GHSI Guardion Health Sciences Inc

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Six Months Ended June 30, 2020 and 2019

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 (1) that has developed medical foods and medical devices in the ocular health space and (2) that has developed and is developing nutraceuticals that the Company believes will provide supportive health benefits to consumers.

Since inception, 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 $3,054,073 and utilized cash in operating activities of $4,020,731 during the six months ended June 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.

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 on the Company’s business is highly uncertain and difficult to predict, as the responses that the Company, other businesses and governments are taking continue to evolve. Furthermore, capital markets and economies worldwide have also been negatively impacted by the COVID-19 pandemic, and it is possible that the COVID-19 pandemic could cause a local, national and/or global economic recession. Policymakers around the globe have responded with fiscal policy actions 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. The magnitude and overall effectiveness of these actions remain uncertain.

The Company believes that sales results have been negatively affected by the closure of medical facilities due to COVID-19 “Stay at Home” orders. 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 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 has determined to toll 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. 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.

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, 2019 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 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, 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 segment:

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

The Company’s medical foods and nutraceuticals revenues are derived from individual retail customers in North America and international distributors. 68% of Medical Foods and Nutraceuticals revenues for the six months ended June 30, 2020 were due to the sale in June of a 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 94% and 39% of Medical Devices revenues for the six months ended June 30, 2020 and 2019, respectively. Distributors contributed approximately 58% and 32% of Medical Devices revenues for the six months ended June 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. 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 for this order. The Company completed shipment of the product, received payment in full, and has recognized revenue for this order of $890,000 during the three months ended June 30, 2020. 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 June 30, 2020, the Medical Foods and Nutraceuticals segment had one customer who accounted for approximately 75% of the Company’s sales. During the three months ended June 30, 2019, the Medical Devices segment had one customer who accounted for approximately 24% of the Company’s sales. No other customer accounted for more than 10% of sales in either period.

During the six months ended June 30, 2020, the Medical Foods and Nutraceuticals segment had one customer who accounted for approximately 62% of the Company’s sales. During the six months ended June 30, 2019, the Medical Devices segment had one customer who accounted for approximately 26% of the Company’s sales. No other customer accounted for more than 10% of sales in either period.

During the three months ended June 30, 2020, three of the Company’s largest vendors accounted for 12%, 36%, and 44% of all purchases. During the three months ended June 30, 2019, two vendors accounted for 34%, and 47% of all purchases. During the six months ended June 30, 2020, three of the Company’s largest vendors accounted for 17%, 24%, and 40% of all purchases. During the six months ended June 30, 2019, three vendors accounted for 20%, 24%, and 32% 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 $75,769 and $106,716 for the six months ended June 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 six months ended June 30, 2020 and 2019, patent costs were $60,501 and $64,482, 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 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.

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:

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.

We consider 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 June 30, 2020, and December 31, 2019, the Company’s balance sheets included Level 2 liabilities comprised of the fair value of warrant liabilities aggregating $19,411 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.

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.

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 June 30, 2020 and December 31, 2019 no amounts were owed or accrued to NutriGuard.

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, 2019 and had been included in the Company’s consolidated statements of operations during the three and six months ended June 30, 2019:

Inventories consisted of the following:

Property and equipment consisted of the following:

For the six months ended June 30, 2020 and 2019, depreciation expense was $46,619 and $29,810, respectively, of which $26,169 and $11,244 was included in research and development expense, $7,821 and $7,821 was included in sales and marketing expense, and $12,629 and $10,745 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 agreement, the Company paid a deposit of $47,449, of which $36,979 represented prepaid rent. As of June 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 June 30, 2020, remaining lease payments under the amended lease agreement averaged $13,103 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, 2020, remaining lease payments averaged $1,864 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 six months ended June 30, 2020, the Company made combined payments on both leases of $74,069 towards the lease liabilities. As of June 30, 2020, the lease liability for Lease 1 was $455,711, and the lease liability for Lease 2 was $56,535. The aggregate balance of the lease liabilities at June 30, 2020 was $512,246, of which $157,119 was current.

Combined rent expense for both leases for the six months ended June 30, 2020 and 2019 was $87,161 and $87,161, respectively. The balance of the right of use asset as of December 31, 2019 was $572,714. During the six months ended June 30, 2020, the Company reflected amortization of right of use asset of $76,327 related to the leases, resulting in a net asset balance of $496,387 as of June 30, 2020.

Common Stock

During the six months ended June 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.

The exercise prices of warrants outstanding and exercisable as of June 30, 2020 are as follows:

During the six months ended June 30, 2020, investors exercised a total of 13,302,400 warrants for 13,302,400 shares of common stock. The warrants were exercisable for $0.34 per share, which resulted in cash proceeds to the Company of $4,549,421.

As of June 30, 2020, the Company had an aggregate of 15,470,338 outstanding warrants to purchase shares of its common stock with a weighted average exercise price of $0.41 and a weighted average remaining life of 4.39 years. The aggregate intrinsic value of warrants outstanding as of June 30, 2020 was $1,073,026.

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 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 June 30, 2020, the fair value of the warrants was determined to be $19,411 and the change in fair value of $6,088 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:

The exercise prices of options outstanding and exercisable as of June 30, 2020 are as follows:

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 three months ended March 31, 2020, the Company granted options to purchase 290,000 shares of common stock to five employees with a grant date fair value of $110,887. The options have an exercise price of $0.32 to $0.41 per share. 250,000 of the options vest on a quarterly basis over two years and 40,000 options vest in full six months after the grant date.

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 six months ended June 30, 2020 and 2019, we recognized aggregate stock-compensation expense, including the modification and forfeiture accounting described above; of $(831,548) and $1,309,155, based upon stock prices ranging from $0.25 to $3.30 per share. During the six months ended June 30, 2020, $66,194 was recorded to sales and marketing expense and $(921,975) was recorded in general and administrative expense. All of the stock compensation expense recognized during the six months ended June 30, 2019 was recorded in general and administrative expense. See Note 9 for discussion of forfeited options related to a settlement with a former officer.

As of June 30, 2020, the Company had an aggregate of 835,000 remaining unvested options outstanding, with a fair value of $349,007, weighted average exercise price of $0.76, and weighted average remaining life of 8.94 years. The aggregate intrinsic value of options outstanding as of June 30, 2020 was $23,006. The aggregate intrinsic value of unvested options outstanding as of June 30, 2020 was $19,616.

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 of settlement payments were recorded in costs related to resignation of former officer expense in the accompanying condensed consolidated statements of operations for the three and six months ended June 30, 2020. As of June 30, 2020, $311,458 of the amount remains accrued on our condensed consolidated balance sheet.

In connection with his separation, 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 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 three and six months ended June 30, 2020 of $(1,401,582) and $(965,295), respectively, that was recorded in costs related to resignation of former officer.

During the six months ended June 30, 2020 and 2019, the Company incurred and paid salaries of $50,313 and $47,104, respectively, to Karen Favish, spouse of Michael Favish, our former CEO. During the six months ended June 30, 2020 and 2019, the Company incurred and paid salaries of $30,000 and $22,863, respectively, to Kristine Townsend, spouse of Controller and Chief Accounting Officer John Townsend. During the six months ended June 30, 2020 and 2019, the Company paid consulting expenses of $27,500 and $60,000, respectively, to Ceatus Media Group, LLC, a web design company owned by Interim CEO David Evans and his spouse Tamara Evans. During the six months ended June 30, 2020 and 2019, the Company paid building rent of $10,708 and $10,398, 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 the Company’s current Chief Science Officer and Interim CEO, Dr. David 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 created in a miniaturized circuit board 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 following tables set forth our total assets by segment. Intersegment balances and transactions have been removed:

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 June 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.

Effective July 20, 2020, the Company appointed Andrew C. Schmidt as Vice President and Chief Financial Officer of the Company. The Company and Mr. Schmidt entered into an employment agreement (the “Employment Agreement”), dated July 20, 2020 (the “Effective Date”), pursuant to which Mr. Schmidt’s annual base salary is $250,000. The Employment Agreement provides that Mr. Schmidt shall have an annual target cash bonus opportunity of no less than $175,000 (the “Bonus”) based on the achievement of Company and individual performance objectives to be determined in good faith by the Board in advance and in consultation with Mr. Schmidt (the “Performance Objectives”), provided, however, that the parties acknowledged and agreed that up to an aggregate of $100,000 of the Bonus shall be payable upon the closing(s) of one or more mergers and acquisition transactions as determined at the discretion of the Board, and $75,000 shall be based upon the satisfactory completion of the Performance Objectives. The initial term of the Employment Agreement is through July 20, 2021, with automatic one-year renewals, unless either party provides written notice of a non-renewal in accordance with the terms of the Employment Agreement (the “Term”).

Mr. Schmidt will also be entitled to certain other benefits consistent with those provided to other senior executives of the Company. In addition, on the Effective Date, Mr. Schmidt was granted an award of one million (1,000,000) stock options (the “Stock Options”) under the Company’s 2018 Equity Incentive Plan (the “Incentive Plan”), at an exercise price of one dollar ($1.00) per share. The Stock Options shall vest and become exercisable in twelve (12) equal installments on the last day of each of the subsequent twelve (12) calendar quarter-end dates following the Effective Date (the first of such dates to be September 30, 2020), subject to continued service, and shall vest in full upon a Change in Control (as defined in the Incentive Plan).