ITEM
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Guardion
Health Sciences, Inc.
Condensed
Consolidated Balance Sheets
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
9,795,441
|
|
|
$
|
11,115,502
|
|
Accounts receivable
|
|
|
22,849
|
|
|
|
78,337
|
|
Inventories, net
|
|
|
1,284,173
|
|
|
|
310,941
|
|
Prepaid expenses
|
|
|
231,621
|
|
|
|
362,938
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
11,334,084
|
|
|
|
11,867,718
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
11,751
|
|
|
|
11,751
|
|
Property and equipment, net
|
|
|
305,600
|
|
|
|
374,638
|
|
Right-of-use asset, net
|
|
|
457,677
|
|
|
|
572,714
|
|
Intangible assets
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
12,159,112
|
|
|
$
|
12,876,821
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
576,890
|
|
|
$
|
70,291
|
|
Accrued expenses
|
|
|
182,597
|
|
|
|
175,052
|
|
Due to former officer
|
|
|
230,208
|
|
|
|
-
|
|
Derivative warrant liability
|
|
|
7,519
|
|
|
|
13,323
|
|
Lease liability – current
|
|
|
159,962
|
|
|
|
151,568
|
|
Total current liabilities
|
|
|
1,157,176
|
|
|
|
410,234
|
|
|
|
|
|
|
|
|
|
|
Lease liability – long-term
|
|
|
313,909
|
|
|
|
434,747
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,471,085
|
|
|
|
844,981
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 10,000,000 shares authorized, no shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.001 par value; 250,000,000 shares authorized; 88,327,312 and 74,982,562 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively
|
|
|
88,327
|
|
|
|
74,983
|
|
Additional paid-in capital
|
|
|
61,308,938
|
|
|
|
57,468,528
|
|
Accumulated deficit
|
|
|
(50,709,238
|
)
|
|
|
(45,511,671
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
10,688,027
|
|
|
|
12,031,840
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
12,159,112
|
|
|
$
|
12,876,821
|
|
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,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical foods and nutraceuticals
|
|
$
|
142,556
|
|
|
$
|
112,957
|
|
|
$
|
1,446,584
|
|
|
$
|
317,338
|
|
Medical devices
|
|
|
110,632
|
|
|
|
44,705
|
|
|
|
237,136
|
|
|
|
337,531
|
|
Other
|
|
|
-
|
|
|
|
3,500
|
|
|
|
6,100
|
|
|
|
9,800
|
|
Total revenue
|
|
|
253,188
|
|
|
|
161,162
|
|
|
|
1,689,820
|
|
|
|
664,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical foods and nutraceuticals
|
|
|
68,956
|
|
|
|
41,655
|
|
|
|
764,245
|
|
|
|
120,608
|
|
Medical devices
|
|
|
45,157
|
|
|
|
27,922
|
|
|
|
101,077
|
|
|
|
136,958
|
|
Other
|
|
|
-
|
|
|
|
1,422
|
|
|
|
2,478
|
|
|
|
3,981
|
|
Total cost of goods sold
|
|
|
114,113
|
|
|
|
70,999
|
|
|
|
867,800
|
|
|
|
261,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
139,075
|
|
|
|
90,163
|
|
|
|
822,020
|
|
|
|
403,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
34,034
|
|
|
|
31,897
|
|
|
|
109,803
|
|
|
|
138,613
|
|
Sales and marketing
|
|
|
167,213
|
|
|
|
448,387
|
|
|
|
1,175,126
|
|
|
|
1,246,846
|
|
General and administrative
|
|
|
2,070,998
|
|
|
|
2,022,367
|
|
|
|
5,299,696
|
|
|
|
5,427,573
|
|
Costs related to resignation of former officer (including the reversal of previously recognized stock compensation expense of $965,295 during the nine months ended September 30, 2020)
|
|
|
-
|
|
|
|
-
|
|
|
|
(615,936
|
)
|
|
|
-
|
|
Loss on sale of equipment
|
|
|
18,500
|
|
|
|
-
|
|
|
|
18,500
|
|
|
|
-
|
|
Impairment loss on equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
30,948
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,290,745
|
|
|
|
2,502,651
|
|
|
|
6,018,137
|
|
|
|
6,813,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,151,670
|
)
|
|
|
(2,412,488
|
)
|
|
|
(5,196,117
|
)
|
|
|
(6,409,910
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
3,716
|
|
|
|
4,205
|
|
|
|
7,254
|
|
|
|
255,842
|
|
Finance cost upon issuance of warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
415,955
|
|
Change in fair value of derivative warrants
|
|
|
(11,892
|
)
|
|
|
(31,322
|
)
|
|
|
(5,804
|
)
|
|
|
(259,154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (income) expense
|
|
|
8,176
|
|
|
|
(27,117
|
)
|
|
|
1,450
|
|
|
|
412,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,143,494
|
)
|
|
$
|
(2,385,371
|
)
|
|
$
|
(5,197,567
|
)
|
|
$
|
(6,822,553
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share – basic and diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.26
|
)
|
Weighted average common shares outstanding – basic and diluted
|
|
|
88,320,523
|
|
|
|
36,035,309
|
|
|
|
84,530,367
|
|
|
|
26,483,713
|
|
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
|
|
Balance at December 31, 2019
|
|
|
74,982,562
|
|
|
$
|
74,983
|
|
|
$
|
57,468,528
|
|
|
$
|
(45,511,671
|
)
|
|
$
|
12,031,840
|
|
Fair value of vested stock options – former officer
|
|
|
-
|
|
|
|
-
|
|
|
|
436,287
|
|
|
|
-
|
|
|
|
436,287
|
|
Fair value of vested stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
55,281
|
|
|
|
-
|
|
|
|
55,281
|
|
Issuance of common stock for services
|
|
|
25,000
|
|
|
|
25
|
|
|
|
12,300
|
|
|
|
-
|
|
|
|
12,325
|
|
Issuance of common stock – warrant exercises
|
|
|
10,382,400
|
|
|
|
10,382
|
|
|
|
3,540,399
|
|
|
|
-
|
|
|
|
3,550,781
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,346,913
|
)
|
|
|
(2,346,913
|
)
|
Balance at March 31, 2020
|
|
|
85,389,962
|
|
|
|
85,390
|
|
|
|
61,512,795
|
|
|
|
(47,858,584
|
)
|
|
|
13,739,601
|
|
Fair value of vested stock options – former officer
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,377,223
|
)
|
|
|
-
|
|
|
|
(1,377,223
|
)
|
Fair value of vested stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
41,782
|
|
|
|
-
|
|
|
|
41,782
|
|
Issuance of common stock – warrant exercises
|
|
|
2,920,000
|
|
|
|
2,920
|
|
|
|
995,720
|
|
|
|
-
|
|
|
|
998,640
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(707,160
|
)
|
|
|
(707,160
|
)
|
Balance at June 30, 2020
|
|
|
88,309,962
|
|
|
|
88,310
|
|
|
|
61,173,074
|
|
|
|
(48,565,744
|
)
|
|
|
12,695,640
|
|
Fair value of vested stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
129,948
|
|
|
|
-
|
|
|
|
129,948
|
|
Issuance of common stock – warrant exercises
|
|
|
17,350
|
|
|
|
17
|
|
|
|
5,916
|
|
|
|
-
|
|
|
|
5,933
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,143,494
|
)
|
|
|
(2,143,494
|
)
|
Balance at September 30, 2020
|
|
|
88,327,312
|
|
|
$
|
88,327
|
|
|
$
|
61,308,938
|
|
|
$
|
(50,709,238
|
)
|
|
$
|
10,688,027
|
|
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
|
|
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
|
|
Fair value of warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
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
|
|
Issuance 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
|
|
Fair value of warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
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
|
|
See
accompanying notes to condensed consolidated financial statements.
Guardion
Health Sciences, Inc.
Condensed
Consolidated Statements of Cash Flows
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,197,567
|
)
|
|
$
|
(6,822,553
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
45,552
|
|
|
|
209,813
|
|
Impairment loss on equipment
|
|
|
30,948
|
|
|
|
-
|
|
Loss on sale of equipment
|
|
|
18,500
|
|
|
|
|
|
Amortization of debt discount
|
|
|
-
|
|
|
|
250,000
|
|
Amortization of right-of-use asset
|
|
|
115,037
|
|
|
|
93,222
|
|
Accrued interest expense included in notes payable
|
|
|
-
|
|
|
|
788
|
|
Stock-based compensation
|
|
|
239,336
|
|
|
|
299,684
|
|
Stock-based compensation – former officer
|
|
|
(940,936
|
)
|
|
|
1,788,751
|
|
Non-cash financing costs – derivative liability
|
|
|
-
|
|
|
|
415,955
|
|
Change in fair value of warrants – derivative liability
|
|
|
(5,804
|
)
|
|
|
(259,154
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in - Accounts receivable
|
|
|
55,488
|
|
|
|
(6,275
|
)
|
Inventories
|
|
|
(656,283
|
)
|
|
|
37,642
|
|
Prepaid expenses
|
|
|
(176,861
|
)
|
|
|
(186,611
|
)
|
Increase (decrease) in - Accounts payable
|
|
|
506,599
|
|
|
|
156,314
|
|
Lease liability
|
|
|
(112,444
|
)
|
|
|
(86,902
|
)
|
Accrued expenses
|
|
|
7,545
|
|
|
|
(49,814
|
)
|
Due to former officer
|
|
|
230,208
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(5,840,682
|
)
|
|
|
(4,189,050
|
)
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
Proceeds from sale of equipment
|
|
|
6,000
|
|
|
|
-
|
|
Purchase of property and equipment
|
|
|
(40,733
|
)
|
|
|
(163,105
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(34,733
|
)
|
|
|
(163,105
|
)
|
|
|
|
|
|
|
|
|
|
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 notes
|
|
|
-
|
|
|
|
100,000
|
|
Payments on promissory notes
|
|
|
-
|
|
|
|
(100,548
|
)
|
Proceeds from exercise of warrants
|
|
|
4,555,354
|
|
|
|
154,375
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
4,555,354
|
|
|
|
9,236,167
|
|
|
|
|
|
|
|
|
|
|
Cash:
|
|
|
|
|
|
|
|
|
Net increase (decrease)
|
|
|
(1,320,061
|
)
|
|
|
4,884,012
|
|
Balance at beginning of period
|
|
|
11,115,502
|
|
|
|
670,948
|
|
Balance at end of period
|
|
$
|
9,795,441
|
|
|
$
|
5,554,960
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
7,254
|
|
|
$
|
-
|
|
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
|
|
Reclassification of prepaid costs to inventory
|
|
$
|
308,178
|
|
|
$
|
-
|
|
Reclassification of property and equipment to equipment held for sale
|
|
$
|
55,448
|
|
|
$
|
-
|
|
Reclassification of property and equipment to inventory
|
|
|
8,771
|
|
|
$
|
-
|
|
Reclassification of warrant liability to equity
|
|
$
|
-
|
|
|
$
|
359,683
|
|
Fair value of common stock issued upon conversion of common stock and accrued interest
|
|
$
|
-
|
|
|
$
|
250,788
|
|
Reclassification 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)
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’s wholly-owned subsidiaries consist of VectorVision Ocular Health, Inc., NutriGuard Formulations, Inc., and Transcranial
Doppler Solutions, Inc. Guardion Health Sciences, including its wholly-owned subsidiaries, is referred to herein as the “Company”.
The
Company is a specialty health sciences company that develops clinically supported nutrition, medical foods and medical devices,
with a focus in the ocular health marketplace.
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 $5,197,567
and utilized cash in operating activities of $5,840,682 during the nine months ended September 30, 2020. 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 audit report related
to the Company’s financial statements for the year ended December 31, 2019, stating there is substantial doubt about the
Company’s ability to continue as a going concern. 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, nutraceuticals,
the MapcatSF medical device, VectorVision diagnostic equipment, and with respect to efforts to continue to build the Company’s
infrastructure. Development and commercialization of medical foods, nutraceuticals 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. Management is continuing to (i) review its business segments
and operations in order to determine its future business strategies and focus, and (ii) explore, with the assistance of a qualified
financial advisor, potential transaction opportunities designed to enhances stockholder value. Furthermore, management is reviewing
its expense profile in order to increase efficiencies and reduce its cash utilization over the near-term.
The
Company intends to seek to raise additional debt and/or equity capital to fund future operations and/or acquisitions, 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.
COVID-19
The
Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic
has had and will continue to have on the Company’s business is highly uncertain and difficult to predict and quantify, as
the responses that the Company, other businesses and governments are taking continue to evolve. Furthermore, economies worldwide
have also been negatively impacted by the COVID-19 pandemic. Policymakers around the globe have responded with fiscal policy actions
intended to support the healthcare industry and economy as a whole, but it is presently unknown whether and to what extent further
fiscal actions will continue or be effective. The magnitude and overall effectiveness of these actions remain uncertain.
The
severity of the impact of the COVID-19 pandemic on the Company’s business will continue to depend on a number of factors,
including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company’s
customers, service providers and suppliers, all of which are uncertain and cannot be predicted. As of the date of issuance of
the Company’s financial statements, the extent to which the COVID-19 pandemic may in the future materially impact the Company’s
financial condition, liquidity or results of operations is uncertain.
NASDAQ
Delisting 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 had 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 was provided an initial period of 180 calendar days, or until March 18, 2020,
to regain compliance with the Minimum Bid Price Requirement. The Company was unable to regain compliance with the Minimum Bid
Price Requirement during the initial period and was eligible for an additional 180 calendar day compliance period under the NASDAQ
listing rules. The Company provided written notice of its intention to cure the deficiency during the additional compliance period,
and on March 19, 2020, the Company received a written notification from Nasdaq that the
Company had been granted an additional 180 calendar days, or until September 14, 2020, to regain compliance with the Minimum
Bid Price Requirement.
The
current COVID-19 crisis has created unprecedented turmoil in U.S. and world financial markets and has significantly impacted investor
confidence. Given these extraordinary market conditions, Nasdaq tolled the compliance periods for bid price and market value of
publicly held shares through June 30, 2020 (the “Price-based Requirements”).
Accordingly,
since the Company had 152 calendar days remaining in its bid price compliance period as of April 16, 2020, it will, upon reinstatement
of the Price-based Requirements, still have 152 calendar days from July 1, 2020, or until November 30, 2020, to regain compliance
with the Minimum Bid Price Requirement. The Company can regain compliance, either during the suspension or during the compliance
period resuming after the suspension, by evidencing compliance with the Price-based Requirements for a minimum of 10 consecutive
trading days.
On
October 29, 2020, at the Company’s Annual Meeting of Stockholders, the stockholders approved a proposal to extend the discretionary
authority previously granted to the Board of Directors to effect a “reverse stock split,” at a specific ratio within
a range of no split and one-for-thirty (1-for-30), with the exact ratio to be determined by the Board of Directors in its sole
discretion on or before October 29, 2021. Since the Company does not intend to execute a reverse stock split prior to November
30, 2020, the Company expects to receive a notice of delisting from Nasdaq shortly after November 30, 2020 because the Company
will not be in compliance with the Minimum Bid Price Requirement on November 30, 2020.
The
Company intends to appeal any notice of delisting that NASDAQ issues after November 30, 2020, as the Company has continuing discretionary
authority to implement a reverse stock split (through October 29, 2021), which the Company may receive additional temporary relief
(not to exceed 180 days from the date of the delisting notice) from NASDAQ. Such temporary relief, if granted, would allow the
Company additional time to execute on its business initiatives to generate greater stockholder value and hopefully increase the
share price of the Company’s common stock. During the appeal process, the Company’s shares will remain listed on NASDAQ.
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 the rules and regulations of the SEC. 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 fiscal year ended December 31, 2019, as filed with the SEC. The condensed consolidated
balance sheet as of December 31, 2019 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, 2020.
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.
Significant
estimates include those related to assumptions used in valuing assets acquired in business acquisitions, impairment testing of
goodwill and other long-term assets, accruals for potential liabilities, valuing equity instruments issued during the period,
and realization of deferred tax assets.
Revenue
Recognition
The Company’s revenue is comprised of sales of medical foods, nutraceuticals and supplements to
consumers through a direct sales/credit card process in the United States and through distributors outside the United States.
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 Accounting Standards Codification (“ASC”) 606, Revenue from Contracts
with Customers 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, nutraceuticals, 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 or suppliers’ 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. Payments for
sales of medical foods and nutraceuticals are 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 medical foods 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 medical foods and medical device 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 product line:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Medical foods and nutraceuticals
|
|
$
|
142,556
|
|
|
$
|
112,957
|
|
|
$
|
1,446,584
|
|
|
$
|
317,338
|
|
Medical devices
|
|
|
110,632
|
|
|
|
44,705
|
|
|
|
237,136
|
|
|
|
337,531
|
|
Other
|
|
|
-
|
|
|
|
3,500
|
|
|
|
6,100
|
|
|
|
9,800
|
|
|
|
$
|
253,188
|
|
|
$
|
161,162
|
|
|
$
|
1,689,820
|
|
|
$
|
664,669
|
|
The
following table presents the Company’s revenues disaggregated by geography:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
North America
|
|
$
|
156,431
|
|
|
$
|
129,992
|
|
|
$
|
668,769
|
|
|
$
|
401,379
|
|
Malaysia
|
|
|
-
|
|
|
|
-
|
|
|
|
890,000
|
|
|
|
-
|
|
Asia
|
|
|
36,661
|
|
|
|
1,500
|
|
|
|
62,450
|
|
|
|
130,450
|
|
Europe and other
|
|
|
60,096
|
|
|
|
29,670
|
|
|
|
68,601
|
|
|
|
132,840
|
|
|
|
$
|
253,188
|
|
|
$
|
161,162
|
|
|
$
|
1,689,820
|
|
|
$
|
664,669
|
|
The
Company’s medical foods and nutraceuticals revenues are derived from individual retail customers in North America and international
distributors. A total of 61% of Medical foods and nutraceuticals revenues for the nine months ended September 30, 2020 were due
to the sale, in June 2020, of a proprietary nutraceutical product to a Malaysian distributor. Medical devices revenues are derived
from a worldwide customer base consisting of both retail customers and distributors. International customers contributed approximately
29% and 39% of Medical devices revenues for the nine months ended September 30, 2020 and 2019, respectively. Distributors contributed
approximately 52% and 64% of Medical devices revenues for the nine months ended September 30, 2020 and 2019, respectively.
During
February 2020, the Company contracted with a Malaysian company to develop an immune-supportive formula for its consumer base.
During the nine months ended September 30, 2020, the Company completed shipment of the product, received payment in full, and
has recognized revenue for this order of $890,000. The sample product order is a proprietary immune-supportive formula that consists
of a two-bottle package, each bottle containing different blends of certain ingredients the formulation of which is proprietary
to the Malaysian company. The product is designed by the Malaysian company to boost immune system capability, which the Malaysian
company intends to sell to its consumer base.
Concentrations
During
the three months ended September 30, 2020, the Medical foods and nutraceuticals segment had no customers that accounted for more
than 10% of the Company’s sales. During the three months ended September 30, 2020, the Medical devices segment had two customers
that accounted for approximately 12% and 15% of the Company’s sales. No other customer accounted for more than 10%
of sales in either period.
During the nine months ended September
30, 2020, the Medical foods and nutraceuticals segment had one customer that accounted for approximately 53% of the Company’s
sales. During the nine months ended September 30, 2020, the Medical devices segment had no customers that accounted for
more than 10% of the Company’s sales. No other customer accounted for more than 10% of sales in either period.
During
the three months ended September 30, 2020, the Medical foods and nutraceuticals segment had two vendors that accounted for approximately
44% and 56% of all purchases. During the three months ended September 30, 2020, the Medical devices segment had three vendors
that accounted for approximately 10%, 29%, and 42% of all purchases. No other vendors exceeded 10% of all purchases during any
periods presented.
During
the nine months ended September 30, 2020, the Medical foods and nutraceuticals segment had three vendors that accounted for 20%,
28%, and 46% of all purchases. During the nine months ended September 30, 2020, the Medical devices segment had two vendors that
accounted for approximately 18% and 55% of all purchases. No other vendors exceeded 10% of all purchases during any periods presented.
Research
and Development Costs
Research
and development costs consist primarily of fees paid to consultants and outside service providers, 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 $109,803 and $138,613 for the nine months ended September 30, 2020 and 2019,
respectively.
Patent
Costs
The
Company is the owner of four issued domestic patents, two pending domestic patent applications, one issued foreign patent in Europe
and the United Kingdom, two issued foreign patents in Ireland, and one issued foreign patent in 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, 2020 and 2019, patent costs were $99,589
and $80,879, respectively, and are included in general and administrative costs in the statements of operations.
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, employees, and for acquiring goods and services from nonemployees, which include grants of employee
stock options, are recognized in the financial statements based on their fair values in accordance with ASC 718, Compensation-Stock
Compensation. Stock option grants, which are generally time vested, are measured at the grant date fair value and depending
on the conditions associated with the vesting of the award, compensation cost is recognized on a straight-line or graded 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 a period equal to the term of the equity award.
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 and options 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,
|
|
|
|
2020
|
|
|
2019
|
|
Warrants
|
|
|
15,452,988
|
|
|
|
1,502,738
|
|
Options
|
|
|
3,919,167
|
|
|
|
2,712,500
|
|
|
|
|
19,372,155
|
|
|
|
4,215,238
|
|
Fair
Value Measurements
Assets
and liabilities recorded at fair value on the balance sheets are categorized based upon the level of judgment associated with
the inputs used to measure the fair value. Level inputs are as follows:
Level
1 – quoted prices in active markets for identical assets or liabilities.
Level
2 – other significant observable inputs for the assets or liabilities through corroboration with market data at the measurement
date.
Level
3 – significant unobservable inputs that reflect management’s best estimate of what market participants would use
to price the assets or liabilities at the measurement date.
The
Company considers carrying amounts of accounts receivable, accounts payable and accrued expenses to approximate fair value due
to the short-term nature of these financial instruments. Our non-financial assets are measured at fair value when there is an
indicator of impairment and recorded at fair value only when an impairment charge is recognized.
As
of September 30, 2020, and December 31, 2019, the Company’s balance sheets included Level 2 liabilities comprised of the
fair value of warrant liabilities aggregating $7,519 and $13,323, respectively.
Recent
Accounting Pronouncements
In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU
2019-12”), which is intended to simplify the accounting for income taxes. ASU 2019-12 removes certain exceptions to the
general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The new standard
will be effective beginning January 1, 2021. The Company is assessing the impact ASU 2019-12 will have on its consolidated financial
statements.
In
June 2016, the FASB issued ASU No. 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASC
326”). The standard significantly changes how entities will measure credit losses for most financial assets, including accounts
and notes receivables. The standard will replace today’s “incurred loss” approach with an “expected loss”
model, under which companies will recognize allowances based on expected rather than incurred losses. Entities will apply the
standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting
period in which the guidance is effective. As a smaller reporting company, the standard will be effective for us for interim and
annual reporting periods beginning after December 15, 2022. The Company is currently assessing the impact of adopting this standard
on the Company’s financial statements and related disclosures.
In
August 2020, the FASB issued ASU No. 2020-06 (“ASU 2020-06”) “Debt—Debt with Conversion and Other Options
(Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible
Instruments and Contracts in an Entity’s Own Equity.” ASU 2020-06 will simplify the accounting for convertible instruments
by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting
models will result in fewer embedded conversion features being separately recognized from the host contract as compared with current
GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features
that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify
for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which
the premiums are recorded as paid-in capital. ASU 2020-06 also amends the guidance for the derivatives scope exception for contracts
in an entity’s own equity to reduce form-over-substance-based accounting conclusions. ASU 2020-06 will be effective January
1, 2024, for the Company. Early adoption is permitted, but no earlier than January 1, 2021, including interim periods within that
year. Management is currently evaluating the effect of the adoption of ASU 2020-06 on the consolidated financial statements, but
currently does not believe ASU 2020-06 will have a significant impact on the Company’s accounting for its convertible debt
instruments. The effect will largely depend on the composition and terms of the financial instruments at the time of adoption.
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
specified gross revenues have been achieved by the Company. As of September 30, 2020 and December 31, 2019 no amounts were owed
or accrued to NutriGuard.
The
following unaudited pro forma financial information gives effect to the Company’s acquisition of NutriGuard as if the acquisition
had occurred on January 1, 2019 and had been included in the Company’s consolidated statements of operations for the three
and nine months ended September 30, 2019:
|
|
Three Months
Ended
September 30,
|
|
|
|
2019
|
|
Pro forma net revenues
|
|
$
|
178,176
|
|
Pro forma net loss
|
|
$
|
(2,338,296
|
)
|
Pro forma net loss per share
|
|
$
|
(0.06
|
)
|
|
|
Nine months
ended
September 30,
|
|
|
|
2019
|
|
Pro forma net revenues
|
|
$
|
724,899
|
|
Pro forma net loss
|
|
$
|
(6,815,355
|
)
|
Pro forma net loss per share
|
|
$
|
(0.26
|
)
|
Inventories,
net of reserves of $56,605 and $56,605, respectively, consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Raw materials
|
|
$
|
121,709
|
|
|
$
|
246,875
|
|
Finished goods
|
|
|
1,162,464
|
|
|
|
64,066
|
|
|
|
$
|
1,284,173
|
|
|
$
|
310,941
|
|
5.
|
Property
and Equipment, net
|
Property
and equipment consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Leasehold improvements
|
|
$
|
103,256
|
|
|
$
|
98,357
|
|
Testing equipment
|
|
|
348,123
|
|
|
|
394,427
|
|
Furniture and fixtures
|
|
|
197,349
|
|
|
|
185,799
|
|
Computer equipment
|
|
|
68,460
|
|
|
|
68,460
|
|
Office equipment
|
|
|
9,835
|
|
|
|
8,193
|
|
|
|
|
727,023
|
|
|
|
755,236
|
|
Less accumulated depreciation and amortization
|
|
|
(421,423
|
)
|
|
|
(380,598
|
)
|
|
|
$
|
305,600
|
|
|
$
|
374,638
|
|
For
the nine months ended September 30, 2020 and 2019, depreciation expense was $45,552 and $48,836, respectively, of which $25,446
and $0 was included in research and development expense, $9,065 and $32,289 was included in sales and marketing expense, and $11,041
and $16,547 was included in general and administrative expense, respectively.
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 lease agreement, the Company paid a deposit of $47,449, of which $36,979 represented prepaid rent.
As of September 30, 2020, $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, 2020, remaining lease payments under Lease 1 averaged $13,146 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 September 30, 2020, remaining lease payments averaged $1,871 per month through February 2023.
The
leases have been accounted for in accordance with ASC 842, 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 present value of Lease 1 at the inception of the lease was $639,520 using
a discount rate of 3.9% and the present value of Lease 2 at the inception of the lease was $81,634 using a discount rate of 3.9%.
The
aggregate balance of the lease liabilities at December 31, 2019 was $586,315. During the nine months ended September 30, 2020,
the Company made combined payments on both leases of $112,444 towards the lease liabilities. The aggregate balance of the lease
liabilities at September 30, 2020 was $473,871, of which $159,962 was current.
Combined
rent expense for both leases for the nine months ended September 30, 2020 and 2019 was $128,150 and $130,742, respectively. The
balance of the right-of-use asset as of December 31, 2019 was $572,714. During the nine months ended September 30, 2020, the Company
reflected amortization of right-of-use asset of $115,037 related to the leases, resulting in a net asset balance of $457,677 as
of September 30, 2020.
7.
|
Settlement
with Former Officer
|
Effective
June 15, 2020, Michael Favish resigned as Chief Executive Officer and as an employee of the Company and resigned from the Company’s
Board of Directors. Terms of the settlement agreement between the parties included the continuation of his previous salary of
$325,000 during the twelve months subsequent to his resignation. The $325,000 of aggregated settlement payments was recorded in
costs related to resignation of former officer expense in the accompanying condensed consolidated statements of operations for
the nine months ended September 30, 2020. As of September 30, 2020, $230,208 of the amount due remains accrued on our condensed
consolidated balance sheet. In addition, 833,333 options previously granted to the former officer were forfeited (See Note 8).
Common
Stock
During
the nine months ended September 30, 2020, the Company issued 25,000 fully vested shares of common stock for services rendered
and recognized $12,325 in stock compensation expense related to these shares.
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, 2019
|
|
|
28,802,738
|
|
|
|
0.38
|
|
|
|
4.91
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeitures
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expirations
|
|
|
(30,000
|
)
|
|
|
(1.50
|
)
|
|
|
-
|
|
Exercised
|
|
|
(13,319,750
|
)
|
|
|
(0.34
|
)
|
|
|
-
|
|
September 30, 2020, all exercisable
|
|
|
15,452,988
|
|
|
$
|
0.39
|
|
|
|
4.06
|
|
The
exercise prices of warrants outstanding and exercisable as of September 30, 2020 are as follows:
Warrants Outstanding and
Exercisable (Shares)
|
|
|
Exercise Prices
|
|
|
12,020,250
|
|
|
$
|
0.34
|
|
|
1,960,000
|
|
|
|
0.44
|
|
|
1,040,000
|
|
|
|
0.50
|
|
|
226,200
|
|
|
|
0.59
|
|
|
35,000
|
|
|
|
1.50
|
|
|
109,038
|
|
|
|
2.88
|
|
|
62,500
|
|
|
|
5.00
|
|
|
15,452,988
|
|
|
|
|
|
During
the nine months ended September 30, 2020, investors exercised a total of 13,319,750 warrants for 13,319,750 shares of common stock.
The warrants were exercisable for $0.34 per share, which resulted in cash proceeds to the Company of $4,555,354.
As
of September 30, 2020, the Company had an aggregate of 15,452,988 outstanding warrants to purchase shares of its common stock
with a weighted average exercise price of $0.39 and a weighted average remaining life of 4.06 years. The aggregate intrinsic value
of warrants outstanding as of September 30, 2020 was zero.
Warrant
Liability
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 initial public offering (“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 December 31, 2019 was $13,323. As of September 30, 2020, the fair value of the
warrants was determined to be $7,519 and the change in fair value of $11,892 was recognized in the accompanying statements of
operations.
The
fair value of the warrant liability was determined at the following reporting dates using the Black-Scholes-Merton option pricing
model and the following assumptions:
|
|
Warrant Liability
As of
|
|
|
Warrant Liability
As of
|
|
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Stock price
|
|
$
|
0.20
|
|
|
$
|
0.22
|
|
Risk free interest rate
|
|
|
0.16
|
%
|
|
|
1.62
|
%
|
Expected volatility
|
|
|
148
|
%
|
|
|
145
|
%
|
Expected life in years
|
|
|
3.51
|
|
|
|
4.26
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Number of warrants
|
|
|
62,500
|
|
|
|
62,500
|
|
Fair value of warrants
|
|
$
|
7,519
|
|
|
$
|
13,323
|
|
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, 2019
|
|
|
2,962,500
|
|
|
|
2.94
|
|
|
|
3.64
|
|
Granted
|
|
|
1,790,000
|
|
|
|
0.90
|
|
|
|
9.71
|
|
Forfeitures
|
|
|
(833,333
|
)
|
|
|
-
|
|
|
|
-
|
|
Expirations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
September 30, 2020, outstanding
|
|
|
3,919,167
|
|
|
$
|
1.69
|
|
|
|
6.01
|
|
September 30, 2020, exercisable
|
|
|
2,327,500
|
|
|
$
|
2.23
|
|
|
|
3.66
|
|
The
exercise prices of options outstanding and exercisable as of September 30, 2020 are as follows:
Options Outstanding
(Shares)
|
|
|
Options Exercisable
(Shares)
|
|
|
Exercise Prices
|
|
|
250,000
|
|
|
|
218,70
|
|
|
$
|
0.25
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
0.32
|
|
|
250,000
|
|
|
|
93,750
|
|
|
|
0.39
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
0.41
|
|
|
100,000
|
|
|
|
50,000
|
|
|
|
0.54
|
|
|
1,500,000
|
|
|
|
145,833
|
|
|
|
1.00
|
|
|
625,000
|
|
|
|
625,000
|
|
|
|
2.00
|
|
|
62,500
|
|
|
|
62,500
|
|
|
|
2.30
|
|
|
675,000
|
|
|
|
675,000
|
|
|
|
2.50
|
|
|
416,667
|
|
|
|
416,667
|
|
|
|
4.40
|
|
|
3,919,167
|
|
|
|
2,327,500
|
|
|
|
|
|
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 nine months ended September 30, 2020, the Company granted options to purchase 1,290,000 shares of common stock to six employees
with a grant date fair value of $581,128. The options have an exercise price of $0.32 to $1.00 per share. Options for 250,000
shares vest on a quarterly basis over two years and options for 40,000 shares vest in full six months after the grant date. Options
for 1,000,000 shares vest ratably over three years.
On
June 30, 2020, the Company granted options to purchase 500,000 shares of common stock to the members of the Company’s Board
of Directors with a grant date fair value of $216,093. The options have an exercise price of $1.00 per share. The options vest
on a quarterly basis over two years beginning three months after the grant date.
During
the nine months ended September 30, 2020 and 2019, the Company recognized aggregate stock-compensation expense of $227,011 and
$1,964,432, based upon stock prices ranging from $0.25 to $3.30 per share.
As
of September 30, 2020, the Company had an aggregate of 1,591,667 remaining unvested options outstanding, with a fair value of
$715,612, weighted average exercise price of $0.91, and weighted average remaining life of 9.45 years. The aggregate intrinsic
value of options outstanding as of September 30, 2020 was zero. The aggregate intrinsic value of unvested options outstanding
as of September 30, 2020 was zero.
In
connection with a separation agreement entered into with Michael Favish, former officer (see Note 7), the expiration date of his
vested stock options was extended for twelve months from June 15, 2020. In accordance with ASC 718, the extension of the exercise
period for the vested options constitutes a modification of the original option agreement. In accounting for the modification,
the Company calculated the fair value of the vested options immediately before modification using current valuation inputs including
the Company’s closing stock price of $0.49 on June 15, 2020, a volatility metric of 142%, and a risk-free interest rate
of 0.22%. The Company also calculated the fair value of the vested options immediately following the modification using the extended
12-month exercise period. An incremental stock compensation charge of $24,359 was recorded in costs related to resignation of
former officer.
Mr.
Favish’s unvested options of 833,333 at the time of his separation were forfeited. All compensation from prior periods related
to these unvested options was reversed, resulting in an adjustment to stock compensation expense during the nine months ended
September 30, 2020 of $(965,295), which was recorded in costs related to resignation of former officer.
In
connection with his separation, the expiration date of Mr. Favish’s vested stock options was extended for twelve months
from June 15, 2020. In accordance with ASC 718, the extension of the exercise period for the vested options constitutes a modification
of the original option agreement. In accounting for the modification, the Company calculated the fair value of the vested options
immediately before modification using current valuation inputs including the Company’s closing stock price of $0.49 on June
15, 2020, a volatility metric of 142%, and a risk-free interest rate of 0.22%. The Company also calculated the fair value of the
vested options immediately following the modification using the extended 12-month exercise period. An incremental stock compensation
charge of $24,359 was recorded in costs related to resignation of former officer.
Mr.
Favish’s unvested options at the time of his separation were forfeited. All compensation from prior periods related to these
unvested options was reversed, resulting in an adjustment to stock compensation expense during the nine months ended September
30, 2020 of $(965,295), which was recorded in costs related to resignation of former officer.
9.
|
Related
Party Transactions
|
During
the nine months ended September 30, 2020 and 2019, the Company incurred and paid salaries of $50,313 and $113,583, respectively,
to Karen Favish, spouse of Michael Favish, the Company’s former Chief Executive Officer. During the nine months ended September
30, 2020 and 2019, the Company incurred and paid salaries of $45,000 and $37,147, respectively, to Kristine Townsend, spouse of
the Company’s former Controller and Chief Accounting Officer John Townsend. During the nine months ended September 30, 2020
and 2019, the Company paid consulting expenses of $45,500 and $88,500, respectively, to Ceatus Media Group, LLC, a web design
company owned by Chief Science Officer and Interim President and Chief Executive Officer Dr. David Evans and his spouse
Tamara Evans. During the nine months ended September 30, 2020 and 2019, the Company paid building rent of $16,114 and $15,648,
respectively, to DWT Evans LLC, a company owned by David Evans and his spouse Tamara Evans.
When
the Company acquired VectorVision, it also acquired AcQviz from Dr. Evans, which is a patented methodology for auto-calibrating
and standardizing the testing light level for computer generated vision testing systems. Dr. Evans is entitled to receive a royalty
on net revenue from AcQviz. As part of the development of the CSV-2000, AcQviz was embedded in the product by Radiant Technologies,
Inc. in exchange for a 3% royalty on the sales of AcQviz. Radiant Technologies is owned by Joseph T. Evans, the brother of Dr.
David Evans.
The
Company determined its reporting units are as follows in accordance with ASC 280, “Segment Reporting” (“ASC
280”). The Company currently operate in two reportable segments: Medical foods and nutraceuticals and Medical devices.
The.
Medical foods and nutraceuticals segment provides a portfolio of science-based, clinically supported nutrition, medical foods,
and supplements. The Company’s products include, among others, Lumega-Z, Glaucocetin, ImmuneSF.
The Medical devices segment includes a
portfolio of medical diagnostic devices currently focused on the ocular space and the Company is believed to be
the industry leader in contrast testing. The medical devices and accessories are used to measure visual function and certain anatomical
features of the eye. These measures detect early disease and monitor changes over time, and the results due to nutritional regimens.
The Company’s products include VectorVision CSV-1000, CSV-1000HGT, CSV-2000, ESV-3000 and associated accessories as well
as the MapcatSF.
The
accounting policies of the Company’s reportable segments are the same as those described in the summary of significant accounting
policies (Note 2). Certain corporate general and administrative expenses, including general overhead functions such as information
systems, accounting, human resources, Board of Director fees, corporate legal fees, other compliance costs and certain administrative
expenses, as well as interest and tax expense, are not allocated to the segments. The reportable segments are each managed separately
because they manufacture and distribute distinct products or provide services with different processes. All reported segment revenues
are derived from external customers.
The
segments are based on the discrete financial information reviewed by the Chief Executive Officer, who is the Company’s Chief
Operating Decision Maker (“CODM”), to make resource allocation decisions and to evaluate performance.
|
|
For the Three Months Ended September 30, 2020
|
|
|
|
Corporate
|
|
|
Medical
Foods and
Nutraceuticals
|
|
|
Medical Devices
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
142,556
|
|
|
$
|
110,632
|
|
|
$
|
253,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
-
|
|
|
|
68,956
|
|
|
|
45,157
|
|
|
|
114,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
-
|
|
|
|
73,600
|
|
|
|
65,475
|
|
|
|
139,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
1,202,402
|
|
|
|
1,081,897
|
|
|
|
6,446
|
|
|
|
2,290,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
$
|
(1,202,402
|
)
|
|
$
|
(1,008,296
|
)
|
|
$
|
59,028
|
|
|
$
|
(2,151,670
|
)
|
|
|
For the Three Months Ended September 30, 2019
|
|
|
|
Corporate
|
|
|
Medical
Foods and
Nutraceuticals
|
|
|
Medical Devices
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,5000
|
|
|
$
|
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 Nine Months Ended September 30, 2020
|
|
|
|
Corporate
|
|
|
Medical
Foods and
Nutraceuticals
|
|
|
Medical Devices
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
6,100
|
|
|
$
|
1,446,584
|
|
|
$
|
237,136
|
|
|
$
|
1,689,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
2,477
|
|
|
|
764,246
|
|
|
|
101,077
|
|
|
|
867,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
3,623
|
|
|
|
682,338
|
|
|
|
136,059
|
|
|
|
822,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
2,655,107
|
|
|
|
3,146,514
|
|
|
|
216,516
|
|
|
|
6,018,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(2,651,484
|
)
|
|
$
|
(2,464,176
|
)
|
|
$
|
(80,457
|
)
|
|
$
|
(5,196,117
|
)
|
|
|
For the Nine Months Ended September 30, 2019
|
|
|
|
Corporate
|
|
|
Medical
Foods and
Nutraceuticals
|
|
|
Medical Devices
|
|
|
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
|
)
|
The
following tables set forth the Company’s total assets by segment. Intersegment balances and transactions have been removed:
|
|
As of September 30, 2020
|
|
|
|
Corporate
|
|
|
Medical
Foods and
Nutraceuticals
|
|
|
Medical Devices
|
|
|
Total
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
9,795,441
|
|
|
$
|
|
|
|
$
|
-
|
|
|
$
|
9,795,441
|
|
Inventories
|
|
|
-
|
|
|
|
922,256
|
|
|
|
361,917
|
|
|
|
1,284,172
|
|
Other
|
|
|
1,600
|
|
|
|
150,659
|
|
|
|
102,211
|
|
|
|
254,471
|
|
Total current assets
|
|
|
9,797,041
|
|
|
|
1,072,915
|
|
|
|
464,128
|
|
|
|
11,334,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Right-of-use asset, net
|
|
|
-
|
|
|
|
408,686
|
|
|
|
48,991
|
|
|
|
457,677
|
|
Property and equipment, net
|
|
|
-
|
|
|
|
146,163
|
|
|
|
159,437
|
|
|
|
305,600
|
|
Intangible assets, net
|
|
|
-
|
|
|
|
50,000
|
|
|
|
-
|
|
|
|
50,000
|
|
Other
|
|
|
-
|
|
|
|
11,751
|
|
|
|
-
|
|
|
|
11,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
9,797,041
|
|
|
$
|
1,689,515
|
|
|
$
|
672,555
|
|
|
$
|
12,159,112
|
|
|
|
As of December 31, 2019
|
|
|
|
Corporate
|
|
|
Medical
Foods and
Nutraceuticals
|
|
|
Medical Devices
|
|
|
Total
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
11,115,502
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11,115,502
|
|
Inventories
|
|
|
5,003
|
|
|
|
126,708
|
|
|
|
179,230
|
|
|
|
310,941
|
|
Other
|
|
|
7,399
|
|
|
|
219,223
|
|
|
|
214,653
|
|
|
|
441,275
|
|
Total current assets
|
|
|
11,127,904
|
|
|
|
345,931
|
|
|
|
393,883
|
|
|
|
11,867,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Right-of-use asset
|
|
|
-
|
|
|
|
509,464
|
|
|
|
63,250
|
|
|
|
572,714
|
|
Property and equipment, net
|
|
|
70,542
|
|
|
|
148,514
|
|
|
|
155,582
|
|
|
|
374,638
|
|
Intangible assets, net
|
|
|
-
|
|
|
|
50,000
|
|
|
|
-
|
|
|
|
50,000
|
|
Other
|
|
|
-
|
|
|
|
11,751
|
|
|
|
-
|
|
|
|
11,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
11,198,446
|
|
|
$
|
1,065,660
|
|
|
$
|
612,715
|
|
|
$
|
12,876,821
|
|
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. As of September 30, 2020, management is not aware of any pending or threatened matters that it
believes warrant a contingency reserve, and therefore there is no provision in the Company’s financial statements with respect
to such matters.
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, 2019, and the notes thereto, which are set forth in the 2019 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 that is developing a portfolio of science-based, clinically supported nutrition, medical foods, and
diagnostics that support healthcare professionals, their patients, and consumers in achieving health goals. Our initial focus
is in the ocular health marketplace.
Research
developments in human physiology and biology over the last decade have uncovered a greater understanding of the role of food,
nutrition, metabolism and metabolites in both disease and wellness. Leveraging new insights into the role of nutrition, the Company
has identified a large market opportunity in creating condition specific formulations backed by clinical science and evidenced-based
protocols.
We
believe in the power of nutrition to make a positive, proven difference to health. Our goal is to pioneer nutritional discoveries
that help people live longer, healthier lives.
Our
strategy is to create strong trusted brands and differentiated products with unique scientifically proven and meaningful benefits
recommended by healthcare professionals and supported by clinical evidence to provide the basis for evidence-based claims.
Through
diagnostics and clinically supported nutrition and medical foods, we help healthcare professionals identify and better manage
their patients’ conditions and help patients and consumers to support the body in health, wellness and manage the impact
of aging or illness.
The
Company identifies specific conditions or areas of health maintenance where targeted nutrition can restore or maintain a metabolic
pathway that is important to the overall management of that condition or aspect of health or where it supports the body’s
recovery and rehabilitation processes.
By
conducting clinical studies to validate the impact of the nutrition on the metabolic pathway, our brands can make strong, relevant
and differentiated claims and gain the trust and endorsement of physicians and healthcare professionals.
The
company’s current focus is on research, discovery and clinical development.
As
we complete clinical validation and build strong claims, we are beginning the early commercialization of our product and service
offerings.
Recent
Trends – COVID-19
The
COVID-19 pandemic has and will continue affecting economies and businesses around the world. The impacts of the pandemic could
be material, but due to the evolving nature of this situation, we are not able at this time to estimate the impact on our financial
or operational results. Among the factors that could impact our results are: effectiveness of COVID-19 mitigation measures, global
economic conditions, consumer spending, work from home trends, supply chain sustainability and other factors. These factors could
result in increased or decreased demand for our products and services and impact our ability to serve customers.
Recent
Developments
Warrant
Exercises
From
January 1, 2020 through September 30, 2020, the
Company received total gross proceeds of $4,555,354 from the exercise of 13,319,750 warrants
issued in the Company’s October 2019 follow-on registered public offering.
Nutraceutical
Sales
During
February 2020, the Company contracted with a Malaysian company to develop an immune-supportive formula for its consumer base.
An initial order was placed for $875,000, and in connection with this order, on March 31, 2020, the Malaysian company paid $437,500
as a deposit. The Company completed shipment of the product, received payment in full, and has recognized revenue for this order
of $890,000 during the nine months ended September 30, 2020.
Going
Concern
The
financial statements have been prepared assuming the Company will continue as a going concern. The Company had a net loss of $5,197,567
and utilized cash in operating activities of $5,840,682 during the nine months ended September 30, 2020. 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, 2019, stating there is substantial doubt about
the Company’s ability to continue as a going concern. 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, nutraceuticals,
the MapcatSF medical device, VectorVision diagnostic equipment, and with respect to efforts to continue to build the Company’s
infrastructure. Development and commercialization of medical foods, nutraceuticals 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. Management is reviewing all of its business segments and operations
with the assistance of an outside consulting firm in order to determine its future business strategies and focus. Furthermore,
management is reviewing its expense profile, with its consulting firm, in order to increase efficiencies and reduce its cash utilization
over the near and long term, while hoping to increase stockholder value.
The
Company intends to seek 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.
Recent
Accounting Pronouncements
See
Note 2 to the condensed consolidated financial statements 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.
During
the nine months ended September 30, 2020, the Medical foods and nutraceuticals segment had one customer who accounted for approximately
61% of the Company’s sales. During the nine months ended September 30, 2019, the Medical devices segment had three customers
who accounted for approximately 52% of the Company’s sales. No other customer accounted for more than 10% of sales in either
period.
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.
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.
Significant
estimates include those related to assumptions used in valuing assets acquired in business acquisitions, impairment testing of
goodwill and other long-term assets, accruals for potential liabilities, valuing equity instruments issued during the period,
and realization of deferred tax assets.
Revenue
recognition
The
Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts
with Customers 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.
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,
employees, and for acquiring goods and services from nonemployees, which include grants of employee stock options, are recognized
in the financial statements based on their fair values in accordance with ASC 718, Compensation-Stock Compensation. Stock option
grants, which are generally time vested, are measured at the grant date fair value and depending on the conditions associated
with the vesting of the award, compensation cost is recognized on a straight-line or graded 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 a period equal to the term of the equity award.
Results
of Operations
Through
September 30, 2020, the Company has primarily been engaged in product development, and commercialization. The Company has incurred
and will continue to incur significant expenditures for the development of its products and intellectual property, which includes
medical foods and nutraceuticals, and medical devices for the diagnosis and monitoring of eye diseases. The Company had limited
revenue during the nine months ended September 30, 2020 and 2019.
Comparison
of Three Months Ended September 30, 2020 and 2019
|
|
Three Months Ended
September 30,
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Change
|
|
Revenue
|
|
$
|
253,188
|
|
|
$
|
161,162
|
|
|
$
|
92,026
|
|
|
|
57
|
%
|
Cost of goods sold
|
|
|
114,113
|
|
|
|
70,999
|
|
|
|
43,114
|
|
|
|
61
|
%
|
Gross Profit
|
|
|
139,075
|
|
|
|
90,163
|
|
|
|
48,912
|
|
|
|
54
|
%
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
34,034
|
|
|
|
31,897
|
|
|
|
2,137
|
|
|
|
7
|
%
|
Sales and marketing
|
|
|
167,213
|
|
|
|
448,387
|
|
|
|
(281,174
|
)
|
|
|
(63
|
)%
|
General and administrative
|
|
|
2,070,998
|
|
|
|
2,022,367
|
|
|
|
48,631
|
|
|
|
2
|
%
|
Loss on sale of equipment
|
|
|
18,500
|
|
|
|
-
|
|
|
|
18,500
|
|
|
|
100
|
%
|
Total Operating Expenses
|
|
|
2,290,745
|
|
|
|
2,502,651
|
|
|
|
(211,905
|
)
|
|
|
(8
|
)%
|
Loss from Operations
|
|
|
(2,151,670
|
)
|
|
|
(2,412,488
|
)
|
|
|
(260,818
|
)
|
|
|
(11
|
)%
|
Other Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
3,716
|
|
|
|
4,205
|
|
|
|
(489
|
)
|
|
|
(12
|
)%
|
Finance cost upon issuance of warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
(100
|
)%
|
Change in fair value of derivative warrants
|
|
|
(11,892
|
)
|
|
|
(31,322
|
)
|
|
|
(19,430
|
)
|
|
|
(62
|
)%
|
Net Loss
|
|
$
|
(2,143,494
|
)
|
|
$
|
(2,385,371
|
)
|
|
$
|
(241,877
|
)
|
|
|
(10
|
)%
|
Revenue
For
the three months ended September 30, 2020, revenue from product sales was $253,188 compared to $161,162 for the three months ended
September 30, 2019, resulting in an increase of $92,026 or 57%. The increase is due primarily to an increase in VectorVision sales
as well as a modest increase in medical foods and nutraceuticals.
Cost
of Goods Sold
For
the three months ended September 30, 2020, cost of goods sold was $114,113 compared to $70,999 for the three months ended September
30, 2019, resulting in an increase of $43,114 or 61%. The increase is due to higher product sales and is consistent with the increase
in revenue.
Gross
Profit
For
the three months ended September 30, 2020, gross profit was $139,075 compared to $90,163 for the three months ended September
30, 2019, resulting in an increase of $48,912 or 54%. Gross profit represented 54% of revenues for the three months ended September
30, 2020, versus 56% of revenue for the three months ended September 30, 2019.
Research
and Development
For
the three months ended September 30, 2020, research and development costs were $34,034 compared to $31,897 for the three months
ended September 30, 2019, resulting in a increase of $2,137 or 7%. Research and development costs consist of clinical studies
related to our medical foods and nutraceuticals.
Sales
and Marketing
For
the three months ended September 30, 2020, sales and marketing expenses were $167,213 compared to $448,387 for the three months
ended September 30, 2019. The decrease in sales and marketing expenses of $281,174 or 63% compared to the prior period was primarily
due to a $133,616 reduction in tradeshow expense due to cancelled tradeshows due to Covid19 as well as reduced labor costs.
General
and Administrative
For
the three months ended September 30, 2020, general and administrative expenses were $2,070,998 compared to $2,022,367 for the
three months ended September 30, 2019. The increase of $48,631 is essentially flat with the prior year period.
Loss
on Sale of Equipment
During
June 2020, in an effort to reduce costs and focus on other segments of the business, the Company began to wind down the Transcranial
Doppler Solutions, Inc. (“TDSI”) subsidiary and ceased its operations. The wind down was completed in the third quarter
ended September 30, 2020. TDSI held a group of ultrasound machines as fixed assets. The Company sold these machines, and therefore
a loss on sale of $18,500 has been recorded in the condensed consolidated statements of operations for the three months ended
September 30, 2020.
Interest
Expense
For
the three months ended September 30, 2020, interest expense was $3,716 compared to $4,205, a decrease of $489 or 12% for the three
months ended September 30, 2019.
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 $229,921 and was recorded as a finance cost in April of 2019. As of September 30, 2020,
the fair value of the warrant liability was determined to be $7,519 and the Company recorded a change in fair value of derivative
warrants for the three months ended September 30, 2020 of $11,892.
Net
Loss
For
the three months ended September 30, 2020, the Company incurred a net loss of $2,143,494 compared to a net loss of $2,385,371
for the three months ended September 30, 2019. The decrease in net loss of $241,877 or 10% compared to the prior year period was
due to increased revenue and a 10% reduction in operating expenses in the current period.
Segment
Information
The
following tables set forth our results of operations by segment.
The
Medical foods and nutraceuticals segment provides a portfolio of science-based, clinically supported nutrition, medical foods,
and supplements. Our products include, among others, Lumega-Z, Glaucocetin, ImmuneSF.
The Medical devices segment includes a
portfolio of medical diagnostic devices currently focused on the ocular space and the Company is believed to be
the industry leader in contrast testing. The medical devices and accessories are used to measure visual function and certain anatomical
features of the eye. These measures detect early disease and monitor changes over time, and evaluate results related to nutritional
regimens. Our products include VectorVision CSV-1000, CSV-1000HGT, CSV-2000, ESV-3000 and associated accessories.
See
Note 10, Segment Reporting, to our Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this report,
for further details on our reportable segments.
|
|
For the Three Months Ended September 30, 2020
|
|
|
|
Corporate
|
|
|
Medical
Foods and
Nutraceuticals
|
|
|
Medical Devices
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
142,556
|
|
|
$
|
110,632
|
|
|
$
|
253,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
-
|
|
|
|
68,956
|
|
|
|
45,157
|
|
|
|
114,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
-
|
|
|
|
73,600
|
|
|
|
65,475
|
|
|
|
139,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
1,202,402
|
|
|
|
1,081,897
|
|
|
|
6,446
|
|
|
|
2,290,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
$
|
(1,202,402
|
)
|
|
$
|
(1,008,296
|
)
|
|
$
|
59,028
|
|
|
$
|
(2,151,670
|
)
|
|
|
For the Three Months Ended September 30, 2019
|
|
|
|
Corporate
|
|
|
Medical
Foods and
Nutraceuticals
|
|
|
Medical Devices
|
|
|
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
|
)
|
Revenue
For
the three months ended September 30, 2020, revenue from our Medical foods and nutraceuticals segment was $142,556 compared to
$112,957 for the three months ended September 30, 2019, resulting in an increase of $29,599 or 26%. The increase is primarily
attributed to Medical foods sales. For the three months ended September 30, 2020, revenue from our Medical devices segment was
$110,632 compared to $44,705 for the three months ended September 30, 2019, resulting in an increase of $65,927 or 147%, primarily
as a result of increased sales of VectorVision products.
Cost
of Goods Sold
For
the three months ended September 30, 2020, cost of goods sold from our Medical foods and nutraceuticals segment was $68,956 compared
to $41,655 for the three months ended September 30, 2019, resulting in an increase of $27,301 or 66%. The increase was due to
the increase in sales noted above. For the three months ended September 30, 2020, cost of goods sold from our Medical devices
segment was $45,157 compared to $27,922 for the three months ended September 30, 2019, resulting in an increase of $17,235 or
62%. The increase was due to the increase in sales noted above.
Gross
Profit
For
the three months ended September 30, 2020, gross profit from the Medical foods and nutraceuticals segment was $73,601 compared
to $71,302 for the three months ended September 30, 2019, resulting in an increase of $2,299 or 3%. For the three months ended
September 30, 2020, gross profit from the Medical devices segment was $65,474 compared to $16,783 for the three months ended September
30, 2019, resulting in an increase of $65,474 or 390%. Gross profit overall represented 55% of revenues for the three months ended
September 30, 2020, versus 56% of revenue for the three months ended September 30, 2019.
Comparison
of Nine Months ended September 30, 2020 and 2019
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Change
|
|
Revenue
|
|
$
|
1,689,820
|
|
|
$
|
664,669
|
|
|
$
|
1,025,152
|
|
|
|
154
|
%
|
Cost of goods sold
|
|
|
867,800
|
|
|
|
261,547
|
|
|
|
606,254
|
|
|
|
232
|
%
|
Gross Profit
|
|
|
822,020
|
|
|
|
403,122
|
|
|
|
418,898
|
|
|
|
104
|
%
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
109,803
|
|
|
|
138,613
|
|
|
|
(28,810
|
)
|
|
|
(21
|
)%
|
Sales and marketing
|
|
|
1,175,126
|
|
|
|
1,246,846
|
|
|
|
(71,720
|
)
|
|
|
(6
|
)%
|
General and administrative
|
|
|
5,299,696
|
|
|
|
5,427,573
|
|
|
|
(127,877
|
)
|
|
|
(2
|
)%
|
Costs related to resignation of former officer
|
|
|
(615,936
|
)
|
|
|
-
|
|
|
|
(615,936
|
)
|
|
|
(100
|
)%
|
Loss on sale of equipment
|
|
|
18,500
|
|
|
|
-
|
|
|
|
18,500
|
|
|
|
100
|
%
|
Impairment loss on equipment
|
|
|
30,948
|
|
|
|
-
|
|
|
|
30,948
|
|
|
|
100
|
%
|
Total Operating Expenses
|
|
|
6,018,137
|
|
|
|
6,813,032
|
|
|
|
(794,895
|
)
|
|
|
(12
|
)%
|
Loss from Operations
|
|
|
(5,196,117
|
)
|
|
|
(6,409,910
|
)
|
|
|
(1,213,793
|
)
|
|
|
(19
|
)%
|
Other Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
7,254
|
|
|
|
255,842
|
|
|
|
(248,589
|
)
|
|
|
(97
|
)%
|
Finance cost upon issuance of warrants
|
|
|
-
|
|
|
|
415,955
|
|
|
|
(415,955
|
)
|
|
|
(100
|
)%
|
Change in fair value of derivative warrants
|
|
|
(5,804
|
)
|
|
|
(259,154
|
)
|
|
|
(253,350
|
)
|
|
|
(98
|
)%
|
Net Loss
|
|
$
|
(5,197,567
|
)
|
|
$
|
(6,822,553
|
)
|
|
$
|
(1,624,986
|
)
|
|
|
(24
|
)%
|
Revenue
For
the nine months ended September 30, 2020, revenue from product sales was $1,689,820 compared to $664,669 for the nine months ended
September 30, 2019, resulting in an increase of $1,025,151 or 154%. The increase is due primarily to the Company’s fulfillment
of a Malaysian order for a proprietary immune-supportive formula that was delivered in June. The Company completed shipment of
the product, received payment in full, and has recognized revenue for this order of $890,000.
Cost
of Goods Sold
For
the nine months ended September 30, 2020, cost of goods sold was $867,800 compared to $261,547 for the nine months ended September
30, 2019, resulting in an increase of $606,253 or 232%. The increase primarily results from the costs of goods sold associated
with the Malaysian order noted above.
Gross
Profit
For
the nine months ended September 30, 2020, gross profit was $822,020 compared to $403,122 for the nine months ended September 30,
2019, resulting in an increase of $418,898 or 104%. Gross profit represented 49% of revenues the nine months ended September 30,
2020, versus 61% of revenue for the nine months ended September 30, 2019. The lower gross profit percentage in 2020 is reflective
of lower distributor pricing given to the Malaysian customer.
Research
and Development
For
the nine months ended September 30, 2020, research and development costs were $109,803 compared to $138,613 for the nine months
ended September 30, 2019, resulting in a decrease of $28,810 or 21%. Research and development costs in our current period consist
primarily of clinical studies related to our medical foods and nutraceuticals versus engineering efforts related to our medical
devices in our prior period.
Sales
and Marketing
For
the nine months ended September 30, 2020, sales and marketing expense was $1,175,126 compared to $1,246,846 for the nine months
ended September 30, 2019. The decrease in sales and marketing expense of $71,720 or 6% compared to the prior period is primarily
attributed to a decrease in trade show activity during the current period as a result of COVID-19.
General
and Administrative
For
the nine months ended September 30, 2020, general and administrative expenses were $5,299,696 compared to $5,427,573 for the nine
months ended September 30, 2019. The decrease of $127,877 or 2% compared to the prior period was primarily due to a $1,266,000
decrease in stock compensation expense related to the resignation of a former officer, which was partially offset by increases
in consulting costs, professional fees, legal costs, and corporate insurance costs.
Costs
Related to Resignation of Former Officer
Effective
June 15, 2020, Michael Favish resigned as Chief Executive Officer and as an employee of the Company, and resigned from the Company’s
Board of Directors. Terms of the settlement agreement included the continuation of his previous salary of $325,000 during the
following twelve months. The $325,000 settlement was recorded in costs related to resignation of former officer expense in the
accompanying condensed consolidated statement of operations for the nine months ended September 30, 2020.
In
connection with his separation, the expiration date of Mr. Favish’s vested stock options was extended for twelve months
from June 15, 2020. In accordance with ASC 718, the extension of the exercise period for the vested options constitutes a modification
of the original option agreement. In accounting for the modification, the Company calculated the fair value of the vested options
immediately before modification using current valuation inputs including the Company’s closing stock price of $0.49 on June
15, 2020, a volatility metric of 142%, and a risk-free interest rate of 0.22%. The Company also calculated the fair value of the
vested options immediately following the modification using the extended 12-month exercise period. An incremental stock compensation
charge of $24,359 was recorded in costs related to resignation of former officer.
Mr.
Favish’s unvested options at the time of his separation were forfeited. All compensation from prior periods related to these
unvested options was reversed, resulting in an adjustment to stock compensation expense during the nine months ended September
30, 2020 of $(965,295) that was recorded in costs related to resignation of former officer.
Loss
on Sale of Equipment
During
June 2020, in an effort to reduce costs and focus on other segments of the business, the Company began to wind down the Transcranial
Doppler Solutions, Inc. (“TDSI”) subsidiary and ceased its operations. The wind down was completed in the third quarter
of 2020. TDSI held a group of ultrasound machines as fixed assets. The Company sold these machines, and therefore a loss on sale
of $18,500 has been recorded in the condensed consolidated statements of operations for the nine months ended September 30, 2020.
Interest
Expense
For
the nine months ended September 30, 2020, interest expense was $7,254 compared to $255,842 for the nine months ended September
30, 2019. The decrease of $248,588 or 97%, was due primarily to the amortization of the valuation discount of the March 2019 convertible
notes of $233,455 that was reflected as an expense when the notes were converted in April of 2019.
Finance
Cost Upon Issuance of Warrants
Finance
costs for the nine months ended September 30, 2019 of $415,955 include 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. 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. (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 at June 30, 2019 because the
warrants 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. There were no such costs for the
comparable period in 2020.
Change
in Fair Value of Derivative Warrants
As
described above, 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 in April
of 2019. As of September 30, 2020, the fair value of the warrant liability was determined to be $7,519 and the Company recorded
a change in fair value of derivative warrants for the nine months ended September 30, 2020 of $5,804.
Net
Loss
For
the nine months ended September 30, 2020, the Company incurred a net loss of $5,197,567, compared to a net loss of $6,822,553
for the nine months ended September 30, 2019. The decrease in net loss of $1,624,986 or 24% compared to the prior year period
was primarily due increased revenues and decreased operating costs.
Segment
Information
The
following tables set forth our results of operations by segment:
The
Medical foods and nutraceuticals segment provides a portfolio of science-based, clinically supported nutrition, medical foods,
and supplements. Our products include, among others, Lumega-Z, Glaucocetin, ImmuneSF.
The Medical devices segment includes a
portfolio of medical diagnostic devices currently focused on the ocular space and the Company is believed to be
the industry leader in contrast testing. Our products include VectorVision CSV-1000, CSV-1000HGT, CSV-2000 and associated accessories
as well as the MapcatSF.
See
Note 10, Segment Reporting, to our Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this report,
for further details on our reportable segments.
|
|
For the Nine Months Ended September 30, 2020
|
|
|
|
Corporate
|
|
|
Medical
Foods and
Nutraceuticals
|
|
|
Medical Devices
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
6,100
|
|
|
$
|
1,446,584
|
|
|
$
|
237,136
|
|
|
$
|
1,689,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
2,477
|
|
|
|
764,246
|
|
|
|
101,077
|
|
|
|
867,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
3,623
|
|
|
|
682,338
|
|
|
|
136,059
|
|
|
|
822,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
2,655,107
|
|
|
|
3,146,514
|
|
|
|
216,516
|
|
|
|
6,018,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(2,651,484
|
)
|
|
$
|
(2,464,176
|
)
|
|
$
|
(80,457
|
)
|
|
$
|
(5,196,117
|
)
|
|
|
For the Nine Months Ended September 30, 2019
|
|
|
|
Corporate
|
|
|
Medical
Foods and
Nutraceuticals
|
|
|
Medical Devices
|
|
|
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
|
)
|
Revenue
For
the nine months ended September 30, 2020, revenue from our Medical foods and nutraceuticals segment was $1,446,584 compared to
$317,338 for the nine months ended September 30, 2019, resulting in an increase of $1,129,246 or 356%. The increase is due primarily
to the fulfillment of a Malaysian order for a proprietary immune-supportive formula that was delivered in June. The Company completed
shipment of the product, received payment in full, and has recognized revenue for this order of $890,000 during June 2020. Medical
foods revenues of $402,498 grew approximately 27% during the nine months ended September 30, 2020, as compared to the prior year
period of $317,338. For the nine months ended September 30, 2020, revenue from our Medical devices segment was $237,136 compared
to $337,531 for the nine months ended September 30, 2019, resulting in a decrease of $100,395 or 30%, primarily as a result of
medical facility closures due to COVID-19 “Stay at Home” orders. The decrease was offset in part from the sale of
a MapCat device in January 2020. The severity of the impact of the COVID-19 pandemic on the Company’s business will continue
to depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and
severity of the impact on the Company’s customers, service providers and suppliers, all of which are uncertain and cannot
be predicted.
Cost
of Goods Sold
For
the nine months ended September 30, 2020, cost of goods sold from our Medical foods and nutraceuticals segment was $764,245 compared
to $120,608 for the nine months ended September 30, 2019, resulting in an increase of $643,637 or 533%. The increase was primarily
due to the Malaysian order noted above. For the nine months ended September 30, 2020, cost of goods sold from our Medical devices
segment was $101,077 compared to $136,958 for the nine months ended September 30, 2019, resulting in a decrease of $35,881 or
26%. The decrease was due to the decrease in sales noted above. In addition, a $13,000 inventory adjustment affecting cost of
sales due primarily to the write off of scrap materials was recorded in March 2020.
Gross
Profit
For
the nine months ended September 30, 2020, gross profit from the Medical foods and nutraceuticals segment was $682,339 compared
to $196,730 for the nine months ended September 30, 2019, resulting in an increase of $485,609 or 247%. For the nine months ended
September 30, 2020, gross profit from the Medical devices segment was $136,059 compared to $200,573 for the nine months ended
September 30, 2019, resulting in a decrease of $64,514 or 32%. Gross profit overall represented 49% of revenues for the nine months
ended September 30, 2020, versus 61% of revenue for the nine months ended September 30, 2019. The lower gross profit percentage
in the current period is reflective of lower distributor pricing given to the Malaysian customer.
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 product candidates. As a result of these and other activities, the Company utilized cash in operating
activities of $5,840,682 during the nine months ended September 30, 2020. The Company had working capital of $10,176,907 at September
30, 2020. As of September 30, 2020, the Company had cash in the amount of $9,795,441 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 stock and other equity-linked securities.
The
COVID-19 pandemic has and will continue affecting economies and businesses around the world. The impacts of the pandemic could
be material, but due to the evolving nature of this situation, the Company is not able at this time to estimate the impact on
our financial or operational results. Among the factors that could impact our results are: effectiveness of COVID-19 mitigation
measures, global economic conditions, consumer spending, work from home trends, supply chain sustainability and other factors.
These factors could result in increased or decreased demand for our products and services and impact our ability to serve customers.
The
Company will continue to incur significant expenses for continued commercialization activities related to its medical foods, medical
devices and its nutraceuticals product line. Development and commercialization of medical foods, medical devices and nutraceuticals
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 its
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 $7,392,467.
The
Company received total gross proceeds of $4,555,354 during the nine months ended September 30, 2020 from the exercise of 13,319,750
warrants issued in the Company’s October 2019 follow-on offering.
The
Company will continue to seek to raise additional debt and/or equity capital to fund future operations and potential transactions
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 is reviewing all of its business segments and operations with the assistance
of an outside consulting firm in order to determine its future business strategies and focus. Furthermore, management is reviewing
its expense profile, with its consulting firm, in order to increase efficiencies and reduce its cash utilization over the near
and long term, while hoping to increase stockholder value.
Management
believes 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,
|
|
|
|
2020
|
|
|
2019
|
|
Net cash used in operating activities
|
|
$
|
(5,840,682
|
)
|
|
$
|
(4,189,050
|
)
|
Net cash used in investing activities
|
|
|
(34,733
|
)
|
|
|
(163,105
|
)
|
Net cash provided by financing activities
|
|
|
4,555,354
|
|
|
|
9,236,167
|
|
Net increase in cash
|
|
$
|
(1,320,061
|
)
|
|
$
|
4,884,012
|
|
Operating
Activities
Net
cash used in operating activities was $5,840,682 during the nine months ended September 30, 2020, versus $4,189,050 used during
the comparable prior year period. The increase in 2020 was due primarily to inventory purchases and higher legal, insurance, professional
services, consulting, and labor costs paid in the current period.
Investing
Activities
Net
cash used in investing activities was $34,733 for nine months ended September 30, 2020 and $163,105 for the nine months ended
September 30, 2019. Cash was used in both periods for the purchase of testing equipment, furniture and fixtures.
Financing
Activities
Net
cash provided by financing activities was $4,555,354 for the nine months ended September 30, 2020 and was due to warrant exercise
during the period. 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. In addition, in March 2019, the Company
issued $350,000 in promissory and convertible promissory notes and received cash of $131,875 from the exercise of warrants. These
proceeds were partially offset by payment of $100,000 to settle a promissory note.
Off-Balance
Sheet Arrangements
At
September 30, 2020 and December 31, 2019, the Company did not have any transactions, obligations or relationships that could be
considered off-balance sheet arrangements.