---

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2016

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to            

 

Commission File Number 333-167380

 

PFO GLOBAL, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Nevada		65-0434332
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

14401 Beltwood Parkway, Suite 115, Dallas, TX 75244

(972) 573-6135 

(Address including zip code, and telephone number, including area code, of principal executive offices)

 

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days*.    Yes   ☐    No   ☒

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No   ☐

 

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer	☐	Accelerated Filer	☒
Non-Accelerated Filer	☐	Smaller reporting company	☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒

 

As of August 1, 2016 there were 20,917,506 shares of the registrant's common stock, par value $0.0001 per share, outstanding, including preferred stock convertible into common stock on an as is converted basis. 

 

 * The registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, but is not required to file such reports under such sections.

 

---

---

 

 

TABLE OF CONTENTS

 

		Page
	PART I — FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	33
Item 4.	Controls and Procedures	34
	PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3.	Defaults Upon Securities	48
Item 4.	Mine Safety Disclosure	48
Item 5.	Other Information	48
Item 6.	Exhibits	49
SIGNATURES

  

 

PART I

 

Item 1.      Condensed Consolidated Financial Statements 

 

PFO Global, inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

see accompanying notes to unaudited interim Condensed Consolidated Financial Statements

 

 

PFO GLOBAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

(Unaudited)

 

 

see accompanying notes to unaudited interim Condensed Consolidated Financial Statements

 

  

PFO GLOBAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(Unaudited)

FOR THE THREE MONTHS ENDED MARCH 31, 2016

 

 

see accompanying notes to unaudited interim Condensed Consolidated Financial Statements

  

 

PFO GLOBAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

 

 

see accompanying notes to unaudited interim Condensed Consolidated Financial Statements

  

  

PFO GLOBAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

 

 

 

 

 

 

  

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The information set forth below should be read in conjunction with our condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Unless otherwise stated, references in this Quarterly Report on Form 10-Q to “us,” “we,” “our,” or our “Company” refer to PFO Global, Inc. and its subsidiaries.

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q (including the section entitled Management’s Discussion and Analysis of Financial Condition and Results of Operations) contains “forward-looking statements” regarding our business, financial condition, results of operations and prospects. All statements other than statements of historical fact contained herein, including statements regarding our business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits from acquisitions to be made by us, or projections involving anticipated revenues, earnings or other aspects of our operating results, are forward-looking statements. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” “assume,” “can,” “could,” “forecast,” “guide,” “may,” “project,” “target,” “would” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this Quarterly Report on Form 10-Q. Additionally, statements concerning future matters are forward-looking statements.

 

Although forward-looking statements in this Quarterly Report on Form 10-Q reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to these differences include those set forth under “Risk Factors” in Part II, Item 1.A of this Quarterly Report on Form 10-Q, as well as those discussed elsewhere in this Quarterly Report on Form 10-Q.

 

Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Quarterly Report on Form 10-Q. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this Quarterly Report on Form 10-Q, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

 

Overview

 

We are an innovative manufacturer and commercial provider of advanced prescription lenses, finished eyewear and vision technologies targeted towards the global optometrists’ marketplace. Our uniquely interactive manufacturing, fulfillment and proprietary online ordering systems combine with our eyewear lens product lines, are intended to meet the needs of a broad array of eyewear markets, from the offices of independent eye care professional to U.S. healthcare entitlement programs, such as Medicaid and Medicare.

 

Headquartered in Dallas, Texas, we provide eyewear and prescription lenses to eye care professionals and prescription laboratories. We have developed proprietary cloud based software and electronic devices to streamline logistics and reduce costs for our customers. Additionally, we offer a high-resolution polycarbonate lens that we believe has lower distortion than competing lenses. We believe that the combination of high quality lenses at low price points combined with our proprietary software and electronic devices enable independent eye care professionals to compete more effectively with large retail chains in the eyewear industry. Further, we believe that our low price points enable us to participate in the United States Medicaid and Medicare programs, as well as insurance programs mandated by the Patient Protection and Affordable Care Act which requires pediatric vision coverage.

 

We have losses from inception and have an accumulated deficit of $35.18 million as of March 31, 2016. Until we are able to generate revenues that result in positive margins from the sale of eyewear and prescription lenses that exceed operating costs, profitable operations will not be attained. We will have to continue funding future cash needs through financing activities. In the event that we choose or need to raise additional capital, we may be required to do so in such a manner that will result in further dilution of an investor’s ownership and voting interest. Also, any new securities may have rights, preferences or privileges senior to those of our current common stockholders. Furthermore, sales of substantial amounts of our common stock in the public market could have an adverse effect upon the market price of our common stock and make it more difficult for us to sell equity securities in the future and at prices we deem appropriate.

 

The market price of our common stock is volatile because we have a very small public float and a limited trading market. Future announcements concerning our major customers or competitors, the results of product testing, technological innovations or commercial products, government rules and regulations, developments concerning proprietary rights, and litigation may have a significant impact on the market price of the shares of our common stock.

 

 

Summary of Recent Developments

 

Completion of Merger

 

On June 30, 2015 (the “Effective Date”), Pro Fit Optix Holding Company, LLC (“Holding”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with PFO Global, Inc., formerly Energy Telecom, Inc. (the “Company”), and PFO Acquisition Corp., a wholly-owned subsidiary of the Company (“Merger Sub”). Pursuant to the Merger Agreement, on the Effective Date, the Company completed the acquisition of Holding by means of a merger of Merger Sub with and into Holding, such that Holding became a wholly-owned subsidiary of the Company (the “Merger”). Immediately following the Merger, the former PFO Global, Inc. equity holders owned approximately 8% of the outstanding shares of the Company’s common stock.

 

For accounting purposes, the Merger was recognized in accordance with ASC 805-40, Reverse Acquisitions. Accordingly, PFO Global, Inc. has been recognized as the accounting acquiree in the Merger, with Holding being the accounting acquirer. As such, the historical financial statements of Holding will be treated as the historical financial statements of the combined company.

 

Debt Financing

 

Subsequent to the Merger, we have sold an aggregate of approximately $7.7 million in principal amount of an 8% original issue discount senior secured convertible debenture, and incurred debt issuance costs of $0.8 million. For further details on the senior secured convertible debenture, refer to Note 5 of the notes to the condensed consolidated financial statements.

 

Critical Accounting Estimates and Policies

 

In response to financial reporting release FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, from the Securities and Exchange Commission ("SEC"), we have selected our more subjective accounting estimation processes for purposes of explaining the methodology used in calculating the estimate, in addition to the inherent uncertainties pertaining to the estimate and the possible effects on our financial condition. The accounting estimates are discussed below and involve certain assumptions that if incorrect could have a material adverse impact on our results of operations and financial condition. See Note 2 to our condensed consolidated financial statements contained herein for further discussion regarding our critical accounting policies and estimates.

 

Our condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, which require management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenue and expenses, and the disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with our board of directors and our audit committee.

 

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. We believe that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition.

 

Recent Accounting Pronouncements

 

See Note 1 of the Notes to our condensed consolidated financial statements information about recent accounting pronouncements.

 

 

Results of Operations

 

Three months ended March 31, 2016 compared to three months ended March 31, 2015

 

The financial information presented in the tables below is comprised of the unaudited condensed consolidated financial information of the Company for the three months ended March 31, 2016 and 2015.

 

 

		Three months Ended March 31,
		2016				2015				% Change
Net sales		$	1,085,387			$	988,037				10	%
Cost of sales			575,299				526,918				9	%
Gross profit			510,088				461,119				11	%
			47	%			47	%
Operating expenses, depreciation and amortization			1,304,266				2,155,488				-39	%
Operating loss			(794,178	)			(1,694,369	)			-53	%
Other (income) / expense			(621,162	)			(869,565	)			-29	%
Net loss		$	(1,415,340	)		$	(2,563,934	)			-45	%

 

 

 

Net sales. Net sales was $1.1 million and $1.0 million for the three months ended March 31, 2016 and 2015, respectively. The 10% increase was due primarily to an increase in sales of prescription lenses and complete eyewear partially offset by a decrease in safety kiosk software development.

 

Cost of Sales. Cost of sales was $0.58 million and $0.53 million for the three months ended March 31, 2016 and 2015, respectively. The increase was primarily due to increased volume of prescription lenses and complete eyewear, offset by a reduction in eyewear frame kit samples and other costs.

 

Gross Profit. Gross profit was $0.51 million and $0.46 million for the three months ended March 31, 2016 and 2015, respectively. The increase was due primarily to increased sales and a reduction in eyewear frame kit samples.

 

Operating Expenses. Operating expenses, exclusive of cost of sales, were $1.30 million and $2.16 million for the three months ended March 31, 2016 and 2015, respectively. This decrease was due primarily to a $0.63 million decrease in personnel costs, and a $0.26 million decrease in selling, legal, general and administrative expenses, partially offset by $0.06 million increase in bad debt expenses. These changes are illustrated in the table below.

 

		Three months Ended March 31,
		2016				2015				% Change
Personnel costs		$	474,735			$	1,103,394				-57	%
General and administrative			429,680				626,633				-31	%
Legal and professional			233,133				198,204				18	%
Sales and marketing			55,361				152,725				-64	%
Research and development			-				4,333				-100	%
Depreciation and amortization			54,287				68,156				-20	%
Bad debt expense			57,069				2,044				2692	%
Total operating expenses		$	1,304,266			$	2,155,488				-39	%

 

 

Other Income. Other Income was $0.62 million and $0.87 million for the three months ended March 31, 2016 and 2015, respectively. This decrease is due primarily to a $0.24 million decrease in the change in the fair value of derivative instruments and a $0.03 million increase in related parties interest expense, excluding non-related parties interest expense, amortization of debt discount and debt issuance costs, offset by a $0.4 million decrease in non-related parties interest expense, amortization of debt discount and debt issuance costs.

 

  

Liquidity and Capital Resources

 

The following table sets forth the major sources and uses of cash for each of the periods set forth below:

 

		Three Months Ended March 31,
		2016				2015
Cash and cash equivalents		$	25,807			$	48,040
Net cash used in operating activities			(960,722	)			(1,275,525	)
Net cash used in investing activities			-				-
Net cash provided by financing activities			960,279				1,248,029
Net increase in cash and cash equivalents		$	(443	)		$	(27,496	)

 

Historically, we have financed our operations primarily through private placements of our equity and borrowings under various debt instruments. For the three months ended March 31, 2016, we used $0.9 million for operating activities and ended the period with $25,807 in cash and cash equivalents. As of March 31, 2016, we had a working capital deficit of approximately $15.5 million. We currently use approximately $643,000 per month for continuing operations, which includes general operating expenses (office lease, utilities, salary and insurance), promotion and marketing (travel, entertainment, meals and website development), prototype development (parts, engineering and testing), and professional services (accounting, legal, professional and state fees and intellectual property fees). We expect this rate to remain relatively consistent for the next twelve months.

 

We believe that we have the ability to raise additional capital that will be sufficient to meet our anticipated cash needs for at least the next 12 months, although there are no assurances that we will be able to raise the capital on terms acceptable to us or at all. The Company has raised approximately $1.5 million, net of debt discounts, through the issuance of convertible debentures subsequent to March 31, 2016. If we are unable to raise additional capital, our business, operating results, and financial condition would be materially adversely affected. These factors raise substantial doubt about our ability to continue as a going concern. For information regarding our ability to continue as a going concern, please refer to Note 2 to our condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q.

 

Operating Activities

 

For the three months ended March 31, 2016, operating activities used $0.96 million in cash as a result of (a) a net loss of $1.42 million, adjusted by non-cash items such as amortization of debt discount and debt issuance costs of $0.63 million, change in the fair value of derivative instruments of $(0.5) million, shares issued in exchange for compensation and services of $0.02 million, accrual of interest due to related parties of $0.08 million, depreciation and amortization of $0.54 million and provision for doubtful accounts of $0.05 million and (b) a decrease in working capital of $0.3 million.

 

For the three months ended March 31, 2015, operating activities used $1.27 million in cash as a result of (a) a net loss of $2.5 million, adjusted by non-cash items such as amortization of debt discount and debt issuance costs of $1.2 million, change in the fair value of derivative instruments of $(0.8) million, accrual of interest due to related parties of $0.07 million, depreciation and amortization of $0.07 million, and (b) an increase in working capital of $0.7 million.

 

Investing Activities

 

For the three months ended March 31, 2016 and March 31, 2015 respectively, we did not use any cash for investing activities.

  

Financing Activities

 

Our financing activities for the three months ended March 31, 2016, resulted in net cash of $0.96 million related to net proceeds of $1 million from issuance of various notes payable, partially offset by $0.04 in loan repayments and debt issue costs.

 

Our financing activities for the three months ended March 31, 2015, resulted in net cash of $1.25 million related to net proceeds of $1.47 million from issuance of various notes payable, partially offset by $0.2 million of loan repayments and debt issuance costs.

 

 

Debt Obligations

 

As of March 31, 2016, the principal amount due under the Company’s promissory notes was $20.6 million, before debt discounts and debt issuance costs of $2.6 million. For information regarding such notes, please refer to Notes 5 and 7 to our condensed consolidated financial statements. The following table provides information regarding annual required repayments under the promissory notes, as of March 31, 2016.

  

 

2016		$	9,591,660
2017			5,522,612
2018			5,510,134
		$	20,624,406

 

As of March 31, 2016, the principal amount due under the Company’s related party notes was $4.7 million. For information regarding such notes, please refer to Note 7 to our condensed consolidated financial statements contained in this Report. The following table provides information regarding annual required repayments under the related party notes as of March 31, 2016:

  

2016		$	-
2017			2,339,699
2018			2,339,698
Total		$	4,679,397

 

As of March 31, 2016, the amount outstanding under the Company’s royalty obligation agreement was $1.875 million. For information regarding such notes, please refer to Note 6 to our condensed consolidated financial statements contained in this Report.

 

Off-Balance Sheet Arrangements

 

We do not engage in any off-balance sheet financing activities, nor do we have any interest in entities referred to as variable interest entities.

 

Impact of Inflation

 

We believe that inflation has not had a material impact on our results of operations for the three months ended March 31, 2016 and 2015. We cannot assure you that future inflation will not have an adverse impact on our operating results and financial condition.

 

 

Item 3.      Quantitative and Qualitative Disclosures about Market Risk 

 

Market risk represents the risk of loss that may result from the change in value of financial instruments due to fluctuations in market prices. Market risk is inherent in all financial instruments. Market risk may be exacerbated in times of trading illiquidity when market participants refrain from transacting in normal quantities and/or at normal bid-offer spreads. Our exposure to market risk is directly related to derivatives, debt and equity linked instruments related to our financing activities.

 

Our assets and liabilities are overwhelmingly denominated in U.S. dollars. We do not use foreign currency contracts or other derivative instruments to manage changes in currency rates. We do not now, nor do we plan to, use derivative financial instruments for speculative or trading purposes. However, these circumstances might change.    

 

We do not hold or issue derivatives, derivative commodity instruments or other financial instruments for speculative trading purposes. Further, we do not believe our cash equivalents have significant risk of default or illiquidity. Although we believe our cash equivalents and investment securities do not contain excessive risk, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in market value. All of our cash equivalents are recorded at fair value.

 

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we might not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

 

 

Item 4.      Controls and Procedures 

 

Evaluation of Disclosure Controls and Procedures

 

Our Principal Executive Officer and Principal Financial Officer conducted an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that as of March 31, 2016, in light of the material weaknesses described below, our disclosure controls and procedures were not effective as of March 31, 2016. See material weaknesses discussed below in Management’s Report on Internal Control over Financial Reporting.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013 as of December 31, 2015.

  

Our internal control over financial reporting is a process designed under the supervision of our Principal Executive Officer and Principal Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with GAAP. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

 

 

Our Company did not maintain, in all material respects, effective internal control over financial reporting as of March 31, 2016, because we continued to have the following material weaknesses:

 

•

Did not maintain sufficient and competent personnel with an appropriate level of experience and training in the application of US GAAP and SEC rules and regulations

•

Did not have sufficient segregation of duties or compensating controls in the accounting and finance function due to limited personnel

•

Did not maintain adequately designed internal controls in order to prevent or detect and correct material misstatements to the financial statements, including internal controls related to complex or nonroutine transactions

•

Lacked documentation to support occurrences of monitoring processes and approval procedures, in order to demonstrate that internal controls were operating effectively

 

Management believes that despite our material weaknesses, our consolidated financial statements for the three months ended March 31, 2016 are fairly stated, in all material respects, in accordance with GAAP.

 

 

Changes in Internal Control over Financial Reporting

 

Other than as described above, there were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act, that occurred during the quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on the Effectiveness of Controls

 

Management, including our CEO and CFO, does not expect that disclosure controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls.

 

 

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

 

PART II

 

Item 1.      Legal Proceedings 

 

From time to time, we have been and may become involved in legal proceedings arising in the ordinary course of our business. Although the results of litigation and claims cannot be predicted with certainty, except as described below we are not presently involved in any legal proceeding in which the outcome, if determined adversely to us, would be expected to have a material adverse effect on our business, operating results, or financial condition. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

 

VSP Labs, Inc.

 

On April 20, 2012, Pro Fit Optix, Inc. (“Optix”) sold software technology to VSP Labs, Inc. (“VSP”) pursuant to a Technology Transfer and Development Agreement (“TTDA”) for $6,000,000 payable in bi-annual installments of $1,000,000 through October 15, 2014 net of credits and incentives as defined in the TTDA. In accordance with the TTDA, Optix was required to perform additional production and customization of the software technology over the agreement term. The software technology required significant customization and development on the effective date and in accordance with ASC 605-35, the Company has accounted for the TTDA under the completed contract method.

 

On October 25, 2013, VSP filed a lawsuit against Optix in the Superior Court of California, County of Sacramento – Unlimited Civil Division. The lawsuit alleges, among other things, that Optix has failed to provide certain services under the TTDA between the parties which allegedly triggered the right of VSP to perform such services on its own or to engage third parties to render such services. The lawsuit seeks declaratory relief to establish that VSP was entitled to perform the services that the Company allegedly failed to perform and also seeks to establish that VSP is entitled to deduct the fees and expenses associated with the performance of such services from the payments that VSP is otherwise required to make under the terms of the TTDA, in addition to recovery of attorneys’ fees and costs associated with the lawsuit. On December 23, 2014, the Company filed a cross complaint against VSP seeking damages based on breach of contract and unfair business practices. On June 17, 2015 the Company and VSP participated in a mediation to resolve the case. A trial date of October 31, 2016 has been set by the court.  The Company plans to vigorously protest VSP’s claim and continue to pursue the uncollected portions under the TTDA as well as damages under its cross complaint. The Company is unable to express an opinion as to the likely outcome of this claim. An unfavorable outcome could have a materially adverse effect on the Company’s financial position and results of operations.

 

Deferred revenue, which is comprised of payments received under the TTDA and prepaid orders of frame inventories were approximately $2,582,000 as of March 31, 2016 and December 31, 2015. Deferred costs, which are comprised of costs incurred related to the TTDA, were approximately $294,000 as of March 31, 2016 and December 31, 2015.

 

During the three months ended March 31, 2016 and 2015, the Company recorded no revenue relating to the VSP Supply Agreement.

 

Claim Investment Agreement

 

On March 4, 2016, Pro Fit Optix, Inc., a subsidiary of the Company, and Hillair Capital Management LLC (“Hillair”) entered into a claim investment agreement (the “Claim Investment Agreement”). Pursuant to the Claim Investment Agreement, Optix may from time to time submit to Hillair directions to pay, or fund in advance, the legal fees and expenses of Optix’s attorney of record in that certain lawsuit captioned VSP Labs, Inc. v. Pro Fit Optix, Inc., pending in the Sacramento Superior Court, Sacramento County, California, Action No. 34-2013-00153788 (the “Lawsuit”), to which Optix is a party, and Hillair will cause Hillair Capital Investment L.P. (“HCI”) to pay such legal fees and expenses on Optix’s behalf. Each payment made pursuant to the Claims Investment Agreement shall constitute an “Investment”, and the sum of all Investments made shall be referred to as the “Investment Amount”.

 

 

In consideration for the Investment, if a final disposition or settlement of any claim in connection with the Lawsuit (“Claims”) results in a Recovery (as defined in the Claim Investment Agreement) to Optix, Optix shall first pay to HCI 100% of any Recovery until HCI has received an amount equal to the Investment Amount, and second, 50% of the amount of any Recovery in excess of the Investment Amount (collectively, the “Hillair Return”). In the event payment is not made to HCI in accordance with the Claims Investment Agreement, Optix shall pay to HCI interest of 24% per annum on any unpaid balances until paid in full.

 

The Investment is being made on a non-recourse basis to Optix; however, Pro Fit Optix has granted to HCI a security interest in the amount of the Hillair Return against Optix’s portion of any Recovery. In addition, the non-recourse limitation shall not apply at any time an Event of Default (as defined in the Claims Investment Agreement) exists or has occurred and is continuing.

 

If for any reason Hillair does not fulfill its obligation to pay legal fees or expenses, Optix’s sole and exclusive remedy is termination of the Claim Investment Agreement. No termination of the Claims Investment Agreement shall relieve Optix of its obligations thereunder until the Hillair Return has been fully and finally discharged and paid. In addition, pursuant to the Claims Investment Agreement, Hillair has the right, in its sole and absolute discretion, to cease and revoke its funding obligations in the event of any unfavorable procedural or substantive outcome occurred in furtherance of the Claims, including but not limited to motions, petitions, verdicts, judgments, orders or appeals granted against Optix.

 

Optix granted Hillair an exclusive right of first refusal for any additional funding that Optix may desire in connection with the Claims. In addition, Optix agreed to limit all advances, including those already taken against the Claims, to a total of $250,000, and Optix may not receive funding in excess of such amount from any source other than HCI without Hillair’s express written consent.

 

The Claim Investment Agreement contains customary representations, warranties and covenants of Optix and Hillair, and each party agreed to keep confidential and not use or disclose the confidential information of the other party.

 

For the three months ended March 31, 2016, Hillair incurred approximately $41,500 in legal fees that will be recovered from any future settlement proceeds.

 

 

Waud Capital Partners, L.L.C.

 

On May 22, 2014, Waud Capital Partners, L.L.C. (“Waud”) filed a breach of contract suit against Optix in the Circuit Court of Cook County, Illinois. In its complaint, Waud alleges that pursuant to the terms of the letter agreement between the parties, it is entitled to reimbursement of certain expenses in the amount of approximately $111,000 that Waud incurred in connection with its proposed investment in Optix, in addition to recovery of attorneys’ fees and costs associated with the lawsuit. In May 2015, the lawsuit was settled for $120,000 to be paid via twelve monthly payments beginning June 1, 2015, and such cost, net of payments, is included in accounts payable and accrued liabilities on the Company’s condensed consolidated balance sheets as of March 31, 2016 and December 31, 2015, respectively. As of March 31, 2016, the outstanding balance was $70,000. The Company is currently in default under this agreement and Waud has instituted legal proceedings to obtain a judgement.

  

Denton-Harvest

 

Rudolf Suter, the Company’s former Chief Executive Officer, is the defendant in a civil action in the United States District Court for the Northern District of Texas, Dallas Division. The plaintiffs, Peter Denton and Harvest Investors, L.P., since January 27, 2012, have filed garnishments related to payments from Optix to Mr. Suter on several occasions. The plaintiffs have also alleged fraudulent conveyances of funds from Mr. Suter to his wife through a “conspiracy” with the Company. Plaintiffs seek approximately $676,000 plus costs from the Company, Mr. Suter and his wife. The Company plans to protest the plaintiffs’ claims. The Company is unable to express an opinion as to the likely outcome of this claim. A trial date of June 5, 2017 has been set by the court.  

 

Item 1A.   Risk Factors 

 

In addition to other information in this Quarterly Report on Form 10-Q, you should carefully consider the following risk factors. The risks described below are not the only ones facing us. Our business is also subject to the risks that affect many other companies, such as competition, technological obsolescence, labor relations, general economic conditions and geopolitical changes. Additional risks not currently known to us or that we currently believe are immaterial also may impair our business operations and our liquidity. If any of the following risks, either alone or taken together, or other risks not presently known to us or that we currently believe to not be significant, develop into actual events, then our business, financial condition, results of operations or prospects could be materially adversely affected. If that happens, the market price of our common stock could decline, and stockholders may lose all or part of their investment.

 

 

We have not been able, and may continue to be unable, to timely file periodic reports with the SEC.

 

We did not file our annual report on Form 10-K for the year ended December 31, 2015, and our quarterly report on Form 10-Q for the quarter ended March 31, 2016 on a timely basis. If we are not able to file any future periodic reports in the time specified by the Securities Exchange Act of 1934, stockholders and potential investors will not have current public information about us, which will likely have a negative effect on our obtaining future capital. Failure to make timely filings also impairs our ability to conduct certain kinds of public offerings on short form registration statements that provide more efficient automatic forward incorporation of future SEC filings. More broadly, our inability to maintain current public information pursuant to SEC reporting rules will have a negative impact on how we are viewed by our shareholders, potential financing sources, the investing public and strategic and commercial parties with whom we do business. Failure to maintain current public information is in circumvention of certain contractual obligations of the Company and could result in an event of default under certain of our indebtedness. Additionally, if our SEC filing delinquencies are prolonged, the SEC could institute administrative proceedings to revoke our registration under the Securities Exchange Act and suspend the trading of our common stock. Our inability to timely file periodic reports now and in the future could materially and adversely affect our continuing business and operations, as well as our future business growth and financial condition

 

The report of our independent registered public accounting firm on our 2015 and 2014 consolidated financial statements contains an explanatory paragraph regarding going concern, and we will need additional financing to execute our business plan, to fund our operations and to continue as a going concern.

 

As a result of our recurring net losses, our independent registered public accounting firm has included an explanatory paragraph in its report on our financial statements for the years ended December 31, 2015 and 2014, expressing substantial doubt as to our ability to continue as a going concern. The inclusion of a going concern explanatory paragraph in the report of our independent registered public accounting firm may make it more difficult for us to secure additional financing or enter into strategic relationship on terms acceptable to us, if at all, and may materially and adversely affect the terms of any financing that we might obtain.

 

We have limited cash on hand and we continue to have significant net losses on a monthly basis.

 

We have limited cash available and anticipate running out of cash on hand prior to the end of June 2016. If we are unable to close on new financing, we may not be able to continue our operations, in which case the value of our business enterprise would be materially and adversely affected.

 

Our sales growth is currently lower than we projected, which has increased our need for additional financing.

 

Our sales growth is currently lower than forecasted, thereby reducing the anticipated cash flow and increasing the requirement for additional financing. If our sales do not increase, our needs for new financing will increase and we will run out of cash on hand sooner than currently projected. If our sales do increase, such increase may not be adequate to offset our negative cash flow. Inadequate sales growth could result in material adverse consequences to our ability to continue to operate.

 

We have a history of annual net losses which may continue and thus may negatively affect our ability to achieve our business objectives.

 

For the three months ended March 31, 2016, we had revenue of $1 million and a net loss of $1.4 million. At March 31, 2016, we had a stockholders’ deficit of $25 million. For the year ended December 31, 2015, we had revenue of $3.4 million and a net loss of $15.7 million. At December 31, 2015, we had a stockholders’ deficit of $24.5 million.

 

There can be no assurance that our future operations will result in net income. Our failure to increase our revenues or improve our gross margins will harm our business. We may not be able to sustain or increase profitability in the future. If our revenues grow more slowly than we anticipate, our gross margins fail to improve, or our operating expenses exceed our expectations, our operating results will suffer. If we are unable to sell our products and services at acceptable prices relative to our costs, or if we fail to develop and introduce on a timely basis new products and services from which we can derive additional revenues, our financial results will suffer.

 

 

If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements could be impaired, which could adversely affect our business, financial condition or results of operations.

 

As a voluntary filer, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. In addition, we are required to furnish a report by management on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We are in the process of designing, implementing and testing the internal control over financial reporting required to comply with this obligation, which process is time consuming, costly and complicated. In addition, our independent registered public accounting firm is required to attest to the effectiveness of our internal control over financial reporting. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting when required, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our notes could be negatively affected, and we could become subject to investigations by the Securities and Exchange Commission, or the SEC, or other regulatory authorities, which could require additional financial and management resources.

 

 

We evaluated deficiencies identified in connection with the preparation of our financial statements for the quarter ended March 31, 2016 in accordance with the framework developed by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Our management concluded that we did not maintain, in all material respects, effective internal control over financial reporting as of March 31, 2016, because we:

 

	•	Did not maintain sufficient and competent personnel with an appropriate level of experience and training in the application of US GAAP and SEC rules and regulations.

	•	Did not have sufficient segregation of duties or compensating controls in the accounting and finance function due to limited personnel.

	•	Did not maintain adequately designed internal controls in order to prevent or detect and correct material misstatements to the financial statements, including internal controls related to complex or nonroutine transactions.

•

Lacked documentation to support occurrences of monitoring processes and approval procedures, in order to demonstrate that internal controls were operating effectively.

 

Accordingly, we concluded that our internal controls over financial reporting were not effective as of March 31, 2016.

 

Our actions to improve internal financial accounting controls may not be sufficient to mitigate these material weaknesses. There may be additional material weaknesses in our control environment now or in the future, requiring corrective action to improve our financial and accounting controls. In addition, implementing any appropriate changes to our internal controls may entail substantial costs in order to modify our existing accounting and information technology systems, may take a significant period of time to complete and may distract our officers, directors and employees from the operation of our business. Any failure to maintain adequate internal control over financial reporting, could increase our operating costs and could materially impair our ability to operate our business.

 

 

We will need to raise additional capital, which may not be available on favorable terms, if at all, and which may cause dilution to stockholders, restrict our operations or adversely affect our ability to operate our business.

 

We will need to raise additional funds through debt or equity financing or through other means. We may be unable to obtain additional financing on favorable terms, or at all, and any additional financings could result in additional dilution to our then existing stockholders or restrict our operations or adversely affect our ability to operate our business. If we are unable to obtain needed financing on acceptable terms, we may not be able to implement our business plan, which will have a material adverse effect on our business, financial condition and results of operations. If we are not able to meet our business objectives, our equity value will decrease and investors may lose some or all of their investment. If we raise funds by issuing equity securities, the percentage ownership of our then stockholders will be reduced. If we raise funds by issuing debt, the ability of our stockholders to receive earnings or distributions may be adversely affected and we may be subject to additional covenants and restrictions.

 

We are dependent on a limited number of suppliers which subjects our business and results of operations to risks of supplier business interruptions.

 

We currently purchase significant amounts of several key products and product components from a limited number of suppliers and anticipate that we will do so for future products as well. Any delays in delivery of or shortages in those or other products and components could interrupt and delay manufacturing of our products and result in the cancellation of orders for our products. Any or all of these suppliers could discontinue the manufacture or supply of these products and components at any time. Due to certain business considerations, we may not be able to identify and integrate alternative sources of supply in a timely fashion or at all. Any transition to alternate suppliers may result in production delays and increased costs and may limit our ability to deliver products to our customers. Furthermore, if we are unable to identify alternative sources of supply, we would have to modify our products to use substitute components, which may cause delays in shipments, increased design and manufacturing costs and increased prices for our products. If we are unable to obtain additional financing, we may be unable to pay our suppliers for product and therefore may be unable to continue to operate our business.

 

 

If our independent contract manufacturers fail to timely deliver to us sufficient quantities of some of our products and components in a timely manner, our operations may be harmed.

 

Our reliance on independent contract manufacturers to manufacture most of our products and components involves several risks, including:

 

	•	inadequate capacity of our manufacturer’s facilities;

	•	interruptions in access to certain process technologies; and

•

reduced control over product availability, quality, delivery schedules, manufacturing yields and costs.

 

Shortages of raw materials, production capacity constraints or delays by our contract manufacturers could negatively affect our ability to meet our production obligations and result in increased prices for affected parts. Any such reduction, constraint or delay may result in delays in shipments of our products or increases in the prices of components, either of which could have a material adverse effect on our business. We do not have supply agreements with all of our current contract manufacturers and we often utilize individual purchase orders, which are subject to acceptance by the supplier. Failure to accept purchase orders could result in an inability to obtain adequate supply of our product or components in a timely manner or on commercially reasonable terms. An unanticipated loss of any of our contract manufacturers could cause delays in our ability to deliver our products while we identify and qualify a replacement manufacturer, which delays could negatively impact our revenues. If we are unable to obtain additional financing, we may be unable to pay our contract manufacturers and therefore may be unable to continue to operate our business.

 

We may be unable to successfully implement our business plan or accurately predict our future operating expenses, which could cause us to experience cash shortfalls in future periods.

 

In order to substantially grow our business, we will require additional funding. There can be no assurance that we will be able to raise any additional needed funds on acceptable terms or at all. The procurement of any such additional financing may result in the dilution of your ownership interest in us. Furthermore, our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies engaged in the development of a new business. Some of the specific risks associated with our business include our:

 

	•	need to manage our expanding operations;

	•	continuing need to raise additional capital; and

•

dependence upon and need to hire key personnel.

 

To address these risks, we must, among other things, respond to our competitors, attract, retain and motivate qualified personnel, and market and sell our lenses, eyewear and related products to eye care providers. We cannot guarantee that we will be successful in addressing any or all of these risks and the other risks described herein, or that we will generate significant revenues or achieve or sustain significant profitability. The failure to address one or more of these risks and successfully implement our strategy could have a material adverse effect on our financial condition or results of operations.

 

We have a significant amount of indebtedness. Our leverage and debt service obligations may adversely affect our financial condition, results of operations and business prospects, and we may have difficulty paying our debts as they become due.

 

As of March 31, 2016, we had approximately $20.6 million in principal amount of debt. Approximately $9.6 million of debt is current, $5.5 million principal amount of debt matures or can be put to us in 2017 and approximately $5.5 million principal amount of debt matures or can be put to us in 2018. We also had a net working capital deficit of approximately $15.5 million as of March 31, 2016. We have been unable to make interest payments on $6,580,000 in debt, under the Securities Purchase Agreement, due on April 1, 2016 and July 1, 2016 and principal payments due on July 1, 2016. We have also been unable to make $125,000 principal payment and outstanding royalty payments due on July 1, 2016 under our Royalty Obligation. The level of and terms and conditions governing our debt:

 

	●	require us to dedicate a substantial portion of future cash flow from operations to service our existing debt obligations and could limit our flexibility in planning for or reacting to changes in our business and the industry in which we operate;

	●	increase our vulnerability to economic downturns or adverse developments in our business;

●

limit our ability to access the capital markets to refinance our existing indebtedness, to raise capital on favorable terms or to obtain additional financing for working capital, capital expenditures, acquisitions, debt service requirements or execution of our business strategy or for other purposes;

---

	●	place restrictions on our ability to obtain additional financing, make investments, lease equipment, sell assets and engage in business combinations;

	●	place us at a competitive disadvantage relative to competitors with lower levels of indebtedness in relation to their overall size or that have less restrictive terms governing their indebtedness and, therefore, that may be able to take advantage of opportunities that our indebtedness prevents us from pursuing;

	●	limit management’s discretion in operating our business; and

●

Increase our cost of borrowing.

 

Any of the above listed factors could have a material adverse effect on our business, financial condition, cash flows and results of operations. Our ability to pay our expenses and fund our working capital needs and debt obligations will depend on our future performance, which will be affected by financial, business, economic, regulatory and other factors. We will not be able to control many of these factors, such as commodity prices, other economic conditions and governmental regulation. To the extent that the value of the collateral pledged under the existing debt declines, we may not be able to pledge additional collateral, and we cannot assure you that we will be able to maintain a sufficiently high valuation to maintain the full commitments. In addition, we cannot be certain that our cash flow will be sufficient to allow us to pay the principal and interest on our debt and meet our other obligations. If we are unable to service our indebtedness and other obligations, we may be required to restructure or refinance all or part of our existing debt, sell assets, reduce capital expenditures, borrow more money or raise equity. We may not be able to restructure or refinance our debt, reduce capital expenditures, sell assets, borrow more money or raise equity on terms acceptable to us, if at all, or such alternative strategies may yield insufficient funds to make required payments on our indebtedness. In addition, our ability to comply with the financial and other restrictive covenants in our indebtedness is uncertain and will be affected by our future performance and events or circumstances beyond our control. Failure to comply with these covenants would result in an event of default under such indebtedness, the potential acceleration of our obligation to repay outstanding debt and the potential foreclosure on the collateral securing such debt. Any of the above risks could materially adversely affect our business, financial condition, cash flows and results of operations and could lead to a restructuring, which may include bankruptcy filing.

 

We have significant capital needs, and our ability to access the capital and credit markets to raise capital on favorable terms is limited by our debt level and industry conditions.

 

Disruptions in the capital and credit markets could limit our ability to access these markets or may significantly increase our cost to borrow. Our current financial situation could cause lenders to increase interest rates, enact tighter lending standards which we may not satisfy as a result of our debt level or otherwise, refuse to refinance existing debt around maturity on favorable terms or at all and may reduce or cease to provide funding to borrowers. Accordingly, even if we were able to access the capital markets, any attempt to do so could be more expensive or subject to significant delays. If we are unable to access the capital and credit markets on favorable terms or at all, it could materially adversely affect our business, financial condition, results of operations, cash flows and liquidity and our ability to repay or refinance our debt.

 

We may be unsuccessful in managing our growth, which could prevent us from becoming profitable.

 

We are planning for significant growth in the foreseeable future, although such growth may not be realized. If we are successful in developing our business plan, our anticipated future growth may place a significant strain on our managerial, financial, human and operational resources. Failure to manage this growth effectively could have a material adverse effect on our financial condition or results of operations. Part of our business strategy may be to acquire assets that will complement our existing business. We are unable to predict whether or when any such acquisitions will be completed. If we proceed with any such transaction, we may not effectively integrate the acquired assets into our existing operations. We also may seek to finance any such acquisition by debt financings or issuances of equity securities, and such financing may not be available on acceptable terms, if at all.

 

If we are unable to solve development challenges as they arise, our future prospects may be materially adversely affected.

 

We may experience delays or be unable to develop the processes, systems and technologies we utilize in our business. Our success will depend largely upon our ability to monitor rapidly emerging or changing technologies; a converging industry; and changing and emerging needs of existing and new customers. The process of internally researching and developing, launching, gaining acceptance and establishing profitability for a new product or service is inherently risky and costly. Unless we are able to verify and/or commercialize some or all of our technology, our future prospects, business and results of operations will be materially adversely affected.

 

 

If we cannot meet international product standards, we will be unable to distribute our products outside of the United States, which could cause our business to suffer.

 

Distribution of our products in countries other than the United States may be subject to regulation in those countries. Failure to satisfy these regulations would impact our ability to sell our products in these countries and could cause our business to suffer.

 

We are a smaller company competing against large, well-established companies that are fiercely competitive, and we may not be able to compete effectively.

 

We are a smaller company operating in a market currently dominated by much larger companies including Essilor, Hoya, Zeiss and Luxottica. The size and financial strength of these competitors may enable them to offer incentives such as large scale free demonstrations that we may not be able to offer. In addition, these large corporations have the ability to spend significantly more on research and development and may develop a technology superior to that employed by us. In addition, these corporations have large, established sales forces that are highly-experienced in fending off competing, superior technologies. This is especially true in the optical and eyewear industry, which is very risk averse and where long-standing trusted supplier relationships are common.

 

In order to effectively compete, we believe that we will need to successfully market our products and services and to anticipate and respond to various competitive factors affecting the relevant markets, such as the introduction of new products and services by our competitors, implementation of pricing strategies adopted by our competitors and changes in fee schedules, or other actions or pressures reducing payment schedules as a result of increased or additional competition, as well as general economic, political and social conditions. If we are unable to effectively compete, it could result in price reductions, lower revenues, under-utilization of the products and services we anticipate providing, reduced operating margins and loss of market share, any of which could have a material adverse effect on our business, financial condition, results of operations and cash flow.

 

If we fail to develop or market new products and adequately commercialize our existing products in development, we could lose market share to our competitors and our results of operations could suffer.

 

The market for our eyewear technology and products is characterized by rapid technological change, new product introductions, technological improvements, changes in medical requirements and evolving industry standards. To be successful, we must continue to develop and commercialize new products and to enhance versions of our existing products. Our products are technologically complex and require significant research, planning, design, development and testing before they may be marketed. This process can take a significant amount of time. In addition, product life cycles may be relatively short because competitors continually seek to develop more effective and less expensive versions of existing products in response to market demand. Our success in developing and commercializing new and enhanced versions of our products is affected by our ability to:

 

	•	recruit engineers;

	•	timely and accurately identify new market trends;

	•	accurately assess customer needs;

	•	adopt competitive pricing;

	•	timely manufacture and deliver products;

	•	accurately predict and control costs associated with the development, manufacturing and support of our products; and

•

anticipate and compete effectively with our competitors’ efforts.

 

Market acceptance of our eyewear and related products depends in part on our ability to demonstrate that our products are more efficient, meet performance requirements, are cost-effective and easier to use, as well as offer technological advantages. Additionally, we may experience design, manufacturing, marketing or other difficulties that could delay or prevent our development, introduction or marketing of new products or new versions of our existing products. As a result of such difficulties and delays, our development expenses may increase and, as a consequence, our results of operations could suffer.

 

Our lengthy sales cycle may increase our exposure to customer cancellations and other risks.

 

Our product sales cycle has been and is expected to continue to be lengthy and variable. We generally need to educate our potential customers about the use and benefits of our products, which can require the investment of significant time and resources. This lengthy sales cycle creates risks related to customer decisions to cancel or change product plans, which could result in the loss of anticipated sales. We may incur significant research and development, selling and general and administrative expenses as part of this process before we can generate the related revenues from any such customer.

 

 

Failure to establish, and perform to, appropriate quality standards to assure the highest level of quality in the design, manufacture and marketing of our products could adversely affect the results of our operations and adversely impact our reputation.

 

Manufacturing or design defects, unanticipated use of our products, or inadequate disclosure of risks relating to the use of our products can lead to injury or other adverse events. These events could lead to recalls or safety alerts relating to our products (either voluntary or required by governmental authorities) and could result, in certain cases, in the removal of a product from the market. Any recall could result in significant costs as well as negative publicity that could reduce demand for our products. In some circumstances, such adverse events could also cause delays in new product approvals.

 

Personal injuries relating to the use of our products can also result in product liability claims being brought against us. Damages assessed in connection with, and the costs of defending, any legal action could be substantial. Our insurance coverage may not be adequate to cover all or any part of the claims asserted against us. A successful claim brought against us that is in excess of, or excluded from, our insurance coverage could have a material adverse effect on our business and results of operations. In addition, litigation could have a material adverse effect on our business if it impacts our existing and potential customer relationships, creates adverse public relations, diverts management resources from the operation of the business, or hampers our ability to otherwise conduct our business.

 

Our business has certain risk factors that differ from the core optical lens businesses operated by our competitors, including an unproven business model, and may produce operational results that are less than anticipated and result in the loss of market share to our competitors.

 

We have an unproven business model and operate in the new and largely untested market for cross-border optical hardware manufacturing and distribution services. As such, we are subject to all of the business risks and uncertainties associated with any new business enterprise and may not be able to operate successfully. We have generated losses since inception. We anticipate that we will continue to generate losses for the foreseeable future and will need additional funding to support the development of our business model. Although we believe that there will be demand for our services, no assurances can be made that we will ever generate positive cash flows or that we will produce the results anticipated in a timely fashion or ever.

 

Our future success and profitability depends on the continued services of members of our management and our ability to hire additional skilled personnel, as necessary.

 

The loss of key management personnel or the inability to attract and retain experienced and qualified employees at our laboratories and research centers could adversely affect our business. Our success is dependent in part on the efforts of key members of our management team. Our future success also depends on our continuing ability to attract, hire, efficiently train, and retain skilled research professionals, marketing personnel, as well as other qualified technical and managerial personnel. In the future, if competition for the services of these professionals increases, we may not be able to continue to attract and retain individuals in our market. Furthermore, if we had to replace any of our key employees, we would not be able to replace the significant amount of knowledge that such individual has about our operations or products. In addition, we would be forced to expend significant time and money in the pursuit of replacements, which would result in both a delay in the implementation of our business plan and the diversion of working capital. Our net revenues and earnings could be adversely affected if a significant number of professionals terminate their relationship with us or become unable or unwilling to continue their employment.

 

Our company and our management team have exposure for potential litigation that may have an impact on our financial performance.

 

We have exposure for potential litigation that may have an impact on our financial performance and we make no assurances regarding any potential incidences or outcomes of any liability lawsuits and litigation. We have no assurance that any indemnification or insurance we have available to us will be adequate to fully protect our interests.

 

Our company has been the subject of litigation, which could adversely affect our business.

 

We could be adversely affected by future legal actions that could subject us to prolonged litigation that could adversely affect our business, results of operations and financial condition. In addition, litigation matters confronting members of the management team could adversely affect our human resources. See “Item 3 – Legal Proceedings” for additional information.

 

Our resources may not be sufficient to manage our expected growth; failure to manage our potential growth properly would be detrimental to our business.

 

We may fail to adequately manage our anticipated future growth. Any growth in our operations will place a significant strain on our administrative, financial and operational resources, and increase demands on our management and on our operational and administrative systems, controls and other resources. We cannot assure you that our existing personnel, systems, procedures or controls will be adequate to support our operations in the future or that we will be able to successfully implement appropriate measures consistent with our growth strategy. As part of this growth, we may have to implement new operational and financial systems, procedures and controls to expand, train and manage our employee base, and maintain close coordination among our technical, accounting, finance, marketing, and sales staff. We cannot guarantee that we will be able to do so, or that if we are able to do so, we will be able to effectively integrate them into our existing staff and systems. If we are unable to manage growth effectively, such as if new employees are unable to achieve performance levels, our business, operating results and financial condition could be materially and adversely affected.

 

 

Risks Related to Our Industry

 

We face the risk of product liability or other claims and may not be able to obtain sufficient insurance coverage, if at all, to cover such claims.

 

Our business exposes us to the risk of product liability claims that is inherent in the testing, manufacturing and marketing of any product. We may be subject to product liability claims if our products cause, or merely appear to have caused, an injury or death. Claims may be made by patients, consumers or healthcare providers. Although we have product liability insurance that we believe is appropriate for our current level of operations, this insurance is subject to deductibles and coverage limitations. Our current product liability insurance may not continue to be available to us on acceptable terms, or at all, and, if available, the coverages may not be adequate to protect us against any future product liability claims. If we are unable to obtain insurance at acceptable cost or on acceptable terms with adequate coverage or otherwise protect against potential product liability claims, we could be exposed to significant financial and other liabilities, which may materially harm our business. A product liability claim, product recall or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could have a material adverse effect on our business, operating results and prospects. We may be subject to claims even if the apparent injury is due to the actions of others. For example, we rely on the expertise of eye doctors such as optometrists, ophthalmologists and opticians, nurses and other associated medical personnel in connection with manufacturing of our products. Injuries that are caused by the activities of our suppliers may also be the basis for a claim against us. These liabilities could prevent, delay or otherwise adversely interfere with our product commercialization efforts, as well as result in judgments, fines, damages and other financial liabilities to us which would have a material adverse effect on our business, operating results and prospects. Defending a suit, regardless of merit, could be costly, could divert management’s attention from our business and might result in adverse publicity, which could result in reduced acceptance of our products in the market. In addition to adversely impacting our business and prospects, such adverse publicity could materially adversely affect the value of our stock.

 

Our business, and that of physicians using our products, is subject to significant governmental healthcare regulation and noncompliance with such regulations, or substantial changes in these regulations, could cause our financial condition to suffer.

 

The healthcare industry is heavily regulated and changes in laws and regulations can be significant. Both us and the physicians who use our products must maintain and safeguard the confidentiality of all patient records, charts and other information generated in connection with the professional medical services provided by such physician, in accordance with federal and state confidentiality laws and regulations, the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) and the regulations promulgated thereunder. In addition, the development, marketing and use of our products is subject to various federal and state regulations, including laws and regulations prohibiting the practice of medicine by non-physicians, prohibitions concerning the kickback, rebate or division of fees between physicians and non-physicians, the manner in which a prospective user of our products may be solicited, the receipt or offering of remuneration as an inducement to refer patients, and self-referral for any person in connection with the furnishings of goods, services or supplies prescribed for medical diagnosis, care or treatment. Many of these laws and regulations are ambiguous, and courts and regulatory authorities have provided little clarification. Moreover, state and local laws vary from jurisdiction to jurisdiction. As a result, we may not always be able to accurately interpret applicable law, and some of our activities could be challenged. Any failure to comply with applicable regulations can result in substantial civil and criminal penalties. Non-compliance by us could have a material adverse effect on our financial condition and could result in the cessation of our business.

 

In addition, the regulatory environment in which we and physicians using our products operate may change significantly in the future. Numerous legislative proposals have been introduced in Congress and in various state legislatures over the past several years that could cause major reforms of the United States healthcare system, inclusive of both state and federal systems. We cannot predict whether any of these proposals will be adopted or the full extent of how they might affect our business. New or revised legislation could have a material adverse effect on our business, financial condition and results of operations.

 

 

We may be subject to or otherwise affected by federal and state healthcare laws, including fraud and abuse and health information privacy and security laws, and could face substantial penalties if we are unable to fully comply with such laws.

 

Healthcare regulation by federal and state governments could significantly impact our business. Healthcare fraud and abuse and health information privacy and security laws potentially applicable to our operations include:

 

	•	the federal Anti-Kickback Law, which constrains our marketing practices and those of our independent sales agents and distributors, educational programs, pricing policies, and relationships with healthcare providers, by prohibiting, among other things, soliciting, receiving, offering or providing remuneration, intended to induce the purchase or recommendation of an item or service reimbursable under a federal healthcare program (such as the Medicare or Medicaid programs);

	•	federal false claims laws which prohibit, among other things, knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent;

	•	HIPAA and its implementing regulations, which created federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters and which also imposes certain regulatory and contractual requirements regarding the privacy, security and transmission of individually identifiable health information; and

•

state laws analogous to each of the above federal laws, such as anti-kickback and false claims laws that may apply to items or services reimbursed by any third-party payor, including commercial insurers, and state laws governing the privacy of certain health information, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

 

If our past or present operations, or those of our independent sales agents and distributors, are found to be in violation of any of such laws or any other governmental regulations that may apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from federal healthcare programs and/or the curtailment or restructuring of our operations. Similarly, if the healthcare providers or entities with whom we do business are found to be non-compliant with applicable laws, they may be subject to sanctions, which could also have a negative impact on us. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Any action against us for violation of these laws, even if we successfully defend against them, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.

 

Risks Related to Our Intellectual Property

 

If we are unable to maintain intellectual property protection or if we infringe on the intellectual property of others, our competitive position could be harmed.

 

Our ability to protect our proprietary discoveries and technologies affects our ability to compete and to achieve sustained profitability. Currently, we rely on a combination of U.S. patent applications, confidentiality or non-disclosure agreements, licenses, work-for-hire agreements and invention assignment agreements and other methods to protect our intellectual property rights. We also maintain certain company know-how, trade secrets and technological innovations designed to provide us with a competitive advantage in the market place. Currently, we have five pending U.S. patent applications and three pending international patent applications relating to various aspects of our business. While we may pursue additional patent applications, it is possible that our pending patent applications and any future applications may not result in issued patents. Even if patents are issued, third parties may independently develop similar or competing technology that avoids our patents. The expiration of patents upon which we may rely for protection of key products could also diminish our competitive advantage and adversely affect our business and our prospects. Further, we cannot be certain that the steps we have taken will prevent the misappropriation of our trade secrets and other confidential information as well as the misuse of our pending patents and other intellectual property, particularly in foreign countries where we have not filed for patent protection. We may not be able to properly execute our business plan if we do not obtain adequate protection of our intellectual property.

 

Companies in the prescription eyewear industry typically obtain patents and frequently engage in substantial intellectual property litigation. Patent prosecution, related proceedings, and litigation in the United States and in other countries may be expensive, time consuming and ultimately unsuccessful. In addition, our products and technologies could infringe on the rights of others. If a third party successfully asserts a claim for infringement against us, we may be liable for substantial damages, be unable to sell products using that technology, or have to seek a license or redesign the related product. These alternatives may be uneconomical or impossible. Intellectual property litigation could be costly, result in product development delays and divert the efforts and attention of management from our business.

 

While we do not believe that our products and technologies infringe on any existing patents or intellectual property rights of third parties, there can be no assurance that such infringement has not occurred or will not occur. The costs of defending an intellectual property claim could be substantial and could adversely affect our business, even if we were ultimately successful in defending any such claims. If our products or technologies were found to infringe the rights of a third party, we would be required to pay significant damages or license fees or cease production, any of which could have a material adverse effect on our business.

 

  

We may not be able to secure all rights to our intellectual property.

 

We are relying on a combination of any applicable U.S. patent, trade secret, trademark and copyright laws, as well as employee and third-party non-disclosure agreements and other protective measures to protect intellectual property rights pertaining to our products and technologies both in the United States and abroad. There can be no assurance, however, that these measures will provide meaningful protection of our technology, trade secrets, know-how, or other intellectual property in the event of any unauthorized use, misappropriation, or disclosure. There can also be no assurance that others will not independently develop similar technologies or duplicate any technology we develop or have developed without violating our intellectual property rights. In addition, there can be no assurance our intellectual property rights will be held to be valid, will not be successfully challenged or will otherwise be of value.

 

Our pending patent applications or any future patent applications may not be approved or may be successfully challenged by others or invalidated through administrative processes or litigation. If our applications are not approved, we may not be able to enter into arrangements to allow us to continue to use our technology on commercially reasonable terms.

 

Obtaining and maintaining a patent portfolio entails significant expense and resources. Part of the expense includes periodic maintenance fees, renewal fees, annuity fees, various other governmental fees on patents and/or patent applications due in several stages over the lifetime of patents and/or applications, as well as the cost associated with complying with numerous procedural steps during the patent application process. We may or may not choose to pursue or maintain protection for particular inventions. In addition, there are situations in which failure to make certain payments or noncompliance with certain requirements in the patent process can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. If we choose to forgo patent protection or allow a patent application or patent to lapse purposefully or inadvertently, our competitive position could suffer.

 

We depend on patents and other means to protect our intellectual property which may not be adequate.

 

The law of patents and trade secrets is constantly evolving and often involves complex legal and factual questions. The coverage we seek in our patent applications can either be denied or significantly reduced before or after a patent is issued. Consequently, we cannot be sure that any particular patent we apply for will be issued, that the scope of the patent protection will exclude our competitors, that interference proceedings regarding any of our patent applications will not be filed, or that a patent will provide any other competitive advantage to us. In addition, we cannot be sure that any of our patents will be held valid if challenged or that others will not claim rights in or ownership of the patents and other proprietary rights held by us.

 

Because patent applications are secret until published 18 months after the filing date of the earliest application to which each claims priority and the publication of discoveries in the scientific or patent literature lags behind actual discoveries, we cannot be certain if our patent application was the first application filed covering a particular invention. If another party’s rights to an invention are superior to ours, we may not be able to obtain a license to use that party’s invention on commercially reasonable terms, if at all. In addition, our competitors, many of which have greater resources than we do, could seek to apply for and obtain patents that will prevent, limit or interfere with our ability to make use of our inventions either in the United States or in international markets. Further, the laws of some foreign countries do not always protect intellectual property rights to the same extent as do the laws of the United States. Litigation or regulatory proceedings in the United States or foreign countries also may be necessary to enforce our patent or other intellectual property rights or to determine the scope and validity of our competitors’ proprietary rights. These proceedings can be costly, result in product development delays, and divert our management’s attention from our business.

 

Even if we have or obtain patents covering our products and technologies, we may still be barred from making, using and selling our products or technologies because of the patent rights of others. Others may have filed patent applications covering products or technologies that are similar or identical to ours and, in the future, may file applications that issue as patents and our products or technologies read on claims of those patents. There are many issued U.S. and foreign patents relating to prescription eyewear. Numerous U.S. and foreign issued patents and pending patent applications owned by others exist in the prescription eyewear field. These could materially affect our ability to develop our products and technologies. Because patent applications can take many years to issue, there may be currently pending applications unknown to us that may later result in issued patents that our products and technologies may infringe. These patent applications may have priority over patent applications filed by us.

 

Legal actions to enforce our patent rights can be expensive and may involve the diversion of significant management time. In addition, these legal actions could be unsuccessful and could also result in the invalidation of our patents or a finding that they are unenforceable. We may or may not choose to pursue litigation or other actions against those that have infringed on our patents, or used them without authorization, due to the associated expense and time commitment of monitoring these activities. If we fail to protect or to enforce our intellectual property rights successfully, our competitive position could suffer, which could harm our results of operations.

 

 

We may also rely upon unpatented proprietary technology, and we cannot assure you that others will not independently develop substantially equivalent technology or otherwise gain access to or disclose our proprietary technology. We may not be able to meaningfully protect our rights in this proprietary technology, which would reduce our ability to compete in the market.

  

We will need to operate without infringing the proprietary rights of others.

 

Although we do not believe that our activities infringe the intellectual property rights of others, we cannot be certain that U.S. or foreign patents or patent applications of other companies do not exist or will not be issued that would materially and adversely affect our ability to commercialize our products. We may be sued for infringing or misappropriating the patent or other intellectual property rights of others. Intellectual property litigation is costly and, even if we prevail, the cost of this litigation could negatively affect our business. If we do not prevail in litigation, in addition to any damages we might have to pay, we could be required to stop the infringing activity or obtain a license requiring us to make royalty payments. Any license we are required to obtain may not be available to us on commercially acceptable terms, if at all. In addition, any license we are required to obtain may be non-exclusive, and therefore our competitors may have access to the same technology licensed to us. If we fail to obtain a required license or are unable to design around another company’s patent, we may be unable to make use of some of our technologies or distribute our products.

 

Although we have confidentiality agreements in place with our employees, these agreements may not adequately prevent disclosure of proprietary information.

 

Our policy is to execute confidentiality agreements with our employees and consultants upon the commencement of their employment or consulting arrangement with us. These agreements generally require that all confidential information developed by an individual or to which the individual is exposed during the course of his or her relationship with us must be kept confidential even after the individual has left our employment. These agreements also generally provide that inventions conceived by the individual in the course of rendering services to us shall be our exclusive property. We cannot be sure that these agreements will provide meaningful protection of our proprietary and other confidential information. In addition, in some situations, these agreements may conflict with, or be subject to, the rights of third parties with whom our employees or consultants have prior employment or consulting relationships. We may be forced to engage in costly and time-consuming litigation to determine the scope of and to enforce our proprietary rights. Even if successful, any litigation could divert our management’s attention from our business.

 

Developments in patent law could have a negative impact on our business.

 

From time to time, the United States Supreme Court, the U.S. Court of Appeals for the Federal Circuit, other federal courts, the United States Congress or the United States Patent and Trademark Office (“USPTO”) may change the standards of patentability and any such changes could have a negative impact on our business.

 

In addition, the Leahy-Smith America Invents Act, or the America Invents Act, which was signed into law in 2011, includes a number of significant changes to U.S. patent law. These changes include a transition from a “first-to-invent” system to a “first-to-file” system, changes to the way issued patents are challenged, and changes to the way patent applications are disputed during the examination process. These changes may favor larger and more established companies that have greater resources to devote to patent application filing and prosecution. The USPTO has developed new and untested regulations and procedures to govern the full implementation of the America Invents Act, and many of the substantive changes to patent law associated with the America Invents Act, and, in particular, the first-to-file provisions, became effective on March 16, 2013. Substantive changes to patent law associated with the America Invents Act may affect our ability to obtain patents, and if obtained, to enforce or defend them. Accordingly, it is not clear what, if any, impact the America Invents Act will ultimately have on the cost of prosecuting our patent applications, our ability to obtain patents based on our discoveries and our ability to enforce or defend any patents that may issue from our patent applications, all of which could have a material adverse effect on our business.

 

 

Risks Related to Our Securities

 

We do not intend to pay dividends on our common stock so any returns will be limited to changes in the value of our common stock.

 

We have never declared or paid any cash dividends on our common stock. We currently anticipate that we will retain future earnings for the development, operation, and expansion of our business, and do not anticipate declaring or paying any cash dividends for the foreseeable future. In addition, our ability to pay cash dividends on our common stock is restricted by our current debt agreements and may be prohibited or limited by the terms of our current and future debt financing arrangements. Any return to stockholders will therefore be limited to the increase, if any, of our stock price, which may never occur.

 

 

An active trading market for our securities may not develop and we expect that our stock price will be volatile and could decline, resulting in a substantial loss in your investment.

 

Prior to the Merger, there has not been a public market for our securities. Our shares of common stock are thinly traded. Due to the illiquidity, the current stock price may not necessarily reflect the current value of the securities and should not be regarded as an indicator of any future market performance or value thereof. An active trading market for our securities may never develop or if it develops it may not be sustained, which could affect your ability to sell your securities and could depress the market price of your securities.

 

In addition, the stock market can be highly volatile. As a result, the market price of our securities can be similarly volatile, and investors in our securities may experience a decrease in the value of their securities, including decreases unrelated to our operating performance or prospects. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

	•	actual or anticipated fluctuations in our operating results;

	•	the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

	•	failure of securities analysts to initiate or maintain coverage of our Company, changes in financial estimates by any securities analysts who follow our Company, or our failure to meet these estimates or the expectations of investors;

	•	ratings changes by any securities analysts who follow our Company;

	•	announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;

	•	changes in operating performance and stock market valuations of other medical technology companies generally, or those in our industry in particular;

	•	price and volume fluctuations in the overall stock market from time to time, including as a result of trends in the economy as a whole;

	•	changes in accounting standards, policies, guidelines, interpretations, or principles;

	•	actual or anticipated developments in our business or our competitors’ businesses or the competitive landscape generally;

	•	developments or disputes concerning our intellectual property or our products, or third-party proprietary rights;

	•	announced or completed acquisitions of businesses or technologies by us or our competitors;

	•	new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

	•	any major change in our board of directors or management;

	•	future sales of shares of our common stock by us or our stockholders;

	•	changes in the general economy and in the local economies in which we operate;

	•	lawsuits threatened or filed against us; and
	•	other events or factors, including those resulting from war, incidents of terrorism, or responses to these events.

 

In addition, the stock markets, and in particular the market on which our common stock trades, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many medical technology companies. Stock prices of many similar companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from operating our business and adversely affect our business, results of operations, financial condition and cash flows.

 

“Penny stock” rules may make buying or selling our securities difficult, which may make our stock less liquid and make it harder for investors to buy and sell our securities.

 

Our shares trade on the OTCQB tier of the OTC Markets Group, Inc. Trading in our securities will be subject to the “penny stock” rules of the SEC, and it is anticipated that trading in our securities will continue to be subject to the penny stock rules for the foreseeable future. The SEC has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. These rules require that any broker-dealer who recommends our securities to persons other than prior customers and accredited investors must, prior to the sale, make a special written suitability determination for the purchaser and receive the purchaser’s written agreement to execute the transaction. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated with trading in the penny stock market. In addition, broker-dealers must disclose commissions payable to both the broker-dealer and the registered representative and current quotations for the securities they offer. The additional burdens imposed upon broker-dealers by these requirements may discourage broker-dealers from recommending transactions in our securities, which could severely limit the liquidity of our securities and consequently adversely affect the market price for our securities.

 

 

The exercise and sale of shares of our common stock issuable pursuant to our stock options and warrants may adversely affect the market price of our common stock.

 

As of March 31, 2016, we had outstanding under our 2012 and 2015 Stock Option Plans, stock options to purchase an aggregate of approximately 2,860,000 shares of common stock at a weighted average exercise price of $0.12 per share and outstanding warrants to purchase approximately 12,939,000 shares of common stock at a weighted average exercise price of $1.89 per share. The exercise of the stock options and warrants and the sale of shares of our common stock issuable pursuant to them would reduce a stockholder’s percentage voting and ownership interest.

 

The stock options and warrants are likely to be exercised when shares of our common stock are trading at a price that is higher than the exercise price of these options and warrants, and we would be able to obtain a higher price for shares of our common stock than we will receive under such stock options and warrants. The exercise, or potential exercise, of these stock options and warrants could adversely affect the market price of our common stock and adversely affect the terms on which we could obtain additional financing.

 

The conversion of debt into shares of our common stock may adversely affect the market price of our common stock.

 

As of March 31, 2016, we owed an aggregate principal amount of approximately $20.6 million pursuant to various debt and finance agreements. To the extent that some or all of such debt is converted into shares of common stock in the future, the issuance of shares of our common stock would reduce a stockholder’s percentage voting and ownership interest. Further, the conversion price could be at a lower price than the trading price of our common stock. The conversion, or potential conversion, of these debt instruments could adversely affect the market price of our common stock and adversely affect the terms on which we could obtain additional financing.

 

We have provisions in our articles of incorporation that substantially limits the personal liability of members of our board of directors for violations of their fiduciary duty of care as a director and that allow us to indemnify our officers, directors, employees and third parties subject to the discretion of our board of directors.

 

Certain provisions in our articles of incorporation could make it very difficult for you to bring any legal actions against our directors for such violations or could require us to pay any amounts incurred by our directors in any such actions. Pursuant to our articles of incorporation and by-laws, members of our board of directors will have no liability for violations of their fiduciary duty of care as a director, except in limited circumstances. This means that you may be unable to prevail in a legal action against our directors even if you believe they have breached their fiduciary duty of care. In addition, our articles of incorporation and by-laws allow us to indemnify our directors from and against any and all expenses or liabilities arising from or in connection with their serving in such capacities with us. This means that if you were able to enforce an action against our officers, directors, employees or certain third parties, in all likelihood we would be required to pay any expenses they incurred in defending the lawsuit and any judgment or settlement they otherwise would be required to pay.

 

As a public company, we incur additional cost and face increased demands on our management and key employees.

 

As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002 (the “Sarbanes Oxley Act”), as well as rules implemented by the SEC, impose various requirements on public companies. Our management and other personnel will devote substantial amounts of time to these requirements. Moreover, despite recent reforms made possible by the JOBS Act, the reporting requirements, rules, and regulations have increased our legal and financial compliance costs and made some activities more time-consuming and costly. We expect these requirements to significantly increase our legal and financial compliance costs and to make some activities more time-consuming and costly. In addition, we incur additional costs associated with our public company reporting requirements. These rules and regulations also make it more difficult and more expensive for us to obtain director and officer liability insurance. We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. If our profitability is harmed by these additional costs, it could have a negative effect on the trading price of our common stock. 

 

The obligations associated with being a public company require significant resources and management attention.

 

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Sarbanes-Oxley Act. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting. As a result, we incur significant legal, accounting and other expenses that we did not previously incur. 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. 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.

 

 

If securities analysts do not publish research or reports about our business or if they publish negative evaluations of our stock, the price of our stock could decline.

 

The trading market for our common stock will rely in part on the research and reports that industry or financial analysts publish about us or our business. We do not currently have and may never obtain research coverage by industry or financial analysts. If no or few analysts commence coverage of us, the trading price of our stock would likely decrease. Even if we do obtain analyst coverage, if one or more of the analysts covering our business downgrade their evaluations of our stock, the price of our stock could decline. If one or more of these analysts cease to cover our stock, we could lose visibility in the market for our stock, which in turn could cause our stock price to decline.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

On February 29, 2016, the Company entered into a services agreement with a service provider (the “Services Agreement”), pursuant to which the Company agreed to issue, on each of the first four anniversaries of the effective date of the Services Agreement, 62,500 restricted shares of the Company’s common stock, so long as on each such date the services provider is providing services pursuant to the Services Agreement, and the Services Agreement has not been terminated. The shares were issued pursuant to the exemption from registration under Rule 506(b) of Regulation D promulgated under the Securities Act.  

 

Item 3.

Defaults upon Senior Securities

 

None

 

Item 4.

Mine Safety Disclosure

 

None

 

Item 5.

Other Information

 

The following table discloses certain additional persons who beneficially owned 5% or more of our common stock as of August 1, 2016 and supplements the Stock Ownership of Certain Beneficial Owners table disclosed under Item 12 of our annual report on Form 10-K for the year ended December 31, 2015. The persons named in the table below have sole voting and investment power with respect to all shares of common stock owned by them, unless otherwise noted.

 

 

 

		Total Number		Percentage
NAME AND ADDRESS OF OWNER		of Shares		of
(1)		owned		Common
		(2)		Stock
				Owned
Harry H. Hahamovitch  (3)		4,407,136		23.9%
Rochelle D. Lipson TTEE (4)		1,211,962		6.6%
R. Douglas Armstrong (5)		1,879,754		9.4%
Dawson James Securities Inc. (6)		1,548,200		8.0%
Lloyd A. Moriber (7)		991,606		5.4%

 

 

 

 

(1)

Unless otherwise noted, the mailing address of each beneficial owner is c/o PFO Global, Inc., 14401 Beltwood Parkway, Suite 115, Dallas, Texas 75244.

 

(2)

Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of our common stock subject to options, warrants or notes currently exercisable or convertible, or exercisable or convertible within 60 days of June 27, 2016, are deemed outstanding for computing the percentage of the person holding such option, warrant or note but are not deemed outstanding for computing the percentage of any other person. Percentage based upon 18,417,506 shares of common stock issued and outstanding as of August 1, 2016.

 

 

(3)

The business address for Harry H. Hahamovitch is 2214 W. Atlantic Avenue, Delray Beach, FL 33445.

 

(4)

The business address for Rochelle D. Lipson TTEE is c/o Cohen, Chase, Hoffman & Schimmel, P.A. 9400 S Dadeland Blvd, Suite 600, Miami, FL 33156.

 

(5)

Includes an aggregate of 1,107,129 shares of common stock issuable upon the exercise of warrants held by Mr. Armstrong, 97,474 shares of common stock held by Auxol Capital, LLC, an entity controlled by Mr. Armstrong, and 452,002 shares of common stock that may be acquired pursuant to the exercise of warrants held by Auxol Capital, LLC. The address for R. Douglas Armstrong is 570 Ocean Drive, # 201, Juno Beach, FL 33408.

 

(6)

Includes Common Stock Purchase Warrants previously purchased and exercisable into 862,958 shares of common stock, in the aggregate but subject to certain adjustments. The business address for Dawson James Securities Inc. is 1 N. Federal Highway, Suite 500, Boca Raton, FL 33432.

 

(7)

The address for Lloyd A. Moriber is One Bal Harbour, 10285 Collins Avenue, # 2507, Bal Harbour, FL 33154.

 

As of June 27, 2016, Hillair Capital Investments LP also held convertible debentures that provided for conversion into an aggregate of 4,390,400 shares of Common Stock and Common Stock Purchase Warrants that provided for the exercise for an aggregate of 3,290,000 shares of Common Stock. The conversion of such convertible debentures and exercise of such Common Stock Purchase Warrants is limited by conversion caps in such instruments that do not allow their conversion or exercise to the extent that it would cause Hillair Capital Investments to obtain beneficial ownership over more than an aggregate of 4.99% of the outstanding shares. Hillair Capital Investments may increase the conversion limitation up to a maximum beneficial ownership of 9.99% upon 61 days’ notice to the Company.

 

 

Item 6.

Exhibits

A list of exhibits filed herewith is contained in the Exhibit Index that immediately precedes such exhibits and is incorporated by reference herein.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	PFO GLOBAL, INC.
	By:	/s/ Matthew Cevasco
		Matthew Cevasco
		President and Chief Executive Officer

 

	By:	/s/ Brigitte Rousseau
		Brigitte Rousseau
		Chief Financial Officer

 

Date: August 05, 2016

 

 

 Supplemental Information to Be Furnished with Reports Filed

Pursuant to Section 15(d) of the Exchange Act by Non-Reporting Issuers

 

 

1.     No annual report to security holders covering the Company’s last fiscal year has been sent as of the date of this report.

 

2.      No proxy statement, form of proxy, or other proxy soliciting material relating to the Company’s last fiscal year has been sent to any of the Company’s security holders with respect to any annual or other meeting of security holders.

 

3.     If such report or proxy material is furnished to security holders subsequent to the filing of this Quarterly Report on Form 10-Q, the Company will furnish copies of such material to the Securities and Exchange Commission at the time it is sent to security holders. 

 

  

EXHIBIT INDEX

 

2.1		Agreement and Plan of Merger, dated June 2, 2015, by and between Energy Telecom, Inc. and Energy Telecom Reincorporation Sub., Inc., filed as an exhibit to the Current Report on Form 8-K, filed with the Securities and Exchange Commission (“Commission”) on June 26, 2015 and incorporated herein by reference.
2.2		Agreement and Plan of Merger, dated June 30, 2015, by and between PFO Global, Inc., PFO Acquisition Corp., and Pro Fit Optix Holding Company, LLC, filed as an exhibit to the Current Report on Form 8-K, filed with the Commission on July 6, 2015 and incorporated herein by reference.
4.1		Amended and Restated Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock, filed as an exhibit to the Current Report on Form 8-K, filed with the Commission on June 26, 2015 and incorporated herein by reference.

10.1		Securities Purchase Agreement, dated as of January 7, 2016, by and between PFO Global, Inc. and Hillair Capital Investment L.P., filed as an exhibit to the Current Report on Form 8-K, filed with the Commission on January 13, 2016 and incorporated herein by reference.
10.2		Debenture, dated January 8, 2016, issued by PFO Global, Inc. to Hillair Capital Investment L.P., filed as an exhibit to the Current Report on Form 8-K, filed with the Commission on January 13, 2016 and incorporated herein by reference.
10.3		Securities Purchase Agreement, dated as of February 17, 2016, by and between PFO Global, Inc. and Hillair Capital Investment L.P., filed as an exhibit to the Current Report on Form 8-K, filed with the Commission on February 19, 2016 and incorporated herein by reference.
10.4		Debenture, dated February 17, 2016, issued by PFO Global, Inc. to Hillair Capital Investment L.P., filed as an exhibit to the Current Report on Form 8-K, filed with the Commission on February 19, 2016 and incorporated herein by reference.
10.5		Claim Investment Agreement, dated March 4, 2016, by and between Pro Fit Optix, Inc. and Hillair Capital Investment L.P., filed as an exhibit to the Current Report on Form 8-K, filed with the Commission on March 4, 2016 and incorporated herein by reference.
10.6		Employment Agreement, dated February 29, 2016, by and between Matthew G. Cevasco and PFO Global, Inc., filed as an exhibit to the Current Report on Form 8-K, filed with the Commission on March 4, 2016 and incorporated herein by reference.

 

31.1*	Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith.