Guardion Health Sciences, Inc. - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

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)

Telephone: 800-873-5141

(Registrant’s telephone number of principal executive offices, including area code)

Not Applicable

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

Securities registered pursuant to Section 12(b) of the Act:

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. ☒ 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). ☒ 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 ☒ No

As of November 1, 2021, there were 24,426,993 shares of the Company’s common stock, par value $0.001 per share, issued and outstanding.

TABLE OF CONTENTS

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 (Unaudited)

See accompanying notes to condensed consolidated financial statements.

Guardion Health Sciences, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

Guardion Health Sciences, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

Guardion Health Sciences, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Three Months and Nine Months Ended September 30, 2021 and 2020

1. Organization and Business Operations

Business

Guardion Health Sciences, Inc. (the “Company”) is a clinical nutrition and diagnostics company that develops and distributes clinically supported nutrition, medical foods, supplements and medical devices. The Company offers a portfolio of science-based, clinically supported products and devices designed to support healthcare professionals and providers, and their patients and consumers. In June 2021, the Company acquired Activ Nutritional, LLC (“Activ”), the owner and distributor of the Viactiv® line of supplements for bone health and other applications (see Note 3). Prior to its acquisition of Activ, the Company was primarily engaged in research and development, product commercialization and capital raising activities.

The Company was formed in December 2009 as a California limited liability company under the name P4L Health Sciences, LLC. On September 30, 2015, the Company converted from a California limited liability company to a Delaware corporation, and changed its name from Guardion Health Sciences, LLC to Guardion Health Sciences, Inc.

Liquidity

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. For the nine months ended September 30, 2021, the Company incurred a net loss of $10,224,649 and used cash in operating activities of $9,078,172. At September 30, 2021, the Company had cash and short-term investments on hand totaling $10,558,662 and working capital of $12,896,508. Notwithstanding the net loss for the nine months ended September 30, 2021, management believes that its current cash balance is sufficient to ensure continuation of the Company as a going concern for at least one year from the date of this quarterly report.

The amount and timing of future cash requirements will depend, in part, on the Company’s ability to ultimately achieve operating profitability. The Company expects to continue to incur net losses and negative operating cash flows in the near-term and will continue to incur significant expenses for the development, commercialization and distribution of its clinical nutrition products (including the Viactiv® product line), the development and commercialization of its diagnostics equipment, and the successful development and commercialization of any new products or product lines. The Company may also utilize cash to fund additional acquisitions.

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

COVID-19

The Company is subject to risks and uncertainties of the COVID-19 pandemic that could adversely impact our business. The Company has implemented additional health and safety precautions and protocols in response to the pandemic and government guidelines, including curtailing employee travel and primarily working remotely. During 2020 and through September 30, 2021, sales of certain products remained flat as compared to prior comparable periods, as many professional offices were closed for long periods, or were operating with limited capacity, due to COVID-19 related orders and protocols. Management is actively focusing on supply chain matters in light of industry-wide supply chain constraints. Through September 30, 2021, the Company has not experienced negative impacts to its supply chain, however, the Company cannot make any assurances in future periods.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the SEC. The condensed consolidated balance sheet as of December 31, 2020 included herein was derived from the audited consolidated financial statements as of that date, but does not include all disclosures, including notes, required by GAAP.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to fairly present the Company’s financial position and results of operations for the interim periods reflected. Except as noted, all adjustments contained herein are of a normal recurring nature. The results of operations for the interim periods presented are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2021.

Reverse Stock Split

On March 1, 2021, following stockholder and board approval, the Company effectuated a 1-for-6 reverse split of its issued and outstanding shares of common stock, without any change to its par value. Accordingly, all share and per share amounts presented herein with respect to common stock have been retroactively adjusted to reflect the above-described reverse stock split for all periods presented. The authorized number of shares of common stock were not affected by the reverse stock split. No fractional shares were issued in connection with the reverse stock split, as all fractional shares were rounded up to the next whole share.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Activ Nutritional, LLC, VectorVision Ocular Health, Inc., NutriGuard Formulations, Inc., and Transcranial Doppler Solutions, Inc. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of our financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. On an ongoing basis, management reviews its estimates and if deemed appropriate, those estimates are adjusted. Significant estimates include those related to assumptions used in valuing inventories at net realizable value, assumptions used in valuing assets acquired in business acquisitions, impairment testing of goodwill and other long-term assets, assumptions used in valuing stock-based compensation, the valuation allowance for deferred tax assets, accruals for potential liabilities, and assumptions used in the determination of the Company’s liquidity. Actual results could differ from those estimates.

Revenue Recognition

The Company generates its revenue from two business segments:

The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Revenue is recognized when control of promised goods or services is transferred to the customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those products or services. The Company reviews its sales transactions to identify contractual rights, performance obligations, and transaction prices, including the allocation of prices to separate performance obligations, if applicable.

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

Shipping and handling activities are performed before the customer obtains control of the goods and therefore represent a fulfillment activity rather than a promised service to the customer. Historically the Company has not experienced any significant payment delays from customers.

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

Revenues by segment are as follows:

 Schedule of Revenues by Segment

The Company’s Clinical Nutrition and Diagnostics revenues earned during the three months and nine months ended September 30, 2021 and 2020 are derived primarily from retail customers in North America. During the nine months ended September 30, 2020, we had a large sale to a single Malaysian distributor in the amount of $890,000

Revenues by geographical area are as follows:

 Schedule of Revenue by Geographical Area

Business Combinations

The Company accounts for its business combinations using the acquisition method of accounting where the purchase consideration is allocated to the tangible and intangible assets acquired, and liabilities assumed, based on their respective fair values as of the acquisition date. The excess of the fair value of the purchase consideration over the estimated fair values of the net assets acquired is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing intangible assets include, but are not limited to, expected future cash flows, which includes consideration of future growth and margins, future changes in technology, brand awareness and discount rates. Fair value estimates are based on the assumptions that management believes a market participant would use in pricing the asset or liability.

Investments

Short-term investments held by the Company as of September 30, 2021, consist of a U.S. Treasury Bill, which is classified as held-to-maturity. The Company’s U.S. Treasury Bill is scheduled to mature approximately 30 days from the date of purchase. Unrealized gains and losses were not material. As of September 30, 2021, the carrying value of the Company’s U.S. Treasury Bill approximates its fair value due to its short-term maturity.

Accounts Receivable

Accounts receivable are recorded net of an allowance for expected losses. Management evaluates the collectability of its trade accounts receivable and determines an allowance for doubtful accounts based on historical write-offs, known or expected trends, and the identification of specific balances deemed uncollectible based on a customer’s financial condition, credit history and the current economic conditions.

At September 30, 2021, based on management’s assessment there was an allowance for doubtful accounts in the amount of $20,332. At December 31, 2020, based on management’s assessment there was no allowance for doubtful accounts.

Property and Equipment

Property and equipment are recorded at cost less accumulated depreciation. Additions, improvements, and major renewals or replacements that substantially extend the useful life of an asset are capitalized. Repairs and maintenance expenditures are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which range from three to seven years. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the remaining lease term.

Management assesses the carrying value of property and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If there is indication of impairment, management prepares an estimate of future cash flows expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value at that time. At September 30, 2021, management determined there were no impairments of the Company’s property and equipment.

Inventories

Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out (“FIFO”) basis. The Company records adjustments to its inventory for estimated obsolescence or diminution in net realizable value equal to the difference between the cost of the inventory and the estimated net realizable value. When evidence exists that the net realizable value of inventory is lower than its cost, the difference is recognized as a loss in the period in which it occurs. Once inventory has been written down, it creates a new cost basis for inventory that may not subsequently be written up. For the three months and nine months ended September 30, 2021 and 2020, there were no write-downs of inventory.

Intangible Assets

Amortizable finite-lived identifiable intangible assets consist of a trade name and customer relationships acquired in the acquisition of Activ, effective June 1, 2021 (See Note 3), and are stated at cost less accumulated amortization. The trade name and customer relationships are being amortized over a period of 10 years. The Company follows ASC 360 in accounting for finite-lived intangible assets, which requires impairment losses to be recorded when indicators of impairment are present and the undiscounted cash flows estimated to be generated by the assets are less than the assets’ carrying amounts. As of September 30, 2021, the Company determined there were no indicators of impairment of its intangible assets.

At September 30, 2021 and December 31, 2020, the Company had a trademark for $50,000 classified as an indefinite-lived intangible asset.

Goodwill

Goodwill consists of the excess of the cost of Activ (see Note 3) over the fair value of amounts assigned to assets acquired and liabilities assumed. Under the guidance of ASC 350, goodwill is not amortized, rather it is tested for impairment annually, and will be tested for impairment between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. An impairment loss generally would be recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit and would be measured as the excess carrying value of goodwill over the derived fair value of goodwill. The Company’s policy is to perform an annual impairment testing for its reporting units on December 31 of each fiscal year.

Concentrations

During the three months ended September 30, 2021, two customers accounted for approximately 59% of the Company’s sales. No other customer accounted for more than 10% of sales during the three months ended September 30, 2021 or 2020.

During the nine months ended September 30, 2021, two customers accounted for approximately 52% of the Company’s sales. No other customer accounted for more than 10% of sales during the nine months ended September 30, 2021 or 2020.

Cash balances are maintained at large, well-established financial institutions. At times, cash balances exceed federally insured limits. Insurance coverage limits are $250,000 per depositor at each financial institution. The Company believes that no significant concentration of credit risk exists with respect to its cash balances because of its assessment of the creditworthiness and financial viability of the financial institutions that hold such cash balances.

Research and Development Costs

Research and development costs consist primarily of fees paid to consultants and outside service providers, and other expenses relating to the acquisition, design, development and testing of the Company’s Clinical Nutrition products. Research and development expenditures are expensed as incurred and totaled $16,234 and $34,034 for the three months ended September 30, 2021 and 2020, respectively, and $53,598 and $109,803 for the nine months ended September 30, 2021 and 2020, respectively.

Patent Costs

The Company is the owner of four issued domestic patents, two pending domestic patent applications and one granted patent in Canada. Due to the significant uncertainty associated with the successful development of one or more commercially viable products based on the Company’s research efforts and any related patent applications, patent costs, including patent-related legal fees, filing fees and internally generated costs, are expensed as incurred. During the nine months ended September 30, 2021, and 2020, patent costs were $56,465 and $99,589, respectively, and are included in general and administrative costs in the statements of operations.

Stock-Based Compensation

The Company periodically issues stock-based compensation to employees and non-employees in non-capital raising transactions for services and for financing costs. Such grants vest and expire according to terms established at the issuance date. The Company accounts for such grants issued and vesting based on ASC 718, Compensation-Stock Compensation whereby the value of the award is measured on the date of grant and recognized for employees as compensation expense on a straight-line or graded basis over the vesting period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for the services.

The fair value of stock options granted is estimated using the Black-Scholes option-pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life, and future dividends. The assumptions used in the Black-Scholes option pricing model could materially affect compensation expense recorded in future periods.

Loss per Common Share

Basic loss per share is computed by dividing net loss by the weighted-average common shares outstanding during a period. Diluted earnings per share is computed based on the weighted-average common shares outstanding plus the effect of dilutive potential common shares outstanding during the period calculated using the treasury stock method. Dilutive potential common shares include shares from unexercised warrants and options. Potential common share equivalents have been excluded where their inclusion would be anti-dilutive. The Company’s basic and diluted net loss per share is the same for all periods presented the Company had a net loss for all periods presented and all shares issuable upon exercise of warrants and options would therefore be anti-dilutive.

The following potentially dilutive shares were excluded from the shares used to calculate diluted earnings per share:

 Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share

Fair Value of Financial Instruments

Accounting standards require certain assets and liabilities be reported at fair value in the financial statements and provide a framework for establishing that fair value. Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, the Company considers the principal or most advantageous market in which it transacts and considers assumptions that market participants would use when pricing the asset or liability. The framework for determining fair value is based on a hierarchy that prioritizes the inputs and valuation techniques used to measure fair value:

Level 1 - Quoted prices in active markets for an identical asset or liability that the Company has the ability to access as of the measurement date.

Level 2 - Inputs, other than quoted prices included within Level 1, which are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.

Level 3 - Unobservable inputs in which there is little or no market data for the asset or liability which requires the reporting entity to develop its own assumptions.

The Company determines the level in the fair value hierarchy within which each fair value measurement falls in its entirety, based on the lowest level input that is significant to the fair value measurement in its entirety. In determining the appropriate levels, the Company performs an analysis of the assets and liabilities at each reporting period end.

The Company believes the carrying amount of its financial instruments (consisting of cash, short-term investments, accounts receivable, and accounts payable and accrued liabilities) approximates fair value due to the short-term nature of such instruments.

At December 31, 2020, the Company’s balance sheets included Level 2 liabilities comprised of the fair value of warrant liabilities of $25,978 (see Note 9). At September 30, 2021, the Company had no warrant liabilities.

Recent Accounting Pronouncements

In September 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The standard significantly changes how entities will measure credit losses for most financial assets, including accounts and notes receivables. The standard will replace today’s “incurred loss” approach with an “expected loss” model, under which companies will recognize allowances based on expected rather than incurred losses. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. As a smaller reporting company, ASU 2016-13 will be effective for the Company beginning January 1, 2023, with early adoption permitted. The Company is currently assessing the impact of adopting this standard on the Company’s financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 eliminates Step 2 of the two-step goodwill impairment test, under which a goodwill impairment loss was measured by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04 requires only a one-step quantitative impairment test, whereby a goodwill impairment loss is measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). Entities are required to apply ASU 2017-04 on a prospective basis. ASU 2017-04 was effective January 1, 2020. The adoption of ASU 2017-04 did not have any impact on the Company’s consolidated financial statement presentation or disclosures.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions and enhances and simplifies various aspects of the income tax accounting guidance in ASC 740. ASU 2019-12 was effective January 1, 2021. The adoption of ASU 2019-12 did not have any impact on the Company’s consolidated financial statement presentation or disclosures.

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”). ASU 2020-06 reduces the number of accounting models for convertible debt instruments by eliminating the cash conversion and beneficial conversion models. As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost as long as no other features require bifurcation and recognition as derivatives. For contracts in an entity’s own equity, the type of contracts primarily affected by this update are freestanding and embedded features that are accounted for as derivatives under the current guidance due to a failure to meet the settlement conditions of the derivative scope exception. This update simplifies the related settlement assessment by removing the requirements to (i) consider whether the contract would be settled in registered shares, (ii) consider whether collateral is required to be posted, and (iii) assess shareholder rights. ASU 2020-06 is effective January 1, 2024 for the Company and the provisions of this update can be adopted using either the modified retrospective method or a fully retrospective method. Early adoption is permitted, but no earlier than January 1, 2021.

At December 31, 2020, the Company recorded a derivative liability of $25,978 related to 10,417 warrants issued in 2019 because the settlement provisions of the warrants contained language that the shares underlying the warrants are required to be registered. Effective January 1, 2021, the Company early adopted ASU 2020-06 using the modified retrospective approach. ASU 2020-06 removed the requirement to consider if the warrants would be settled in registered shares, and accordingly, the adoption of ASU 2020-06 resulted in a decrease to accumulated deficit of $25,978 and a decrease in derivative warrant liability of $25,978 on January 1, 2021.

In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic 470-50), Compensation — Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”). ASU 2021-04 provides guidance as to how an issuer should account for a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option (i.e., a warrant) that remains classified after modification or exchange as an exchange of the original instrument for a new instrument. An issuer should measure the effect of a modification or exchange as the difference between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification or exchange and then apply a recognition model that comprises four categories of transactions and the corresponding accounting treatment for each category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination or modification). ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the guidance provided in ASU 2021-04 prospectively to modifications or exchanges occurring on or after the effective date. Early adoption is permitted for all entities, including adoption in an interim period. If an entity elects to early adopt ASU 2021-04 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period. The adoption of ASU 2021-04 is not expected to have any impact on the Company’s consolidated financial statement presentation or disclosures.

Other recent accounting pronouncements issued by the FASB, its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future financial statements.

3. Acquisition of Activ Nutritional, LLC

On June 1, 2021, the Company completed the acquisition of Activ. The acquisition was made pursuant to an equity purchase agreement dated May 18, 2021 between the Company, Adare Pharmaceuticals, Inc., (“Adare”), and Activ. The Company acquired all of the issued and outstanding equity of Activ from Adare for $26,000,000 in cash, subject to certain adjustments as provided in the equity purchase agreement.

Activ owns the Viactiv® line of supplement chews for bone health, immune health and other applications which are currently marketed through many of the nation’s largest retailers, including, among others, Walmart (retail and online), Target and Amazon. The Viactiv product lines are expected to become the Company’s most prominent product lines for the foreseeable future.

The Company utilized the acquisition method of accounting for the acquisition in accordance with ASC 805, Business Combinations. The Company allocated the purchase price to Activ’s tangible assets, identifiable intangible assets, and assumed liabilities at their estimated fair values as of the date of acquisition. The fair value of the intangible assets was estimated using the income approach, pursuant to which after-tax cash flows are discounted to present value based on projections and other available financial data. The cash flows were based on estimates used to value the acquisition, and the discount rates applied were benchmarked with reference to the implied rate of return from the transaction model, as well as the weighted average cost of capital. The valuation assumptions took into consideration the Company’s estimates of customer attrition and revenue growth projections. The excess of the purchase price paid by the Company over the estimated fair value of identified tangible and intangible assets has been recorded as goodwill.

The following table summarizes the allocation of the fair value of the purchase consideration to the fair value of tangible assets, identifiable intangible assets, and assumed liabilities of Activ on the date of acquisition (provisional):

 Schedule of Fair Value of Assets Acquired and Liabilities Assumed

The Company consolidated Activ’s operations with the Company’s operations commencing June 1, 2021, the closing date of the transaction. Activ’s operations are included in the Company’s Clinical Nutrition segment. The amount of revenue and net income of Activ included in the Company’s consolidated statements of operations during the three months ended September 30, 2021, was $2,998,117 and $496,621. The amount of revenue and net income of Activ included in the Company’s consolidated statements of operations during the nine months ended September 30, 2021 was $4,047,920 and $727,909, respectively.

Acquisition-related transaction costs (e.g., legal, due diligence, valuation, investment banking and other professional fees) are not included as a component of consideration transferred, but were expensed as incurred. During the three months and nine months ended September 30, 2021, the Company incurred approximately $0 and $2,104,000 of acquisition-related costs, respectively, which are included as a line item in the Company’s consolidated statements of operations.

Pro Forma Information

The following unaudited pro forma condensed consolidated statement of operations for the three months and nine months ended September 30, 2021 and 2020 is presented as if the acquisition of Activ had occurred on January 1, 2020, after giving effect to certain pro forma adjustments. The pro forma results of operations are presented for informational purposes only and are not indicative of the results of operations that would have been achieved if the acquisition had actually been consummated on January 1, 2020. These results are prepared in accordance with ASC 606.

 Schedule of Pro Forma Financial Information

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

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

For the nine months ended September 30, 2021 and 2020, depreciation and amortization expense was $61,115 and $45,552, respectively.

During the nine months ended September 30, 212, the Company opted for an early termination of its San Diego, California office and warehouse lease and terminated the lease effective October 31, 2021. In connection with this early lease termination, the Company determined that certain leasehold improvements, testing equipment, furniture and fixtures, computer equipment, and office equipment would no longer be needed and recorded a loss on disposal of $31,883 related to this office and warehouse closure, which is included in the consolidated statements of operations.

6. Intangible Assets, Net

Intangible assets, net consisted of the following:

 Schedule of Intangible Assets

The trade name and customer relationship were acquired June 1, 2021 in conjunction with the acquisition of Activ (see Note 3) and are being amortized over a period of 10 years. For the three months and nine months ended September 30, 2021 and 2020, amortization expense was $297,500 and $396,667, respectively.

The expected future amortization expense for amortizable finite-lived intangible assets as of September 30, 2021 is as follows:

Schedule of Finite-lived Intangible Assets Amortization Expense 

7. Operating Leases

As of September 30, 2021, the Company leased its corporate office and a warehouse space in San Diego, California and an additional warehouse space in Ohio under two operating leases. The Company accounts for its leases under ASC 842, Leases. The Company determines whether a contract is, or contains, a lease at inception, and all leases greater than 12 months result in recognition of a right-of-use asset and an operating lease liability. Right-of-use assets represent the Company’s right to use an underlying asset during the lease term, and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Leases with the duration of less than 12 months are not recognized on the balance sheet and are expensed on a straight-line basis over the lease term.

Lease cancellation

In October 2012, the Company entered into a lease for its corporate office and warehouse located in San Diego, California. The term of the lease, as amended, had a term through July 2023. On September 22, 2021, the Company entered into an agreement with the landlord to terminate the lease for this corporate office and warehouse space effective October 31, 2021. At September 22, 2021, the Company had recorded a right of use asset of $269,706, a lease deposit of $10,470, and an operating lease liability of $282,597, respectively, related to this lease. Pursuant to the termination agreement, the Company agreed to forfeit its security deposit, and pay the landlord an early termination fee of $108,527 before October 31, 2021 and vacate the premises before October 31, 2021, in exchange for a complete release. The Company vacated the leased space on October 29, 2021. As of September 30, 2021, the Company accounted for the cancellation of the lease by writing off the right-of-use asset and the forfeited lease deposit from the consolidated balance sheet and recording a $280,176 impairment expense for the three months and nine months ended September 30, 2021. Subsequent to September 30, 2021, upon payment of the early termination fee of $108,527 in October 2021, the operating lease liability of $270,396 was cancelled in full, and a gain on lease cancellation of $161,869 was recorded.

In July, 2021 the Company entered into a month-to-month lease for its primary corporate office space located in Houston, Texas, with lease payments of approximately $1,700 per month.

During the three months and nine months ended September 30, 2021 and 2020, lease expense totaled $44,548 and $43,246, respectively, and $132,002 and $128,150, respectively.

As of December 31, 2020, the Company’s net right of use asset totaled $418,590. During the three months and nine months ended September 30, 2021, the Company recorded amortization of right-of-use asset of $79,328 and $119,578, respectively. In addition, during the three months ended September 30, 2021 we recorded an impairment of our right-of-use asset of $269,706 associated with the cancellation of the San Diego California lease described above. At September 30, 2021, the net right-of-use assets were $29,305.

As of December 31, 2020, the Company’s operating lease liabilities totaled $434,748. During the nine months ended September 30, 2021, the Company made payments of $120,839 towards the operating lease liability. As of September 30, 2021, the operating lease liabilities totaled $313,909.

As of September 30, 2021, the weighted average remaining lease terms for operating leases are 1.33 years, and the weighted average discount rate for operating lease is 3.9%.

Future minimum lease payments under the leases are as follows:

 Schedule of Lease Liability

8. Payable to Former Officer

Effective June 15, 2020, Michael Favish resigned as Chief Executive Officer of the Company and also resigned from the Company’s Board of Directors. Terms of the settlement agreement between the parties included the continuation of his previous annual salary of $325,000 during the twelve months subsequent to his resignation. The $325,000 of aggregate settlement payments was recorded in costs related to resignation of former officer expense in the consolidated statements of operations during nine months ended September 30, 2020. The final payment due the former officer was made on June 15, 2021.

9. Derivative Liability

On April 9, 2019, the Company issued 10,417 warrants with an exercise price of $30.00 per share to the Company’s underwriter in connection with the Company’s initial public offering. The Company accounted for these warrants as a derivative liability in the financial statements because they were associated with the initial public offering, which was a registered offering, and the settlement provisions contained language that the shares underlying the warrants were required to be registered. The fair value of the warrants was remeasured at each reporting period, and the change in the fair value was recognized in earnings in the statements of operations. At December 31, 2020, the fair value of the derivative warrant liability was $25,978.

Effective January 1, 2021, the Company early adopted ASU 2020-06 using the modified retrospective approach. ASU 2020-06 removed the requirement to consider if the warrants would be settled in registered shares, and accordingly, the adoption of ASU 2020-06 resulted in a decrease to accumulated deficit of $25,978 and a decrease in derivative warrant liability of $25,978 on January 1, 2021.

At December 31, 2020, the fair value of such warrant was determined to be $2.49 using the Black-Scholes option pricing model utilizing the following assumptions:

 Schedule of Fair Value Assumptions of Warrant Liability

For the three months and nine months ended September 30, 2020, the change in fair value of the warrants was determined $11,892 and $5,804, respectively. There was no change in fair value of warrants during the three months and nine months ended September 30, 2021.

10. Stockholders’ Equity

Common Stock

January 2021 and February 2021 At the Market Offerings

On January 8, 2021, the Company entered into a sales agreement with Maxim Group LLC (“Maxim”) pursuant to which the Company could sell up to $10,000,000 worth of shares of the Company’s common stock in an “at the market” offering through Maxim (the “January 2021 1st ATM Offering”). The offer and sale of the shares was made pursuant to a shelf registration statement on Form S-3. The Company agreed to pay Maxim a commission equal to 3.0% of the aggregate gross proceeds from each sale of shares. On January 15, 2021, the Company completed the January 2021 1st ATM Offering, pursuant to which the Company sold an aggregate of 2,559,834 shares of its common stock and raised net proceeds (after deduction for sales commissions) of approximately $9,700,000.

On January 28, 2021, the Company entered into a sales agreement with Maxim pursuant to which the Company could sell up to $25,000,000 worth of shares of the Company’s common stock in an “at the market” offering through Maxim (the “January 2021 2nd ATM Offering”). On February 10, 2021, the Company completed the January 2021 2nd ATM Offering, pursuant to which the Company sold an aggregate of 5,048,840 shares of its common stock and raised net proceeds (after deduction for sales commissions) of approximately $24,250,000.

The Company incurred costs related to these financings of approximately $327,000 which is reflected as a reduction to the proceeds from the shares issued. The net cash received from both offerings after all expenses was approximately $33,623,000.

Warrants

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

 Schedule of Warrants Activity

The exercise prices of warrants outstanding and exercisable as of September 30, 2021 are as follows:

 Schedule of Exercise Price of Warrants Outstanding and Exercisable

During the nine months ended September 30, 2021, investors exercised warrants into a total of 1,647,691 shares of common stock. The warrants were exercisable for an average price of $2.26 per share, which resulted in cash proceeds to the Company of $3,568,415.

Stock Options

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

 Schedule of Share-based Compensation, Stock Options, Activity

The exercise prices of options outstanding and exercisable as of September 30, 2021 are as follows:

 Schedule of Exercise Price of Options Outstanding and Exercisable

During the nine months ended September 30, 2021, the Company granted options to purchase 269,339 shares of common stock to employees and members of the Board of Directors with a grant date fair value of $652,360 using a Black-Scholes option pricing model based on the following assumptions: (i) volatility rates of 117% to 119%, (ii) discount rates of 0.38% to 1.28%, (iii) zero expected dividend yield, and (iv) expected life of 6 years. The options have an exercise price of $1.61 to $3.95 per share. 67,558 of the options will vest on the one-year anniversary of the grant date and the remaining 135,113 options will vest on monthly basis over two years. Options for 66,668 shares vest ratably over three years. As part of their annual compensation for service on the Board of Directors, each of the four non-officer directors receives annual stock option grant for 16,333 shares of the Company’s common stock on the earlier of the annual meeting of stockholders or June 30. The option shall vest and become exercisable in eight equal installments on the last day of each of the subsequent eight calendar quarter-end dates following the date of grant.

The volatility of the Company’s common stock is based on an average volatility of similar companies in the same industry. The risk-free interest rate was based on rates established by the Federal Reserve Bank. The expected dividend yield was based on the fact that the Company has not paid dividends to its common stockholders in the past and does not expect to pay dividends to its common stockholders in the future. The expected life of the stock options granted is estimated using the “simplified” method, whereby the expected term equals the average of the vesting term and the original contract.

During the nine months ended September 30, 2021 and 2020, the Company recognized stock-compensation expense related to the fair value of vested stock options of $589,229 and $227,011 respectively, which was recorded in general and administrative expense.

As of September 30, 2021, the Company had an aggregate of 422,308 remaining unvested options outstanding, with a remaining fair value of $515,830, with a weighted average remaining life of 9.14 years. The aggregate intrinsic value of options outstanding as of September 30, 2021 was zero.

Restricted Common Stock

In January 2021, the Company granted 152,671 shares of the Company’s common stock to the Company’s Chief Executive Officer (“CEO”). The shares vest on the first anniversary of the award. If the CEO’s employment with the Company is terminated for any reason, any shares not then vested will be forfeited. Also effective in January 2021, the Company granted 41,667 shares of the Company’s common stock to a consultant for services, with 4,167 of the shares vesting immediately and the balance of 37,500 shares vesting through August 15, 2021. In the event the consultant’s service with the Company terminates, any shares not then vested will be forfeited. During the quarter ended September 30, 2021 the Company granted 50,000 shares of the Company’s common stock with vesting terms to the Company’s Chief Commercial Officer. The shares vest one third per year for three years on the anniversary of the award.

The total fair value of the 244,338 shares was determined to be $742,912 based on the price per shares of the Company’s common stock on the dates granted. The Company accounts for the share awards using the straight-line attribution or graded vesting method over the requisite service period provided that the amount of compensation cost recognized at any date is no less than the portion of the grant-date fair value of the award that is vested at that date. During the nine months ended September 30, 2021, total share-based expense recognized related to vested restricted shares totaled $505,926. At September 30, 2021, there was $226,713 of unvested compensation related to these awards that will be amortized over a remaining vesting period of 2.75 years.

The following table summarizes restricted common stock activity for the nine months ended September 30, 2021:

 Schedule of Non Vested Restricted Common Stock Activity

11. Related Party Transactions

David Evans, Ph.D., a director and the Company’s Chief Science Officer, and his spouse, wholly own Ceatus Media Group LLC (“Ceatus”) and DWT Evans LLC (“DWT”). For the three months and nine months ended September 30, 2021 and 2020 the Company paid Ceatus $15,000 and $13,750, and $51,000 and $45,500, respectively, for services related to digital marketing for the Company. The Company’s wholly owned subsidiary, VectorVision Ocular Health, leases office and warehouse space from DWT. For the nine months ended September 30, 2021 and 2020, the Company paid DWT rent in the amounts of $16,603 and $16,114, respectively

In September 2017, the Company acquired VectorVision, Inc. from David Evans. At the same time, the Company also acquired AcQviz from David Evans, which is a patented methodology for auto-calibrating and standardizing the testing light level for computer generated vision testing systems. David Evans is entitled to receive a royalty on net revenue from AcQviz. As part of the development of the CSV-2000, AcQviz was embedded in the product by Radiant Technologies, Inc. in exchange for a 3% royalty on the sales of AcQviz. Radiant Technologies is owned by Joseph Evans, the brother of David Evans. During the three months and nine months ended September 30, 2021 and 2020, the Company did not incur any royalties with respect to revenues from AcQviz.

12. Segment Reporting

The Company determined its reporting units in accordance with ASC 280, “Segment Reporting”. The Company currently operates in two reportable segments: Clinical Nutrition and Diagnostics Equipment.

The Clinical Nutrition segment provides a portfolio of science-based, clinically supported nutrition, medical foods, and supplements. The Diagnostics Equipment segment includes a portfolio of medical diagnostic devices currently focused on the ocular space and contrast testing. The Company’s diagnostics equipment and accessories are used to measure visual function and certain anatomical features of the eye that detect early disease and monitor changes over time.

The segments are based on the discrete financial information reviewed by the Chief Executive Officer, who is the Company’s Chief Operating Decision Maker (“CODM”), to make resource allocation decisions and to evaluate performance. The reportable segments are each managed separately because they manufacture and distribute distinct products or provide services with different processes. All reported segment revenues are derived from external customers.

The accounting policies of the Company’s reportable segments are the same as those described in the summary of significant accounting policies (see Note 2). Certain corporate general and administrative expenses, including general overhead functions such as information systems, accounting, human resources, Board of Director fees, corporate legal fees, other compliance costs and certain administrative expenses, as well as interest and tax expense, are not allocated to the segments. The following tables set forth our results of operations by segment:

Schedule of Segment Reporting Information, by Segment 

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

13. Commitments and Contingencies

The Company is periodically the subject of various pending or threatened legal actions and claims arising out of its operations in the normal course of business. In the opinion of management of the Company, adequate provision has been made in the Company’s financial statements at September 30, 2021 and December 31, 2020 with respect to any such matters.

The Company is not currently a party to any material legal proceedings and is not aware of any pending or threatened legal proceeding against the Company that the Company believes could have a material adverse effect on its business, operating results, cash flows or financial condition.

Effective January 6, 2021, the Board of Directors appointed Bret Scholtes as President, Chief Executive Officer, and as a director of the Company. The Company and Mr. Scholtes entered into an employment agreement pursuant to which Mr. Scholtes’ annual base salary is $400,000. The employment agreement provides that Mr. Scholtes shall have an annual target cash bonus of no less than $400,000 based on performance objectives determined by the Board of Directors.

Additionally, Mr. Scholtes shall be granted (i) stock options equal to 2% of the Company’s issued and outstanding shares of common stock on the date of grant if the Company achieves certain specified performance objectives established by the Board of Directors for the Company’s fiscal years ending December 31, 2021, and December 31, 2022, and (ii) additional stock options equal to either 2% or 3% of the Company’s issued and outstanding shares of common stock on the date of grant if the Company meets certain financial objectives during the first five years following January 6, 2021. If Mr. Scholtes’ employment is terminated by the Company without cause, as defined under his employment agreement, if the term expires after a notice of non-renewal is delivered by the Company, or if Mr. Scholtes’ employment is terminated following a change of control, as defined, Mr. Scholtes will be entitled to (a) twelve months’ base salary, (b) the prorated portion of the any bonus, based on actual performance, and (c) base salary and benefits accrued through the date of termination.

On September 22, 2021, Guardion Health Sciences, Inc. (the “Company”) entered into a Lease Termination Agreement (the “Agreement”) with Cal-Sorrento, Ltd. (“Cal-Sorrento”) pursuant to which, effective as of October 31, 2021 (the “Termination Date”), the Industrial Lease (the “Lease”) originally dated October 24, 2012, as amended, by and between the Company and Cal-Sorrento with respect to leased premises located at 15150 Avenue of Science, Suite 200, San Diego, California 92128, shall terminate. Pursuant to the Agreement and in consideration for the early termination of the Lease, (i) the Company shall forfeit the security deposit paid to Cal-Sorrento, (ii) the Company shall pay Cal-Sorrento an early termination fee of $108,527, and (iii) the Company shall vacate the premises on or before October 31, 2021. Effective upon the Termination Date and provided that the Company has satisfied all of its obligations pursuant to the Agreement, each of the Company and Cal-Sorrento shall release each other and their respective agents, employees, partners, officers, directors, stockholders and members from all obligations under the Lease.

See Note 11 regarding office and warehouse lease obligation of VectorVision Ocular Health to DWT, a related party. For the nine months ended September 30, 2021 and 2020, the Company paid DWT rent in the amounts of $16,603 and $16,114, respectively

14. Subsequent Events

The Company performed an evaluation of subsequent events through the date of filing of these consolidated financial statements with the SEC. There were no material subsequent events which affected, or could affect, the amounts or disclosures in the consolidated financial statements, except as described below.

Effective October 2021 the Company completed the termination of its San Diego office and warehouse space as described above in footnote 7.

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 three month and nine month periods ended September 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, plans or intentions regarding our product development and commercialization efforts, research and development 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 for the year ended December 31, 2020, which are set forth in the Company’s December 31, 2020 Annual Report on Form 10-K and filed with the SEC. All dollar amounts refer to U.S. dollars unless otherwise indicated.

Overview

Guardion Health Sciences, Inc., a Delaware corporation (the “Company” or “we”) 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.

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. Our portfolio of science-based, clinically supported products support healthcare professionals, their patients, and consumers in achieving health goals.

The Company’s profile and focus fundamentally changed with the acquisition of Activ Nutritional, LLC (“Activ”) in June 2021, the owner and distributor of the Viactiv® line of supplements for bone health, immune health and other applications.

The acquisition and integration of the Viactiv line of products has changed the Company’s financial position, market profile and brand focus, and has also expanded the Company’s search for additional business opportunities in the short-term, both internal and external.

The Company believes the Activ acquisition adds valuable attributes, including (1) Viactiv’s brand awareness and acceptance from the consumer; (2) experienced management; (3) established distribution networks and relationships; (4) product development potential; and (5) a long track record of revenue growth and profitability. .

Recent Developments

Acquisition of Activ Nutritional

On June 1, 2021, the Company completed its 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 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 be the Company’s most prominent product lines for the foreseeable future.

The Company utilized the acquisition method of accounting for the acquisition in accordance with ASC 805, Business Combinations. The Company allocated the purchase price to Activ’s tangible assets, identifiable intangible assets, and assumed liabilities at their estimated fair values as of the date of acquisition. The fair value of the intangible assets was estimated using the income approach in which after-tax cash flows are discounted to present value by a third-party valuation firm based on projections and financial data provided by management of the Company. The cash flows are based on estimates used to value the acquisition, and the discount rates applied were benchmarked with reference to the implied rate of return from the transaction model as well as the weighted average cost of capital. The valuation assumptions take into consideration our estimates of customer attrition and revenue growth projections. The excess of the purchase price paid by the Company over the estimated fair value of identified tangible and intangible assets has been recorded as goodwill.

Appointment of CEO

Effective as of January 6, 2021, the Board of Directors appointed Bret Scholtes as President and Chief Executive Officer and as a director of the Company.

The Company and Mr. Scholtes entered into an employment agreement pursuant to which Mr. Scholtes’ annual base salary is $400,000. The Employment Agreement provides that Mr. Scholtes shall have an annual target cash bonus opportunity of no less than $400,000 (the “Bonus”) based on the achievement of Company and individual performance objectives to be determined 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 Company’s 2018 Equity Incentive Plan (the “Incentive Plan”), at an exercise price equal to the closing price of the 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.

The Company incurred costs related to these financings of approximately $327,000 which are reflected in APIC as a reduction that offsets to the proceeds for shares issued. The net cash received from both offering after all expense is approximately $33,623,000.

Warrant Exercises

During the nine months ended September 30, 2021, investors exercised a total of 1,647,691 warrants for 1,647,691 shares of common stock. The warrants were exercisable for an average price of $2.26 per share, which resulted in cash proceeds to the Company of $3,568,415.

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 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, 2021, two customers accounted for approximately 54% of the Company’s sales. No other customer accounted for more than 10% of sales during the period.

Critical Accounting Policies and Estimates

The Company’s financial statements have been prepared in conformity with 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.

Business Combinations

The Company accounts for its business combinations using the acquisition method of accounting where the purchase consideration is allocated to the tangible and intangible assets acquired, and liabilities assumed, based on their respective fair values as of the acquisition date. The excess of the fair value of the purchase consideration over the estimated fair values of the net assets acquired is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing intangible assets include, but are not limited to, expected future cash flows, which includes consideration of future growth and margins, future changes in technology, 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 non-employees in non-capital raising transactions for services and for financing costs. Such grants vest and expire according to terms established at the issuance date. The Company accounts for such grants issued and vesting based on ASC 718, Compensation-Stock Compensation, whereby the value of the award is measured on the date of grant and recognized for employees as compensation expense on a straight-line or graded basis over the vesting period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for the services.

The fair value of stock options granted is estimated using the Black-Scholes option-pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life, and future dividends. The assumptions used in the Black-Scholes option pricing model could materially affect compensation expense recorded in future periods. 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.