ITEM
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Guardion
Health Sciences, Inc.
Condensed
Consolidated Balance Sheets
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
5,554,960
|
|
|
$
|
670,948
|
|
Accounts receivable
|
|
|
21,927
|
|
|
|
28,203
|
|
Inventories
|
|
|
320,355
|
|
|
|
357,997
|
|
Prepaid expenses
|
|
|
234,384
|
|
|
|
47,773
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
6,131,626
|
|
|
|
1,104,921
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
11,751
|
|
|
|
11,751
|
|
Property and equipment, net
|
|
|
389,074
|
|
|
|
274,804
|
|
Right of use asset, net
|
|
|
563,948
|
|
|
|
-
|
|
Deferred offering costs
|
|
|
-
|
|
|
|
270,000
|
|
Intangible assets, net
|
|
|
295,127
|
|
|
|
456,104
|
|
Goodwill
|
|
|
1,563,520
|
|
|
|
1,563,520
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
8,955,046
|
|
|
$
|
3,681,100
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
218,815
|
|
|
$
|
413,925
|
|
Accrued expenses and deferred rent
|
|
|
63,964
|
|
|
|
81,412
|
|
Derivative warrant liability
|
|
|
47,118
|
|
|
|
-
|
|
Lease liability – current
|
|
|
129,025
|
|
|
|
-
|
|
Total current liabilities
|
|
|
458,922
|
|
|
|
495,337
|
|
|
|
|
|
|
|
|
|
|
Lease liability – long term
|
|
|
447,292
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
906,214
|
|
|
|
495,337
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 10,000,000 shares authorized
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.001 par value; 90,000,000 shares authorized; 50,482,562 and 20,564,328 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively
|
|
|
50,483
|
|
|
|
20,564
|
|
Additional paid-in capital
|
|
|
49,454,265
|
|
|
|
37,798,562
|
|
Accumulated deficit
|
|
|
(41,455,916
|
)
|
|
|
(34,633,363
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
8,048,832
|
|
|
|
3,185,763
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
8,955,046
|
|
|
$
|
3,681,100
|
|
See
accompanying notes to condensed consolidated financial statements.
Guardion
Health Sciences, Inc.
Condensed
Consolidated Statements of Operations
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical foods
|
|
$
|
112,957
|
|
|
$
|
86,082
|
|
|
$
|
317,338
|
|
|
$
|
238,213
|
|
Vision testing diagnostics
|
|
|
44,705
|
|
|
|
208,148
|
|
|
|
337,531
|
|
|
|
469,834
|
|
Other
|
|
|
3,500
|
|
|
|
-
|
|
|
|
9,800
|
|
|
|
-
|
|
Total revenue
|
|
|
161,162
|
|
|
|
294,230
|
|
|
|
664,669
|
|
|
|
708,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical foods
|
|
|
41,655
|
|
|
|
37,076
|
|
|
|
120,608
|
|
|
|
110,462
|
|
Vision testing diagnostics
|
|
|
27,922
|
|
|
|
88,330
|
|
|
|
136,958
|
|
|
|
181,999
|
|
Other
|
|
|
1,422
|
|
|
|
-
|
|
|
|
3,981
|
|
|
|
-
|
|
Total cost of goods sold
|
|
|
70,999
|
|
|
|
125,406
|
|
|
|
261,547
|
|
|
|
292,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
90,163
|
|
|
|
168,824
|
|
|
|
403,122
|
|
|
|
415,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
31,897
|
|
|
|
4,793
|
|
|
|
138,613
|
|
|
|
199,500
|
|
Sales and marketing
|
|
|
448,387
|
|
|
|
240,028
|
|
|
|
1,246,846
|
|
|
|
1,224,491
|
|
General and administrative
|
|
|
2,022,367
|
|
|
|
1,064,645
|
|
|
|
5,427,573
|
|
|
|
3,779,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,502,651
|
|
|
|
1,309,466
|
|
|
|
6,813,032
|
|
|
|
5,203,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,412,488
|
)
|
|
|
(1,140,642
|
)
|
|
|
(6,409,910
|
)
|
|
|
(4,787,730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
4,205
|
|
|
|
545
|
|
|
|
255,842
|
|
|
|
2,090
|
|
Finance cost upon issuance of warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
415,955
|
|
|
|
-
|
|
Change in fair value of derivative warrants
|
|
|
(31,322
|
)
|
|
|
-
|
|
|
|
(259,154
|
)
|
|
|
-
|
|
Costs associated with extension of warrant expiration dates
|
|
|
-
|
|
|
|
1,007,006
|
|
|
|
-
|
|
|
|
1,501,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (income) expense
|
|
|
(27,117
|
)
|
|
|
1,007,551
|
|
|
|
412,643
|
|
|
|
1,503,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,385,371
|
)
|
|
$
|
(2,148,193
|
)
|
|
$
|
(6,822,553
|
)
|
|
$
|
(6,291,217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share – basic and diluted
|
|
$
|
(0.07
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
(0.31
|
)
|
Weighted average common shares outstanding – basic and diluted
|
|
|
36,035,309
|
|
|
|
20,164,761
|
|
|
|
26,483,713
|
|
|
|
20,162,354
|
|
See
accompanying notes to condensed consolidated financial statements.
Guardion
Health Sciences, Inc.
Condensed
Consolidated Statement of Stockholders’ Equity
(Unaudited)
|
|
Common Stock
|
|
|
Additional
Paid-In
|
|
|
Accumulated
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three, Six and Nine Months Ended September 30, 2019
|
|
Balance at December 31, 2018
|
|
|
20,564,328
|
|
|
$
|
20,564
|
|
|
$
|
37,798,562
|
|
|
$
|
(34,633,363
|
)
|
|
$
|
3,185,763
|
|
Fair value of vested stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
56,232
|
|
|
|
-
|
|
|
|
56,232
|
|
Issuance of common stock – warrant exercises
|
|
|
292,283
|
|
|
|
293
|
|
|
|
30,957
|
|
|
|
-
|
|
|
|
31,250
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,385,099
|
)
|
|
|
(1,385,099
|
)
|
Balance at March 31, 2019
|
|
|
20,856,611
|
|
|
|
20,857
|
|
|
|
37,885,751
|
|
|
|
(36,018,462
|
)
|
|
|
1,888,146
|
|
Fair value of vested stock options – officer and director
|
|
|
-
|
|
|
|
-
|
|
|
|
1,066,159
|
|
|
|
-
|
|
|
|
1,066,159
|
|
Fair value of vested stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
62,763
|
|
|
|
-
|
|
|
|
62,763
|
|
Reclass of warrant liability to equity
|
|
|
-
|
|
|
|
-
|
|
|
|
359,683
|
|
|
|
-
|
|
|
|
359,683
|
|
Sale of common stock
|
|
|
1,250,000
|
|
|
|
1,250
|
|
|
|
3,886,750
|
|
|
|
-
|
|
|
|
3,888,000
|
|
Issuance of common stock for services
|
|
|
54,387
|
|
|
|
55
|
|
|
|
123,947
|
|
|
|
-
|
|
|
|
124,002
|
|
Issuance of common stock – warrant exercises
|
|
|
463,726
|
|
|
|
463
|
|
|
|
100,162
|
|
|
|
-
|
|
|
|
100,625
|
|
Fair value of common stock – conversion of notes payable and related interest
|
|
|
109,038
|
|
|
|
109
|
|
|
|
250,679
|
|
|
|
-
|
|
|
|
250,788
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,052,078
|
)
|
|
|
(3,052,078
|
)
|
Balance at June 30, 2019
|
|
|
22,733,762
|
|
|
|
22,734
|
|
|
|
43,735,894
|
|
|
|
(39,070,540
|
)
|
|
|
4,688,088
|
|
Fair value of vested stock options – officer and director
|
|
|
-
|
|
|
|
-
|
|
|
|
722,592
|
|
|
|
-
|
|
|
|
722,592
|
|
Fair value of vested stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
56,688
|
|
|
|
-
|
|
|
|
56,688
|
|
Sale of common stock
|
|
|
12,000,000
|
|
|
|
12,000
|
|
|
|
4,932,340
|
|
|
|
-
|
|
|
|
4,944,340
|
|
Issuance of common stock – warrant exercises
|
|
|
15,748,800
|
|
|
|
15,749
|
|
|
|
6,751
|
|
|
|
-
|
|
|
|
22,500
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,385,376
|
)
|
|
|
(2,385,376
|
)
|
Balance at September 30, 2019
|
|
|
50,482,562
|
|
|
$
|
50,483
|
|
|
$
|
49,454,265
|
|
|
$
|
(41,455,916
|
)
|
|
$
|
8,048,832
|
|
|
|
Three, Six and Nine Months Ended September 30, 2018
|
|
Balance at December 31, 2017
|
|
|
20,091,761
|
|
|
$
|
20,092
|
|
|
$
|
33,716,140
|
|
|
$
|
(26,865,956
|
)
|
|
$
|
6,870,276
|
|
Fair value of vested stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
777,513
|
|
|
|
-
|
|
|
|
777,513
|
|
Issuance of common stock – warrant exercises
|
|
|
73,000
|
|
|
|
73
|
|
|
|
1,387
|
|
|
|
-
|
|
|
|
1,460
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,333,461
|
)
|
|
|
(2,333,461
|
)
|
Balance at March 31, 2018
|
|
|
20,164,761
|
|
|
|
20,165
|
|
|
|
34,495,040
|
|
|
|
(29,199,417
|
)
|
|
|
5,315,788
|
|
Fair value of vested stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
277,372
|
|
|
|
-
|
|
|
|
277,372
|
|
Costs associated with extension of warrant expiration dates
|
|
|
-
|
|
|
|
-
|
|
|
|
494,391
|
|
|
|
-
|
|
|
|
494,391
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,809,564
|
)
|
|
|
(1,809,564
|
)
|
Balance at June 30, 2018
|
|
|
20,164,761
|
|
|
|
20,165
|
|
|
|
35,266,803
|
|
|
|
(31,008,981
|
)
|
|
|
4,277,987
|
|
Fair value of vested stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
350,337
|
|
|
|
-
|
|
|
|
350,337
|
|
Costs associated with extension of warrant expiration dates
|
|
|
-
|
|
|
|
-
|
|
|
|
1,007,006
|
|
|
|
-
|
|
|
|
1,007,006
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,148,192
|
)
|
|
|
(2,148,192
|
)
|
Balance at September 30, 2018
|
|
|
20,164,761
|
|
|
$
|
20,165
|
|
|
$
|
36,624,146
|
|
|
$
|
(33,157,173
|
)
|
|
$
|
3,487,138
|
|
See
accompanying notes to condensed consolidated financial statements.
Guardion
Health Sciences, Inc.
Condensed
Consolidated Statements of Cash Flows
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,822,553
|
)
|
|
$
|
(6,291,217
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
209,813
|
|
|
|
223,014
|
|
Amortization of debt discount
|
|
|
250,000
|
|
|
|
-
|
|
Accrued interest expense included in notes payable
|
|
|
788
|
|
|
|
-
|
|
Amortization of right of use asset
|
|
|
93,222
|
|
|
|
-
|
|
Stock-based compensation
|
|
|
299,684
|
|
|
|
1,405,222
|
|
Stock-based compensation – officer and director
|
|
|
1,788,751
|
|
|
|
-
|
|
Non-cash financing costs – derivative liability
|
|
|
415,955
|
|
|
|
-
|
|
Change in fair value of warrants – derivative liability
|
|
|
(259,154
|
)
|
|
|
-
|
|
Costs associated with extension of warrant expiration dates
|
|
|
-
|
|
|
|
1,501,397
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in -
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
6,275
|
|
|
|
55,761
|
|
Inventories
|
|
|
37,642
|
|
|
|
(226,537
|
)
|
Deposits and prepaid expenses
|
|
|
(186,611
|
)
|
|
|
77,147
|
|
Lease liability
|
|
|
(86,902
|
)
|
|
|
-
|
|
Increase (decrease) in -
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
75,439
|
|
|
|
(43,117
|
)
|
Accrued expenses and deferred rent
|
|
|
(11,399
|
)
|
|
|
10,390
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(4,189,050
|
)
|
|
|
(3,287,940
|
)
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(163,105
|
)
|
|
|
(228,311
|
)
|
Purchase of intellectual property
|
|
|
-
|
|
|
|
(50,000
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(163,105
|
)
|
|
|
(278,311
|
)
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds from initial public offering
|
|
|
3,888,000
|
|
|
|
-
|
|
Proceeds from follow-on public offering
|
|
|
4,944,340
|
|
|
|
-
|
|
Proceeds from issuance of convertible notes
|
|
|
250,000
|
|
|
|
-
|
|
Proceeds from issuance of promissory note
|
|
|
100,000
|
|
|
|
-
|
|
Payments on promissory note
|
|
|
(100,548
|
)
|
|
|
-
|
|
Payments on line of credit
|
|
|
-
|
|
|
|
(30,535
|
)
|
Proceeds from exercise of warrants
|
|
|
154,375
|
|
|
|
1,460
|
|
Decrease in due to related parties
|
|
|
-
|
|
|
|
(38,114
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
9,236,167
|
|
|
|
(67,189
|
)
|
|
|
|
|
|
|
|
|
|
Cash:
|
|
|
|
|
|
|
|
|
Net increase (decrease)
|
|
|
4,884,012
|
|
|
|
(3,633,440
|
)
|
Balance at beginning of period
|
|
|
670,948
|
|
|
|
4,735,230
|
|
Balance at end of period
|
|
$
|
5,554,960
|
|
|
$
|
1,101,790
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for-
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
-
|
|
|
$
|
-
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
Fair value of warrant liability issued in connection with issuance of convertible notes
|
|
$
|
436,034
|
|
|
$
|
-
|
|
Recording of lease asset and liability upon adoption of ASU 2016-02
|
|
$
|
663,218
|
|
|
$
|
-
|
|
Reclass of warrant liability to equity
|
|
$
|
359,683
|
|
|
$
|
-
|
|
Fair value of common stock issued upon conversion of common stock and accrued interest
|
|
$
|
250,788
|
|
|
$
|
-
|
|
Reclass of deferred offering cost to equity
|
|
$
|
270,000
|
|
|
$
|
-
|
|
See
accompanying notes to condensed consolidated financial statements.
Guardion
Health Sciences, Inc.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Nine
Months Ended September 30, 2019 and 2018
1. Organization and Business Operations
Organization
and Business
Guardion
Health Sciences, Inc. (the “Company”) was formed in December 2009 as a California limited liability company under
the name P4L Health Sciences, LLC. On June 30, 2015, the Company converted from a California limited liability company to a Delaware
corporation, changing its name from Guardion Health Sciences, LLC to Guardion Health Sciences, Inc.
The
Company is a specialty health sciences company formed to develop, formulate and distribute condition-specific medical foods with
an initial medical food product on the market under the brand name Lumega-Z® that is designed to replenish and
restore the macular protective pigment. A depleted macular protective pigment is a modifiable risk factor for retina-based diseases
such as age-related macular degeneration (“AMD”), computer vision syndrome (“CVS”) and diabetic retinopathy.
The Company believes this risk may be modified by taking Lumega-Z to maintain a healthy macular protective pigment. Additional
research has also shown a depleted macular protective pigment to be a biomarker for neurodegenerative diseases such as Alzheimer’s
disease and dementia.
The
Company invented a proprietary technology, embodied in the Company’s medical device, the MapcatSF® that accurately
measures the macular pigment optical density (“MPOD”). On November 8, 2016, the United States Patent and Trademark
Office (“USPTO”) issued patent number 9,486,136 for the MapcatSF invention. Using the MapcatSF to measure the MPOD
allows one to monitor the increase in the density of the macular protective pigment after taking Lumega-Z. The MapcatSF is a non-mydriatic,
non-invasive device that accurately measures the MPOD, the lens optical density and lens equivalent age, thereby creating an evidence-based
protocol that is shared with the patient. A non-mydriatic device is one that does not require dilation of the pupil for it to
function. The MapcatSF is the first medical device using a patented “single fixation” process and “automatic
lens density correction” that produces accurate serialized data.
In
September 2017, the Company, through its wholly-owned subsidiary VectorVision Ocular Health, Inc. (“VectorVision”),
acquired substantially all of the assets and certain liabilities of VectorVision, Inc., a company that specialized in the standardization
of contrast sensitivity, glare sensitivity, low contrast acuity, and early treatment diabetic retinopathy study (“ETDRS”)
visual acuity testing. VectorVision’s standardization system is designed to provide the practitioner or researcher with
the ability to delineate very small changes in visual capability, either as compared to the population or from visit to visit.
VectorVision develops, manufactures and sells equipment and supplies for standardized vision testing for use by eye doctors in
clinical trials, for real-world vision evaluation, and industrial vision testing. The acquisition expanded the Company’s
technical portfolio. CSV-1000 and CSV-3000 instruments offer auto-calibrated tests to ensure correct testing luminance and contrast
levels for consistent, highly accurate and repeatable results. Recently issued patents the Company received for continuously calibrating
the light source, an automated standardization technology the Company refers to as AcQvizTM, are expected to be incorporated
into the new CSV-2000, in which the proprietary standardized contrast sensitivity test patterns can be presented to the patient
using a computer monitor as opposed to the current calibrated backlit system. The Company believes the acquisition of VectorVision
further establishes its position at the forefront of early detection, intervention and monitoring of a range of eye diseases.
In
August 2018, the Company created a wholly owned subsidiary, Transcranial Doppler Solutions, Inc. (“TDSI”). TDSI is
dedicated to the pursuit of early predictors resulting in, the Company believes, valuable therapeutic intervention for practitioners
and their patients, and additional revenue streams generated from the testing and sale of Company products to appropriate customers.
The Company has established operations with selected clinics and is focusing on expanding its client base.
In
November 2018, the Company launched a new medical food product, GlaucoCetinTM, which the Company believes is the first
vision-specific medical food designed to support and protect the mitochondrial function of optic nerve cells and improve blood
flow in the ophthalmic artery in patients with glaucoma.
In
September 2019, the Company, through its wholly owned subsidiary NutriGuard Formulations, Inc., acquired the nutraceuticals business
from NutriGuard Research, Inc. Pursuant to the Asset Purchase Agreement, the Company purchased specified assets of the NutriGuard
brand and business, primarily consisting of inventory, trademarks, copyrights and other intellectual property. Once developed,
the NutriGuard Formulations nutraceutical product line should provide the Company a new direct-to-consumer (“DTC”)
capability. The Company intends to build a portfolio of nutraceutical products under the NutriGuard brand by developing new formulations
and marketing its products to patients directly through DTC channels and through recommendations by their physicians. See Note
3 for additional information.
The
Company has been primarily engaged in research and development, product commercialization and capital raising activities.
Going
Concern and Liquidity
The
financial statements have been prepared assuming the Company will continue as a going concern. The Company had a net loss of $6,822,553
and utilized cash in operating activities of $4,189,050 during the nine months ended September 30, 2019. The Company expects to
continue to incur net losses and negative operating cash flows in the near-term. As a result, management has concluded that there
is substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the consolidated
financial statements are issued.
The
Company’s independent registered public accounting firm has also included explanatory language in their opinion accompanying
the Company’s audited financial statements for the year ended December 31, 2018. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications
of liabilities that may result from the possible inability of the Company to continue as a going concern.
The
Company will continue to incur significant expenses for commercialization activities related to its medical foods, the MapcatSF
medical device, VectorVision diagnostic equipment, the TDSI business, the new NutriGuard line of nutraceuticals and with respect
to efforts to continue to build the Company’s infrastructure. Development and commercialization of medical foods and medical
devices involves a lengthy and complex process. Additionally, the Company’s long-term viability and growth may depend upon
the successful development and commercialization of new complementary products or product lines.
The
Company is seeking to raise additional debt and/or equity capital to fund future operations, but there can be no assurances that
the Company will be able to secure such additional financing in the amounts necessary to fully fund its operating requirements
on acceptable terms or at all. If the Company is unable to access sufficient capital resources on a timely basis, the Company
may be forced to reduce or discontinue its technology and product development programs and curtail or cease operations.
NASDAQ
Notice
On
September 20, 2019, the Company received a notification letter from the Nasdaq Listing Qualifications Staff (the “Staff”)
of the Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that, for the last 30 consecutive business days, the
closing bid price for the Company’s common stock was below the minimum $1.00 per share requirement for continued listing
on The Nasdaq Capital Market as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”).
The Nasdaq letter has no immediate effect on the listing of the Company’s common stock on the Nasdaq Capital Market.
In
accordance with Nasdaq listing rules, the Company has been provided an initial period of 180 calendar days, or until March 18,
2020 (the “Compliance Date”), to regain compliance with the Minimum Bid Price Requirement. If, at any time during
this 180-day period, the closing bid price of the Company’s common stock is at least $1.00 for a minimum of 10 consecutive
business days, the Staff will provide the Company written confirmation of compliance with the Minimum Bid Price Requirement and
the matter will be closed. If the Company does not regain compliance by the Compliance Date, the Company may be eligible for an
additional 180 calendar day compliance period. To qualify for such additional compliance period, the Company would have to meet
the continued listing requirements of the NASDAQ Capital Market, except for the Minimum Bid Price Requirement, and the Company
would need to provide written notice of its intention to cure the deficiency during the additional compliance period. If the Company
is not eligible for the additional compliance period or it appears to the Staff that the Company will not be able to cure the
deficiency or if the Staff exercises its discretion to not provide such additional compliance period, the Staff will provide written
notice to the Company that its common stock will be subject to delisting. At that time, the Company may appeal the Staff’s
delisting determination to a Nasdaq Hearing Panel.
Reverse
Stock Split
On
January 30, 2019, following stockholder and Board approval, the Company filed a Certificate of Amendment to its Amended Certificate
of Incorporation, as amended (the “Amendment”), with the Secretary of State of the State of Delaware to effectuate
a one-for-two (1:2) reverse stock split (the “Reverse Stock Split”) of its common stock, par value $0.001 per share,
without any change to its par value. The Amendment became effective on the filing date. The number of shares authorized for common
and preferred stock were not affected by the Reverse Stock Split. No fractional shares were issued in connection with the Reverse
Stock Split as all fractional shares were “rounded up” to the next whole share. Proportional adjustments for the Reverse
Stock Split were made to all share and per share amounts as if the split occurred at the beginning of the earliest period presented.
Board
Actions
In
October 2019, our board of directors approved an amendment to increase the number of authorized common stock from 90,000,000 to
250,000,000 shares. In addition, the board approved an amendment to our certificate of incorporation, as amended, to combine the
outstanding shares of our common stock into a lesser number of outstanding shares (a “Reverse Stock Split”).
The
board of directors determined that an increase in authorized common shares is in the best interests of the Company and believes
that the availability of additional authorized shares of common stock is required for several reasons, including enabling investors
to exercise the Series B warrants issued pursuant to our October 30 public offering as well as the flexibility to issue common
stock for a variety of general corporate purposes as the board of directors may determine to be desirable, including future financings,
investment opportunities, acquisitions, or other distributions.
The
short-term intent of a Reverse Stock Split is to increase the price of the common stock and thereby regain compliance with the
NASDAQ minimum bid price requirement. In addition, the Company believes a Reverse Stock Split will make its common stock more
attractive to a broader range of investors, as it believes that the current market price of the common stock may prevent certain
institutional investors, professional investors and other members of the investing public from purchasing stock. Many brokerage
houses and institutional investors have internal policies and practices that either prohibit them from investing in low-priced
stocks or tend to discourage individual brokers from recommending low-priced stocks to their customers. Furthermore, some of those
policies and practices may function to make the processing of trades in low-priced stocks economically unattractive to brokers.
Moreover, because brokers’ commissions on low-priced stocks generally represent a higher percentage of the stock price than
commissions on higher-priced stocks, the current average price per share of common stock can result in individual stockholders
paying transaction costs representing a higher percentage of their total share value than would be the case if the share price
were higher. The Company believes that the Reverse Stock Split will make our common stock a more attractive and cost-effective
investment for many investors, which in turn would enhance liquidity for holders of our common stock.
Shareholder
approval for these actions is expected to be solicited at our 2019 Annual Meeting of Stockholders that is currently scheduled
for December 5, 2019.
2. Summary of Significant Accounting Policies
Basis
of Presentation
The
accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”)
and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial
reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with
GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated
financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC. The condensed consolidated
balance sheet as of December 31, 2018 included herein was derived from the audited consolidated financial statements as of that
date, but does not include all disclosures, including notes, required by GAAP.
In
the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary
to fairly present the Company’s financial position and results of operations for the interim periods reflected. Except as
noted, all adjustments contained herein are of a normal recurring nature. The results of operations for the interim periods presented
are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2019.
Certain
prior period amounts have been reclassified to conform to current period presentation. Such amounts consist of operating segment
disclosures, whereby revenue and cost of goods sold have been broken out on the Consolidated Statements of Operations to conform
with the Company’s reportable business segments as of September 30, 2019.
Use
of Estimates
The
preparation of the financial statements in conformity with GAAP requires management to make certain estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of expenses during the reporting period. Actual results could differ from those
estimates.
These
estimates and assumptions include estimates for reserves of uncollectible accounts, inventory obsolescence, depreciable lives
of property and equipment, analysis of impairments of recorded long-term tangible and intangible assets, realization of deferred
tax assets, accruals for potential liabilities and assumptions made in valuing stock instruments issued for services.
Intangible
Assets
In
connection with the VectorVision transaction, the Company identified and allocated estimated fair values to intangible assets
including goodwill and customer relationships.
In
accordance with Accounting Standard Codification (“ASC”) 350 – Intangibles – Goodwill and Other, the Company
determined whether these assets are expected to have indefinite (such as goodwill) or limited useful lives, and for those with
limited lives, the Company established an amortization period and method of amortization. Its goodwill and other intangible assets
are subject to periodic impairment testing.
The
Company utilized the services of an independent third-party valuation firm to assist in identifying intangible assets and in estimating
their fair values. The useful lives for the Company’s intangible assets other than goodwill were estimated based on Management’s
consideration of various factors, including assumptions that market participants might use about sales expectations as well as
potential effects of obsolescence, competition, technological progress and the regulatory environment. Because the future pattern
in which the economic benefits of these intangible assets may not be reliably determined, amortization expense is generally calculated
on a straight-line basis.
Amortization
expense for the identifiable intangible assets associated with the VectorVision acquisition is approximately $54,000 per quarter
and is included with general and administrative expenses in the Company’s Statements of Operations.
Impairment
of Long-Lived Assets
The
Company reviews long-lived assets, including property and equipment, identifiable intangible assets, and goodwill for impairment
at each fiscal year end or when events or changes in circumstances indicate the carrying value of these assets may exceed their
current fair values. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset
to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds
its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds
the fair value of the assets. Assets to be disposed of are separately presented in the balance sheet and reported at the lower
of the carrying amount or fair value less costs to sell and are no longer depreciated. The Company has not historically recorded
any impairment to its long-lived assets. In the future, if events or market conditions affect the estimated fair value to the
extent that a long-lived asset is impaired, the Company will adjust the carrying value of these long-lived assets in the period
in which the impairment occurs. As of September 30, 2019 and December 31, 2018, the Company had not deemed any long-lived assets
as impaired and was not aware of the existence of any indicators of impairment at such dates.
Deferred
Offering Costs
Deferred
offering costs consist principally of legal, accounting, and underwriters’ fees incurred related to equity financings. These
deferred offering costs are charged against the gross proceeds received during the appropriate period. During the period ended
June 30, 2019, $270,000 of offering costs deferred at December 31, 2018 were offset to paid in capital upon completion of our
April 2019 offering. As of September 30, 2019, there were no comparable deferred offering costs.
Revenue
Recognition
The
Company’s revenue is comprised of sales of medical foods and dietary supplements to consumers through a direct sales/credit
card process. In addition, the Company sells medical device equipment and supplies to customers both in the U.S. and internationally.
The
Company recognizes revenue in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU
2014-09” or “Topic 606”) and all related amendments. The standard provides authoritative guidance clarifying
the principles for recognizing revenue and developing a common revenue standard for U.S. generally accepted accounting principles.
The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods and services
to customers in an amount that reflects the consideration to which the entity expects to be entitled in the exchange for those
goods or services.
Under
the guidance, revenue is recognized when control of promised goods or services is transferred to the Company’s customers,
in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The
Company reviews its sales transactions to identify contractual rights, performance obligations, and transaction prices, including
the allocation of prices to separate performance obligations, if applicable. Revenue and costs of sales are recognized once products
are delivered to the customer’s control and performance obligations are satisfied.
All
products sold by the Company are distinct individual products and consist of medical foods, supplemental formulas, medical devices
and related supplies. The products are offered for sale as finished goods only, and there are no performance obligations required
post-shipment for customers to derive the expected value from them. Contracts with customers contain no incentives or discounts
that could cause revenue to be allocated or adjusted over time.
Control
of products sold transfers to customers upon shipment from the Company’s facilities, and the Company’s performance
obligations are satisfied at that time. Shipping and handling activities are performed before the customer obtains control of
the goods and therefore represent a fulfillment activity rather than a promised service to the customer. Payment for sales of
Lumega-Z is generally made by approved credit cards. Payments for medical device sales are generally made by check, credit card,
or wire transfer. Historically the Company has not experienced any significant payment delays from customers.
The
Company provides a 30-day right of return to its retail Lumega-Z customers. A right of return does not represent a separate performance
obligation, but because customers are allowed to return products, the consideration to which the Company expects to be entitled
is variable. Upon evaluation of historical Lumega-Z and VectorVision product returns, the Company determined that less than one
percent of products is returned, and therefore believes it is probable that such returns will not cause a significant reversal
of revenue in the future. Due to the insignificant amount of historical returns as well as the standalone nature of the Company’s
products and assessment of performance obligations and transaction pricing for the Company’s sales contracts, the Company
does not currently maintain a contract asset or liability balance at this time. The Company assesses its contracts and the reasonableness
of its conclusions on a quarterly basis.
The
following table presents the Company’s revenues disaggregated by segment:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Medical foods
|
|
$
|
112,957
|
|
|
$
|
86,082
|
|
|
$
|
317,338
|
|
|
$
|
238,213
|
|
Vision testing diagnostics
|
|
|
44,705
|
|
|
|
208,148
|
|
|
|
337,531
|
|
|
|
469,834
|
|
Other
|
|
|
3,500
|
|
|
|
-
|
|
|
|
9,800
|
|
|
|
-
|
|
|
|
$
|
161,162
|
|
|
$
|
294,230
|
|
|
$
|
664,669
|
|
|
$
|
708,047
|
|
Research
and Development Costs
Research
and development costs consist primarily of fees paid to consultants and outside service providers, patent fees and costs, and
other expenses relating to the acquisition, design, development and testing of the Company’s medical foods and related products.
Research and development expenditures are expensed as incurred and totaled $138,613 and $199,500 for the nine months ended September
30, 2019 and 2018, respectively.
Patent
Costs
The
Company is the owner of three issued domestic patents, three pending domestic patent applications, one issued foreign patent in
Europe, one issued foreign patent in Hong Kong, and three foreign patent applications in Canada, Europe and Hong Kong. Due to
the significant uncertainty associated with the successful development of one or more commercially viable products based on the
Company’s research efforts and any related patent applications, patent costs, including patent-related legal fees, filing
fees and internally generated costs, are expensed as incurred. During the nine months ended September 30, 2019 and 2018, patent
costs were $80,879 and $43,347, respectively, and are included in general and administrative costs in the statements of operations.
Leases
Prior
to January 1, 2019, the Company accounted for leases under Accounting Standards Codification (ASC) 840, Accounting for Leases.
Effective from January 1, 2019, the Company adopted the guidance of ASU 2016-02 (ASC 842), Leases, which requires an entity to
recognize a right-of-use asset and a lease liability for virtually all leases. The Company adopted ASC 842 using a modified retrospective
approach. As a result, the comparative financial information has not been updated and the required disclosures prior to the date
of adoption have not been updated and continue to be reported under the accounting standards in effect for those periods. The
adoption of ASC 842 on January 1, 2019 resulted in the recognition of operating lease right-of-use assets of $657,169, lease liabilities
for operating leases of $663,218, and a zero cumulative-effect adjustment to accumulated deficit. See Note 8 for further information
regarding the impact of the adoption of ASC 842 on the Company’s financial statements.
Stock-Based
Compensation
The
Company periodically issues stock-based compensation to officers, directors, contractors and consultants for services rendered.
Such issuances vest and expire according to terms established at the issuance date.
Stock-based
payments to officers, directors, and employees, which include grants of employee stock options, are recognized in the financial
statements based on their fair values in accordance with Topic 718. Stock option grants, which are generally time vested, will
be measured at the grant date fair value and charged to operations on a straight-line basis over the vesting period. The fair
value of stock options is determined utilizing the Black-Scholes option-pricing model, which is affected by several variables,
including the risk-free interest rate, the expected dividend yield, the expected life of the equity award, the exercise price
of the stock option as compared to the fair market value of the common stock on the grant date and the estimated volatility of
the common stock over the term of the equity award.
In
prior periods, the Company accounted for stock option and warrant grants issued and vesting to non-employees in accordance with
the authoritative guidance of the FASB whereby the value of the stock compensation is based upon the measurement date as determined
at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn
the equity instruments is complete. On January 1, 2019, the Company adopted Accounting Standards Update (ASU) 2018-07 which expands
the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The Company
recognizes the fair value of stock-based compensation within its statements of operations with classification depending on the
nature of the services rendered. The adoption of the new standard had no cumulative effect on previously reported amounts.
Net
Loss per Share
The
Company’s computation of basic and diluted net loss per common share is measured as net loss divided by the weighted average
common shares outstanding during the respective periods, excluding unvested restricted common stock. Shares of restricted stock
are included in the basic weighted average number of common shares outstanding from the time they vest. Potential common shares
such as from unexercised warrants, options, and shares associated with convertible debt outstanding that have an anti-dilutive
effect are excluded from the calculation of diluted net loss per share. The Company’s basic and diluted net loss per share
is the same for all periods presented because all shares issuable upon exercise of warrants and conversion of convertible debt
outstanding are anti-dilutive as they decrease loss per share.
The
following table sets forth the number of shares excluded from the computation of diluted loss per share, as their inclusion would
have been anti-dilutive:
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Warrants
|
|
|
1,502,738
|
|
|
|
1,260,674
|
|
Options
|
|
|
2,712,500
|
|
|
|
1,362,500
|
|
|
|
|
4,215,238
|
|
|
|
2,623,174
|
|
Recent
Accounting Pronouncements
The
Company’s management does not believe that there are any recently issued, but not yet effective, authoritative guidance,
if currently adopted, would have a material impact on the Company’s financial statement presentation or disclosures.
3. Acquisition of NutriGuard
Effective
September 20, 2019 (the “Effective Date”), the Company’s newly-formed wholly-owned subsidiary, NutriGuard Formulations,
Inc., a Delaware corporation, completed an asset purchase agreement (the “Asset Purchase Agreement”) with NutriGuard
Research, Inc., a California corporation (“NutriGuard”), and NutriGuard’s sole shareholder, Mark McCarty.
Pursuant
to the Asset Purchase Agreement, the Company purchased specified assets of the NutriGuard brand and business, consisting primarily
of inventory, trademarks, copyrights and other intellectual property. In exchange, the Company agreed to pay a 3% royalty, payable
quarterly, to NutriGuard based on the operating results of the NutriGuard branded products in future periods, after $500,000 in
gross revenues have been achieved by the Company. The Company is unable at this time to reasonably estimate the timing or amount
of future revenue streams that would generate royalty payments, as the Company will need to develop new product formulations and
implement a new marketing and distribution infrastructure, which will require the investment of a significant amount of capital
over an extended period of time. Accordingly, any royalty payments in the future will be charged directly to operations when incurred.
In
addition, on the Effective date, the Company and Mr. McCarty entered into a consulting agreement (as described below), and Mr.
McCarty and NutriGuard agreed, among other terms, to no longer use the “NutriGuard” name. Mr. McCarty also entered
into a non-competition covenant for a period of 5 years.
As
the Company did not pay any cash or non-cash consideration, nor did it assume any liabilities, in conjunction with this acquisition,
the Company did not recognize any tangible or intangible assets at closing. All costs related to this transaction, consisting
primarily of legal fees, were charged to operations as incurred. Although NutriGuard has conducted limited operations with nominal
revenues during the past few years, the Company has determined that the NutriGuard acquisition qualifies as the acquisition of
a business under Accounting Standards Codification (“ASC”) 805: Business Combinations (“ASC 805”). However,
the recent historical operations of NutriGuard did not meet any of the three-element significance level tests (investment, assets
and pre-tax income) with regard to the accounting standards requiring acquisition company financial statements and related pro
forma financial information, and the Company has therefore concluded that the acquisition of NutriGuard was not significant. The
value of the NutriGuard business consists primarily of intangible assets for which no accounting value will be attributed in the
Company’s financial statements. The Company intends to utilize these intangible assets to build a nutraceutical brand and
product portfolio based on updated and reformulated compounds, which will require the investment of a significant amount of capital
over an extended period of time.
The
following preliminary unaudited pro forma financial information gives effect to the Company’s acquisition of NutriGuard
as if the acquisition had occurred on January 1, 2018 and had been included in the Company’s consolidated statements of
operations during the three and nine-month periods ended September 30, 2019 and 2018:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Pro forma net revenues
|
|
$
|
178,176
|
|
|
$
|
314,465
|
|
|
$
|
724,899
|
|
|
$
|
780,778
|
|
Pro forma net loss attributable to common shareholders
|
|
$
|
(2,338,296
|
)
|
|
$
|
(2,181,230
|
)
|
|
$
|
(6,815,355
|
)
|
|
$
|
(6,396,375
|
)
|
Pro forma net loss per share
|
|
$
|
(0.06
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
(0.32
|
)
|
Mr.
McCarty’s consulting agreement with the Company provides that Mr. McCarty will serve as, the Director of Research of the
Company for a period of 3 years at a rate of $7,500 per month for 12 months and $5,000 per month thereafter. It is intended that
Mr. McCarty will assist the Company, among other tasks, in developing new formulations for distribution under the NutriGuard brand,
as well as identifying production sources for such compounds and developing distribution networks for such products.
Pursuant
to the consulting agreement, the Company granted Mr. McCarty stock options to purchase 100,000 shares of the Company’s common
stock, exercisable at a price of $0.5411 per share, which was the closing market price of the Company’s common stock on
the Effective Date. The stock options were granted under the terms of the Company’s 2018 Equity Incentive Plan, which options
shall vest as follows: 25% on the Effective Date, 25% on the first anniversary following the Effective Date, 25% on the second
anniversary following the Effective Date, and 25% on the third anniversary following the Effective Date.
4. Segment Reporting
The
Company determined its reporting units in accordance with ASC 280, “Segment Reporting” (“ASC 280”). The
Company historically has reported its operating results as a single reportable segment described as the business of developing
and commercializing a variety of products that support the detection, intervention and monitoring of a range of eye diseases.
The Company’s chief executive officer, who is the Chief Operating Decision Maker (“CODM”), has historically
reviewed financial information on an aggregated basis for purposes of allocating resources and evaluating financial performance.
In
September 2017, the Company, through its wholly-owned subsidiary VectorVision Ocular Health, Inc., acquired substantially all
of the assets and certain liabilities of VectorVision, Inc., a company that specialized in the standardization of contrast sensitivity,
glare sensitivity, low contrast acuity, and early treatment diabetic retinopathy study (“ETDRS”) visual acuity testing.
In August 2018, the Company created a wholly owned subsidiary, Transcranial Doppler Solutions, Inc. (“TDSI”). The
Company has established TDSI operations with selected clinics and is focusing on expanding its client base.
Although
all of the Company’s products and services target the early detection, intervention and monitoring of a range of eye diseases,
the addition of potential new products or services as the Company grows requires management to periodically reevaluate its reporting
structure. As sales of our medical foods as well as sales of VectorVision products grow, there is an increased need for the CODM
to evaluate revenue and gross profit on a product line or group basis for purposes of resource allocation. As of September 30,
2019, the TDSI subsidiary does not meet the required quantitative criteria to be considered a reportable operating segment. Additionally,
TDSI does not share similar economic characteristics or a majority of the aggregation criteria set forth in ASC 280, and therefore
is included in the category “Other” below. The TDSI business earned $9,800 of service revenue and incurred approximately
$205,000 of operating costs during the nine months ended September 30, 2019. As of September 30, 2019, based on anticipated growth
and the expanding diversity of product and service offerings by the Company, management has concluded that results should be reported
in two operating segments: Medical Foods and Vision Testing Diagnostics. The following tables set forth our results of operations
by segment (results allocated to Other consist of non-cash stock compensation expense, depreciation and amortization, corporate
legal fees, and the TDSI operations):
|
|
For the Three Months Ended September 30, 2019
|
|
|
|
Other
|
|
|
Medical Foods
|
|
|
Vision Testing
Diagnostics
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,500
|
|
|
$
|
112,957
|
|
|
$
|
44,705
|
|
|
$
|
161,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
1,422
|
|
|
|
41,655
|
|
|
|
27,922
|
|
|
|
70,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,078
|
|
|
|
71,302
|
|
|
|
16,783
|
|
|
|
90,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
1,235,389
|
|
|
|
1,124,462
|
|
|
|
142,800
|
|
|
|
2,502,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(1,233,311
|
)
|
|
$
|
(1,053,160
|
)
|
|
$
|
(126,017
|
)
|
|
$
|
(2,412,488
|
)
|
|
|
For the Three Months Ended September 30, 2018
|
|
|
|
Other
|
|
|
Medical Foods
|
|
|
Vision Testing
Diagnostics
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
86,082
|
|
|
$
|
208,148
|
|
|
$
|
294,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
-
|
|
|
|
37,076
|
|
|
|
88,330
|
|
|
|
125,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
-
|
|
|
|
49,006
|
|
|
|
119,818
|
|
|
|
168,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
623,791
|
|
|
|
574,974
|
|
|
|
110,701
|
|
|
|
1,309,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(623,791
|
)
|
|
$
|
(525,968
|
)
|
|
$
|
9,117
|
|
|
$
|
(1,140,642
|
)
|
|
|
For the Nine Months Ended September 30, 2019
|
|
|
|
Other
|
|
|
Medical Foods
|
|
|
Vision Testing
Diagnostics
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
9,800
|
|
|
$
|
317,338
|
|
|
$
|
337,531
|
|
|
$
|
664,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
3,981
|
|
|
|
120,608
|
|
|
|
136,958
|
|
|
|
261,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
5,819
|
|
|
|
196,730
|
|
|
|
200,573
|
|
|
|
403,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
3,195,227
|
|
|
|
3,127,782
|
|
|
|
490,023
|
|
|
|
6,813,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(3,189,408
|
)
|
|
$
|
(2,931,052
|
)
|
|
$
|
(289,450
|
)
|
|
$
|
(6,409,910
|
)
|
|
|
For the Nine Months Ended September 30, 2018
|
|
|
|
Other
|
|
|
Medical Foods
|
|
|
Vision Testing
Diagnostics
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
238,213
|
|
|
$
|
469,834
|
|
|
$
|
708,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
-
|
|
|
|
110,462
|
|
|
|
181,999
|
|
|
|
292,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
-
|
|
|
|
127,751
|
|
|
|
287,835
|
|
|
|
415,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
2,126,939
|
|
|
|
2,801,924
|
|
|
|
274,453
|
|
|
|
5,203,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(2,126,939
|
)
|
|
$
|
(2,674,173
|
)
|
|
$
|
13,382
|
|
|
$
|
(4,787,730
|
)
|
The
following tables set forth our total assets by segment. Intersegment balances and transactions have been removed:
|
|
As of September 30, 2019
|
|
|
|
Other
|
|
|
Medical Foods
|
|
|
Vision Testing
Diagnostics
|
|
|
Total
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
5,759
|
|
|
$
|
5,506,189
|
|
|
$
|
43,012
|
|
|
$
|
5,554,960
|
|
Inventories
|
|
|
-
|
|
|
|
166,410
|
|
|
|
153,945
|
|
|
|
320,355
|
|
Other
|
|
|
3,500
|
|
|
|
191,899
|
|
|
|
60,912
|
|
|
|
256,311
|
|
Total current assets
|
|
|
9,259
|
|
|
|
5,864,498
|
|
|
|
257,869
|
|
|
|
6,131,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Right to use asset
|
|
|
563,948
|
|
|
|
-
|
|
|
|
-
|
|
|
|
563,948
|
|
Property and equipment, net
|
|
|
-
|
|
|
|
375,537
|
|
|
|
13,537
|
|
|
|
389,074
|
|
Intangible assets, net
|
|
|
295,127
|
|
|
|
-
|
|
|
|
-
|
|
|
|
295,127
|
|
Goodwill
|
|
|
1,563,520
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,563,520
|
|
Other
|
|
|
-
|
|
|
|
11,751
|
|
|
|
-
|
|
|
|
11,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,431,854
|
|
|
$
|
6,251,786
|
|
|
$
|
271,406
|
|
|
$
|
8,955,046
|
|
|
|
As of December 31, 2018
|
|
|
|
Other
|
|
|
Medical Foods
|
|
|
Vision Testing
Diagnostics
|
|
|
Total
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
-
|
|
|
$
|
552,613
|
|
|
$
|
118,335
|
|
|
$
|
670,948
|
|
Inventories
|
|
|
-
|
|
|
|
235,957
|
|
|
|
122,040
|
|
|
|
357,997
|
|
Other
|
|
|
-
|
|
|
|
44,110
|
|
|
|
31,866
|
|
|
|
75,976
|
|
Total current assets
|
|
|
-
|
|
|
|
832,680
|
|
|
|
272,241
|
|
|
|
1,104,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
-
|
|
|
|
264,178
|
|
|
|
10,626
|
|
|
|
274,804
|
|
Deferred offering
|
|
|
270,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
270,000
|
|
Intangible assets, net
|
|
|
456,104
|
|
|
|
-
|
|
|
|
-
|
|
|
|
456,104
|
|
Goodwill
|
|
|
1,563,520
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,563,520
|
|
Other
|
|
|
-
|
|
|
|
11,751
|
|
|
|
-
|
|
|
|
11,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,289,624
|
|
|
$
|
1,108,609
|
|
|
$
|
282,867
|
|
|
$
|
3,681,100
|
|
5. Inventories
Inventories
consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Raw materials
|
|
$
|
253,851
|
|
|
$
|
282,574
|
|
Finished goods
|
|
|
66,504
|
|
|
|
75,423
|
|
|
|
$
|
320,355
|
|
|
$
|
357,997
|
|
6. Property and Equipment, net
Property
and equipment consisted of the following:
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
Leasehold
improvements
|
|
$
|
98,357
|
|
|
$
|
98,357
|
|
Testing
equipment
|
|
|
394,427
|
|
|
|
249,447
|
|
Furniture
and fixtures
|
|
|
177,828
|
|
|
|
163,186
|
|
Computer
equipment
|
|
|
68,460
|
|
|
|
64,976
|
|
Office
equipment
|
|
|
8,193
|
|
|
|
8,193
|
|
|
|
|
747,265
|
|
|
|
584,159
|
|
Less
accumulated depreciation and amortization
|
|
|
(358,191
|
)
|
|
|
(309,355
|
)
|
|
|
$
|
389,074
|
|
|
$
|
274,804
|
|
For
the nine months ended September 30, 2019 and 2018, depreciation and amortization expense was $48,836 and $62,036, respectively,
of which $0 and $23,854 was included in research and development expense, $32,289 and $7,242 was included in sales and marketing
expense, and $16,547 and $30,940 was included in general and administrative expense, respectively.
7. Intangible Assets
The
Company’s intangible assets, including finite-lived intangible assets and $50,000 of non-amortizable purchased intellectual
property, consisted of the following:
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
Customer
relationships
|
|
$
|
430,700
|
|
|
$
|
430,700
|
|
Technology
|
|
|
161,100
|
|
|
|
161,100
|
|
Trade
Names
|
|
|
115,600
|
|
|
|
115,600
|
|
Noncompetition
|
|
|
17,000
|
|
|
|
17,000
|
|
|
|
|
724,400
|
|
|
|
724,400
|
|
Less
accumulated amortization
|
|
|
(429,273
|
)
|
|
|
(268,296
|
)
|
|
|
$
|
295,127
|
|
|
$
|
456,104
|
|
The
Company’s amortization expense on its finite-lived intangible assets was $160,978 and $160,978 for the nine months ended
September 30, 2019 and 2018, respectively.
The
Company estimates future amortization expense on its finite-lived intangible assets as of September 30, 2019 to be as follows:
For Years Ended December 31,
|
|
|
|
2019
|
|
$
|
53,659
|
|
2020
|
|
|
165,320
|
|
2021
|
|
|
16,307
|
|
2022
|
|
|
9,840
|
|
|
|
$
|
245,126
|
|
8. Promissory Notes
Promissory
Note
On
March 12, 2019, the Company issued a promissory note with principal in the amount of $100,000, simple interest of 10% annually,
and with a maturity date of June 10, 2019. On April 11, 2019, the Company repaid the promissory note for a total of $100,548 including
accrued interest.
Convertible
Notes and Related Warrants
On
March 15, 2019, the Company issued a convertible note with principal in the amount of $100,000, simple interest of 5% annually,
and with a maturity date of September 30, 2019. In addition, on March 20, 2019, the Company issued a convertible note with principal
in the amount of $150,000, simple interest of 5% annually, and with a maturity date of September 30, 2019. The convertible notes
(principal and accrued interest) were mandatorily convertible upon the consummation of the IPO. Concurrent with the issuance of
the notes, the Company issued warrants to both note holders equal to the number of shares of common stock that the holders receive
in connection with the converted notes. The per share exercise price of the warrants was set at 125% of the conversion price of
the notes, defined in the note agreements, as the lower of (a) 75% of the price per share of common stock of the IPO or (b) $2.30.
The Company determined that it would have to issue 109,038 warrants based upon the completion of the IPO in April 2019
Due
to the variable terms of both the exercise price and the number of warrants to be issued, the warrants were accounted for as a
derivative liability upon issuance. The aggregate fair value of the warrants was calculated as $436,034 based on a probability
effected Black-Scholes option pricing model with a stock price of $4.00, volatility of 138%, and risk-free rates ranging from
2.34% - 2.39%. The Company recognized a debt discount of $250,000 equal to the face amount of the convertible notes and recorded
a financing cost of $186,034 equal to the difference between the fair value of the warrants and the debt discount. See Note 10
for further discussion of the derivative liability.
The
convertible notes and accrued interest with an aggregate balance of $250,788 were mandatorily converted into 109,038 shares of
common stock based on a conversion price of $2.30 per share upon the consummation of the IPO in April 2019 and the valuation discount
of $250,000 was recognized as interest cost.
9. Lease Liabilities
In
October 2012, the Company entered into a lease agreement for 9,605 square feet of office and warehouse space commencing March
1, 2013. Upon entering into the agreement, the Company paid a deposit of $47,449, of which $36,979 represented prepaid rent. As
of September 30, 2019, $11,751 remained on deposit under the lease agreement. The lease (“Lease 1”) was renewed for
an additional five years in 2018. As of September 30, 2019, remaining lease payments under the amended lease agreement average
$12,959 per month through July 2023.
In
connection with the VectorVision acquisition on September 29, 2017, the Company assumed a lease agreement for 5,000 square feet
of office and warehouse space which commenced on October 1, 2017. The lease (“Lease 2”) was renewed for an additional
65 months. As of June 30, 2019, remaining lease payments average $1,844 per month through February 2023.
In
accounting for the leases, the Company adopted ASU 2016-02 - Leases, which requires a lessee to record a right-of-use asset and
a corresponding lease liability at the inception of the lease initially measured at the present value of the lease payments. The
Company classified the leases as operating leases and determined that the fair value of Lease 1 at the inception of the lease
was $625,778 using a discount rate of 8.0%. the fair value of Lease 2 at the inception of the lease was $100,742 using a discount
rate of 8%. During the nine months ended September 30, 2019, the Company made combined payments on both leases of $124,422 towards
the lease liabilities. As of September 30, 2019 and December 31, 2018, the lease liability for Lease 1 was $510,496 and $586,082,
respectively, and the lease liability for Lease 2 was $65,821 and $77,137, respectively. ASU 2016-02 requires recognition in the
statement of operations of a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally
on a straight-line basis. Combined rent expense for both leases for the nine months ended September 30, 2019 and 2018 was $130,742
and $137,600, respectively. During the nine months ended September 30, 2019 and 2018, the Company reflected amortization of right
of use asset of $93,222 and $28,034 related to the leases, respectively, resulting in a net asset balance of $563,948 as of September
30, 2019.
10. Contingencies
The
Company is periodically the subject of various pending or threatened legal actions and claims arising out of its operations in
the normal course of business. In the opinion of management of the Company, adequate provision has been made in the Company’s
financial statements at September 30, 2019 with respect to such matters.
11. Stockholders’ Equity (Deficit)
Common
Stock
On
April 9, 2019, the Company closed its initial public offering (the “IPO”)
and issued 1,250,000 shares of its common stock at a public offering price of $4.00 per share for total gross proceeds of $5.0
million pursuant to an underwriting agreement by and between the Company, WallachBeth Capital, LLC, and WestPark Capital, Inc.,
acting as the representatives. In connection with the IPO, two convertible promissory notes previously issued on March 15, 2019
and March 20, 2019 were automatically converted into 109,038 shares of common stock based on a conversion price of $2.30 per share.
The Company also issued 109,038 warrants to the note holders with an exercise price of $2.88 per share. Due to the variable terms
of both the exercise price and the number of warrants to be issued, the warrants were accounted for as derivative liabilities
upon issuance. On April 9, 2019, the Company issued 62,500 warrants with an exercise price of $5.00 per share to the underwriters
and affiliates in connection with the IPO. The Company accounted for these warrants as a derivative liability in the financial
statements upon issuance because they were associated with a registered offering, and the settlement provisions contained language
that the shares underlying the warrants are required to be registered. Net proceeds to the Company were $3,888,000 after deducting
underwriting discounts, commissions, and other offering expenses. See Warrant Liability discussion below for additional details.
On
August 15, 2019, the Company closed a second public offering consisting of (i) 12,000,000 shares of common stock, par value $0.001
per share, of the Company, (ii) pre-funded warrants exercisable for 1,000,000 shares of common stock, and (iii) warrants to purchase
up to an aggregate of 13,000,000 shares of common stock pursuant to an underwriting agreement by and between the Company, Maxim
Group LLC, and WallachBeth Capital LLC, acting as the representatives. On August 16, 2019, the Company sold an additional 1,950,000
Warrants upon exercise of the underwriters’ over-allotment option. The public offering price was $0.44 per share of common
stock, $0.43 per pre-funded warrant and $0.01 per accompanying warrant. On August 15, 2019, the Company issued 1,040,000 warrants
with an exercise price of $0.50 per share to the underwriters in connection with the offering. Net proceeds to the Company were
$4,944,340 after deducting underwriting discounts, commissions, and other offering expenses. See Warrants discussion below for
additional details.
Warrants
A
summary of the Company’s warrant activity is as follows:
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
December 31, 2018
|
|
|
1,265,674
|
|
|
|
0.71
|
|
|
|
0.29
|
|
Granted
|
|
|
17,161,538
|
|
|
|
0.58
|
|
|
|
4.88
|
|
Forfeitures
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expirations
|
|
|
(279,424
|
)
|
|
|
(1.83
|
)
|
|
|
-
|
|
Exercised
|
|
|
(16,645,050
|
)
|
|
|
(0.55
|
)
|
|
|
-
|
|
September 30, 2019, all exercisable
|
|
|
1,502,738
|
|
|
$
|
0.92
|
|
|
|
4.65
|
|
The
exercise prices of warrants outstanding and exercisable as of September 30, 2019 are as follows:
Warrants Outstanding and Exercisable (Shares)
|
|
|
Exercise Prices
|
|
|
1,040,000
|
|
|
$
|
0.50
|
|
|
226,200
|
|
|
|
0.59
|
|
|
65,000
|
|
|
|
1.50
|
|
|
109,038
|
|
|
|
2.88
|
|
|
62,500
|
|
|
|
5.00
|
|
|
1,502,738
|
|
|
|
|
|
During
the nine months ended September 30, 2019, the Company granted 17,161,538 warrants to investors, consisting of (a) 171,538 warrants
associated with our IPO financing in April 2019 (see Warrant Liability discussion below), and (b) 16,990,000 warrants associated
with our August public offering, including pre-funded warrants exercisable for 1,000,000 shares of common stock, warrants to purchase
up to an aggregate of 13,000,000 shares of common stock, warrants to purchase 1,950,000 shares of common stock upon the exercise
of the underwriters’ over-allotment option, and warrants to purchase 1,040,000 shares of common stock issued to the underwriters
as representatives of the public offering.
The
August pre-funded warrants were sold to purchasers whose purchase of shares of common stock in the offering would otherwise result
in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% of the Company’s
outstanding common stock immediately following the consummation of the offering, in lieu of shares of common stock. Each pre-funded
warrant represents the right to purchase one share of common stock at an exercise price of $0.01 per share.
The
August public offering price was $0.44 per share of common stock and $0.01 per accompanying warrant. Each warrant sold with the
shares of common stock represents the right to purchase one share of common stock at an exercise price of $0.585 per share. The
warrants are exercisable immediately, expire five years from the date of issuance and provide that, beginning on the earlier of
(i) 30 days from the effective date of the Registration Statement and (ii) the date on which the Common Stock trades an aggregate
of more than 40,000,000 shares after the announcement of the pricing of the offering, and ending on the twelve month anniversary
thereof, each warrant may be exercised at the option of the holder on a cashless basis at a ratio of one warrant for one share
of common stock, in whole or in part, if the weighted average price of the common stock on the trading day immediately prior to
the exercise date fails to exceed the initial exercise price of the warrant.
During
the nine months ended September 30, 2019, investors exercised a total of 16,645,050 warrants for 16,504,806 shares of common stock,
consisting of (I) 15,356,300 warrants exercised on a cashless basis for 15,216,056 net common shares, and (II) 1,288,750 warrants
exercised for a total of $154,375 in proceeds to the Company (1,000,000 of these warrants were exercisable for $0.01 per share,
and 288,750 were exercisable for $0.50 per share).
During
the nine months ended September 30, 2019, 279,424 warrants expired unexercised.
As
of September 30, 2019, the Company had an aggregate of 1,502,738 outstanding warrants to purchase shares of its common stock with
a weighted average exercise price of $0.92, a weighted average remaining life of 4.65 years and an aggregate intrinsic value of
$312,517, based upon a stock valuation of $0.762 per share. The intrinsic value is calculated as the difference between the market
value of the underlying common stock and the exercise price of the warrants.
Warrant
Liability
In
March 2019, the Company issued warrants to two convertible note holders pursuant to the anticipated completion of the Company’s
IPO (the IPO was completed on April 9, 2019). Due to the variable terms of both the exercise price and the number of warrants
to be issued, the warrants were accounted for as derivative liabilities at the issuance date. The fair value of the warrants will
be remeasured at each reporting period, with the change in the fair value recognized in earnings in the accompanying statements
of operations. The Company estimated that the issuance of 109,038 warrants with an exercise price of $2.88 per share would correspond
to the number of shares of common stock that the holders would receive in connection with the completion of the IPO. The fair
value of the warrants at issuance was determined to be $436,034, of which $250,000 was recorded as a valuation discount and $186,034
was recorded as a finance cost. Upon completion of the IPO, the exercise price and the number of warrants were fixed and the warrants
are no longer accounted for as liabilities. The fair value of the warrants at the closing of the IPO was determined to be $359,683
using a Black-Scholes model with a weighted average remaining life of 4.94 years and a stock valuation of $3.30 per share, and
such amount was reclassified to equity. During the period ended September 30, 2019, the Company recognized a change in warrant
liability of $76,351 that was recorded in the accompanying statements of operations.
On
April 9, 2019, the Company issued 62,500 warrants with an exercise price of $5.00 per share to the underwriter in connection with
the Company’s IPO. The Company accounted for these warrants as a derivative liability in the financial statements at June
30, 2019 because they were associated with the IPO, a registered offering, and the settlement provisions contained language that
the shares underlying the warrants are required to be registered. The fair value of the warrants is remeasured at each reporting
period, and the change in the fair value is recognized in earnings in the accompanying Statements of Operations. The fair value
of the warrants at the date of issuance was determined to be $229,921 and was recorded as a finance cost. As of September 30,
2019, the fair value of the warrants was determined to be $47,118 and the change in fair value of $182,803 was recognized in the
accompanying statements of operations.
The
fair value of the warrant liability was determined at the following issuance and reporting dates using the Black-Scholes-Merton
option pricing model and the following assumptions:
|
|
Convertible Noteholders
|
|
|
Underwriter
|
|
|
Warrant Liability
As of
|
|
|
|
Upon Issuance
|
|
|
Upon Issuance
|
|
|
September 30, 2019
|
|
Stock price
|
|
$
|
4.00
|
|
|
$
|
3.68
|
|
|
$
|
0.76
|
|
Risk free interest rate
|
|
|
2.34 – 2.39
|
%
|
|
|
2.29
|
%
|
|
|
1.56
|
%
|
Expected volatility
|
|
|
138
|
%
|
|
|
137
|
%
|
|
|
145
|
%
|
Expected life in years
|
|
|
5.00
|
|
|
|
5.00
|
|
|
|
4.51
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Number of warrants
|
|
|
109,038
|
|
|
|
62,500
|
|
|
|
62,500
|
|
Fair value of warrants
|
|
$
|
436,034
|
|
|
$
|
229,921
|
|
|
$
|
47,118
|
|
Stock
Options
A
summary of the Company’s stock option activity is as follows:
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted Average Remaining Contractual Term (Years)
|
|
December 31, 2018
|
|
|
1,362,500
|
|
|
|
2.26
|
|
|
|
3.78
|
|
Granted
|
|
|
1,350,000
|
|
|
|
4.11
|
|
|
|
4.56
|
|
Forfeitures
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expirations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
September 30, 2019, outstanding
|
|
|
2,712,500
|
|
|
$
|
3.18
|
|
|
|
3.79
|
|
September 30, 2019, exercisable
|
|
|
1,520,833
|
|
|
$
|
2.51
|
|
|
|
3.33
|
|
The
exercise prices of options outstanding and exercisable as of September 30, 2019 are as follows:
Options Outstanding
(Shares)
|
|
|
Options Exercisable
(Shares)
|
|
|
Exercise Prices
|
|
|
100,000
|
|
|
|
25,000
|
|
|
$
|
0.54
|
|
|
625,000
|
|
|
|
625,000
|
|
|
|
2.00
|
|
|
62,500
|
|
|
|
62,500
|
|
|
|
2.30
|
|
|
675,000
|
|
|
|
600,000
|
|
|
|
2.50
|
|
|
1,250,000
|
|
|
|
208,333
|
|
|
|
4.40
|
|
|
2,712,500
|
|
|
|
1,520,833
|
|
|
|
|
|
On
April 9, 2019, the Company granted options to purchase 1,250,000 shares of common stock to the Company’s Chairman and CEO
with a grant date fair value of $4,122,750 and at a price per share of $4.40. The options vest on a quarterly basis over three
years. On September 20, 2019, the Company granted options to purchase 100,000 shares of common stock to a consultant with a grant
date fair value of $54,004 and at a price per share of $0.54. The options vest on an annual basis over three years. The Company
accounts for share-based payments in accordance with ASC 718 wherein grants are measured at the grant date fair value and charged
to operations over the vesting periods. During the period ended September 30, 2019, $1,807,491 of compensation expense was recognized
relating the amortization of these awards.
During
the nine months ended September 30, 2019, option awards were valued based upon the Black-Scholes option-pricing model, with stock
prices ranging from $0.54 to $4.00 per share, volatility ranging from 115% to 145%, and an average risk-free rate ranging from
1.63% to 2.46%.
During
the nine months ended September 30, 2019 and 2018, we recognized aggregate stock-compensation expense of $1,964,432 and $1,405,221,
respectively, based upon stock prices ranging from $0.54 to $4.00 per share, all of which was recorded in general and administrative
expense.
As
of September 30, 2019, the Company had an aggregate of 1,191,667 remaining unvested options outstanding, with a total estimated
fair value of $2,407,256, weighted average exercise price of $4.04, and weighted average remaining life of 4.38 years. The aggregate
intrinsic value of options outstanding as of September 30, 2019 was $22,090.
12. Related Party Transactions
During
the nine months ended September 30, 2019 and 2018, the Company incurred and paid $225,000 and $206,250, respectively, of salary
expense to our Board Chairman and CEO, Mr. Michael Favish. In addition, compensation cost of $1,788,751 was recognized on amortization
of stock option awards during the nine months ended September 30, 2019.
13. Subsequent Events
Public
Offering
On
October 30, 2019, the Company completed an underwritten public offering of 24,500,000 shares of its common stock (including 1,700,000
pre-funded warrants to purchase common stock in lieu thereof) and Series B warrants to purchase up to 24,500,000 shares of the
Company’s common stock. Each share of common stock (or pre-funded warrant) was sold together with one Series B warrant to
purchase one share of common stock at a combined price to the public of $0.342 per share and Series B warrant. The shares of common
stock or pre-funded warrants and the accompanying Series B warrants were sold together but will be issued separately and will
be immediately separable upon issuance. Net proceeds, after deducting underwriting discounts, commissions and offering expenses,
were approximately $7.2 million.
As
of October 30, 2019, the 1,700,000 pre-funded warrants, with an exercise price of $0.01 per warrant, have been exercised in full
and the Company has received $17,000 in proceeds from exercise.
The
Series B warrants are exercisable at a price of $0.342 per share of common stock and will expire five years from the date on which
the Series B warrants become initially exercisable. Currently, Guardion does not have a sufficient number of authorized shares
of common stock to issue the shares of common stock issuable upon the exercise of the Series B warrants. As a result, the Series
B warrants will become exercisable only after Guardion effectuates an amendment to its certificate of incorporation to either
(i) increase the number of authorized shares of its common stock or (ii) implement a reverse stock split with respect to the shares
of its common stock. There can be no assurance that Guardion’s stockholders will approve a charter amendment, or as to when,
if ever, the, holders of the Series B warrants will be able to exercise the Series B warrants.
Maxim
Group LLC and WallachBeth Capital, LLC are acting as joint-bookrunning managers in connection with the offering. Guardion also
has granted to the underwriters a 45-day option to purchase up to an additional 3,675,000 shares of common stock and/or Series
B warrants to purchase up to 3,675,000 shares of common stock, at the public offering price less discounts and commissions.
The
following table sets forth the unaudited condensed consolidated balance sheet of the Company as of September 30, 2019 on an as
reported basis and on an unaudited pro-forma basis giving effect to the issuance and sale of 22,800,000 shares of our common stock,
pre-funded warrants to purchase 1,700,000 shares of common stock and warrants to purchase 24,500,000 shares of common stock, after
deducting the underwriting discounts, commissions and offering expenses payable by us, and after all pre-funded warrants were
exercised:
|
|
Actual
As Reported
|
|
|
Pro Forma
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Cash and cash equivalents
|
|
$
|
5,554,960
|
|
|
$
|
12,749,850
|
|
Other current assets
|
|
|
576,666
|
|
|
|
576,666
|
|
Non-current assets
|
|
|
2,823,420
|
|
|
|
2,823,420
|
|
Total assets
|
|
$
|
8,955,046
|
|
|
$
|
16,149,936
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
458,922
|
|
|
$
|
458,922
|
|
Lease liability – long term
|
|
|
447,292
|
|
|
|
447,292
|
|
Total liabilities
|
|
|
906,214
|
|
|
|
906,214
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 90,000,000 shares authorized; 50,482,562 issued and outstanding as reported, and 74,982,562 shares on a proforma basis
|
|
|
50,483
|
|
|
|
74,983
|
|
Additional paid-in capital
|
|
|
49,454,265
|
|
|
|
56,624,655
|
|
Accumulated deficit
|
|
|
(41,455,916
|
)
|
|
|
(41,455,916
|
)
|
Total stockholders’ equity
|
|
|
8,048,832
|
|
|
|
15,243,722
|
|
Total liabilities and stockholders’ equity
|
|
$
|
8,955,046
|
|
|
$
|
16,149,936
|
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Presentation
of Information
As
used in this Quarterly Report on Form 10-Q, the terms “we,” “us” “our” and the “Company”
mean Guardion Health Sciences, Inc. unless the context requires otherwise. The following discussion and analysis should be read
in conjunction with our audited financial statements and the related notes that appear elsewhere in this report and our audited
financing statements for the year ended December 31, 2018, and the notes thereto, which are set forth in the 2018 Form 10-K. All
dollar amounts refer to U.S. dollars unless otherwise indicated.
Overview
Guardion
Health Sciences, Inc. (the “Company” or “we”) was formed in December 2009 in California as a limited liability
company under the name P4L Health Sciences, LLC, and it subsequently changed its name to Guardion Health Sciences, LLC. On June
30, 2015, the Company converted from a California limited liability company to a Delaware corporation, changing its name to Guardion
Health Sciences, Inc.
The
Company is a specialty health sciences company formed to develop, formulate and distribute condition-specific medical foods with
an initial medical food product on the market under the brand name Lumega-Z® that is designed to replenish and
restore the macular protective pigment. A depleted macular protective pigment is a modifiable risk factor for retina-based diseases
such as age-related macular degeneration (“AMD”), computer vision syndrome (“CVS”) and diabetic retinopathy.
The Company believes this risk may be modified by taking Lumega-Z to maintain a healthy macular protective pigment. Additional
research has also shown a depleted macular protective pigment to be a biomarker for neurodegenerative diseases such as Alzheimer’s
disease and dementia.
The
Company invented a proprietary technology, embodied in the Company’s medical device, the MapcatSF® that accurately
measures the macular pigment optical density (“MPOD”). On November 8, 2016, the United States Patent and Trademark
Office (“USPTO”) issued patent number 9,486,136 for the MapcatSF invention. Using the MapcatSF to measure the MPOD
allows one to monitor the increase in the density of the macular protective pigment after taking Lumega-Z. The MapcatSF is a non-mydriatic,
non-invasive device that accurately measures the MPOD, the lens optical density and lens equivalent age, thereby creating an evidence-based
protocol that is shared with the patient. A non-mydriatic device is one that does not require dilation of the pupil for it to
function. The MapcatSF is the first medical device using a patented “single fixation” process and “automatic
lens density correction” that produces accurate serialized data.
In
September 2017, the Company, through its wholly-owned subsidiary VectorVision Ocular Health, Inc. (“VectorVision”),
acquired substantially all of the assets and certain liabilities of VectorVision, Inc., a company that specialized in the standardization
of contrast sensitivity, glare sensitivity, low contrast acuity, and early treatment diabetic retinopathy study (“ETDRS”)
visual acuity testing. VectorVision’s standardization system is designed to provide the practitioner or researcher with
the ability to delineate very small changes in visual capability, either as compared to the population or from visit to visit.
VectorVision develops, manufactures and sells equipment and supplies for standardized vision testing for use by eye doctors in
clinical trials, for real-world vision evaluation, and industrial vision testing. The acquisition expanded the Company’s
technical portfolio. CSV-1000 and CSV-3000 instruments offer auto-calibrated tests to ensure correct testing luminance and contrast
levels for consistent, highly accurate and repeatable results. Recently issued patents the Company received for continuously calibrating
the light source, an automated standardization technology the Company refers to as AcQvizTM, are expected to be incorporated
into the new CSV-2000, in which the proprietary standardized contrast sensitivity test patterns can be presented to the patient
using a computer monitor as opposed to the current calibrated backlit system. The Company believes the acquisition of VectorVision
further establishes its position at the forefront of early detection, intervention and monitoring of a range of eye diseases.
In
August 2018, the Company created a wholly owned subsidiary, Transcranial Doppler Solutions, Inc. (“TDSI”). TDSI is
dedicated to the pursuit of early predictors resulting in, the Company believes, valuable therapeutic intervention for practitioners
and their patients, and additional revenue streams generated from the testing and sale of Company products to appropriate customers.
The Company has established operations with selected clinics and is focusing on expanding its client base.
In
November 2018, the Company launched a new medical food product, GlaucoCetinTM, which the Company believes is the first
vision-specific medical food designed to support and protect the mitochondrial function of optic nerve cells and improve blood
flow in the ophthalmic artery in patients with glaucoma.
In
September 2019, the Company, through its wholly owned subsidiary NutriGuard Formulations, Inc., acquired the nutraceuticals business
from NutriGuard Research, Inc. See “Recent Developments” below. Pursuant to the Asset Purchase Agreement, the Company
purchased specified assets of the NutriGuard brand and business, primarily consisting of inventory, trademarks, copyrights and
other intellectual property. Once developed, the NutriGuard Formulations nutraceutical product line should provide the Company
a new direct-to-consumer (“DTC”) capability. The Company intends to build a portfolio of nutraceutical products under
the NutriGuard brand by developing new formulations and marketing its products to patients directly through DTC channels and through
recommendations by their physicians.
The
Company has been primarily engaged in research and development, product commercialization and capital raising activities.
By
combining the MapcatSF medical device, the newly acquired VectorVision standardized vision testing technology and Lumega-Z medical
food, the Company has developed, based on Management’s knowledge of the industry, what it believes to be the only reliable
three-pronged, evidence-based protocol for replenishing and restoring the macular protective pigment, increasing overall retinal
health and measuring the related improvements in visual function.
Recent
Developments
Initial
Public Offering
On
April 9, 2019, the Company closed its initial public offering (the “IPO”) of 1,250,000 shares of common stock, par
value $0.001 per share, at an IPO price to the public of $4.00 per share resulting in net proceeds to the Company of $3,888,000
after all costs and expenses. The shares began trading on the NASDAQ Capital Market on April 5, 2019 under the symbol “GHSI.”
Follow-On
Public Offerings
On
August 15, 2019, the Company completed a second public offering (the “August Offering”) of (i) 12,000,000 shares of
common stock, (ii) pre-funded warrants exercisable for 1,000,000 shares of common stock (the “Pre-Funded Warrants”),
and (iii) warrants to purchase up to an aggregate of 13,000,000 shares of common stock (the “August Warrants”). The
August Offering was conducted pursuant to an Underwriting Agreement, dated August 13, 2019 by and between the Company and Maxim
Group LLC and WallachBeth Capital, LLC. On August 16, 2019, the Company sold an additional 1,950,000 August Warrants upon exercise
of the underwriters’ over-allotment option. The net proceeds to the Company from the August Offering, after deducting underwriting
discounts and commissions and other estimated expenses were $4,944,340.
The
public offering price was $0.44 per share of common stock and $0.01 per accompanying August Warrant. Each August Warrant represents
the right to purchase one share of common stock at an exercise price of $0.585 per share. The August Warrants are exercisable
immediately, expire five years from the date of issuance and provide that, beginning on the earlier of (i) September 11, 2019
and (ii) the date on which the common stock traded an aggregate of more than 40,000,000 shares after the announcement of the pricing
of the August Offering, and ending on the twelve (12) month anniversary thereof, each August Warrant may be exercised at the option
of the holder on a cashless basis at a ratio of one August Warrant for one share of common stock, in whole or in part, if the
weighted average price of the Common Stock on the trading day immediately prior to the exercise date fails to exceed the initial
exercise price of the August Warrant. As of November 13, 2019, 1,000,000 August Pre-Funded Warrants have been exercised for proceeds
of $10,000 and 14,723,800 August Warrants have been exercised on a cashless basis, and the Company has issued an aggregate of
15,723,800 shares of common stock upon such exercises.
On
October 30, 2019, the Company completed a third public offering of 24,500,000 shares of its common stock (including 1,700,000
pre-funded warrants to purchase common stock in lieu thereof) and Series B warrants to purchase up to 24,500,000 shares of the
Company’s common stock. Each share of common stock (or pre-funded warrant) was sold together with one Series B warrant to
purchase one share of common stock at a combined price to the public of $0.342 per share and Series B warrant. The shares of common
stock or pre-funded warrants and the accompanying Series B warrants were sold together but will be issued separately and will
be immediately separable upon issuance. Net proceeds, after deducting underwriting discounts, commissions and offering expenses,
were approximately $7.2 million.
The
Series B warrants are exercisable at a price of $0.342 per share of common stock and will expire five years from the date on which
the Series B warrants become initially exercisable. Currently, Guardion does not have a sufficient number of authorized shares
of common stock to issue the shares of common stock issuable upon the exercise of the Series B warrants. As a result, the Series
B warrants will become exercisable only after Guardion effectuates an amendment to its certificate of incorporation to either
(i) increase the number of authorized shares of its common stock or (ii) implement a reverse stock split with respect to the shares
of its common stock. There can be no assurance that Guardion’s stockholders will approve a charter amendment, or as to when,
if ever, the, holders of the Series B warrants will be able to exercise the Series B warrants.
Maxim
Group LLC and WallachBeth Capital, LLC are acting as joint-bookrunning managers in connection with the offering. Guardion also
has granted to the underwriters a 45-day option to purchase up to an additional 3,675,000 shares of common stock and/or Series
B warrants to purchase up to 3,675,000 shares of common stock, at the public offering price less discounts and commissions.
NutriGuard
Acquisition
Effective
September 20, 2019 (the “Effective Date”), the Company’s newly-formed wholly-owned subsidiary, NutriGuard Formulations,
Inc., a Delaware corporation (“Buyer”), entered into an asset purchase agreement (the “Asset Purchase Agreement”)
with NutriGuard Research, Inc., a California corporation (“NutriGuard”), and NutriGuard’s sole shareholder,
Mark McCarty (the “NutriGuard Acquisition”).
Pursuant
to the Asset Purchase Agreement, Buyer purchased from NutriGuard specified assets of the NutriGuard brand and business, primarily
consisting of inventory, trademarks, copyrights and other intellectual property. In exchange, Buyer agreed to pay a royalty fee
to NutriGuard subsequent to meeting certain financial performance metrics based on the operating results of the NutriGuard brand
of products following the Effective Date. NutriGuard and Mr. McCarty also agreed, among other terms, to no longer use the “NutriGuard”
name upon the Effective Date.
In
addition, on the Effective Date, the Company and Mr. McCarty entered into a consulting agreement (the “Consulting Agreement”)
with Buyer pursuant to which Mr. McCarty will provide consulting services to, and serve as the Director of Research of, Buyer.
Additionally, the Company granted to Mr. McCarty stock options to purchase 100,000 shares of the Company’s common stock,
exercisable at a price of $0.5411 per share (which was the closing price of the Company’s common stock on the Effective
Date). The options were granted under the terms of the Company’s 2018 Equity Incentive Plan, which options vest as follows:
25% on the Effective Date, 25% on the first anniversary following the Effective Date, 25% on the second anniversary following
the Effective Date, and 25% on the third anniversary following the Effective Date. The vested portion of the options may be exercised
at any time prior to the earliest to occur of: (a) the 5th anniversary of the Effective Date; (b) 90 days following
the termination of the Consulting Agreement for any reason other than “for cause”; (c) 6 months following termination
of the Consulting Agreement due to Mr. McCarty’s death or disability; or (iv) in the event of a termination of Mr. McCarty
“for cause” under the Consulting Agreement.
Patents
On
October 29, 2019, the USPTO issued US Patent No. 10,456,028 as the second patent covering inventions embodied in the MapcatSF®.
Prior to the issuance of US Patent No. 9,486,136, the Company filed a continuation application, Patent Application 15/346,010,
covering new embodiments around the MapcatSF®device. These new embodiments contain improvements related to the
accuracy of intensity measurements made with the device, as well as new patentably distinct features around photodiode detector
calibrations. This patent application has now issued as US Patent No. 10,456,028.
Going
Concern
The
financial statements have been prepared assuming the Company will continue as a going concern. The Company had a net loss of $6,822,553
and utilized cash in operating activities of $4,189,050 during the nine months ended September 30, 2019. The Company expects to
continue to incur net losses and negative operating cash flows in the near-term. As a result, management has concluded that there
is substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial
statements are issued.
The
Company’s independent registered public accounting firm has also included explanatory language in their opinion accompanying
the Company’s audited financial statements for the year ended December 31, 2018. The Company’s financial statements
do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the
amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.
The
Company will continue to incur significant expenses for continued commercialization activities related to Lumega-Z, the MapcatSF®
medical device, VectorVision products, the TDSI business, the new NutriGuard line of nutraceuticals and with respect to
efforts to continue to build the Company’s infrastructure. Development and commercialization of medical foods and medical
devices involves a lengthy and complex process. Additionally, the Company’s long-term viability and growth may depend upon
the successful development and commercialization of new complementary products or product lines. On April 9, 2019, the Company
completed the IPO, resulting in net cash proceeds of $3,888,000 to the Company. The Company is seeking to raise additional debt
and/or equity capital to fund future operations, but there can be no assurances that the Company will be able to secure such additional
financing in the amounts necessary to fully fund its operating requirements on acceptable terms or at all. If the Company is unable
to access sufficient capital resources on a timely basis, the Company may be forced to reduce or discontinue its technology and
product development programs and curtail or cease operations.
NASDAQ
Notice
On
September 20, 2019, the Company received a notification letter from the Nasdaq Listing Qualifications Staff (the “Staff”)
of the Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that, for the last 30 consecutive business days, the
closing bid price for the Company’s common stock was below the minimum $1.00 per share requirement for continued listing
on The Nasdaq Capital Market as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”).
The Nasdaq letter has no immediate effect on the listing of the Company’s common stock on the Nasdaq Capital Market.
In
accordance with Nasdaq listing rules, the Company has been provided an initial period of 180 calendar days, or until March 18,
2020 (the “Compliance Date”), to regain compliance with the Minimum Bid Price Requirement. If, at any time during
this 180-day period, the closing bid price of the Company’s common stock is at least $1.00 for a minimum of 10 consecutive
business days, the Staff will provide the Company written confirmation of compliance with the Minimum Bid Price Requirement and
the matter will be closed. If the Company does not regain compliance by the Compliance Date, the Company may be eligible for an
additional 180 calendar day compliance period. To qualify for such additional compliance period, the Company would have to meet
the continued listing requirements of the NASDAQ Capital Market, except for the Minimum Bid Price Requirement, and the Company
would need to provide written notice of its intention to cure the deficiency during the additional compliance period. If the Company
is not eligible for the additional compliance period or it appears to the Staff that the Company will not be able to cure the
deficiency or if the Staff exercises its discretion to not provide such additional compliance period, the Staff will provide written
notice to the Company that its common stock will be subject to delisting. At that time, the Company may appeal the Staff’s
delisting determination to a Nasdaq Hearing Panel.
Reverse
Stock Split
On
January 30, 2019, following stockholder and Board approval, the Company filed a Certificate of Amendment to its Amended Certificate
of Incorporation, as amended (the “Amendment”), with the Secretary of State of the State of Delaware to effectuate
a one-for-two (1:2) reverse stock split (the “Reverse Stock Split”) of its common stock, par value $0.001 per share,
without any change to its par value. The Amendment became effective on the filing date. The number of shares authorized for common
and preferred stock were not affected by the Reverse Stock Split. No fractional shares were issued in connection with the Reverse
Stock Split as all fractional shares were “rounded up” to the next whole share. Proportional adjustments for the Reverse
Stock Split were made to the Company’s outstanding common stock, stock options, and warrants as if the split occurred at
the beginning of the earliest period presented.
Recent
Accounting Pronouncements
See
Note 2 to the condensed consolidated financial statements for the period ended September 30, 2019 for management’s discussion
of recent accounting pronouncements.
Concentration
of Risk
Cash
balances are maintained at large, well-established financial institutions. At times, cash balances may exceed federally insured
limits. Insurance coverage limits are $250,000 per depositor at each financial institution. The Company has never experienced
any losses related to these balances.
Critical
Accounting Policies and Estimates
The
Company’s financial statements have been prepared in conformity with accounting principles generally accepted in the United
States of America (“GAAP”). The preparation of its financial statements in conformity with GAAP requires management
to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Actual
results could differ from those estimates. The Company’s financial statements included herein include all adjustments, consisting
of only normal recurring adjustments, necessary to present fairly the Company’s financial position, results of operations
and cash flows.
The
following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s
financial statements.
Intangible
Assets
In
connection with the VectorVision transaction, the Company identified and allocated estimated fair values to intangible assets
including goodwill and customer relationships.
In
accordance with Accounting Standard Codification (“ASC”) 350 – Intangibles – Goodwill and Other, the Company
determined whether these assets are expected to have indefinite (such as goodwill) or limited useful lives, and for those with
limited lives, the Company established an amortization period and method of amortization. The Company’s goodwill and other
intangible assets are subject to periodic impairment testing.
The
Company utilized the services of an independent third-party valuation firm to assist it in identifying intangible assets and in
estimating their fair values. The useful lives for its intangible assets other than goodwill were estimated based on Management’s
consideration of various factors, including assumptions that market participants might use about sales expectations as well as
potential effects of obsolescence, competition, technological progress and the regulatory environment. Because the future pattern
in which the economic benefits of these intangible assets may not be reliably determined, amortization expense is generally calculated
on a straight-line basis.
The
Company reviews all intangible assets for impairment when circumstances indicate that their carrying values may not be recoverable.
If the carrying value of an asset group is not recoverable, the Company recognizes an impairment loss for the excess carrying
value over the fair value in its consolidated statements of operations. As of September 30, 2019 and December 31, 2018, the Company
was not aware of the existence of any indicators of impairment of its intangibles at such dates.
Goodwill
Goodwill
represents the excess of the purchase consideration over the fair value of the net tangible and identifiable intangible assets
acquired in a business combination. The Company evaluates goodwill for impairment on an annual basis or whenever events and changes
in circumstances suggest that the carrying amount may not be recoverable. The Company conducts its annual impairment analysis
in the beginning of the fourth quarter of each fiscal year. Impairment of goodwill is tested at the reporting unit level by comparing
the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. Estimations and assumptions
regarding the number of reporting units, future performances, results of the Company’s operations and comparability of its
market capitalization and net book value will be used. If the carrying amount of the reporting unit exceeds its fair value, goodwill
is considered impaired and an impairment loss is measured by the resulting amount. As of September 30, 2019 and December 31, 2018,
the Company was not aware of the existence of any indicators of impairment of its goodwill at such dates.
Stock-Based
Compensation
The
Company periodically issues stock-based compensation to officers, directors, contractors and consultants for services rendered.
Such issuances vest and expire according to terms established at the issuance date.
Stock-based
payments to officers, directors, and employees, which include grants of employee stock options, are recognized in the financial
statements based on their fair values. Stock option grants, which are generally time vested, will be measured at the grant date
fair value and charged to operations on a straight-line basis over the vesting period. The fair value of stock options is determined
utilizing the Black-Scholes option-pricing model, which is affected by several variables, including the risk-free interest rate,
the expected dividend yield, the expected life of the equity award, the exercise price of the stock option as compared to the
fair market value of the common stock on the grant date and the estimated volatility of the common stock over the term of the
equity award.
In
prior periods, the Company accounted for stock option and warrant grants issued and vesting to non-employees in accordance with
the authoritative guidance of the FASB whereas the value of the stock compensation is based upon the measurement date as determined
at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn
the equity instruments is complete. On January 1, 2019, the Company adopted Accounting Standards Update (ASU) 2018-07 which expands
the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. Non-employee
stock-based compensation charges generally are amortized over the vesting period using a graded vesting basis. In certain circumstances
where there are no future performance requirements by the non-employee, grants are immediately vested and the total stock-based
compensation charge is recorded in the period of the measurement date.
The
risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Until the Company has established
a trading market for its common stock, estimated volatility is based on the average historical volatilities of comparable public
companies in a similar industry. The expected dividend yield is based on the current yield at the grant date. The Company has
never declared or paid dividends on its common stock and has no plans to do so for the foreseeable future.
The
fair value of common stock was determined based on management’s judgment. Due to the availability of historical data from
the Company’s recent preferred stock sales, Management used a valuation of $1.15 for accounting purposes during the first
six months of 2018. Management used a valuation $4.00 for the first quarter of 2019. Management considered business and market
factors affecting the Company during these periods, including capital raising efforts, its proprietary technology, and other factors.
Based on this evaluation, management believes that its valuations are appropriate for accounting purposes during these periods.
Closing prices of our common stock ranging from $1.26 to $3.30 were used in our fair value calculations during the second quarter
of 2019.
The
Company recognizes the fair value of stock-based compensation within its statements of operations with classification depending
on the nature of the services rendered.
Plan
of Operations
General
Overview
Based
on the availability of sufficient funding, the Company intends to increase its commercialization activities and:
|
●
|
further
the commercial production of the MapcatSF;
|
|
●
|
expand
the Company’s domestic sales and marketing efforts;
|
|
●
|
explore
sales and marketing opportunities in foreign markets such as Asia and Europe;
|
|
●
|
increase
production of Lumega-Z and GlaucoCetinTM to support the additional sales resulting from the deployment of additional
MapcatSF units and increased marketing and promotional activity;
|
|
●
|
commence
certain FDA electrical safety testing of the MapcatSF;
|
|
●
|
increase
focus on intellectual property protection and strategy;
|
|
●
|
expand
the sales and marketing of the VectorVision product line;
|
|
●
|
develop
the TDSI business and operations;
|
|
●
|
explore
opportunities and channels to enter the expansive market opportunity in China for non-pharmacologic treatments of macular
degeneration, glaucoma and diabetic retinopathy; and
|
|
●
|
increase
the existing NutriGuard customer base through NutriGuard Formulations, Inc. and build on its product platform by making NutriGuard
products available to customers directly through direct-to-consumer (DTC) channels and through recommendations by their physicians.
|
The
FDA and other regulatory bodies require electronic medical devices to comply with IEC 60601 standards. The International Electrical
Commission (“IEC”) established technical standards for the safety and effectiveness of medical electrical equipment.
Adherence to these standards is required for commercialization of electrical medical equipment. As a medical device powered by
electricity, the MapcatSF will need to undergo testing to demonstrate compliance with the IEC 60601 standards. This testing is
typically conducted by a Nationally Recognized Testing Laboratory (“NRTL”), which is an independent laboratory recognized
by the Occupational Safety and Health Administration (“OSHA”) to test products to the specifications of applicable
product safety standards. The Company is in discussions with its contract manufacturer of the MapcatSF to engage an NRTL at the
appropriate juncture prior to commercialization of the MapcatSF. The relevant predicate device for the MapcatSF is the MPS II,
the applicable Class I product code for the MapcatSF is HJW and the applicable Code of Federal Regulation is 886.1050. The FDA
does not require test documents to be submitted to the FDA for a Class I medical device, but that the evidence of such testing
be placed in a Design History file and be kept internally at the company or manufacturer and readily available should the FDA
or other regulatory bodies request to review the testing documents. While the FDA does not require that a Class I medical device
have formal validation, the Company expects to complete applicable IEC 60601-1 testing prior to commercialization because the
Company believes in marketing a product that has evidence that it is safe and effective.
Results
of Operations
Through
September 30, 2019, the Company had limited operations and has primarily been engaged in product development, commercialization,
and raising capital. The Company has incurred and will continue to incur significant expenditures for the development of its products
and intellectual property, which includes both medical foods and medical diagnostic equipment for the treatment of various eye
diseases. The Company had limited revenue during the nine months ended September 30, 2019 and 2018.
Comparison
of Three Months Ended September 30, 2019 and 2018
|
|
Three Months Ended
September 30,
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
Revenue
|
|
$
|
161,162
|
|
|
$
|
294,230
|
|
|
$
|
(133,068
|
)
|
|
|
(45
|
)%
|
Cost of goods sold
|
|
|
70,999
|
|
|
|
125,406
|
|
|
|
(54,407
|
)
|
|
|
(43
|
)%
|
Gross Profit
|
|
|
90,163
|
|
|
|
168,824
|
|
|
|
(78,661
|
)
|
|
|
(47
|
)%
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
31,897
|
|
|
|
4,793
|
|
|
|
27,104
|
|
|
|
566
|
%
|
Sales and marketing
|
|
|
448,387
|
|
|
|
240,028
|
|
|
|
208,359
|
|
|
|
87
|
%
|
General and administrative
|
|
|
2,022,367
|
|
|
|
1,064,645
|
|
|
|
957,722
|
|
|
|
90
|
%
|
Total Operating Expenses
|
|
|
2,502,651
|
|
|
|
1,309,466
|
|
|
|
1,193,185
|
|
|
|
91
|
%
|
Loss from Operations
|
|
|
(2,412,488
|
)
|
|
|
(1,140,642
|
)
|
|
|
(1,271,846
|
)
|
|
|
112
|
%
|
Other Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
4,205
|
|
|
|
545
|
|
|
|
3,660
|
|
|
|
672
|
%
|
Change in fair value of derivative warrants
|
|
|
(31,322
|
)
|
|
|
-
|
|
|
|
(31,322
|
)
|
|
|
100
|
%
|
Costs associated with extension of warrant expiration dates
|
|
|
-
|
|
|
|
1,007,006
|
|
|
|
(1,007,006
|
)
|
|
|
(100
|
)%
|
Net Loss
|
|
$
|
(2,385,371
|
)
|
|
$
|
(2,148,193
|
)
|
|
$
|
(237,178
|
)
|
|
|
11
|
%
|
Revenue
For
the three months ended September 30, 2019, revenue from product sales was $161,162 compared to $294,230 for the three months ended
September 30, 2018, resulting in a decrease of $133,068 or 45%. The decrease can be attributed primarily to a reduction in sales
of the Vector Vision CSV-1000 product in the third quarter of 2019 as compared to the prior periods due to the transition of sales
and manufacturing efforts away from our VectorVision CSV-1000 device. Although the CSV-1000 will continue to be sold, the Company
plans to put a greater focus on sales and marketing efforts of the new CSV-2000 and anticipates sales of the next generation device
to commence during the fourth quarter of 2019.
Cost
of Goods Sold
For
the three months ended September 30, 2019, cost of goods sold was $70,999 compared to $125,406 for the three months ended September
30, 2018, resulting in a decrease of $54,407 or 43%. The decrease reflects the VectorVision product transition noted above.
Gross
Profit
For
the three months ended September 30, 2019, gross profit was $90,163 compared to $168,824 for the three months ended September
30, 2018, resulting in a decrease of $78,661 or 47% due to the VectorVision product transition noted above. Gross profit represented
56% of revenues the three months ended September 30, 2019, versus 57% of revenue for the three months ended September 30, 2018.
Research
and Development
For
the three months ended September 30, 2019, research and development costs were $31,897 compared to $4,793 for the three months
ended September 30, 2018, resulting in an increase of $27,104 or 566%. The increase was due to engineering development costs associated
with the Company’s CSV-2000 product in 2019.
Sales
and Marketing
For
the three months ended September 30, 2019, sales and marketing expenses were $448,387 compared to $240,028 for the three months
ended September 30, 2018. The increase in sales and marketing expenses of $208,359 or 87% compared to the prior period was primarily
due to increased labor costs of approximately $43,000 as well as an increase of approximately $143,000 due to marketing, website
development, professional services, and trade show expenses in the current quarter.
General
and Administrative
For
the three months ended September 30, 2019, general and administrative expenses were $2,022,367 compared to $1,064,645 for the
three months ended September 30, 2018. The increase of $957,722 or 90% compared to the prior period was primarily due to an increase
in non-cash stock compensation costs during the current period of approximately $429,000. Consulting, professional services, and
investor relations costs increased approximately $203,000 in the current period, legal fees increased approximately $259,000,
and corporate insurance costs rose approximately $86,000.
Interest
Expense
For
the three months ended September 30, 2019, interest expense was $4,205 compared to $545 for the three months ended September 30,
2018. The increase of 3,660 compared to the prior period was due primarily to financing costs associated with corporate insurance
coverage. There were no such costs for the comparable period in 2018.
Change
in Fair Value of Derivative Warrants
On
April 4, 2019, the Company issued 62,500 warrants with an exercise price of $5.00 per share to the Underwriter in connection with
the Company’s IPO. The Company accounted for these warrants as a derivative liability in the financial statements because
they were associated with the IPO, a registered offering, and the settlement provisions contained language that the shares underlying
the warrants are required to be registered. The fair value of the warrants will be remeasured at each reporting period, with the
change in the fair value recognized in earnings in the accompanying Statements of Operations. The fair value of the warrants at
the date of issuance was determined to be $229,291 and was recorded as a finance cost. As of September 30, 2019, the fair value
of the warrant liability was determined to be $47,118 and the Company recorded a change in fair value of derivative warrants of
$31,322 in the Statements of Operations.
Costs
Associated with Extension of Warrant Expiration Dates
During
September 2018, the Company extended warrants to purchase shares of common stock of the Company that were scheduled to expire
at dates ranging from September 30, 2018 through January 25, 2019 held by two stockholders. The Company recognized expense of
$1,007,006 relating to the extension of the exercise period of the warrants using a Black-Scholes option-pricing model to estimate
fair value.
Net
Loss
For
the three months ended September 30, 2019, the Company incurred a net loss of $2,385,371, compared to a net loss of $2,148,193
for the three months ended September 30, 2018. The increase in net loss of $237,178 or 11% compared to the prior year period was
primarily due to an increase in non-cash stock compensation costs of approximately $429,000. In addition, expenses for corporate
insurance, investor relations, consulting, legal and professional fees have increased versus the prior period. The increases were
partially offset by warrant exercise period extension costs in 2018 that were not incurred in the current period.
Segment
Information
As
of September 30, 2019, Management reported its operating results in two operating segments: Medical Foods, and Vision Testing
Diagnostics. As of September 30, 2019, the TDSI subsidiary does not meet the required quantitative criteria to be considered a
reportable operating segment.
|
i.
|
Medical
Foods – Our Medical Foods segment develops, formulates and distributes condition-specific medical foods with an
initial medical food product on the market under the brand name Lumega-Z® that replenishes and restores the
macular protective pigment. We have also invented a proprietary technology, embodied in a medical device, the MapcatSF,®
that accurately measures the macular pigment optical density (“MPOD”). Using the MapcatSF to measure the
MPOD allows one to monitor the increase in the density of the macular protective pigment after taking Lumega-Z. The Company
has also developed a new medical food product, GlaucoCetinTM, which the Company believes is the first vision-specific
medical food designed to support and protect the mitochondrial function of optic nerve cells and improve blood flow in the
ophthalmic artery in patients with glaucoma. GlaucoCetinTM combines a unique set of ingredients, specifically designed
to stop or potentially reverse the underlying cause of optic nerve loss, and ultimately vision loss, in patients with glaucoma.
|
|
|
|
|
ii.
|
Vision
Testing Diagnostics – Our Vision Testing Diagnostics segment, under the brand name VectorVision, specializes in
the standardization of contrast sensitivity, glare sensitivity, low contrast acuity, and early treatment diabetic retinopathy
study (“ETDRS”) visual acuity testing. VectorVision’s standardization system is designed to provide the
practitioner or researcher with the ability to delineate very small changes in visual capability, either as compared to the
population or from visit to visit. VectorVision develops, manufactures and sells equipment and supplies for standardized vision
testing for use by eye doctors in clinical trials, for real-world vision evaluation, and industrial vision testing.
|
The
following tables set forth our results of operations by segment (results allocated to Other consist of non-cash stock compensation
expense, depreciation and amortization, corporate legal fees, and the TDSI operations):
|
|
For the Three Months Ended September 30, 2019
|
|
|
|
Other
|
|
|
Medical Foods
|
|
|
Vision Testing
Diagnostics
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,500
|
|
|
$
|
112,957
|
|
|
$
|
44,705
|
|
|
$
|
161,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
1,422
|
|
|
|
41,655
|
|
|
|
27,922
|
|
|
|
70,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,078
|
|
|
|
71,302
|
|
|
|
16,783
|
|
|
|
90,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
1,235,389
|
|
|
|
1,124,462
|
|
|
|
142,800
|
|
|
|
2,502,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(1,233,311
|
)
|
|
$
|
(1,053,160
|
)
|
|
$
|
(126,017
|
)
|
|
$
|
(2,412,488
|
)
|
|
|
For the Three Months Ended September 30, 2018
|
|
|
|
Other
|
|
|
Medical Foods
|
|
|
Vision Testing
Diagnostics
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
86,082
|
|
|
$
|
208,148
|
|
|
$
|
294,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
-
|
|
|
|
37,076
|
|
|
|
88,330
|
|
|
|
125,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
-
|
|
|
|
49,006
|
|
|
|
119,818
|
|
|
|
168,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
623,791
|
|
|
|
574,974
|
|
|
|
110,701
|
|
|
|
1,309,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(623,791
|
)
|
|
$
|
(525,968
|
)
|
|
$
|
9,117
|
|
|
$
|
(1,140,642
|
)
|
Revenue
For
the three months ended September 30, 2019, revenue from our Medical Foods segment was $112,957 compared to $86,082 for the three
months ended September 30, 2018, resulting in an increase of $26,875 or 31%. The increase reflects an increased customer base
for Lumega-Z as the Company expands into new clinics. For the three months ended September 30, 2019, revenue from our Vision Testing
Diagnostics segment was $44,705 compared to $208,148 for the three months ended September 30, 2018, resulting in a decrease of
$163,443 or 79%. The decrease is due to the transition of sales and manufacturing efforts away from our VectorVision CSV-1000
device. The Company anticipates sales of the next generation CSV-2000 device to commence during the fourth quarter of 2019. The
Company also earned $3,500 in diagnostic imaging services revenue from its TDSI business during the three months ended June 30,
2019, as shown in the Other category above.
Cost
of Goods Sold
For
the three months ended September 30, 2019, cost of goods sold from our Medical Foods segment was $41,655 compared to $37,076 for
the three months ended September 30, 2018, resulting in an increase of $4,579 or 12% that corresponds to the increase in Medical
Foods revenue. For the three months ended September 30, 2019, cost of goods sold from our Vision Testing Diagnostics segment was
$27,922 compared to $88,330 for the three months ended September 30, 2018, resulting in a decrease of $60,408 or 68%. The decrease
reflects the transition of sales and manufacturing efforts away from our VectorVision CSV-1000 device.
Gross
Profit
For
the three months ended September 30, 2019, gross profit from the Medical Foods segment was $71,302 compared to $49,006 for the
three months ended September 30, 2018, resulting in an increase of $22,296 or 45%. For the three months ended September 30, 2019,
gross profit from the Vision Testing Diagnostics segment was $16,783 compared to $119,818 for the three months ended September
30, 2018, resulting in a decrease of $103,035 or 86%. The overall decrease is due primarily to the transition of sales efforts
away from our VectorVision CSV-1000 device. Gross profit overall represented 56% of revenues for the three months ended September
30, 2019, versus 57% of revenue for the three months ended June 30, 2018.
Comparison
of Nine Months Ended September 30, 2019 and 2018
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
Revenue
|
|
$
|
664,669
|
|
|
$
|
708,047
|
|
|
$
|
(43,378
|
)
|
|
|
(6
|
)%
|
Cost of goods sold
|
|
|
261,547
|
|
|
|
292,461
|
|
|
|
(30,914
|
)
|
|
|
(11
|
)%
|
Gross Profit
|
|
|
403,122
|
|
|
|
415,586
|
|
|
|
(12,464
|
)
|
|
|
(3
|
)%
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
138,613
|
|
|
|
199,500
|
|
|
|
(60,887
|
)
|
|
|
(31
|
)%
|
Sales and marketing
|
|
|
1,246,846
|
|
|
|
1,224,491
|
|
|
|
22,355
|
|
|
|
2
|
%
|
General and administrative
|
|
|
5,427,573
|
|
|
|
3,779,325
|
|
|
|
1,648,248
|
|
|
|
44
|
%
|
Total Operating Expenses
|
|
|
6,813,032
|
|
|
|
5,203,316
|
|
|
|
1,609,716
|
|
|
|
31
|
%
|
Loss from Operations
|
|
|
(6,409,910
|
)
|
|
|
(4,787,730
|
)
|
|
|
(1,622,180
|
)
|
|
|
34
|
%
|
Other Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
255,842
|
|
|
|
2,090
|
|
|
|
253,752
|
|
|
|
12,141
|
%
|
Finance cost upon issuance of warrants
|
|
|
415,955
|
|
|
|
-
|
|
|
|
415,955
|
|
|
|
100
|
%
|
Change in fair value of derivative warrants
|
|
|
(259,154
|
)
|
|
|
-
|
|
|
|
(259,154
|
)
|
|
|
(100
|
)%
|
Costs associated with extension of warrant expiration dates
|
|
|
-
|
|
|
|
1,501,397
|
|
|
|
(1,501,397
|
)
|
|
|
(100
|
)%
|
Net Loss
|
|
$
|
(6,822,553
|
)
|
|
$
|
(6,291,217
|
)
|
|
$
|
(531,336
|
)
|
|
|
8
|
%
|
Revenue
For
the nine months ended September 30, 2019, revenue from product sales was $664,669 compared to $708,047 for the nine months ended
September 30, 2018, resulting in a decrease of $43,378 or 6%. The decrease is primarily due to the transition of sales and manufacturing
efforts away from our VectorVision CSV-1000 device. Although the CSV-1000 will continue to be sold, the Company plans to put a
greater focus on sales and marketing efforts of the new CSV-2000 and anticipates sales of the next generation CSV-2000 device
to commence during the fourth quarter of 2019.
Cost
of Goods Sold
For
the nine months ended September 30, 2019, cost of goods sold was $261,547 compared to $292,461 for the nine months ended September
30, 2018, resulting in a decrease of $30,914 or 11%. The decrease reflects the VectorVision product transition noted above.
Gross
Profit
For
the nine months ended September 30, 2019, gross profit was $403,122 compared to $415,586 for the nine months ended September 30,
2018, resulting in a decrease of $12,464 or 3% due to the VectorVision product transition noted above. Gross profit represented
61% of revenues for the nine months ended September 30, 2019, versus 59% of revenue for the nine months ended September 30, 2018.
Research
and Development
For
the nine months ended September 30, 2019, research and development costs were $138,613 compared to $199,500 for the nine months
ended September 30, 2018, resulting in a decrease of $60,887 or 31%. The decrease was due to reduced engineering development costs
associated with the Company’s MapcatSF medical device during 2019 partially offset by engineering costs associated with
the Company’s CSV-2000 product.
Sales
and Marketing
For
the nine months ended September 30, 2019, sales and marketing expenses were $1,246,846 compared to $1,224,491 for the nine months
ended September 30, 2018. The increase in sales and marketing expenses of $22,355 or 2% compared to the prior period was primarily
due to increased labor costs of approximately $123,000, trade show costs of approximately $94,000 as well as increases in professional
services and website development of approximately $77,000. The increases were largely offset by the cancellation of a third-party
contract sales agreement in the second quarter of 2018.
General
and Administrative
For
the nine months ended September 30, 2019, general and administrative expenses were $5,427,573 compared to $3,779,325 for the nine
months ended September 30, 2018. The increase of $1,648,248 or 44% compared to the prior period was primarily due to an increase
in non-cash stock compensation costs during the current period of approximately $683,000. Consulting, professional services, and
investor relations costs increased approximately $348,000 in the current period, legal fees increased approximately $220,000,
corporate insurance costs rose approximately $178,000, and travel costs increased approximately $154,000.
Interest
Expense
For
the nine months ended September 30, 2019, interest expense was $255,842 compared to $2,090 for the nine months ended September
30, 2018. The increase of $253,752 compared to the prior period was due primarily to the amortization of the debt discount associated
with March 2019 convertible notes for $250,000 that were converted to equity in April of 2019. There were no such costs for the
comparable period in 2018.
Finance
Cost Upon Issuance of Warrants
Finance
costs for the nine months ended September 30, 2019 of $415,955 include the following; (a) In March 2019, the Company issued warrants
to two convertible note holders pursuant to the anticipated completion of the Company’s IPO (the IPO was completed on April
9, 2019). Due to the variable terms of both the exercise price and the number of warrants to be issued, the warrants were accounted
for as derivative liabilities at March 31, 2019. The fair value of the warrants at the closing of the IPO was determined to be
$436,034, of which $250,000 was recorded as a valuation discount, and $186,034 was recorded as a finance cost. (b) On April 4,
2019, the Company issued 62,500 warrants with an exercise price of $5.00 per share to the Underwriter in connection with the Company’s
IPO. The Company accounted for these warrants as a derivative liability in the financial statements at June 30, 2019 because they
were associated with the IPO, a registered offering, and the settlement provisions contained language that the shares underlying
the warrants are required to be registered. The fair value of the warrants at the date of issuance was determined to be $229,921
and was recorded as a finance cost. There were no such costs for the comparable period in
2018.
Change
in Fair Value of Derivative Warrants
The
change in fair value of the derivative warrant liability was a decrease of $259,154 for the nine months ended September 30, 2019
and includes the following:
(I)
In March 2019, the Company issued warrants to two convertible note holders pursuant to the anticipated completion of the Company’s
IPO (the IPO was completed on April 9, 2019). Due to the variable terms of both the exercise price and the number of warrants
to be issued, the warrants were accounted for as derivative liabilities at March 31, 2019 with a fair value of $436,034. Upon
completion of the IPO on April 9, 2019, the exercise price and the number of warrants were fixed and the warrants were no longer
accounted for as liabilities. As such the fair value of the warrant liability of $359,683 was reclassified to equity and the remaining
liability of $76,351 was recorded as a change in fair value of derivative liabilities in the Statements of Operations.
(II)
On April 4, 2019, the Company issued 62,500 warrants with an exercise price of $5.00 per share to the Underwriter in connection
with the Company’s IPO. The Company accounted for these warrants as a derivative liability in the financial statements because
they were associated with the IPO, a registered offering, and the settlement provisions contained language that the shares underlying
the warrants are required to be registered. The fair value of the warrants will be remeasured at each reporting period, with the
change in the fair value recognized in earnings in the accompanying Statements of Operations. The fair value of the warrants at
the date of issuance was determined to be $229,921 and was recorded as a finance cost. As of September 30, 2019, the fair value
of the warrant liability was determined to be $47,118 and the Company recorded a change in fair value of derivative warrants of
$182,803 in the Statements of Operations. There were no such costs for the comparable period
in 2018.
Costs
Associated with Extension of Warrant Expiration Dates
During
April, May and September of 2018, the Company and certain stockholders who held warrants to purchase shares of common stock of
the Company that were scheduled to expire at various dates in 2018 and early 2019 extended the termination dates of such warrants.
The Company recognized expense of $1,501,397 relating to the extension of the exercise period of the warrants using a Black-Scholes
option-pricing model to estimate fair value.
Net
Loss
For
the nine months ended September 30, 2019, the Company incurred a net loss of $6,822,553, compared to a net loss of $6,291,217
for the nine months ended September 30, 2018. The increase in net loss of $531,336 or 8% compared to the prior year period was
primarily due to an increase in non-cash stock compensation costs of approximately $683,000. In addition, expenses for corporate
insurance, investor relations, labor, legal and professional fees, and travel have increased versus the prior period but were
offset by the elimination of costs associated with engagement of a third-party contract sales organization in 2018 as well as
non-cash costs associated with the extension of warrant expiration dates in 2018.
Segment
Information
The
following tables set forth our results of operations by segment (results allocated to Other consist of non-cash stock compensation
expense, depreciation and amortization, corporate legal fees, and the TDSI operations):
|
|
For the Nine Months Ended September 30, 2019
|
|
|
|
Other
|
|
|
Medical Foods
|
|
|
Vision Testing
Diagnostics
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
9,800
|
|
|
$
|
317,338
|
|
|
$
|
337,531
|
|
|
$
|
664,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
3,981
|
|
|
|
120,608
|
|
|
|
136,958
|
|
|
|
261,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
5,819
|
|
|
|
196,730
|
|
|
|
200,573
|
|
|
|
403,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
3,195,227
|
|
|
|
3,127,782
|
|
|
|
490,023
|
|
|
|
6,813,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(3,189,408
|
)
|
|
$
|
(2,931,052
|
)
|
|
$
|
(289,450
|
)
|
|
$
|
(6,409,910
|
)
|
|
|
For
the Nine Months Ended September 30, 2018
|
|
|
|
Other
|
|
|
Medical
Foods
|
|
|
Vision
Testing
Diagnostics
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
238,213
|
|
|
$
|
469,834
|
|
|
$
|
708,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
-
|
|
|
|
110,462
|
|
|
|
181,999
|
|
|
|
292,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
-
|
|
|
|
127,751
|
|
|
|
287,835
|
|
|
|
415,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
2,126,939
|
|
|
|
2,801,924
|
|
|
|
274,453
|
|
|
|
5,203,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
$
|
(2,126,939
|
)
|
|
$
|
(2,674,173
|
)
|
|
$
|
13,382
|
|
|
$
|
(4,787,730
|
)
|
Revenue
For
the nine months ended September 30, 2019, revenue from our Medical Foods segment was $317,338 compared to $238,213 for the nine
months ended September 30, 2018, resulting in an increase of $79,125 or 33%. The increase reflects an increased customer base
for Lumega-Z as the Company expands into new clinics. For the nine months ended September 30, 2019, revenue from our Vision Testing
Diagnostics segment was $337,531 compared to $469,834 for the nine months ended September 30, 2018, resulting in a decrease of
$132,303 or 28%. The decrease was due to the transition of sales and manufacturing efforts away from our VectorVision CSV-1000
device. The Company anticipates sales of the next generation CSV-2000 device to commence during the fourth quarter of 2019. The
Company also earned $9,800 in diagnostic imaging services revenue from its TDSI business during the nine months ended September
30, 2019, as shown in the Other category above.
Cost
of Goods Sold
For
the nine months ended September 30, 2019, cost of goods sold from our Medical Foods segment was $120,608 compared to $110,462
for the nine months ended September 30, 2018, resulting in an increase of $10,146 or 9% that corresponds to the increase in Medical
Foods revenue. For the nine months ended September 30, 2019, cost of goods sold from our Vision Testing Diagnostics segment was
$136,958 compared to $181,999 for the nine months ended September 30, 2018, resulting in a decrease of $45,041 or 25%. The decrease
reflects the transition of sales and manufacturing efforts away from our VectorVision CSV-1000 device.
Gross
Profit
For
the nine months ended September 30, 2019, gross profit from the Medical Foods segment was $196,730 compared to $127,751 for the
nine months ended September 30, 2018, resulting in an increase of $68,979 or 54%. The increase reflects an increased customer
base for Lumega-Z. For the nine months ended September 30, 2019, gross profit from the Vision Testing Diagnostics segment was
$200,573 compared to $287,835 for the nine months ended September 30, 2018, resulting in a decrease of $87,262 or 30%. The decrease
is due to the transition of sales efforts away from our VectorVision CSV-1000 device. Gross profit overall represented 61% of
revenues for the nine months ended September 30, 2019, versus 59% of revenue for the nine months ended September 30, 2018.
Liquidity
and Capital Resources
Since
its formation in 2009, the Company has devoted substantial effort and capital resources to the development and commercialization
activities related to its lead product Lumega-Z, its MapcatSF medical device, its new medical food, GlaucoCetinTM,
and VectorVision’s new CSV-2000 and AcQvizTM devices. As a result of these and other activities, the Company
utilized cash in operating activities of $4,189,050 during the nine months ended September 30, 2019. The Company had working capital
of $5,672,704 at September 30, 2019. As of September 30, 2019, the Company had cash in the amount of $5,554,960 and no available
borrowings. The Company’s financing has historically come primarily from the issuance of convertible notes, promissory notes
and from the sale of common and preferred stocks.
On
October 30, 2019, the Company completed an underwritten public offering of 24,500,000 shares of its common stock (including 1,700,000
pre-funded warrants to purchase common stock in lieu thereof) and Series B warrants to purchase up to 24,500,000 shares of the
Company’s common stock. Net proceeds, after deducting underwriting discounts, commissions and offering expenses, were approximately
$7.2 million. The Company’s pro-form cash balance as of September 30, 2019, after including this offering on a net basis,
would have been approximately $12.7 million.
The
financial statements have been prepared assuming the Company will continue as a going concern. The Company expects to continue
to incur net losses and negative operating cash flows in the near-term. As a result, management has concluded that there is substantial
doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements
are issued.
The
Company’s independent registered public accounting firm has also included explanatory language in their opinion accompanying
the Company’s audited financial statements for the year ended December 31, 2018. The Company’s financial statements
do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the
amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.
The
Company will continue to incur significant expenses for continued commercialization activities related to Lumega-Z, the MapcatSF
medical device, VectorVision products, the TDSI business and with respect to efforts to continue to build the Company’s
infrastructure. Development and commercialization of medical foods and medical devices involves a lengthy and complex process.
Additionally, the Company’s long-term viability and growth may depend upon the successful development and commercialization
of new complementary products or product lines. On April 9, 2019, the Company completed the IPO, resulting in net cash proceeds
of $3,888,000 to the Company. On August 15, 2019, the Company consummated an underwritten public offering resulting in net proceeds
to the Company of $4,944,340. On October 30, 2019, the Company consummated an underwritten public offering resulting in net proceeds
to the Company of approximately $7.2 million. The Company will continue to seek to raise additional debt and/or equity capital
to fund future operations as necessary, but there can be no assurances that the Company will be able to secure such additional
financing in the amounts necessary to fully fund its operating requirements on acceptable terms or at all. If the Company is unable
to access sufficient capital resources on a timely basis, the Company may be forced to reduce or discontinue its technology and
product development programs and curtail or cease operations.
Management
believes that with net proceeds raised of approximately $12.1 million from the August and October offerings that the Company has
adequate funding to pursue its planned business initiatives and operations through at least December 31, 2020.
Sources
and Uses of Cash
The
following table sets forth the Company’s major sources and uses of cash for each of the following periods:
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Net cash used in operating activities
|
|
$
|
(4,189,050
|
)
|
|
$
|
(3,287,940
|
)
|
Net cash used in investing activities
|
|
|
(163,105
|
)
|
|
|
(278,311
|
)
|
Net cash provided by (used in) financing activities
|
|
|
9,236,167
|
|
|
|
(67,189
|
)
|
Net increase (decrease) in cash
|
|
$
|
4,884,012
|
|
|
$
|
(3,633,440
|
)
|
Operating
Activities
Net
cash used in operating activities was $4,189,050 during the nine months ended September 30, 2019, versus $3,287,940 used during
the comparable prior year period. Cash in both periods was used for used for engineering, corporate insurance, investor relations,
labor, legal and professional fees, travel and other operating costs.
Investing
Activities
Net
cash used in investing activities was $163,105 for the nine months ended September 30, 2019 and $278,311 for the nine months ended
September 30, 2018. In June 2019, we purchased medical imaging equipment for use in our TDSI business. In January 2018, we acquired
the rights to a trademark portfolio for $50,000. In addition, we purchased a trade show booth in February 2018 and have invested
in MapCatSF equipment and internal-use software development.
Financing
Activities
Net
cash provided by financing activities was $9,236,167 for the nine months ended September 30, 2019 was due primarily to the completion
of our IPO, which resulted in net proceeds of $3,888,000, and our follow-on offering in August which resulted in net proceeds
of $4,944,340. In addition, in March 2019, the Company issued $350,000 in promissory and convertible promissory notes and received
cash of $154,375 from the exercise of warrants. These proceeds were partially offset by payment of $100,000 to settle a promissory
note. Net cash used in financing activities was $67,189 for the nine months ended September 30, 2018 was due primarily to our
payoff of a line of credit balance that had been assumed during our 2017 VectorVision acquisition.
Off-Balance
Sheet Arrangements
At
September 30, 2019 and December 31, 2018, the Company did not have any transactions, obligations or relationships that could be
considered off-balance sheet arrangements.