Guardion Health Sciences, Inc. - Quarter Report: 2020 September (Form 10-Q)

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 September 30, 2020

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: 001-38861

GUARDION HEALTH SCIENCES, INC.

(Exact name of Registrant as specified in its charter)

15150 Avenue of Science, Suite 200

San Diego, California 92128

Telephone: 858-605-9055

(Address and telephone number of principal executive offices)

Not applicable

(Former name, former address, and former fiscal year, if changed since last report)

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.

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 November 12, 2020, 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 September 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

See accompanying notes to condensed consolidated financial statements.

Guardion Health Sciences, Inc.

Condensed Consolidated Statements of Operations

See accompanying notes to condensed consolidated financial statements.

Guardion Health Sciences, Inc.

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

Guardion Health Sciences, Inc.

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

Guardion Health Sciences, Inc.

Condensed Consolidated Statements of Cash Flows

See accompanying notes to condensed consolidated financial statements.

Guardion Health Sciences, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Organization and Business

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

The Company’s wholly-owned subsidiaries consist of VectorVision Ocular Health, Inc., NutriGuard Formulations, Inc., and Transcranial Doppler Solutions, Inc. Guardion Health Sciences, including its wholly-owned subsidiaries, is referred to herein as the “Company”.

The Company is a specialty health sciences company that develops clinically supported nutrition, medical foods and medical devices, with a focus in the ocular health marketplace.

Going Concern and Liquidity

The financial statements have been prepared assuming the Company will continue as a going concern. The Company had a net loss of $5,197,567 and utilized cash in operating activities of $5,840,682 during the nine months ended September 30, 2020. The Company expects to continue to incur net losses and negative operating cash flows in the near-term. As a result, management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued.

The Company’s independent registered public accounting firm has also included explanatory language in their audit report related to the Company’s financial statements for the year ended December 31, 2019, stating there is substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.

The Company will continue to incur significant expenses for commercialization activities related to its medical foods, nutraceuticals, the MapcatSF medical device, VectorVision diagnostic equipment, and with respect to efforts to continue to build the Company’s infrastructure. Development and commercialization of medical foods, nutraceuticals and medical devices involves a lengthy and complex process. Additionally, the Company’s long-term viability and growth may depend upon the successful development and commercialization of new complementary products or product lines. Management is continuing to (i) review its business segments and operations in order to determine its future business strategies and focus, and (ii) explore, with the assistance of a qualified financial advisor, potential transaction opportunities designed to enhances stockholder value. Furthermore, management is reviewing its expense profile in order to increase efficiencies and reduce its cash utilization over the near-term.

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

COVID-19

The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic has had and will continue to have on the Company’s business is highly uncertain and difficult to predict and quantify, as the responses that the Company, other businesses and governments are taking continue to evolve. Furthermore, economies worldwide have also been negatively impacted by the COVID-19 pandemic. Policymakers around the globe have responded with fiscal policy actions intended to support the healthcare industry and economy as a whole, but it is presently unknown whether and to what extent further fiscal actions will continue or be effective. The magnitude and overall effectiveness of these actions remain uncertain.

The severity of the impact of the COVID-19 pandemic on the Company’s business will continue to depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company’s customers, service providers and suppliers, all of which are uncertain and cannot be predicted. As of the date of issuance of the Company’s financial statements, the extent to which the COVID-19 pandemic may in the future materially impact the Company’s financial condition, liquidity or results of operations is uncertain.

NASDAQ Delisting Notice

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

In accordance with Nasdaq listing rules, the Company was provided an initial period of 180 calendar days, or until March 18, 2020, to regain compliance with the Minimum Bid Price Requirement. The Company was unable to regain compliance with the Minimum Bid Price Requirement during the initial period and was eligible for an additional 180 calendar day compliance period under the NASDAQ listing rules. The Company provided written notice of its intention to cure the deficiency during the additional compliance period, and on March 19, 2020, the Company received a written notification from Nasdaq that the Company had been granted an additional 180 calendar days, or until September 14, 2020, to regain compliance with the Minimum Bid Price Requirement.

The current COVID-19 crisis has created unprecedented turmoil in U.S. and world financial markets and has significantly impacted investor confidence. Given these extraordinary market conditions, Nasdaq tolled the compliance periods for bid price and market value of publicly held shares through June 30, 2020 (the “Price-based Requirements”).

Accordingly, since the Company had 152 calendar days remaining in its bid price compliance period as of April 16, 2020, it will, upon reinstatement of the Price-based Requirements, still have 152 calendar days from July 1, 2020, or until November 30, 2020, to regain compliance with the Minimum Bid Price Requirement. The Company can regain compliance, either during the suspension or during the compliance period resuming after the suspension, by evidencing compliance with the Price-based Requirements for a minimum of 10 consecutive trading days.

On October 29, 2020, at the Company’s Annual Meeting of Stockholders, the stockholders approved a proposal to extend the discretionary authority previously granted to the Board of Directors to effect a “reverse stock split,” at a specific ratio within a range of no split and one-for-thirty (1-for-30), with the exact ratio to be determined by the Board of Directors in its sole discretion on or before October 29, 2021. Since the Company does not intend to execute a reverse stock split prior to November 30, 2020, the Company expects to receive a notice of delisting from Nasdaq shortly after November 30, 2020 because the Company will not be in compliance with the Minimum Bid Price Requirement on November 30, 2020.

The Company intends to appeal any notice of delisting that NASDAQ issues after November 30, 2020, as the Company has continuing discretionary authority to implement a reverse stock split (through October 29, 2021), which the Company may receive additional temporary relief (not to exceed 180 days from the date of the delisting notice) from NASDAQ. Such temporary relief, if granted, would allow the Company additional time to execute on its business initiatives to generate greater stockholder value and hopefully increase the share price of the Company’s common stock. During the appeal process, the Company’s shares will remain listed on NASDAQ.

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as filed with the SEC. The condensed consolidated balance sheet as of December 31, 2019 included herein was derived from the audited consolidated financial statements as of that date, but does not include all disclosures, including notes, required by GAAP.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to fairly present the Company’s financial position and results of operations for the interim periods reflected. Except as noted, all adjustments contained herein are of a normal recurring nature. The results of operations for the interim periods presented are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2020.

Use of Estimates

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

Significant estimates include those related to assumptions used in valuing assets acquired in business acquisitions, impairment testing of goodwill and other long-term assets, accruals for potential liabilities, valuing equity instruments issued during the period, and realization of deferred tax assets.

Revenue Recognition

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

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

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

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

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

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

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

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

The Company’s medical foods and nutraceuticals revenues are derived from individual retail customers in North America and international distributors. A total of 61% of Medical foods and nutraceuticals revenues for the nine months ended September 30, 2020 were due to the sale, in June 2020, of a proprietary nutraceutical product to a Malaysian distributor. Medical devices revenues are derived from a worldwide customer base consisting of both retail customers and distributors. International customers contributed approximately 29% and 39% of Medical devices revenues for the nine months ended September 30, 2020 and 2019, respectively. Distributors contributed approximately 52% and 64% of Medical devices revenues for the nine months ended September 30, 2020 and 2019, respectively.

During February 2020, the Company contracted with a Malaysian company to develop an immune-supportive formula for its consumer base. During the nine months ended September 30, 2020, the Company completed shipment of the product, received payment in full, and has recognized revenue for this order of $890,000. The sample product order is a proprietary immune-supportive formula that consists of a two-bottle package, each bottle containing different blends of certain ingredients the formulation of which is proprietary to the Malaysian company. The product is designed by the Malaysian company to boost immune system capability, which the Malaysian company intends to sell to its consumer base.

Concentrations

During the three months ended September 30, 2020, the Medical foods and nutraceuticals segment had no customers that accounted for more than 10% of the Company’s sales. During the three months ended September 30, 2020, the Medical devices segment had two customers that accounted for approximately 12% and 15% of the Company’s sales. No other customer accounted for more than 10% of sales in either period.

During the nine months ended September 30, 2020, the Medical foods and nutraceuticals segment had one customer that accounted for approximately 53% of the Company’s sales. During the nine months ended September 30, 2020, the Medical devices segment had no customers that accounted for more than 10% of the Company’s sales. No other customer accounted for more than 10% of sales in either period.

During the three months ended September 30, 2020, the Medical foods and nutraceuticals segment had two vendors that accounted for approximately 44% and 56% of all purchases. During the three months ended September 30, 2020, the Medical devices segment had three vendors that accounted for approximately 10%, 29%, and 42% of all purchases. No other vendors exceeded 10% of all purchases during any periods presented.

During the nine months ended September 30, 2020, the Medical foods and nutraceuticals segment had three vendors that accounted for 20%, 28%, and 46% of all purchases. During the nine months ended September 30, 2020, the Medical devices segment had two vendors that accounted for approximately 18% and 55% of all purchases. No other vendors exceeded 10% of all purchases during any periods presented.

Research and Development Costs

Research and development costs consist primarily of fees paid to consultants and outside service providers, and other expenses relating to the acquisition, design, development and testing of the Company’s medical foods and related products. Research and development expenditures are expensed as incurred and totaled $109,803 and $138,613 for the nine months ended September 30, 2020 and 2019, respectively.

Patent Costs

The Company is the owner of four issued domestic patents, two pending domestic patent applications, one issued foreign patent in Europe and the United Kingdom, two issued foreign patents in Ireland, and one issued foreign patent in Hong Kong. Due to the significant uncertainty associated with the successful development of one or more commercially viable products based on the Company’s research efforts and any related patent applications, patent costs, including patent-related legal fees, filing fees and internally generated costs, are expensed as incurred. During the nine months ended September 30, 2020 and 2019, patent costs were $99,589 and $80,879, respectively, and are included in general and administrative costs in the statements of operations.

Stock-Based Compensation

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

Stock-based payments to officers, directors, employees, and for acquiring goods and services from nonemployees, which include grants of employee stock options, are recognized in the financial statements based on their fair values in accordance with ASC 718, Compensation-Stock Compensation. Stock option grants, which are generally time vested, are measured at the grant date fair value and depending on the conditions associated with the vesting of the award, compensation cost is recognized on a straight-line or graded basis over the vesting period. The fair value of stock options is determined utilizing the Black-Scholes option-pricing model, which is affected by several variables, including the risk-free interest rate, the expected dividend yield, the expected life of the equity award, the exercise price of the stock option as compared to the fair market value of the common stock on the grant date, and the estimated volatility of the common stock over a period equal to the term of the equity award.

Net Loss per Share

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

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

Fair Value Measurements

Assets and liabilities recorded at fair value on the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure the fair value. Level inputs are as follows:

Level 1 – quoted prices in active markets for identical assets or liabilities.

Level 2 – other significant observable inputs for the assets or liabilities through corroboration with market data at the measurement date.

Level 3 – significant unobservable inputs that reflect management’s best estimate of what market participants would use to price the assets or liabilities at the measurement date.

The Company considers carrying amounts of accounts receivable, accounts payable and accrued expenses to approximate fair value due to the short-term nature of these financial instruments. Our non-financial assets are measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment charge is recognized.

As of September 30, 2020, and December 31, 2019, the Company’s balance sheets included Level 2 liabilities comprised of the fair value of warrant liabilities aggregating $7,519 and $13,323, respectively.

Recent Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify the accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The new standard will be effective beginning January 1, 2021. The Company is assessing the impact ASU 2019-12 will have on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASC 326”). The standard significantly changes how entities will measure credit losses for most financial assets, including accounts and notes receivables. The standard will replace today’s “incurred loss” approach with an “expected loss” model, under which companies will recognize allowances based on expected rather than incurred losses. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. As a smaller reporting company, the standard will be effective for us for interim and annual reporting periods beginning after December 15, 2022. The Company is currently assessing the impact of adopting this standard on the Company’s financial statements and related disclosures.

In August 2020, the FASB issued ASU No. 2020-06 (“ASU 2020-06”) “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” ASU 2020-06 will simplify the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models will result in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. ASU 2020-06 also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. ASU 2020-06 will be effective January 1, 2024, for the Company. Early adoption is permitted, but no earlier than January 1, 2021, including interim periods within that year. Management is currently evaluating the effect of the adoption of ASU 2020-06 on the consolidated financial statements, but currently does not believe ASU 2020-06 will have a significant impact on the Company’s accounting for its convertible debt instruments. The effect will largely depend on the composition and terms of the financial instruments at the time of adoption.

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

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

Pursuant to the Asset Purchase Agreement, the Company purchased specified assets of the NutriGuard brand and business, consisting primarily of inventory, trademarks, copyrights and other intellectual property. In exchange, the Company agreed to pay a 3% royalty, payable quarterly, to NutriGuard based on the operating results of the NutriGuard branded products in future periods, after $500,000 in specified gross revenues have been achieved by the Company. As of September 30, 2020 and December 31, 2019 no amounts were owed or accrued to NutriGuard.

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

Inventories, net of reserves of $56,605 and $56,605, respectively, consisted of the following:

Property and equipment consisted of the following:

For the nine months ended September 30, 2020 and 2019, depreciation expense was $45,552 and $48,836, respectively, of which $25,446 and $0 was included in research and development expense, $9,065 and $32,289 was included in sales and marketing expense, and $11,041 and $16,547 was included in general and administrative expense, respectively.

In October 2012, the Company entered into a lease agreement for 9,605 square feet of office and warehouse space commencing March 1, 2013. Upon entering into the lease agreement, the Company paid a deposit of $47,449, of which $36,979 represented prepaid rent. As of September 30, 2020, $11,751 remained on deposit under the lease agreement. The lease (“Lease 1”) was renewed for an additional five years in 2018. As of September 30, 2020, remaining lease payments under Lease 1 averaged $13,146 per month through July 2023.

In connection with the VectorVision acquisition on September 29, 2017, the Company assumed a lease agreement for 5,000 square feet of office and warehouse space which commenced on October 1, 2017. The lease (“Lease 2”) was renewed for an additional 65 months. As of September 30, 2020, remaining lease payments averaged $1,871 per month through February 2023.

The leases have been accounted for in accordance with ASC 842, which requires a lessee to record a right-of-use asset and a corresponding lease liability at the inception of the lease initially measured at the present value of the lease payments. The Company classified the leases as operating leases and determined that the present value of Lease 1 at the inception of the lease was $639,520 using a discount rate of 3.9% and the present value of Lease 2 at the inception of the lease was $81,634 using a discount rate of 3.9%.

The aggregate balance of the lease liabilities at December 31, 2019 was $586,315. During the nine months ended September 30, 2020, the Company made combined payments on both leases of $112,444 towards the lease liabilities. The aggregate balance of the lease liabilities at September 30, 2020 was $473,871, of which $159,962 was current.

Combined rent expense for both leases for the nine months ended September 30, 2020 and 2019 was $128,150 and $130,742, respectively. The balance of the right-of-use asset as of December 31, 2019 was $572,714. During the nine months ended September 30, 2020, the Company reflected amortization of right-of-use asset of $115,037 related to the leases, resulting in a net asset balance of $457,677 as of September 30, 2020.

Effective June 15, 2020, Michael Favish resigned as Chief Executive Officer and as an employee of the Company and resigned from the Company’s Board of Directors. Terms of the settlement agreement between the parties included the continuation of his previous salary of $325,000 during the twelve months subsequent to his resignation. The $325,000 of aggregated settlement payments was recorded in costs related to resignation of former officer expense in the accompanying condensed consolidated statements of operations for the nine months ended September 30, 2020. As of September 30, 2020, $230,208 of the amount due remains accrued on our condensed consolidated balance sheet. In addition, 833,333 options previously granted to the former officer were forfeited (See Note 8).

Common Stock

During the nine months ended September 30, 2020, the Company issued 25,000 fully vested shares of common stock for services rendered and recognized $12,325 in stock compensation expense related to these shares.

Warrants

A summary of the Company’s warrant activity is as follows:

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

During the nine months ended September 30, 2020, investors exercised a total of 13,319,750 warrants for 13,319,750 shares of common stock. The warrants were exercisable for $0.34 per share, which resulted in cash proceeds to the Company of $4,555,354.

As of September 30, 2020, the Company had an aggregate of 15,452,988 outstanding warrants to purchase shares of its common stock with a weighted average exercise price of $0.39 and a weighted average remaining life of 4.06 years. The aggregate intrinsic value of warrants outstanding as of September 30, 2020 was zero.

Warrant Liability

On April 9, 2019, the Company issued 62,500 warrants with an exercise price of $5.00 per share to the underwriter in connection with the Company’s initial public offering (“IPO”). The Company accounted for these warrants as a derivative liability in the financial statements at June 30, 2019 because they were associated with the IPO, a registered offering, and the settlement provisions contained language that the shares underlying the warrants are required to be registered. The fair value of the warrants is remeasured at each reporting period, and the change in the fair value is recognized in earnings in the accompanying Statements of Operations. The fair value of the warrants at December 31, 2019 was $13,323. As of September 30, 2020, the fair value of the warrants was determined to be $7,519 and the change in fair value of $11,892 was recognized in the accompanying statements of operations.

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

Stock Options

A summary of the Company’s stock option activity is as follows:

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

The Company accounts for share-based payments in accordance with ASC 718 wherein grants are measured at the grant date fair value and charged to operations over the vesting periods.

During the nine months ended September 30, 2020, the Company granted options to purchase 1,290,000 shares of common stock to six employees with a grant date fair value of $581,128. The options have an exercise price of $0.32 to $1.00 per share. Options for 250,000 shares vest on a quarterly basis over two years and options for 40,000 shares vest in full six months after the grant date. Options for 1,000,000 shares vest ratably over three years.

On June 30, 2020, the Company granted options to purchase 500,000 shares of common stock to the members of the Company’s Board of Directors with a grant date fair value of $216,093. The options have an exercise price of $1.00 per share. The options vest on a quarterly basis over two years beginning three months after the grant date.

During the nine months ended September 30, 2020 and 2019, the Company recognized aggregate stock-compensation expense of $227,011 and $1,964,432, based upon stock prices ranging from $0.25 to $3.30 per share.

As of September 30, 2020, the Company had an aggregate of 1,591,667 remaining unvested options outstanding, with a fair value of $715,612, weighted average exercise price of $0.91, and weighted average remaining life of 9.45 years. The aggregate intrinsic value of options outstanding as of September 30, 2020 was zero. The aggregate intrinsic value of unvested options outstanding as of September 30, 2020 was zero.

In connection with a separation agreement entered into with Michael Favish, former officer (see Note 7), the expiration date of his vested stock options was extended for twelve months from June 15, 2020. In accordance with ASC 718, the extension of the exercise period for the vested options constitutes a modification of the original option agreement. In accounting for the modification, the Company calculated the fair value of the vested options immediately before modification using current valuation inputs including the Company’s closing stock price of $0.49 on June 15, 2020, a volatility metric of 142%, and a risk-free interest rate of 0.22%. The Company also calculated the fair value of the vested options immediately following the modification using the extended 12-month exercise period. An incremental stock compensation charge of $24,359 was recorded in costs related to resignation of former officer.

Mr. Favish’s unvested options of 833,333 at the time of his separation were forfeited. All compensation from prior periods related to these unvested options was reversed, resulting in an adjustment to stock compensation expense during the nine months ended September 30, 2020 of $(965,295), which was recorded in costs related to resignation of former officer.

In connection with his separation, the expiration date of Mr. Favish’s vested stock options was extended for twelve months from June 15, 2020. In accordance with ASC 718, the extension of the exercise period for the vested options constitutes a modification of the original option agreement. In accounting for the modification, the Company calculated the fair value of the vested options immediately before modification using current valuation inputs including the Company’s closing stock price of $0.49 on June 15, 2020, a volatility metric of 142%, and a risk-free interest rate of 0.22%. The Company also calculated the fair value of the vested options immediately following the modification using the extended 12-month exercise period. An incremental stock compensation charge of $24,359 was recorded in costs related to resignation of former officer.

Mr. Favish’s unvested options at the time of his separation were forfeited. All compensation from prior periods related to these unvested options was reversed, resulting in an adjustment to stock compensation expense during the nine months ended September 30, 2020 of $(965,295), which was recorded in costs related to resignation of former officer.

During the nine months ended September 30, 2020 and 2019, the Company incurred and paid salaries of $50,313 and $113,583, respectively, to Karen Favish, spouse of Michael Favish, the Company’s former Chief Executive Officer. During the nine months ended September 30, 2020 and 2019, the Company incurred and paid salaries of $45,000 and $37,147, respectively, to Kristine Townsend, spouse of the Company’s former Controller and Chief Accounting Officer John Townsend. During the nine months ended September 30, 2020 and 2019, the Company paid consulting expenses of $45,500 and $88,500, respectively, to Ceatus Media Group, LLC, a web design company owned by Chief Science Officer and Interim President and Chief Executive Officer Dr. David Evans and his spouse Tamara Evans. During the nine months ended September 30, 2020 and 2019, the Company paid building rent of $16,114 and $15,648, respectively, to DWT Evans LLC, a company owned by David Evans and his spouse Tamara Evans.

When the Company acquired VectorVision, it also acquired AcQviz from Dr. Evans, which is a patented methodology for auto-calibrating and standardizing the testing light level for computer generated vision testing systems. Dr. Evans is entitled to receive a royalty on net revenue from AcQviz. As part of the development of the CSV-2000, AcQviz was embedded in the product by Radiant Technologies, Inc. in exchange for a 3% royalty on the sales of AcQviz. Radiant Technologies is owned by Joseph T. Evans, the brother of Dr. David Evans.

The Company determined its reporting units are as follows in accordance with ASC 280, “Segment Reporting” (“ASC 280”). The Company currently operate in two reportable segments: Medical foods and nutraceuticals and Medical devices.

The. Medical foods and nutraceuticals segment provides a portfolio of science-based, clinically supported nutrition, medical foods, and supplements. The Company’s products include, among others, Lumega-Z, Glaucocetin, ImmuneSF.

The Medical devices segment includes a portfolio of medical diagnostic devices currently focused on the ocular space and the Company is believed to be the industry leader in contrast testing. The medical devices and accessories are used to measure visual function and certain anatomical features of the eye. These measures detect early disease and monitor changes over time, and the results due to nutritional regimens. The Company’s products include VectorVision CSV-1000, CSV-1000HGT, CSV-2000, ESV-3000 and associated accessories as well as the MapcatSF.

The accounting policies of the Company’s reportable segments are the same as those described in the summary of significant accounting policies (Note 2). Certain corporate general and administrative expenses, including general overhead functions such as information systems, accounting, human resources, Board of Director fees, corporate legal fees, other compliance costs and certain administrative expenses, as well as interest and tax expense, are not allocated to the segments. The reportable segments are each managed separately because they manufacture and distribute distinct products or provide services with different processes. All reported segment revenues are derived from external customers.

The segments are based on the discrete financial information reviewed by the Chief Executive Officer, who is the Company’s Chief Operating Decision Maker (“CODM”), to make resource allocation decisions and to evaluate performance.

The following tables set forth the Company’s total assets by segment. Intersegment balances and transactions have been removed:

The Company is periodically the subject of various pending or threatened legal actions and claims arising out of its operations in the normal course of business. As of September 30, 2020, management is not aware of any pending or threatened matters that it believes warrant a contingency reserve, and therefore there is no provision in the Company’s financial statements with respect to such matters.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Presentation of Information

As used in this Quarterly Report on Form 10-Q, the terms “we,” “us” “our” and the “Company” mean Guardion Health Sciences, Inc. unless the context requires otherwise. The following discussion and analysis should be read in conjunction with our audited financial statements and the related notes that appear elsewhere in this report and our audited financing statements for the year ended December 31, 2019, and the notes thereto, which are set forth in the 2019 Form 10-K. All dollar amounts refer to U.S. dollars unless otherwise indicated.

Overview

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

The Company is a specialty health sciences company that is developing a portfolio of science-based, clinically supported nutrition, medical foods, and diagnostics that support healthcare professionals, their patients, and consumers in achieving health goals. Our initial focus is in the ocular health marketplace.

Research developments in human physiology and biology over the last decade have uncovered a greater understanding of the role of food, nutrition, metabolism and metabolites in both disease and wellness. Leveraging new insights into the role of nutrition, the Company has identified a large market opportunity in creating condition specific formulations backed by clinical science and evidenced-based protocols.

We believe in the power of nutrition to make a positive, proven difference to health. Our goal is to pioneer nutritional discoveries that help people live longer, healthier lives.

Our strategy is to create strong trusted brands and differentiated products with unique scientifically proven and meaningful benefits recommended by healthcare professionals and supported by clinical evidence to provide the basis for evidence-based claims.

Through diagnostics and clinically supported nutrition and medical foods, we help healthcare professionals identify and better manage their patients’ conditions and help patients and consumers to support the body in health, wellness and manage the impact of aging or illness.

The Company identifies specific conditions or areas of health maintenance where targeted nutrition can restore or maintain a metabolic pathway that is important to the overall management of that condition or aspect of health or where it supports the body’s recovery and rehabilitation processes.

By conducting clinical studies to validate the impact of the nutrition on the metabolic pathway, our brands can make strong, relevant and differentiated claims and gain the trust and endorsement of physicians and healthcare professionals.

The company’s current focus is on research, discovery and clinical development.

As we complete clinical validation and build strong claims, we are beginning the early commercialization of our product and service offerings.

Recent Trends – COVID-19

The COVID-19 pandemic has and will continue affecting economies and businesses around the world. The impacts of the pandemic could be material, but due to the evolving nature of this situation, we are not able at this time to estimate the impact on our financial or operational results. Among the factors that could impact our results are: effectiveness of COVID-19 mitigation measures, global economic conditions, consumer spending, work from home trends, supply chain sustainability and other factors. These factors could result in increased or decreased demand for our products and services and impact our ability to serve customers.

Recent Developments

Warrant Exercises

From January 1, 2020 through September 30, 2020, the Company received total gross proceeds of $4,555,354 from the exercise of 13,319,750 warrants issued in the Company’s October 2019 follow-on registered public offering.

Nutraceutical Sales

During February 2020, the Company contracted with a Malaysian company to develop an immune-supportive formula for its consumer base. An initial order was placed for $875,000, and in connection with this order, on March 31, 2020, the Malaysian company paid $437,500 as a deposit. The Company completed shipment of the product, received payment in full, and has recognized revenue for this order of $890,000 during the nine months ended September 30, 2020.

Going Concern

The financial statements have been prepared assuming the Company will continue as a going concern. The Company had a net loss of $5,197,567 and utilized cash in operating activities of $5,840,682 during the nine months ended September 30, 2020. The Company expects to continue to incur net losses and negative operating cash flows in the near-term. As a result, management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued.

The Company’s independent registered public accounting firm has also included explanatory language in their opinion accompanying the Company’s audited financial statements for the year ended December 31, 2019, stating there is substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.

The Company will continue to incur significant expenses for commercialization activities related to its medical foods, nutraceuticals, the MapcatSF medical device, VectorVision diagnostic equipment, and with respect to efforts to continue to build the Company’s infrastructure. Development and commercialization of medical foods, nutraceuticals and medical devices involves a lengthy and complex process. Additionally, the Company’s long-term viability and growth may depend upon the successful development and commercialization of new complementary products or product lines. Management is reviewing all of its business segments and operations with the assistance of an outside consulting firm in order to determine its future business strategies and focus. Furthermore, management is reviewing its expense profile, with its consulting firm, in order to increase efficiencies and reduce its cash utilization over the near and long term, while hoping to increase stockholder value.

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

Recent Accounting Pronouncements

See Note 2 to the condensed consolidated financial statements for management’s discussion of recent accounting pronouncements.

Concentration of Risk

Cash balances are maintained at large, well-established financial institutions. At times, cash balances may exceed federally insured limits. Insurance coverage limits are $250,000 per depositor at each financial institution. The Company has never experienced any losses related to these balances.

During the nine months ended September 30, 2020, the Medical foods and nutraceuticals segment had one customer who accounted for approximately 61% of the Company’s sales. During the nine months ended September 30, 2019, the Medical devices segment had three customers who accounted for approximately 52% of the Company’s sales. No other customer accounted for more than 10% of sales in either period.

Critical Accounting Policies and Estimates

The Company’s financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of its financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Actual results could differ from those estimates. The Company’s financial statements included herein include all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows.

The following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s financial statements.

Use of Estimates

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

Significant estimates include those related to assumptions used in valuing assets acquired in business acquisitions, impairment testing of goodwill and other long-term assets, accruals for potential liabilities, valuing equity instruments issued during the period, and realization of deferred tax assets.

Revenue recognition

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

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

Stock-Based Compensation

The Company periodically issues stock-based compensation to officers, directors, contractors and consultants for services rendered. Such issuances vest and expire according to terms established at the issuance date. Stock-based payments to officers, directors, employees, and for acquiring goods and services from nonemployees, which include grants of employee stock options, are recognized in the financial statements based on their fair values in accordance with ASC 718, Compensation-Stock Compensation. Stock option grants, which are generally time vested, are measured at the grant date fair value and depending on the conditions associated with the vesting of the award, compensation cost is recognized on a straight-line or graded basis over the vesting period. The fair value of stock options is determined utilizing the Black-Scholes option-pricing model, which is affected by several variables, including the risk-free interest rate, the expected dividend yield, the expected life of the equity award, the exercise price of the stock option as compared to the fair market value of the common stock on the grant date, and the estimated volatility of the common stock over a period equal to the term of the equity award.

Results of Operations

Through September 30, 2020, the Company has primarily been engaged in product development, and commercialization. The Company has incurred and will continue to incur significant expenditures for the development of its products and intellectual property, which includes medical foods and nutraceuticals, and medical devices for the diagnosis and monitoring of eye diseases. The Company had limited revenue during the nine months ended September 30, 2020 and 2019.

Comparison of Three Months Ended September 30, 2020 and 2019

Revenue

For the three months ended September 30, 2020, revenue from product sales was $253,188 compared to $161,162 for the three months ended September 30, 2019, resulting in an increase of $92,026 or 57%. The increase is due primarily to an increase in VectorVision sales as well as a modest increase in medical foods and nutraceuticals.

Cost of Goods Sold

For the three months ended September 30, 2020, cost of goods sold was $114,113 compared to $70,999 for the three months ended September 30, 2019, resulting in an increase of $43,114 or 61%. The increase is due to higher product sales and is consistent with the increase in revenue.

Gross Profit

For the three months ended September 30, 2020, gross profit was $139,075 compared to $90,163 for the three months ended September 30, 2019, resulting in an increase of $48,912 or 54%. Gross profit represented 54% of revenues for the three months ended September 30, 2020, versus 56% of revenue for the three months ended September 30, 2019.

Research and Development

For the three months ended September 30, 2020, research and development costs were $34,034 compared to $31,897 for the three months ended September 30, 2019, resulting in a increase of $2,137 or 7%. Research and development costs consist of clinical studies related to our medical foods and nutraceuticals.

Sales and Marketing

For the three months ended September 30, 2020, sales and marketing expenses were $167,213 compared to $448,387 for the three months ended September 30, 2019. The decrease in sales and marketing expenses of $281,174 or 63% compared to the prior period was primarily due to a $133,616 reduction in tradeshow expense due to cancelled tradeshows due to Covid19 as well as reduced labor costs.

General and Administrative

For the three months ended September 30, 2020, general and administrative expenses were $2,070,998 compared to $2,022,367 for the three months ended September 30, 2019. The increase of $48,631 is essentially flat with the prior year period.

Loss on Sale of Equipment

During June 2020, in an effort to reduce costs and focus on other segments of the business, the Company began to wind down the Transcranial Doppler Solutions, Inc. (“TDSI”) subsidiary and ceased its operations. The wind down was completed in the third quarter ended September 30, 2020. TDSI held a group of ultrasound machines as fixed assets. The Company sold these machines, and therefore a loss on sale of $18,500 has been recorded in the condensed consolidated statements of operations for the three months ended September 30, 2020.

Interest Expense

For the three months ended September 30, 2020, interest expense was $3,716 compared to $4,205, a decrease of $489 or 12% for the three months ended September 30, 2019.

Change in Fair Value of Derivative Warrants

On April 4, 2019, the Company issued 62,500 warrants with an exercise price of $5.00 per share to the Underwriter in connection with the Company’s IPO. The Company accounted for these warrants as a derivative liability in the financial statements because they were associated with the IPO, a registered offering, and the settlement provisions contained language that the shares underlying the warrants are required to be registered. The fair value of the warrants will be remeasured at each reporting period, with the change in the fair value recognized in earnings in the accompanying Statements of Operations. The fair value of the warrants at the date of issuance was determined to be $229,921 and was recorded as a finance cost in April of 2019. As of September 30, 2020, the fair value of the warrant liability was determined to be $7,519 and the Company recorded a change in fair value of derivative warrants for the three months ended September 30, 2020 of $11,892.

Net Loss

For the three months ended September 30, 2020, the Company incurred a net loss of $2,143,494 compared to a net loss of $2,385,371 for the three months ended September 30, 2019. The decrease in net loss of $241,877 or 10% compared to the prior year period was due to increased revenue and a 10% reduction in operating expenses in the current period.

Segment Information

The following tables set forth our results of operations by segment.

The Medical foods and nutraceuticals segment provides a portfolio of science-based, clinically supported nutrition, medical foods, and supplements. Our products include, among others, Lumega-Z, Glaucocetin, ImmuneSF.

The Medical devices segment includes a portfolio of medical diagnostic devices currently focused on the ocular space and the Company is believed to be the industry leader in contrast testing. The medical devices and accessories are used to measure visual function and certain anatomical features of the eye. These measures detect early disease and monitor changes over time, and evaluate results related to nutritional regimens. Our products include VectorVision CSV-1000, CSV-1000HGT, CSV-2000, ESV-3000 and associated accessories.

See Note 10, Segment Reporting, to our Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this report, for further details on our reportable segments.

Revenue

For the three months ended September 30, 2020, revenue from our Medical foods and nutraceuticals segment was $142,556 compared to $112,957 for the three months ended September 30, 2019, resulting in an increase of $29,599 or 26%. The increase is primarily attributed to Medical foods sales. For the three months ended September 30, 2020, revenue from our Medical devices segment was $110,632 compared to $44,705 for the three months ended September 30, 2019, resulting in an increase of $65,927 or 147%, primarily as a result of increased sales of VectorVision products.

Cost of Goods Sold

For the three months ended September 30, 2020, cost of goods sold from our Medical foods and nutraceuticals segment was $68,956 compared to $41,655 for the three months ended September 30, 2019, resulting in an increase of $27,301 or 66%. The increase was due to the increase in sales noted above. For the three months ended September 30, 2020, cost of goods sold from our Medical devices segment was $45,157 compared to $27,922 for the three months ended September 30, 2019, resulting in an increase of $17,235 or 62%. The increase was due to the increase in sales noted above.

Gross Profit

For the three months ended September 30, 2020, gross profit from the Medical foods and nutraceuticals segment was $73,601 compared to $71,302 for the three months ended September 30, 2019, resulting in an increase of $2,299 or 3%. For the three months ended September 30, 2020, gross profit from the Medical devices segment was $65,474 compared to $16,783 for the three months ended September 30, 2019, resulting in an increase of $65,474 or 390%. Gross profit overall represented 55% of revenues for the three months ended September 30, 2020, versus 56% of revenue for the three months ended September 30, 2019.

Comparison of Nine Months ended September 30, 2020 and 2019

Revenue

For the nine months ended September 30, 2020, revenue from product sales was $1,689,820 compared to $664,669 for the nine months ended September 30, 2019, resulting in an increase of $1,025,151 or 154%. The increase is due primarily to the Company’s fulfillment of a Malaysian order for a proprietary immune-supportive formula that was delivered in June. The Company completed shipment of the product, received payment in full, and has recognized revenue for this order of $890,000.

Cost of Goods Sold

For the nine months ended September 30, 2020, cost of goods sold was $867,800 compared to $261,547 for the nine months ended September 30, 2019, resulting in an increase of $606,253 or 232%. The increase primarily results from the costs of goods sold associated with the Malaysian order noted above.

Gross Profit

For the nine months ended September 30, 2020, gross profit was $822,020 compared to $403,122 for the nine months ended September 30, 2019, resulting in an increase of $418,898 or 104%. Gross profit represented 49% of revenues the nine months ended September 30, 2020, versus 61% of revenue for the nine months ended September 30, 2019. The lower gross profit percentage in 2020 is reflective of lower distributor pricing given to the Malaysian customer.

Research and Development

For the nine months ended September 30, 2020, research and development costs were $109,803 compared to $138,613 for the nine months ended September 30, 2019, resulting in a decrease of $28,810 or 21%. Research and development costs in our current period consist primarily of clinical studies related to our medical foods and nutraceuticals versus engineering efforts related to our medical devices in our prior period.

Sales and Marketing

For the nine months ended September 30, 2020, sales and marketing expense was $1,175,126 compared to $1,246,846 for the nine months ended September 30, 2019. The decrease in sales and marketing expense of $71,720 or 6% compared to the prior period is primarily attributed to a decrease in trade show activity during the current period as a result of COVID-19.

General and Administrative

For the nine months ended September 30, 2020, general and administrative expenses were $5,299,696 compared to $5,427,573 for the nine months ended September 30, 2019. The decrease of $127,877 or 2% compared to the prior period was primarily due to a $1,266,000 decrease in stock compensation expense related to the resignation of a former officer, which was partially offset by increases in consulting costs, professional fees, legal costs, and corporate insurance costs.

Costs Related to Resignation of Former Officer

Effective June 15, 2020, Michael Favish resigned as Chief Executive Officer and as an employee of the Company, and resigned from the Company’s Board of Directors. Terms of the settlement agreement included the continuation of his previous salary of $325,000 during the following twelve months. The $325,000 settlement was recorded in costs related to resignation of former officer expense in the accompanying condensed consolidated statement of operations for the nine months ended September 30, 2020.

In connection with his separation, the expiration date of Mr. Favish’s vested stock options was extended for twelve months from June 15, 2020. In accordance with ASC 718, the extension of the exercise period for the vested options constitutes a modification of the original option agreement. In accounting for the modification, the Company calculated the fair value of the vested options immediately before modification using current valuation inputs including the Company’s closing stock price of $0.49 on June 15, 2020, a volatility metric of 142%, and a risk-free interest rate of 0.22%. The Company also calculated the fair value of the vested options immediately following the modification using the extended 12-month exercise period. An incremental stock compensation charge of $24,359 was recorded in costs related to resignation of former officer.