UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] ☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 20202021
OR
[ ] ☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _______
Commission file number: 000-55723
GUARDION HEALTH SCIENCES, INC.
(Exact name of Registrant as specified in its charter)
Delaware | 47-4428421 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
151502925 Richmond Avenue of Science,
Suite 2001200
San Diego, California 92128Houston, Texas77098
Telephone: 858-605-9055800-873-5141
(Address and telephone number of principal executive offices)
Not applicableApplicable
(Former name, former address, and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, par value $0.001 per share | GHSI | The NASDAQ Stock Market, LLC |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] ☒ Yes [ ] ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). [X] ☒ Yes [ ] ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer | ||
Non-accelerated filer | Smaller reporting company | ||
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act [ ]☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [ ]☐ Yes [X] ☒ No
Securities registered pursuant to Section 12(b) of the Act:
As of August 12, 2020,16, 2021, there were 88,327,312 shares of the Company’s common stock, par value $0.001 per share, issued and outstanding.
TABLE OF CONTENTS
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q for the three-month period ended June 30, 2020 contains “forward-looking statements” within the meaning of the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements contain information about our expectations, beliefs or intentions regarding our product development and commercialization efforts, business, financial condition, results of operations, strategies or prospects, and other similar matters. These forward-looking statements are based on management’s current expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. These statements may be identified by words such as “expects,” “plans,” “projects,” “will,” “may,” “anticipates,” “believes,” “should,” “intends,” “estimates,” and other words of similar meaning.
Actual results could differ materially from those contained in forward-looking statements. Many factors could cause actual results to differ materially from those in forward-looking statements, including those matters discussed below. Readers are urged to read the risk factors set forth in the Company’s recent filings with the U. S. Securities and Exchange Commission (the “SEC”), including the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and in other documents the Company files with the SEC from time to time. These filings are available at the SEC’s website (www.sec.gov).
Other unknown or unpredictable factors that could also adversely affect our business, financial condition and results of operations may arise from time to time. Given these risks and uncertainties, the forward-looking statements discussed in this report may not prove to be accurate. Accordingly, you should not place undue reliance on these forward-looking statements, which only reflect the views of the Company’s management as of the date of this report. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results or expectations, except as required by law.
PART I – FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Guardion Health Sciences, Inc.
Condensed Consolidated Balance Sheets
June 30, | December 31, | |||||||||||||||
June 30, 2020 | December 31, 2019 | 2021 | 2020 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Assets | ||||||||||||||||
Current assets | ||||||||||||||||
Cash | $ | 11,603,459 | $ | 11,115,502 | $ | 5,502,411 | $ | 8,518,732 | ||||||||
Short-term investments | 7,000,266 | - | ||||||||||||||
Accounts receivable | 34,180 | 78,337 | 1,884,782 | 11,248 | ||||||||||||
Inventories | 1,235,052 | 310,941 | 956,259 | 384,972 | ||||||||||||
Prepaid expenses | 274,140 | 362,938 | 1,203,169 | 179,931 | ||||||||||||
Equipment held for sale | 24,500 | - | ||||||||||||||
Total current assets | 13,171,331 | 11,867,718 | 16,546,887 | 9,094,883 | ||||||||||||
Deposits | 11,751 | 11,751 | 11,751 | 11,751 | ||||||||||||
Prepaid expense | 302,331 | - | ||||||||||||||
Property and equipment, net | 304,534 | 374,638 | 245,711 | 285,676 | ||||||||||||
Right of use asset, net | 496,387 | 572,714 | 339,262 | 418,590 | ||||||||||||
Intangible assets | 50,000 | 50,000 | ||||||||||||||
Intangible assets, net | 11,850,833 | 50,000 | ||||||||||||||
Goodwill | 11,988,050 | - | ||||||||||||||
Total assets | $ | 14,034,003 | $ | 12,876,821 | $ | 41,284,825 | $ | 9,860,900 | ||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||
Current liabilities | ||||||||||||||||
Accounts payable | $ | 332,787 | $ | 70,291 | $ | 768,338 | $ | 608,313 | ||||||||
Accrued expenses | 162,461 | 175,052 | 867,923 | 127,637 | ||||||||||||
Due to former officer | 311,458 | - | ||||||||||||||
Operating lease liability – current | 168,700 | 162,845 | ||||||||||||||
Payable to former officer | - | 148,958 | ||||||||||||||
Derivative warrant liability | 19,411 | 13,323 | - | 25,978 | ||||||||||||
Lease liability – current | 157,119 | 151,568 | ||||||||||||||
Total current liabilities | 983,236 | 410,234 | 1,804,961 | 1,073,731 | ||||||||||||
Lease liability – long term | 355,127 | 434,747 | ||||||||||||||
Operating lease liability – long term | 186,427 | 271,903 | ||||||||||||||
Total liabilities | 1,338,363 | 844,981 | 1,991,388 | 1,345,634 | ||||||||||||
Commitments and contingencies | ||||||||||||||||
Stockholders’ Equity | ||||||||||||||||
Preferred stock, $0.001 par value; 10,000,000 shares authorized, no shares issued and outstanding | - | - | ||||||||||||||
Common stock, $0.001 par value; 250,000,000 shares authorized; 88,309,962 and 74,982,562 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively | 88,310 | 74,983 | ||||||||||||||
Preferred stock, $ | par value; shares authorized, shares issued and outstanding- | - | ||||||||||||||
Common stock, $ | par value; shares authorized; shares and shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively24,427 | 15,171 | ||||||||||||||
Additional paid-in capital | 61,173,074 | 57,468,528 | 100,535,886 | 62,583,423 | ||||||||||||
Accumulated deficit | (48,565,744 | ) | (45,511,671 | ) | (61,266,876 | ) | (54,083,328 | ) | ||||||||
Total stockholders’ equity | 12,695,640 | 12,031,840 | 39,293,437 | 8,515,266 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 14,034,003 | $ | 12,876,821 | $ | 41,284,825 | $ | 9,860,900 |
See accompanying notes to condensed consolidated financial statements.
Guardion Health Sciences, Inc.
Condensed Consolidated Statements of Operations (Unaudited)
2021 | 2020 | 2021 | 2020 | |||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Revenue | ||||||||||||||||
Clinical nutrition | $ | 1,171,445 | $ | 1,152,894 | $ | 1,333,588 | $ | 1,304,028 | ||||||||
Diagnostics equipment | 52,275 | 35,315 | 123,429 | 126,505 | ||||||||||||
Other | - | 2,700 | - | 6,100 | ||||||||||||
Total revenue | 1,223,720 | 1,190,909 | 1,457,017 | 1,436,633 | ||||||||||||
Cost of goods sold | ||||||||||||||||
Clinical nutrition | 639,188 | 628,205 | 724,105 | 695,291 | ||||||||||||
Diagnostics equipment | 26,031 | 15,278 | 74,150 | 55,920 | ||||||||||||
Other | - | 1,096 | - | 2,477 | ||||||||||||
Total cost of goods sold | 665,219 | 644,579 | 798,255 | 753,688 | ||||||||||||
Gross profit | 558,501 | 546,330 | 658,762 | 682,945 | ||||||||||||
Operating expenses | ||||||||||||||||
Research and development | 16,756 | 44,581 | 37,364 | 75,769 | ||||||||||||
Sales and marketing | 440,793 | 519,067 | 898,520 | 1,007,913 | ||||||||||||
General and administrative | 2,537,826 | 1,712,183 | 4,829,277 | 3,228,698 | ||||||||||||
Transaction costs related to acquisition of Activ Nutritional, LLC | 2,103,680 | - | 2,103,680 | - | ||||||||||||
Costs related to resignation of former officer (including the reversal of previously recognized stock compensation expense of $ | and $ during the three months and six months ended June 30, 2020, respectively)- | (1,052,223 | ) | - | (615,936 | ) | ||||||||||
Impairment loss on equipment held for sale | - | 30,948 | - | 30,948 | ||||||||||||
Total operating expenses | 5,099,055 | 1,254,556 | 7,868,841 | 3,727,392 | ||||||||||||
Loss from operations | (4,540,554 | ) | (708,226 | ) | (7,210,079 | ) | (3,044,447 | ) | ||||||||
Other income (expense): | ||||||||||||||||
Interest expense | - | (1,790 | ) | - | (3,538 | ) | ||||||||||
Interest income | 266 | - | 266 | - | ||||||||||||
Change in fair value of derivative liability | - | 2,856 | - | (6,088 | ) | |||||||||||
Total other income (expense) | 266 | 1,066 | 266 | (9,626 | ) | |||||||||||
Net loss | $ | (4,540,288 | ) | $ | (707,160 | ) | $ | (7,209,813 | ) | $ | (3,054,073 | ) | ||||
Net loss per common share – basic and diluted | $ | (0.19 | ) | $ | (0.05 | ) | $ | (0.31 | ) | $ | (0.22 | ) | ||||
Weighted average common shares outstanding – basic and diluted | 24,426,993 | 14,427,869 | 22,897,683 | 13,766,465 |
Three Months Ended June 30, | �� | Six Months Ended June 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Revenue | ||||||||||||||||
Medical foods and nutraceuticals | $ | 1,152,894 | $ | 104,448 | $ | 1,304,028 | $ | 204,382 | ||||||||
Medical devices | 35,315 | 150,222 | 126,505 | 292,826 | ||||||||||||
Other | 2,700 | 6,300 | 6,100 | 6,300 | ||||||||||||
Total revenue | 1,190,909 | 260,970 | 1,436,633 | 503,508 | ||||||||||||
Cost of goods sold | ||||||||||||||||
Medical foods and nutraceuticals | 628,205 | 40,681 | 695,291 | 78,953 | ||||||||||||
Medical devices | 15,278 | 53,816 | 55,920 | 109,036 | ||||||||||||
Other | 1,096 | 2,559 | 2,477 | 2,559 | ||||||||||||
Total cost of goods sold | 644,579 | 97,056 | 753,688 | 190,548 | ||||||||||||
Gross profit | 546,330 | 163,914 | 682,945 | 312,960 | ||||||||||||
Operating expenses | ||||||||||||||||
Research and development | 44,581 | 77,688 | 75,769 | 106,716 | ||||||||||||
Sales and marketing | 519,067 | 409,409 | 1,007,913 | 764,028 | ||||||||||||
General and administrative | 1,712,183 | 2,489,011 | 3,228,698 | 3,439,633 | ||||||||||||
Costs related to resignation of former officer (including the reversal of previously recognized stock compensation expense of $1,401,582 and $965,295 during the three and six months ended June 30, 2020, respectively) | (1,052,223 | ) | - | (615,936 | ) | - | ||||||||||
Impairment loss on equipment held for sale | 30,948 | - | 30,948 | - | ||||||||||||
Total operating expenses | 1,254,556 | 2,976,108 | 3,727,392 | 4,310,377 | ||||||||||||
Loss from operations | (708,226 | ) | (2,812,194 | ) | (3,044,447 | ) | (3,997,417 | ) | ||||||||
Other (income) expense: | ||||||||||||||||
Interest expense | 1,790 | 234,065 | 3,538 | 251,637 | ||||||||||||
Finance cost upon issuance of warrants | - | 229,921 | - | 415,955 | ||||||||||||
Change in fair value of derivative warrants | (2,856 | ) | (227,832 | ) | 6,088 | (227,832 | ) | |||||||||
Total other (income) expense | (1,066 | ) | 236,154 | 9,626 | 439,760 | |||||||||||
Net loss | $ | (707,160 | ) | $ | (3,048,348 | ) | $ | (3,054,073 | ) | $ | (4,437,177 | ) | ||||
Net loss per common share – basic and diluted | $ | (0.01 | ) | $ | (0.14 | ) | $ | (0.04 | ) | $ | (0.21 | ) | ||||
Weighted average common shares outstanding – basic and diluted | 86,567,215 | 22,537,943 | 82,598,791 | 21,628,758 |
See accompanying notes to condensed consolidated financial statements.
Guardion Health Sciences, Inc.
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
Common Stock | Additional Paid-In | Accumulated | Total Stockholders’ | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||||||||||||
Shares | Amount | Capital | Deficit | Equity | Common Stock | Additional Paid-In | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||||||||||
Three and Six Months Ended June 30, 2020 | Shares | Amount | Capital | Deficit | Equity | |||||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | 74,982,562 | $ | 74,983 | $ | 57,468,528 | $ | (45,511,671 | ) | $ | 12,031,840 | ||||||||||||||||||||||||||||||
Three and Six Months Ended June 30, 2021 | ||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2020 | 15,170,628 | $ | 15,171 | $ | 62,583,423 | $ | (54,083,328 | ) | $ | 8,515,266 | ||||||||||||||||||||||||||||||
Cumulative effect adjustment from the impact of adoption of ASU 2020-06 related to warrants (See Notes 2 and 9) | - | - | - | 26,265 | 26,265 | |||||||||||||||||||||||||||||||||||
Fair value of vested stock options | - | - | 205,772 | - | 205,772 | |||||||||||||||||||||||||||||||||||
Fair value of vested restricted stock | - | - | 181,843 | - | 181,843 | |||||||||||||||||||||||||||||||||||
Common stock issued for cash, net of offering costs | 7,608,674 | 7,608 | 33,654,989 | - | 33,662,597 | |||||||||||||||||||||||||||||||||||
Common stock issued upon exercise of warrants | 1,647,691 | 1,648 | 3,566,767 | - | 3,568,415 | |||||||||||||||||||||||||||||||||||
Fair value of vested stock options – officer and director | - | - | 436,287 | - | 436,287 | |||||||||||||||||||||||||||||||||||
Issuance of common stock for services | ||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for services, shares | ||||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | (2,669,525 | ) | (2,669,525 | ) | |||||||||||||||||||||||||||||||||
Balance at March 31, 2021 | 24,426,993 | 24,427 | 100,192,794 | (56,726,588 | ) | 43,490,633 | ||||||||||||||||||||||||||||||||||
Fair value of vested stock options | - | - | 55,281 | - | 55,281 | - | - | 183,452 | - | 183,452 | ||||||||||||||||||||||||||||||
Issuance of common stock for services | 25,000 | 25 | 12,300 | - | 12,325 | |||||||||||||||||||||||||||||||||||
Issuance of common stock – warrant exercises | 10,382,400 | 10,382 | 3,540,399 | - | 3,550,781 | |||||||||||||||||||||||||||||||||||
Fair value of vested restricted stock | - | - | 159,640 | - | 159,640 | |||||||||||||||||||||||||||||||||||
Net loss | - | - | - | (2,346,913 | ) | (2,346,913 | ) | - | - | - | (4,540,288 | ) | (4,540,288 | ) | ||||||||||||||||||||||||||
Balance at March 31, 2020 | 85,389,962 | $ | 85,390 | $ | 61,512,795 | $ | (47,858,584 | ) | $ | 13,739,601 | ||||||||||||||||||||||||||||||
Fair value of vested stock options – officer and director | - | - | (1,377,223 | ) | - | (1,377,223 | ) | |||||||||||||||||||||||||||||||||
Fair value of vested stock options | - | - | 41,782 | - | 41,782 | |||||||||||||||||||||||||||||||||||
Issuance of common stock – warrant exercises | 2,920,000 | 2,920 | 995,720 | - | 998,640 | |||||||||||||||||||||||||||||||||||
Net loss | - | - | - | (707,160 | ) | (707,160 | ) | |||||||||||||||||||||||||||||||||
Balance at June 30, 2020 | 88,309,962 | $ | 88,310 | $ | 61,173,074 | $ | (48,565,744 | ) | $ | 12,695,640 | ||||||||||||||||||||||||||||||
Balance at June 30, 2021 | 24,426,993 | $ | 24,427 | $ | 100,535,886 | $ | (61,266,876 | ) | $ | 39,293,437 |
Three and Six Months Ended June 30, 2019 | Common Stock | Additional Paid-In | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||||||||||||||
Balance at December 31, 2018 | 20,564,328 | $ | 20,564 | $ | 37,798,562 | $ | (34,633,363 | ) | $ | 3,185,763 | ||||||||||||||||||||||||||||||
Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||||||||||||||||
Three and Six Months Ended June 30, 2020 | ||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | 12,497,094 | $ | 12,497 | $ | 57,531,014 | $ | (45,511,671 | ) | $ | 12,031,840 | ||||||||||||||||||||||||||||||
Fair value of vested stock options – officer and director | - | - | 436,287 | - | 436,287 | |||||||||||||||||||||||||||||||||||
Fair value of vested stock options | - | - | 55,281 | - | 55,281 | |||||||||||||||||||||||||||||||||||
Issuance of common stock for services | 4,167 | 25 | 12,300 | - | 12,325 | |||||||||||||||||||||||||||||||||||
Issuance of common stock – warrant exercises | 1,730,400 | 10,382 | 3,540,399 | - | 3,550,781 | |||||||||||||||||||||||||||||||||||
Net loss | - | - | - | (2,346,913 | ) | (2,346,913 | ||||||||||||||||||||||||||||||||||
Balance at March 31, 2020 | 14,231,661 | 22,904 | 61,575,281 | (47,858,584 | ) | 13,739,601 | ||||||||||||||||||||||||||||||||||
Fair value of vested stock options – officer and director | - | - | (1,377,223 | ) | - | (1,377,223 | ) | |||||||||||||||||||||||||||||||||
Fair value of vested stock options | - | - | 56,232 | - | 56,232 | - | - | 41,782 | - | 41,782 | ||||||||||||||||||||||||||||||
Issuance of common stock – warrant exercises | 292,283 | 293 | 30,957 | - | 31,250 | 48,666 | 487 | 998,153 | - | 998,640 | ||||||||||||||||||||||||||||||
Common stock issued upon exercise of warrants | 48,666 | 487 | 998,153 | - | 998,640 | |||||||||||||||||||||||||||||||||||
Net loss | - | - | - | (1,385,099 | ) | (1,385,099 | ) | - | - | - | (707,160 | ) | (707,160 | ) | ||||||||||||||||||||||||||
Balance at March 31, 2019 | 20,856,611 | $ | 20,857 | $ | 37,885,751 | $ | (36,018,462 | ) | $ | 1,888,146 | ||||||||||||||||||||||||||||||
Fair value of vested stock options – officer and director | - | - | 1,066,159 | - | 1,066,159 | |||||||||||||||||||||||||||||||||||
Fair value of vested stock options | - | - | 62,763 | - | 62,763 | |||||||||||||||||||||||||||||||||||
Fair value of warrants | - | - | 359,683 | - | 359,683 | |||||||||||||||||||||||||||||||||||
Sale of common stock | 1,250,000 | 1,250 | 3,886,750 | - | 3,888,000 | |||||||||||||||||||||||||||||||||||
Issuance of common stock for services | 54,387 | 55 | 123,947 | - | 124,002 | |||||||||||||||||||||||||||||||||||
Issuance of common stock – warrant exercises | 463,726 | 463 | 100,162 | - | 100,625 | |||||||||||||||||||||||||||||||||||
Issuance of common stock – conversion of notes payable and related interest | 109,038 | 109 | 250,679 | - | 250,788 | |||||||||||||||||||||||||||||||||||
Net loss | - | - | - | (3,052,078 | ) | (3,052,078 | ) | |||||||||||||||||||||||||||||||||
Balance at June 30, 2019 | 22,733,762 | $ | 22,734 | $ | 43,735,894 | $ | (39,070,540 | ) | $ | 4,688,088 | ||||||||||||||||||||||||||||||
Balance at June 30, 2020 | 14,280,327 | $ | 23,391 | $ | 61,237,993 | $ | (48,565,744 | ) | $ | 12,695,640 |
See accompanying notes to condensed consolidated financial statements.
Guardion Health Sciences, Inc.
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, | ||||||||
2020 | 2019 | |||||||
(Unaudited) | (Unaudited) | |||||||
Operating Activities | ||||||||
Net loss | $ | (3,054,073 | ) | $ | (4,437,177 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 46,619 | 137,128 | ||||||
Impairment loss on equipment held for sale | 30,948 | - | ||||||
Amortization of debt discount | - | 250,000 | ||||||
Amortization of lease right | 76,327 | 61,571 | ||||||
Accrued interest expense included in notes payable | - | 788 | ||||||
Stock-based compensation | 109,388 | 242,996 | ||||||
Stock-based compensation – officer and director | (940,936 | ) | 1,066,159 | |||||
Non-cash financing costs – derivative liability | - | 415,955 | ||||||
Change in fair value of warrants – derivative liability | 6,088 | (227,832 | ) | |||||
Changes in operating assets and liabilities: | ||||||||
(Increase) decrease in - | ||||||||
Accounts receivable | 44,157 | (7,718 | ) | |||||
Inventories | (607,162 | ) | 39,311 | |||||
Prepaid expenses | (219,380 | ) | (84,533 | ) | ||||
Increase (decrease) in - | ||||||||
Accounts payable | 262,496 | 156,314 | ||||||
Lease liability | (74,070 | ) | (56,844 | ) | ||||
Accrued expenses | (12,591 | ) | (49,814 | ) | ||||
Due to former officer | 311,458 | - | ||||||
Net cash used in operating activities | (4,020,731 | ) | (2,493,696 | ) | ||||
Investing Activities | ||||||||
Purchase of property and equipment | (40,733 | ) | (58,934 | ) | ||||
Net cash used in investing activities | (40,733 | ) | (58,934 | ) | ||||
Financing Activities | ||||||||
Proceeds from initial public offering | - | 3,888,000 | ||||||
Proceeds from issuance of convertible notes | - | 250,000 | ||||||
Proceeds from issuance of promissory notes | - | 100,000 | ||||||
Payments on promissory notes | - | (100,548 | ) | |||||
Proceeds from exercise of warrants | 4,549,421 | 131,875 | ||||||
Deferred financing costs of IPO | - | (19,000 | ) | |||||
Net cash provided by financing activities | 4,549,421 | 4,250,327 | ||||||
Cash: | ||||||||
Net increase | 487,957 | 1,697,697 | ||||||
Balance at beginning of period | 11,115,502 | 670,948 | ||||||
Balance at end of period | $ | 11,603,459 | $ | 2,368,645 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for: | ||||||||
Interest | $ | - | $ | - | ||||
Income taxes | $ | - | $ | - | ||||
Non-cash financing activities: | ||||||||
Fair value of warrants issued in connection with convertible notes | $ | - | $ | 436,034 | ||||
Recording of lease asset and liability upon adoption of ASU 2016-02 | $ | - | $ | 663,218 | ||||
Reclass of prepaid costs to inventory | $ | 308,178 | $ | - | ||||
Reclass of property and equipment to equipment held for sale | $ | 55,448 | $ | - | ||||
Reclass of property and equipment to inventory | 8,771 | $ | - | |||||
Reclass of warrant liability to equity | $ | - | $ | 359,683 | ||||
Fair value of common stock issued upon conversion of common stock and accrued interest | $ | - | $ | 250,788 | ||||
Reclass of deferred offering cost to equity | $ | - | $ | 270,000 |
(Unaudited)
2021 | 2020 | |||||||
Six Months Ended | ||||||||
June 30, | ||||||||
2021 | 2020 | |||||||
Operating Activities | ||||||||
Net loss | $ | (7,209,813 | ) | $ | (3,054,073 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 140,275 | 46,619 | ||||||
Impairment loss on equipment held for sale | - | 30,948 | ||||||
Amortization of operating lease right-of-use asset | 79,328 | 76,327 | ||||||
Fair value of vested stock options | 389,224 | - | ||||||
Fair value of vested restricted stock | 341,483 | 109,388 | ||||||
Fair value of vested stock options – officer and director | - | (940,936 | ) | |||||
Change in fair value of derivative liability | - | 6,088 | ||||||
Changes in operating assets and liabilities: | ||||||||
(Increase)/decrease: | ||||||||
Accounts receivable | (73,839 | ) | 44,157 | |||||
Inventories | 41,776 | (607,162 | ) | |||||
Prepaid expenses | (1,276,545 | ) | (219,380 | ) | ||||
Increase/(decrease): | ||||||||
Accounts payable | (153,706 | ) | 262,496 | |||||
Operating lease liability | (79,621 | ) | (74,070 | ) | ||||
Accrued expenses | 665,042 | (12,591 | ||||||
Payable to former officer | (148,958 | ) | 311,458 | |||||
Net cash used in operating activities | (7,285,354 | ) | (4,020,731 | ) | ||||
Investing Activities | ||||||||
Purchase of property and equipment | (1,142 | ) | (40,733 | ) | ||||
Purchase of US Treasury Bills | (35,000,000 | ) | - | |||||
Sale of US Treasury Bills | 27,999,734 | - | ||||||
Cash paid for acquisition, net of cash acquired | (25,960,572 | ) | - | |||||
Net cash used in investing activities | (32,961,980 | ) | (40,733 | ) | ||||
Financing Activities | ||||||||
Proceeds from sale of common stock, net | 33,662,599 | - | ||||||
Proceeds from exercise of warrants | 3,568,414 | 4,549,421 | ||||||
Net cash provided by financing activities | 37,231,013 | 4,549,421 | ||||||
Cash: | ||||||||
Net (decrease) increase | (3,016,321 | ) | 487,957 | |||||
Balance at beginning of period | 8,518,732 | 11,115,502 | ||||||
Balance at end of period | $ | 5,502,411 | $ | 11,603,459 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for: | ||||||||
Income taxes | $ | 20,844 | - | |||||
Non-cash financing activities: | ||||||||
Reclass of prepaid costs to inventory | $ | - | $ | 308,178 | ||||
Reclass of equipment sold from property and equipment to equipment held for sale | $ | - | $ | 55,448 | ||||
Adjust warrant liability for adoption of ASU 2020-06 | $ | 25,978 | $ | - | ||||
Reclass of property and equipment to inventory | $ | - | $ | 8,771 |
See accompanying notes to condensed consolidated financial statements.
Guardion Health Sciences, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Three Months and Six Months Ended June 30, 20202021 and 20192020
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 chewable mineral supplements for bone health and other applications (see Note 3). Prior to its acquisition of Activ, the Company has been 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 June 30, 2015, the Company converted from a California limited liability company to a Delaware corporation, changingand changed 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 accompanying consolidated financial statements have been prepared assuming the Company will continue ason a going concern. The Company had a net lossconcern basis, which contemplates the realization of $3,054,073assets and utilized cashthe settlement of liabilities and commitments in operating activitiesthe normal course of $4,020,731 duringbusiness. For the six months ended June 30, 2020.2021, the Company incurred a net loss of $7,209,813 and used cash in operating activities of $7,285,354. At June 30, 2021, the Company had cash and short-term investments on hand totaling $12,502,677 and working capital of $14,741,926. Notwithstanding the net loss for the six months ended June 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. 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 recoverabilitynear-term 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 the development, commercialization activities related toand distribution of its medical foods, nutraceuticals,clinical nutrition products (including the MapcatSF medical device, VectorVision diagnostic equipment, and with respect to efforts to continue to buildViactiv® product line), the Company’s infrastructure. Developmentdevelopment and commercialization of medical foods, nutraceuticalsits diagnostics equipment, 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 any 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 intendsmay also utilize cash to fund additional acquisitions.
The Company may seek to raise additional debt and/or equity capital to fund future 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. IfOver 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 or cease operations.
COVID-19
The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. 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 the first half of 2021, sales of certain products remained flat as compared to prior comparable periods, as many professional offices were closed for long periods, or operating with limited capacity, due to COVID-19 related orders. During 2020 and through the second quarter of 2021, the Company did not experience a jeopardization of its supply chain due to the COVID-19 outbreak.
7 |
The extent of the impact of the COVID-19 pandemic has had and will continue to have on the Company’s business is highly uncertain and difficult to predict 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.quantify. 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, thefull extent to which the COVID-19 pandemic may in the future materiallywill directly or indirectly impact the Company’s financial condition, liquidity orbusiness, results of operations is uncertain.
NASDAQ Notice
On September 20, 2019,and financial condition, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the Company received a notification letter from the Nasdaq Listing Qualifications Staff (the “Staff”)actions taken to contain or treat it, including vaccination efforts and new strains of the Nasdaq Stock Market LLC (“Nasdaq”) notifyingvirus, as well as 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 listingeconomic impact 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 listinglocal, regional, national and international markets.
2.Summary of the Company’s common stock on the Nasdaq Capital Market.Significant Accounting Policies
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 suchthe rules and regulations.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, 20192020, as filed with the SEC. The condensed consolidated balance sheet as of December 31, 20192020 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, 2020.2021.
Reverse Stock Split
On March 1, 2021, following stockholder and board approval, the Company effectuated a 1-for-6 reverse splitof its issued and outstanding shares of common stock, without any change to its par value. 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.
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.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, VectorVision Ocular Health, Inc., NutriGuard Formulations, Inc., Transcranial Doppler Solutions, Inc, and Activ Nutritional, LLC. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of theour financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and liabilitiesexpenses, and the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period.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, 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 bothassumptions used in the U.S. and internationally.determination of the Company’s liquidity. Actual results could differ from those estimates.
8 |
Revenue Recognition
The Company generates its revenue from two business segments:
● | Clinical Nutrition | |
● | Diagnostics Equipment |
The Company recognizes revenue in accordance with ASU 2014-09,Accounting Standards Codification (“ASC”) 606, 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. Revenue is recognized when control of promised goods or services is transferred to the Company’s customers,customer in an amount that reflects the consideration to which the Company expects to be entitled to in exchange for those goodsproducts 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 rightIn certain circumstances, returns of return to its retail Medical Foods customers.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 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.
Revenues by segment are as follows:
The following table presents the Company’s revenues disaggregatedSchedule of Revenues by segment:Segment
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Clinical nutrition | $ | 1,171,445 | $ | 1,152,894 | $ | 1,333,588 | $ | 1,304,028 | ||||||||
Diagnostics equipment | 52,275 | 35,315 | 123,429 | 126,505 | ||||||||||||
Other | - | 2,700 | - | 6,100 | ||||||||||||
$ | 1,223,720 | $ | 1,190,909 | $ | 1,457,017 | $ | 1,436,633 |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Medical foods and nutraceuticals | $ | 1,152,894 | $ | 104,448 | $ | 1,304,028 | $ | 204,382 | ||||||||
Medical devices | 35,315 | 150,222 | 126,505 | 292,826 | ||||||||||||
Other | 2,700 | 6,300 | 6,100 | 6,300 | ||||||||||||
$ | 1,190,909 | $ | 260,970 | $ | 1,436,633 | $ | 503,508 |
The following table presents the Company’s revenues disaggregated by geography:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
North America | $ | 270,664 | $ | 116,611 | $ | 505,023 | $ | 227,322 | ||||||||
Malaysia | 890,000 | - | 890,000 | - | ||||||||||||
Asia | 22,990 | 63,650 | 25,790 | 128,950 | ||||||||||||
Europe and other | 7,255 | 80,709 | 15,820 | 147,236 | ||||||||||||
$ | 1,190,909 | $ | 260,970 | $ | 1,436,633 | $ | 503,508 |
The Company’s medical foodsClinical Nutrition revenues earned during the three months and nutraceuticals revenuessix months ended June 30, 2021 and 2020 are derived from distributors and 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 DevicesAmerica. Diagnostics Equipment revenues are derived from a worldwide customer base consisting of both retail customers and distributors. International customers contributedSales to distributors were approximately 94%81% and 39%58% of Medical Devicestotal revenues for the six months ended June 30, 2021 and 2020, respectively, which included the Viactiv® product line from June 1, 2021 through June 30, 2021.
Revenues by geographical area are as follows:
Schedule of Revenue by Geographical Area
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
North America | $ | 1,176,608 | $ | 270,664 | $ | 1,348,748 | $ | 505,023 | ||||||||
Malaysia | - | 890,000 | - | 890,000 | ||||||||||||
Asia - other | 29,787 | 22,990 | 88,049 | 25,790 | ||||||||||||
Europe and other | 17,325 | 7,255 | 20,220 | 15,820 | ||||||||||||
$ | 1,223,720 | $ | 1,190,909 | $ | 1,457,017 | $ | 1,436,633 |
9 |
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 2019, respectively. Distributors contributedintangible 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 as of June 30, 2021, consist of a U.S. Treasury Bill, which is classified as held-to-maturity. The Company’s U.S. Treasury Bill matured July 29, 2021 and the proceeds were reinvested into another U.S. Treasury Bill that is scheduled to mature approximately 58%30 days from the date of purchase. Unrealized gains and 32%losses were de minimus. As of Medical Devices revenuesJune 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.
There was 0allowance for doubtful accounts as of June 30, 2021 and December 31,2020.
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 written up. For the three months and six months ended June 30, 2021 and 2020, there were 0 write-downs of inventory.
Intangible Assets
Amortizable finite-lived identifiable intangible assets consist of a trade name and 2019, respectively.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 June 30, 2021, the Company determined there were 0 indicators of impairment of its intangible assets.
10 |
During February
At June 30, 2021 and December 31, 2020, the Company contracted withhas a Malaysian companytrademark 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 developassets 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 immune-supportive formulaevent 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 consumer base. An initial order was placed for $875,000, and in connection with this order,reporting units on MarchDecember 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.fiscal year.
Concentrations
During the three months ended June 30, 2020, the Medical Foods and Nutraceuticals segment had one customer who2021, two customers 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% 39% and 13% 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, 2021 or 2020.
During the six months ended June 30, 2020, the Medical Foods and Nutraceuticals segment had one customer who2021, two customers 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%33% and 11% 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. Duringduring the six months ended June 30, 2020, three2021 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 Company’s largest vendors accounted for 17%, 24%,creditworthiness and 40%financial viability 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.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 medical foods and relatedClinical Nutrition products. Research and development expenditures are expensed as incurred and totaled $75,769$16,756 and $106,716$44,581 for the three months ended June 30, 2021 and 2020, respectively, and $37,364 and $75,769 for the six months ended June 30, 2021 and 2020, and 2019, respectively.
Patent Costs
The Company is the owner of four issued domestic patents, two pending domestic patent applications and one issued foreigngranted patent in Europe and the United Kingdom, two issued foreign patents in Ireland, and one issued foreign patent in Hong Kong.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 six months ended June 30, 20202021, and 2019,2020, patent costs were $60,501 $34,940 and $64,482,$60,501, 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, contractorsemployees and consultantsnon-employees in non-capital raising transactions for services rendered.and for financing costs. Such issuancesgrants vest and expire according to terms established at the issuance date.
Stock-based payments to officers, directors, employees, The Company accounts for such grants issued and for acquiring goods and services from nonemployees, which include grants of employee stock options, are recognized in the financial statementsvesting based on their fair values in accordance with Topic 718. Stock option grants, which are generally time vested, will beASC 718, Compensation-Stock Compensation whereby the value of the award is measured aton the date of grant date fair value and charged to operationsrecognized 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.
11 |
The fair value of stock options granted is determined utilizingestimated using the Black-Scholes option-pricing model, which is affected by several variables, including theuses certain assumptions related to risk-free interest rate, therates, expected dividend yield, thevolatility, expected life, ofand future dividends. The assumptions used in the equity award,Black-Scholes option pricing model could materially affect compensation expense recorded in future periods.
Basic loss per share is computed by dividing net loss by the exercise price of the stock option as compared to the fair market value of theweighted-average common stockshares outstanding during a period. Diluted earnings per share is computed based on the grant date andweighted-average common shares outstanding plus the estimated volatilityeffect 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 averagedilutive potential common shares outstanding during the respective periods, excluding unvested restricted common stock. Shares of restrictedperiod calculated using the treasury stock are included in the basic weighted average number ofmethod. Dilutive potential common shares outstanding from the time they vest. Potential commoninclude shares such as from unexercised warrants and options thatoptions. Potential common share equivalents have an anti-dilutive effect arebeen excluded from the calculation of diluted net loss per share.where their inclusion would be anti-dilutive. The Company’s basic and diluted net loss per share is the same for all periods presented becausethe Company had a net loss for all periods presented and all shares issuable upon exercise of warrants and conversion of convertible debt outstanding are anti-dilutive as they decrease loss per share.options would therefore be anti-dilutive.
Schedule of diluted loss per share, as their inclusion would have been anti-dilutive:Antidilutive Securities Excluded from Computation of Earnings Per Share
June 30, | ||||||||
2021 | 2020 | |||||||
Warrants | 485,067 | 2,578,390 | ||||||
Options | 978,087 | 486,524 | ||||||
1,463,154 | 3,064,914 |
June 30, | ||||||||
2020 | 2019 | |||||||
Warrants | 15,470,338 | 261,538 | ||||||
Options | 2,919,167 | 2,612,500 | ||||||
18,389,505 | 2,874,038 |
Fair Value Measurementsof Financial Instruments
AssetsAccounting standards require certain assets and liabilities recordedbe 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 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 the balance sheets are categorized based upon the level of judgment associated witha hierarchy that prioritizes the inputs and valuation techniques used to measure the fair value. Level inputs are as follows:value:
Level 1 – quoted- Quoted prices in active markets for an identical assetsasset or liabilities.liability that the Company has the ability to access as of the measurement date.
Level 2 –- Inputs, other significantthan quoted prices included within Level 1, which are directly observable inputs for the assetsasset or liabilitiesliability or indirectly observable through corroboration with observable market data.
Level 3 - Unobservable inputs in which there is little or no market data atfor 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 date.
Level 3 –falls in its entirety, based on the lowest level input that is significant unobservable inputs that reflect management’s best estimateto the fair value measurement in its entirety. In determining the appropriate levels, the Company performs an analysis of what market participants would use to price the assets orand liabilities at each reporting period end.
The Company believes the measurement date.
We consider carrying amountsamount of its financial instruments (consisting of cash, short-term investments, accounts receivable, and accounts payable and accrued expenses to approximateliabilities) approximates fair value due to the short-term nature of these financialsuch 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, andAt December 31, 2019,2020, the Company’s balance sheets included Level 2 liabilities comprised of the fair value of warrant liabilities aggregating $19,411 and $13,323, respectively.of $25,978(see Note 9). At June 30, 2021, the Company had 0warrant liabilities.
12 |
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 FASBFinancial Accounting Standards Board (the “FASB”) issued ASU No.Accounting Standards Update (“ASU”) 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASC 326”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, the standardASU 2016-13 will be effective for us for interim and annual reporting periodsthe Company beginning after December 15, 2022.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 had 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.
13 |
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 does not believe that there are any recently issued, but not yet effective, authoritative guidance, if currently adopted, wouldto have a material impact on the Company’s present or future financial statement presentation or disclosures.statements.
Effective September 20, 2019 (the “Effective Date”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 newly-formed wholly-owned subsidiary, NutriGuard Formulations, Inc., a Delaware corporation, completed an assetmost 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 agreement (the “Asset Purchase Agreement”)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 NutriGuard Research, Inc., a California corporation (“NutriGuard”),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 NutriGuard’s sole shareholder, Mark McCarty.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:
Schedule of Fair Value of Assets Acquired and Liabilities Assumed
Fair value of consideration : | ||||
Purchase price, as adjusted, paid in cash | $ | 26,044,570 | ||
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 | 11,988,050 | |||
Fair value of net assets acquired | $ | 26,044,570 | ||
Pursuant toThe Company consolidated Activ’s operations with the Asset Purchase Agreement,Company’s operations commencing June 1, 2021, the Company purchased specified assetsclosing date 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 productstransaction. Activ’s operations are included 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 acquisitionClinical Nutrition segment. The amount of NutriGuard as if the acquisition had occurred on January 1, 2019revenue and had beennet income of Activ included in the Company’s consolidated statements of operations during the three months and six months ended June 30, 2019:2021, was $1,049,803 and $231,288, respectively.
Three Months Ended June 30, | ||||
2019 | ||||
Pro forma net revenues | $ | 279,044 | ||
Pro forma net loss attributable to common shareholders | $ | (3,069,472 | ) | |
Pro forma net loss per share | $ | (0.14 | ) |
Six Months Ended June 30, | ||||
2019 | ||||
Pro forma net revenues | $ | 546,724 | ||
Pro forma net loss attributable to common shareholders | $ | (4,477,053 | ) | |
Pro forma net loss per share | $ | (0.21 | ) |
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 six months ended June 30, 2021, the Company incurred approximately $2,104,000 of acquisition-related costs, 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 six months ended June 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
June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | |||||||||||||
Unaudited Pro forma for the three months ended | Unaudited Pro forma for the six months ended | |||||||||||||||
June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | |||||||||||||
Revenue | $ | 3,016,094 | $ | 4,257,140 | $ | 6,989,810 | $ | 7,520,816 | ||||||||
Net loss | $ | (2,434,005 | ) | $ | (815,869 | ) | $ | (4,641,387 | ) | $ | (5,282,721 | ) | ||||
Net loss per share-basic and diluted | $ | (0.10 | ) | $ | (0.06 | ) | $ | (0.20 | ) | $ | (0.38 | ) |
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
June 30, | December 31, | |||||||
2021 | 2020 | |||||||
Raw materials | $ | 69,904 | $ | 218,307 | ||||
Finished goods | 886,355 | 166,665 | ||||||
Inventory, net | $ | 956,259 | $ | 384,972 |
15 |
June 30, | December 31, | |||||||
2020 | 2019 | |||||||
Raw materials | $ | 870,384 | $ | 246,875 | ||||
Finished goods | 364,668 | 64,066 | ||||||
$ | 1,235,052 | $ | 310,941 |
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
June 30, | December 31, | June 30, | December 31, | |||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||
Leasehold improvements | $ | 98,357 | $ | 98,357 | $ | 103,255 | $ | 103,255 | ||||||||
Testing equipment | 336,959 | 394,427 | 348,124 | 348,124 | ||||||||||||
Furniture and fixtures | 199,132 | 185,799 | 197,349 | 197,349 | ||||||||||||
Computer equipment | 68,460 | 68,460 | 69,602 | 68,460 | ||||||||||||
Office equipment | 8,193 | 8,193 | 9,835 | 9,835 | ||||||||||||
711,101 | 755,236 | 728,165 | 727,023 | |||||||||||||
Less accumulated depreciation and amortization | (406,567 | ) | (380,598 | ) | (482,454 | ) | (441,347 | ) | ||||||||
$ | 304,534 | $ | 374,638 | $ | 245,711 | $ | 285,676 |
For the six months ended June 30, 2021 and 2020, depreciation and 2019, depreciationamortization expense was $46,619$41,107 and $29,810,$46,619, respectively.
6.Intangible Assets, Net
Intangible assets, net consisted of the following:
Schedule of Intangible Assets
June 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 | (99,167 | ) | - | |||||
Intangible assets, net | $ | 11,850,833 | $ | 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 six months ended June 30, 2021 and 2020, amortization expense was $99,167.
The expected future amortization expense for amortizable finite-lived intangible assets as of June 30, 2021 is as follows:
Schedule of Finite-lived Intangible Assets Amortization Expense
Total | ||||
2021 (remaining 6 months) | $ | 595,000 | ||
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 | $ | 11,800,833 |
7.Operating Leases
The Company leases an office and certain warehouse space under two operating leases. The Company accounts for its leases under ASC 842, Leases. During the three months ended June 30, 2021 and 2020, lease costs totaled $52,585 and $30,488, respectively, and during the six months ended June 30, 2021 and 2020, lease costs totaled $98,486 and $74,069, respectively.
As of which $26,169December 31, 2020, the Company’s net right of use asset totaled $418,590. During the three months and $11,244 was included in researchsix months ended June 30, 2021, the Company recorded amortization of right-of-use asset of $39,470 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,$79,328, respectively. At June 30, 2021, the net right-of-use assets were $339,262.
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,December 31, 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 asCompany’s 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.totaled $434,748. During the six months ended June 30, 2020,2021, the Company made combined payments on both leases of $74,069$101,993 towards the operating lease liabilities.liability. As of June 30, 2020,2021, the operating lease liabilityliabilities totaled $355,127.
As of June 30, 2021, the weighted average remaining lease terms for Lease 1 was $455,711,operating leases are 2.04 years, and the weighted average discount rate for operating lease liability foris 3.9%.
Future minimum lease payments under the leases are as follows:
Schedule of Lease 2 was $56,535. The aggregate balanceLiability
Year ending | Operating Leases | |||
Remainder of 2021 | $ | 89,479 | ||
2022 | 182,249 | |||
2023 | 98,417 | |||
Total lease payments | 370,145 | |||
Less: Imputed interest/present value discount | (15,018 | ) | ||
Present value of lease liabilities | 355,127 | |||
Less: Current portion | (168,700 | ) | ||
Operating lease liability - long term | $ | 186,427 |
8.Payable to Former Officer
Effective June 15, 2020, Michael Favish resigned as Chief Executive Officer of the lease liabilities at June 30, 2020Company and also resigned from the Company’s Board of Directors. Terms of the settlement agreement between the parties included the continuation of his previous salary of $325,000 during the twelve months subsequent to his resignation. The $325,000 of aggregate settlement payments was $512,246,recorded in costs related to resignation of which $157,119 was current.
Combined rentformer officer expense for both leases forin the consolidated statements of operations during the three months and six months ended June 30, 2020 and 20192020. The final payment due the former officer 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 endedmade on 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, 2020.15, 2021.
Common Stock9.Derivative Liability
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.
Warrants
A summary of the Company’s warrant activity is as follows:
Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | ||||||||||
December 31, 2019 | 28,802,738 | 0.38 | 4.91 | |||||||||
Granted | - | - | - | |||||||||
Forfeitures | - | - | - | |||||||||
Expirations | (30,000 | ) | (1.50 | ) | - | |||||||
Exercised | (13,302,400 | ) | (0.34 | ) | - | |||||||
June 30, 2020, all exercisable | 15,470,338 | $ | 0.41 | 4.39 |
The exercise prices of warrants outstanding and exercisable as of June 30, 2020 are as follows:
Warrants Outstanding and Exercisable (Shares) | Exercise Prices | |||||
12,037,600 | $ | 0.34 | ||||
1,960,000 | 0.44 | |||||
1,040,000 | 0.50 | |||||
226,200 | 0.59 | |||||
35,000 | 1.50 | |||||
109,038 | 2.88 | |||||
62,500 | 5.00 | |||||
15,470,338 |
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 62,50010,417 warrants with an exercise price of $5.00$30.00 per share to the underwriter in connection with the Company’s IPO.initial public offering. 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,initial public offering, which was a registered offering, and the settlement provisions contained language that the shares underlying the warrants arewere required to be registered. The fair value of the warrants iswas remeasured at each reporting period, and the change in the fair value iswas recognized in earnings in the accompanying Statementsstatements of Operations. The fair value of the warrants atoperations. At December 31, 2019 was $13,323. As of June 30, 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 $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$2.49 using the Black-Scholes-MertonBlack-Scholes option pricing model andutilizing the following assumptions:
Schedule of Fair Value Assumptions of Warrant Liability
Warrant Liability As of | Warrant Liability As of | Warrant Liability As of | ||||||||||
June 30, 2020 | December 31, 2019 | December 31, 2020 | ||||||||||
Stock price | $ | 0.44 | $ | 0.22 | $ | |||||||
Risk free interest rate | 0.18 | % | 1.62 | % | 0.17 | % | ||||||
Expected volatility | 142 | % | 145 | % | 148 | % | ||||||
Expected life in years | 3.76 | 4.26 | 3.8 | |||||||||
Expected dividend yield | 0 | % | 0 | % | 0 | % | ||||||
Number of warrants | 62,500 | 62,500 | 10,417 | |||||||||
Fair value of warrants | $ | 19,411 | $ | 13,323 | $ | 25,978 |
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 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 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 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 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 | |||||||||
Granted | - | - | - | |||||||||
Forfeitures | - | - | - | |||||||||
Expirations | - | - | - | |||||||||
Exercised | (1,647,691 | ) | 2.26 | - | ||||||||
June 30, 2021, all exercisable | 485,067 | 2.71 |
The exercise prices of warrants outstanding and exercisable as of June 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 |
18 |
During the six months ended June 30, 2021, investors exercised a total of 1,647,691 warrants for 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
Schedule of Share-based Compensation, Stock Options, Activity
Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | |||||||||||||||||||
December 31, 2019 | 2,962,500 | 2.94 | 3.64 | |||||||||||||||||||||
December 31, 2020 | 778,196 | 9.32 | ||||||||||||||||||||||
Granted | 790,000 | 0.77 | 9.83 | 269,339 | 2.98 | |||||||||||||||||||
Forfeitures | (833,333 | ) | - | - | (69,445 | ) | 26.40 | - | ||||||||||||||||
Expirations | - | - | - | - | - | - | ||||||||||||||||||
Exercised | - | - | - | - | - | - | ||||||||||||||||||
June 30, 2020, outstanding | 2,919,167 | $ | 1.93 | 4.77 | ||||||||||||||||||||
June 30, 2020, exercisable | 2,084,167 | $ | 2.40 | 3.10 | ||||||||||||||||||||
June 30, 2021, outstanding | 978,090 | $ | 6.48 | |||||||||||||||||||||
June 30, 2021, exercisable | 547,631 | $ | 8.50 |
Schedule of Exercise Price of Options Outstanding and Exercisable
Options Outstanding | Exercise Prices | |||||
(Shares) | ||||||
41,667 | 1.48 | |||||
50,000 | 1.61 | |||||
66,668 | 1.76 | |||||
5,001 | 1.91 | |||||
41,667 | 2.33 | |||||
1,667 | 2.46 | |||||
16,667 | 3.25 | |||||
152,671 | 3.95 | |||||
375,000 | 6 | |||||
104,167 | 12 | |||||
10,415 | 13.8 | |||||
112,500 | 15 | |||||
978,090 |
19 |
Options Outstanding (Shares) | Options Exercisable (Shares) | Exercise Prices | ||||||||
250,000 | 187,500 | $ | 0.25 | |||||||
30,000 | 30,000 | 0.32 | ||||||||
250,000 | 62,500 | 0.39 | ||||||||
10,000 | - | 0.41 | ||||||||
100,000 | 25,000 | 0.54 | ||||||||
500,000 | - | 1.00 | ||||||||
625,000 | 625,000 | 2.00 | ||||||||
62,500 | 62,500 | 2.30 | ||||||||
675,000 | 675,000 | 2.50 | ||||||||
416,667 | 416,667 | 4.40 | ||||||||
2,919,167 | 2,084,167 |
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 threesix months ended March 31, 2020,June 30, 2021, 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 $216,093.$ using a Black-Scholes option pricing model based on the following assumptions: (i) volatility rates of to , (ii) discount rates of to , (iii) zero expected dividend yield, and (iv) expected life of years. The options have an exercise price of $1.00$ to $ per share. The of the options will vest on a quarterlythe anniversary of the grant date and the remaining options will vest on monthly basis over two years beginningyears. Options for shares vest ratably over three months afteryears. 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 date.for 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 six months ended June 30, 2021 and 2020, and 2019, wethe Company recognized aggregate stock-compensation expense includingrelated to the modificationfair value of vested stock options of $ 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 $(921,975)$ , respectively, which 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, 2020,2021, the Company had an aggregate of 835,000 remaining unvested options outstanding, with a remaining fair value of $349,007, weighted average exercise price of $0.76, and$715,836, with a weighted average remaining life of 8.949.31 years. The aggregate intrinsic value of options outstanding as of June 30, 20202021 was $23,006. The aggregate intrinsic value$ .
Restricted Common Stock
In January 2021, the Company granted shares of unvested options outstanding as of June 30, 2020 was $19,616.
Effective June 15, 2020, Michael Favish resigned asthe Company’s common stock to the Company’s Chief Executive Officer and as an employee(“CEO”). The shares vest on the first anniversary of the award. If the CEO’s employment with the Company and resigned fromis terminated for any reason, any shares not then vested will be forfeited. Also effective in January 2021, the Company granted shares of the Company’s Board of Directors. Terms common stock to a consultant for services, with of the settlement agreement includedshares vesting immediately and the continuationbalance of his previous salary of $325,000 duringshares vesting through August 15, 2021. In the following twelve months. The $325,000 of settlement payments were recorded in costs related to resignation of former officer expense inevent the accompanying condensed consolidated statements of operations forconsultant’s service with the three and six monthsCompany terminates, any shares not then vested will be forfeited. During the quarter ended June 30, 2020. As of June 30, 2020, $311,4582021 the Company granted shares of the amount remains accruedCompany’s common stock with vesting terms to the Company’s Chief Commercial Officer. The shares vest one third per year for three years 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 extensionanniversary of the exercise period for the vested options constitutes a modification of the original option agreement. In accounting for the modification, the Company calculated theaward.
The total fair value of the vested options immediately before modification using current valuation inputs including shares was determined to be $ based on the price per shares of the Company’s closingcommon stock price of $0.49 on June 15, 2020, a volatility metric of 142%, and a risk-free interest rate of 0.22%.the dates granted. The Company also calculatedaccounts 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 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.
date. During the six months ended June 30, 2020 and 2019, the Company incurred and paid salaries2021, total share-based expense recognized related to vested restricted shares totaled $ . At June 30, 2021, there was $ of $50,313 and $47,104, respectively,unvested compensation related to Karen Favish, spousethese awards that will be amortized over a remaining vesting period of Michael Favish, our former CEO. During3.3 years.
The following table summarizes restricted common stock activity for the six months ended June 30, 2020 and 2019,2021:
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 | 3.95 | ||||||
Vested | (22,500 | ) | (1.41 | ) | ||||
Forfeited | ||||||||
Non-vested shares, June 30, 2021 | 210,171 | $ | 3.00 |
20 |
11.Related Party Transactions
David Evans, Ph.D., was the interim chief executive officer of the Company incurredfrom June 12, 2020 to January 6, 2021, and together with his spouse, wholly owns Ceatus Media Group LLC (“Ceatus”) and DWT Evans LLC (“DWT”). For the three months and six months ended June 30, 2021 and 2020 the Company paid salaries of $30,000Ceatus $19,500 and $22,863,$13,750, and $42,000 and $27,500, respectively, for services related to Kristine Townsend, spouse of Controllerdigital marketing for the Company. The Company’s wholly owned subsidiary, VectorVision Ocular Health, leases office and Chief Accounting Officer John Townsend. Duringwarehouse space from DWT. For the six months ended June 30, 20202021 and 2019,2020, the Company paid consulting expensesDWT rent in the amounts of $27,500$11,142 and $60,000,$10,708, 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.
WhenIn September 2017, the Company acquired VectorVision, itInc. from David Evans. At the same time, the Company 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.David Evans is entitled to receive a royalty on net revenue from AcQviz. As part of the development of the CSV-2000, AcQviz was createdembedded in a miniaturized circuit boardthe product by Radiant Technologies, Inc. in exchange for a 3% royalty on the sales of AcQviz. Radiant Technologies is owned by Joseph T. Evans, the brother of Dr. David Evans. During the three months and six months ended June 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 are as follows in accordance with ASC 280, “Segment Reporting”. The Company currently operates in 2 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 (“ASC 280”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.
For the Three Months Ended June 30, 2020 | ||||||||||||||||
Corporate | Medical Foods and Nutraceuticals | Medical Devices | Total | |||||||||||||
Revenue | $ | 2,700 | $ | 1,152,894 | $ | 35,315 | $ | 1,190,909 | ||||||||
Cost of goods sold | 1,096 | 628,205 | 15,278 | 644,579 | ||||||||||||
Gross profit | 1,604 | 524,689 | 20,037 | 546,330 | ||||||||||||
Operating expenses | 88,428 | 1,072,508 | 93,620 | 1,254,556 | ||||||||||||
Loss from operations | $ | (86,824 | ) | $ | (547,819 | ) | $ | (73,583 | ) | $ | (708,226 | ) |
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
Corporate | Clinical Nutrition | Diagnostics Equipment | Total | |||||||||||||
For the Three Months Ended June 30, 2021 | ||||||||||||||||
Corporate | Clinical Nutrition | Diagnostics Equipment | Total | |||||||||||||
Revenue | $ | - | $ | 1,171,445 | $ | 52,275 | $ | 1,223,720 | ||||||||
Cost of goods sold | - | 639,188 | 26,031 | 665,219 | ||||||||||||
Gross profit | - | 532,257 | 26,244 | 558,501 | ||||||||||||
Stock compensation expense | 343,092 | - | - | 343,092 | ||||||||||||
Operating expenses | 2,759,319 | 1,938,799 | 57,845 | 4,755,963 | ||||||||||||
Loss from operations | $ | (3,102,411 | ) | $ | (1,406,542 | ) | $ | (31,601 | ) | $ | (4,540,554 | ) |
Corporate | Clinical Nutrition | Diagnostics Equipment | Total | |||||||||||||||||||||||||||||
For the Three Months Ended June 30, 2019 | For the Three Months Ended June 30, 2020 | |||||||||||||||||||||||||||||||
Corporate | Medical Foods and Nutraceuticals | Medical Devices | Total | Corporate | Clinical Nutrition | Diagnostics Equipment | Total | |||||||||||||||||||||||||
Revenue | $ | 6,300 | $ | 104,448 | $ | 150,222 | $ | 260,970 | $ | 2,700 | $ | 1,152,894 | $ | 35,315 | $ | 1,190,909 | ||||||||||||||||
Cost of goods sold | 2,559 | 40,681 | 53,816 | 97,056 | 1,096 | 628,205 | 15,278 | 644,579 | ||||||||||||||||||||||||
Gross profit | 3,741 | 63,767 | 96,406 | 163,914 | 1,604 | 524,689 | 20,037 | 546,330 | ||||||||||||||||||||||||
Stock compensation expense | (1,335,441 | ) | - | - | (1,335,441 | ) | ||||||||||||||||||||||||||
Operating expenses | 72,021 | 2,643,725 | 260,362 | 2,976,108 | 1,423,869 | 1,072,508 | 93,620 | 2,589,997 | ||||||||||||||||||||||||
Loss from operations | $ | (68,280 | ) | $ | (2,579,958 | ) | $ | (163,956 | ) | $ | (2,812,194 | ) | $ | (86,824 | ) | $ | (547,819 | ) | $ | (73,583 | ) | $ | (708,226 | ) |
Corporate | Clinical Nutrition | Diagnostics Equipment | Total | |||||||||||||||||||||||||||||
For the Six Months Ended June 30, 2020 | For the Six Months Ended June 30, 2021 | |||||||||||||||||||||||||||||||
Corporate | Medical Foods and Nutraceuticals | Medical Devices | Total | Corporate | Clinical Nutrition | Diagnostics Equipment | Total | |||||||||||||||||||||||||
Revenue | $ | 6,100 | $ | 1,304,028 | $ | 126,505 | $ | 1,436,633 | $ | - | $ | 1,333,588 | $ | 123,429 | $ | 1,457,017 | ||||||||||||||||
Cost of goods sold | 2,477 | 695,291 | 55,920 | 753,688 | - | 724,105 | 74,150 | 798,255 | ||||||||||||||||||||||||
Gross profit | 3,623 | 608,737 | 70,585 | 682,945 | - | 609,483 | 49,279 | 658,762 | ||||||||||||||||||||||||
Stock compensation expense | 730,707 | - | - | 730,707 | ||||||||||||||||||||||||||||
Operating expenses | 172,911 | 3,344,411 | 210,070 | 3,727,392 | 3,909,898 | 3,114,926 | 113,310 | 7,138,134 | ||||||||||||||||||||||||
Loss from operations | $ | (169,288 | ) | $ | (2,735,674 | ) | $ | (139,485 | ) | $ | (3,044,447 | ) | $ | (4,640,605 | ) | $ | (2,505,443 | ) | $ | (64,031 | ) | $ | (7,210,079 | ) |
Corporate | Clinical Nutrition | Diagnostics Equipment | Total | |||||||||||||||||||||||||||||
For the Six Months Ended June 30, 2019 | For the Six Months Ended June 30, 2020 | |||||||||||||||||||||||||||||||
Corporate | Medical Foods and Nutraceuticals | Medical Devices | Total | Corporate | Clinical Nutrition | Diagnostics Equipment | Total | |||||||||||||||||||||||||
Revenue | $ | 6,300 | $ | 204,382 | $ | 292,826 | $ | 503,508 | $ | 6,100 | $ | 1,304,028 | $ | 126,505 | $ | 1,436,633 | ||||||||||||||||
Cost of goods sold | 2,559 | 78,953 | 109,036 | 190,548 | 2,477 | 695,291 | 55,920 | 753,688 | ||||||||||||||||||||||||
Gross profit | 3,741 | 125,429 | 183,790 | 312,960 | 3,623 | 608,737 | 70,585 | 682,945 | ||||||||||||||||||||||||
Stock compensation expense | (831,573 | ) | - | - | (831,573 | ) | ||||||||||||||||||||||||||
Operating expenses | 120,783 | 3,719,338 | 470,256 | 4,310,377 | 1,004,484 | 3,344,411 | 210,070 | 4,558,965 | ||||||||||||||||||||||||
Loss from operations | $ | (117,042 | ) | $ | (3,593,909 | ) | $ | (286,466 | ) | $ | (3,997,417 | ) | $ | (169,288 | ) | $ | (2,735,674 | ) | $ | (139,485 | ) | $ | (3,044,447 | ) |
The following tables set forth our total assets by segment. Intersegment balances and transactions have been removed:
As of June 30, 2020 | ||||||||||||||||
Corporate | Medical Foods and Nutraceuticals | Medical Devices | Total | |||||||||||||
Current assets | ||||||||||||||||
Cash | $ | 11,603,459 | $ | - | $ | - | $ | 11,603,459 | ||||||||
Inventories | - | 868,409 | 366,643 | 1,235,052 | ||||||||||||
Other | 25,980 | 259,479 | 47,361 | 332,820 | ||||||||||||
Total current assets | 11,629,439 | 1,127,888 | 414,004 | 13,171,331 | ||||||||||||
Right of use asset, net | - | 442,596 | 53,791 | 496,387 | ||||||||||||
Property and equipment, net | - | 169,267 | 135,267 | 304,534 | ||||||||||||
Intangible assets, net | - | 50,000 | - | 50,000 | ||||||||||||
Other | - | 11,751 | - | 11,751 | ||||||||||||
Total assets | $ | 11,629,439 | $ | 1,801,502 | $ | 603,062 | $ | 14,034,003 |
As of December 31, 2019 | ||||||||||||||||
Corporate | Medical Foods and Nutraceuticals | Medical Devices | Total | |||||||||||||
Current assets | ||||||||||||||||
Cash | $ | 11,115,502 | $ | - | $ | - | $ | 11,115,502 | ||||||||
Inventories | 5,003 | 126,708 | 179,230 | 310,941 | ||||||||||||
Other | 7,399 | 219,223 | 214,653 | 441,275 | ||||||||||||
Total current assets | 11,127,904 | 345,931 | 393,883 | 11,867,718 | ||||||||||||
Right of use asset | - | 509,464 | 63,250 | 572,714 | ||||||||||||
Property and equipment, net | 70,542 | 148,514 | 155,582 | 374,638 | ||||||||||||
Intangible assets, net | - | 50,000 | - | 50,000 | ||||||||||||
Other | - | 11,751 | - | 11,751 | ||||||||||||
Total assets | $ | 11,198,446 | $ | 1,065,660 | $ | 612,715 | $ | 12,876,821 |
Corporate | Clinical Nutrition | Diagnostics Equipment | Total | |||||||||||||
As of June 30, 2021 | ||||||||||||||||
Corporate | Clinical Nutrition | Diagnostics Equipment | Total | |||||||||||||
Current assets | ||||||||||||||||
Cash | $ | 5,502,411 | $ | - | $ | - | $ | 5,502,411 | ||||||||
Short-term investments | 7,000,266 | - | - | 7,000,266 | ||||||||||||
Inventories | - | 835,643 | 120,616 | 956,259 | ||||||||||||
Accounts receivable | - | 1,857,952 | 26,830 | 1,884,782 | ||||||||||||
Other | - | 1,072,918 | 130,251 | 1,203,169 | ||||||||||||
Total current assets | 12,502,677 | 3,766,513 | 277,697 | 16,546,887 | ||||||||||||
Right of use asset, net | - | 304,961 | 34,301 | 339,262 | ||||||||||||
Property and equipment, net | - | 113,945 | 131,766 | 245,711 | ||||||||||||
Intangible assets, net | - | 11,850,833 | - | 11,850,833 | ||||||||||||
Goodwill | - | 11,988,050 | - | 11,988,050 | ||||||||||||
Other | - | 314,082 | - | 314,082 | ||||||||||||
Total assets | $ | 12,502,677 | $ | 28,338,384 | $ | 443,764 | $ | 41,284,825 |
Corporate | Clinical Nutrition | Diagnostics Equipment | Total | |||||||||||||
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 | $ | 426,117 | $ | 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. AsIn the opinion 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 nothe Company, adequate provision has been made in the Company’s financial statements at June 30, 2021 and December 31, 2020 with respect to any such matters.
Effective July 20, 2020,January 6, 2021, the CompanyBoard of Directors appointed Andrew C. SchmidtBret Scholtes as Vice President, Chief Executive Officer, and Chief Financial Officeras a director of the Company. The Company and Mr. SchmidtScholtes entered into an employment agreement (the “Employment Agreement”), dated July 20, 2020 (the “Effective Date”), pursuant to which Mr. Schmidt’sScholtes’ annual base salary is $250,000.$400,000. The Employment Agreementemployment agreement provides that Mr. SchmidtScholtes 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”).Directors.
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).
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.
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.
24 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q for the six-month period ended June 30, 2021 contains “forward-looking statements” within the meaning of the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements contain information about our expectations, beliefs or intentions regarding our product development and commercialization efforts, business, financial condition, results of operations, strategies or prospects, and other similar matters. These forward-looking statements are based on management’s current expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. These statements may be identified by words such as “expects,” “plans,” “projects,” “will,” “may,” “anticipates,” “believes,” “should,” “intends,” “estimates,” “hopes” and other words of similar meaning.
Actual results could differ materially from those contained in forward-looking statements. Many factors could cause actual results to differ materially from those in forward-looking statements, including those matters discussed below. Readers are urged to read the risk factors set forth in the Company’s recent filings with the U. S. Securities and Exchange Commission (the “SEC”), including the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and in other documents the Company files with the SEC from time to time. These filings are available at the SEC’s website (www.sec.gov).
Other unknown or unpredictable factors that could also adversely affect our business, financial condition and results of operations may arise from time to time. Given these risks and uncertainties, the forward-looking statements discussed in this report may not prove to be accurate. Accordingly, you should not place undue reliance on these forward-looking statements, which only reflect the views of the Company’s management as of the date of this report. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results or expectations, except as required by law.
Presentation of Information
As used in this Quarterly Report on Form 10-Q, the terms “we,” “us” “our” and the “Company” mean Guardion Health Sciences, Inc., and its affiliates unless the context requires otherwise. The following discussion and analysis should be read in conjunction with our audited financial statements and the related notes that appear elsewhere in this report and our audited financing statements for the year ended December 31, 2019,2020, and the notes thereto, which are set forth in the 2019Company’s 2020 Annual Report on Form 10-K. All dollar amounts refer to U.S. dollars unless otherwise indicated.
Overview
Guardion Health Sciences, Inc., a Delaware corporation (the “Company” or “we”) was formedis 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.
We see opportunities to grow our business and create value by acquiring, developing and distributing condition-specific, clinically proven nutrition, medical foods, supplements and diagnostic devices. We see opportunities to grow our business and create value by developing and distributing condition-specific, clinically proven nutrition, medical foods, supplements and diagnostic devices. Our portfolio of science-based, clinically supported products support healthcare professionals, their patients, and consumers in December 2009achieving health goals.
25 |
The Company’s profile and focus fundamentally changed with the acquisition of Activ Nutritional, LLC in California as a limited liability company underJune 2021, (“Activ”), the name P4L Health Sciences, LLC,owner and it subsequently changed its name to Guardion Health Sciences, LLC. On June 30, 2015,distributor of the Company converted from a California limited liability company to a Delaware corporation, changing its name to Guardion Health Sciences, Inc.Viactiv® line of chewable mineral supplements for bone health, immune health and other applications.
The Company is a specialty health sciences company (1) thatacquisition and integration of the Viactiv line of products has developed medical foodschanged the Company’s financial position, market profile and medical devicesbrand focus, and has also expanded the Company’s search for additional business opportunities in the ocular health spaceshort-term, both internal and external.
The Company believes the Viactiv acquisition adds valuable attributes, including (1) Viactiv’s brand awareness and acceptance from the consumer; (2) that has developedexperienced management; (3) established distribution networks and is developing nutraceuticalsrelationships; (4) product development potential; and (5) a long track record of revenue growth and profitability.
● | Brand awareness - Viactiv was initially launched by industry leaders Mead Johnson/Johnson &Johnson approximately twenty years ago, and we believe this history, along with the product’s marketing campaigns, taste profile and receipt of consistently positive consumer reviews, have led to strong consumer awareness and acceptance. | |
● | Experienced management – As part of the Activ acquisition the Company appointed Craig Sheehan as the Chief Commercial Officer. Mr. Sheehan was the senior executive responsible for the Viactiv brand as a member of the executive leadership team of Adare Pharmaceuticals. | |
● | Established distribution – Viactiv’s products are currently marketed through many of the nation’s largest retailers, including, among others, Walmart (retail and online), Target, CVS and Amazon. | |
● | Product development potential – The Viactiv brand has promising organic growth potential through expanded product development, increased marketing programs, and line extensions. Viactiv recently launched its Calcium Plus Immune product and there are other complementary products in development that the Company is considering bring to market. Track record of profitability – Viactiv generated net revenues of approximately $11,900,000 in 2020 and operating income of approximately $1,200,000 in 2020. For the three months and six months ended June 30, 2021, on a pro forma basis, Guardion’s total revenues would have been $3,137,736 and $7,273,595, respectively, and the Viactiv products would have accounted for 94% and 94%, respectively, of Guardion’s pro forma total revenues for those periods. The Company expects the acquisition of Viactiv to contribute increasing revenue and consistent operating margins and profitability, as well as a multitude of growth opportunities, to the Company. |
Recent Developments
Acquisition of Activ Nutritional
On June 1, 2021, the Company believes will provide supportive health benefitscompleted its previously announced acquisition of Activ. The acquisition was made pursuant to consumers. Management is reviewingan Equity Purchase Agreement dated May 18, 2021, between the Company, Adare Pharmaceuticals, Inc., (“Adare”), and Activ. . The Company acquired all of its business segmentsthe issued and operationsoutstanding shares of Activ from Adare for $26 million 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 will 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 assistancepurchase price to Activ’s tangible assets, identifiable intangible assets, and assumed liabilities at their estimated fair values as of an outside consultingthe date of acquisition. The fair value of the intangible assets was estimated using the income approach in which after-tax cash flows are discounted to present value by a third-party valuation firm in orderbased on projections and financial data provided by management of the Company. The cash flows are based on estimates used to determine its future business strategiesvalue the acquisition, and focus. Furthermore, management is reviewing its expense profile,the discount rates applied were benchmarked with its consulting firm, in orderreference to increase efficienciesthe implied rate of return from the transaction model as well as the weighted average cost of capital. The valuation assumptions take into consideration our estimates of customer attrition and reduce its cash utilizationrevenue growth projections. The excess of the purchase price paid by the Company over the nearestimated fair value of identified tangible and long term, while hoping to increase stockholder value.intangible assets has been recorded as goodwill.
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Recent Trends – COVID-19
Appointment of CEO
The COVID-19 pandemic has
Effective as of January 6, 2021, the Board of Directors appointed Bret Scholtes as President and will continue affecting economiesChief Executive Officer and businesses around the world. The impactsas a director of the pandemic couldCompany.
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 opportunity of no less than $400,000 (the “Bonus”) based on the achievement of Company and individual performance objectives to be material, but duedetermined by the Board of Directors.
Mr. Scholtes was granted an award of stock options equal to one percent (1%) of the issued and outstanding number of shares of the Company’s common stock (the “Stock Options”) pursuant to the evolving natureCompany’s 2018 Equity Incentive Plan (the “Incentive Plan”), at an exercise price equal to the closing price of this situation, wethe Company’s common stock on the Effective Date (152,671 shares, exercise price of $3.95 per share). One third (1/3) of the Stock Options shall vest and become exercisable the first anniversary of the Effective Date, and the balance of the Stock Options shall vest ratably in equal installments for the twenty-four (24) months thereafter, subject to continued service, and shall vest in full upon a Change in Control (as defined in the Incentive Plan). Additionally, the Company shall grant unvested shares of common stock in an amount equal to one percent (1%) of the number of shares of Company common stock issued and outstanding on the Effective Date (the “Stock Grant”) to Mr. Scholtes under the Incentive Plan (152,671 shares). The shares underlying the Stock Grant shall become vested in full on the first anniversary of the Effective Date. Additionally, Mr. Scholtes shall be granted (i) additional stock options equal to two percent (2%) of the Company’s issued and outstanding shares of common stock on the date of grant if the Company achieves certain specified written performance objectives established by the Board for the Company’s fiscal years ending December 31, 2021 and December 31, 2022 and (ii) additional stock options equal to either two percent (2%) or three percent (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 the Effective Date.
If Mr. Scholtes’ employment is terminated by the Company without cause (as defined in 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 in the Incentive Plan), Mr. Scholtes will be entitled to (a) twelve months’ base salary, (b) the prorated portion of the Bonus for the year in which the termination occurs, based on actual performance and (c) base salary and benefits accrued through the date of termination.
January 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 its common stock in an “at the market” offering through Maxim (the “January 2021 1st ATM Offering”). 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 gross 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 its 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 gross proceeds (after deduction for sales commissions) of approximately $24,250,000.
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The Company incurred costs related to these financings of approximately $327,000 which are not able at this timereflected in APIC as a reduction that offsets to estimate the impact on our financial or operational results. Among the factors that could impact our results are: effectiveness of COVID-19 mitigation measures, global economic conditions, consumer spending, workproceeds for shares issued. The net cash received from home trends, supply chain sustainability and other factors. These factors could result in increased or decreased demand for our products and services and impact our ability to serve customers.both offering after all expense is approximately $33,623,000.
Recent Developments
Warrant Exercises
From January 1, 20202021 through June 30, 2020, the2021, the Company received total gross proceeds of $4,549,421$3,568,415 from the exercise of 13,302,4001,647,691 warrants issued in the Company’s October 2019 follow-on offering.issued.
Nutraceutical Sales
During February 2020, the Company contracted with a Malaysian company to develop an immune-supportive formula for its consumer base. An initial order was placed for $875,000, and in connection with this order, on March 31, 2020, the Malaysian company paid $437,500 as a deposit 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.
Going Concern
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.
Recent Accounting Pronouncements
See Note 2 to the condensed consolidated financial statements for management’s discussion of recent accounting pronouncements.
Concentration of Risk
Cash balances are maintained at large, well-established financial institutions. At times, cash balances may exceed federally insured limits. Insurance coverage limits are $250,000 per depositor at each financial institution. The Company has never experienced any losses related to these balances.
During the six months ended June 30, 2020, the Medical Foods and Nutraceuticals segment had one customer who2021, two customers 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%44% of the Company’s sales. No other customer accounted for more than 10% of such sales in either period.the 2021 or 2020 six-month periods.
Critical Accounting Policies and Estimates
The Company’s financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).GAAP. The preparation of its financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Actual results could differ from those estimates. The Company’s financial statements included herein include all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows.
The following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s financial statements.
Revenue Recognition
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.
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. 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 is not subsequently written up.
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Stock-Based Compensation
Business Combinations
The Company accounts for share-based awardsits 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, expected cost and time to develop in-process research and development, 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.
Stock-Based Compensation
The Company periodically issues stock-based compensation to employees and nonemployees directorsnon-employees in non-capital raising transactions for services and consultants in accordance withfor financing costs. Such grants vest and expire according to terms established at the provisions of issuance date. The Company accounts for such grants issued and vesting based on ASC 718, Compensation—Stock Compensation., and underCompensation-Stock Compensation, whereby the recently issued guidance following FASB’s pronouncement, ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. Under ASC 718, and applicable updates adopted, share-based awards are valued at fair value of the award is measured on the date of grant and thatrecognized 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 recognized overestimated using the requisite service, or vesting, period.Black-Scholes option-pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life, and future dividends. The Company values its equity awards usingassumptions used in the Black-Scholes option pricing model could materially affect compensation expense recorded in future periods. The Company periodically issues stock-based compensation to officers, directors, contractors and accountsconsultants for forfeitures when they occur.services rendered. Such issuances vest and expire according to terms established at the issuance date.
Recent Trends – Market Conditions; COVID-19
The COVID-19 pandemic has and will continue affecting economies and businesses around the world. The impacts of the pandemic could be material, but due to the evolving nature of this situation, we are not able at this time to estimate the impact on our financial or operational results. Among the factors that could impact our results are the effectiveness of COVID-19 mitigation and vaccination measures; the development of COVID-19 variants, global economic conditions; consumer spending; work from home trends; supply chain sustainability; and other factors. These factors could result in increased or decreased demand for our products and services and impact our ability to serve customers.
Plan of Operations
General Overview
The Company is focused on building a leading clinical nutrition company with the objective that it become a top performing growth company. Our team has taken the first part of 2021 to assess the business, the core fundamentals, and the market opportunity for the Company’s products and services. With the acquisition of Activ, management believes that the Company will be able to accelerate its growth and development.
Our team is focused on building a strong foundation by developing a business model and infrastructure that are designed for long-term commercial success. This process will take time, but we are taking important steps required to build a stronger company, such as the Activ acquisition. Furthermore, we successfully raised equity in two at-the-market equity financings during the first three months ended March 31, 2021, and the Company implemented a reverse stock split that enabled us to come into full compliance with Nasdaq’s continued listing rules regarding minimum bid stock price. Based on the availability of sufficient funding, the Company intends to increase its commercialization and business development activities, including engaging in further strategic acquisitions, to capitalize on growth opportunities.
UseOver the long-term, we believe one of the Black-Scholes option pricing model requirescritical keys to our success will be to create value in well-differentiated and robust brands through strong clinically proven claims that address consumer needs in growing markets, both domestically and internationally. We are committed to bringing compelling products to market under meaningful and differentiated brands supported by strong science.
We are currently working on a number of initiatives required to achieve these long-term goals. These include the input of subjective assumptions including expected volatility, expected term,following:
Growth initiatives focused on increasing revenue and a risk-free interest rate. The Company estimates volatility using a blend of its own historical stock price volatility as well asbringing compelling products to market under meaningful and differentiated brands that of market comparable entities since the Company’s common stock has limited trading history and limited observable volatility of its own. The expected term of the options is estimatedare supported by using the Securities and Exchange Commission Staff Bulletin No. 107’s Simplified Method for Estimate Expected Term. The risk-free interest rate is estimated using comparable published federal funds rates.strong science.
● | Brand Strategy – Brands are an important part of our strategy, and Guardion’s team is evaluating the best ways to manage its brand portfolio. In particular, we are seeking to develop a strategy that best leverages Viactiv’s strong consumer awareness and acceptance. | |
● | Scientific Work – Our team continuously evaluates scientific journals and clinical evidence to improve the science behind our existing products and drive our product development process. In addition, we are working with health care professionals to increase clinical evidence on existing products. | |
● | Product Strategy – Our team is evaluating our current product portfolio and seeking opportunities to improve or discontinue our existing products and technologies and develop new ones. We are focused on differentiated formulations, product taste, compelling product formats, and competitive cost structures. | |
● | Sales Channels – Our team is evaluating opportunities to increase product commercialization through better access to sales channels. The Viactiv products enjoy established distribution through traditional retailers and third-party eCommerce retailers. Our other clinical nutrition products are sold directly to consumers via the Company’s website. By leveraging our collective experience selling in these channels, we seek to increase the distribution of our products. | |
● | Existing Business Lines – Our team is evaluating the Company’s non-Viactiv business lines to determine their fit in the strategic direction of the Company. As discussed elsewhere and in our Annual Report on Form 10-K for the Year Ended December 31, 2020, product development and successful commercialization can be an expensive and time-consuming process. Management wants to focus on those products and technologies that possess the greatest chance for commercial success within a reasonable period of time and a reasonable deployment of capital. |
Efficiency initiatives focused on increased profitability
● | Logistics – Our team is evaluating the way our products are handled, stored and transported. We believe there could be opportunities to become more efficient and potentially reduce warehouse costs. | |
● | Office costs – We have moved our executive offices to Houston, Texas. We are evaluating options to decrease our costs as a result of this relocation, and the Company’s successful use of virtual management. | |
● | Portfolio evaluation – We are evaluating our entire product portfolio with the goal to identify efficiencies and insuring fit with the Company’s strategy. | |
● | Information Technology – Our team is implementing a number of information technology projects designed to increase efficiency and marketing effectiveness, and to manage risk. |
Results of Operations
Through June 30, 2020,2021, the Company has primarily been engaged in product development, commercialization, and raising capital. The Company has incurred and will continue to incur significant expenditures for the development of its products and intellectual property, which includes nutrition, medical foods, nutraceuticalssupplements and medical devices for the treatment of various eye diseases.Diagnostics Equipment. These products support healthcare professionals, their patients and consumers in achieving health goals. The Company had limited revenue during the three and six months ended June 30, 20202021 and 2019.2020.
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Comparison of Three Months Ended June 30, 20202021 and 20192020
Three Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||||||||||||||||||
2020 | 2019 | Change | 2021 | 2020 | Change | |||||||||||||||||||||||||||
Revenue | $ | 1,190,909 | $ | 260,970 | $ | 929,939 | 356 | % | $ | 1,223,720 | $ | 1,190,909 | $ | 32,811 | 3 | % | ||||||||||||||||
Cost of goods sold | 644,579 | 97,056 | 547,523 | 564 | % | 665,219 | 644,579 | 20,640 | 3 | % | ||||||||||||||||||||||
Gross Profit | 546,330 | 163,914 | 382,416 | 233 | % | 558,501 | 546,330 | 12,171 | 2 | % | ||||||||||||||||||||||
Operating Expenses: | ||||||||||||||||||||||||||||||||
Research and development | 44,581 | 77,688 | (33,107 | ) | (43 | )% | 16,756 | 44,581 | (27,825 | ) | (62 | )% | ||||||||||||||||||||
Sales and marketing | 519,067 | 409,409 | 109,658 | 27 | % | 440,793 | 519,067 | (78,274 | ) | (15 | )% | |||||||||||||||||||||
General and administrative | 1,712,183 | 2,489,011 | (776,828 | ) | (31 | )% | 2,537,826 | 1,712,183 | 825,643 | 48 | % | |||||||||||||||||||||
Acquisition transaction costs | 2,103,680 | - | 2,103,680 | |||||||||||||||||||||||||||||
Costs related to resignation of former officer | (1,052,223 | ) | - | (1,052,223 | ) | (100 | )% | - | (1,052,223 | ) | 1,052,223 | |||||||||||||||||||||
Impairment loss on equipment held for sale | 30,948 | - | 30,948 | 100 | % | - | 30,948 | (30,948 | ) | |||||||||||||||||||||||
Total Operating Expenses | 1,254,556 | 2,976,108 | (1,721,552 | ) | (58 | )% | 5,099,055 | 1,254,556 | 3,844,499 | 306 | % | |||||||||||||||||||||
Loss from Operations | (708,226 | ) | (2,812,194 | ) | 2,103,968 | (75 | )% | (4,540,554 | ) | (708,226 | ) | (3,832,328 | ) | 541 | % | |||||||||||||||||
Other Expense: | ||||||||||||||||||||||||||||||||
Other Expense (Income): | ||||||||||||||||||||||||||||||||
Interest expense | 1,790 | 234,065 | (232,275 | ) | (99 | )% | - | 1,790 | (1,790 | ) | (100 | )% | ||||||||||||||||||||
Finance cost upon issuance of warrants | - | 229,921 | (229,921 | ) | (100 | )% | ||||||||||||||||||||||||||
Interest income | (266 | ) | - | (266 | ) | |||||||||||||||||||||||||||
Change in fair value of derivative warrants | (2,856 | ) | (227,832 | ) | 224,976 | (99 | )% | - | (2,856 | ) | 2,856 | (100 | )% | |||||||||||||||||||
Net Loss | $ | (707,160 | ) | $ | (3,048,348 | ) | $ | 2,341,188 | (77 | )% | $ | (4,540,288 | ) | $ | (707,160 | ) | $ | (3,833,128 | ) | (542 | )% |
Revenue
For the three months ended June 30, 2020,2021, revenue from product sales was $1,190,909$1,223,720 compared to $260,970$1,190,909 for the three months ended June 30, 2019,2020, resulting in an increase of $929,939$32,811 or 356%3%. The increase isrelatively flat overall performance reflects a combination of improved sales of Clinical Nutrition resulting from our acquisition of Activ Nutritional, LLC, offset by a decrease in Diagnostics Equipment sales primarily due primarily to the fulfillmentimpact of a Malaysian orderCOVID-19 office closures for an immune-supportive formula thatmany in our customer base. Activ was deliveredacquired on June 1, 2021 and contributed $1,049,803 of revenue in June. The Company completed shipmentthe one month it was part of the product, received payment in full, and has recognized revenue for this order of $890,000Company during the three monthsperiod ended June 30, 2020.
Cost2021. This contribution represented 86% of Goods Sold
the Company’s revenue during the quarter. For the three months ended June 30, 2020,2021, on a proforma basis, the amount of revenue from Activ we would have included in our consolidated results was $2,842,177.
Cost of Goods Sold
For the three months ended June 30, 2021, cost of goods sold was $644,579$665,219 compared to $97,056$644,579 for the three months ended June 30, 2019, resulting in2020, an increase of $547,523$20,640 or 564%3%. This reflectsincrease is primarily driven by the costsaddition of goods sold associated with the Malaysian order noted above.Viactiv product line to our offerings.
Gross Profit
For the three months ended June 30, 2020,2021, gross profit was $546,330$558,501 compared to $163,914$546,330 for the three months ended June 30, 2019, resulting in2020, an increase of $382,416$12,171 or 233%.2%, primarily as a result in the decrease in Diagnostics Equipment sales and the increase in cost of goods sold. Gross profit represented 46% of revenues in each three-month period ended June 30. Activ was acquired on June 1, 2021 and contributed $503,073 of gross profit in the one month it was part of the Company. This contribution represented 90% of the Company’s gross profit during the quarter.
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Research and Development
For the three months ended June 30, 2021, research and development costs were $16,756 compared to $44,581 for the three months ended June 30, 2020, versus 63%a decrease of revenue$27,825 or 62%, primarily as a result of the timing of certain studies conducted on a periodic basis. Research and development costs primarily consist of engineering efforts related to our Diagnostics Equipment and clinical studies related to our medical foods.
Sales and Marketing
For the three months ended June 30, 2021, sales and marketing expenses were $440,793 as compared to $519,067 for the three months ended June 30, 2019. The lower gross profit percentage2020, representing a decrease in 2020 is reflectivesales and marketing expenses of lower distributor pricing given$78,274 or 15% compared to the Malaysian customer.prior three-month period. The decrease is primarily attributable to increases in marketing and advertising of approximately $187,000 partially offset by decreases in payroll and stock compensation of approximately $233,000 which in previous years allocated to Sales and Marketing which is now in general and administrative costs and a decrease in postage costs of approximately $20,000.
ResearchGeneral and DevelopmentAdministrative
For the three months ended June 30, 2020, research2021, general and development costsadministrative expenses were $44,581$2,537,826 as compared to $77,688$1,712,183 for the three months ended June 30, 2019, resulting2020. The increase of $825,643 or 48% compared to the prior period was primarily attributable increases in stock-based compensation increased approximately $767,000 and professional fees of approximately $409,000, offset primarily by a decrease in payroll costs of $33,107 or 43%. Research and development costs consist of engineering efforts related to our medical devices. The decrease in the current period reflects higher development costs associated with the CSV-2000 that were incurred in 2019.approximately $268,000.
Sales and MarketingAcquisition Transaction Costs
For the three months ended June 30, 2020, sales and marketing expenses2021, acquisition transaction costs were $519,067 compared$2,103,680 all of which relate to $409,409 forour acquisition of Activ. We did not have any acquisition costs in the three months ended June 30, 2019. The increasecomparable three-month period in sales and marketing expenses of $109,658 or 27% compared to the prior period was primarily due to a $98,000 increase in labor costs stemming from our new sales force initiatives.2020.
General and Administrative
For the three months ended June 30, 2020, general and administrative expenses were $1,712,183 compared to $2,489,011 for the three months ended June 30, 2019. The decrease of $776,828 or 31% compared to the prior period was primarily due to a $1,240,000 decrease in stock compensation expense. This reduction was partially offset by increases of $263,000 in consulting costs, $179,000 in legal costs, and $92,000 in labor costs.
Costs relatedRelated to resignationResignation of former officerFormer Officer
Effective June 15, 2020, Michael Favish resigned as Chief Executive Officer and as an employee of the Company and resigned from the Company’s Board of Directors. Terms of the settlement agreement included the continuation of his previous salary of $325,000 during the following twelve months. The $325,000 settlement was recorded in costs related to resignation of former officer expense in the accompanying condensed consolidated statement of operations for the three months ended June 30, 2020.
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 months ended June 30, 2020 of $(1,401,582) that was recorded in costs related to resignation of former officer.
Impairment Loss on Equipment Held for Sale
During June 2020, in an effort to reduce costs, and focus on other segments of the business, the Company began to wind down the Transcranial Doppler Solutions, Inc. (“TDSI”) subsidiary and ceased its operations.TDSI subsidiary. The wind down is currently expected to bewas completed in the third quarter of 2020. TDSI holds a group of ultrasound machines as fixed assets. We intend to sell these machines, and therefore have reflected their value as the lower of carrying value or fair value less estimated selling costs. An impairment charge of $30,948 has been recorded in the condensed consolidated statements of operations for the three months ended June 30, 2020. No impairment charge was recorded for the three months ended June 30, 2021.
Interest Expense
For the three months ended June 30, 2020,2021, interest expense was $1,790$0 compared to $234,065$1,790 for the three months ended June 30, 2019. The decrease2020. In 2020 we financed the cost of $232,275 or 99%, was due primarily tovarious insurance policies and incurred interest expense. We did not finance the amortizationcost of the valuation discount2021 insurance policies therefore we incurred no interest in the quarter ended June 30, 2021.
Net Loss
For the three months ended June 30, 2021, the Company incurred a net loss of the March 2019 convertible notes$4,540,288, compared to a net loss of $233,455 that was reflected as an expense when the notes were converted in April of 2019.
Finance Cost Upon Issuance of Warrants
Finance costs$707,160 for the three months ended June 30, 2019 were $229,921. There were no such costs for the comparable period in 2020. On April 4, 2019, the Company issued 62,500 warrants with an exercise price of $5.00 per share to the underwriter (the “Underwriter”) in connection with the Company’s IPO. The Company accounted for these warrants as a derivative liability in the financial statements at June 30, 2019 because they were associated with the IPO, a registered offering, and the settlement provisions contained language that the shares underlying the warrants are required to be registered. The fair value of the warrants at the date of issuance was determined to be $229,291 and was recorded as a finance cost.
Change in Fair Value of Derivative Warrants
On April 4, 2019, the Company issued 62,500 warrants with an exercise price of $5.00 per share to the Underwriter in connection with the Company’s IPO. The Company accounted for these warrants as a derivative liability in the financial statements because they were associated with the IPO, a registered offering, and the settlement provisions contained language that the shares underlying the warrants are required to be registered. The fair value of the warrants will be remeasured at each reporting period, with the change in the fair value recognized in earnings in the accompanying Statements of Operations. The fair value of the warrants at the date of issuance was determined to be $229,921 and was recorded as a finance cost in April of 2019. As of June 30, 2020, the fair value of the warrant liability was determined to be $19,411 and the Company recorded a change in fair value of derivative warrants for the three months ended June 30, 2020 of $2,856.
Net Loss
For the three months ended June 30, 2020, the Company incurred a net loss of $701,160, compared to a net loss of $3,048,348 for the three months ended June 30, 2019. The decreaseincrease in net loss of $2,341,188$3,833,128 or 77%542% compared to the prior year period wasis primarily dueattributable to the revenue from the Malaysian orderincrease in costs of goods sold, general and the reduced stock compensationadministrative costs during the current period.and acquisition transaction costs described above.
Segment Information
The following tables set forth our results of operations by segment (results allocated to Corporate consistsegment:
The Clinical Nutrition segment’s Viactiv® line of supplement chews for bone health, immune health and other applications are currently marketed through many of the TDSI operations):nation’s largest retailers, including, among others, Walmart (retail and online), Target and Amazon. The Company believes the Viactiv product lines will become the Company’s most prominent product lines. Our other products in the Clinical Nutrition segment include Lumega-Z, GlaucoCetin and ImmuneSF.
For the Three Months Ended June 30, 2020 | ||||||||||||||||
Corporate | Medical Foods and Nutraceuticals | Medical Devices | Total | |||||||||||||
Revenue | $ | 2,700 | $ | 1,152,894 | $ | 35,315 | $ | 1,190,909 | ||||||||
Cost of goods sold | 1,096 | 628,205 | 15,278 | 644,579 | ||||||||||||
Gross profit | 1,604 | 524,689 | 20,037 | 546,330 | ||||||||||||
Operating expenses | 88,428 | 1,072,508 | 93,620 | 1,254,556 | ||||||||||||
Loss from operations | $ | (86,824 | ) | $ | (547,819 | ) | $ | (73,583 | ) | $ | (708,226 | ) |
The Diagnostics Equipment segment includes a portfolio of medical diagnostic devices currently focused on the ocular space and is the industry leader in contrast testing. Our products include VectorVision CSV-1000, CSV-1000HGT, CSV-2000 and associated accessories as well as the MapcatSF.
For the Three Months Ended June 30, 2019 | ||||||||||||||||
Corporate | Medical Foods and Nutraceuticals | Medical Devices | Total | |||||||||||||
Revenue | $ | 6,300 | $ | 104,448 | $ | 150,222 | $ | 260,970 | ||||||||
Cost of goods sold | 2,559 | 40,681 | 53,816 | 97,056 | ||||||||||||
Gross profit | 3,741 | 63,767 | 96,406 | 163,914 | ||||||||||||
Operating expenses | 72,021 | 2,643,725 | 260,362 | 2,976,108 | ||||||||||||
Loss from operations | $ | (68,280 | ) | $ | (2,579,958 | ) | $ | (163,956 | ) | $ | (2,812,194 | ) |
See Note 12 to the condensed consolidated financial statements for further details on our reportable segments.
For the Three Months Ended June 30, 2021 | ||||||||||||||||
Corporate | Clinical Nutrition | Diagnostics Equipment | Total | |||||||||||||
Revenue | $ | - | $ | 1,171,445 | $ | 52,275 | $ | 1,223,720 | ||||||||
Cost of goods sold | - | 639,188 | 26,031 | 665,219 | ||||||||||||
Gross profit | - | 532,257 | 26,244 | 558,501 | ||||||||||||
Stock compensation expense | 343,092 | - | - | 343,092 | ||||||||||||
Operating expenses | 2,759,319 | 1,938,799 | 57,845 | 4,755,963 | ||||||||||||
Loss from operations | $ | (3,102,411 | ) | $ | (1,406,542 | ) | $ | (31,601 | ) | $ | (4,540,554 | ) |
For the Three Months Ended June 30, 2020 | ||||||||||||||||
Corporate | Clinical Nutrition | Diagnostics Equipment | Total | |||||||||||||
Revenue | $ | 2,700 | $ | 1,152,894 | $ | 35,315 | $ | 1,190,909 | ||||||||
Cost of goods sold | 1,096 | 628,205 | 15,278 | 644,579 | ||||||||||||
Gross profit | 1,604 | 524,689 | 20,037 | 546,330 | ||||||||||||
Stock compensation expense | (1,335,441 | ) | - | - | (1,335,441 | ) | ||||||||||
Operating expenses | 1,423,869 | 1,072,508 | 93,620 | 2,589,997 | ||||||||||||
Loss from operations | $ | (86,824 | ) | $ | (547,819 | ) | $ | (73,583 | ) | $ | (708,226 | ) |
Revenue
For the three months ended June 30, 2020,2021, revenue from our Medical Foods and NutraceuticalsClinical Nutrition segment was $1,152,894$1,171,445 compared to $104,448$1,152,894 for the three months ended June 30, 2019, resulting in2020, an increase of $1,048,446$18,551 or 1004%. The increase is due primarily to the completion of a Malaysian order for an immune-supportive formula that was delivered in June. The Company completed shipment of the product, received payment in full, and has recognized revenue for this order of $890,000 during the three months ended June 30, 2020. Medical Foods revenues of $131,114 grew approximately 26% during the three months ended June 30, 2020, as compared to the prior year period of $104,448. For the three months ended June 30, 2020, revenue from our Medical Devices segment was $35,315 compared to $150,222 for the three months ended June 30, 2019, resulting in a decrease of $114,907 or 76%, primarily as a result of medical facility closures 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.
Cost of Goods Sold
For the three months ended June 30, 2020, cost of goods sold from our Medical Foods and Nutraceuticals segment was $628,205 compared to $40,681 for the three months ended June 30, 2019, resulting in an increase of $587,524 or 1,444%. The increase was due to the Malaysian order noted above For the three months ended June 30, 2020, cost of goods sold from our Medical Devices segment was $15,278 compared to $53,816 for the three months ended June 30, 2019, resulting in a decrease of $38,538 or 72%. The decrease was due to the decrease in sales noted above.
Gross Profit
For the three months ended June 30, 2020, gross profit from the Medical Foods and Nutraceuticals segment was $524,689 compared to $63,767 for the three months ended June 30, 2019, resulting in an increase of $460,922 or 723%2%. For the three months ended June 30, 2020, gross profit2021, revenue from the Medical Devicesour Diagnostics Equipment segment was $20,037$52,275 compared to $96,406$35,315 for the three months ended June 30, 2019,2020, an increase of $16,960 or 48% primarily due to the sale of MapcatSF devices in first quarter of 2020.
Cost of Goods Sold
For the three months ended June 30, 2021, cost of goods sold from our Clinical Nutrition segment was $639,188 as compared to $628,205 for the three months ended June 30, 2020, an increase of $10,983 or 2%. For the three months ended June 30, 2021, cost of goods sold from our Diagnostics Equipment segment was $26,031 as compared to $15,278 for the three months ended June 30, 2020, an increase of $10,753 or 70%.
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Gross Profit
For the three months ended June 30, 2021, gross profit from the Clinical Nutrition segment was $532,257 compared to $524,689 for the three months ended June 30, 2020, an increase of $7,568 or 1 %. For the three months ended June 30, 2021, gross profit from the Diagnostics Equipment segment was $26,244 as compared to $20,037 for the three months ended June 30, 2020, resulting in a decrease of $76,369$6,207 or 79%31%. Gross profit overall represented 46% of revenues for the three months ended June 30, 2020, versus 63%2021and 46% of revenuerevenues for the three months ended June 30, 2019. The lower gross profit percentage in the current period is reflective of lower distributor pricing given to the Malaysian customer.2020.
Comparison of Six Months Ended June 30, 20202021 and 20192020
Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2020 | 2019 | Change | 2021 | 2020 | Change | |||||||||||||||||||||||||||
Revenue | $ | 1,436,633 | $ | 503,508 | $ | 933,125 | 185 | % | $ | 1,457,017 | $ | 1,436,633 | $ | 20,384 | 1 | % | ||||||||||||||||
Cost of goods sold | 753,688 | 190,548 | 563,140 | 296 | % | 798,255 | 753,688 | 44,567 | 6 | % | ||||||||||||||||||||||
Gross Profit | 682,945 | 312,960 | 369,985 | 118 | % | 658,762 | 682,945 | (24,183 | ) | (4 | )% | |||||||||||||||||||||
Operating Expenses: | ||||||||||||||||||||||||||||||||
Research and development | 75,769 | 106,716 | (30,947 | ) | (29 | )% | 37,364 | 75,769 | (38,405 | ) | (51 | )% | ||||||||||||||||||||
Sales and marketing | 1,007,913 | 764,028 | 243,885 | 32 | % | 898,520 | 1,007,913 | (109,393 | ) | (11 | )% | |||||||||||||||||||||
General and administrative | 3,228,698 | 3,439,633 | (210,935 | ) | (24 | )% | 4,829,277 | 3,228,698 | 1,600,579 | 50 | % | |||||||||||||||||||||
Acquisition transaction costs | 2,103,680 | - | 2,103,680 | |||||||||||||||||||||||||||||
Costs related to resignation of former officer | (615,936 | ) | - | (615,936 | ) | (100 | )% | - | (615,936 | ) | 615,936 | (100 | )% | |||||||||||||||||||
Impairment loss on equipment held for sale | 30,948 | - | 30,948 | 100 | % | - | 30,948 | (30,948 | ) | (100 | )% | |||||||||||||||||||||
Total Operating Expenses | 3,727,392 | 4,310,377 | (582,985 | ) | (14 | )% | 7,868,841 | 3,727,392 | 4,141,449 | 111 | % | |||||||||||||||||||||
Loss from Operations | (3,044,447 | ) | (3,997,417 | ) | 952,970 | (24 | )% | (7,210,079 | ) | (3,044,447 | ) | (4,165,632 | ) | 137 | % | |||||||||||||||||
Other Expense: | ||||||||||||||||||||||||||||||||
Other Expense (Income): | ||||||||||||||||||||||||||||||||
Interest expense | 3,538 | 251,637 | (248,099 | ) | (99 | )% | - | - | - | - | % | |||||||||||||||||||||
Finance cost upon issuance of warrants | - | 415,955 | (415,955 | ) | (100 | )% | ||||||||||||||||||||||||||
Interest income | (266 | ) | - | (266 | ) | |||||||||||||||||||||||||||
Change in fair value of derivative warrants | 6,088 | (227,832 | ) | 233,920 | (103 | )% | - | 6,088 | (6,088 | ) | (100 | )% | ||||||||||||||||||||
Net Loss | $ | (3,054,073 | ) | $ | (4,437,177 | ) | $ | 1,383,104 | (31 | )% | $ | (7,209,813 | ) | $ | (3,054,073 | ) | $ | (4,155,740 | ) | 136 | % |
Revenue
For the six months ended June 30, 2020,2021, revenue from product sales was $1,436,633$1,457,017 compared to $503,508$1,436,633 for the six months ended June 30, 2019,2020, resulting in an increase of $933,125$20,384 or 185%1%. The increase isrelatively flat overall performance reflects a combination of improved sales of Clinical Nutrition a direct result of our acquisition and integration of Activ partially offset by a decrease in Diagnostics Equipment sales primarily due primarily to the completionimpact of a Malaysian orderCOVID-19 office closures for an immune-supportive formula that was deliveredmany in June. The Company completed shipment of the product, received payment in full, and has recognized revenue for this order of $890,000.
Cost of Goods Sold
our customer base. For the six months ended June 30, 2020,2021, on a proforma basis, the amount of revenue from Activ we would have included in our consolidated results was $6,582,596.
Cost of Goods Sold
For the six months ended June 30, 2021, cost of goods sold was $753,688$798,255 compared to $190,548$753,688 for the six months ended June 30, 2019, resulting in2020, an increase of $563,140$44,567 or 296%6%. This reflectsincrease is primarily driven by a change in product mix as the costsresult of goods sold associated withour acquisition and integration of Activ. During the Malaysian order noted above.six months ended June 30, 2021, the Company recorded an inventory write down of approximately $6,000 related to Vector Vision raw materials inventory.
Gross Profit
For the six months ended June 30, 2020,2021, gross profit was $682,945$658,762 compared to $312,960$682,945 for the six months ended June 30, 2019,2020, a decrease of $24,183 or 4%, primarily as a result in the decrease in Diagnostics Equipment sales and the increase in cost of goods sold resulting in an increasefrom the acquisition and integration of $369,985 or 118%.Activ. Gross profit represented 48%46% of revenues for the six months ended June 30, 2020,2021, versus 62%48% of revenue for the six months ended June 30, 2019. The lower gross profit percentage in 2020 is reflective of lower distributor pricing given to the Malaysian customer.2020.
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Research and Development
For the six months ended June 30, 2020,2021, research and development costs were $75,769$37,364 compared to $106,716$75,769 for the six months ended June 30, 2019, resulting in2020, a decrease of $30,947$38,405 or 29%.51%, primarily as a result of the timing of certain studies conducted on a periodic basis. Research and development costs primarily consist of engineering efforts related to our Diagnostics Equipment and clinical studies related to our medical devices. The decrease in the current period reflects higher development costs associated with the CSV-2000 that were incurred in 2019.foods.
Sales and Marketing
For the six months ended June 30, 2020,2021, sales and marketing expenses were $1,007,913$898,520 as compared to $764,028$1,007,913 for the six months ended June 30, 2019. The increase2020, representing a decrease in sales and marketing expenses of $243,885$109,393 or 32%11% compared to the prior period was primarily due to a $203,000 increase in labor costs stemming from our new sales force initiatives.six-month period.
General and Administrative
For the six months ended June 30, 2020,2021, general and administrative expenses were $3,228,698$4,829,277 as compared to $3,439,633$3,228,698 for the six months ended June 30, 2019.2020. The decreaseincrease of $210,935$1,600,579 or 24%50% compared to the prior periodperiod. was primarily dueattributable to a $1,266,000 decreaseincreases of approximately in stockprofessional fees of $178,000, an increase in stock-based compensation expense. This decrease wasof $687,000, an increase in consulting fees of $303,000, an increase of $61,000 in Insurance, an increase in computer and internet costs of $64,000 partially offset by increasesdecreases of $252,000$48,000 in consulting costs, $152,000 in professional fees, $324,000 in legal costs, $206,000 in labor costs,office expense and $116,000a decrease of $38,000 in corporate insurance costs. Management is reviewing its expense profile, with its consulting firm,travel expenses.
Acquisition Transaction Costs
For the six months ended June 30, 2021, acquisition transaction costs were $2,103,680 all of which relate to our acquisition of Activ. We did not have any acquisition costs in order to increase efficiencies and reduce its cash utilization over the near and long term, while hoping to increase stockholder value.comparable six month period of 2020.
Costs relatedRelated to resignationResignation of former officerFormer Officer
Effective June 15, 2020, Michael Favish resigned as Chief Executive Officer and as an employee of the Company and resigned from the Company’s Board of Directors. Terms of the settlement agreement included the continuation of his previous salary of $325,000 during the following twelve months. The $325,000 settlement was recorded in costs related to resignation of former officer expense in the accompanying condensed consolidated statement of operations for the six months ended June 30, 2020.
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 six months ended June 30, 2020 of $(965,295) that was recorded in costs related to resignation of former officer.
Impairment Loss on Equipment Held for Sale
During June 2020, in an effort to reduce costs, the Company began to wind down the TDSI subsidiary. The wind down is currently expected to bewas completed in the third quarter of 2020. TDSI holds a group of ultrasound machines as fixed assets. We intend to sell these machines, and therefore have reflected their value as the lower of carrying value or fair value less estimated selling costs. An impairment charge of $30,948 has been recorded in the condensed consolidated statements of operations for the six months ended June 30, 2020. No impairment charge was recorded for the six months ended June 30, 2021.
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Interest Expense
For the six months ended June 30, 2020,2021, interest expense was $3,538$0 compared to $251,637$3,538 for the six months ended June 30, 2019. The decrease2020. In 2020 we financed the cost of $248,099 or 99%, was due primarily tovarious insurance policies and incurred interest expense. We did not finance the amortizationcost of the valuation discount of the March 2019 convertible notes of $233,455 that was reflected as an expense when the notes were converted2021 insurance policies therefore we incurred no interest in April of 2019.
Finance Cost Upon Issuance of Warrants
Finance costs for the six months ended June 30, 2019 of $415,955 include the following; (I) In March 2019, the Company issued warrants to two convertible note holders pursuant to the anticipated completion of the Company’s IPO (the IPO was completed on April 9, 2019). Due to the variable terms of both the exercise price and the number of warrants to be issued, the warrants were accounted for as derivative liabilities at March 31, 2019. The fair value of the warrants at the closing of the IPO was determined to be $436,034, of which $250,000 was recorded as a valuation discount, and $186,034 was recorded as a finance cost. (II) On April 4, 2019, the Company issued 62,500 warrants with an exercise price of $5.00 per share to the Underwriter in connection with the Company’s IPO. The Company accounted for these warrants as a derivative liability in the financial statements at June 30, 2019 because 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. There were no such costs for the comparable period in 2020.2021.
Change in Fair Value of Derivative Warrants
On April 4, 2019, the Company issued 62,500 warrants with an exercise price of $5.00 per share to the Underwriter in connection with the Company’s IPO. The Company accounted for these warrants as a derivative liability in the financial statements because they were associated with the IPO, a registered offering, and the settlement provisions contained language that the shares underlying the warrants are required to be registered. The fair value of the warrants will be remeasured at each reporting period, with the change in the fair value recognized in earnings in the accompanying Statements of Operations. The fair value of the warrants at the date of issuance was determined to be $229,921 and was recorded as a finance cost in April of 2019. As of June 30, 2020, the fair value of the warrant liability was determined to be $19,411 and the Company recorded a change in fair value of derivative warrants for the six months ended June 30, 2020 of $6,088.
Net Loss
For the six months ended June 30, 2020,2021, the Company incurred a net loss of $3,054,073,$7,209,813, compared to a net loss of $4,437,177$3,054,073 for the sixthree months ended June 30, 2019.2020. The decreaseincrease in net loss of $1,383,104$4,155,740 or 31%136% compared to the prior year period wasis primarily dueattributable to the reduced stock compensationincrease in costs during the current period.of goods sold and general and administrative costs described above.
Segment Information
The following tables set forth our results of operations by segment:
The Clinical Nutrition segment (results allocatedprovides a portfolio of science-based, clinically supported nutrition, medical foods, and supplements. Our products include, among others, Lumega-Z, GlaucoCetin and ImmuneSF.
The Diagnostics Equipment segment includes a portfolio of medical diagnostic devices currently focused on the ocular space and is the industry leader in contrast testing. Our products include VectorVision CSV-1000, CSV-1000HGT, CSV-2000 and associated accessories as well as the MapcatSF.
See Note 12 to Corporate consist of the TDSI operations):condensed consolidated financial statements for further details on our reportable segments.
For the Six Months Ended June 30, 2020 | For the Six Months Ended June 30, 2021 | |||||||||||||||||||||||||||||||
Corporate | Medical Foods and Nutraceuticals | Medical Devices | Total | Corporate | Clinical Nutrition | Diagnostics Equipment | Total | |||||||||||||||||||||||||
Revenue | $ | 6,100 | $ | 1,304,028 | $ | 126,505 | $ | 1,436,633 | $ | - | $ | 1,333,588 | $ | 123,429 | $ | 1,457,017 | ||||||||||||||||
Cost of goods sold | 2,477 | 695,291 | 55,920 | 753,688 | - | 724,105 | 74,150 | 798,255 | ||||||||||||||||||||||||
Gross profit | 3,623 | 608,737 | 70,585 | 682,945 | - | 609,483 | 49,279 | 658,762 | ||||||||||||||||||||||||
Stock compensation expense | 730,707 | - | - | 730,707 | ||||||||||||||||||||||||||||
Operating expenses | 172,911 | 3,344,411 | 210,070 | 3,727,392 | 3,909,898 | 3,114,926 | 113,310 | 7,138,134 | ||||||||||||||||||||||||
Loss from operations | $ | (169,288 | ) | $ | (2,735,674 | ) | $ | (139,485 | ) | $ | (3,044,447 | ) | $ | (4,640,605 | ) | $ | (2,505,443 | ) | $ | (64,031 | ) | $ | (7,210,079 | ) |
For the Six Months Ended June 30, 2019 | For the Six Months Ended June 30, 2020 | |||||||||||||||||||||||||||||||
Corporate | Medical Foods and Nutraceuticals | Medical Devices | Total | Corporate | Clinical Nutrition | Diagnostics Equipment | Total | |||||||||||||||||||||||||
Revenue | $ | 6,300 | $ | 204,382 | $ | 292,826 | $ | 503,508 | $ | 6,100 | $ | 1,304,028 | $ | 126,505 | $ | 1,436,633 | ||||||||||||||||
Cost of goods sold | 2,559 | 78,953 | 109,036 | 190,548 | 2,477 | 695,291 | 55,920 | 753,688 | ||||||||||||||||||||||||
Gross profit | 3,741 | 125,429 | 183,790 | 312,960 | 3,623 | 608,737 | 70,585 | 682,945 | ||||||||||||||||||||||||
Stock compensation expense | (831,573 | ) | - | - | (831,573 | ) | ||||||||||||||||||||||||||
Operating expenses | 120,783 | 3,719,338 | 470,256 | 4,310,377 | 1,004,484 | 3,344,411 | 210,070 | 4,558,965 | ||||||||||||||||||||||||
Loss from operations | $ | (117,042 | ) | $ | (3,593,909 | ) | $ | (286,466 | ) | $ | (3,997,417 | ) | $ | (169,288 | ) | $ | (2,735,674 | ) | $ | (139,485 | ) | $ | (3,044,447 | ) |
Revenue
For the six months ended June 30, 2020,2021, revenue from our Medical Foods and NutraceuticalsClinical Nutrition segment was $1,304,028$1,333,588 compared to $204,382$1,304,028 for the six months ended June 30, 2019, resulting in2020, an increase of $1,099,646$29,560 or 538%2%. The increase is due primarilyFor the six months ended June 30, 2021, revenue from our Diagnostics Equipment segment was $123,429 compared to the completion of a Malaysian order$126,505 for an immune-supportive formula that was delivered in June. The Company completed shipment of the product, received payment in full, and has recognized revenue for this order of $890,000 during June 2020. Medical Foods revenues of $270,903 grew approximately 33% during the six months ended June 30, 2020, as compared to the prior year perioda decrease of $204,382. $3,076 or 2%.
Cost of Goods Sold
For the six months ended June 30, 2020, revenue2021, cost of goods sold from our Medical DevicesClinical Nutrition segment was $126,505$724,105 as compared to $292,826$695,291 for the six months ended June 30, 2019, resulting in a decrease of $166,321 or 57%, primarily as a result of medical facility closures due to COVID-19 “Stay at Home” orders. The decrease was offset in part from the sale of a MapCat device in January 2020. The severity of the impact of the COVID-19 pandemic on the Company’s business will continue to depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company’s customers, service providers and suppliers, all of which are uncertain and cannot be predicted.
Cost of Goods Sold
For the six months ended June 30, 2020, cost of goods sold from our Medical Foods and Nutraceuticals segment was $695,291 compared to $78,953 for the six months ended June 30, 2019, resulting in an increase of $616,338$28,814 or 781%4%. The increase was primarily due to the Malaysian order noted above.change in product mix for the Clinical Nutrition segment resulting from our acquisition of Activ. For the six months ended June 30, 2020,2021, cost of goods sold from our Medical DevicesDiagnostics Equipment segment was $55,920$74,150 as compared to $109,036$55,920 for the six months ended June 30, 2019, resulting2020, an increase of $18,230 or 33%. This increase is primarily driven by a change in a decrease of $53,116 or 49%. The decrease was due toproduct mix in the decrease in sales noted above. In addition, a $13,000 inventory adjustment affecting cost of sales due primarily to the write off of scrap materials was recorded in March 2020.Diagnostics Equipment business.
Gross Profit
For the three months ended June 30, 2021, gross profit from the Clinical Nutrition segment was $609,483 compared to $608,737 for the six months ended June 30, 2020, gross profit from the Medical Foods and Nutraceuticals segment was $608,737 compared to $125,429 for the six months ended June 30, 2019, resulting in an increase of $483,308$746 or 385%less than 1%. For the six months ended June 30, 2020,2021, gross profit from the Medical DevicesDiagnostics Equipment segment was $70,585$49,279 as compared to $183,790$70,585 for the six months ended June 30, 2019,2020, resulting in a decrease of $113,205$21,306 or 62%30%. Gross profit overall represented 48%45% of revenues for the six months ended June 30, 2020,2021, versus 62%48% of revenue for the six months ended June 30, 2019. The lower gross profit percentage in the current period is reflective of lower distributor pricing given to the Malaysian customer.2020.
Liquidity and Capital Resources
Since its formation in 2009, the Company has devoted substantial effort and capital resources to the development and commercialization activities related to its product candidates. As a result of these and other activities, the Company utilized cash in operating activities of $4,020,731 duringFor the six months ended June 30, 2020. The2021, the Company had working capitalincurred a net loss of $12,188,095 at$7,209,813 and used cash in operating activities of $7,285,354. At June 30, 2020. As of June 30, 2020,2021, the Company had cash inon hand of $5,502,411, short term investments of $7,000,266, and working capital of $14,741,926. Notwithstanding the amountnet loss for the half quarter of $11,603,459 and no available borrowings. 2021, management believes that its current cash balance is sufficient to fund operations for at least the next twelve months.
The Company’s financing has historically come primarily from the issuance of convertible notes, promissory notes and from the sale of common and preferred stock and other equity securities.
The COVID-19 pandemic has and will continue affecting economies and businesses around the world. The impacts of the pandemic could be material, but due to the evolving nature of this situation, we are not able at this time to estimate the impact on our financial or operational results. Among the factors that could impact our results are: effectiveness of COVID-19 mitigation measures, global economic conditions, consumer spending, work from home trends, supply chain sustainability and other factors. These factors could result in increased or decreased demand for our products and services and impact our ability to serve customers.
stock. The Company will continue to incur significant expenses for continued commercialization activities related to its medical foods, medical devicesClinical Nutrition product lines, Diagnostics Equipment, and building its nutraceuticals product line.infrastructure. Development and commercialization of medical foods, medical devicesClinical Nutrition products and nutraceuticalsDiagnostics Equipment involves a lengthy and complex process. Additionally, the Company’s long-term viability and growth may depend upon the successful development and commercialization of new complementary products or product lines. On April 9, 2019, the Company completed its initial public offering (the “IPO”), resulting in net cash proceeds of $3,888,000 to the Company. On August 15, 2019, the Company consummated an underwritten public offering resulting in net proceeds to the Company of $4,944,340. On October 30, 2019, the Company consummated an underwritten public offering resulting in net proceeds to the Company of $7,392,467.
The Company received total gross proceeds of $4,549,421 during the six months ended June 30, 2020 from the exercise of 13,302,400 warrants issued in the Company’s October 2019 follow-on offering.
The Company willmay continue to seek to raise additional debt and/or equity capital to fund future operations and acquisitions as necessary, but there can be no assurances that the Company will be able to secure such additional financing in the amounts necessary to fully fund its operating requirements on acceptable terms or at all. IfOver time, if the Company is unable to access sufficient capital resources on a timely basis, the Company may be forced to reduce or discontinue its technology and product development programs and curtail or cease operations. Management is reviewing all of its business segments and operations with the assistance of an outside consulting firm in order to determine its future business strategies and focus. Furthermore, management is reviewing its expense profile, with its consulting firm, in order to increase efficiencies and reduce its cash utilization over the near and long term, while hoping to increase stockholder value.
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Management believes that the Company has adequate funding to pursue its planned business initiatives and operations through at least December 31, 2020.
Sources and Uses of Cash
The following table sets forth the Company’s major sources and uses of cash for each of the following periods:
Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||
Net cash used in operating activities | $ | (4,020,731 | ) | $ | (2,493,696 | ) | $ | (7,285,354 | ) | $ | (4,020,731 | ) | ||||
Net cash used in investing activities | (40,733 | ) | (58,934 | ) | (32,961,980 | ) | (40,733 | ) | ||||||||
Net cash provided by financing activities | 4,549,421 | 4,250,327 | 37,231,013 | 4,549,421 | ||||||||||||
Net increase in cash | $ | 487,957 | $ | 1,697,697 | ||||||||||||
Net (decrease) increase in cash | $ | (3,016,321 | ) | $ | 487,957 |
Operating Activities
Net cash used in operating activities was $4,020,731$7,285,354 during the six months ended June 30, 2020,2021, versus $2,493,696$4,020,731 used during the comparable prior year period. The increase inover 2020 was due primarily to inventory purchases andtransaction costs associated with our acquisition of Activ, higher legal, insurance, professional services, consulting, and labor costs paid in the current three-month period.
Investing Activities
Net cash used in investing activities was $40,733$32,961,980 for sixthe three months ended June 30, 20202021 and $58,934$40,733 for the six months ended June 30, 2019.2020. The increase was primarily to fund the Activ acquisition in June 2021. Cash was used in both periodsthe prior year period for the purchase of testing equipment, furniture and fixtures. There immaterial purchases of furniture, fixtures and equipment in the quarter ended June 30, 2021.
Financing Activities
Net cash provided by financing activities was $4,549,421$37,231,013 for the six months ended June 30, 2021 and consisted of the sale of common stock with net proceeds of $33,662,599 and warrant exercises during the period with proceeds of $3,568,414. Net cash provided by financing activities was $4,459,421 for the six months ended June 30, 2020 and was dueis all attributable to warrant exercise during the period. Net cash provided by financing activities was $4,250,327 for the six months ended June 30, 2019 was due primarily to the completion of our IPO, which resulted in net proceeds of $3,888,000. In addition, in March 2019, the Company issued $350,000 in promissory and convertible promissory notes and received cash of $131,875 from the exercise of warrants. These proceeds were partially offset by payment of $100,000 to settle a promissory note.
Off-Balance Sheet Arrangements
At June 30, 20202021 and December 31, 2019,2020, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company carried out an evaluation, underUnder the supervision and with the participation of the Company’sour management, including the Company’sour Chief Executive Officer and our Chief FinancialAccounting Officer, we conducted an evaluation of the effectiveness of the design and operation of the Company’sour disclosure controls and procedures, pursuant toas such term is defined under Securities and Exchange Act Rule 13a-15.of 1934 Rules 13a-15(f). Based uponon this evaluation, the interimour Chief Executive Officer and our Chief FinancialAccounting Officer each concluded that the Company’s disclosure controls and procedures arewere not effective to provide reasonable assurance that information required to be disclosed byas of June 30, 2021. As of June 30, 2021, management’s assessment identified the Companyfollowing material weakness in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that such information has been accumulated and communicated to the Company’s management, including the Company’s interim Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.
In evaluating the effectiveness of our internal control over financial reporting, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework 2013. Based on this evaluation, our interim Chief Executive Officer and our Chief Financial Officer determined, based upon the existence of the material weakness described below, that we did not maintain effective internal control over financial reporting as of June 30, 2020.reporting:
Segregation of Duties – The Company did not maintain effective policies to ensure adequate segregation of duties within its accounting processes. Specifically, due to the size of the Company and the smaller nature of department teams, opportunities are limited to segregate duties, resulting in one individual having almost complete responsibility for the processing of certain financial information.
While we have designed and implemented, or expect to implement, measures that we believe address or will address this control weakness, we continue to develop our internal controls, processes and reporting systems by, among other things, hiring qualified personnel with expertise to perform specific functions, and designing and implementing improved processes and internal controls, including ongoing senior management review and audit committee oversight. We plan to remediate the identified material weakness through the redistribution of job responsibilities, by hiring additional senior accounting staff, and through the design and implementation of additional internal controls and policies in order to promote adequate segregation of duties. We expect to complete the remediation and improvements byin 2021 in conjunction with the endprocess of 2020.developing our various business initiatives. We expect to incur additional costs to addressremediate this weakness, primarily personnel costs.
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Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation that occurred during or subsequent to the second quarterperiod ended in 2020June 30, 2021 that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting.
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. 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. Regardless of the outcome, such proceedings or claims can have an adverse impact on the Company because of defense and settlement costs, diversion of resources and other factors, and there can be no assurances that favorable outcomes will be obtained. 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.
Our business, financial condition, results of operations, and cash flows may be impacted by a number of factors, many of which are beyond our control, including those set forth in our Form 10-K, and our Form 10-Q for the quarter ended March 30, 2020, the occurrence of any one of which could have a material adverse effect on our actual results.
There have been no material changes to the Risk Factors previously disclosed in our Form 10-K and our Form 10-Q for the quarter ended March 30, 2020, except as noted below.10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
Not applicable.
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Not applicable.
Inline XBRL Instance Document | ||
101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104* | Cover Page Interactive Data File - the cover page from the |
* | |
+ | Indicates a management contract or |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on the 14th16th day of May, 2020.August 2021.
Signature | Title | Date | ||
/s/ | August | |||
(Principal Executive Officer) | ||||
/s/ | Chief | August | ||
(Principal Financial and Accounting Officer) |