Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATMENTS
Some of the statements in this report are “forward-looking statements.” These forward-looking statements involve certain known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. The words “believe,” “expect,” “anticipate,” “intend,” “plan,” and similar expressions identify forward-looking statements. We caution you not to place undue reliance on these forward-looking statements. We undertake no obligation to update and revise any forward-looking statements or to publicly announce the result of any revisions to any of the forward-looking statements in this report to reflect any future or developments. However, the Private Securities Litigation Reform Act of 1995 is not available to us as a penny stock issuer and thus we may not rely on the statutory safe harbor from liability for forward-looking statements. Further, Section 27A(b)(2)(D) of the Securities Act of 1933 and Section 21E(b)(2)(D) of the Securities Exchange Act of 1934 expressly state that the safe harbor for forward looking statements does not apply to statements made in connection with any offering.
Overview
We are a manufacturer of dietary supplements formulated to help maintain healthy blood sugar, triglycerides and cholesterol and digestive health and our business focus is serving the consumer market segment of persons concerned about pre-diabetes and/or Type-2 diabetes. Our principal product is Glucose Health® and we are in the early stages of manufacturing, marketing and distributing this product. For the period ending December 31, 2016, we generated a gross profit before operating expenses, a loss from operations and a net loss per share.
On October 1, 2014, the Company entered into an Intellectual Property Purchase Agreement to purchase the “Glucose Health Natural Blood Sugar Maintenance” product. The product concept is a dietary supplement formulated from natural ingredients shown in certain clinical research, such as that published by the National Institutes of Health, National Library of Medicine website (see www.glucosehealth.com/clinical-trials), to have a beneficial impact upon blood glucose, triglyceride and cholesterol levels. The Centers for Disease Control and Prevention (CDC) publishes a National Diabetes Statistics Report annually. Their 2014 Report estimates 2 of 5 presently healthy Americans will develop Type-2 diabetes in their lifetime. We believe this CDC Report and other similar research points to a large and growing market of consumers likely concerned with pre-diabetes or Type-2 diabetes, including many of whom are also likely seeking natural products such as Glucose Health® to proactively maintain their good health.
After the purchase of the product, the Company undertook a series of steps to achieve a final product offering that would be considered efficacious as well as pleasant tasting by our target consumer market, being persons concerned with pre-diabetes and Type-2 diabetes, and would offer a value proposition relative to our competition to be considered for stocking by national and regional pharmacy retailers. To assist in achieving our final product objectives, we retained a former head of beverage product development at Nestle. We retained an attorney specializing in compliance with Food and Drug Administration (FDA) and regulations pertaining to dietary supplements and Federal Trade Commission (FDC) regulations, necessary, in part, to enable our product to be stocked by national pharmacy retailers. We also undertook several actions to establish and build our Glucose Health® brand. The Company conducted a design competition related to its packaging artwork and product logo and retained an experienced product packaging graphic artist to assist with all digital and print representations of the product. The Company filed for and received trademark protection for Glucose Health® with the United States Trademark and Patent Office (USPTO). While our primary sales and marketing focus is achieving sales to consumers through national and regional pharmacies, secondarily, we intend to also market the product directly to customers via our dedicated product website and through other online marketplaces.
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Recent Developments
On January 5, 2015, the Company signed a contract manufacturing agreement for testing, compounding, supply and order fulfillment for the Glucose Health® product and additionally a purchasing agreement to distribute the product through a limited number of Northwest Arkansas pharmacies.
On January 7, 2015, the Company completed its implementation of Current Good Manufacturing Practices (CGMP). The Dietary Supplement (DS) CGMP rule in 21 CFR part 111 of the FDA's regulations requires companies which manufacture, package, label, or hold a dietary supplement to establish and follow current good manufacturing practice to ensure the quality of the dietary supplement and to ensure that the dietary supplement is packaged and labeled as specified in the master manufacturing record.
On January 26, 2015, the Company filed an initial application for trademark protection related to its line of dietary products, with the United States Trademark and Patent Office (USPTO).
On January 29, 2015, the Company appointed Chandrasekhar Mallangi, Ph.D., as an advisor. Dr. Mallangi earned a Ph.D. in Food Science from Oregon State University and is an advisor to multinational companies in the development of nutritional products. Dr. Mallangi is the credited inventor and co-inventor for patents awarded by the USPTO to subsidiaries of Nestle, SA of Vevey, Switzerland.
On February 10, 2015, Murray Fleming, the Company’s Chief Executive Officer was appointed the Company’s Chief Financial Officer. Mr. Fleming replaced James Hodge the Company’s interim Chief Financial Officer. Mr. Hodge continued as the Company’s Chairman of the board of directors.
On February 24, 2015, the Company completed FDA facility registration, a compliance procedure for manufacturers of dietary supplements.
On May 26, 2015, the Company completed the first production run of the product and pursuant to the January 5, 2015 purchasing agreement, the product began to be offered for retail sale through a limited number of Northwest Arkansas pharmacies as well as on the Company’s product website www.glucosehealth.com.
On July 7, 2015, the Company received notification from the United States Patent and Trademark Office (USPTO) that its application for trademark of “Glucose Health” was accepted to the Supplemental Register (Reg. 4,770,720) with first use recognized by the USPTO as of February 1, 2015.
On January 6, 2016, the Company executed a General Merchandise Supplier Agreement ("Agreement") with Wal-Mart Stores, Inc.
On January 27, 2016, the Company notified OTC Markets, Inc. of its intention to not renew its OTCQB service. The Company filed Form 8-A12G in fiscal 2015 registering a class of securities under the 1934 Securities Exchange Act. Accordingly, the Company does not make use of the OTC Markets Disclosure and News Service and instead files its periodic and annual reports and audited financial statements with the Securities and Exchange Commission.
On February 4, 2016, the Company's Chief Executive Officer and Chief Financial Officer, Murray Fleming, was appointed to the board of directors of Glucose Health, Inc. ("Company"). On February 5, 2016, James Hodge resigned from the board of directors.
On March 8, 2016, the Company received a series of material purchase orders from the Customer pursuant to a General Merchandise Supplier Agreement ("Agreement") with Wal-Mart Stores, Inc., executed January 6, 2016.
On October 4, 2016, the Company executed a non-recourse receivables financing agreement with Citibank, N.A. (Citibank) whereby receivables due to the Company are assumed from Wal-Mart Stores Inc. by Citibank and paid subject to an interest premium based upon LIBOR.
As of December 31, 2016, the Company’s Glucose Health® Daily Blood Sugar Maintenance Blueberry Tea Mix (60-Day Supply) product is stocked in the "Diabetic Supplies" section of most Walmart pharmacies in all 50 states.
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Our Plan of Operation for the Next Twelve Months
Our principal business strategy for the next twelve months will be to implement marketing and sales initiatives and earn significant revenues from the manufacture and distribution of our Glucose Health® product. Our sales initiatives will be focused upon securing repeat purchase orders for Glucose Health® from national and regional pharmacy retailers. Our marketing initiatives will be primarily to support Glucose Health® channel sales through national and regional partners. We intend to begin advertising in and sponsoring, various print, digital and social media platforms, which align with the interest of our customers in natural products including dietary supplements related to metabolic syndrome, pre-diabetes and Type-2 diabetes. Secondarily to our primary sales and marketing initiatives above, we also intend to grow our online sales of Glucose Health® product through sales from our product website and sales through other online marketplaces. We also intend to further develop our Glucose Health® product to introduce flavor variations of our proprietary formula and to introduce a variety of packaging options to our target consumer market segment.
Use of Estimates
The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, bad debts, investments, intangible assets, and income taxes. Our estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
Results of Operations
The following discussion should be read in conjunction with our financial statements included in Item 8 of this annual report.
Results of Operations for the Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Revenues
We generated revenues of $313,229 and $4,272 for the years ended December 31, 2016 and 2015, respectively. We hope to fully implement our plan of operations by December 31, 2017 and generate greater revenues, of which there is no assurance.
Gross profit
We reported a gross profit of $19,167 and $397 for the years ended December 31, 2016 and 2015, respectively. We hope to fully implement our plan of operations by December 31, 2017 and generate greater profits, of which there is no assurance, and retain and invest such profits in expanding our operations.
Operating expenses
For the year ended December 31, 2016, we had total operating expenses of $105,814, as compared to total operating expenses of $156,570 for the year ended December 31, 2015. The decrease of $50,756 or 32%, in our operating expenses between the two periods is due to continued further reductions in general and administrative expenses and stock based compensation.
We will continue to incur significant legal and accounting expenses related to maintaining our status as a publicly-traded company subject to the Securities Exchange Act of 1934, requiring the filing of periodic reports and audited financial statements with the Securities and Exchange Commission.
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Net loss
For the year ended December 31, 2016, we had a net loss of $410,443 or $0.15 per share with $323,796 of this net loss for the period related to the recording of interest expense and amortization of debt discount, a non-cash adjustment to reconcile net loss to net cash used in operations. In comparison, for the year ended December 31, 2015, we had a net loss of $266,064 or $0.14 per share with $120,028 of this net loss for the period related to the recording of interest expense and amortization of debt discount, a non-cash adjustment to reconcile net loss to net cash used in operations. We expect to incur net losses for the foreseeable future as we are in the initial stages of implementing our plan of operations.
Liquidity and Capital Resources
At December 31, 2016, our total assets were $33,145 consisting of $20,542 cash, $0 inventory, $11,724 accounts receivable and $639 prepaid consultant compensation. This compares to our total assets of $15,407 at December 31, 2015, consisting of $2,055 in cash, $8,370 inventory, $3,150 in accounts receivable and $1,282 in prepaid consultant compensation.
At December 31, 2016, our current liabilities totaled $528,592, consisting of $138,134 in accounts payable and accrued expenses, $35,000 in notes payable, related party, $5,000 in notes payable, $112,157 in convertible notes payable, related party, $164,793 in convertible notes payable and $35,000 in other notes payable. This compares to our current liabilities at December 31, 2015 of $403,226, consisting of $94,920 in accounts payable and accrued expenses, $6,075 in notes payable, $100,829 in related party convertible notes payable and $201,402 in convertible notes payable.
We had a working capital deficit for 2016 and 2015 of $495,687 and $388,119, respectively. We continue to rely upon funding from two private firms, one which is beneficially owned by the Company’s CEO, to meet our working capital requirements and continue our operations. Unless we continue secure additional funding from these firms, or others, of which there can be no assurance, we may not be able to continue our operations.
At December 31, 2016 and 2015, we had no other liabilities and no long-term commitments or contingencies.
Going Concern
Our independent registered public accounting firm has questioned our ability to continue operations as a “going concern.” While we expect to continue to grow our revenues and our gross profits from sales of Glucose Health®, there is no assurance of this occurring, and in the interim as we implement our plan of operations, we will seek to raise funds to meet our working capital needs principally through sales of our securities. However, we cannot guarantee that we will be able to obtain sufficient additional funds when needed, or that such funds, even if available, will be obtainable on terms satisfactory to us. As a result, our independent registered public accounting firm believes that substantial doubt exists about our ability to continue operations.
Material Commitments
Notes payable, related party:
On May 1, 2016, the Company issued a $35,000 note to a corporation owned by the Company’s CEO. The loan bears interest at 24% per annum and has a maturity date of December 31, 2016. $35,000 remains outstanding as of December 31, 2016.
On March 11, 2016, the Company issued a $35,000 note to a corporation owned by the Company's CEO. The loan bears interest at 24% per annum and has a maturity date of July 11, 2016. On July 29, 2016, the loan was repaid in full.
Notes payable:
On September 15, 2016, the Company issued a $5,000 note to a corporation. The loan bears interest at 12% per annum and is payable on demand. $5,000 remains outstanding at December 31, 2016.
On May 18, 2016, the Company issued a $30,000 note to a corporation. The loan bears interest at 24% per annum and has a maturity date of July 18, 2016. On July 21, 2016, the loan was repaid in full.
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Convertible notes payable, related party:
The Company consolidated 18 separate convertible promissory notes of various principal amounts and fixed conversion prices, all bearing 5% interest per annum, issued to a corporation owned by the Company’s CEO during the period from August 4, 2014 through April 1, 2016, into a single convertible promissory note of $112,157, bearing 5% interest per annum with a pro-rata fixed conversion price of $0.011, plus $5,939 accrued interest not subject to additional interest. The consolidation was for the purposes of administrative simplification and no inducement nor benefit was given to the corporation owned by the Company’s CEO. The current net note balance is $112,157.
Convertible notes payable:
The Company consolidated 20 separate convertible promissory notes of various principal amounts and fixed conversion rates, all bearing 5% interest per annum, issued to corporation during the period from August 2, 2013 through April 1, 2016, into a single convertible promissory note of $169,065, bearing 5% interest per annum with a pro-rata fixed conversion price of $0.008, plus $12,516 accrued interest not subject to additional interest. The consolidation was for the purposes of administrative simplification and no inducement nor benefit was given to the corporation. The current net note balance is $164,670.
Other notes payable:
On December 10, 2013, the Company issued a convertible note to an individual. The loan bears interest at 5% per annum, has a fixed conversion price of $0.015 and a maturity date of June 10, 2014. $3,000 remains outstanding at December 31, 2016.
On December 10, 2013, the Company issued a convertible note to an individual. The loan bears interest at 5% per annum, has a fixed conversion price of $0.015 and a maturity date of June 10, 2014. $5,000 remains outstanding at December 31, 2016.
On June 11, 2013, the Company issued three convertible notes to three corporations. The loans bear interest at 5% per annum with fixed conversion prices of $0.0065 and maturity dates of August 11, 2013. $18,377 remains outstanding as of December 31, 2016.
On January 25, 2013, the Company issued a $12,000 note to an individual. $6,000 remains outstanding at December 31, 2016.
On April 20, 2012, the Company issued a convertible note to an individual. The loan bears interest at 5% per annum, has a fixed conversion price of $0.009 and a maturity date of October 20, 2012. $2,500 remains outstanding as of December 31, 2016.
At December 31, 2016, accrued interest on the above notes and convertible notes amounted to $38,631.
Off-Balance Sheet Arrangements
We have no-off balance sheet contractual arrangements, as that term is defined in Item 303(a)(4) of Regulation S-K.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
As a smaller reporting company, we are not required to provide the information required by this Item.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.