is formulated to be consumed or administered 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.
These regulatory changes have reduced the costs and time associated with bringing medical foods to market. Until 1972, medical foods were categorized as drugs and then as “foods for special dietary purposes” until 1988. The field of candidates for development into medical foods is always expanding due to continuing advances in the understanding of the science of nutrition and disease, coupled with advances in food technology increasing the number of products that can be formulated and commercialized.
We distribute our products through E-commerce in an online store that is operated at www.guardionhealth.com. The contents of our website are not incorporated into this prospectus.
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Competitive Advantage
By combining our cutting edge technology with our MapcatSF medical device and Lumega-Z medical food, we have developed based on management’s knowledge of the industry, the only reliable two-pronged evidence-based protocol for replenishing and restoring the Macular Protective Pigment (“MPP”), which affects AMD, cataracts and CVS. The MapcatSF will be the first device using a patented “single fixation” process and “automatic lens density correction” that produces accurate serialized data. Historically, a number of specialized densometers used by research groups within the medical community have been known to produce unreliable data; due in part to the fact that they are not Troxler-free. The Troxler effect is an optical illusion affecting visual perception where an unchanging stimulus away from a fixation point will fade away and disappear as one stares at a fixation point consistently. A device that is Troxler-free does not have this fading of images that otherwise would occur as a result of the Troxler effect. Being Troxler-free is thought to be an important function in being able to accurately complete the testing using these devices. The MapcatSF has been installed at the Illinois College of Optometry (“ICO”) and is being included in the college’s curriculum. ICO is responsible for graduating 20% of the optometrists practicing in the US.
Medical Foods Products Industry Overview
The science of nutrition was long overlooked and underdeveloped and has now shown that the sick and elderly have special nutritional needs that cannot be met by traditional adult diets. Medical nutrition has emerged today as an attractive segment in the food industry.
A number of diseases are associated with metabolic imbalances and that patients in treatment have specific nutritional requirements. Some examples are ocular health, pain syndromes, insomnia, cognitive disorders, IBS, and heart disease. Many older Americans have or will develop chronic diseases that are amenable to the dietary management benefits of medical foods. Medical foods help address these diseases and conditions in a drug-free way with food-based ingredients, yet are a medical product taken under supervision by a physician. The term “medical foods” does not pertain to all foods fed to sick patients. Medical foods are foods that are specially formulated and processed (as opposed to a naturally occurring foodstuff used in a natural state) for patients who are seriously ill or who require the product as a major treatment modality according to FDA regulations.
Medical foods consist of food-based ingredients that are part of the normal human diet and are Generally Recognized as Safe (“GRAS”) under FDA standards. Medical foods must make disease claims for which there is scientific evidence for the nutrient deficiencies that cannot be corrected by normal diet. Medical foods are intended for a vulnerable population suffering from a particular chronic disease and so have special, extra-rigorous guarantees of safety. All ingredients must be designated GRAS and used in therapeutic concentrations to address the particular nutritional needs of the patient. Medical foods are taken under the supervision of a physician or professional healthcare provider who monitors and adjusts the food ‘dosage.’ In addition, under FDA guidelines and congressionally approved laws medical foods do not require FDA preapproval but undergo continuous FDA monitoring and approval of label claims. Even though pre-market FDA approval is not required for a medical food, the official requirements and responsibilities for the manufacturer, in terms of safety, are greater than for dietary supplements, including solid scientific support for the formula as a whole. For these reasons, medical foods have greater guarantees of efficacy. In contradistinction, dietary supplements, such as vitamins, minerals and botanicals, do not require FDA preapproval, cannot make disease claims, are intended for normal people without disease and cannot claim that they prevent, mitigate or treat a given disease. Dietary supplements do not require physician supervision and can be administered to a person that can self-administer the supplement without supervision.
Competitive Strategy
Since there are no research-validated pharmaceutical solutions for slowing the progression of adult macular degeneration (“AMD”), it is necessary for physicians to recommend Age-Related Eye Disease Study (“AREDS”)-based supplements to their AMD patients.1 However, more than 90% of all AREDS-based nutritional products currently on the market are in tablet form. As previously discussed, tablets are difficult to administer and have a low efficiency of absorption. For this reason, some doctors may hesitate to prescribe tablet form AREDS-based nutraceuticals despite the fact that is all they have available to them.
Lumega-Z addresses this concern. In contrast, Lumega-Z is formulated using a proprietary molecular micronization process (“MMP”) to maximize efficiency of absorption and safety and to minimize compatibility issues.
1 The Age-Related Eye Disease Study (AREDS) was a clinical trial sponsored by the National Eye Institute, one of the National Institutes of Health in the United States, the results of which were reported in the October 2001 issue of Archives of Ophthalmology. “A Randomized, Placebo-Controlled, Clinical Trial of High-Dose Supplementation With Vitamins C and E, Beta Carotene, and Zinc for Age-Related Macular Degeneration and Vision Loss.” Archives of Ophthalmology 119.10 (2001): 1417. doi:10.1001/archopht.119.10.1417. http://archopht.jamanetwork.com/article.aspx?articleid=268224
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Growth Strategy
Our Company believes that marketing our product is critical in ensuring its success. We have several marketing initiatives and will implement them according to the success and product feedback that our Company and products create. The Company will also consider acquiring other companies or product lines that may be complementary or supplementary as part of our future efforts to expand the business, which acquisitions could be for cash, stock or a combination thereof. We believe that we can grow our business using the following sales and marketing strategies:
Sales and Marketing
The use of dietary supplements to enhance health and well-being is a longstanding and increasing trend. According to industry sources, up to 52% of adults in the United States have reported taking nutritional supplements.2 Worldwide sales of supplements surpassed $53 billion in 2007, with Asia Pacific capturing 44.2% market share.
Supplementation has recently generated much interest among health professionals in a relatively new area, the prevention and slowing of the AMD epidemic.
U.S. Statistics
| § | AMD is one of the leading cause of blindness in the developed world, responsible for 50% of blindness.3 |
| § | AMD cases in the United States is estimated to be 15 million.4 |
| § | In the U.S., one in three people will develop AMD or some vision-reducing eye disease by age 65.5 |
Worldwide Statistics
| § | AMD is the third leading cause of blindness throughout the entire world, exceeded only by cataracts and glaucoma.6 |
| § | Overall, the prevalence of AMD appears to be lower and more variable in the developing nations as compared to more developed countries.7 Healthcare experts believe this will likely change for the worse with increasing life expectancy, changing lifestyles and increase in viewing computer monitors.8 |
Marketing Lumega-Z to Practitioners
In order to reach the large, expanding AMD patient population, GHS will primarily market its vision formulation to the patients through ophthalmologists and optometrists. In the U.S. alone, there are more than 19,000 ophthalmologists9 and over 33,000 optometrists currently practicing.10 There are over 213,000 ophthalmologists worldwide.11
Sales Channel
Lumega-Z is a regulated Medical Food and therefore must be administered under the supervision of a physician or professional healthcare provider. Once the healthcare provider has determined that the patient requires Lumega-Z, they will follow the following procedures:
| § | GHS will provide all clinicians a DAC number (Doctor Authorization Code) |
| § | Patients will be given a customized prescription with the DAC number; this will enable them to order Lumega-Z either online or by calling the 800 number |
| § | Patients will be able to take advantage of using their Health Care Flexible Spending Accounts (HCFSA) or Health Savings Account (HAS) dollars (pre-tax) |
GHS will support the clinicians by making available Online Ocular Nutrition courses to train their technicians.
2 “Multivitamin-multimineral supplements: who uses them?” Am J Clin Nutr. 2007 Jan;85(1):277S-279S.
3 “Leading Causes of Blindness.” NIH MedlinePlus, Summer 2008 Issue: Volume 3 Number 3 Pages 14 - 15
4 Retina Health Series; Facts from the ASRS, American Society of Retina Specialists.
5 Ganley JP, Roberts J, eds. Eye conditions and related need for medical care among persons 1–74 years of age, United States, 1971–72. Hyattsville, Md.: U.S. Dept. of Health and Human Services, Public Health Service, National Center for Health Statistics, 1983; DHHS publication no. 83-1678.
6 “Prevention of Blindness and Visual Impairment.” World Health Organization website, under Programmes, viewed on February 5, 2016, available at http://www.who.int/blindness/causes/priority/en/index7.html
7 Nazimul H, Rohit K, Anjli H. Trend of Retinal Diseases in Developing Countries. Expert Rev Ophthalmol. 2008;3:43-50.
8 Id.
9 American Academy of Ophthalmology, 2014, viewed on February 3, 2016, available at http://www.aao.org/newsroom/eye-health-statistics.
10 U.S Bureau of Labor Statistics, Division of Occupational Employment Statistics. Occupational Employment and Wages, May 2014, viewed on February 3, 2016, available at http://www.bls.gov/oes/current/oes291041.htm
11 American Academy of Ophthalmology, 2014, viewed on February 3, 2016, available at http://www.aao.org/newsroom/eye-health-statistics.
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Proprietary Technology and Intellectual Property
Patents
We currently own and have exclusive rights to the following pending patent applications:
| Pat. App. No. | Title | Owner | Product | File Date | ||||
| 14/377,929 |
APPARATUS FOR USE IN THE MEASUREMENT OF MACULAR PIGMENT OPTICAL DENSITY AND/OR LENS OPTICAL DENSITY OF AN EYE |
GHS | MapcatSFTM | 08/11/14 | ||||
| 14/028,104 | EMULSION OF CAROTENOIDS AND OCULAR ANTIOXIDANTS | GHS | Lumega-Z® | 09/16/13 |
The MapcatSFTM patent filing describes an apparatus for use in the measurement of the optical density of the macular pigment in the human eye, as well as an apparatus for the use in measuring the lens optical density of a human eye. The apparatus is particularly applicable to flicker photometers, which are used to measure the macular pigment in the human eye.
The Lumega-Z® patent filing describes a daily liquid supplement for ocular and body health containing at least one of lutein, zeaxanthin, meso-zeaxanthin and astaxanthin for a human subject for nutritionally supplementing macular pigments in the human eye. The micronized nutrients in a lipid based emulsion described in the patent are more efficiently absorbed into the bloodstream than conventional supplement formulations resulting in higher serum levels and increased macular pigment.
Trade Secrets
Our MapcatSF device employs a secret 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 IC block designed in such a way as to make it difficult to reverse engineer.
Trademarks
We utilize trademarks on all current products and believe that having distinguishing marks is an important factor in marketing our products. Currently, we have one U.S. registered trademarks on the principal register at the United States Patent and Trademark Office (“USPTO”) and we have two common law trademarks. These marks are listed below. We believe that having distinctive marks for any additional products that we develop will also be an important marketing characteristic. We have not sought any foreign trademark protection for our products or product candidates at this time. U.S. trademark registrations generally are for fixed, but renewable, terms.
We currently own and have exclusive rights to the following registered trademarks:
| Registration No. | Mark | Owner | Product | |||
| 3978935 | LUMEGA-Z | GHS | Lumega-Z |
We currently own and have exclusive rights to the following pending trademark applications:
| Serial Number | Mark | Owner | Product | |||
| 86823358 | MAPCAT SF | GHS | MapcatSF | |||
| 86818552 | GUARDION | GHS | Company name for Guardion |
Medical Foods and Medical Device Manufacturing and Sources and Availability of Raw Materials
We outsource the manufacturing of our medical food products to the following contract manufacturers: Manufacturer A for carotenoids, Manufacturer B for all other supplements, and Manufacturer C for Omega 3. We do not have contracts with our manufacturers. We process orders through purchase orders and invoices with each manufacturer.
Manufacturer A is a Mexican corporation established in 1966 that has been involved in the research, development, production and commercialization of carotenoids from natural sources for the past 49 years with operations in Mexico. According to its own advertising, its carotenoids are produced under the strictest standards and Current Good Manufacturing Practice (cGMP) from the optimization of seeds and plants, to cultivation methods, fertilization and manual harvesting of flowers and peppers. These processes are followed by a gentle dehydration. Then, meals that contain oleoresins are saponified and isomerized, followed by stabilization and standardization. The final products are packaged and distributed. Manufacturer A just recently completed an FDA inspection with no findings, which demonstrates they satisfy cGMP requirements.
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Manufacturer B offers a vast array of full service contract vitamin manufacturing, liquid vitamin manufacturing and skin care manufacturing and lotions manufacturing services. According to their own advertising, their desire to be better than the best has resulted in a full service vitamin manufacturing and skin care manufacturing company, whose commitment to quality, integrity, consistency and customer service is unsurpassed. Manufacturer B claims it has old school business values combined with the latest cGMP computerized process management technology and an experienced, knowledgeable staff to make itself more than a contract liquid manufacturer.
Manufacturer C is a custom chemicals and food ingredients manufacturer with two facilities in Coshocton, Ohio. According to its own advertising, Manufacturer C was established as an Ohio corporation in 1981 and has grown from a small research chemical sales business in specialty hydrocarbons and fine chemicals to a fully capable GMP manufacturer with a wide portfolio of products and services in the fine chemical, food ingredient, pharmaceutical, and nutritional supplement markets.
Manufacturer D is a full-service, consumer, medical device design and engineering company based in Orange County, Southern California, established in 1998. According to its own advertising, it successfully completed over 100 projects including 16 Medical Carts, 22 Table-Top Instruments, 20 Hand Held Devices and 9 Single Use/Disposable Medical Devices. Manufacturer D claims it can take product from concept to market quickly and cost-effectively and is ISO 13485 certified. The primary objective of ISO 13485 is to facilitate harmonized medical device regulatory requirements for quality management systems.
Government Regulation
Statutory Definition and One FDA Regulation
Under the Federal Food, Drug, and Cosmetic Act of 1938 (“FFDCA”), 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 FFDCA, such as food, food additive, dietary supplement, GRAS food component, new drug, GRAS and Effective (“GRAS/E”) drug for over the counter use, and GRAS/E drug for use under the supervision of a physician. The categories overlap and products can fall within more than one category depending on their intended use.
The FDA has provided little guidance on the regulation of medical foods, as it is still a relatively new and evolving category of product under the FFDCA.
Our medical food products are defined and regulated by the FDA. 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, or by mouth, under the supervision of a physician and which is intended for the specific dietary management of a disease or condition for which distinctive nutritional requirements, based on recognized scientific principles, are established by medical evaluation.” The FDA advises that it considers the statutory definition of medical foods to “narrowly” constrain the types of products that fit within the category of food (see May 2007 Guidance, and Food Labeling; Reference Daily Intakes and Daily Reference Values; Mandatory Status of Nutrition Labeling and Nutrition Content Revision proposed rule.) This is a Final Rule, binding regulation, on nutrition labeling for conventional foods.
The one FDA regulation pertaining to medical foods exempts them from the nutrition labeling requirements that apply to conventional foods, but they are subject to special labeling requirements. Under 21 C.F.R. sec. 101.9 (j) (8),
(j) The following foods are exempt from this section or are subject to special labeling requirements:
(8) Medical foods as defined in section 5(b) of the Orphan Drug Act. A medical food is a food which is formulated to be consumed or administered enterally, or by mouth, under the supervision of a physician and which is intended for the specific dietary management of a disease or condition for which distinctive nutritional requirements, based on recognized scientific principles, are established by medical evaluation. A food is subject to this exemption only if: (i) It is a specially formulated and processed product (as opposed to a naturally occurring foodstuff used in its natural state) for the partial or exclusive feeding of a patient by means of oral intake or enteral feeding by tube; (ii) It is intended for the dietary management of a patient who, because of therapeutic or chronic medical needs, has limited or impaired capacity to ingest, digest, absorb, or metabolize ordinary foodstuffs or certain nutrients, or who has other special medically determined nutrient requirements, the dietary management of which cannot be achieved by the modification of the normal diet alone; (iii) It provides nutritional support specifically modified for the management of the unique nutrient needs that result from the specific disease or condition, as determined by medical evaluation; (iv) It is intended to be used under medical supervision; and (v) It is intended only for a patient receiving active and ongoing medical supervision wherein the patient requires medical care on a recurring basis for, among other things, instructions on the use of the medical food.
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Unlike for drugs and for dietary supplements, there is no overall regulatory scheme for medical foods, or even a pending proposed rule, meaning that no FDA rulemaking is in progress. However, a very detailed Advanced Notice of Proposed Rulemaking (“ANPR”) entitled “Regulation of Medical Foods,” was published in the Federal Register on Nov. 29, 1996. This ANPR never progressed to a proposed rule, the Notice and Comment procedure, and an eventual Final Rule (binding regulation). However, it still represents FDA’s position and policy on medical foods, in conjunction with the May 2007 and August 2013 Draft Guidance. This ANPR was in effect withdrawn, because on April 22, 2003, the FDA published a proposal to withdraw numerous long-pending proposed rules, including this ANPR. The FDA cited as its reasons for withdrawal, first, that the subjects are not a regulatory priority, and agency resources are limited, second, the proposed rules have become outdated due to advances in science or changes in the products or the industry regulated, or changes in legal or regulatory contexts; and, third, to eliminate uncertainty, so that the FDA or the private sector may resolve underlying issues in ways other than those in the proposals. In May 2007, the FDA issued its Guidance to Industry, presumably because the medical foods sector was growing, but it did not engage in a formal rulemaking procedure, either because it did not have the resources and/or because the medical foods category is still lower priority than drugs and medical devices. A third draft guidance was issued in August 2013 further attempting to clarify the FDA’s position on medical foods. The guidance has not been formalized but we maintain compliance with this draft guidance.
Regulatory Requirements
Overview: Medical foods are FDA-regulated, but there is no complete set or scheme of regulations. There is no pre-market approval, or even pre-market notification required. Rather, it is the responsibility of the manufacturer and marketer to test for safety and efficacy before marketing and selling. The developer of a medical food must adhere closely to the statutory definition, and to the descriptions of a medical food in the one regulation regarding exemption from nutrition labeling, and in the May 2007 Guidance and the August 2013 Draft Guidance.
Threshold Issue: The manufacturer must demonstrate that the disease or condition to be targeted, scientifically and medically, is a disease with distinctive (or unique) nutritional requirements (ANPR 1996). The FDA has stated that this is a “narrow category,” (2007 Guidance) and that whether a product is valid for this category depends on the published medical science of the disease and its origins. The targeted disease or condition may be, or caused by, a metabolic imbalance or deficiency or the accelerated requirements for a certain nutrient caused by a disease state. We and our Scientific Advisory Board examine the distinctive nutritional requirements of a disease.
Formulation: A medical food may not be a single ingredient formula - otherwise, that product would be a dietary supplement for a nutrient deficiency. (FDA Field Guides) A medical food formula must go beyond a mere modification of the diet. (FDA regulation; 2007 Guidance, 2013 Draft Guidance). The formula must meet and satisfy the distinctive nutritional requirements, not merely ameliorate the symptoms. For example, Glucosamine or MSM, or an herb’s “active” constituent may indeed help osteoarthritis. One must demonstrate that these nutrients are the distinctive nutritional requirements for osteoarthritis.
Safety: There is no particular or mandated FDA pre-market safety studies required of the formula as a whole. However, all ingredients must be either GRAS or approved food-additives. (See FDA letter to Industry (2001) regarding no botanicals or “novel” ingredients permitted in “functional foods”; and the ANPR.) Since medical foods are typically taken with prescription drugs, the developer must assess whether any medical food/drug interactions pose a risk. Many ingredients have been determined by the FDA to be GRAS and are listed as such by regulation. Other ingredients may achieve self-affirmed GRAS status through a panel of experts on that particular substance that author a GRAS Report. The standard for an ingredient to achieve GRAS status requires not only technical demonstration of non-toxicity and safety, but also general recognition and agreement on that safety by experts in the field. All ingredients we use in our medical foods are either FDA-approved food additives or have GRAS status. Note that the GRAS requirement for ingredients (above) is arguably a higher safety standard than the risk/benefit analysis required for pharmaceuticals. Like any evolving area, especially where no premarket approval is required, the FDA reserves the right to raise questions about the qualification of products within any category as well as the labeling and manufacturing safety of those products.
Efficacy: No particular FDA pre-market efficacy studies are required by the FDA or by Congressional statute, similar to or comparable to Phase 2 & 3 trials for prescription drugs. However, a company must have data to demonstrate that the formula, when taken as directed, meets the distinctive nutritional requirements of the particular disease.
Manufacturing: There are no “good manufacturing practice” (“GMP”) regulations for medical foods in particular. Drug GMPs are not required, nor are the relatively new dietary supplement GMPs required; only food GMPs are required. The manufacture of our medical foods is outsourced in its entirety. We use state of the art facilities that manufacture only nutritional supplements and medical foods.
Labeling: As for all food labels, printing must be legible, and many required elements must be conspicuous, such as a Statement of Identity, the statement “Must be administered under the supervision of a physician or professional healthcare provider,” quantity, ingredient listing, name and address of the distributor and other requirements as for fully set forth in the 2007 Guidance.
Marketing: A medical food is a food product, thus the FDA does not regulate advertisements and promotional activities according to the pharmaceutical statutes and regulations; there is no side effects disclaimer or fair balancing required, e.g., in DTC advertising of drugs on television. However, the FDA has a very broad definition of “labeling”; thus all promotional materials, including websites, are under the authority, monitoring and enforcement of FDA. The Federal Trade Commission (“FTC”) also has joint jurisdiction with the FDA over food products, per a 1983 Memorandum of Understanding. Thus, all advertising claims, both express and implied, must be true, accurate, well-substantiated, and not misleading.
Enforcement: Enforcement is post-market, mostly via annual FDA inspections of food facilities, including packaging, distribution facilities, and fulfillment houses, as well as the manufacturer. (Field Guides for Compliance). FDA also gathers material at trade shows and conferences, and examines websites. FTC has joint jurisdiction, and performs sophisticated Internet searches, both randomly and at the request of the FDA or of a competitor.
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Stark II
Congress enacted significant prohibitions against physician self-referrals in the Omnibus Budget Reconciliation Act of 1993. This law commonly referred to as “Stark II,” applies to physician dispensing of outpatient prescription drugs that are reimbursable by Medicare or Medicaid. Our product, Lumega-Z, is not a prescription drug, nor do we participate in Medicare, Medicaid or any other federal or state-funded program. Stark II, 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 the requirements of the exception. We are mindful that if our Lumega-Z product becomes eligible for reimbursement from any such program or if Lumega-Z were deemed to be a prescription drug, Stark laws could potentially become applicable with regard to Lumega-Z.
Anti-Kickback Statute and HIPAA Criminal Laws
While we do not yet participate in any federal or state-funded healthcare programs, we are mindful that should we participate in such programs or should our customers receive reimbursement or subsidy from a federal or state healthcare program, certain laws may become applicable to us. The federal Anti-Kickback Statute makes it illegal for any person, including a pharmaceutical, biologic, or medical device company (or a party acting on its behalf), to knowingly and willfully solicit, offer, receive or pay any remuneration, directly or indirectly, in exchange for, or to induce, the referral of business, including the purchase, ordering or prescription of a particular item or service, or arranging for the purchase, ordering, or prescription of a particular item or service for which payment may be made under federal healthcare programs such as Medicare and Medicaid. In 1996, under the Health Insurance Portability and Accountability Act (“HIPAA”), the Anti-Kickback Statute was expanded to be made applicable to most federal and state-funded health care programs.
The federal Anti-Kickback Statute is broad and prohibits many arrangements and practices that may be lawful in businesses outside of the healthcare industry. Recognizing that the Anti-Kickback Statute is broad and may technically prohibit many innocuous and beneficial arrangements, Congress created several exceptions in the Social Security Act and has authorized the U.S. Department of Health and Human Services (“HHS”) to publish regulatory “safe harbors” that exempt certain practices from enforcement action under the Anti-Kickback Statute prohibitions. For example, there are safe harbors available for certain discounts to purchasers, personal services arrangements and various other types of arrangements.
In addition, many states have adopted laws similar to the federal Anti-Kickback Statute. Some of these state prohibitions apply to referral of patients for healthcare services reimbursed by any third-party payer, not only the Medicare and Medicaid programs or other governmental payers. At least one state, California, also has adopted a law requiring pharmaceutical companies to implement compliance programs to prevent and deter conduct that may violate fraud and abuse laws that comply with the voluntary industry guidelines and the Office of Inspector General (“OIG”) compliance guidance. We believe we have structured our business arrangements to comply with these laws.
HIPAA created two new federal crimes: health care fraud and false statements relating to health care matters. The health care fraud statute prohibits knowingly and willfully executing a scheme to defraud any health care benefit program, including private payers. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from federal and state health care programs such as Medicare and Medicaid. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for health care benefits, items or services. A violation of this statute is a felony and may result in fines or imprisonment. Additionally, HIPAA granted expanded enforcement authority to HHS and the U.S. Department of Justice (“DOJ”) and provided enhanced resources to support the activities and responsibilities of the OIG and DOJ by authorizing large increases in funding for investigating fraud and abuse violations relating to health care delivery and payment.
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: health plans, health care clearing houses, and 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 our business.
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.
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The HITECH Act establishes four categories of violations that reflect increasing levels of culpability and four corresponding tiers of penalty amounts that significantly increase the minimum penalty amount of each violation. The maximum penalty amount is $1,500,000 for repeated violations of the same provision. In addition, the HITECH Act permits the imposition of penalties if the Covered Entity did not know, and with the exercise of reasonable diligence, would not have known, of the violation. Such violations are now punishable under the lowest tier of penalties. In addition, the HITECH Act prohibits the imposition of penalties for violations corrected within a 30-day period so long as those violations were not due to willful neglect.
State Regulatory Requirements
Each state has its own regulations concerning physician dispensing, restrictions on the corporate practice of medicine, 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, we solicit the opinion of healthcare counsel regarding the expansion of operations and utilize local counsel when necessary.
Other United States Regulatory Requirements
In the United States, the research, manufacturing, distribution, sale, and promotion of drug and biological products are subject to regulation by various federal, state, and local authorities in addition to the FDA, including the Centers for Medicare and Medicaid Services (formerly the Health Care Financing Administration), other divisions of the United States Department of Health and Human Services (e.g., the Office of Inspector General), the United States Department of Justice and individual United States Attorney offices within the Department of Justice, and state and local governments. Pricing and rebate programs must comply with the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990 and the Veterans Health Care Act of 1992, each as amended. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. All of these activities are also potentially subject to federal and state consumer protection, unfair competition, and other laws. In addition, we may be subject to federal and state laws requiring the disclosure of financial arrangements with health care professionals.
Foreign Regulatory Requirements
While not yet applicable to us, we may eventually be subject to widely varying foreign regulations, which may be quite different from those of the FDA, governing clinical trials, manufacture, product registration and approval, and sales. Whether or not FDA approval has been obtained, we must obtain a separate approval for a product by the comparable regulatory authorities of foreign countries prior to the commencement of product marketing in these countries. In certain countries, regulatory authorities also establish pricing and reimbursement criteria. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval.
Corporate History
Guardion Health Sciences, Inc. was formed under the name P4L Health Sciences, LLC in December, 2009 in California as a limited liability company. The Company changed its name to Guardion Health Sciences in December 2009. We are a specialty health sciences company that develops, formulates and distributes condition-specific medical foods with an initial medical food product that addresses a depleted macular protective pigment, which is a biomarker and leading cause of age-related macular degeneration (“AMD”), as well as computer vision syndrome (“CVS”). We have also developed a proprietary medical device that accurately measures the macular ocular pigment density. In June 2015, GHS became a Delaware “C” corporation.
Properties
The Company’s address is 15150 Avenue of Science, Suite 200, San Diego, California 92128. Our telephone number is 858-605-9055. The Company’s offices are rented under a six (6) year lease for approximately 9,605 square feet of space at a current rental of $9,893 per month.
Employees
As of February 2, 2016, the Company had a staff of eight, consisting of three officers, four full-time staff and one part-time staff person, all of whom are independent contractors.
Legal Proceedings
From time to time, the Company may become involved in litigation relating to claims arising out of its operations in the normal course of business. Except as described below, no legal proceedings, government actions, administrative actions, investigations or claims are currently pending against us or involve the Company which, in the opinion of the management of the Company, could reasonably be expected to have a material adverse effect on its business or financial condition.
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There are no proceedings in which any of the directors, officers or affiliates of the Company, or any registered or beneficial stockholder, is an adverse party or has a material interest adverse to that of the Company.
Set forth below is certain information regarding our executive officers and directors. Each of the directors listed below was elected to our board of directors to serve until our next annual meeting of stockholders or until his or her successor is elected and qualified. All directors hold office for one-year terms until the election and qualification of their successors. The following table sets forth information regarding the members of our board of directors and our executive officers:
| Name | Age | Position | ||
| Michael Favish | 67 |
President, Chief Executive Officer and Chairman of the Board of Directors
| ||
| Robert Weingarten | 63 | Director | ||
| Mark Goldstone | 52 |
Executive Vice President of Marketing and Director
| ||
| Gordon Bethwaite | 40 |
Vice President of Sales and Marketing
| ||
| Vincent J. Roth | 48 | General Counsel and Corporate Secretary |
Management Team
Michael Favish has been Chief Executive Officer, President and Chairman of the Board since the Company’s formation in 2009. He has more than 30 years’ experience in founding, developing and managing private and public companies. He is an acknowledged and respected leader and innovator with hands-on experience in strategic marketing, brand building and product development. Mr. Favish founded Fotoball USA, Inc. (“Fotoball”), a pioneer in retail licensed products and marketing, in 1984. In 1994, Mr. Favish transformed Fotoball into a publicly held company with 200 employees listed on the Nasdaq Stock Market. After growing revenues from $7 million in 1994 to $50 million in 2003, Fotoball was acquired in January 2004 by an industry leading NSE company.
Robert N. Weingarten has been a financial advisor to the Company since late 2011 and became a Director of the Company effective June 30, 2015. He is an experienced business consultant and advisor with an ongoing consulting practice. Since 1979, he has provided financial consulting and advisory services to numerous public companies in various stages of development, operation or reorganization. Mr. Weingarten was appointed as a director of Staffing 360, Inc. on February 25, 2014 and resigned this position on April 20, 2014. Mr. Weingarten was the Non-Executive Chairman of New Dawn Mining Corp. (“New Dawn”) from August 31, 2005 through September 30, 2010, and was named the Executive Chairman of New Dawn in October 2010. On July 8, 2010, Mr. Weingarten was appointed to the board of directors of Central African Gold Limited (formerly known as Central African Gold Plc and listed on the Alternative Investment Market of the London Stock Exchange at that time). Central African Gold Limited was an indirect, wholly-owned subsidiary of New Dawn. Both New Dawn and Central African Gold Limited have ceased to be publicly traded reporting companies in their respective jurisdictions. On April 29, 2014, Mr. Weingarten was appointed to the Board of Directors of RespireRx Pharmaceuticals Inc., formerly known as Cortex Pharmaceuticals, Inc. (“RespireRx”), and was named Vice President and Chief Financial Officer of RespireRx and continues to serve in these roles. Mr. Weingarten received a B.A. Degree in Accounting from the University of Washington in 1974, and an M.B.A. Degree in Finance from the University of Southern California in 1975. Mr. Weingarten is a Certified Public Accountant (inactive) in the State of California.
Mark Goldstone has been Executive Vice President of Marketing and Director since June 2015. He has over 25 years of experience in the healthcare industry, encompassing operations, commercialization and consulting. He has executed numerous M&A, financing and strategic partnership transactions, for a broad array of middle market and emerging growth companies in technology, life sciences and healthcare services. Mr. Goldstone was the Worldwide President of DDB’s healthcare business, where he was responsible for a global communications business spanning 40+ offices in over 36 markets. The business covered advertising, digital, integrated communications, HCP promotion, branding, naming, design, market shaping, medical education and scientific communications. Mr. Goldstone has previously held senior positions at Publicis Healthcare Communications Group where he was responsible for the global Sanofi-Aventis business and at Interbrand where he was CEO of its global Healthcare business. Mr. Goldstone moved from the United Kingdom to New York with Havas, where he held senior positions at Robert A. Becker, Euro RSCG and Jordan McGrath Case & Partners, Euro RSCG and ultimately at Euro RSCG Worldwide Headquarters, where he helped devise and build their global healthcare business – Euro RSCG Life Worldwide (Now Havas Life). Mr. Goldstone holds a BSc (Hons) in Pharmacy. He is a board member of the prestigious Galien Foundation and a board member of G3 Global Genomics Group. He is a member of the Royal Pharmaceutical Society of Great Britain and is a past Co-Chairman of New York Corporate Development for the American Diabetes Association.
Gordon Bethwaite has been Vice President of Sales and Marketing since December 2015. He is a senior figure in the ophthalmic space, with over 15 years of experience in the sales and marketing of diagnostic, surgical and optical products. After graduating with a degree in Applied Biology from Liverpool John Moores University, Gordon transitioned into the corporate healthcare environment. Throughout his career, Gordon has held senior management positions in both the ophthalmology & optometry, and audiology industries. Most recently, from October, 2012 to December, 2015, he served as Market Development Manager and subsequently, Director of Marketing for the ophthalmic diagnostic and surgical portfolio at Carl Zeiss Meditec, a global leader and innovator in the industry.
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Through his collaborations with thought leading doctors in cataract, refractive, retina and glaucoma specialties, Gordon brings a wealth of expertise and knowledge to the table. A passion for the technology, clinical and surgical application, and business environment of the industry, coupled with an in-depth understanding of the dynamics of the eye care market and years of collaboration with his customers, all combine to provide Gordon with a rich skill set invaluable to his role as Vice President of Sales and Marketing for the Company.
Vincent J. Roth has served as General Counsel and Corporate Secretary since April 2015. He is an experienced corporate attorney with over 15 years of experience serving as the General Counsel to public and private companies in the high-tech, healthcare, medical device, nutraceutical, and biotechnology industries. In addition to managing legal affairs, Mr. Roth is very familiar with operating in highly regulated industries. Mr. Roth recently completed a Master of Laws in Intellectual Property at the University of San Diego with honors. He received a Master of Laws in Business and Corporate Law from the University of San Diego with honors, a Juris Doctor and an MBA from Temple University, a Master of Liberal Arts in Sociology from the University of Pennsylvania and a BBA in Marketing and Human Resources from Temple University.
Director or Officer Involvement in Certain Legal Proceedings
Our directors and executive officers were not involved in any legal proceedings as described in Item 401(f) of Regulation S-K in the past ten years.
Independent Directors
We believe Mark Goldstone is an “independent director” as that term is defined by listing standards of the national exchanges and SEC rules, including the rules relating to the independence standards of an audit committee and the non-employee director definition of Rule 16b-3 under the Securities Exchange Act of 1934. We intend to add additional independent directors in order to meet listing requirements of a national securities exchange.
Committees of the Board of Directors
Currently, our Board of Directors acts as audit, nominating, corporate governance and compensation committees. The Board of Directors has not yet adopted charters relative to its audit committee, compensation committee and nominating committee. Until such time as we add more members to the Board, the entire Board will determine all matters and no committees have been formed. We intend to appoint persons to the board of directors and committees of the board of directors as required to meet the corporate governance requirements of a national securities exchange, although we are not required to comply with these requirements until we are listed on a national securities exchange. We intend to appoint directors in the future so that we have a majority of our directors who will be independent directors, and of which at least one director will qualify as an “audit committee financial expert,” prior to a listing on a national securities exchange.
Audit Committee
The audit committee’s duties under the terms of its charter are to recommend to our board of directors the engagement of independent auditors to audit our financial statements and to include the terms of its charter review our accounting and auditing principles. The audit committee reviews the scope, timing and fees for the annual audit and the results of audit examinations performed by independent public accountants, including their recommendations to improve the system of accounting and internal controls. The audit committee oversees the independent auditors, including their independence and objectivity. However, the committee members are not acting as professional accountants or auditors, and their functions are not intended to duplicate or substitute for the activities of management and the independent auditors. The audit committee is empowered to retain independent legal counsel and other advisors as it deems necessary or appropriate to assist the audit committee in fulfilling its responsibilities, and to approve the fees and other retention terms of the advisors. The audit committee members possess an understanding of financial statements and generally accepted accounting principles.
The table below sets forth, for the last three fiscal years, the compensation earned by (i) each individual who served as our principal executive officer or principal financial officer, and (ii) our most highly compensated executive officers, other than those listed in clause (i) above, who were serving as executive officers at the end of the last fiscal year (together, the “Named Executive Officers”). No other executive officer had annual compensation in excess of $100,000 during the last fiscal year.
| Executive | Year | Salary | Bonus($) | Stock Awards | All Other Compensation | Total | ||||||||||||||||
| Michael Favish(1) | 2014 | $ | 150,000 | - | - | - | $ | 150,000 | ||||||||||||||
| 2015 | $ | 200,000 | - | - | - | $ | 200,000 | |||||||||||||||
| Vincent J. Roth(2) | 2014 | - | - | - | - | |||||||||||||||||
| 2015 | $ | 104,000 | - | $ | 1,500 | - | $ | 105,500 | ||||||||||||||
| Gordon Bethwaite(3) | 2014 | - | - | - | - | |||||||||||||||||
| 2015 | - | - | $ | 2,500 | - | $ | 2,500 | |||||||||||||||
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(1) Michael Favish has been the Company’s CEO since inception. He does not have a written agreement with the Company. Mr. Favish received 5,500,000 units of membership interest at inception of the Company on December 1, 2009 when the Company was a California limited liability company, such units became 5,500,000 shares of Common Stock when the Company incorporated as a Delaware corporation on June 30, 2015. The Company accrued a salary of $150,000 for Mr. Favish in fiscal year 2014, $200,000 in fiscal year 2015 and will accrue a salary of $250,000 for fiscal year 2016. It is expected that Mr. Favish will be engaged with a formal employment agreement in 2016.
(2)Vincent J. Roth began as the Company’s General Counsel and Corporate Secretary on May 6, 2015 at an annual compensation of $156,000. Mr. Roth was awarded a stock grant on August 7, 2015 for services rendered for 150,000 shares of the Company’s common stock at a price of $0.01 per share. It is expected that Mr. Roth will be engaged with a formal employment agreement in 2016.
(3) Gordon Bethwaite was awarded a stock grant on October 1, 2015 for 250,000 shares of the Company’s common stock at a price of $0.01 per share as an inducement to engage as the Company’s Vice President of Sales and Marketing and to compensate Mr. Bethwaite for work to be performed. These shares reverse vest quarterly over the first year, with the first quarter vested on January 1, 2016. Mr. Bethwaite officially began his engagement as Vice President of Sales and Marketing on January 1, 2016 with an annualized compensation of $208,000. It is expected that Mr. Bethwaite will be engaged with a formal employment agreement in 2016.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Except as set forth below, during the past three years, there have been no transactions, whether directly or indirectly, between the Company and any of its officers, directors or their family members.
In December 2013, a member, Christopher Scangas, contributed $66,947 of fixed assets, which were recorded at historical cost.
Due to and from related parties represents unreimbursed expenses paid on behalf of, and amounts loaned to the Company by, Michael Favish, the Company’s Chief Executive Officer, as well as other shareholders. The advances are unsecured, non-interest bearing and are due on demand. As of September 30, 2015 and December 31, 2014, the Company had $236,844 and $54,735 due to related parties and as of December 31, 2013, the Company had $56,876 due from related parties.
The Company also pays management fees directly to Michael Favish. For the nine months ended September 30, 2015 and the years ended December 31, 2014 and 2013, the Company incurred management fees of $156,250, $152,758 and $61,950, respectively.
On May 1, 2015, the Company issued 450,000 membership units to a related party, Cynthia Elaine Trust dated 12/12/14, upon exercise of warrants at a weighted average exercise price of $0.20 per unit. In lieu of the aggregate cash payment of $90,000, the holder applied $90,000 of accrued interest towards the exercise price of the warrants.
For the nine months ended September 30, 2015, the Company issued $464,557 of stock-based compensation to individuals that were related parties at the time of issuance. There was no stock-based compensation issued during the years ended December 31, 2014 and 2013.
As of September 30, 2015 and December 31, 2014 and 2013, the Company had a total of $0, $514,693 and $463,644, respectively, of principal and interest outstanding under its convertible notes payable with related parties.
PRINCIPAL AND SELLING STOCKHOLDERS
The following tables set forth certain information as of February 1, 2016 and as adjusted to reflect the sale of Common Stock in this Offering, regarding the beneficial ownership of our common stock by the following persons:
· each person or entity who, to our knowledge, owns more than 5% of our common stock;
· our executive officers named in the Summary Compensation Table above;
· each director;
· all of our executive officers and directors as a group; and
· the Selling Securityholders.
Unless otherwise indicated in the footnotes to the following table, each person named in the table has sole voting and investment power and that person’s address is c/o Guardion Health Sciences, Inc., 15150 Avenue of Science, Suite 200 San Diego, California 92128. Shares of common stock subject to options, warrants, or other rights currently exercisable or exercisable within 60 days of the date of this prospectus, are deemed to be beneficially owned and outstanding for computing the share ownership and percentage of the stockholder holding the options, warrants or other rights, but are not deemed outstanding for computing the percentage of any other stockholder.
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The following table sets forth certain information regarding our common stock, beneficially owned as of February 1, 2016 by (i) each person known to us to beneficially own more than 5% of our common stock, (ii) each executive officer and director, and (iii) all directors and executive officers as a group. The following table is based on the Company having 21,906,396 shares of Common Stock issued and outstanding as of February 1, 2016 prior to the Offering. We calculated beneficial ownership according to Rule 13d-3 of the Securities Exchange Act of 1934, as amended as of that date (the “Exchange Act”). Shares of our Common Stock issuable upon exercise of options or warrants or conversion of notes that are exercisable or convertible within 60 days after February 1, 2016 are included as beneficially owned by the holder, but not deemed outstanding for computing the percentage of any other Stockholder for Percentage of Common Stock Beneficially Owned Immediately After the Offering gives effect to the sale of all shares issuable upon the exercise of options or warrants and conversion of notes. Beneficial ownership generally includes voting and dispositive power with respect to securities. Unless otherwise indicated below, the persons and entities named in the table have sole voting and sole dispositive power with respect to all Units beneficially owned.
| Name of Beneficial Owner and title, if any | Shares of Common Stock Beneficially Owned | Percentage of Common Stock Beneficially Owned Immediately Prior to the Offering | ||||||
| Officers and Directors: | ||||||||
| Michael Favish, Chief Executive Officer, President and Director (1) | 5,750,000 | (1) | 26.24 | % | ||||
| Robert N. Weingarten, Director | 1,250,000 | 5.69 | % | |||||
| Mark Goldstone, Director (2) | 1,000,000 | (2) | 4.56 | % | ||||
| Gordon Bethwaite, Vice President (3) | 250,000 | (3) | 1.14 | % | ||||
| Vincent J. Roth, General Counsel and Corporate Secretary | 150,000 | * | ||||||
| All Officers and Directors as a Group (5 persons)(4) | 8,400,000 | (4) | 38.3 | % | ||||
| 5% Shareholders: | ||||||||
| Christopher Scangas (5) | 2,578,489 | (5) | 11.77 | % | ||||
| Leon Krajian (6) | 2,521,697 | (6) | 11.5 | % | ||||
| Jeffrey Morris (7) | 1,278,211 | (7) | 5.83 | % | ||||
* less than 1%
| (1) | Includes 250,000 shares held by Mr. Favish’s spouse. |
| (2) | Consists of 1,000,000 shares of restricted Common Stock of the Company that reverse vest quarterly over a one year period with the first quarter vested on December 31, 2015. |
| (3) | These shares reverse vest quarterly over the first year commencing October 1, 2015, with the first 25% of the shares vested on January 1, 2016. |
| (4) | Unless otherwise indicated, the business address of each individual is c/o Guardion Health Sciences, Inc., 15150 Avenue of Science, Suite 200, San Diego, California 92128. |
| (5) | Includes 2,075,753 shares held in the name of Cynthia Elaine Trust dated December 12, 2014; 138,750 shares held in the name of Cynthia Elaine Scangas Dated June 12 2002-IRA rollover, BNY Mellon Trustee; and 363,986 shares held in the name of Jason Scangas, the son of Christopher Scangas, for whom Christopher Scangas holds Power of Attorney. |
| (6) | Includes 231,974 shares held in the name of Equity Trust Company Custodian FBO Leon S. Krajian IRA; 146,000 shares that may be purchased pursuant to an exercisable warrant issued to Equity Trust Company Custodian FBO Leon S. Krajian IRA that is vested and expires May 1, 2018; and 100,000 shares that may be purchased pursuant to an exercisable warrant issued to Leon Krajian that is vested and expires September 30, 2018. |
| (7) | Shares are held in the name of Jeff and Phyllis Morris Family Trust UDT Dated June 11, 1999; includes an exercisable warrant to purchase 30,237 shares that is vested and expires May 1, 2018. |
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Selling Securityholders
| Name | Beneficial Ownership | |||||||||||||
| Number | Percent | Warrants | ||||||||||||
| Officers and Directors | ||||||||||||||
| Michael Favish | (1) | 5,500,000 | 25.1 | % | ||||||||||
| Robert Weingarten | (2) | 1,250,000 | 5.7 | % | ||||||||||
| Mark Goldstone | (3) | 1,000,000 | 4.5 | % | ||||||||||
| Vincent Roth | (4) | 150,000 | * | |||||||||||
| Bethwaite, Gordon | (5) | 250,000 | 1.1 | % | ||||||||||
| 5% or greater shareholders | ||||||||||||||
| Krajian, Leon | (6) | 1,875,697 | 11.5 | % | 646,000 | |||||||||
| Jeffrey Morris | (7) | 1,278,211 | 5.9 | % | 30,237 | |||||||||
| Christopher Scangas | (8) | 2,578,489 | 11.7 | % | ||||||||||
| Selling Securityholders | ||||||||||||||
| A.G. Borgia Insurance Services Inc. Defined Benefit Pension Plan | (9) | 92,819 | ||||||||||||
| Addis, Demetre | (10) | 186,402 | ||||||||||||
| Altschuler, Stanley | (11) | 1,053,227 | ||||||||||||
| Andrews, Joseph S. | (12) | 20,000 | ||||||||||||
| Armendariz, Azminda Valle | (13) | 5,000 | ||||||||||||
| Arthur Pappathanasi Cust IRA | (14) | 118,048 | 59,024 | |||||||||||
| Bane, Kenneth D. | (15) | 45,755 | ||||||||||||
| Bone, Richard A. | (16) | 300,000 | ||||||||||||
| Borger, Howard E. | (17) | 130,938 | ||||||||||||
| Borgia Family Trust UTD 8/1/1986 | (18) | 60,474 | 30,237 | |||||||||||
| Brand, Patrice L. | (19) | 15,000 | ||||||||||||
| Burke, Charles Rice | (20) | 8,182 | ||||||||||||
| Burke, Edward Rogers | (21) | 8,182 | ||||||||||||
| Carbondale Metal, LLC | (22) | 138,272 | ||||||||||||
| Carchide, Meghan | (23) | 46,410 | ||||||||||||
| Chase, Christopher | (24) | 93,201 | ||||||||||||
| Chavez, Denise | (25) | 4,850 | ||||||||||||
| Chen, Chieh-His | (26) | 36,932 | ||||||||||||
| Chen, Yu-Jen | (27) | 100,091 | ||||||||||||
| Chun, Lin Ching | (28) | 325,840 | 74,022 | |||||||||||
| Clancy, Timothy | (29) | 403,581 | ||||||||||||
| Czerminski, Walter A. | (30) | 99,182 | ||||||||||||
| Davies Family Trust dated February 16, 1994 | (31) | 20,000 | ||||||||||||
| Degnan 2000 Trust Dated April 14, 2000 | (32) | 91,910 | ||||||||||||
| Donati, Robert | (33) | 10,000 | ||||||||||||
| Donoghue, Daniel R. | (34) | 149,614 | ||||||||||||
| Dussin Investment Co. PSP | (35) | 110,500 | ||||||||||||
| Favish, Greg | (36) | 9,375 | ||||||||||||
| Favish, Karen M. | (37) | 250,000 | ||||||||||||
| Favish, Terrence | (38) | 9,474 | ||||||||||||
| Fitzpatrick, Brian | (39) | 53,850 | 26,926 | |||||||||||
| Gagliano, Donald A. | (40) | 20,000 | ||||||||||||
| Goldstone, Mark | (41) | 1,000,000 | ||||||||||||
| Hamby, Jonathan M. | (42) | 156,378 | ||||||||||||
| Harbushka Family Trust dated July 30, 2015 | (43) | 65,782 | ||||||||||||
| Heller Family Trust U/A 10-31-97 | (44) | 45,455 | ||||||||||||
| Heller, Charles J. | (45) | 101,910 | ||||||||||||
| Hendler, Joyce M. | (46) | 50,000 | ||||||||||||
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| Hovanesian Family Trust | (47) | 30,000 | ||||||||||||
| Huang, Wenlue | (48) | 25,000 | ||||||||||||
| Janet Levin and Frank Gruber as joint tenants | (49) | 121,545 | 60,773 | |||||||||||
| Karam, Jean | (50) | 31,705 | ||||||||||||
| Kopman, Fraeda | (51) | 174,966 | ||||||||||||
| Lamont, Chris | (52) | 223,803 | ||||||||||||
| Landrum, John T. | (53) | 50,000 | ||||||||||||
| LaVelle, Benjamin & Angela | (54) | 57,141 | ||||||||||||
| Leisher, Steve | (55) | 15,765 | ||||||||||||
| Lonner, Monique | (56) | 234,959 | ||||||||||||
| Margin, Susan | (57) | 36,364 | ||||||||||||
| Marie, Janice | (58) | 65,157 | ||||||||||||
| McCarty, Mark | (59) | 20,000 | ||||||||||||
| McCaslin Family Trust | (60) | 32,735 | ||||||||||||
| Morris, Amanda | (61) | 122,974 | 30,237 | |||||||||||
| MSSB C/F Donna S. Duvall | (62) | 57,246 | ||||||||||||
| Narendra, Andy | (63) | 300,000 | ||||||||||||
| Obex Holding, LLC | (64) | 53,548 | 26,774 | |||||||||||
| Powell, Marie | (65) | 9,091 | ||||||||||||
| Rehfeld, Dean and Lisa Lindsey | (66) | 83,334 | ||||||||||||
| Ritch, Robert | (67) | 20,000 | ||||||||||||
| Scangas Schatz, Heather | (68) | 121,784 | 60,892 | |||||||||||
| Scangas Verma, Marie Rebecca | (69) | 121,784 | 60,892 | |||||||||||
| Scangas, Arthur | (70) | 166,667 | ||||||||||||
| Scangas, Evan | (71) | 46,410 | ||||||||||||
| Sichenzia Ross Friedman Ference LLP | (72) | 150,000 | ||||||||||||
| Siegel, Mark | (73) | 59,517 | 29,759 | |||||||||||
| SMC San Diego Trust | (74) | 45,455 | ||||||||||||
| Snyder Family Trust U/D/T, dated July 13, 2009 | (75) | 52,864 | 26,432 | |||||||||||
| Snyder, Scott | (76) | 445,098 | 118,018 | |||||||||||
| Stath J. Karras and Terry L. Karras as Trustees of the Karras Family Trust Dated February 15, 2002 | (77) | 67,032 | ||||||||||||
| Stephen Soden and Julie Soden Family Trust Dated March 24, 2008 | (78) | 125,000 | ||||||||||||
| Steward, Kailee (doc in Kailee Krajian) | (79) | 47,319 | ||||||||||||
| Steward, Kailee (Krajian) | (80) | 25,872 | ||||||||||||
| Stewart, William E. | (81) | 50,500 | ||||||||||||
| Strat, Montgomery | (82) | 5,000 | ||||||||||||
| Theodore, Nicholas | (83) | 53,535 | 26,768 | |||||||||||
| Titmas, Harper Rae | (84) | 16,364 | ||||||||||||
| Trattler, William | (85) | 15,000 | ||||||||||||
| Wanebo, Andrea | (86) | 4,848 | ||||||||||||
| Wanebo, Ella | (87) | 5,455 | ||||||||||||
| Wanebo, Grace | (88) | 5,455 | ||||||||||||
| Wanebo, Isabella | (89) | 4,848 | ||||||||||||
| Wanebo, Oliver | (90) | 5,455 | ||||||||||||
| Weinstein, Andrew F. | (91) | 45,755 | ||||||||||||
| William and Anne Marie Hoversen | (92) | 57,888 | ||||||||||||
| Yu, Lin Ching | (93) | 107,364 | ||||||||||||
| LEWKO, LLC | (94) | 28,176 | ||||||||||||
| Edward Grier | (95) | 575,542 | 100,000 | |||||||||||
| 43 |
| (1) | Our Chief Executive Officer, President and Director; The Shares were issued to the Michael Favish Living Trust Dated Jan 31, 2007 on December 1, 2009. | |
| (2) | A Director of the Company, the Shares consist of 1,250,000 shares purchased from the Issuer on June 29, 2015 for $1,250.00. | |
| (3) | A Director of the Company; The Shares consist of 1,000,000 shares of restricted Common Stock of the Company that reverse vest quarterly over a one year period with the first quarter vested on December 31, 2015. | |
| (4) | Our General Counsel and Corporate Secretary; Shares consist of 150,000 shares issued on August 7, 2015 for services provided. | |
| (5) | VP of Sales and Marketing of the Company; Shares consist of 250,000 shares of restricted Common Stock of the Company that reverse vest quarterly over a one year period with the first quarter vested on January 1, 2016. | |
| (6) | Includes 231,974 shares held in the name of Equity Trust Company Custodian FBO Leon S. Krajian IRA; 146,000 shares that may be purchased pursuant to an exercisable warrant issued to Equity Trust Company Custodian FBO Leon S. Krajian IRA issued May 1, 2015 that is vested and expires May 1, 2018 at a per share price of $0.01; and 500,000 shares that may be purchased pursuant to various exercisable warrants issued to Leon Krajian between May 1, 2015 and January 25, 2016, each of which are vested and expire between May 1, 2018 and January 25, 2019, respectively and are exercisable at $0.25 per share. Includes 99,182 shares and 1,544,541 shares of Common Stock issued upon the June 29, 2012 conversion of a $50,000 promissory note issued September 29, 2011 and the May 1, 2015 conversion of a master convertible promissory note issued November 29, 2012 for amounts invested from November 29, 2012 through September 11, 2014 for an aggregate amount of $317,500, respectively, inclusive of 12% interest and additional purchases in connection with the notes. | |
| (7) | Shares are held in the name of Jeff and Phyllis Morris Family Trust UDT Dated June 11, 1999 (Consists of 187,500 shares of Common Stock issued upon the June 29, 2012 conversion of a $75,000 promissory note issued July 26, 2010, inclusive of 12% interest.); and an exercisable warrant to purchase 30,237 shares granted May 1, 2015 that is vested and expires May 1, 2018 with an exercise price of $1.00 per share. | |
| (8) | Includes 2,075,753 shares held in the name of Cynthia Elaine Trust dated December 12, 2014 (consisting of 69,688 and 138,750 shares of Common Stock issued upon the June 29, 2012 conversion of a $25,000 and a $50,000 promissory note issued July 27, 2010 and August 1, 2010, respectively, inclusive of 12% interest and additional share purchases in connection with the notes; 138,750 shares held in the name of Cynthia Elaine Scangas Dated June 12 2002-IRA rollover, BNY Mellon Trustee; and 363,986 shares held in the name of Jason Scangas (consisting of 136,250 shares of Common Stock issued upon the June 29, 2012 conversion of a $50,000 promissory note issued December 1, 2010, inclusive of 12% interest), the son of Christopher Scangas, for whom Christopher Scangas holds Power of Attorney. | |
| (9) | Includes 92,819 shares of Common Stock issued upon the June 29, 2012 conversion of a $50,000 promissory note issued April 16, 2012, inclusive of 12% interest. | |
| (10) | Consists of 103,068 shares of Common Stock issued upon the August 10, 2015 conversion of a $50,000 promissory note issued February 8, 2014, inclusive of 10% interest and 83,334 shares issued from the August 10, 2015 exercise of warrants granted on February 8, 2014 with an exercise price of $0.01. | |
| (11) | Shares were purchased on April 1, 2015 for $1,053.23 and are held in the name of Stanley and Laurie Altschuler. | |
| (12) | Consists of 20, 000 shares issued for services provided on August 7, 2015. | |
| (13) | Consists of 5, 000 shares issued for services provided on August 7, 2015. | |
| (14) | Includes 59,024 shares issuable upon exercise of a common stock purchase warrant granted May 1, 2015 with a per share exercise price of $1.00 | |
| (15) | Consists of 24,921 shares of Common Stock issued upon the August 10, 2015 conversion of a $12,500 promissory note issued May 1, 2013, inclusive of 12% interest and 20,834 shares issued from the August 10, 2015 exercise of warrants granted on June 24, 2014 with an exercise price of $0.01. | |
| (16) | Consists of 300, 000 shares issued on August 7, 2015 for services provided. |
| 44 |
| (17) | Consists of 130,938 shares of Common Stock issued upon the June 29, 2012 conversion of a $50,000 promissory note issued June 24. 2014, inclusive of 10% interest. | |
| (18) | Includes 30,237 shares issuable upon exercise of a common stock purchase warrant granted May 1, 2015 with a per share exercise price of $1.00 | |
| (19) | Consists of 15,000 shares issued on August 6, 2015 for services provided. | |
| (20) | Consists of 8,182 shares issued May 7, 2015 in exchange for extinguishment of $327 debt. | |
| (21) | Consists of 8,182 shares issued May 7, 2015 in exchange for extinguishment of $327 debt. | |
| (22) | Includes 92,819 shares of Common Stock issued upon the June 29, 2012 conversion of a $50,000 promissory note issued April 28, 2012, inclusive of 12% interest. | |
| (23) | Includes 46,410 shares of Common Stock issued upon the June 29, 2012 conversion of a $25,000 promissory note issued March 31, 2012, inclusive of 12% interest. | |
| (24) | Consists of 51,534 shares of Common Stock issued upon the August 10, 2015 conversion of a $25,000 promissory note issued February 8, 2014, inclusive of 10% interest and 41,667 shares issued from the August 10, 2015 exercise of warrants granted on February 8, 2014 with an exercise price of $0.01. | |
| (25) | Consists of 4,850 shares of Common Stock purchased from the Issuer on September 3, 2013 for $2,667.49 | |
| (26) | Consists of 36,932 shares of Common Stock issued upon the May 1, 2015 conversion of a $50,000 promissory note issued to Lin Ching Chun, which included $16,619.18 of interest at 12%, which interest converted at $0.45 per share into 36,932 shares, for which Lin Ching Chun gifted these shares to Chieh-His Chen. | |
| (27) | Consists of 100,091 shares of Common Stock issued upon the June 29, 2012 conversion of a $50,000 promissory note issued April 11, 2011, inclusive of 12% interest. | |
| (28) | Consists of 214,728 shares of Common Stock issued upon the June 29, 2012 conversion of a $100,000 promissory note issued December 29, 2010, inclusive of 12% interest; Includes 74,022 shares issuable upon exercise of a common stock purchase warrant granted May 1, 2015 with a per share exercise price of $1.00 | |
| (29) | Consists of 226,914 shares of Common Stock issued upon the August 10, 2015 conversion of a $100,000 promissory note issued February 5, 2014, inclusive of 10% interest and 166,667 shares issued from the August 10, 2015 exercise of warrants granted on February 5, 2014 with an exercise price of $0.01, and 10,000 shares issued on August 10, 2015 as repayment for a non-interest bearing loan. | |
| (30) | Consists of 99,182 shares of Common Stock issued upon the June 29, 2012 conversion of a $50,000 promissory note issued April 28, 2012, inclusive of 12% interest. | |
| (31) | Consists of 20,000 shares issued on August 7, 2015 for services provided. | |
| (32) | Consists of 91,910 shares of Common Stock issued upon the June 29, 2012 conversion of a $50,000 promissory note issued September 29, 2011, inclusive of 12% interest. | |
| (33) | Consists of 10,000 shares issued October 1, 2015 for services provided. | |
| (34) | Consists of 98,204 shares of Common Stock issued upon the June 29, 2012 conversion of a $37,500 promissory note issued August 2, 2010, inclusive of 12% interest and 51,140 shares of Common Stock issued upon the June 29, 2012 conversion of a $25,000 promissory note issued May 6, 2011, inclusive of 12% interest. | |
| (35) | Consists of 110,500 shares of Common Stock issued upon the June 29, 2012 conversion of a $40,000 promissory note issued August 30, 2010, inclusive of 12% interest and additional purchase in connection with the note. | |
| (36) | Consists of 9,375 shares of Common Stock issued upon the August 7, 2015 conversion of a $5,000 invoice issued October 27, 2014, inclusive of 4% interest. | |
| (37) | Wife of CEO and President; 250,000 shares issued on August 7, 2015 for services provided. | |
| (38) | Consists of 9,474 shares of Common Stock issued upon the August 10, 2015 conversion of a $5,000 invoice issued July 23, 2014, inclusive of 4% interest. | |
| (39) | Includes 53,850 shares of Common Stock issued upon the August 10, 2015 conversion of a $25,000 promissory note issued November 3, 2014, inclusive of 10% interest; 13,463 shares issuable upon exercise of a common stock purchase warrant granted August 10, 2015 with a per share exercise price of $0.60 and 13,462 shares issuable upon exercise of a common stock purchase warrant granted August 10, 2015 with a per share exercise price of $0.75. | |
| (40) | Consists of 20,000 shares issued on August 7, 2015 for services provided. | |
| (41) | Consists of 1,000,000 shares issued on October 1, 2015 for services to be provided over the following year. | |
| (42) | Consists of 65,469 shares of Common Stock issued upon the June 29, 2012 conversion of a $25,000 promissory note issued August 3, 2010, inclusive of 12% interest and 90,909 shares of Common Stock purchased from the Issuer on January 3, 2013 for $50,000. | |
| (43) | Consists of 65,782 shares of Common Stock issued upon the June 29, 2012 conversion of a $25,000 promissory note issued July 27, 2010, inclusive of 12% interest. | |
| (44) | Consists of 45,455 shares of Common Stock purchased from the Issuer on June 4, 2012 for $25,000. | |
| (45) | Consists of 101,910 shares of Common Stock issued upon the June 29, 2012 conversion of a $50,000 promissory note issued June 10, 2011, inclusive of 12% interest. |
| 45 |
| (46) | Consists of 50,000 shares issued on August 7, 2015 for services provided. | |
| (47) | Consists of 30,000 shares issued on August 7, 2015 for services provided. | |
| (48) | Consists of 25,000 shares issued on August 7, 2015 for services provided. | |
| (49) | Includes 60,773 shares issuable upon exercise of a common stock purchase warrant granted May 1, 2015 with a per share exercise price of $1.00 | |
| (50) | Consists of 31,250 shares issued June 29, 2012 for the $25,000 of services provided. | |
| (51) | Consists of 67,032 shares of Common Stock issued upon the June 29, 2012 conversion of a $25,000 promissory note issued March 1, 2010, inclusive of 12% interest; 50,046 shares of Common Stock issued upon the June 29, 2012 conversion of a $25,000 promissory note issued August 6, 2011, inclusive of 12% interest; 57888 shares of Common Stock issued upon the August 10, 2015 conversion of a $25,000 promissory note issued May 1, 2013, inclusive of 12% interest. | |
| (52) | Includes 223,803 shares of Common Stock issued upon the August 10, 2015 conversion of a $90,000 promissory note issued August 14, 2014, inclusive of 12% interest. | |
| (53) | Consists of 50,000 shares issued on August 7, 2015 for services provided. | |
| (54) | Includes 57,141 shares of Common Stock issued upon the August 10, 2015 conversion of a $25,000 promissory note issued June 20, 2013, inclusive of 12% interest. | |
| (55) | Includes 10,510 shares of Common Stock issued upon the August 10, 2015 conversion of a $5,000 promissory note issued February 6, 2015, inclusive of 10% interest and 5,255 shares purchased at $0.34 per share in connection with a cancellation of a warrant. | |
| (56) | Includes 234,959 shares of Common Stock issued upon the August 10, 2015 conversion of a $100,000 promissory note issued March 5, 2013, inclusive of 12% interest. | |
| (57) | 36,364 shares of Common Stock purchased from the Issuer on October 4, 2013 for $20,000. | |
| (58) | Consists of 65,157 shares of Common Stock issued upon the June 29, 2012 conversion of a $25,000 promissory note issued August 30, 2010, inclusive of 12% interest. | |
| (59) | Consists of 20,000 shares issued on August 7, 2015 for services provided. | |
| (60) | Consists of 32,735 shares of Common Stock issued upon the June 29, 2012 conversion of a $12,500 promissory note issued August 5, 2010, inclusive of 12% interest. | |
| (61) | Includes 62,500 shares of Common Stock issued upon the June 29, 2012 conversion of a $25,000 promissory note issued July 26, 2010, inclusive of 12% interest and 30,237 shares issuable upon exercise of a common stock purchase warrant granted May 1, 2015 with a per share exercise price of $1.00. | |
| (62) | Consists of 57,246 shares of Common Stock issued upon the August 10, 2015 conversion of a $25,000 promissory note issued June 13, 2013, inclusive of 12% interest. | |
| (63) | Consists of 300,000 shares issued on August 7, 2015 for services provided. | |
| (64) | Includes 53,548 shares of Common Stock issued upon the August 10, 2015 conversion of a $25,000 promissory note issued November 25, 2014, inclusive of 10% interest and 13,387 shares issuable upon exercise of a common stock purchase warrant granted August 10, 2015 with a per share exercise price of $0.60 and 13,387 shares issuable upon exercise of a common stock purchase warrant granted August 10, 2015 with a per share exercise price of $0.75. | |
| (65) | Consists of 9,091 shares issued on August 10, 2015 for the extinguishment of $5,000 of debt. | |
| (66) | Consists of 83,334 shares issued on September 8, 2015 for the exercise of a warrant in the name of Cynthia Elaine Trust dated 12/12/14, which shares were issued in the name of Dean and Lisa Lindsey Rehfeld upon exercise of the warrant. | |
| (67) | Consists of 20,000 shares issued on August 7, 2015 for services provided. | |
| (68) | Includes 60,892 shares issuable upon exercise of a common stock purchase warrant granted May 1, 2015 with a per share exercise price of $1.00 | |
| (69) | Includes 60,892 shares issuable upon exercise of a common stock purchase warrant granted May 1, 2015 with a per share exercise price of $1.00 | |
| (70) | Consists of 166,667 shares issued on September 11, 2015 for exercise of a warrant in the name of Jason Scangas, which shares were issued in the name of Arthur Scangas upon exercise of the warrant. | |
| (71) | Includes 46,410 shares of Common Stock issued upon the June 29, 2012 conversion of a $25,000 promissory note issued March 31, 2012, inclusive of 12% interest. | |
| (72) | Consists of 150,000 shares issued on August 10, 2015 for services provided. | |
| (73) | Includes 29,759 shares issuable upon exercise of a common stock purchase warrant granted May 1, 2015 with a per share exercise price of $1.00 | |
| (74) | Consists of 45,455 shares of Common Stock purchased from the Issuer on September 9, 2013 for $25,000. | |
| (75) | Includes 52,864 shares of Common Stock issued upon the August 10, 2015 conversion of a $25,000 promissory note issued January 14, 2015, inclusive of 10% interest; 13,216 shares issuable upon exercise of a common stock purchase warrant granted August 10, 2015 with a per share exercise price of $0.60 and 13,216 shares issuable upon exercise of a common stock purchase warrant granted August 10, 2015 with a per share exercise price of $0.75. | |
| (76) | Consists of 209,063 shares of Common Stock issued upon the June 29, 2012 conversion of a $75,000 promissory note issued July 26, 2010, inclusive of 12% interest including additional shares purchased in connection with the conversion and 118,018 shares issuable upon exercise of a common stock purchase warrant granted May 1, 2015 with a per share exercise price of $1.00. |
| 46 |
| (77) | Consists of 67,032 shares of Common Stock issued upon the June 29, 2012 conversion of a $25,000 promissory note issued March 1, 2010, inclusive of 12% interest. | |
| (78) | Consists of 125,000 shares issued on December 1, 2009 for services provided. | |
| (79) | Consists of 47,319 shares of Common Stock issued upon the June 29, 2012 conversion of a $25,000 promissory note issued February 28, 2012, inclusive of 12% interest. | |
| (80) | Consists of 25,872 shares of Common Stock issued upon the May 1, 2015 conversion of a $12,500 promissory note issued January 16, 2015, inclusive of 12% interest. | |
| (81) | Consists of 50,500 shares of Common Stock issued upon the June 29, 2012 conversion of a $25,000 promissory note issued June 30, 2011, inclusive of 12% interest. | |
| (82) | Consists of 5,000 shares issued on August 10, 2015 for the extinguishment of $2,800 of debt. | |
| (83) | Includes 53,535 shares of Common Stock issued upon the August 10, 2015 conversion of a $25,000 promissory note issued November 26, 2014, inclusive of 10% interest; 13,384 shares issuable upon exercise of a common stock purchase warrant granted August 10, 2015 with a per share exercise price of $0.60 and 13,384 shares issuable upon exercise of a common stock purchase warrant granted August 10, 2015 with a per share exercise price of $0.75. | |
| (84) | Consists of 16,364 shares issued May 7, 2015 in exchange for extinguishment of $655 debt. | |
| (85) | Consists of 15,000 shares issued on August 7, 2015 for services provided. | |
| (86) | Consists of 4,848 shares purchased from the Issuer on September 3, 2013 for $2,666. | |
| (87) | Consists of 5,455 shares purchased from the Issuer on September 3, 2013 for $3,000. | |
| (88) | Consists of 5,455 shares purchased from the Issuer on September 3, 2013 for $3,000. | |
| (89) | Consists of 4,848 shares purchased from the Issuer on September 3, 2013 for $ 2,666. | |
| (90) | Consists of 5,455 shares purchased from the Issuer on September 3, 2013 for $3,000. | |
| (91) | Consists of 24,921 shares of Common Stock issued upon the August 10, 2015 conversion of a $12,500 promissory note issued June 24, 2014, inclusive of 10% interest and 20,834 shares issued from the August 10, 2015 exercise of warrants granted on June 24, 2014 with an exercise price of $0.01. | |
| (92) | Consists of 57,888 shares of Common Stock issued upon the August 10, 2015 conversion of a $25,000 promissory note issued May 1, 2013, inclusive of 12% interest. | |
| (93) | Consists of 107,364 shares of Common Stock issued upon the June 29, 2012 conversion of a $50,000 promissory note issued December 29, 2010, inclusive of 12% interest. | |
| (94) | Includes 28,176 shares issuable upon exercise of a common stock purchase warrant granted August 10, 2015 with a per share exercise price of $0.01. | |
| (95) | Consisting of 575,542 shares issuable upon conversion of a promissory note with a principal amount of $500,000 and 100,000 shares issuable upon the exercise of a common stock purchase warrant at $0.25 per share issued on November 30, 2015. | |
| (96) |
Each Selling Securityholder and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on the over-the-counter market or any other stock exchange, market or trading facility on which the shares are traded, after our shares are traded publicly, or in private transactions. These sales may be at fixed or negotiated prices. The distribution of the shares by the Selling Securityholders is not currently subject to any underwriting agreement. Each Selling Securityholder must use a broker-dealer which is registered in the state in which the Selling Securityholder seeks to sell their shares. A Selling Securityholder may use any one or more of the following methods when selling shares:
•ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
•block trades in which the broker-dealer will attempt to sell the shares as agent, but may position and resell a portion of the block as principal to facilitate the transaction;
•purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
•conducting business in places where business practices and customs are unfamiliar and unknown;
•an exchange distribution in accordance with the rules of the applicable exchange;
•privately negotiated transactions;
•settlement of short sales entered into after the date of this prospectus;
•broker-dealers may agree with the Selling Securityholders to sell a specified number of the shares at a stipulated price per share;
| 47 |
•a combination of any of these methods of sale;
•through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise; or
•any other method permitted pursuant to applicable law.
The Selling Securityholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus.
The Selling Securityholders will offer the Shares under this Prospectus on an immediate and continuous basis at a fixed offering price of $___ per share. The initial offering price is based, in part, on the last private sale of the Company’s Common Stock at $0.60 per share and comparison by Management of similarly situated companies and an independent valuation report last calculated on June 30, 2015.
The Company has not engaged any FINRA member firms to participate in the distribution of securities. Broker-dealers engaged by the Selling Securityholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Securityholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. Each Selling Securityholder does not expect these commissions and discounts relating to its sales of shares to exceed what is customary in the types of transactions involved. The SEC has indicated that it is their position that any broker-dealer firm which is a Selling Securityholder is deemed an underwriter and therefore these firms may be deemed an underwriter with respect to the securities being sold by them.
We are required to pay certain fees and expenses incurred by us incident to the registration of the shares. We have agreed to indemnify the Selling Securityholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.
The Selling Securityholders may agree to indemnify any agent, dealer or broker-dealer that participates in transactions involving sales of the shares against certain liabilities, including liabilities arising under the Securities Act.
We have advised the Selling Securityholders that the anti-manipulation rules of Regulation M under the Exchange Act may apply to sales of shares in the market and to the activities of the Selling Securityholders and their affiliates. In addition, we will make copies of this Prospectus available to the Selling Securityholders for the purpose of satisfying the Prospectus delivery requirements of the Securities Act.
In connection with the sale of our common stock or interests therein, the Selling Securityholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The Selling Securityholders may also sell shares of our common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The Selling Securityholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to these broker-dealers or other financial institutions of shares offered by this prospectus, which shares these broker-dealers or other financial institutions may resell pursuant to this prospectus (as supplemented or amended to reflect these transactions).
Because Selling Securityholders may be deemed to be “underwriters” within the meaning of the Securities Act, they will be subject to the prospectus delivery requirements of the Securities Act. In addition, any securities covered by this prospectus which qualify for sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather than under this prospectus. There is no underwriter or coordinating broker acting in connection with the proposed sale of the shares by the Selling Securityholders.
Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the shares may not simultaneously engage in market making activities with respect to our common stock for a period of two business days prior to the commencement of the distribution. In addition, the Selling Securityholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of shares of our common stock by the Selling Securityholders or any other person. We will make copies of this prospectus available to the Selling Securityholders and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale.
Authorized and Outstanding Capital Stock
The following description of our capital stock and provisions of our articles of incorporation and by-laws are summaries and are qualified by reference to our articles of incorporation and by-laws. Copies of these documents have been filed with the SEC as exhibits to our registration statement, of which this prospectus forms a part.
We have authorized 100,000,000 shares of capital stock, par value $0.001 per share, of which 90,000,000 are shares of common stock and 10,000,000 are shares of “blank check” preferred stock.
As of February 1, 2016, we had 21,906,396 shares of common stock held of record by 94 shareholders of record.
We have authorized 10,000,000 shares of Preferred Stock. There are no shares of preferred stock outstanding.
| 48 |
Common Stock
The holders of our common stock are entitled to one vote per share. In addition, the holders of our common stock will be entitled to receive ratably dividends, if any, declared by our board of directors out of legally available funds; however, the current policy of our board of directors is to retain earnings, if any, for operations and growth. Upon liquidation, dissolution or winding-up, the holders of our common stock are entitled to share ratably in all assets that are legally available for distribution. The holders of our common stock have no preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders of our common stock are subject to, and may be adversely affected by, the rights of the holders of any series of preferred stock, which may be designated solely by action of our board of directors and issued in the future.
Preferred Stock
Our board of directors are authorized, subject to any limitations prescribed by law, without further vote or action by our stockholders, to issue from time to time shares of preferred stock in one or more series. Each series of preferred stock will have the number of shares, designations, preferences, voting powers, qualifications and special or relative rights or privileges as shall be determined by our board of directors, which may include, among others, dividend rights, voting rights, liquidation preferences, conversion rights and preemptive rights.
It is not possible to state the actual effect of the issuance of any shares of preferred stock upon the rights of holders of our common stock until the board of directors determines the specific rights of the holders of our preferred stock. However, the effects might include, among other things:
· Impairing dividend rights of our common stock;
· Diluting the voting power of our common stock;
· Impairing the liquidation rights of our common stock; and
· Delaying or preventing a change of control without further action by our stockholders.
Blank Check Preferred Stock
The ability to authorize “blank check” preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us. These and other provisions may have the effect of deferring hostile takeovers or delaying changes in control or management of our Company.
Common Stock Purchase Warrants
We have 554,091 warrants to purchase common stock outstanding at an exercise price of $1.00 per share issued on May 1, 2015 expiring on May 1, 2018, held by 10 warrant holders.
On August 10, 2015, we issued common stock purchase warrants in connection with an investor’s issuance of a convertible promissory note. Warrant coverage was provided to each investor in a number of shares equal to 50% of the shares of stock the investor would receive on conversion of their note. Of the warrants, half were issued with an exercise price of $0.75 per share and half were issued with and exercise price of $0.60 per share. A total of 106,899 warrants to purchase common stock are outstanding from this round of investment.
In connection with the issuance of bridge loans between September 30, 2015 and January 25, 2016 totaling $350,000, we issued the lender a total of 600,000 common stock purchase warrants with an exercise price of $0.25 exercisable for three (3) years issued.
On August 10, 2015, a creditor exchanged its outstanding invoices of $15,497 for 28,176 warrants to purchase common stock at $0.01.
Transfer Agent
Our transfer agent is VStock Transfer with an address 18 Lafayette Pl, Woodmere, NY 11598.
Indemnification of Directors and Officers
Each person who was or is made a party or is threatened to be made a party to or is involved (including, without limitation, as a witness) in any actual or threatened action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a “proceeding”), by reason of the fact that such person is or was a director of the Company or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise (hereinafter an “indemnitee”), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Company to the full extent authorized by the General Corporation Law of the State of Delaware (“Delaware Code”), as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than said law permitted the Company to provide prior to such amendment), or by other applicable law as then in effect, against all expense, liability and loss (including attorney’s fees, judgments, fines, ERISA excise taxes or penalties and amounts to be paid in settlement) actually and reasonably incurred or suffered by such indemnitee in connection therewith and such indemnification shall continue as to an indemnitee who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the indemnitee’s heirs, executors and administrators. The right to indemnification conferred shall be a contract right and shall include the right to be paid by the Company the expenses incurred in defending any such proceeding in advance of its final disposition (hereinafter an “advancement of expenses”); provided, however, that, if the Delaware Code requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee while a director or officer, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the Company of an undertaking, by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined that such indemnitee is not entitled to be indemnified under. Any person who is or was serving as a director of a wholly owned subsidiary of the Company shall be deemed, for indemnification purposes, to be a director or officer of the Company entitled to indemnification under the Company’s bylaws and the Delaware Code. The Company may by action of its Board of Directors, grant rights to indemnification and advancement of expenses to employees and agents of the Company with the same scope and effects as the indemnification provisions for officers and directors.
| 49 |
Disclosure of Commission Position on Indemnification for Securities Act Liabilities
Insofar as indemnification for liabilities under the Securities Act may be permitted to officers, directors or persons controlling our Company pursuant to the foregoing provisions, we have been informed that is it is the opinion of the Securities and Exchange Commission that such indemnification is against public policy as expressed in such Securities Act and is, therefore, unenforceable.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1, under the Securities Act with respect to the shares of common stock being offered by this prospectus. This prospectus does not contain all of the information set forth in the registration statement or the exhibits to the registration statement. For further information with respect to us and the shares we and the Selling Securityholders are offering pursuant to this prospectus, you should refer to the registration statement and its exhibits. Statements contained in this prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete, and you should refer to the copy of that contract or other documents filed as an exhibit to the registrations statement. You may read or obtain a copy of the registration statement at the SEC’s public reference room and Website referred to below.
We will file annual, quarterly and current reports and other information with the SEC under the Exchange Act. Our SEC filings are available to the public over the Internet at the SEC’s website at http://www.sec.gov. You may also read and copy any document we file at the SEC’s public reference room located at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms and their copy charges. You may also request a copy of those filings, excluding exhibits, from us at no cost. These requests should be addressed to us at: Guardion Health Sciences, Inc., 15150 Avenue of Science, Suite 200, San Diego, California 92128, Attention: Vincent J. Roth, General Counsel.
Davidoff Hutcher & Citron LLP, 605 Third Avenue, New York, New York 10158, will pass upon the validity of the shares of our common stock to be sold in this offering.
The financial statements as of and for the years ended December 31, 2014 and 2013 have been audited by Weinberg & Co., 1925 Century Park East, Suite 1120, Los Angeles, CA 90067, an independent registered public accounting firm as set forth in their report and are included in reliance upon such report given as authority of such firm as experts in accounting and auditing.
| 50 |
| Guardion Health Sciences, Inc. | |
| Financial Statements | |
| Nine Months Ended September 30, 2015 and 2014 (Unaudited) and the Years Ended December 31, 2014 and 2013 |
| Guardion Health Sciences, Inc. |
| Contents |
| Report of Independent Registered Public Accounting Firm | F-2 | |
| Financial Statements | ||
| Balance Sheets | F-3 | |
| Statements of Operations | F-4 | |
| Statements of Members’ and Stockholders’ Deficiency | F-5 | |
| Statements of Cash Flows | F-7 | |
| Notes to Financial Statements | F-8 – F-28 |
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Guardion Health Sciences, Inc.
San Diego, California
We have audited the accompanying balance sheets of Guardion Health Sciences, Inc. (the "Company") as of December 31, 2014 and 2013 and the related statements of operations, members’ and stockholders' deficiency and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform our audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that we considered appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Guardion Health Sciences, Inc. as of December 31, 2014 and 2013, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1, the Company has experienced negative operating cash flows since inception and has a members’ deficiency as of December 31, 2014. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1 to the financial statements. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| /s/ Weinberg & Company, P.A. | |
| Weinberg & Company, P.A. | |
| Los Angeles, California | |
| February 11, 2016 |
| F-2 |
Guardion Health Sciences, Inc.
Balance Sheets
| September 30, | December 31, | |||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (unaudited) | ||||||||||||
| Assets | ||||||||||||
| Current assets | ||||||||||||
| Cash | $ | 24,497 | $ | 6,160 | $ | 22,877 | ||||||
| Accounts receivable | 1,242 | 1,041 | 1,578 | |||||||||
| Inventories | 38,338 | 24,227 | 93,768 | |||||||||
| Current portion of deposits and prepaid expenses | 20,507 | 9,605 | 9,317 | |||||||||
| Due from related party | - | - | 56,876 | |||||||||
| Total current assets | 84,584 | 41,033 | 184,416 | |||||||||
| Deposits and prepaid expenses, less current portion | 20,470 | 10,470 | 20,075 | |||||||||
| Property and equipment, net | 185,827 | 214,166 | 249,121 | |||||||||
| Other non-current assets | - | 8,207 | 9,033 | |||||||||
| Total assets | $ | 290,881 | $ | 273,876 | $ | 462,645 | ||||||
| Liabilities, Members’ and Stockholders’ Deficiency | ||||||||||||
| Current liabilities | ||||||||||||
| Accounts payable and accrued liabilities | $ | 160,886 | $ | 198,422 | $ | 240,419 | ||||||
| Accrued and deferred lease costs | 154,997 | 160,360 | 70,057 | |||||||||
| Due to related party | 236,844 | 54,735 | - | |||||||||
| Current portion of convertible notes payable, net of debt discount of $0, $86,190 and $0, respectively | 40,584 | 693,133 | 36,850 | |||||||||
| Current portion of convertible notes payable related party, net of debt discount of $0, $45,087 and $9,745, respectively | - | 347,645 | 38,570 | |||||||||
| Current portion of promissory notes payable, net of debt discount of $0, $98,654 and $0, respectively | - | 141,347 | 35,000 | |||||||||
| Total current liabilities | 593,311 | 1,595,642 | 420,896 | |||||||||
| Convertible notes payable, net of debt discount of $0, $252,320 and $339,022, respectively, less current portion | 510,274 | 382,109 | 685,828 | |||||||||
| Convertible notes payable related party, net of debt discount of $0, $16,965 and $157,267, respectively, less current portion | - | 104,996 | 258,062 | |||||||||
| Promissory notes payable, net of debt discount of $0, $9,395 and $0, respectively, less current portion | - | 3,762 | - | |||||||||
| Total liabilities | 1,103,585 | 2,086,509 | 1,364,786 | |||||||||
| Commitments and contingencies | ||||||||||||
| Members’ and Stockholders’ Deficiency | ||||||||||||
| Members’ equity; 10,821,827 units outstanding at December 31, 2014 and 2013 | - | 3,452,852 | 3,042,852 | |||||||||
| Preferred stock, $0.0001 par value; 10,000,000 shares authorized; none issued and outstanding at September 30, 2015 (unaudited) | - | - | - | |||||||||
| Common stock, $0.0001 par value; 90,000,000 shares authorized; 20,646,396 shares issued and outstanding at September 30, 2015 (unaudited) | 2,064 | - | - | |||||||||
| Additional paid-in capital | 12,089,236 | - | - | |||||||||
| Accumulated deficit | (12,904,004 | ) | (5,265,485 | ) | (3,944,993 | ) | ||||||
| Total members’ and stockholders’ deficiency | (812,704 | ) | (1,812,633 | ) | (902,141 | ) | ||||||
| Total liabilities, members’ and stockholders’ deficiency | $ | 290,881 | $ | 273,876 | $ | 462,645 | ||||||
See accompanying notes to financial statements.
| F-3 |
| Guardion Health Sciences, Inc. |
| Statements of Operations |
| Nine Months Ended September 30, | Years Ended December 31, | |||||||||||||||
| 2015 | 2014 | 2014 | 2013 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| Revenue | $ | 86,802 | $ | 132,655 | $ | 164,582 | $ | 260,356 | ||||||||
| Cost of goods sold | 36,865 | 121,203 | 145,529 | 168,878 | ||||||||||||
| Gross profit | 49.937 | 11,452 | 19,053 | 91,478 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Research and development (including $342,000 of stock-based compensation for the nine months ended September 30, 2015) | 386,673 | 46,711 | 43,436 | 259,786 | ||||||||||||
| Sales and marketing | 40,574 | 30,442 | 46,768 | 51,600 | ||||||||||||
| General and administrative (including $3,937,233 of stock-based compensation for the nine months ended September 30, 2015, of which $464,557 was to related parties) | 4,662,643 | 462,365 | 638,002 | 616,703 | ||||||||||||
| Total operating expenses | 5,089,890 | 539,518 | 728,206 | 928,089 | ||||||||||||
| Loss from operations | (5,039,953 | ) | (528,066 | ) | (709,153 | ) | (836,611 | ) | ||||||||
| Other expenses: | ||||||||||||||||
| Interest expense | 640,351 | 443,457 | 611,339 | 406,067 | ||||||||||||
| Cost to induce conversion of notes payable | 1,699,609 | - | - | - | ||||||||||||
| Loss on settlement of promissory notes and accounts payable | 258,606 | - | - | - | ||||||||||||
| Total other expenses | 2,598,566 | 443,457 | 611,339 | 406,067 | ||||||||||||
| Net loss | $ | (7,638,519 | ) | $ | (971,523 | ) | $ | (1,320,492 | ) | $ | (1,242,678 | ) | ||||
| Basic and diluted net loss per common share | $ | (0.51 | ) | $ | (0.09 | ) | $ | (0.12 | ) | $ | (0.12 | ) | ||||
| Basic and diluted weighted average common shares outstanding | 14,894,883 | 10,821,827 | 10,821,827 | 10,711,515 | ||||||||||||
See accompanying notes to financial statements.
| F-4 |
Guardion Health Sciences, Inc.
Statement of Stockholders’ and Members’ Deficiency
| Members’ Capital | Common Stock | |||||||||||||||||||||||||||
| Units | Amount | Shares | Amount | Additional Paid-In Capital | Accumulated Deficit | Total Members’ and Stockholders’ Deficiency | ||||||||||||||||||||||
| Balance at December 31, 2012 | 10,572,735 | $ | 2,650,794 | - | $ | - | $ | - | $ | (2,702,315 | ) | $ | (51,521 | ) | ||||||||||||||
| Issuance of membership units | 158,183 | 87,000 | - | - | - | - | 87,000 | |||||||||||||||||||||
| Issuance of membership units - conversion of notes payable | 90,909 | 50,000 | - | - | - | - | 50,000 | |||||||||||||||||||||
| Issuance of convertible notes payable - beneficial conversion feature | - | 188,111 | - | - | - | - | 188,111 | |||||||||||||||||||||
| Capital contribution | - | 66,947 | - | - | - | - | 66,947 | |||||||||||||||||||||
| Net loss | - | - | - | - | (1,242,678 | ) | (1,242,678 | ) | ||||||||||||||||||||
| Balance at December 31, 2013 | 10,821,827 | $ | 3,042,852 | - | $ | - | $ | - | $ | (3,944,993 | ) | (902,141 | ) | |||||||||||||||
| Fair value of warrants issued with promissory notes payable and convertible notes payable | - | 241,548 | - | - | - | - | 241,548 | |||||||||||||||||||||
| Issuance of convertible notes payable – beneficial conversion feature | - | 168,452 | - | - | - | - | 168,452 | |||||||||||||||||||||
| Net loss | (1,320,492 | ) | (1,320,492 | ) | ||||||||||||||||||||||||
| Balance at December 31, 2014 | 10,821,827 | $ | 3,452,852 | - | $ | - | $ | - | $ | (5,265,485 | ) | $ | (1,812,633 | ) | ||||||||||||||
| Fair value of warrants issued with convertible notes payable | - | 16,656 | - | - | - | - | 16,656 | |||||||||||||||||||||
| Issuance of convertible notes payable - beneficial conversion feature | - | 25,844 | - | - | - | - | 25,844 | |||||||||||||||||||||
| Issuance of membership units - conversion of notes payable, promissory notes payable and related interest | 2,659,294 | 1,429,035 | - | - | - | - | 1,429,035 | |||||||||||||||||||||
| Issuance of membership units as inducement to convert | 995,926 | 1,135,356 | - | - | - | - | 1,135,356 | |||||||||||||||||||||
| Issuance of warrants as inducement to convert | - | 506,857 | - | - | - | - | 506,857 | |||||||||||||||||||||
| Issuance of membership units for consulting services | 2,303,227 | 2,625,679 | - | - | - | - | 2,625,679 | |||||||||||||||||||||
| Issuance of membership units to related party upon warrant exercise | 450,000 | 90,000 | - | - | - | - | 90,000 | |||||||||||||||||||||
| Net loss- January 1, 2015 through June 30, 2015 | - | - | - | - | - | (5,071,113 | ) | (5,071,113 | ) | |||||||||||||||||||
| Conversion of Membership Units to Common Stock on June 30, 2015 | (17,230,274 | ) | (9,282,279 | ) | 17,230,274 | 1,722 | 9,280,557 | - | - | |||||||||||||||||||
| Issuance of common stock - conversion of notes payable, promissory notes payable and related interest | - | - | 1,328,346 | 133 | 983,641 | - | 983,774 | |||||||||||||||||||||
| Issuance of common stock as inducement to convert | - | - | 50,348 | 5 | 57,391 | - | 57,396 | |||||||||||||||||||||
| Issuance of common stock for services | - | - | 1,454,091 | 146 | 1,657,518 | - | 1,657,664 | |||||||||||||||||||||
(continued)
| F-5 |
Guardion Health Sciences, Inc.
Statement of Stockholders’ and Members’ Deficiency
(continued)
| Members’ Capital | Common Stock | |||||||||||||||||||||||||||
| Units | Amount | Shares | Amount | Additional Paid-In Capital | Accumulated Deficit | Total Stockholders’ Deficiency | ||||||||||||||||||||||
| Issuance of common stock - warrant exercises | - | - | 583,337 | 58 | 78,276 | - | 78,334 | |||||||||||||||||||||
| Fair value of warrants issued in conversion of accounts payable | - | - | - | - | 31,853 | - | 31,853 | |||||||||||||||||||||
| Net loss - July 1, 2015 to September 30, 2015 | - | - | - | - | - | (2,567,406 | ) | (2,567,406 | ) | |||||||||||||||||||
| Balance at September 30, 2015 (unaudited) | - | $ | - | 20,646,396 | $ | 2,064 | $ | 12,089,236 | $ | (12,904,004 | ) | $ | (812,704 | ) | ||||||||||||||
See accompanying notes to financial statements.
| F-6 |
Guardion Health Sciences, Inc.
Statements of Cash Flows
| Nine Months Ended September 30, | Years Ended December 31, | |||||||||||||||
| 2015 | 2014 | 2014 | 2013 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| Operating Activities | ||||||||||||||||
| Net loss | $ | (7,638,519 | ) | $ | (971,523 | ) | $ | (1,320,492 | ) | $ | (1,242,678 | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
| Depreciation and amortization | 38,710 | 32,386 | 43,231 | 8,842 | ||||||||||||
| Amortization of debt discount | 551,110 | 290,303 | 407,424 | 266,307 | ||||||||||||
| Accrued interest expense included in notes payable | 95,347 | 146,488 | 198,757 | 139,759 | ||||||||||||
| Stock-based compensation for consulting services | 4,279,233 | - | - | - | ||||||||||||
| Loss on settlement of promissory notes payable and accounts payable | 258,606 | - | - | - | ||||||||||||
| Inducement expense on conversions of notes payable to equity | 1,699,609 | - | - | - | ||||||||||||
| Warrants issued in payment of accounts payable | 7,992 | - | - | - | ||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||
| (Increase) decrease in - | ||||||||||||||||
| Accounts receivable | (201 | ) | 995 | 537 | 513 | |||||||||||
| Inventories | (14,111 | ) | 73,787 | 69,541 | (1,173 | ) | ||||||||||
| Deposits and prepaid expenses | (20,902 | ) | 9,317 | 9,317 | 18,057 | |||||||||||
| Increase (decrease) in - | ||||||||||||||||
| Accounts payable and accrued expenses | (30,619 | ) | (98,491 | ) | (38,167 | ) | 258,930 | |||||||||
| Accrued and deferred rent costs | (5,363 | ) | 94,900 | 86,474 | 45,144 | |||||||||||
| Net cash used in operating activities | (779,108 | ) | (421,838 | ) | (543,378 | ) | (506,299 | ) | ||||||||
| Investing Activities | ||||||||||||||||
| Purchase of property and equipment | (2,164 | ) | (5,550 | ) | (7,450 | ) | (176,273 | ) | ||||||||
| Net cash used in investing activities | (2,164 | ) | (5,550 | ) | (7,450 | ) | (176,273 | ) | ||||||||
| Financing Activities | ||||||||||||||||
| Proceeds from issuance of convertible notes payable | 542,500 | 135,000 | 222,500 | 465,000 | ||||||||||||
| Proceeds from issuance of promissory notes | - | 200,000 | 200,000 | 35,000 | ||||||||||||
| Proceeds from issuance of convertible notes payable – related party | - | - | - | 100,000 | ||||||||||||
| Proceeds from issuance of common stock and membership units | - | - | - | 87,000 | ||||||||||||
| Proceeds from exercise of warrants | 75,000 | - | ||||||||||||||
| (Increase) decrease in due from related parties | 182,109 | 56,876 | 56,876 | (11,612 | ) | |||||||||||
| Increase in due to related parties | - | 12,635 | 54,735 | - | ||||||||||||
| Net cash provided by financing activities | 799,609 | 404,511 | 534,111 | 675,388 | ||||||||||||
| Cash: | ||||||||||||||||
| Net increase (decrease) | 18,337 | (22,877 | ) | (16,717 | ) | (7,184 | ) | |||||||||
| Balance at beginning of period | 6,160 | 22,877 | 22,877 | 30,061 | ||||||||||||
| Balance at end of period | $ | 24,497 | $ | - | $ | 6,160 | $ | 22,877 | ||||||||
| Supplemental disclosure of cash flow information: | ||||||||||||||||
| Cash paid for - | ||||||||||||||||
| Interest | $ | - | $ | - | $ | - | $ | - | ||||||||
| Income taxes | $ | - | $ | - | $ | - | $ | - | ||||||||
| Non-cash financing activities: | ||||||||||||||||
| Fair value of warrants issued in connection with promissory and convertible notes payable | $ | 16,656 | $ | 200,000 | $ | 241,548 | $ | - | ||||||||
| Beneficial conversion feature associated with promissory and convertible notes payable | $ | 25,844 | $ | 135,000 | $ | 168,452 | $ | 188,111 | ||||||||
| Conversion of notes payable and related interest into common stock | $ | 2,412,809 | $ | - | $ | - | $ | 50,000 | ||||||||
| Accrued interest on notes payable utilized to exercise warrants | $ | 93,334 | $ | - | $ | - | $ | - | ||||||||
| Fair value of warrants issued to settle accounts payable | $ | 7,504 | $ | - | $ | - | $ | - | ||||||||
| Contribution of property and equipment to members’ capital | $ | - | $ | - | $ | - | $ | 66,947 | ||||||||
See accompanying notes to financial statements.
| F-7 |
| Guardion Health Sciences, Inc. |
| Notes to Financial Statements |
| Nine Months Ended September 30, 2015 and 2014 (unaudited) |
| and Years Ended December 31, 2014 and 2013 |
| 1. | Organization and Business Operations |
Organization and Business
Guardion Health Sciences, Inc. (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.
The Company is a specialty health sciences company that develops, formulates and distributes condition-specific medical foods. The Company’s initial medical food product, Lumega-Z, addresses a depleted macular protective pigment, which is a biomarker and leading cause of age-related macular degeneration (“AMD”), as well as computer vision syndrome (“CVS”). The Company has also developed a proprietary medical device, the MapcatSF, which measures the macular ocular pigment density.
Through September 30, 2015, the Company has had limited operations, but has been primarily engaged in research and development and capital raising. The Company has incurred significant expenditures for the development of the Company's products and intellectual property, which includes research and development of both medical foods and medical diagnostic equipment for the treatment of various eye diseases. The Company had limited revenue during the nine months ended September 30, 2015 and the years ended December 31, 2014 and 2013.
Going Concern and Liquidity
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has utilized cash in operating activities of $779,108, $543,378 and $506,299 during the nine months ending September 30, 2015 (unaudited) and the years ended December 31, 2014 and 2013, respectively, and had a deficit of $812,704, $1,812,633 and $902,141 as of September 30, 2015 (unaudited) and December 31, 2014 and 2013, respectively. The Company expects to continue to incur net losses and negative operating cash flows at least through 2016. As a result, management and the Company’s auditors believe that there is substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.
The Company will continue to incur significant expenses for commercialization activities related to its lead product Lumega-Z, the MapcatSF medical device, and with respect to efforts to build the Company’s infrastructure. Development and commercialization of medical foods and medical devices involves a lengthy and complex process. Additionally, the Company’s long-term viability and growth will depend upon the successful development and commercialization of products other than Lumega-Z and the MapcatSF. The Company is continuing attempts to raise additional debt and/or equity capital to fund future operations (see Note 12) , but there can be no assurances that the Company will be able to secure such additional financing in the amounts necessary to fully fund its operating requirements on acceptable terms or at all. If the Company is unable to access sufficient capital resources on a timely basis, the Company may be forced to reduce or discontinue its technology and product development programs and curtail or cease operations.
| F-8 |
| Guardion Health Sciences, Inc. |
| Notes to Financial Statements |
| Nine Months Ended September 30, 2015 and 2014 (unaudited) |
| and Years Ended December 31, 2014 and 2013 |
| 2. | Summary of Significant Accounting Policies |
Basis of Presentation and Use of Estimates
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of the accompanying financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
As discussed in Note 1, on June 30, 2015 the Company converted from a California limited liability company to a Delaware corporation and LLC units were converted to common stock on a one-for-one basis.
Interim Unaudited Financial Information
The accompanying financial statements for the nine months ended September 30, 2015 and 2014 are unaudited. In the opinion of management, these financial statements have been prepared on the same basis as the audited financial statements included herein and include all adjustments, including normal recurring adjustments, necessary to present fairly the Company's financial position, results of operations and cash flows. The information disclosed in the notes to the financial statements for such interim periods is also unaudited.
Fair Value of Financial Instruments
The authoritative guidance with respect to fair value established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels, and requires that assets and liabilities carried at fair value be classified and disclosed in one of three categories, as presented below. Disclosure as to transfers into and out of Levels 1 and 2, and activity in Level 3 fair value measurements, is also required.
Level 1. Observable inputs such as quoted prices in active markets for an identical asset or liability that the Company has the ability to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active-exchange traded securities and exchange-based derivatives.
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. Financial assets and liabilities utilizing Level 2 inputs include fixed income securities, non-exchange based derivatives, mutual funds, and fair-value hedges.
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. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded, non-exchange-based derivatives and commingled investment funds, and are measured using present value pricing models.
| F-9 |
| Guardion Health Sciences, Inc. |
| Notes to Financial Statements |
| Nine Months Ended September 30, 2015 and 2014 (unaudited) |
| and Years Ended December 31, 2014 and 2013 |
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. The fair value of the Company’s notes payable approximate their carrying value given the interest rates of such notes.
Concentration of Credit Risk and Other Risks and Uncertainties
Cash balances are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances. All of the non-interest bearing cash balances were fully insured at September 30, 2015, and December 31, 2014 and 2013. Insurance coverage limits are $250,000 per depositor at each financial institution. There were no interest-bearing amounts on deposit in excess of federally insured limits at September 30, 2015, or at December 31, 2014 and 2013.
Inventories
The Company’s inventories are stated at the lower of weighted-average cost or market. The cost of finished goods and raw materials is determined on a first-in, first-out basis. The Company evaluates its inventories for obsolescence and recoverability at each reporting period.
Property and Equipment
Property and equipment are initially recorded at their historical cost. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets (ranging 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.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, consisting of property and equipment, for impairment at each fiscal year end or when events or changes in circumstances indicate the carrying value of these assets may exceed their current fair values. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the assets. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The Company has not historically recorded any impairment to its long-lived assets. In the future, if events or market conditions affect the estimated fair value to the extent that a long-lived asset is impaired, the Company will adjust the carrying value of these long-lived assets in the period in which the impairment occurs. As of September 30, 2015 and December 31, 2014 and 2013, the Company had not deemed any long-lived assets as impaired, and was not aware of the existence of any indicators of impairment at such dates.
| F-10 |
| Guardion Health Sciences, Inc. |
| Notes to Financial Statements |
| Nine Months Ended September 30, 2015 and 2014 (unaudited) |
| and Years Ended December 31, 2014 and 2013 |
Revenue Recognition
The Company’s revenue is currently comprised of sales of medical foods and dietary supplements to consumers through a direct sales/credit card process. Revenue is recognized when there is persuasive evidence an arrangement exists, the selling price is fixed or determinable, collectability is reasonably assured, and the product has shipped.
The Company allows for returns within 30 days of purchase. Product returns for the nine months ended September 30, 2015 (unaudited) and 2014 (unaudited), and the years ended December 31, 2014 and 2013 were insignificant.
Research and Development Costs
Research and development expenditures, which include patent related costs, are expensed as incurred and totaled $386,673, $46,711, $43,436 and $259,786 for the nine months ended September 30, 2015 (unaudited) and 2014 (unaudited), and for the years ended December 31, 2014 and 2013, respectively.
Patent Costs
The Company is the owner of several domestic patents. 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 other costs, including internally generated costs, are expensed as incurred. During the nine months ended September 30, 2015 and 2014, and the years ended December 31, 2014 and 2013, patent costs were $22,698, $14,433, $32,783 and $20,483, respectively, and are included in total research and development costs in the statement of operations.
Convertible Notes Payable
When conventional convertible debt is issued with detachable warrants, the proceeds from issuance are allocated to the two instruments based on their relative fair values. This method is generally appropriate if debt is issued with any other freestanding instrument that is classified in equity.
When the convertible debt instrument includes both detachable instruments such as warrants, and a beneficial conversion option, the proceeds of issuance are allocated among the convertible instrument and the other detachable instruments based on their relative fair values as indicated above, and the amount allocated to the convertible instrument is further analyzed to determine if the embedded conversion option has intrinsic value. If the conversion features of conventional convertible debt provide for a rate of conversion that is below market value, then the conversion option has intrinsic value and this feature is characterized as a beneficial conversion feature (“BCF”). The Company calculates an effective conversion price based on the fair value allocated to the convertible instrument divided by the number of conversion shares based upon the conversion terms of the instrument. The resulting calculation or effective conversion price is used to measure the intrinsic value, if any, of the embedded conversion option. Stated differently, intrinsic value is calculated at the commitment date as the difference between the conversion price (effective or otherwise) and the fair value of the common stock or other securities into which the security is convertible, multiplied by the number of shares into which the security is convertible.
The fair value of members’ units or common stock was determined based on management’s judgement. In order to assist management in calculating such fair value, the Company retained a third party valuation firm in determining the value of the Company. The third party valuation firm’s input was utilized in determining the related per unit or share valuations of the Company’s equity used at September 30, 2015, and December 31, 2014 and 2013. Management made the final determination as to valuation based on various inputs, including the valuation report prepared by the third party valuation firm.
| F-11 |
| Guardion Health Sciences, Inc. |
| Notes to Financial Statements |
| Nine Months Ended September 30, 2015 and 2014 (unaudited) |
| and Years Ended December 31, 2014 and 2013 |
If the intrinsic value of the BCF is greater than the proceeds allocated to the convertible instrument, the amount of the discount assigned to the BCF is limited to the amount of the proceeds allocated to the convertible instrument. A BCF is recorded by the Company as a debt discount and in those circumstances, the convertible debt will be recorded net of the discount related to the BCF. The Company amortizes the discount to interest expense over the life of the debt using the effective interest rate method or the straight-line method, as an approximation of effective interest amortization.
Stock-Based Compensation
The Company periodically issues stock-based compensation to officers, directors, employees and consultants for services rendered. Such issuances vest and expire according to terms established at the issuance date.
Stock-based payments to officers and directors, and to employees in the future which will include grants of employee stock options, are recognized in the financial statements based on their fair values. Stock option grants, which are generally time vested, will be measured at the grant date fair value and charged to operations on a straight-line basis over the vesting period. The fair value of stock options is determined utilizing the Black-Scholes option-pricing model, which is affected by several variables, including the risk-free interest rate, the expected dividend yield, the expected life of the equity award, the exercise price of the stock option as compared to the fair market value of the common stock on the grant date and the estimated volatility of the common stock over the term of the equity award.
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Until the Company has established a trading market for its common stock, estimated volatility is based on the average historical volatilities of comparable public companies in a similar industry. The expected dividend yield is based on the current yield at the grant date; the Company has never declared or paid dividends and has no plans to do so for the foreseeable future.
The fair value of members’ units or common stock was determined based on management’s judgement. In order to assist management in calculating such fair value, the Company retained a third party valuation firm in determining the value of the Company. The third party valuation firm’s input was utilized in determining the related per unit or share valuations of the Company’s equity used at September 30, 2015, and December 31, 2014 and 2013. Management made the final determination as to valuation based on various inputs, including the valuation report prepared by the third party valuation firm.
The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the FASB whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.
| F-12 |
| Guardion Health Sciences, Inc. |
| Notes to Financial Statements |
| Nine Months Ended September 30, 2015 and 2014 (unaudited) |
| and Years Ended December 31, 2014 and 2013 |
The Company recognizes stock compensation expense on stock or unit purchases at a price less than fair value, and for fully-vested stock issued to consultants and other service providers, for the excess of fair value of the stock or units over the price paid for the stock or units.
The Company recognizes the fair value of stock-based compensation within its statements of operations with classification depending on the nature of the services rendered. The Company issues new shares to satisfy stock option exercises.
During the nine months ended September 30, 2015 (unaudited), the Company recognized aggregate stock-compensation expense based upon a stock price of $1.14 per share of $4,279,233, of which $3,937,233 was recorded in general and administrative expense and $342,000 was recorded in research in development expense. There was no stock-based compensation expense during the nine months ended September 30, 2014 (unaudited) or the years ended December 31, 2014 or 2013.
Income Taxes
As of September 30, 2015, the Company was a corporation subject to U.S. federal income taxes and California state income taxes. Prior to June 30, 2015, the Company was a limited liability company and taxed as a pass through entity whereby substantially all income tax attributes were passed through to the individual members, except for the minimum state income tax and an LLC fee based on revenues.
The Company currently accounts for income taxes under an asset and liability approach for financial accounting and reporting for income taxes. Accordingly, the Company recognizes deferred tax assets and liabilities for the expected impact of differences between the financial statements and the tax basis of assets and liabilities.
The Company accounts for uncertainties 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 September 30, 2015, 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.
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 was to determine 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.
| F-13 |
| Guardion Health Sciences, Inc. |
| Notes to Financial Statements |
| Nine Months Ended September 30, 2015 and 2014 (unaudited) |
| and Years Ended December 31, 2014 and 2013 |
Net Loss per Share
The Company’s computation of basic and diluted net loss per common share is measured as net loss divided by the weighted average common shares outstanding during the respective periods. The company considers membership units to be equivalent to common shares for purposes of the computation of net loss per share. For diluted net loss per share, the weighted average number of common shares outstanding are adjusted to include (i) dilutive warrants under the treasury method, and (ii) the shares associated with the conversion of convertible debt outstanding during the period under the if-converted method, and related interest charges applicable to the convertible debt added back to net income. Potential common shares that have an anti-dilutive effect are excluded from the calculation of diluted net loss per share. 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 conversion of convertible debt outstanding are anti-dilutive as they decrease loss per share.
The following table sets forth the number of shares excluded from the computation of diluted loss per share, as their inclusion would have been anti-dilutive:
| September 30, | December 31, | |||||||||||||||
| 2015 | 2014 | 2014 | 2013 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| Warrants | 835,166 | 333,336 | 1,317,894 | 904,091 | ||||||||||||
| Estimated shares issuable upon conversion of convertible notes payable | 1,054,672 | 3,097,530 | 3,327,274 | 2,646,841 | ||||||||||||
| 1,889,838 | 3,430,866 | 4,645,168 | 3,550,932 | |||||||||||||
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. ASU 2014-09 also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. Based on the FASB’s Exposure Draft Update issued on April 29, 2015, and approved in July 2015, Revenue from Contracts With Customers (Topic 606): Deferral of the Effective Date, ASU 2014-09 is now effective for reporting periods beginning after December 15, 2017, with early adoption permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The adoption of ASU 2014-09 is not expected to have any impact on the Company’s financial statement presentation or disclosures.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15 (ASU 2014-15), Presentation of Financial Statements – Going Concern (Subtopic 205-10). ASU 2014-15 provides guidance as to management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued (or at the date that the financial statements are available to be issued when applicable). Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The adoption of ASU 2014-15 is not expected to have any impact on the Company’s financial statement presentation or disclosures.
| F-14 |
| Guardion Health Sciences, Inc. |
| Notes to Financial Statements |
| Nine Months Ended September 30, 2015 and 2014 (unaudited) |
| and Years Ended December 31, 2014 and 2013 |
In February 2015, the FASB issued Accounting Standards Update No. 2015-02 (ASU 2015-02), Consolidation (Topic 810). ASU 2015-02 changes the guidance with respect to the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. All legal entities are subject to reevaluation under the revised consolidation mode. ASU 2015-02 affects the following areas: (1) limited partnerships and similar legal entities; (2) evaluating fees paid to a decision maker or a service provider as a variable interest; (3) the effect of fee arrangements on the primary beneficiary determination; (4) the effect of related parties on the primary beneficiary determination; and (5) certain investment funds. ASU 2015-02 is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the guidance in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. A reporting entity may apply the amendments in this guidance using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A reporting entity also may apply the amendments retrospectively. The adoption of ASU 2015-02 is not expected to have any impact on the Company’s financial statement presentation or disclosures.
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.
| 3. | Inventories |
Inventories consisted of the following:
| September 30, | December 31, | |||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Raw materials | $ | 31,278 | $ | 21,859 | $ | 93,768 | ||||||
| Finished goods | 7,060 | 2,368 | - | |||||||||
| $ | 38,338 | $ | 24,227 | $ | 93,768 | |||||||
| F-15 |
| Guardion Health Sciences, Inc. |
| Notes to Financial Statements |
| Nine Months Ended September 30, 2015 and 2014 (unaudited) |
| and Years Ended December 31, 2014 and 2013 |
| 4. | Property and Equipment, net |
Property and equipment consisted of the following:
| September 30, | December 31, | |||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Leasehold improvements | $ | 98,357 | $ | 98,357 | $ | 90,907 | ||||||
| Testing equipment | 145,502 | 145,502 | 145,502 | |||||||||
| Furniture and fixtures | 15,189 | 15,189 | 15,189 | |||||||||
| Computer equipment | 12,083 | 9,919 | 9,919 | |||||||||
| Office equipment | 2,694 | 2,694 | 2,694 | |||||||||
| 273,825 | 271,661 | 264,211 | ||||||||||
| Less accumulated depreciation and amortization | (87,998 | ) | (57,495 | ) | (15,090 | ) | ||||||
| $ | 185,827 | $ | 214,166 | $ | 249,121 | |||||||
For the nine months ended September 30, 2015 and 2014, depreciation and amortization expense was $30,503 and $31,768, respectively, of which $21,975 and $21,975 was included in research and development expense, respectively, and $8,528 and $9,793 was included in general and administrative expense, respectively. For the years ended December 31, 2014 and 2013, depreciation and amortization expense was $42,405 and $8,017, respectively, of which $29,300 and $200 was included in research and development expense, respectively, and $13,105 and $7,817 was included in general and administrative expense, respectively.
| F-16 |
| Guardion Health Sciences, Inc. |
| Notes to Financial Statements |
| Nine Months Ended September 30, 2015 and 2014 (unaudited) |
| and Years Ended December 31, 2014 and 2013 |
| 5. | Convertible Notes Payable |
As of September 30, 2015 (unaudited), and December 31, 2014 and 2013, the Company had a total of $550,858, $1,413,752 and $1,061,700, respectively, of principal and interest outstanding under its convertible unsecured notes payable, which consisted of the following:
| September 30, | December 31, | |||||||||||
| Year of issuance: | 2015 | 2014 | 2013 | |||||||||
| 2010 (due August 2013) | $ | 25,000 | $ | 25,000 | $ | 25,000 | ||||||
| 2012 (due June through October 2015) | - | 450,000 | 450,000 | |||||||||
| 2013 (due March through October 2016) | - | 465,000 | 465,000 | |||||||||
| 2014 (due December 2015 through December 2017) | - | 222,500 | - | |||||||||
| 2015 (due May 1, 2017) | 500,000 | - | - | |||||||||
| Accrued interest | 25,858 | 251,252 | 121,700 | |||||||||
| Total principal and interest | 550,858 | 1,413,752 | 1,061,700 | |||||||||
| Debt discount – unamortized balance | - | (338,510 | ) | (339,022 | ) | |||||||
| Convertible notes payable, net | 550,858 | 1,075,242 | 722,678 | |||||||||
| Convertible notes payable - current portion, net | 40,584 | 693,133 | 36,850 | |||||||||
| Convertible notes payable, net | 510,274 | 382,109 | 685,828 | |||||||||
| $ | 550,858 | $ | 1,075,242 | $ | 722,678 | |||||||
Convertible notes payable have historically consisted of loans provided to the Company from various investors. These notes carry simple interest at a rate of 12% per annum and the majority had three year terms. In lieu of the repayment of the principal and accrued interest, the outstanding amounts were convertible, at the option of the note holder, generally at any time on or prior to maturity and automatically under certain conditions, into membership interests in the Company at conversion prices ranging from of $0.50 - $0.55 per unit. The debt discount associated with convertible notes payable at December 31, 2014 and 2013 represents the unamortized discount related to beneficial conversion features and outstanding warrants to purchase the Company’s units, which is amortized to interest expense over the life of the corresponding note payable.
During the nine months ended September 30, 2015 (unaudited) and 2014 (unaudited), and the years ended December 31, 2014 and 2013, amortization of debt discount related to the Company’s convertible notes payable aggregated $381,009, $147,405, $241,169 and $163,655, respectively.
During the nine months ended September 30, 2015 (unaudited) and 2014 (unaudited), and the years ended December 31, 2014 and 2013, interest expense related to the Company’s convertible notes payable was $64,813, $105,144, $129,551 and $91,759, respectively.
As of September 30, 2015, and December 31, 2014 and 2013, the Company was past the stated maturity date for the payment of outstanding principal and interest related to its convertible notes payable of $40,584, $38,340 and $35,315, respectively. These amounts are included in the current portion of convertible notes payable as demand notes for all periods presented.
| F-17 |
| Guardion Health Sciences, Inc. |
| Notes to Financial Statements |
| Nine Months Ended September 30, 2015 and 2014 (unaudited) |
| and Years Ended December 31, 2014 and 2013 |
2013 Activity
During the period March 2013 through October 2013, the Company issued convertible notes payable in the principal amount of $465,000, with simple interest of 12% per year due at maturity and an average term of three years. In connection with the issuance the 2013 convertible notes, the Company recognized debt discounts at the dates of issuance in the aggregate amount of $146,294 related to the intrinsic value of beneficial conversion features.
During the year ended December 31, 2013, an investor converted a $50,000 convertible note payable into 90,909 membership units at a conversion price of $0.55 per unit.
Debt discount amortization for the year ended December 31, 2013 totaled $163,655 resulting in an unamortized debt discount balance of $339,021 at such date.
2014 Activity
During the period February 2014 through November 2014, the Company issued convertible notes payable in the principal amount of $222,500, with simple interest of 10 - 12% per year, due at maturity and an average term of three years. In connection with the issuance of the 2014 convertible notes, the Company issued to certain investors an aggregate of 80,467 warrants to purchase membership units at prices ranging from $0.60 to $0.75 per unit with a three year term. The Company recognized a debt discount at the dates of issuance in the aggregate amount of $240,657 related to the relative fair value of the warrants and beneficial conversion features, which comprised $199,109 related to the intrinsic value of beneficial conversion features and $41,548 related to the relative fair value of the warrants. The aggregate fair value allocated to the warrants of $41,548 was based on a probability-effected Black-Scholes option pricing model with a stock price of $1.50, volatility of 105% and risk-free interest rate of 0.88%.
Debt discount amortization for the year ended December 31, 2014 totaled $241,169, resulting in an unamortized debt discount balance of $338,510 at such date.
2015 Activity
During the period January 1, 2015 through March 31, 2015, the Company issued convertible notes payable in the principal amount of $42,500, with simple interest of 10 - 12% per year, due at maturity and an average term of 3 years. The notes are convertible at a price of $0.50 upon the occurrence of a public company event or the next equity financing, or upon voluntary election of the majority of note holders, all as defined in the notes. Certain holders received warrants to purchase 31,687 membership interests equal to 50% of the number of membership units issued upon conversion of the notes, at a price per unit of $0.60 for 50% of the warrants and a price per unit of $0.75 for the remaining 50% of the warrants, with three year terms and contingent upon the conversion of the related note. The Company recognized a debt discount at the dates of issuance in the aggregate amount of $42,500 related to the relative fair value of the warrants and beneficial conversion features, which comprised $25,844 related to the intrinsic value of beneficial conversion features and $16,656 related to the relative fair value of the warrants. The aggregate fair value allocated to the warrants of $16,656 was based on a probability effected Black-Scholes option pricing model with a stock price of $1.50, volatility of 104 - 109% and risk-free rate of 0.83% - 1.03%.
| F-18 |
| Guardion Health Sciences, Inc. |
| Notes to Financial Statements |
| Nine Months Ended September 30, 2015 and 2014 (unaudited) |
| and Years Ended December 31, 2014 and 2013 |
During the period May 1, 2015 through June 30, 2015, the Company issued 1,793,692 membership units upon the conversion of $986,542 of outstanding principal and interest pursuant to the terms of the convertible note agreements. Upon conversion, the remaining unamortized debt discount of $119,972 was charged to interest expense.
On May 1, 2015, the Company issued a convertible note in the principal amount of $500,000, with interest at 5% per year, and a two year maturity. The note is convertible within 10 business days after a Going Public Event, which is defined as the occurrence of any of the following:
(i) The registration of any class of securities of the Borrower pursuant to an effective registration statement under the Securities Act of 1933, as amended;
(ii) The registration of any class of securities of the Borrower pursuant to an effective registration statement under the Securities Exchange Act of 1934, as amended;
(iii) The merger by and between the Company and an entity subject to the reporting obligations under the Securities Exchange Act of 1934, as amended, including both shell and non-shell companies; provided, however, that the Borrower and its equity holders must receive 50% or more of the equity interest in the Reporting Company immediately after the merger.
Upon conversion of the principal amount of the note, the holder is entitled to an undiluted 4.76% equity interest in the Company. Upon conversion, the Company will recognize a contingent beneficial conversion feature calculated as of the date of note issuance.
On August 10, 2015, the Company issued 886,988 shares of the Company’s common stock upon the conversion of $480,625 of outstanding principal and interest pursuant to the terms of the convertible notes. Upon conversion, the remaining unamortized debt discount of $143,971 was charged to interest expense.
In connection with the May 1, 2015 conversion of notes payable, the Company issued 995,926 membership units valued at $1,135,356 to the holders of the notes as an inducement to convert their notes payable. In addition, as a further inducement to convert the notes, the Company offered to certain holders of the notes 146,000 warrants valued at $165,072 to acquire membership units. The fair value of the warrants was based on a Black-Scholes option pricing model, with a stock price of $1.14, volatility of 113%, and a risk-free interest rate of 0.97%.
In connection with the August 10, 2015 conversion of notes payable, the Company issued 50,348 shares of its common stock valued at $57,396 to the holders of the notes as an inducement to convert their notes payable, which was calculated as the excess of the shares actually received over the shares the holder was entitled to receive per the terms of their respective note agreements, multiplied by the fair value of the Company’s common stock of $1.14 per share. Upon conversion, the remaining unamortized debt discount of $381,009 was charged to interest expense.
Future maturities of principal under convertible notes are as follows:
| Years ended: | ||||
| 2015 (remaining 3 months and currently due) | $ | 25,000 | ||
| 2016 | - | |||
| 2017 | 500,000 | |||
| $ | 525,000 | |||
| F-19 |
| Guardion Health Sciences, Inc. |
| Notes to Financial Statements |
| Nine Months Ended September 30, 2015 and 2014 (unaudited) |
| and Years Ended December 31, 2014 and 2013 |
| 6. | Convertible Notes Payable - Related Party |
As of September 30, 2015 (unaudited), and December 31, 2014 and 2013, the Company had a total of $0, $514,693 and $463,644, respectively, of principal and interest outstanding under its convertible unsecured notes payable with related parties, which consisted of the following:
| September 30, | December 31, | |||||||||||
| Year of Issuance: | 2015 | 2014 | 2013 | |||||||||
| 2011 (due June 30, 2015) | $ | - | $ | 40,000 | $ | 40,000 | ||||||
| 2012 (due June 30, 2015) | - | 260,000 | 260,000 | |||||||||
| 2013 (due April 1, 2016) | - | 100,000 | 100,000 | |||||||||
| Accrued interest | - | 114,693 | 63,644 | |||||||||
| Total principal and interest | - | 514,693 | 463,644 | |||||||||
| Debt discount – unamortized balance | - | (62,052 | ) | (167,012 | ) | |||||||
| Convertible notes payable - related party, net | 452,641 | 296,632 | ||||||||||
| Current portion of convertible notes payable - related party | - | 347,645 | 38,570 | |||||||||
| Non-current portion of convertible notes payable - related party | - | 104,996 | 258,062 | |||||||||
| $ | - | $ | 452,641 | $ | 296,632 | |||||||
Convertible notes payable to related parties consisted of loans provided to the Company from various unit holders. These notes carried simple interest at a rate of 12% per annum and approximate three year terms. In lieu of the repayment of the principal and accrued interest, the outstanding amounts may be converted, at the option of the holder, generally at any time on or prior to maturity and automatically under certain conditions, into membership units at conversion prices ranging from $0.45 - $0.55 per share. The debt discount associated with the notes payable to related parties at December 31, 2014 and 2013 represents the unamortized discount related to beneficial conversion features and outstanding warrants to purchase membership units, which is amortized to interest expense over the life of the corresponding note payable.
During the nine months ended September 30, 2015 (unaudited) and 2014 (unaudited), and the years ended December 31, 2014 and 2013, amortization of debt discount related to the Company’s notes payable to related parties aggregated $62,052, $78,504, $104,960 and $102,653, respectively.
During the nine months ended September 30, 2015 (unaudited) and 2014 (unaudited), and the years ended December 31, 2014 and 2013, interest expense related to the Company’s notes payable to related parties was $13,182, $36,037, $51,049 and $48,000, respectively.
| F-20 |
| Guardion Health Sciences, Inc. |
| Notes to Financial Statements |
| Nine Months Ended September 30, 2015 and 2014 (unaudited) |
| and Years Ended December 31, 2014 and 2013 |
2013 Activity
In March 2013, the Company issued a $100,000 convertible note payable to a related party, convertible at a price of $0.55 per share and a 3 year term. The note converts automatically upon the occurrence of a commercial milestone or upon the voluntary election of the holder or the Majority Note Holders, as defined in the note. The Company recognized a debt discount at the date of issuance in the amount of $41,818 related to the intrinsic value of the beneficial conversion feature.
2015 Activity
On May 1, 2015, the Company issued 865,602 membership units upon the conversion of $442,493 of outstanding principal and a portion of accrued interest. Upon conversion, the remaining unamortized debt discount of $27,257 was charged to interest expense. In addition, as an inducement to convert the notes, the Company offered to certain holders 350,001 warrants valued at $341,785 to acquire membership units. The fair value of the warrants was based on a Black-Scholes option-pricing model, with a stock price of $1.14, volatility of 113% and a risk-free interest rate of 0.97%.
| 7. | Promissory Notes |
As of September 30, 2015 (unaudited), and December 31, 2014 and 2013, the Company had a total of $0, $253,158 and $35,000, respectively, of principal and interest outstanding under its unsecured promissory notes, which consisted of the following:
| September 30, | December 31, | |||||||||||
| Year of issuance: | 2015 | 2014 | 2013 | |||||||||
| 2013 | $ | - | $ | 35,000 | $ | 35,000 | ||||||
| 2014 (due July 2015 through July 2016) | - | 200,000 | - | |||||||||
| Accrued interest | - | 18,158 | - | |||||||||
| Total principal and interest | - | 253,158 | 35,000 | |||||||||
| Debt discount – unamortized balance | - | (108,049 | ) | - | ||||||||
| Promissory notes, net | - | 145,109 | 35,000 | |||||||||
| Current portion of promissory notes | - | 141,347 | 35,000 | |||||||||
| Non-current portion of promissory notes, net | - | 3,762 | - | |||||||||
| $ | - | $ | 145,109 | $ | 35,000 | |||||||
Promissory notes outstanding as of December 31, 2014 and 2013 include principal and interest to various outside investors. The majority of these notes carried simple interest at a rate of 10% per annum and an approximate two year term at issuance. Debt discount related to the promissory notes at December 31, 2014 represented the unamortized discount associated with the issuance of warrants to the holders, which was amortized over the life of the corresponding note.
During the nine months ended September 30, 2015 (unaudited) and 2014 (unaudited), and the years ended December 31, 2014 and 2013, amortization of debt discount related to the Company’s promissory notes aggregated $108,049, $64,394, $91,952 and $0, respectively.
| F-21 |
| Guardion Health Sciences, Inc. |
| Notes to Financial Statements |
| Nine Months Ended September 30, 2015 and 2014 (unaudited) |
| and Years Ended December 31, 2014 and 2013 |
During the nine months ended September 30, 2015 (unaudited) and 2014 (unaudited), and the years ended December 31, 2014 and 2013, interest expense related to the Company’s promissory notes was $10,867, $11,973, $18,158 and $0, respectively.
2013 Activity
In December of 2013, the Company received a non-interest bearing loan of $35,000 from a third party.
2014 Activity
In February through June of 2014, the Company issued $200,000 of promissory notes to various outside investors, with a weighted average term at issuance of approximately two years. The holders received 333,336 warrants to purchase shares of the Company’s membership units at a price per unit of $0.01 with terms ranging from two to three years. The Company recognized a debt discount at the dates of issuance in the aggregate amount of $200,000 related to the fair value of the warrants. The aggregate fair value of the warrants of $200,000 was based on a Black-Scholes option-pricing model with a stock price of $1.50, volatility of 102 - 108%, and a risk-free interest rate of 0.33 - 0.95%.
2015 Activity
On August 10, 2015, the Company issued 441,358 shares of its common stock valued at $503,149 upon the conversion of $260,900 of outstanding principal and interest. Upon conversion, the remaining unamortized debt discount of $41,861 was charged to interest expense. The Company recognized a loss on settlement of promissory notes of $242,249.
| 8. | Commitments and Contingencies |
Operating Lease
In October 2012, the Company entered into a lease agreement for 9,605 square feet of office and warehouse space commencing March 1, 2013. As of September 30, 2015, remaining average monthly lease payments were approximately $10,042 through July 2018. Upon entering into the agreement, the Company paid a deposit of $47,449, of which $36,979 represented prepaid rent. As of September 30, 2015, $10,470 remained on deposit under the lease agreement.
As of September 30, 2015 (unaudited) and December 31, 2014 and 2013, the Company had accrued and deferred rent payable for its office and warehouse facilities under its lease agreement in the aggregate of $154,997, $160,360 and $70,057, respectively.
The approximate future minimum lease payments under non-cancelable operating leases at December 31, 2014 are as follows:
Years ending December 31,
| 2015 (3 months) | $ | 28,815 | ||
| 2016 | 108,248 | |||
| 2017 | 121,599 | |||
| 2018 | 72,710 | |||
| $ | 331,372 |
| F-22 |
| Guardion Health Sciences, Inc. |
| Notes to Financial Statements |
| Nine Months Ended September 30, 2015 and 2014 (unaudited) |
| and Years Ended December 31, 2014 and 2013 |
Rent expense was $79,303 and $79,303, $105,738 and $88,115 for the nine months ended September 30, 2015 and 2014, and the years ended December 31, 2014 and 2013, respectively.
Contingencies
The Company is subject to claims and assessments from time to time in the ordinary course of business. The Company’s management does not believe that any such matters, individually or in the aggregate, will have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
| 9. | Stockholders’ Deficit |
As of September 30, 2015, the Company is authorized to issue is 100,000,000 shares of stock, consisting of 90,000,000 shares of common stock with a par value of $0.0001 per share and 10,000,000 shares of preferred stock with a par value of $0.0001 per share (see Note 12). At September 30, 2015 (unaudited), the Company had 20,646,396 shares of common stock issued and outstanding. The Company did not have any shares of preferred stock issued and outstanding at September 30, 2015 (unaudited).
On June 30, 2015 the Company changed its form of organization from a limited liability company to a corporation under the laws of the state of Delaware and all LLC membership units were converted to common stock on a one for one basis. The Company was previously governed by the terms and conditions of the Guardion Health Sciences, LLC Second Amended and Restated Operating Agreement dated January 28, 2012 (the “Operating Agreement”) and had one authorized class of units, and one class of members which consisted of four members. The LLC's business, property, and affairs were managed exclusively by the manager. Members' voting rights were in direct proportion to their Membership Interests.
Activity
2013
During the year ended December 31, 2013, 158,183 membership units were issued to investors at a price per share of $0.55 for aggregate proceeds of $87,000.
2015
During the period April 1, 2015 through June 30, 2015, the Company sold 2,303,227 membership units to two consultants for aggregate cash consideration of $2,303. These membership units had a fair value of $2,625,679 or $1.14 per unit. Accordingly, during the nine months ended September 30, 2015, the Company recognized $2,623,376 in stock compensation from this transaction, which was recorded in general and administrative expenses in the statement of operations.
On May 1, 2015, the Company issued 450,000 membership units to a related party upon exercise of 450,000 warrants, as described in “Warrant Activity” below.
| F-23 |
| Guardion Health Sciences, Inc. |
| Notes to Financial Statements |
| Nine Months Ended September 30, 2015 and 2014 (unaudited) |
| and Years Ended December 31, 2014 and 2013 |
During the period August 1, 2015 through September 30, 2015, the Company issued 1,454,091 shares of the Company’s common stock valued at $1,657,664, or $1.14 per share, as compensation for services rendered. There was no stock-based compensation issued during the years ended December 31, 2014 and 2013.
During the period August 1, 2015 through September 30, 2015, the Company issued 583,337 shares of the Company’s common stock upon exercise of warrants, as described at “Warrant Activity” below.
Warrant Activity
2014
During the period February 1, 2014 through June 30, 2014, in connection with the issuance of $200,000 of promissory notes to various outside investors, the Company issued 333,336 warrants to purchase membership units at a price per unit of $0.01 with terms ranging from two to three years.
During the period February 1, 2014 through November 30, 2014, in connection with the issuance of convertible notes payable of $222,500, the Company issued to certain investors an aggregate of 80,467 warrants to purchase membership units at prices ranging from $0.60 to $0.75 per unit with a three year term, contingent on conversion of the related note.
2015
During the period January 1, 2015 through March 31, 2015, in connection with the issuance of notes payable of $42,500 convertible at a price of $0.50 per membership unit upon certain events, the Company issued 31,687 warrants to purchase membership units equal to 50% of the number of units issued upon conversion of the notes, at a price per unit of $0.60 for 50% of the warrants and a price per unit of $0.75 for the remaining 50% of the warrants, with three year terms and contingent upon the conversion of the related notes.
On May 1 2015, the Company issued warrants valued at $506,857 to purchase 496,001 membership units at a weighted average exercise price of $0.21 per unit with 3 year terms, as inducements to convert notes payable, as more fully described at Note 5 and Note 6.
On May 1, 2015, the Company issued 450,000 membership units to a related party upon exercise of 450,000 warrants at a weighted average exercise price of $0.20 per unit. In lieu of the aggregate cash payment of $90,000, the holder applied $90,000 of accrued interest towards the exercise price of warrants.
During the period August 1, 2015 through September 30, 2015, the Company issued 250,001 shares of the Company's common stock upon exercise of 250,001 warrants for aggregate cash consideration of $75,000.
During this period, the Company also issued 333,336 shares of the Company's common stock upon exercise of 333,336 warrants at an average exercise price of $0.01 per share. In lieu of the aggregate cash payment of $3,334, the holder applied $3,334 of accrued interest toward the exercise price of the warrants.
| F-24 |
| Guardion Health Sciences, Inc. |
| Notes to Financial Statements |
| Nine Months Ended September 30, 2015 and 2014 (unaudited) |
| and Years Ended December 31, 2014 and 2013 |
On August 10, 2015, the Company issued warrants to purchase 28,176 shares of its common stock at an exercise price of $0.01 per share and a three year term in settlement of $15,497 of accounts payable. The warrants were valued at $31,853, based upon the Black-Scholes option-pricing model, with a stock price of $1.14, volatility of 105% and a risk free interest rate of 1.09%. The Company recognized a loss on settlement of accounts payable of $16,357.
A summary of the Company’s warrant activity is as follows:
| Membership Units or Shares | ||||
| December 31, 2013 | 904,091 | |||
| Granted | 413,803 | |||
| December 31, 2014 | 1,317,894 | |||
| Granted | 555,864 | |||
| Cancelled | (5,255 | ) | ||
| Exercised | (1,033,337 | ) | ||
| September 30, 2015 | 835,166 | |||
Additional details of the Company’s outstanding warrants are as follows:
| Outstanding at: | Membership Units or Shares | Weighted Average Exercise Price | ||||||
| December 31, 2013 | 904,091 | $ | 0.64 | |||||
| December 31, 2014 | 1,317,894 | $ | 0.37 | |||||
| September 30, 2015 | 835,166 | $ | 0.75 | |||||
As of September 30, 2015, the Company had an aggregate of 835,166 outstanding warrants to purchase shares of its common stock with a weighted average remaining life of 2.6 years and aggregate intrinsic value of $324,100, based upon a stock price of $1.14 per share. The intrinsic value is calculated as the difference between the market value of the underlying common stock and the exercise price of the warrants.
| 10. | Related Party Transactions |
In December 2013, a member contributed $66,947 of fixed assets, which were recorded at historical cost.
Due to and from related parties represents unreimbursed expenses paid on behalf of, and amounts loaned to the Company by, Michael Favish, the Company’s Chief Executive Officer, as well as certain other LLC members. The advances are unsecured, non-interest bearing and are due on demand. As of September 30, 2015 and December 31, 2014, the Company had $236,844 and $54,735 due to related parties, and as of December 31, 2013, the Company had $56,876 due from related parties.
| F-25 |
| Guardion Health Sciences, Inc. |
| Notes to Financial Statements |
| Nine Months Ended September 30, 2015 and 2014 (unaudited) |
| and Years Ended December 31, 2014 and 2013 |
The Company also pays management fees directly to Michael Favish, the Company’s Chief Executive Officer. For the nine months ended September 30, 2015 and 2014, and the years ended December 31, 2014 and 2013, the Company incurred management fees of $156,250, $55,700, $152,758 and $61,950, respectively. Accrued management fees in the amount of $150,000, $82,420 and $0 were included in due to related parties at September 30, 2015 and December 31, 2014 and 2013, respectively.
On May 1, 2015, the Company issued 450,000 membership units to a related party upon exercise of warrants at a weighted average exercise price of $0.20 per unit or $90,000 (see Note 9).
For the nine months ended September 30, 2015, the Company issued $464,557 of stock-based compensation to individuals that were related parties at the time of issuance. There was no stock-based compensation issued during the years ended December 31, 2014 and 2013.
As of September 30, 2015 and December 31, 2014 and 2013, the Company had a total of $0, $514,693 and $463,644, respectively, of principal and interest outstanding under its convertible notes payable with related parties (see Note 6).
| 11. | Income Taxes |
As of June 30, 2015, the Company became subject to U.S. federal income taxes and state income taxes. Prior to that date, the Company was a limited liability company and as such was taxed as a pass through entity whereby substantially all income tax attributes were passed through to the individual members of the limited liability company, except for California minimum state income tax and an LLC fee based on revenues.
The Company currently accounts for income taxes under an asset and liability approach for financial accounting and reporting for income taxes. Accordingly, the Company recognizes deferred income taxes to 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.
As of September 30, 2015 (unaudited), significant components of the Company’s deferred tax assets were as follows:
| Net operating loss carryforwards | $ | 928,000 | ||
| Deferred rent | 13,000 | |||
| Accrued compensation due to related party | 95,000 | |||
| Depreciation | 1,000 | |||
| Total deferred tax assets | 1,037,000 | |||
| Valuation allowance | (1,037,000 | ) | ||
| 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 September 30, 2015, 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.
| F-26 |
| Guardion Health Sciences, Inc. |
| Notes to Financial Statements |
| Nine Months Ended September 30, 2015 and 2014 (unaudited) |
| and Years Ended December 31, 2014 and 2013 |
No federal tax provision has been provided for the nine months ended September 30, 2015 due to the losses incurred during the period. Prior to July 1, 2015, the Company operated as a limited liability company, and as such, all profits, losses, revenues, expenses and other income tax attributes were passed through to the limited liability company owners. Reconciled below is the difference between the income tax rate computed by applying the U.S. federal statutory rate and the effective tax rate for the period July 1, 2015 to September 30, 2015.
| F-27 |
| Guardion Health Sciences, Inc. |
| Notes to Financial Statements |
| Nine Months Ended September 30, 2015 and 2014 (unaudited) |
| and Years Ended December 31, 2014 and 2013 |
| U. S. federal statutory tax rate | (35.0 | )% | ||
| Amortization of note payable discounts | 2.9 | % | ||
| Change in valuation allowance | 32.1 | % | ||
| Effective tax rate | 0.0 | % |
At September 30, 2015, the Company has available net operating loss carryforwards for federal income tax purposes of approximately $2,278,000 which, if not utilized earlier, will expire in 2035.
| 12. | Subsequent Events |
Subsequent to September 30, 2015, the Company borrowed an aggregate of $250,000 under unsecured notes payable, with interest at the rate of 12% per annum and 90 day terms (the “Loans”). The note holder received warrants with a term of three years to purchase 500,000 shares of the Company’s common stock at an exercise price of $0.25 per share (the “Loan Warrants”). On January 26, 2016, the Company entered into an addendum to the Loans which includes additional post-maturity interest in the form of warrants to purchase shares of the Company’s common stock as follows:
| · | in the event the Loans are not paid by maturity, the Company shall grant a warrant to purchase 1/10th of the number of shares and under the same terms as set forth in the Loan Warrants; |
| · | each month thereafter, if the Loan is not paid in full, the Company will grant a warrant to purchase 1/10th of the number of shares and under the same terms as set forth in the Loan Warrants; |
| · | the Loans shall continue to accrue interest at the rate of 12% until paid in full; and |
| · | upon repayment of the Loans, the holder shall receive an additional warrant to purchase shares of Company’s common stock at $0.25 per share for the number of shares equivalent to the amount of post-maturity interest paid on each of the Loans upon repayment under the same terms as set forth in the Loan Warrants. |
Subsequent to September 30, 2015, the Company issued an aggregate of 1,260,000 shares of restricted common stock valued at $1,436,400 or $1.14 per share, consisting of 1,000,000 shares to a director, 250,000 shares to the vice president of sales and marketing, and 10,000 shares to a consultant, for cash consideration of $0.01 per share and aggregate cash consideration of $12,600. The shares will vest through June 30, 2017 as the services are provided. Accordingly, the fair value of such shares of common stock will be charged to general and administrative expense or sales and marketing expense, as applicable, over the vesting period.
On October 30, 2015, the Company amended its Certificate of Incorporation to change the par value of its common stock and preferred stock from $0.0001 per share to $0.001 per share.
On November 30, 2015, the Company entered into a $100,000 promissory note payable with an investor. The note carries interest at 5% and is due and payable on the earlier of (i) May 1, 2016, (ii) upon default, or (iii) upon receipt of an aggregate of $1,000,000 from an equity placement that generates gross proceeds of at least $1,000,000. In connection with the issuance of the promissory note, the Company issued a warrant with a three year term to purchase 100,000 shares of the Company’s common stock at an exercise price of $0.25 per share.
| F-28 |
OUTSIDE BACK COVER OF PROSPECTUS
We have not authorized any dealer, salesperson or any other person to give any information or to represent anything other than those contained in this prospectus in connection with the offer contained herein, and, if given or made, you should not rely upon such information or representations as having been authorized by _________________. This prospectus does not constitute an offer of any securities other than those to which it relates or an offer to sell, or a solicitation of an offer to buy, to those to which it relates in any state to any person to whom it is not lawful to make such offer in such state. The delivery of this prospectus at any time does not imply that the information herein is correct as of any time after the date of this prospectus.
DEALER PROSPECTUS DELIVERY REQUIREMENT
Until _______________, 2016 [90 days from the date of this prospectus], all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus.
GUARDION HEALTH SCIENCES, INC.
24,606,559 Shares
Common Stock
PROSPECTUS
__________, 2016
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses payable by us in connection with the issuance and distribution of the securities being registered. None of the following expenses are payable by the Selling Securityholders. All of the amounts shown are estimates, except for the SEC registration fee.
| SEC registration fee | $ | |||
| FINRA Registration Fee | $ | |||
| Legal fees and expenses | $ | |||
| Accounting fees and expenses | $ | |||
| Miscellaneous | $ | |||
| TOTAL | $ |
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Each person who was or is made a party or is threatened to be made a party to or is involved (including, without limitation, as a witness) in any actual or threatened action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a “proceeding”), by reason of the fact that such person is or was a director of the Company or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise (hereinafter an “indemnitee”), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Company to the full extent authorized by the General Corporation Law of the State of Delaware (“Delaware Code”), as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than said law permitted the Company to provide prior to such amendment), or by other applicable law as then in effect, against all expense, liability and loss (including attorney’s fees, judgments, fines, ERISA excise taxes or penalties and amounts to be paid in settlement) actually and reasonably incurred or suffered by such indemnitee in connection therewith and such indemnification shall continue as to an indemnitee who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the indemnitee’s heirs, executors and administrators. The right to indemnification conferred shall be a contract right and shall include the right to be paid by the Company the expenses incurred in defending any such proceeding in advance of its final disposition (hereinafter an “advancement of expenses”); provided, however, that, if the Delaware Code requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee while a director or officer, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the Company of an undertaking, by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined that such indemnitee is not entitled to be indemnified under. Any person who is or was serving as a director of a wholly owned subsidiary of the Company shall be deemed, for indemnification purposes, to be a director or officer of the Company entitled to indemnification under the Company’s bylaws and the Delaware Code. The Company may by action of its Board of Directors, grant rights to indemnification and advancement of expenses to employees and agents of the Company with the same scope and effects as the indemnification provisions for officers and directors.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Company conducted a small private placement during calendar year 2013 during which it sold units of the Company’s membership interest while the company was a California limited liability company. The company sold units at a price of $0.55 per unit.
On August 10, 2015, we issued common stock purchase warrants in connection with an investor’s issuance of a convertible promissory note. Warrant coverage was provided to each investor in a number of shares equal to 50% of the shares of stock the investor would receive on conversion of their note. Of the warrants, half were issued with an exercise price of $0.75 per share and half were issued with and exercise price of $0.60 per share. A total of 106,899 warrants to purchase common stock are outstanding from this round of investment. The units were sold pursuant to the exemption afforded under Section 4(a)(2) of the Securities Act of 1933. There were no placement agents or underwriters for this private placement.
| II - 1 |
The Company did not conduct any specific private placement during calendar years 2014 or 2015. The company did not raise any money with its securities during calendar year 2014. During calendar year 2015, the company conducted four unrelated transactions. In one transaction, the company sold 1,053,227 units of its membership interest while the company was a California limited liability company to an advisor assisting the company with developing certain strategic relationships. These units were sold at par value. In a second transaction, the company sold a promissory note for $500,000 convertible into the company’s common stock based into approximately 1,137,933 shares of the company’s common stock depending up interest and certain other factors as set forth in the promissory note. In a third transaction, the company sold 1,250,000 units of its membership interest while the company was a California limited liability company to an advisor assisting the company with financial affairs. These units were sold at par value. In a fourth transaction, the company issued a total of 32,728 units of membership interest to an investor at a price of $0.04 per unit by converting the interest accrued on a short term loan from that investor.
During January and February 2016, the company conducted a private placement during which the company sold shares of the company’s common stock at $0.60 per share along with a warrant to purchase one share of common stock for each dollar invested at an exercise price of $1.00, which warrant is immediately vested and exercisable for a period of three years from the closing of the private placement.
The Company is currently engaged in a private placement in which it is selling to accredited investors (1) convertible promissory notes that will automatically convert into the Common Stock of the Company upon the occurrence of certain events related to the Company becoming a public reporting company with the SEC, and (2) warrants to purchase one share of Common Stock of the Company for each dollar invested, whereby such warrant is immediately exercisable at One Dollar ($1.00) per share for a period of three (3) years from the date of issue. As of February 11, 2016, an aggregate of $76,000.00 of convertible promissory notes had been sold. No placement agents or underwriters are involved in this offering and no sales commissions or other compensation is being paid.
ITEM 16. Exhibits and Financial Statement Schedules.
| Exhibit No. | Description | |
| 3.1 | Articles of Organization of P4L Health Sciences, LLC and restatement changing name to Guardion Health Sciences, LLC filed in California | |
| 3.2 | Articles of Conversion; Delaware and California | |
| 3.3 | Articles of Incorporation in Delaware and amendment thereto | |
| 3.4 | Bylaws | |
| 4.1 | May 1, 2015 Promissory Note Purchase Agreement | |
| 4.2 | May 1, 2015 Promissory Note | |
| 4.3 | November 30, 2015 Amendment to May 1, 2015 Promissory Note | |
| 4.4 | November 30, 2015 Promissory Note | |
| 4.5 | November 30, 2015 Warrant Agreement | |
| 5.1 | Opinion of Davidoff Hutcher & Citron LLP# | |
| 10.1 | Lease for 15150 Avenue of the Sciences, Suite 200, San Diego California and amendments thereto | |
| 10.2 | Form of Restricted Unit Purchase Agreement from Round 3 Funding in 2013 | |
| 10.3 | Form of Bridge Loan from September 30, 2015 - January 25, 2016 | |
| 10.4 | Form of Indemnification Agreement | |
| 23.1 | Consent of Davidoff Hutcher & Citron, LLP (included in Exhibit 5.1)# | |
| 23.2 | Consent of Weinberg & Co. LA |
# to be filed with an amendment to this registration statement
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;
(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.
| II - 2 |
(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
(5) That, for the purpose of determining any liability under the Securities Act of 1933 to any purchaser in the initial distribution of the securities: The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424 (§ 230.424 of this chapter);
(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
(6) (i) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(ii) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(7) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized on the 11th day of February, 2016.
| GUARDION HEALTH SCIENCES, INC. | |||
| By: | /s/ Michael Favish | ||
| Name: | Michael Favish | ||
| Title: | Chief Executive Officer | ||
POWER OF ATTORNEY
We, the undersigned officers and directors of GUARDION HEALTH SCIENCES, INC., hereby severally constitute and appoint Michael Favish and Vincent Roth, and each of them (with full power to each of them to act alone), our true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for us and in our stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and all documents relating thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them full power and authority to do and perform each and every act and thing necessary or advisable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue thereof.
WITNESS our hands and common seal on the dates set forth below.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Michael Favish | CEO, President, and | February 11, 2016 | ||
| Michael Favish | Chairman of the Board | |||
|
(Principal Executive Officer) (Principal Accounting and Financial Officer)
|
||||
| /s/ Robert N. Weingarten | Director | February 11, 2016 | ||
| Robert N. Weingarten | ||||
| /s/ Mark Goldstone | ||||
| Mark Goldstone | Executive Vice President of Marketing and | February 11, 2016 | ||
| Director |
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