Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Three
Months and Nine Months Ended September 30, 2021 and 2020
1.
Organization and Business Operations
Business
Guardion
Health Sciences, Inc. (the “Company”) is a clinical nutrition and diagnostics company that develops and distributes clinically
supported nutrition, medical foods, supplements and medical devices. The Company offers a portfolio of science-based, clinically supported
products and devices designed to support healthcare professionals and providers, and their patients and consumers. In June 2021, the
Company acquired Activ Nutritional, LLC (“Activ”), the owner and distributor of the Viactiv® line of supplements for bone health and other applications (see Note 3). Prior to its acquisition of Activ, the Company was primarily engaged
in research and development, product commercialization and capital raising activities.
The
Company was formed in December 2009 as a California limited liability company under the name P4L Health Sciences, LLC. On September 30,
2015, the Company converted from a California limited liability company to a Delaware corporation, and changed its name from Guardion
Health Sciences, LLC to Guardion Health Sciences, Inc.
Liquidity
The
accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets
and the settlement of liabilities and commitments in the normal course of business. For the nine months ended September 30, 2021, the
Company incurred a net loss of $10,224,649
and used cash in operating activities of
$9,078,172.
At September 30, 2021, the Company had cash and short-term investments on hand totaling $10,558,662
and working capital of $12,896,508.
Notwithstanding the net loss for the nine months ended September 30,
2021, management believes that its current cash balance is sufficient to ensure continuation of the Company as a going concern for at
least one year from the date of this quarterly report.
The
amount and timing of future cash requirements will depend, in part, on the Company’s ability to ultimately achieve operating profitability.
The Company expects to continue to incur net losses and negative operating cash flows in the near-term and will continue to incur significant
expenses for the development, commercialization and distribution of its clinical nutrition products (including the Viactiv® product
line), the development and commercialization of its diagnostics equipment, and the successful development and commercialization of any
new products or product lines. The Company may also utilize cash to fund additional acquisitions.
The
Company may seek to raise additional debt and/or equity capital to fund operations and strategic initiatives, 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. Over time, if the Company is unable to access sufficient capital resources on a timely basis to fund its
operations, the Company may be forced to reduce or discontinue some or all of its technology and product development programs and curtail
operations.
COVID-19
The
Company is subject to risks and uncertainties of the COVID-19 pandemic that could adversely impact our business. The Company has implemented
additional health and safety precautions and protocols in response to the pandemic and government guidelines, including curtailing employee
travel and primarily working remotely. During 2020 and through September 30, 2021, sales of certain products remained flat as compared
to prior comparable periods, as many professional offices were closed for long periods, or were operating with limited capacity,
due to COVID-19 related orders and protocols. Management is actively focusing on supply chain matters in light of industry-wide supply
chain constraints. Through September 30, 2021, the Company has not experienced negative impacts to its supply chain, however, the Company
cannot make any assurances in future periods.
2.
Summary of Significant Accounting Policies
Basis
of Presentation
The
accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and applicable
rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information
and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant
to the rules and regulations of the SEC. Accordingly, these interim condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2020, as filed with the SEC. The condensed consolidated balance sheet as of December 31, 2020 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, 2021.
Reverse
Stock Split
On
March 1, 2021, following stockholder and board approval, the Company effectuated a 1-for-6 reverse split of its issued and outstanding
shares of common stock, without any change to its par value. Accordingly, all share and per share amounts presented herein with respect
to common stock have been retroactively adjusted to reflect the above-described reverse stock split for all periods presented. The authorized
number of shares of common 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.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Activ Nutritional, LLC, VectorVision
Ocular Health, Inc., NutriGuard Formulations, Inc., and Transcranial Doppler Solutions, Inc. All intercompany balances and transactions
have been eliminated in consolidation.
Use
of Estimates
The
preparation of our financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Actual results
could differ from those estimates. On an ongoing basis, management reviews its estimates and if deemed appropriate, those estimates are
adjusted. Significant estimates include those related to assumptions used in valuing inventories at net realizable value, assumptions
used in valuing assets acquired in business acquisitions, impairment testing of goodwill and other long-term assets, assumptions used
in valuing stock-based compensation, the valuation allowance for deferred tax assets, accruals for potential liabilities, and assumptions
used in the determination of the Company’s liquidity. Actual results could differ from those estimates.
Revenue
Recognition
The
Company generates its revenue from two business segments:
|
●
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Clinical
Nutrition
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●
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Diagnostics
Equipment
|
The
Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with
Customers. Revenue is recognized when control of promised goods or services is transferred to the customer in an amount that reflects
the consideration to which the Company expects to be entitled in exchange for those products 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.
All
products sold by the Company are distinct individual products and 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.
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. Historically the Company has not experienced any significant payment delays from customers.
In
certain circumstances, returns of products are allowed. 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 product returns, the Company determined 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.
Revenues
by segment are as follows:
Schedule of Revenues by Segment
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Clinical nutrition
|
|
$
|
3,109,525
|
|
|
$
|
142,556
|
|
|
$
|
4,443,113
|
|
|
$
|
1,446,584
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|
Diagnostics equipment
|
|
|
39,087
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|
|
|
110,632
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|
|
|
162,515
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|
|
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237,136
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|
Other
|
|
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-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,100
|
|
Total revenue
|
|
$
|
3,148,612
|
|
|
$
|
253,188
|
|
|
$
|
4,605,628
|
|
|
$
|
1,689,820
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|
The
Company’s Clinical Nutrition and Diagnostics revenues earned during the three months and nine months ended September 30, 2021 and
2020 are derived primarily from retail customers in North America. During the nine months ended September 30, 2020, we had a large
sale to a single Malaysian distributor in the amount of $890,000
Revenues
by geographical area are as follows:
Schedule of Revenue by Geographical Area
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|
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|
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Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
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2021
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|
|
2020
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|
2021
|
|
|
2020
|
|
North America
|
|
$
|
3,132,782
|
|
|
$
|
156,431
|
|
|
$
|
4,481,439
|
|
|
$
|
668,769
|
|
Malaysia
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
890,000
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|
Asia - other
|
|
|
29,584
|
|
|
|
36,661
|
|
|
|
117,633
|
|
|
|
62,450
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|
Europe and other
|
|
|
(13,754
|
)
|
|
|
60,096
|
|
|
|
6,556
|
|
|
|
68,601
|
|
Revenues
|
|
$
|
3,148,612
|
|
|
$
|
253,188
|
|
|
$
|
4,605,628
|
|
|
$
|
1,689,820
|
|
Business
Combinations
The
Company accounts for its business combinations using the acquisition method of accounting where the purchase consideration is allocated
to the tangible and intangible assets acquired, and liabilities assumed, based on their respective fair values as of the acquisition
date. The excess of the fair value of the purchase consideration over the estimated fair values of the net assets acquired is recorded
as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and
assumptions, especially with respect to intangible assets. Critical estimates in valuing intangible assets include, but are not limited
to, expected future cash flows, which includes consideration of future growth and margins, future changes in technology, brand awareness
and discount rates. Fair value estimates are based on the assumptions that management believes a market participant would use in pricing
the asset or liability.
Investments
Short-term
investments held by the Company as of September 30, 2021, consist of a U.S. Treasury Bill, which is classified as held-to-maturity. The
Company’s U.S. Treasury Bill is scheduled to mature approximately 30 days from the date of purchase. Unrealized gains and losses
were not material. As of September 30, 2021, the carrying value of the Company’s U.S. Treasury Bill approximates its fair
value due to its short-term maturity.
Accounts
Receivable
Accounts
receivable are recorded net of an allowance for expected losses. Management evaluates the collectability of its trade accounts receivable
and determines an allowance for doubtful accounts based on historical write-offs, known or expected trends, and the identification of
specific balances deemed uncollectible based on a customer’s financial condition, credit history and the current economic conditions.
At September 30, 2021, based on management’s
assessment there was an allowance for doubtful accounts in the amount of $20,332. At December 31, 2020, based on management’s assessment
there was no allowance for doubtful accounts.
Property
and Equipment
Property
and equipment are recorded at cost less accumulated depreciation. Additions, improvements, and major renewals or replacements that substantially
extend the useful life of an asset are capitalized. Repairs and maintenance expenditures are expensed as incurred. Depreciation is computed
using the straight-line method over the estimated useful lives of the related assets, which range from three to seven years. Leasehold
improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the remaining lease term.
Management
assesses the carrying value of property and equipment whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. If there is indication of impairment, management prepares an estimate of future cash flows expected to result from
the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment
loss is recognized to write down the asset to its estimated fair value at that time. At September 30, 2021, management determined there
were no impairments of the Company’s property and equipment.
Inventories
Inventories
are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out (“FIFO”) basis. The
Company records adjustments to its inventory for estimated obsolescence or diminution in net realizable value equal to the difference
between the cost of the inventory and the estimated net realizable value. When evidence exists that the net realizable value of inventory
is lower than its cost, the difference is recognized as a loss in the period in which it occurs. Once inventory has been written down,
it creates a new cost basis for inventory that may not subsequently be written up. For the three months and nine months ended September
30, 2021 and 2020, there were no write-downs of inventory.
Intangible
Assets
Amortizable
finite-lived identifiable intangible assets consist of a trade name and customer relationships acquired in the acquisition of Activ,
effective June 1, 2021 (See Note 3), and are stated at cost less accumulated amortization. The trade name and customer relationships
are being amortized over a period of 10
years. The Company follows ASC 360 in accounting
for finite-lived intangible assets, which requires impairment losses to be recorded when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by the assets are less than the assets’ carrying amounts. As of September 30,
2021, the Company determined there were no
indicators of impairment of its intangible assets.
At
September 30, 2021 and December 31, 2020, the Company had a trademark for $50,000
classified as an indefinite-lived intangible
asset.
Goodwill
Goodwill
consists of the excess of the cost of Activ (see Note 3) over the fair value of amounts assigned to assets acquired and liabilities assumed.
Under the guidance of ASC 350, goodwill is not amortized, rather it is tested for impairment annually, and will be tested for impairment
between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. An impairment
loss generally would be recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value
of the reporting unit and would be measured as the excess carrying value of goodwill over the derived fair value of goodwill. The Company’s
policy is to perform an annual impairment testing for its reporting units on December 31 of each fiscal year.
Concentrations
During
the three months ended September 30, 2021, two customers accounted for approximately 59% of the Company’s sales. No other customer
accounted for more than 10% of sales during the three months ended September 30, 2021 or 2020.
During
the nine months ended September 30, 2021, two customers accounted for approximately 52% of the Company’s sales. No other customer
accounted for more than 10% of sales during the nine months ended September 30, 2021 or 2020.
Cash
balances are maintained at large, well-established financial institutions. At times, cash balances exceed federally insured limits. Insurance
coverage limits are $250,000 per depositor at each financial institution. The Company believes that no significant concentration of credit
risk exists with respect to its cash balances because of its assessment of the creditworthiness and financial viability of the financial
institutions that hold such cash balances.
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 Clinical Nutrition products. Research and development expenditures
are expensed as incurred and totaled $16,234 and $34,034 for the three months ended September 30, 2021 and 2020, respectively, and $53,598
and $109,803 for the nine months ended September 30, 2021 and 2020, respectively.
Patent
Costs
The
Company is the owner of four issued domestic patents, two pending domestic patent applications and one granted patent in Canada. 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, 2021, and 2020, patent costs were $56,465 and $99,589, 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 employees and non-employees in non-capital raising transactions for services
and for financing costs. Such grants vest and expire according to terms established at the issuance date. The Company accounts for such
grants issued and vesting based on ASC 718, Compensation-Stock Compensation whereby the value of the award is measured on the
date of grant and recognized for employees as compensation expense on a straight-line or graded basis over the vesting period. Recognition
of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for the services.
The
fair value of stock options granted is estimated using the Black-Scholes option-pricing model, which uses certain assumptions related
to risk-free interest rates, expected volatility, expected life, and future dividends. The assumptions used in the Black-Scholes option
pricing model could materially affect compensation expense recorded in future periods.
Loss
per Common Share
Basic
loss per share is computed by dividing net loss by the weighted-average common shares outstanding during a period. Diluted earnings per
share is computed based on the weighted-average common shares outstanding plus the effect of dilutive potential common shares outstanding
during the period calculated using the treasury stock method. Dilutive potential common shares include shares from unexercised warrants
and options. Potential common share equivalents have been excluded where their inclusion would be anti-dilutive. The Company’s
basic and diluted net loss per share is the same for all periods presented the Company had a net loss for all periods presented and all
shares issuable upon exercise of warrants and options would therefore be anti-dilutive.
The
following potentially dilutive shares were excluded from the shares used to calculate diluted earnings per share:
Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Warrants
|
|
|
485,067
|
|
|
|
2,575,498
|
|
Options
|
|
|
1,019,762
|
|
|
|
653,195
|
|
|
|
|
1,504,829
|
|
|
|
3,228,693
|
|
Fair
Value of Financial Instruments
Accounting
standards require certain assets and liabilities be reported at fair value in the financial statements and provide a framework for establishing
that fair value. Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. When determining fair value, the Company considers the
principal or most advantageous market in which it transacts and considers assumptions that market participants would use when pricing
the asset or liability. The framework for determining fair value is based on a hierarchy that prioritizes the inputs and valuation techniques
used to measure fair value:
Level
1 - Quoted prices in active markets for an identical asset or liability that the Company has the ability to access as of the measurement
date.
Level
2 - Inputs, other than quoted prices included within Level 1, which are directly observable for the asset or liability or indirectly
observable through corroboration with observable market data.
Level
3 - Unobservable inputs in which there is little or no market data for the asset or liability which requires the reporting entity
to develop its own assumptions.
The
Company determines the level in the fair value hierarchy within which each fair value measurement falls in its entirety, based on the
lowest level input that is significant to the fair value measurement in its entirety. In determining the appropriate levels, the Company
performs an analysis of the assets and liabilities at each reporting period end.
The
Company believes the carrying amount of its financial instruments (consisting of cash, short-term investments, accounts receivable, and
accounts payable and accrued liabilities) approximates fair value due to the short-term nature of such instruments.
At
December 31, 2020, the Company’s balance sheets included Level 2 liabilities comprised of the fair value of warrant liabilities
of $25,978 (see Note 9). At September 30, 2021, the Company had no warrant liabilities.
Recent
Accounting Pronouncements
In
September 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”)
2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). 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, ASU 2016-13 will be effective for the Company beginning January 1, 2023, with early adoption permitted. The Company is currently
assessing the impact of adopting this standard on the Company’s financial statements and related disclosures.
In
January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment
(“ASU 2017-04”). ASU 2017-04 eliminates Step 2 of the two-step goodwill impairment test, under which a goodwill impairment
loss was measured by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill.
ASU 2017-04 requires only a one-step quantitative impairment test, whereby a goodwill impairment loss is measured as the excess of a
reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). Entities
are required to apply ASU 2017-04 on a prospective basis. ASU 2017-04 was effective January 1, 2020. The adoption of ASU 2017-04 did
not have any impact on the Company’s consolidated financial statement presentation or disclosures.
In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”).
ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions and enhances and simplifies various aspects of
the income tax accounting guidance in ASC 740. ASU 2019-12 was effective January 1, 2021. The adoption of ASU 2019-12 did not have any
impact on the Company’s consolidated financial statement presentation or disclosures.
In
August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts
in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”). ASU 2020-06 reduces the number of accounting models for convertible
debt instruments by eliminating the cash conversion and beneficial conversion models. As a result, a convertible debt instrument will
be accounted for as a single liability measured at its amortized cost as long as no other features require bifurcation and recognition
as derivatives. For contracts in an entity’s own equity, the type of contracts primarily affected by this update are freestanding
and embedded features that are accounted for as derivatives under the current guidance due to a failure to meet the settlement conditions
of the derivative scope exception. This update simplifies the related settlement assessment by removing the requirements to (i) consider
whether the contract would be settled in registered shares, (ii) consider whether collateral is required to be posted, and (iii) assess
shareholder rights. ASU 2020-06 is effective January 1, 2024 for the Company and the provisions of this update can be adopted using either
the modified retrospective method or a fully retrospective method. Early adoption is permitted, but no earlier than January 1, 2021.
At
December 31, 2020, the Company recorded a derivative liability of $25,978 related to 10,417 warrants issued in 2019 because the settlement
provisions of the warrants contained language that the shares underlying the warrants are required to be registered. Effective January
1, 2021, the Company early adopted ASU 2020-06 using the modified retrospective approach. ASU 2020-06 removed the requirement to consider
if the warrants would be settled in registered shares, and accordingly, the adoption of ASU 2020-06 resulted in a decrease to accumulated
deficit of $25,978 and a decrease in derivative warrant liability of $25,978 on January 1, 2021.
In
May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic 470-50),
Compensation — Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic
815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU
2021-04”). ASU 2021-04 provides guidance as to how an issuer should account for a modification of the terms or conditions or an
exchange of a freestanding equity-classified written call option (i.e., a warrant) that remains classified after modification or exchange
as an exchange of the original instrument for a new instrument. An issuer should measure the effect of a modification or exchange as
the difference between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification
or exchange and then apply a recognition model that comprises four categories of transactions and the corresponding accounting treatment
for each category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination
or modification). ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods
within those fiscal years. An entity should apply the guidance provided in ASU 2021-04 prospectively to modifications or exchanges occurring
on or after the effective date. Early adoption is permitted for all entities, including adoption in an interim period. If an entity elects
to early adopt ASU 2021-04 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes
that interim period. The adoption of ASU 2021-04 is not expected to have any impact on the Company’s consolidated financial statement
presentation or disclosures.
Other
recent accounting pronouncements issued by the FASB, its Emerging Issues Task Force, the American Institute of Certified Public Accountants,
and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s
present or future financial statements.
3.
Acquisition of Activ Nutritional, LLC
On
June 1, 2021, the Company completed the acquisition of Activ. The acquisition was made pursuant to an equity purchase agreement dated
May 18, 2021 between the Company, Adare Pharmaceuticals, Inc., (“Adare”), and Activ. The Company acquired all of the issued
and outstanding equity of Activ from Adare for $26,000,000 in cash, subject to certain adjustments as provided in the equity purchase
agreement.
Activ
owns the Viactiv® line of supplement chews for bone health, immune health and other applications which are currently marketed through
many of the nation’s largest retailers, including, among others, Walmart (retail and online), Target and Amazon. The Viactiv product
lines are expected to become the Company’s most prominent product lines for the foreseeable future.
The
Company utilized the acquisition method of accounting for the acquisition in accordance with ASC 805, Business Combinations. The
Company allocated the purchase price to Activ’s tangible assets, identifiable intangible assets, and assumed liabilities at their
estimated fair values as of the date of acquisition. The fair value of the intangible assets was estimated using the income approach,
pursuant to which after-tax cash flows are discounted to present value based on projections and other available financial data. The cash
flows were based on estimates used to value the acquisition, and the discount rates applied were benchmarked with reference to the implied
rate of return from the transaction model, as well as the weighted average cost of capital. The valuation assumptions took into consideration
the Company’s estimates of customer attrition and revenue growth projections. The excess of the purchase price paid by the Company
over the estimated fair value of identified tangible and intangible assets has been recorded as goodwill.
The
following table summarizes the allocation of the fair value of the purchase consideration to the fair value of tangible assets, identifiable
intangible assets, and assumed liabilities of Activ on the date of acquisition (provisional):
Schedule of Fair Value of Assets Acquired and Liabilities Assumed
Fair value of consideration:
|
|
|
|
|
Purchase price, as adjusted, paid in cash
|
|
$
|
25,949,654
|
|
Allocation of the consideration to the fair value of assets acquired and liabilities assumed:
|
|
|
|
|
Cash
|
|
$
|
8,468
|
|
Accounts receivable
|
|
|
1,799,695
|
|
Inventories
|
|
|
613,063
|
|
Prepaids
|
|
|
49,025
|
|
Accounts payable
|
|
|
(313,731
|
)
|
Net tangible assets
|
|
|
2,156,520
|
|
|
|
|
|
|
Trade names and trademarks
|
|
|
9,200,000
|
|
Customer relationships
|
|
|
2,700,000
|
|
Net identifiable intangible assets
|
|
|
11,900,000
|
|
|
|
|
|
|
Goodwill
|
|
|
11,893,134
|
|
|
|
|
|
|
Fair value of net assets acquired
|
|
$
|
25,949,654
|
|
The
Company consolidated Activ’s operations with the Company’s operations commencing June 1, 2021, the closing date of the transaction.
Activ’s operations are included in the Company’s Clinical Nutrition segment. The amount of revenue and net income of Activ
included in the Company’s consolidated statements of operations during the three months ended September 30, 2021, was $2,998,117
and $496,621. The amount of revenue and net income of Activ included in the Company’s consolidated statements of operations during
the nine months ended September 30, 2021 was $4,047,920 and $727,909, respectively.
Acquisition-related
transaction costs (e.g., legal, due diligence, valuation, investment banking and other professional fees) are not included as a component
of consideration transferred, but were expensed as incurred. During the three months and nine months ended September 30, 2021, the Company
incurred approximately $0 and $2,104,000 of acquisition-related costs, respectively, which are included as a line item in the Company’s
consolidated statements of operations.
Pro
Forma Information
The
following unaudited pro forma condensed consolidated statement of operations for the three months and nine months ended September 30,
2021 and 2020 is presented as if the acquisition of Activ had occurred on January 1, 2020, after giving effect to certain pro forma adjustments.
The pro forma results of operations are presented for informational purposes only and are not indicative of the results of operations
that would have been achieved if the acquisition had actually been consummated on January 1, 2020. These results are prepared in accordance
with ASC 606.
Schedule of Pro Forma Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited Pro forma
for the Three Months Ended
|
|
|
Unaudited Pro forma
for the Nine Months Ended
|
|
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
Revenue
|
|
$
|
3,148,612
|
|
|
$
|
3,051,161
|
|
|
$
|
10,138,421
|
|
|
$
|
10,571,976
|
|
Net loss
|
|
$
|
(3,014,836
|
)
|
|
$
|
(2,132,023
|
)
|
|
$
|
(7,726,233
|
)
|
|
$
|
(7,296,486
|
)
|
Net loss per share-basic and diluted
|
|
$
|
(0.12
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(0.53
|
)
|
Trade
name and trademarks, and customer relationship intangible assets are being amortized over an estimated useful life of 10 years. The pro
forma adjustments include a net increase in amortization expense to record amortization expense for the $11,900,000 of acquired net identifiable
intangible assets, and an adjustment to present acquisition-related transaction costs and other one-time costs directly attributable
to the acquisition as if they were incurred in the earliest period presented.
4.
Inventories
Inventories
consisted of the following:
Schedule of Inventories
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Raw materials
|
|
$
|
64,217
|
|
|
$
|
218,307
|
|
Finished goods
|
|
|
728,416
|
|
|
|
166,665
|
|
Inventory, net
|
|
$
|
792,633
|
|
|
$
|
384,972
|
|
The
Company’s inventories are stated at the lower of cost or net realizable value on a first-in, first-out (FIFO) basis.
5.
Property and Equipment, Net
Property
and equipment, net consisted of the following:
Schedule of Property and Equipment
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Leasehold improvements
|
|
$
|
4,898
|
|
|
$
|
103,255
|
|
Testing equipment
|
|
|
183,483
|
|
|
|
348,124
|
|
Furniture and fixtures
|
|
|
129,537
|
|
|
|
197,349
|
|
Computer equipment
|
|
|
60,831
|
|
|
|
68,460
|
|
Computer software
|
|
|
50,035
|
|
|
|
-
|
|
Office equipment
|
|
|
1,642
|
|
|
|
9,835
|
|
|
|
|
430,425
|
|
|
|
727,023
|
|
Less accumulated depreciation and amortization
|
|
|
(160,938
|
)
|
|
|
(441,347
|
)
|
|
|
$
|
269,487
|
|
|
$
|
285,676
|
|
For
the nine months ended September 30, 2021 and 2020, depreciation and amortization expense was $61,115
and $45,552,
respectively.
During
the nine months ended September 30, 212, the Company opted for an early termination of its San Diego, California office and warehouse
lease and terminated the lease effective October 31, 2021. In connection with this early lease termination, the Company determined that
certain leasehold improvements, testing equipment, furniture and fixtures, computer equipment, and office equipment would no longer be
needed and recorded a loss on disposal of $31,883
related to this office and warehouse closure,
which is included in the consolidated statements of operations.
6.
Intangible Assets, Net
Intangible
assets, net consisted of the following:
Schedule of Intangible Assets
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Trade name
|
|
$
|
9,200,000
|
|
|
$
|
-
|
|
Customer relationships
|
|
|
2,700,000
|
|
|
|
-
|
|
Trademark
|
|
|
50,000
|
|
|
|
50,000
|
|
Intangible assets, gross
|
|
|
11,950,000
|
|
|
|
50,000
|
|
Less accumulated amortization
|
|
|
(396,667
|
)
|
|
|
-
|
|
Intangible assets, net
|
|
$
|
11,553,333
|
|
|
$
|
50,000
|
|
The
trade name and customer relationship were acquired June 1, 2021 in conjunction with the acquisition of Activ (see Note 3) and are being
amortized over a period of 10 years. For the three months and nine months ended September 30, 2021 and 2020, amortization expense was
$297,500 and $396,667, respectively.
The
expected future amortization expense for amortizable finite-lived intangible assets as of September 30, 2021 is as follows:
Schedule of Finite-lived Intangible Assets Amortization Expense
|
|
Total
|
|
2021 (remaining 3 months)
|
|
$
|
347,500
|
|
2022
|
|
|
1,190,000
|
|
2023
|
|
|
1,190,000
|
|
2024
|
|
|
1,190,000
|
|
2025
|
|
|
1,190,000
|
|
Thereafter
|
|
|
6,445,833
|
|
Total future expected amortization expense
|
|
$
|
11,553,333
|
|
7.
Operating Leases
As
of September 30, 2021, the Company leased its corporate office and a warehouse space in San Diego, California and an additional
warehouse space in Ohio under two operating leases. The Company accounts for its leases under ASC 842, Leases. The Company
determines whether a contract is, or contains, a lease at inception, and all leases greater than 12 months result in recognition of a
right-of-use asset and an operating lease liability. Right-of-use assets represent the Company’s right to use an underlying
asset during the lease term, and operating lease liabilities represent the Company’s obligation to make lease payments arising
from the lease. Leases with the duration of less than 12 months are not recognized on the balance sheet and are expensed on a straight-line
basis over the lease term.
Lease
cancellation
In
October 2012, the Company entered into a lease for its corporate office and warehouse located in San Diego, California. The term of
the lease, as amended, had a term through July 2023. On September 22, 2021, the Company entered into an agreement with the
landlord to terminate the lease for this corporate office and warehouse space effective October 31, 2021. At September 22, 2021, the Company had
recorded a right of use asset of $269,706,
a lease deposit of $10,470,
and an operating lease liability of $282,597,
respectively, related to this lease. Pursuant
to the termination agreement, the Company agreed to forfeit its security deposit, and pay the landlord an early termination fee of
$108,527
before October 31, 2021 and vacate the premises before October 31, 2021, in exchange for a complete release. The Company vacated the leased space on
October 29, 2021. As of September 30, 2021, the Company accounted for the cancellation of the lease by writing off the
right-of-use asset and the forfeited lease deposit from the consolidated balance sheet and recording
a $280,176 impairment
expense for the three months and nine months ended September 30, 2021. Subsequent to September 30, 2021, upon payment of the
early termination fee of $108,527 in
October 2021, the operating lease liability of $270,396 was
cancelled in full, and a gain on lease cancellation of $161,869 was
recorded.
In
July, 2021 the Company entered into a month-to-month lease for its primary corporate office space located in Houston, Texas,
with lease payments of approximately $1,700
per month.
During
the three months and nine months ended September 30, 2021 and 2020, lease expense totaled $44,548 and
$43,246, respectively,
and $132,002 and
$128,150,
respectively.
As
of December 31, 2020, the Company’s net right of use asset totaled $418,590.
During the three months and nine months ended September 30, 2021, the Company recorded amortization of right-of-use asset of $79,328
and $119,578,
respectively. In addition, during the three months ended September 30, 2021 we recorded an impairment of our right-of-use asset of $269,706
associated with the cancellation of the San
Diego California lease described above. At September 30, 2021, the net right-of-use assets were $29,305.
As
of December 31, 2020, the Company’s operating lease liabilities totaled $434,748. During the nine months ended September 30, 2021,
the Company made payments of $120,839 towards the operating lease liability. As of September 30, 2021, the operating lease liabilities
totaled $313,909.
As
of September 30, 2021, the weighted average remaining lease terms for operating leases are 1.33 years, and the weighted average discount
rate for operating lease is 3.9%.
Future
minimum lease payments under the leases are as follows:
Schedule of Lease Liability
Year ending
|
|
Operating Leases
|
|
|
|
|
|
Remainder of 2021
|
|
$
|
44,931
|
|
2022
|
|
|
182,249
|
|
2023
|
|
|
98,417
|
|
Total lease payments
|
|
|
325,597
|
|
Less: Imputed interest/present value discount
|
|
|
(11,688
|
)
|
Present value of lease liabilities
|
|
|
313,909
|
|
Less: Current portion
|
|
|
(313,909
|
)
|
|
|
$
|
-
|
|
8.
Payable to Former Officer
Effective
June 15, 2020, Michael Favish resigned as Chief Executive Officer of the Company and also resigned from the Company’s Board of
Directors. Terms of the settlement agreement between the parties included the continuation of his previous annual salary of $325,000
during the twelve months subsequent to his resignation.
The $325,000
of aggregate settlement payments was recorded
in costs related to resignation of former officer expense in the consolidated statements of operations during nine months ended September
30, 2020. The final payment due the former officer was made on June 15, 2021.
9.
Derivative Liability
On
April 9, 2019, the Company issued 10,417
warrants with an exercise
price of $30.00
per share to the Company’s
underwriter in connection with the Company’s initial public offering. The Company accounted for these warrants as a derivative
liability in the financial statements because they were associated with the initial public offering, which was a registered offering,
and the settlement provisions contained language that the shares underlying the warrants were required to be registered. The fair value
of the warrants was remeasured at each reporting period, and the change in the fair value was recognized in earnings in the statements
of operations. At December 31, 2020, the fair value of the derivative warrant liability was $25,978.
Effective
January 1, 2021, the Company early adopted ASU 2020-06 using the modified retrospective approach. ASU 2020-06 removed the requirement
to consider if the warrants would be settled in registered shares, and accordingly, the adoption of ASU 2020-06 resulted in a decrease
to accumulated deficit of $25,978 and a decrease in derivative warrant liability of $25,978 on January 1, 2021.
At
December 31, 2020, the fair value of such warrant was determined to be $2.49 using the Black-Scholes option pricing model utilizing the
following assumptions:
Schedule of Fair Value Assumptions of Warrant Liability
|
|
Warrant Liability
As of
|
|
|
|
December 31, 2020
|
|
Stock price
|
|
$
|
2.49
|
|
Risk free interest rate
|
|
|
0.17
|
%
|
Expected volatility
|
|
|
148
|
%
|
Expected life in years
|
|
|
3.8
|
|
Expected dividend yield
|
|
|
0
|
%
|
Number of warrants
|
|
|
10,417
|
|
Fair value of warrants
|
|
$
|
25,978
|
|
For
the three months and nine months ended September 30, 2020, the change in fair value of the warrants was determined $11,892
and $5,804,
respectively. There was no
change in fair value of warrants during the three
months and nine months ended September 30, 2021.
10.
Stockholders’ Equity
Common
Stock
January
2021 and February 2021 At the Market Offerings
On
January 8, 2021, the Company entered into a sales agreement with Maxim Group LLC (“Maxim”) pursuant to which the Company
could sell up to $10,000,000
worth of shares of the Company’s
common stock in an “at the market” offering through Maxim (the “January 2021 1st ATM Offering”). The offer and
sale of the shares was made pursuant to a shelf registration statement on Form S-3. The Company agreed to pay Maxim a commission equal
to 3.0% of the aggregate gross proceeds from each sale of shares. On January 15, 2021, the Company completed the January 2021 1st ATM
Offering, pursuant to which the Company sold an aggregate of 2,559,834
shares of its common stock and raised net proceeds
(after deduction for sales commissions) of approximately $9,700,000.
On
January 28, 2021, the Company entered into a sales agreement with Maxim pursuant to which the Company could sell up to $25,000,000
worth of shares of the Company’s
common stock in an “at the market” offering through Maxim (the “January 2021 2nd ATM Offering”). On February
10, 2021, the Company completed the January 2021 2nd ATM Offering, pursuant to which the Company sold an aggregate of 5,048,840
shares of its common stock and raised net proceeds
(after deduction for sales commissions) of approximately $24,250,000.
The
Company incurred costs related to these financings of approximately $327,000 which is reflected as a reduction to the proceeds from the
shares issued. The net cash received from both offerings after all expenses was approximately $33,623,000.
Warrants
A
summary of the Company’s warrant activity is as follows:
Schedule of Warrants Activity
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
December 31, 2020
|
|
|
2,132,758
|
|
|
$
|
2.48
|
|
|
|
3.81
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeitures
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expirations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(1,647,691
|
)
|
|
|
2.26
|
|
|
|
-
|
|
September 30, 2021, all exercisable
|
|
|
485,067
|
|
|
|
2.71
|
|
|
|
2.71
|
|
The
exercise prices of warrants outstanding and exercisable as of September 30, 2021 are as follows:
Schedule of Exercise Price of Warrants Outstanding and Exercisable
|
Warrants Outstanding and Exercisable (Shares)
|
|
Exercise Prices
|
|
|
160,108
|
|
$
|
2.05
|
|
|
146.667
|
|
|
2.67
|
|
|
112,001
|
|
|
3.30
|
|
|
37,700
|
|
|
3.51
|
|
|
18,174
|
|
|
17.25
|
|
|
10,417
|
|
|
30.00
|
|
|
485,067
|
|
|
|
|
During
the nine months ended September 30, 2021, investors exercised warrants into a total of 1,647,691 shares of common stock. The warrants
were exercisable for an average price of $2.26 per share, which resulted in cash proceeds to the Company of $3,568,415.
Stock
Options
A
summary of the Company’s stock option activity is as follows:
Schedule of Share-based Compensation, Stock Options, Activity
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
December 31, 2020
|
|
|
819,868
|
|
|
|
9.32
|
|
|
|
6.31
|
|
Granted
|
|
|
269,339
|
|
|
|
2.98
|
|
|
|
9.46
|
|
Forfeitures
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expirations
|
|
|
(69,445
|
)
|
|
|
26.4
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
September 30, 2021, outstanding
|
|
|
1,019,762
|
|
|
|
6.48
|
|
|
|
6.99
|
|
September 30, 2021, exercisable
|
|
|
597,454
|
|
|
|
8.18
|
|
|
|
5.46
|
|
The
exercise prices of options outstanding and exercisable as of September 30, 2021 are as follows:
Schedule of Exercise Price of Options Outstanding and Exercisable
|
Options
Outstanding (Shares)
|
|
Exercise Prices
|
|
|
|
|
|
|
|
41,667
|
|
$
|
1.48
|
|
|
50,000
|
|
|
1.61
|
|
|
66,668
|
|
|
1.76
|
|
|
5,001
|
|
|
1.91
|
|
|
41,667
|
|
|
2.33
|
|
|
18,334
|
|
|
3.25
|
|
|
152,671
|
|
|
3.95
|
|
|
416,670
|
|
|
6.00
|
|
|
104,167
|
|
|
12.00
|
|
|
10,417
|
|
|
13.80
|
|
|
112,500
|
|
|
15.00
|
|
|
1,019,762
|
|
|
|
|
During
the nine months ended September 30, 2021, the Company granted options to purchase 269,339 shares of common stock to employees and members
of the Board of Directors with a grant date fair value of $652,360 using a Black-Scholes option pricing model based on the following
assumptions: (i) volatility rates of 117% to 119%, (ii) discount rates of 0.38% to 1.28%, (iii) zero expected dividend yield, and (iv)
expected life of 6 years. The options have an exercise price of $1.61 to $3.95 per share. 67,558 of the options will vest on the one-year
anniversary of the grant date and the remaining 135,113 options will vest on monthly basis over two years. Options for 66,668 shares
vest ratably over three years. As part of their annual compensation for service on the Board of
Directors, each of the four non-officer directors receives annual stock option grant for 16,333 shares of the Company’s
common stock on the earlier of the annual meeting of stockholders or June 30. The option shall
vest and become exercisable in eight equal installments on the last day of each of the subsequent eight calendar quarter-end dates following
the date of grant.
The
volatility of the Company’s common stock is based on an average volatility of similar companies in the same industry. The risk-free
interest rate was based on rates established by the Federal Reserve Bank. The expected dividend yield was based on the fact that the
Company has not paid dividends to its common stockholders in the past and does not expect to pay dividends to its common stockholders
in the future. The expected life of the stock options granted is estimated using the “simplified” method, whereby the expected
term equals the average of the vesting term and the original contract.
During
the nine months ended September 30, 2021 and 2020, the Company recognized stock-compensation expense related to the fair value of vested
stock options of $589,229
and $227,011
respectively, which was recorded in general and
administrative expense.
As
of September 30, 2021, the Company had an aggregate of 422,308 remaining unvested options outstanding, with a remaining fair value of
$515,830, with a weighted average remaining life of 9.14 years. The aggregate intrinsic value of options outstanding as of September
30, 2021 was zero.
Restricted
Common Stock
In
January 2021, the Company granted 152,671 shares of the Company’s common stock to the Company’s Chief Executive Officer (“CEO”).
The shares vest on the first anniversary of the award. If the CEO’s employment with the Company is terminated for any reason, any
shares not then vested will be forfeited. Also effective in January 2021, the Company granted 41,667 shares of the Company’s common
stock to a consultant for services, with 4,167 of the shares vesting immediately and the balance of 37,500 shares vesting through August
15, 2021. In the event the consultant’s service with the Company terminates, any shares not then vested will be forfeited. During
the quarter ended September 30, 2021 the Company granted 50,000 shares of the Company’s common stock with vesting terms to the
Company’s Chief Commercial Officer. The shares vest one third per year for three years on the anniversary of the award.
The
total fair value of the 244,338
shares was determined to be $742,912
based on the price per shares of the Company’s
common stock on the dates granted. The Company accounts for the share awards using the straight-line attribution or graded vesting method
over the requisite service period provided that the amount of compensation cost recognized at any date is no less than the portion of
the grant-date fair value of the award that is vested at that date. During the nine months ended September 30, 2021, total share-based
expense recognized related to vested restricted shares totaled $505,926.
At September 30, 2021, there was $226,713
of unvested compensation related to these awards
that will be amortized over a remaining vesting period of 2.75
years.
The
following table summarizes restricted common stock activity for the nine months ended September 30, 2021:
Schedule of Non Vested Restricted Common Stock Activity
|
|
Number of shares
|
|
|
Fair value of shares
|
|
Non-vested shares, December 31, 2020
|
|
|
30,000
|
|
|
$
|
1.41
|
|
Granted
|
|
|
202,671
|
|
|
|
3.38
|
|
Vested
|
|
|
(30,000
|
)
|
|
|
1.41
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Non-vested shares, September 30, 2021
|
|
|
202,671
|
|
|
|
3.38
|
|
11.
Related Party Transactions
David
Evans, Ph.D., a director and the Company’s Chief Science Officer, and his spouse, wholly own Ceatus Media Group LLC (“Ceatus”)
and DWT Evans LLC (“DWT”). For the three months and nine months ended September 30, 2021 and 2020 the Company paid Ceatus
$15,000 and $13,750, and $51,000 and $45,500, respectively, for services related to digital marketing for the Company. The Company’s
wholly owned subsidiary, VectorVision Ocular Health, leases office and warehouse space from DWT. For the nine months ended September
30, 2021 and 2020, the Company paid DWT rent in the amounts of $16,603 and $16,114, respectively
In
September 2017, the Company acquired VectorVision, Inc. from David Evans. At the same time, the Company also acquired AcQviz from David
Evans, which is a patented methodology for auto-calibrating and standardizing the testing light level for computer generated vision testing
systems. David Evans is entitled to receive a royalty on net revenue from AcQviz. As part of the development of the CSV-2000, AcQviz
was embedded in the product by Radiant Technologies, Inc. in exchange for a 3% royalty on the sales of AcQviz. Radiant Technologies is
owned by Joseph Evans, the brother of David Evans. During the three months and nine months ended September 30, 2021 and 2020, the Company
did not incur any royalties with respect to revenues from AcQviz.
12.
Segment Reporting
The
Company determined its reporting units in accordance with ASC 280, “Segment Reporting”. The Company currently operates in
two reportable segments: Clinical Nutrition and Diagnostics Equipment.
The
Clinical Nutrition segment provides a portfolio of science-based, clinically supported nutrition, medical foods, and supplements. The
Diagnostics Equipment segment includes a portfolio of medical diagnostic devices currently focused on the ocular space and contrast testing.
The Company’s diagnostics equipment and accessories are used to measure visual function and certain anatomical features of the
eye that detect early disease and monitor changes over time.
The
segments are based on the discrete financial information reviewed by the Chief Executive Officer, who is the Company’s Chief Operating
Decision Maker (“CODM”), to make resource allocation decisions and to evaluate performance. The reportable segments are each
managed separately because they manufacture and distribute distinct products or provide services with different processes. All reported
segment revenues are derived from external customers.
The
accounting policies of the Company’s reportable segments are the same as those described in the summary of significant accounting
policies (see Note 2). Certain corporate general and administrative expenses, including general overhead functions such as information
systems, accounting, human resources, Board of Director fees, corporate legal fees, other compliance costs and certain administrative
expenses, as well as interest and tax expense, are not allocated to the segments. The following tables set forth our results of operations
by segment:
Schedule of Segment Reporting Information, by Segment
|
|
For the Three Months Ended September 30, 2021
|
|
|
|
Corporate
|
|
|
Clinical
Nutrition
|
|
|
Diagnostics
Equipment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
3,109,525
|
|
|
$
|
39,087
|
|
|
$
|
3,148,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
-
|
|
|
|
1,730,318
|
|
|
|
30,268
|
|
|
|
1,760,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
-
|
|
|
|
1,379,207
|
|
|
|
8,819
|
|
|
|
1,388,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense
|
|
|
364,448
|
|
|
|
-
|
|
|
|
-
|
|
|
|
364,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
1,166,837
|
|
|
|
2,802,886
|
|
|
|
69,373
|
|
|
|
4,039,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(1,531,285
|
)
|
|
$
|
(1,423,679
|
)
|
|
$
|
(60,554
|
)
|
|
$
|
(3,015,518
|
)
|
|
|
For the Three Months Ended September 30, 2020
|
|
|
|
Corporate
|
|
|
Clinical
Nutrition
|
|
|
Diagnostics
Equipment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
142,556
|
|
|
$
|
110,632
|
|
|
$
|
253,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
-
|
|
|
|
68,956
|
|
|
|
45,157
|
|
|
|
114,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
-
|
|
|
|
73,600
|
|
|
|
65,475
|
|
|
|
139,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
1,202,402
|
|
|
|
1,081,897
|
|
|
|
6,446
|
|
|
|
2,290,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(1,202,402
|
)
|
|
$
|
(1,008,296
|
)
|
|
$
|
59,028
|
|
|
$
|
(2,151,670
|
)
|
|
|
For the Nine Months Ended September 30, 2021
|
|
|
|
Corporate
|
|
|
Clinical
Nutrition
|
|
|
Diagnostics
Equipment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
4,443,112
|
|
|
$
|
162,516
|
|
|
$
|
4,605,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
-
|
|
|
|
2,454,402
|
|
|
|
104,418
|
|
|
|
2,558,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
-
|
|
|
|
1,988,711
|
|
|
|
58,098
|
|
|
|
2,046,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense
|
|
|
1,095,155
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,095,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
5,076,756
|
|
|
|
5,917,798
|
|
|
|
182,683
|
|
|
|
11,177,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(6,171,911
|
)
|
|
$
|
(3,929,088
|
)
|
|
$
|
(124,585
|
)
|
|
$
|
(10,225,583
|
)
|
|
|
For the Nine Months Ended September 30, 2020
|
|
|
|
Corporate
|
|
|
Clinical
Nutrition
|
|
|
Diagnostics
Equipment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
6,100
|
|
|
$
|
1,446,584
|
|
|
$
|
237,136
|
|
|
$
|
1,689,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
2,477
|
|
|
|
764,246
|
|
|
|
101,077
|
|
|
|
867,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
3,623
|
|
|
|
682,338
|
|
|
|
136,059
|
|
|
|
822,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
2,655,107
|
|
|
|
3,146,514
|
|
|
|
216,516
|
|
|
|
6,018,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(2,651,484
|
)
|
|
$
|
(2,464,176
|
)
|
|
$
|
(80,457
|
)
|
|
$
|
(5,196,117
|
)
|
The
following tables set forth our total assets by segment. Intersegment balances and transactions have been removed:
|
|
As of September 30, 2021
|
|
|
|
Corporate
|
|
|
Clinical
Nutrition
|
|
|
Diagnostics
Equipment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3,563,854
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,563,854
|
|
Short-term investments
|
|
|
6,994,808
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,994,808
|
|
Inventories
|
|
|
-
|
|
|
|
680,767
|
|
|
|
111,866
|
|
|
|
792,633
|
|
Accounts receivable
|
|
|
-
|
|
|
|
2,253,370
|
|
|
|
15,253
|
|
|
|
2,268,623
|
|
Other
|
|
|
-
|
|
|
|
1,205,332
|
|
|
|
41,378
|
|
|
|
1,246,710
|
|
Total current assets
|
|
|
10,558,662
|
|
|
|
4,139,469
|
|
|
|
168,498
|
|
|
|
14,866,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Right of use asset, net
|
|
|
-
|
|
|
|
-
|
|
|
|
29,305
|
|
|
|
29,305
|
|
Property and equipment, net
|
|
|
-
|
|
|
|
130,274
|
|
|
|
139,213
|
|
|
|
269,487
|
|
Intangible assets, net
|
|
|
-
|
|
|
|
11,553,333
|
|
|
|
-
|
|
|
|
11,553,333
|
|
Goodwill
|
|
|
-
|
|
|
|
11,893,134
|
|
|
|
-
|
|
|
|
11,893,134
|
|
Other
|
|
|
-
|
|
|
|
1,281
|
|
|
|
-
|
|
|
|
1,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
10,558,662
|
|
|
$
|
27,717,492
|
|
|
$
|
337,016
|
|
|
$
|
38,613,170
|
|
|
|
As of December 31, 2020
|
|
|
|
Corporate
|
|
|
Clinical
Nutrition
|
|
|
Diagnostics
Equipment
|
|
|
Total
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
8,518,732
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,518,732
|
|
Inventories
|
|
|
-
|
|
|
|
254,879
|
|
|
|
130,093
|
|
|
|
384,972
|
|
Other
|
|
|
-
|
|
|
|
89,333
|
|
|
|
101,846
|
|
|
|
191,179
|
|
Total current assets
|
|
|
8,518,732
|
|
|
|
344,212
|
|
|
|
231,939
|
|
|
|
9,094,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Right of use asset
|
|
|
-
|
|
|
|
374,447
|
|
|
|
44,143
|
|
|
|
418,590
|
|
Property and equipment, net
|
|
|
-
|
|
|
|
135,641
|
|
|
|
150,035
|
|
|
|
285,676
|
|
Intangible assets, net
|
|
|
-
|
|
|
|
50,000
|
|
|
|
-
|
|
|
|
50,000
|
|
Other
|
|
|
-
|
|
|
|
11,751
|
|
|
|
-
|
|
|
|
11,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
8,518,732
|
|
|
$
|
916,051
|
|
|
$
|
426,217
|
|
|
$
|
9,860,900
|
|
13.
Commitments and 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, 2021 and December 31, 2020 with respect to any such matters.
The Company is not currently a party to any material
legal proceedings and is not aware of any pending or threatened legal proceeding against the Company that the Company believes could
have a material adverse effect on its business, operating results, cash flows or financial condition.
Effective
January 6, 2021, the Board of Directors appointed Bret Scholtes as President, Chief Executive Officer, and as a director of the Company.
The Company and Mr. Scholtes entered into an employment agreement pursuant to which Mr. Scholtes’ annual base salary is $400,000.
The employment agreement provides that Mr. Scholtes shall have an annual target cash bonus of no less than $400,000 based on performance
objectives determined by the Board of Directors.
Additionally,
Mr. Scholtes shall be granted (i) stock options equal to 2% of the Company’s issued and outstanding shares of common stock on the
date of grant if the Company achieves certain specified performance objectives established by the Board of Directors for the Company’s
fiscal years ending December 31, 2021, and December 31, 2022, and (ii) additional stock options equal to either 2% or 3% of the Company’s
issued and outstanding shares of common stock on the date of grant if the Company meets certain financial objectives during the first
five years following January 6, 2021. If Mr. Scholtes’ employment is terminated by the Company without cause, as defined under
his employment agreement, if the term expires after a notice of non-renewal is delivered by the Company, or if Mr. Scholtes’ employment
is terminated following a change of control, as defined, Mr. Scholtes will be entitled to (a) twelve months’ base salary, (b) the
prorated portion of the any bonus, based on actual performance, and (c) base salary and benefits accrued through the date of termination.
On
September 22, 2021, Guardion Health Sciences, Inc. (the
“Company”) entered into a Lease Termination Agreement (the “Agreement”) with Cal-Sorrento, Ltd. (“Cal-Sorrento”)
pursuant to which, effective as of October 31, 2021 (the “Termination Date”), the Industrial Lease (the “Lease”)
originally dated October 24, 2012, as amended, by and between the Company and Cal-Sorrento with respect to leased premises located at
15150 Avenue of Science, Suite 200, San Diego, California 92128, shall terminate. Pursuant
to the Agreement and in consideration for the early termination of the Lease, (i) the Company shall forfeit the security deposit paid
to Cal-Sorrento, (ii) the Company shall pay Cal-Sorrento an early termination fee of $108,527, and (iii) the Company shall vacate the
premises on or before October 31, 2021. Effective
upon the Termination Date and provided that the Company has satisfied all of its obligations pursuant to the Agreement, each of the Company
and Cal-Sorrento shall release each other and their respective agents, employees, partners, officers, directors, stockholders and members
from all obligations under the Lease.
See Note 11 regarding office and warehouse lease
obligation of VectorVision Ocular Health to DWT, a related party. For the nine months ended September 30, 2021 and 2020, the Company
paid DWT rent in the amounts of $16,603 and $16,114, respectively
14.
Subsequent Events
The
Company performed an evaluation of subsequent events through the date of filing of these consolidated financial statements with the SEC.
There were no material subsequent events which affected, or could affect, the amounts or disclosures in the consolidated financial statements,
except as described below.
Effective October 2021 the Company completed
the termination of its San Diego office and warehouse space as described above in footnote 7.