GHSI Guardion Health Sciences Inc

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Nine Months Ended September 30, 2019 and 2018

1. Organization and Business Operations

Organization and Business

Guardion Health Sciences, Inc. (the “Company”) was formed in December 2009 as a California limited liability company under the name P4L Health Sciences, LLC. On June 30, 2015, the Company converted from a California limited liability company to a Delaware corporation, changing its name from Guardion Health Sciences, LLC to Guardion Health Sciences, Inc.

The Company is a specialty health sciences company formed to develop, formulate and distribute condition-specific medical foods with an initial medical food product on the market under the brand name Lumega-Z^® that is designed to replenish and restore the macular protective pigment. A depleted macular protective pigment is a modifiable risk factor for retina-based diseases such as age-related macular degeneration (“AMD”), computer vision syndrome (“CVS”) and diabetic retinopathy. The Company believes this risk may be modified by taking Lumega-Z to maintain a healthy macular protective pigment. Additional research has also shown a depleted macular protective pigment to be a biomarker for neurodegenerative diseases such as Alzheimer’s disease and dementia.

The Company invented a proprietary technology, embodied in the Company’s medical device, the MapcatSF^® that accurately measures the macular pigment optical density (“MPOD”). On November 8, 2016, the United States Patent and Trademark Office (“USPTO”) issued patent number 9,486,136 for the MapcatSF invention. Using the MapcatSF to measure the MPOD allows one to monitor the increase in the density of the macular protective pigment after taking Lumega-Z. The MapcatSF is a non-mydriatic, non-invasive device that accurately measures the MPOD, the lens optical density and lens equivalent age, thereby creating an evidence-based protocol that is shared with the patient. A non-mydriatic device is one that does not require dilation of the pupil for it to function. The MapcatSF is the first medical device using a patented “single fixation” process and “automatic lens density correction” that produces accurate serialized data.

In September 2017, the Company, through its wholly-owned subsidiary VectorVision Ocular Health, Inc. (“VectorVision”), acquired substantially all of the assets and certain liabilities of VectorVision, Inc., a company that specialized in the standardization of contrast sensitivity, glare sensitivity, low contrast acuity, and early treatment diabetic retinopathy study (“ETDRS”) visual acuity testing. VectorVision’s standardization system is designed to provide the practitioner or researcher with the ability to delineate very small changes in visual capability, either as compared to the population or from visit to visit. VectorVision develops, manufactures and sells equipment and supplies for standardized vision testing for use by eye doctors in clinical trials, for real-world vision evaluation, and industrial vision testing. The acquisition expanded the Company’s technical portfolio. CSV-1000 and CSV-3000 instruments offer auto-calibrated tests to ensure correct testing luminance and contrast levels for consistent, highly accurate and repeatable results. Recently issued patents the Company received for continuously calibrating the light source, an automated standardization technology the Company refers to as AcQviz^TM, are expected to be incorporated into the new CSV-2000, in which the proprietary standardized contrast sensitivity test patterns can be presented to the patient using a computer monitor as opposed to the current calibrated backlit system. The Company believes the acquisition of VectorVision further establishes its position at the forefront of early detection, intervention and monitoring of a range of eye diseases.

In August 2018, the Company created a wholly owned subsidiary, Transcranial Doppler Solutions, Inc. (“TDSI”). TDSI is dedicated to the pursuit of early predictors resulting in, the Company believes, valuable therapeutic intervention for practitioners and their patients, and additional revenue streams generated from the testing and sale of Company products to appropriate customers. The Company has established operations with selected clinics and is focusing on expanding its client base.

In November 2018, the Company launched a new medical food product, GlaucoCetin^TM, which the Company believes is the first vision-specific medical food designed to support and protect the mitochondrial function of optic nerve cells and improve blood flow in the ophthalmic artery in patients with glaucoma.

In September 2019, the Company, through its wholly owned subsidiary NutriGuard Formulations, Inc., acquired the nutraceuticals business from NutriGuard Research, Inc. Pursuant to the Asset Purchase Agreement, the Company purchased specified assets of the NutriGuard brand and business, primarily consisting of inventory, trademarks, copyrights and other intellectual property. Once developed, the NutriGuard Formulations nutraceutical product line should provide the Company a new direct-to-consumer (“DTC”) capability. The Company intends to build a portfolio of nutraceutical products under the NutriGuard brand by developing new formulations and marketing its products to patients directly through DTC channels and through recommendations by their physicians. See Note 3 for additional information.

The Company has been primarily engaged in research and development, product commercialization and capital raising activities.

Going Concern and Liquidity

The financial statements have been prepared assuming the Company will continue as a going concern. The Company had a net loss of $6,822,553 and utilized cash in operating activities of $4,189,050 during the nine months ended September 30, 2019. The Company expects to continue to incur net losses and negative operating cash flows in the near-term. As a result, management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the consolidated financial statements are issued.

The Company’s independent registered public accounting firm has also included explanatory language in their opinion accompanying the Company’s audited financial statements for the year ended December 31, 2018. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.

The Company will continue to incur significant expenses for commercialization activities related to its medical foods, the MapcatSF medical device, VectorVision diagnostic equipment, the TDSI business, the new NutriGuard line of nutraceuticals and with respect to efforts to continue to build the Company’s infrastructure. Development and commercialization of medical foods and medical devices involves a lengthy and complex process. Additionally, the Company’s long-term viability and growth may depend upon the successful development and commercialization of new complementary products or product lines.

The Company is seeking to raise additional debt and/or equity capital to fund future operations, but there can be no assurances that the Company will be able to secure such additional financing in the amounts necessary to fully fund its operating requirements on acceptable terms or at all. If the Company is unable to access sufficient capital resources on a timely basis, the Company may be forced to reduce or discontinue its technology and product development programs and curtail or cease operations.

NASDAQ Notice

On September 20, 2019, the Company received a notification letter from the Nasdaq Listing Qualifications Staff (the “Staff”) of the Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that, for the last 30 consecutive business days, the closing bid price for the Company’s common stock was below the minimum $1.00 per share requirement for continued listing on The Nasdaq Capital Market as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”). The Nasdaq letter has no immediate effect on the listing of the Company’s common stock on the Nasdaq Capital Market.

In accordance with Nasdaq listing rules, the Company has been provided an initial period of 180 calendar days, or until March 18, 2020 (the “Compliance Date”), to regain compliance with the Minimum Bid Price Requirement. If, at any time during this 180-day period, the closing bid price of the Company’s common stock is at least $1.00 for a minimum of 10 consecutive business days, the Staff will provide the Company written confirmation of compliance with the Minimum Bid Price Requirement and the matter will be closed. If the Company does not regain compliance by the Compliance Date, the Company may be eligible for an additional 180 calendar day compliance period. To qualify for such additional compliance period, the Company would have to meet the continued listing requirements of the NASDAQ Capital Market, except for the Minimum Bid Price Requirement, and the Company would need to provide written notice of its intention to cure the deficiency during the additional compliance period. If the Company is not eligible for the additional compliance period or it appears to the Staff that the Company will not be able to cure the deficiency or if the Staff exercises its discretion to not provide such additional compliance period, the Staff will provide written notice to the Company that its common stock will be subject to delisting. At that time, the Company may appeal the Staff’s delisting determination to a Nasdaq Hearing Panel.

Reverse Stock Split

On January 30, 2019, following stockholder and Board approval, the Company filed a Certificate of Amendment to its Amended Certificate of Incorporation, as amended (the “Amendment”), with the Secretary of State of the State of Delaware to effectuate a one-for-two (1:2) reverse stock split (the “Reverse Stock Split”) of its common stock, par value $0.001 per share, without any change to its par value. The Amendment became effective on the filing date. The number of shares authorized for common and preferred stock were not affected by the Reverse Stock Split. No fractional shares were issued in connection with the Reverse Stock Split as all fractional shares were “rounded up” to the next whole share. Proportional adjustments for the Reverse Stock Split were made to all share and per share amounts as if the split occurred at the beginning of the earliest period presented.

Board Actions

In October 2019, our board of directors approved an amendment to increase the number of authorized common stock from 90,000,000 to 250,000,000 shares. In addition, the board approved an amendment to our certificate of incorporation, as amended, to combine the outstanding shares of our common stock into a lesser number of outstanding shares (a “Reverse Stock Split”).

The board of directors determined that an increase in authorized common shares is in the best interests of the Company and believes that the availability of additional authorized shares of common stock is required for several reasons, including enabling investors to exercise the Series B warrants issued pursuant to our October 30 public offering as well as the flexibility to issue common stock for a variety of general corporate purposes as the board of directors may determine to be desirable, including future financings, investment opportunities, acquisitions, or other distributions.

The short-term intent of a Reverse Stock Split is to increase the price of the common stock and thereby regain compliance with the NASDAQ minimum bid price requirement. In addition, the Company believes a Reverse Stock Split will make its common stock more attractive to a broader range of investors, as it believes that the current market price of the common stock may prevent certain institutional investors, professional investors and other members of the investing public from purchasing stock. Many brokerage houses and institutional investors have internal policies and practices that either prohibit them from investing in low-priced stocks or tend to discourage individual brokers from recommending low-priced stocks to their customers. Furthermore, some of those policies and practices may function to make the processing of trades in low-priced stocks economically unattractive to brokers. Moreover, because brokers’ commissions on low-priced stocks generally represent a higher percentage of the stock price than commissions on higher-priced stocks, the current average price per share of common stock can result in individual stockholders paying transaction costs representing a higher percentage of their total share value than would be the case if the share price were higher. The Company believes that the Reverse Stock Split will make our common stock a more attractive and cost-effective investment for many investors, which in turn would enhance liquidity for holders of our common stock.

Shareholder approval for these actions is expected to be solicited at our 2019 Annual Meeting of Stockholders that is currently scheduled for December 5, 2019.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC. The condensed consolidated balance sheet as of December 31, 2018 included herein was derived from the audited consolidated financial statements as of that date, but does not include all disclosures, including notes, required by GAAP.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to fairly present the Company’s financial position and results of operations for the interim periods reflected. Except as noted, all adjustments contained herein are of a normal recurring nature. The results of operations for the interim periods presented are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2019.

Certain prior period amounts have been reclassified to conform to current period presentation. Such amounts consist of operating segment disclosures, whereby revenue and cost of goods sold have been broken out on the Consolidated Statements of Operations to conform with the Company’s reportable business segments as of September 30, 2019.

Use of Estimates

The preparation of the financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Actual results could differ from those estimates.

These estimates and assumptions include estimates for reserves of uncollectible accounts, inventory obsolescence, depreciable lives of property and equipment, analysis of impairments of recorded long-term tangible and intangible assets, realization of deferred tax assets, accruals for potential liabilities and assumptions made in valuing stock instruments issued for services.

Intangible Assets

In connection with the VectorVision transaction, the Company identified and allocated estimated fair values to intangible assets including goodwill and customer relationships.

In accordance with Accounting Standard Codification (“ASC”) 350 – Intangibles – Goodwill and Other, the Company determined whether these assets are expected to have indefinite (such as goodwill) or limited useful lives, and for those with limited lives, the Company established an amortization period and method of amortization. Its goodwill and other intangible assets are subject to periodic impairment testing.

The Company utilized the services of an independent third-party valuation firm to assist in identifying intangible assets and in estimating their fair values. The useful lives for the Company’s intangible assets other than goodwill were estimated based on Management’s consideration of various factors, including assumptions that market participants might use about sales expectations as well as potential effects of obsolescence, competition, technological progress and the regulatory environment. Because the future pattern in which the economic benefits of these intangible assets may not be reliably determined, amortization expense is generally calculated on a straight-line basis.

Amortization expense for the identifiable intangible assets associated with the VectorVision acquisition is approximately $54,000 per quarter and is included with general and administrative expenses in the Company’s Statements of Operations.

Impairment of Long-Lived Assets

The Company reviews long-lived assets, including property and equipment, identifiable intangible assets, and goodwill for impairment at each fiscal year end or when events or changes in circumstances indicate the carrying value of these assets may exceed their current fair values. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the assets. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and are no longer depreciated. The Company has not historically recorded any impairment to its long-lived assets. In the future, if events or market conditions affect the estimated fair value to the extent that a long-lived asset is impaired, the Company will adjust the carrying value of these long-lived assets in the period in which the impairment occurs. As of September 30, 2019 and December 31, 2018, the Company had not deemed any long-lived assets as impaired and was not aware of the existence of any indicators of impairment at such dates.

Deferred Offering Costs

Deferred offering costs consist principally of legal, accounting, and underwriters’ fees incurred related to equity financings. These deferred offering costs are charged against the gross proceeds received during the appropriate period. During the period ended June 30, 2019, $270,000 of offering costs deferred at December 31, 2018 were offset to paid in capital upon completion of our April 2019 offering. As of September 30, 2019, there were no comparable deferred offering costs.

Revenue Recognition

The Company’s revenue is comprised of sales of medical foods and dietary supplements to consumers through a direct sales/credit card process. In addition, the Company sells medical device equipment and supplies to customers both in the U.S. and internationally.

The Company recognizes revenue in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09” or “Topic 606”) and all related amendments. The standard provides authoritative guidance clarifying the principles for recognizing revenue and developing a common revenue standard for U.S. generally accepted accounting principles. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in the exchange for those goods or services.

Under the guidance, revenue is recognized when control of promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company reviews its sales transactions to identify contractual rights, performance obligations, and transaction prices, including the allocation of prices to separate performance obligations, if applicable. Revenue and costs of sales are recognized once products are delivered to the customer’s control and performance obligations are satisfied.

All products sold by the Company are distinct individual products and consist of medical foods, supplemental formulas, medical devices and related supplies. The products are offered for sale as finished goods only, and there are no performance obligations required post-shipment for customers to derive the expected value from them. Contracts with customers contain no incentives or discounts that could cause revenue to be allocated or adjusted over time.

Control of products sold transfers to customers upon shipment from the Company’s facilities, and the Company’s performance obligations are satisfied at that time. Shipping and handling activities are performed before the customer obtains control of the goods and therefore represent a fulfillment activity rather than a promised service to the customer. Payment for sales of Lumega-Z is generally made by approved credit cards. Payments for medical device sales are generally made by check, credit card, or wire transfer. Historically the Company has not experienced any significant payment delays from customers.

The Company provides a 30-day right of return to its retail Lumega-Z customers. A right of return does not represent a separate performance obligation, but because customers are allowed to return products, the consideration to which the Company expects to be entitled is variable. Upon evaluation of historical Lumega-Z and VectorVision product returns, the Company determined that less than one percent of products is returned, and therefore believes it is probable that such returns will not cause a significant reversal of revenue in the future. Due to the insignificant amount of historical returns as well as the standalone nature of the Company’s products and assessment of performance obligations and transaction pricing for the Company’s sales contracts, the Company does not currently maintain a contract asset or liability balance at this time. The Company assesses its contracts and the reasonableness of its conclusions on a quarterly basis.

The following table presents the Company’s revenues disaggregated by segment:

Research and Development Costs

Research and development costs consist primarily of fees paid to consultants and outside service providers, patent fees and costs, and other expenses relating to the acquisition, design, development and testing of the Company’s medical foods and related products. Research and development expenditures are expensed as incurred and totaled $138,613 and $199,500 for the nine months ended September 30, 2019 and 2018, respectively.

Patent Costs

The Company is the owner of three issued domestic patents, three pending domestic patent applications, one issued foreign patent in Europe, one issued foreign patent in Hong Kong, and three foreign patent applications in Canada, Europe and Hong Kong. Due to the significant uncertainty associated with the successful development of one or more commercially viable products based on the Company’s research efforts and any related patent applications, patent costs, including patent-related legal fees, filing fees and internally generated costs, are expensed as incurred. During the nine months ended September 30, 2019 and 2018, patent costs were $80,879 and $43,347, respectively, and are included in general and administrative costs in the statements of operations.

Leases

Prior to January 1, 2019, the Company accounted for leases under Accounting Standards Codification (ASC) 840, Accounting for Leases. Effective from January 1, 2019, the Company adopted the guidance of ASU 2016-02 (ASC 842), Leases, which requires an entity to recognize a right-of-use asset and a lease liability for virtually all leases. The Company adopted ASC 842 using a modified retrospective approach. As a result, the comparative financial information has not been updated and the required disclosures prior to the date of adoption have not been updated and continue to be reported under the accounting standards in effect for those periods. The adoption of ASC 842 on January 1, 2019 resulted in the recognition of operating lease right-of-use assets of $657,169, lease liabilities for operating leases of $663,218, and a zero cumulative-effect adjustment to accumulated deficit. See Note 8 for further information regarding the impact of the adoption of ASC 842 on the Company’s financial statements.

Stock-Based Compensation

The Company periodically issues stock-based compensation to officers, directors, contractors and consultants for services rendered. Such issuances vest and expire according to terms established at the issuance date.

Stock-based payments to officers, directors, and employees, which include grants of employee stock options, are recognized in the financial statements based on their fair values in accordance with Topic 718. Stock option grants, which are generally time vested, will be measured at the grant date fair value and charged to operations on a straight-line basis over the vesting period. The fair value of stock options is determined utilizing the Black-Scholes option-pricing model, which is affected by several variables, including the risk-free interest rate, the expected dividend yield, the expected life of the equity award, the exercise price of the stock option as compared to the fair market value of the common stock on the grant date and the estimated volatility of the common stock over the term of the equity award.

In prior periods, the Company accounted for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the FASB whereby the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. On January 1, 2019, the Company adopted Accounting Standards Update (ASU) 2018-07 which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The Company recognizes the fair value of stock-based compensation within its statements of operations with classification depending on the nature of the services rendered. The adoption of the new standard had no cumulative effect on previously reported amounts.

Net Loss per Share

The Company’s computation of basic and diluted net loss per common share is measured as net loss divided by the weighted average common shares outstanding during the respective periods, excluding unvested restricted common stock. Shares of restricted stock are included in the basic weighted average number of common shares outstanding from the time they vest. Potential common shares such as from unexercised warrants, options, and shares associated with convertible debt outstanding that have an anti-dilutive effect are excluded from the calculation of diluted net loss per share. The Company’s basic and diluted net loss per share is the same for all periods presented because all shares issuable upon exercise of warrants and conversion of convertible debt outstanding are anti-dilutive as they decrease loss per share.

The following table sets forth the number of shares excluded from the computation of diluted loss per share, as their inclusion would have been anti-dilutive:

Recent Accounting Pronouncements

The Company’s management does not believe that there are any recently issued, but not yet effective, authoritative guidance, if currently adopted, would have a material impact on the Company’s financial statement presentation or disclosures.

3. Acquisition of NutriGuard

Effective September 20, 2019 (the “Effective Date”), the Company’s newly-formed wholly-owned subsidiary, NutriGuard Formulations, Inc., a Delaware corporation, completed an asset purchase agreement (the “Asset Purchase Agreement”) with NutriGuard Research, Inc., a California corporation (“NutriGuard”), and NutriGuard’s sole shareholder, Mark McCarty.

Pursuant to the Asset Purchase Agreement, the Company purchased specified assets of the NutriGuard brand and business, consisting primarily of inventory, trademarks, copyrights and other intellectual property. In exchange, the Company agreed to pay a 3% royalty, payable quarterly, to NutriGuard based on the operating results of the NutriGuard branded products in future periods, after $500,000 in gross revenues have been achieved by the Company. The Company is unable at this time to reasonably estimate the timing or amount of future revenue streams that would generate royalty payments, as the Company will need to develop new product formulations and implement a new marketing and distribution infrastructure, which will require the investment of a significant amount of capital over an extended period of time. Accordingly, any royalty payments in the future will be charged directly to operations when incurred.

In addition, on the Effective date, the Company and Mr. McCarty entered into a consulting agreement (as described below), and Mr. McCarty and NutriGuard agreed, among other terms, to no longer use the “NutriGuard” name. Mr. McCarty also entered into a non-competition covenant for a period of 5 years.

As the Company did not pay any cash or non-cash consideration, nor did it assume any liabilities, in conjunction with this acquisition, the Company did not recognize any tangible or intangible assets at closing. All costs related to this transaction, consisting primarily of legal fees, were charged to operations as incurred. Although NutriGuard has conducted limited operations with nominal revenues during the past few years, the Company has determined that the NutriGuard acquisition qualifies as the acquisition of a business under Accounting Standards Codification (“ASC”) 805: Business Combinations (“ASC 805”). However, the recent historical operations of NutriGuard did not meet any of the three-element significance level tests (investment, assets and pre-tax income) with regard to the accounting standards requiring acquisition company financial statements and related pro forma financial information, and the Company has therefore concluded that the acquisition of NutriGuard was not significant. The value of the NutriGuard business consists primarily of intangible assets for which no accounting value will be attributed in the Company’s financial statements. The Company intends to utilize these intangible assets to build a nutraceutical brand and product portfolio based on updated and reformulated compounds, which will require the investment of a significant amount of capital over an extended period of time.

The following preliminary unaudited pro forma financial information gives effect to the Company’s acquisition of NutriGuard as if the acquisition had occurred on January 1, 2018 and had been included in the Company’s consolidated statements of operations during the three and nine-month periods ended September 30, 2019 and 2018:

Mr. McCarty’s consulting agreement with the Company provides that Mr. McCarty will serve as, the Director of Research of the Company for a period of 3 years at a rate of $7,500 per month for 12 months and $5,000 per month thereafter. It is intended that Mr. McCarty will assist the Company, among other tasks, in developing new formulations for distribution under the NutriGuard brand, as well as identifying production sources for such compounds and developing distribution networks for such products.

Pursuant to the consulting agreement, the Company granted Mr. McCarty stock options to purchase 100,000 shares of the Company’s common stock, exercisable at a price of $0.5411 per share, which was the closing market price of the Company’s common stock on the Effective Date. The stock options were granted under the terms of the Company’s 2018 Equity Incentive Plan, which options shall vest as follows: 25% on the Effective Date, 25% on the first anniversary following the Effective Date, 25% on the second anniversary following the Effective Date, and 25% on the third anniversary following the Effective Date.

4. Segment Reporting

The Company determined its reporting units in accordance with ASC 280, “Segment Reporting” (“ASC 280”). The Company historically has reported its operating results as a single reportable segment described as the business of developing and commercializing a variety of products that support the detection, intervention and monitoring of a range of eye diseases. The Company’s chief executive officer, who is the Chief Operating Decision Maker (“CODM”), has historically reviewed financial information on an aggregated basis for purposes of allocating resources and evaluating financial performance.

In September 2017, the Company, through its wholly-owned subsidiary VectorVision Ocular Health, Inc., acquired substantially all of the assets and certain liabilities of VectorVision, Inc., a company that specialized in the standardization of contrast sensitivity, glare sensitivity, low contrast acuity, and early treatment diabetic retinopathy study (“ETDRS”) visual acuity testing. In August 2018, the Company created a wholly owned subsidiary, Transcranial Doppler Solutions, Inc. (“TDSI”). The Company has established TDSI operations with selected clinics and is focusing on expanding its client base.

Although all of the Company’s products and services target the early detection, intervention and monitoring of a range of eye diseases, the addition of potential new products or services as the Company grows requires management to periodically reevaluate its reporting structure. As sales of our medical foods as well as sales of VectorVision products grow, there is an increased need for the CODM to evaluate revenue and gross profit on a product line or group basis for purposes of resource allocation. As of September 30, 2019, the TDSI subsidiary does not meet the required quantitative criteria to be considered a reportable operating segment. Additionally, TDSI does not share similar economic characteristics or a majority of the aggregation criteria set forth in ASC 280, and therefore is included in the category “Other” below. The TDSI business earned $9,800 of service revenue and incurred approximately $205,000 of operating costs during the nine months ended September 30, 2019. As of September 30, 2019, based on anticipated growth and the expanding diversity of product and service offerings by the Company, management has concluded that results should be reported in two operating segments: Medical Foods and Vision Testing Diagnostics. The following tables set forth our results of operations by segment (results allocated to Other consist of non-cash stock compensation expense, depreciation and amortization, corporate legal fees, and the TDSI operations):

The following tables set forth our total assets by segment. Intersegment balances and transactions have been removed:

5. Inventories

Inventories consisted of the following:

6. Property and Equipment, net

Property and equipment consisted of the following:

For the nine months ended September 30, 2019 and 2018, depreciation and amortization expense was $48,836 and $62,036, respectively, of which $0 and $23,854 was included in research and development expense, $32,289 and $7,242 was included in sales and marketing expense, and $16,547 and $30,940 was included in general and administrative expense, respectively.

7. Intangible Assets

The Company’s intangible assets, including finite-lived intangible assets and $50,000 of non-amortizable purchased intellectual property, consisted of the following:

The Company’s amortization expense on its finite-lived intangible assets was $160,978 and $160,978 for the nine months ended September 30, 2019 and 2018, respectively.

The Company estimates future amortization expense on its finite-lived intangible assets as of September 30, 2019 to be as follows:

8. Promissory Notes

Promissory Note

On March 12, 2019, the Company issued a promissory note with principal in the amount of $100,000, simple interest of 10% annually, and with a maturity date of June 10, 2019. On April 11, 2019, the Company repaid the promissory note for a total of $100,548 including accrued interest.

Convertible Notes and Related Warrants

On March 15, 2019, the Company issued a convertible note with principal in the amount of $100,000, simple interest of 5% annually, and with a maturity date of September 30, 2019. In addition, on March 20, 2019, the Company issued a convertible note with principal in the amount of $150,000, simple interest of 5% annually, and with a maturity date of September 30, 2019. The convertible notes (principal and accrued interest) were mandatorily convertible upon the consummation of the IPO. Concurrent with the issuance of the notes, the Company issued warrants to both note holders equal to the number of shares of common stock that the holders receive in connection with the converted notes. The per share exercise price of the warrants was set at 125% of the conversion price of the notes, defined in the note agreements, as the lower of (a) 75% of the price per share of common stock of the IPO or (b) $2.30. The Company determined that it would have to issue 109,038 warrants based upon the completion of the IPO in April 2019

Due to the variable terms of both the exercise price and the number of warrants to be issued, the warrants were accounted for as a derivative liability upon issuance. The aggregate fair value of the warrants was calculated as $436,034 based on a probability effected Black-Scholes option pricing model with a stock price of $4.00, volatility of 138%, and risk-free rates ranging from 2.34% - 2.39%. The Company recognized a debt discount of $250,000 equal to the face amount of the convertible notes and recorded a financing cost of $186,034 equal to the difference between the fair value of the warrants and the debt discount. See Note 10 for further discussion of the derivative liability.

The convertible notes and accrued interest with an aggregate balance of $250,788 were mandatorily converted into 109,038 shares of common stock based on a conversion price of $2.30 per share upon the consummation of the IPO in April 2019 and the valuation discount of $250,000 was recognized as interest cost.

9. Lease Liabilities

In October 2012, the Company entered into a lease agreement for 9,605 square feet of office and warehouse space commencing March 1, 2013. Upon entering into the agreement, the Company paid a deposit of $47,449, of which $36,979 represented prepaid rent. As of September 30, 2019, $11,751 remained on deposit under the lease agreement. The lease (“Lease 1”) was renewed for an additional five years in 2018. As of September 30, 2019, remaining lease payments under the amended lease agreement average $12,959 per month through July 2023.

In connection with the VectorVision acquisition on September 29, 2017, the Company assumed a lease agreement for 5,000 square feet of office and warehouse space which commenced on October 1, 2017. The lease (“Lease 2”) was renewed for an additional 65 months. As of June 30, 2019, remaining lease payments average $1,844 per month through February 2023.

In accounting for the leases, the Company adopted ASU 2016-02 - Leases, which requires a lessee to record a right-of-use asset and a corresponding lease liability at the inception of the lease initially measured at the present value of the lease payments. The Company classified the leases as operating leases and determined that the fair value of Lease 1 at the inception of the lease was $625,778 using a discount rate of 8.0%. the fair value of Lease 2 at the inception of the lease was $100,742 using a discount rate of 8%. During the nine months ended September 30, 2019, the Company made combined payments on both leases of $124,422 towards the lease liabilities. As of September 30, 2019 and December 31, 2018, the lease liability for Lease 1 was $510,496 and $586,082, respectively, and the lease liability for Lease 2 was $65,821 and $77,137, respectively. ASU 2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. Combined rent expense for both leases for the nine months ended September 30, 2019 and 2018 was $130,742 and $137,600, respectively. During the nine months ended September 30, 2019 and 2018, the Company reflected amortization of right of use asset of $93,222 and $28,034 related to the leases, respectively, resulting in a net asset balance of $563,948 as of September 30, 2019.

10. Contingencies

The Company is periodically the subject of various pending or threatened legal actions and claims arising out of its operations in the normal course of business. In the opinion of management of the Company, adequate provision has been made in the Company’s financial statements at September 30, 2019 with respect to such matters.

11. Stockholders’ Equity (Deficit)

Common Stock

On April 9, 2019, the Company closed its initial public offering (the “IPO”) and issued 1,250,000 shares of its common stock at a public offering price of $4.00 per share for total gross proceeds of $5.0 million pursuant to an underwriting agreement by and between the Company, WallachBeth Capital, LLC, and WestPark Capital, Inc., acting as the representatives. In connection with the IPO, two convertible promissory notes previously issued on March 15, 2019 and March 20, 2019 were automatically converted into 109,038 shares of common stock based on a conversion price of $2.30 per share. The Company also issued 109,038 warrants to the note holders with an exercise price of $2.88 per share. Due to the variable terms of both the exercise price and the number of warrants to be issued, the warrants were accounted for as derivative liabilities upon issuance. On April 9, 2019, the Company issued 62,500 warrants with an exercise price of $5.00 per share to the underwriters and affiliates in connection with the IPO. The Company accounted for these warrants as a derivative liability in the financial statements upon issuance because they were associated with a registered offering, and the settlement provisions contained language that the shares underlying the warrants are required to be registered. Net proceeds to the Company were $3,888,000 after deducting underwriting discounts, commissions, and other offering expenses. See Warrant Liability discussion below for additional details.

On August 15, 2019, the Company closed a second public offering consisting of (i) 12,000,000 shares of common stock, par value $0.001 per share, of the Company, (ii) pre-funded warrants exercisable for 1,000,000 shares of common stock, and (iii) warrants to purchase up to an aggregate of 13,000,000 shares of common stock pursuant to an underwriting agreement by and between the Company, Maxim Group LLC, and WallachBeth Capital LLC, acting as the representatives. On August 16, 2019, the Company sold an additional 1,950,000 Warrants upon exercise of the underwriters’ over-allotment option. The public offering price was $0.44 per share of common stock, $0.43 per pre-funded warrant and $0.01 per accompanying warrant. On August 15, 2019, the Company issued 1,040,000 warrants with an exercise price of $0.50 per share to the underwriters in connection with the offering. Net proceeds to the Company were $4,944,340 after deducting underwriting discounts, commissions, and other offering expenses. See Warrants discussion below for additional details.

The exercise prices of warrants outstanding and exercisable as of September 30, 2019 are as follows:

During the nine months ended September 30, 2019, the Company granted 17,161,538 warrants to investors, consisting of (a) 171,538 warrants associated with our IPO financing in April 2019 (see Warrant Liability discussion below), and (b) 16,990,000 warrants associated with our August public offering, including pre-funded warrants exercisable for 1,000,000 shares of common stock, warrants to purchase up to an aggregate of 13,000,000 shares of common stock, warrants to purchase 1,950,000 shares of common stock upon the exercise of the underwriters’ over-allotment option, and warrants to purchase 1,040,000 shares of common stock issued to the underwriters as representatives of the public offering.

The August pre-funded warrants were sold to purchasers whose purchase of shares of common stock in the offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% of the Company’s outstanding common stock immediately following the consummation of the offering, in lieu of shares of common stock. Each pre-funded warrant represents the right to purchase one share of common stock at an exercise price of $0.01 per share.

The August public offering price was $0.44 per share of common stock and $0.01 per accompanying warrant. Each warrant sold with the shares of common stock represents the right to purchase one share of common stock at an exercise price of $0.585 per share. The warrants are exercisable immediately, expire five years from the date of issuance and provide that, beginning on the earlier of (i) 30 days from the effective date of the Registration Statement and (ii) the date on which the Common Stock trades an aggregate of more than 40,000,000 shares after the announcement of the pricing of the offering, and ending on the twelve month anniversary thereof, each warrant may be exercised at the option of the holder on a cashless basis at a ratio of one warrant for one share of common stock, in whole or in part, if the weighted average price of the common stock on the trading day immediately prior to the exercise date fails to exceed the initial exercise price of the warrant.

During the nine months ended September 30, 2019, investors exercised a total of 16,645,050 warrants for 16,504,806 shares of common stock, consisting of (I) 15,356,300 warrants exercised on a cashless basis for 15,216,056 net common shares, and (II) 1,288,750 warrants exercised for a total of $154,375 in proceeds to the Company (1,000,000 of these warrants were exercisable for $0.01 per share, and 288,750 were exercisable for $0.50 per share).

During the nine months ended September 30, 2019, 279,424 warrants expired unexercised.

As of September 30, 2019, the Company had an aggregate of 1,502,738 outstanding warrants to purchase shares of its common stock with a weighted average exercise price of $0.92, a weighted average remaining life of 4.65 years and an aggregate intrinsic value of $312,517, based upon a stock valuation of $0.762 per share. The intrinsic value is calculated as the difference between the market value of the underlying common stock and the exercise price of the warrants.

Warrant Liability

In March 2019, the Company issued warrants to two convertible note holders pursuant to the anticipated completion of the Company’s IPO (the IPO was completed on April 9, 2019). Due to the variable terms of both the exercise price and the number of warrants to be issued, the warrants were accounted for as derivative liabilities at the issuance date. The fair value of the warrants will be remeasured at each reporting period, with the change in the fair value recognized in earnings in the accompanying statements of operations. The Company estimated that the issuance of 109,038 warrants with an exercise price of $2.88 per share would correspond to the number of shares of common stock that the holders would receive in connection with the completion of the IPO. The fair value of the warrants at issuance was determined to be $436,034, of which $250,000 was recorded as a valuation discount and $186,034 was recorded as a finance cost. Upon completion of the IPO, the exercise price and the number of warrants were fixed and the warrants are no longer accounted for as liabilities. The fair value of the warrants at the closing of the IPO was determined to be $359,683 using a Black-Scholes model with a weighted average remaining life of 4.94 years and a stock valuation of $3.30 per share, and such amount was reclassified to equity. During the period ended September 30, 2019, the Company recognized a change in warrant liability of $76,351 that was recorded in the accompanying statements of operations.

On April 9, 2019, the Company issued 62,500 warrants with an exercise price of $5.00 per share to the underwriter in connection with the Company’s IPO. The Company accounted for these warrants as a derivative liability in the financial statements at June 30, 2019 because they were associated with the IPO, a registered offering, and the settlement provisions contained language that the shares underlying the warrants are required to be registered. The fair value of the warrants is remeasured at each reporting period, and the change in the fair value is recognized in earnings in the accompanying Statements of Operations. The fair value of the warrants at the date of issuance was determined to be $229,921 and was recorded as a finance cost. As of September 30, 2019, the fair value of the warrants was determined to be $47,118 and the change in fair value of $182,803 was recognized in the accompanying statements of operations.

The fair value of the warrant liability was determined at the following issuance and reporting dates using the Black-Scholes-Merton option pricing model and the following assumptions:

The exercise prices of options outstanding and exercisable as of September 30, 2019 are as follows:

On April 9, 2019, the Company granted options to purchase 1,250,000 shares of common stock to the Company’s Chairman and CEO with a grant date fair value of $4,122,750 and at a price per share of $4.40. The options vest on a quarterly basis over three years. On September 20, 2019, the Company granted options to purchase 100,000 shares of common stock to a consultant with a grant date fair value of $54,004 and at a price per share of $0.54. The options vest on an annual basis over three years. The Company accounts for share-based payments in accordance with ASC 718 wherein grants are measured at the grant date fair value and charged to operations over the vesting periods. During the period ended September 30, 2019, $1,807,491 of compensation expense was recognized relating the amortization of these awards.

During the nine months ended September 30, 2019, option awards were valued based upon the Black-Scholes option-pricing model, with stock prices ranging from $0.54 to $4.00 per share, volatility ranging from 115% to 145%, and an average risk-free rate ranging from 1.63% to 2.46%.

During the nine months ended September 30, 2019 and 2018, we recognized aggregate stock-compensation expense of $1,964,432 and $1,405,221, respectively, based upon stock prices ranging from $0.54 to $4.00 per share, all of which was recorded in general and administrative expense.

As of September 30, 2019, the Company had an aggregate of 1,191,667 remaining unvested options outstanding, with a total estimated fair value of $2,407,256, weighted average exercise price of $4.04, and weighted average remaining life of 4.38 years. The aggregate intrinsic value of options outstanding as of September 30, 2019 was $22,090.

12. Related Party Transactions

During the nine months ended September 30, 2019 and 2018, the Company incurred and paid $225,000 and $206,250, respectively, of salary expense to our Board Chairman and CEO, Mr. Michael Favish. In addition, compensation cost of $1,788,751 was recognized on amortization of stock option awards during the nine months ended September 30, 2019.

13. Subsequent Events

Public Offering

On October 30, 2019, the Company completed an underwritten public offering of 24,500,000 shares of its common stock (including 1,700,000 pre-funded warrants to purchase common stock in lieu thereof) and Series B warrants to purchase up to 24,500,000 shares of the Company’s common stock. Each share of common stock (or pre-funded warrant) was sold together with one Series B warrant to purchase one share of common stock at a combined price to the public of $0.342 per share and Series B warrant. The shares of common stock or pre-funded warrants and the accompanying Series B warrants were sold together but will be issued separately and will be immediately separable upon issuance. Net proceeds, after deducting underwriting discounts, commissions and offering expenses, were approximately $7.2 million.

As of October 30, 2019, the 1,700,000 pre-funded warrants, with an exercise price of $0.01 per warrant, have been exercised in full and the Company has received $17,000 in proceeds from exercise.

The Series B warrants are exercisable at a price of $0.342 per share of common stock and will expire five years from the date on which the Series B warrants become initially exercisable. Currently, Guardion does not have a sufficient number of authorized shares of common stock to issue the shares of common stock issuable upon the exercise of the Series B warrants. As a result, the Series B warrants will become exercisable only after Guardion effectuates an amendment to its certificate of incorporation to either (i) increase the number of authorized shares of its common stock or (ii) implement a reverse stock split with respect to the shares of its common stock. There can be no assurance that Guardion’s stockholders will approve a charter amendment, or as to when, if ever, the, holders of the Series B warrants will be able to exercise the Series B warrants.

Maxim Group LLC and WallachBeth Capital, LLC are acting as joint-bookrunning managers in connection with the offering. Guardion also has granted to the underwriters a 45-day option to purchase up to an additional 3,675,000 shares of common stock and/or Series B warrants to purchase up to 3,675,000 shares of common stock, at the public offering price less discounts and commissions.

The following table sets forth the unaudited condensed consolidated balance sheet of the Company as of September 30, 2019 on an as reported basis and on an unaudited pro-forma basis giving effect to the issuance and sale of 22,800,000 shares of our common stock, pre-funded warrants to purchase 1,700,000 shares of common stock and warrants to purchase 24,500,000 shares of common stock, after deducting the underwriting discounts, commissions and offering expenses payable by us, and after all pre-funded warrants were exercised: