Guardion Health Sciences, Inc. - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2022

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)

800-873-5141

(Registrant’s telephone number, 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 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 5, 2022, there were 61,600,823 shares of the Company’s common stock, par value $0.001 per share, issued and outstanding.

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

This Quarterly Report on Form 10-Q contains “forward-looking statements” which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of 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 and 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 our recent filings with the U.S. Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and in other documents we file with the SEC from time to time.

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 Quarterly Report on Form 10-Q may not prove to be accurate. Accordingly, you should not place undue reliance on these forward-looking statements, which only reflect the views of our management as of the date of this Quarterly Report on Form 10-Q. Any public statements or disclosures by us following this Quarterly Report on Form 10-Q that modify or impact any of the forward-looking statements contained in this Quarterly Report on Form 10-Q will be deemed to modify or supersede such statements in this Quarterly Report on Form 10-Q. 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.

This Quarterly Report on Form 10-Q may include market data and certain industry data and forecasts, which we may obtain from internal company surveys, market research, consultant surveys, publicly available information, reports of governmental agencies and industry publications, articles and surveys. Industry surveys, publications, consultant surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but the accuracy and completeness of such information is not guaranteed. While we believe that such studies and publications are reliable, we have not independently verified market and industry data from third-party sources.

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

For the Three and Nine Months Ended September 30, 2022 and 2021

(Unaudited)

1. Organization and Business Operations

Business

Guardion Health Sciences, Inc., a Delaware corporation (the “Company”), was incorporated in June 2015, and is currently headquartered in Houston, Texas. The Company develops and distributes clinically supported nutritional medical foods and dietary supplements. These products are designed to support retail consumers, healthcare professionals and providers, and their patients by strengthening bone health and immune health to guard the body from the forces of aging though a scientifically developed combination of Calcium, Vitamin D, and Vitamin K.

On June 1, 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). As a result of the Activ acquisition, the Company’s commercial efforts fundamentally changed to its current focus on science-based clinical nutrition and supplements.

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, 2022, the Company incurred a net loss of $6,016,562 and used cash in operating activities of $6,082,906. At September 30, 2022, the Company had cash on hand totaling $12,946,003 and working capital of $16,077,890.

Notwithstanding the net loss for the nine months ended September 30, 2022, management believes that its current cash as of September 30, 2022 is sufficient to ensure continuation of the Company as a going concern for at least one year from the date of this Quarterly Report on Form 10-Q.

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 and the successful development and commercialization of any new products or product lines. The Company may also utilize cash to fund acquisitions or other strategic initiatives.

The Company may 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 product development programs and/or curtail or cease its operations.

COVID-19 and Inflation

COVID-19 and Supply Disruptions. The Company’s financial results for the nine months ended September 30, 2022 have been affected by supply chain constraints due, in large part, to the COVID-19 pandemic and resulting labor shortages and increased wages experienced by the Company’s suppliers. These constraints began in the fourth quarter of 2021 and have continued into 2022 and have impacted the Company’s ability to obtain inventory to fulfill customer orders for its Viactiv branded products on a timely basis and may continue to impact the Company’s ability to fulfill customer orders going forward which may have a material adverse effect on the Company’s business and results of operations. Additionally, the Company is subject to out-of-stock fees to certain retailers in the event that the Company is unable to adequately maintain certain inventory levels of its Viactiv products with such retailers. Although the Company expects these supply chain challenges to continue through 2022 and into 2023, the Company has begun to see some improvement in the inventory production cycle.

Inflation. The continuing impact of the COVID-19 pandemic, higher inflation, the actions by the Federal Reserve to address inflation, most notably dramatic increases in interest rates, and rising energy prices create uncertainty about the future economic environment which will continue to evolve and, we believe, has impacted the Company’s business in the quarter ended September 30, 2022, and may continue to impact business in future periods. The implications of higher government deficits and debt, tighter monetary policy, and potentially higher long-term interest rates may drive a higher cost of capital for the business.

Nasdaq Notice

On January 25, 2022, the Company received a written notice from the Nasdaq Stock Market LLC (“Nasdaq”) that the Company had not been in compliance with the minimum bid price requirement set forth in Nasdaq Listing Rule 5550(a)(2) for a period of 30 consecutive business days. Nasdaq Listing Rule 5550(a)(2) requires listed securities to maintain a minimum closing bid price of $1.00 per share, and Nasdaq Listing Rule 5810(c)(3)(A) provides that a failure to meet the minimum bid price requirement exists if the deficiency continues for a period of 30 consecutive business days.

In accordance with Nasdaq Listing Rule 5810(3)(A), the Company was provided a compliance period of 180 calendar days from the date of the notice, or until July 25, 2022, to regain compliance with the $1.00 minimum bid price requirement. The Company did not regain compliance during the compliance period ended July 25, 2022. Accordingly, the Company requested that Nasdaq grant the Company a second 180 calendar day period to regain compliance.

On July 26, 2022, the Company received a written notice from Nasdaq that the Company was granted a second 180 calendar day period, or until January 23, 2023, to regain compliance with the $1.00 minimum bid price requirement. Nasdaq’s determination to grant the second compliance period was based on the Company meeting the continued listing requirement for market value of publicly held shares and all other applicable requirements for initial listing on The Nasdaq Capital Market, with the exception of the minimum bid price requirement, and the Company’s written notice of its intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary. Previously, at the Company’s Annual Meeting of Stockholders (“Annual Meeting”) held on June 16, 2022, the proposal to grant discretionary authority to the Company’s Board of Directors to amend the Company’s Certificate of Incorporation, as amended, to combine outstanding shares of the Company’s common stock into a lesser number of outstanding shares at a specific ratio within a range of no split to a maximum of a 1-for-30 split, with the exact ratio to be determined by the Board of Directors in its sole discretion (the “Reverse Stock Split”) was not approved by the requisite vote of a majority of the Company’s issued and outstanding shares. Although 63% of the stockholders represented at the Annual Meeting voted in favor of the Reverse Stock Split, more than 50% of the Company’s issued and outstanding shares were required to vote in favor of the Reverse Stock Split. To regain compliance, the closing bid price of the Company’s common stock must be at least $1.00 per share for a minimum of 10 consecutive business days prior to January 23, 2023.

The Company is carefully assessing potential actions to regain compliance, including, without limitation, holding a special stockholders’ meeting to solicit approval of a Reverse Stock Split; however, the Company may be unable to regain compliance with the $1.00 minimum bid price requirement during the compliance period. If the Company fails to regain compliance during the second 180-day period that will expire on January 23, 2023, then Nasdaq will notify the Company of its determination to delist the Company’s common stock, at which point the Company will have an opportunity to appeal the delisting determination to the Hearing Review Council at Nasdaq, before the Company’s common stock is formally delisted.

2. Summary of Significant Accounting Policies

Basis of Presentation

The unaudited condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) pursuant to the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. The unaudited condensed consolidated financial statements have been prepared on the same basis as the Company’s annual financial statements for the year ended December 31, 2021 and, in the opinion of management, reflect all adjustments, which consist of normal recurring adjustments, considered necessary for a fair presentation of the periods presented. 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, 2022. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes, included in the Company’s 2021 Annual Report on Form 10-K, filed with the SEC on March 31, 2022. The condensed consolidated balance sheet as of December 31, 2021, was derived from the audited consolidated financial statements as of that date, but does not include all disclosures, including notes, required by GAAP.

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated in consolidation.

For the year ended December 31, 2021, management concluded that the Company had one operating and reporting segment made up of its clinical nutrition business, and management changed the Company’s reportable segments to align with these revisions to the Company’s internal reporting structure. The Company previously had two reportable segments, which included a clinical nutrition segment and a medical devices segment. At September 30, 2022 and December 31, 2021, as there was only one reporting unit, all of the Company’s prior period segment information has been eliminated.

Reverse Stock Split

On March 1, 2021, the Company effectuated a one-for-six (1:6) reverse stock split of its common stock without any change to its par value. Accordingly, all common shares, stock options, stock warrants and per share amounts in these condensed consolidated financial statements and footnotes have been adjusted retroactively to reflect the reverse stock split for all periods presented.

Use of Estimates

The preparation of the Company’s 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. 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 materially from those estimates.

Revenue Recognition

The Company recognizes revenue and costs of sales when control of the products transfers to the customer, which generally occurs upon delivery to the customer. The Company’s performance obligations are satisfied upon delivery to the customer. 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 products.

The Company does not have any significant contracts with customers requiring performance beyond delivery, and 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. Due to the insignificant amount of historical returns, as well as the standalone nature of the Company’s products, and the 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 geographical area are as follows:

 Schedule of Revenue by Geographical Area

Third-Party Outsourcing

The Company derives substantially all of its revenue from the sale of products using a third-party fulfillment center to provide order processing and sales fulfillment, customer invoicing and collections, and product warehousing. Substantially all of the Company’s products are shipped through the third-party fulfillment center to the customer. Shipping charges to customers are included in revenues. In addition, the Company uses the third-party fulfillment center to provide sales and inventory management, and marketing and promotional services.

The Company outsources the production of substantially all of its products with a third-party that manufactures and packages the finished products under a product supply agreement.

Costs incurred related to third-party outsourcing, which includes manufacturing, order processing and fulfillment, customer invoicing, collections and warehousing, were approximately $1,876,259 and $4,951,259 for the three months ended September 30, 2022 and 2021, respectively, and $1,932,967 and $2,560,487 for the nine months ended September 30, 2022 and 2021, respectively.

Cost of Goods Sold

Cost of goods sold is comprised of the costs for third-party contract manufacturing, packaging, manufacturing fees, and in-bound freight charges.

Shipping Costs

Shipping costs associated with product distribution after manufacture are included as part of cost of goods sold. Shipping and handling expense totaled $209,804 and $182,580 for the three months ended September 30, 2022 and 2021, respectively, and $622,178 and $277,997 for the nine months ended September 30, 2022 and 2021, respectively.

Advertising Costs

Advertising costs are expensed as incurred and are included in sales and marketing expense. Advertising costs were $385,010 and $513,701 for the three months ended September 30, 2022 and 2021, respectively, and $1,264,740 and $1,203,421 for the nine months ended September 30, 2022 and 2021, respectively.

Concentrations

Revenue. During the three months ended September 30, 2022, the Company had one customer that accounted for 57% of total revenue. During the three months ended September 30, 2021, the Company had two customers that accounted for 49% and 10% of the Company’s total revenue. No other customer accounted for more than 10% of revenue, during the three months ended September 30, 2022 and 2021. The Company sells the majority of its products to one of the largest retailers in the United States. Activ has been selling to this retailer for several years.

During the nine months ended September 30, 2022, the Company had one customer that accounted for 56% of total revenue. During the nine months ended September 30, 2021, the Company had two customers that accounted for 42% and 10% of the Company’s total revenue. No other customer accounted for more than 10% of revenue, during the nine months ended September 30, 2022 and 2021.

Accounts receivable. As of September 30, 2022, the Company had accounts receivable from one customer which comprised approximately 63% of its accounts receivable. As of December 31, 2021, the Company had accounts receivable from two customers which comprised approximately 50% and 48% of its accounts receivable. No other customer accounted for more than 10% of accounts receivable as of September 30, 2022 and December 31, 2021. Historically the Company has not experienced any collectability issues with this customer.

Purchases from vendors. During the three months and nine months ended September 30, 2022, the Company utilized one manufacturer for most of its production and packaging of its clinical nutrition products. Total purchases from this manufacturer accounted for approximately 49% of all purchases during the three months ended September 30, 2022. There was one other vendor during the three months ended September 30, 2022 that accounted for 12% of total purchases. During the three months ended September 30, 2021, the Company’s largest vendor accounted for approximately 38% of all purchases. During the nine months ended September 30, 2021, the Company’s largest vendors accounted for approximately 16% and 15% of all purchases. No other vendor accounted for more than 10% of purchases during the three months and nine months ended September 30, 2022 and 2021.

Accounts payable. As of September 30, 2022, one vendor accounted for 88% of total accounts payable. As of December 31, 2021, the Company’s largest two vendors accounted for 18% and 13% of the total accounts payable. No other vendor accounted for more than 10% of accounts payable as of September 30, 2022 and December 31, 2021.

Cash and cash equivalents

Cash and cash equivalents consist of funds deposited with a major, established, high quality financial institution and short-term (original maturity of generally 60 days or less) liquid investments in money market deposit accounts. Cash equivalents are classified as Level 1 in the GAAP valuation hierarchy and are valued using the net asset value (“NAV”) per share of the money market fund. As of September 30, 2022, included in cash and cash equivalents was $12,917,044 held in the Goldman Sachs Financial Square Government Institutional Fund.

The Company’s policy is to maintain its cash balances with financial institutions with high credit ratings and in accounts insured by the Federal Deposit Insurance Corporation (the “FDIC”) and/or by the Securities Investor Protection Corporation (the “SIPC”). The Company may periodically have cash balances in financial institutions in excess of the FDIC and SIPC insurance limits of $250,000 and $500,000, respectively. The Company has not experienced any losses to date resulting from this policy, and management believes that the risk of loss associated with any uninsured balances is remote.

Investments

Short-term investments held by the Company as of December 31, 2021 consist of a U.S. Treasury Bill, which is classified as held-to-maturity. The Company’s U.S. Treasury Bill was scheduled to mature approximately 30 days from the date of purchase. Unrealized gains and losses were not material. As of December 31, 2021, the carrying value of the Company’s U.S. Treasury Bill approximates its fair value due to its short-term maturity. As of September 30, 2022, the Company held no short-term investments.

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.

At September 30, 2022, management concluded that there were no impairment triggering events. If economic uncertainty increases and/or the global economy worsens, the Company’s business, financial condition and results of operations may be sufficiently impacted to result in future impairment charges in the short-term. Management will continue to monitor the effects that macroeconomic conditions have on its business and operations, and will review impairment indicators to the extent necessary in the upcoming months.

Stock-Based Compensation

Stock-based awards for stock options and restricted stock awards to employees and non-employees are accounted using the fair value method in accordance with ASC 718, Share-Compensation – Stock Compensation. The estimated fair value of stock options granted to employees in exchange for services is measured at the grant date, using a fair value-based method, such as a Black-Scholes option valuation model, and is recognized as an expense on a straight-line basis over the requisite service periods. The assumptions used in the Black-Scholes option pricing model could materially affect compensation expense recorded in future periods. The fair value of restricted stock units is measured at the grant date based on the closing market price of the Company’s common stock on the date of grant, and is recognized as an expense on a straight-line basis over the requisite service periods. Recognition of compensation expense for non-employees is accounted for in the same period and manner as if the Company had paid cash for the services.

Loss per Common Share

Basic loss per share is computed by dividing net loss by the weighted-average common shares outstanding during the period, excluding shares of unvested restricted common stock outstanding. 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. Shares of vested restricted stock are included in the diluted weighted average number of common shares outstanding from the date they are vested. 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 as 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 Anti-dilutive 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 on 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 following table sets forth by level, within the fair value hierarchy, the Company’s financial assets at fair value as of September 30, 2022 and December 31, 2021:

 Schedule of Financial Assets at Fair Value

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

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 and effective January 1, 2021, the Company early adopted ASU 2020-06 using the modified retrospective approach.

At December 31, 2020, the Company recorded a derivative liability of $26,265 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. 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 $26,265 and a decrease in derivative warrant liability of $26,265 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 equity 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. The Company adopted ASU 2021-04 effective January 1, 2022. The adoption of ASU 2021-04 did not have any impact on the Company’s consolidated financial statement presentation or disclosures.

Recently Issued Accounting Pronouncements Not Yet Adopted

In September 2016, the FASB issued ASU No. 2016-13, Credit Losses – Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 requires entities to use a forward-looking approach based on current expected credit losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for the Company beginning January 1, 2023, and early adoption is permitted. The Company does not believe the potential impact of the new guidance and related codification improvements will be material to its financial position, results of operations and cash flows.

Other recent accounting pronouncements issued by FASB, its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the SEC 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 acquired Activ, the owner and distributor of the Viactiv® line of supplements for bone health and other applications, for total purchase consideration of $25,949,654.

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

 Schedule of Fair Value of Assets Acquired and Liabilities Assumed

The Company consolidated Activ’s operations with the Company’s operations commencing on June 1, 2021. Subsequently, goodwill of $11,893,134 was written off as impaired at December 31, 2021.

Activ’s revenue and operating income (loss) included in the accompanying condensed consolidated statements of operations are as follows:

 Schedule of Activ’s Revenue and Operating Income (Loss)

Pro Forma Information

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

 Schedule of Pro Forma Financial Information

Acquisition-related transaction costs of $2,103,680 (consisting of legal, due diligence, valuation, investment banking fees and costs 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, 2022, the Company incurred no acquisition-related costs.

4. Inventories

Inventories consisted of the following on the dates noted below:

 Schedule of Inventories

The Company’s inventories are stated at the lower of cost or net realizable value calculated on a first-in, first-out basis.

5. Property and Equipment, Net

Property and equipment, net consisted of the following on the dates noted below:

 Schedule of Property and Equipment

Depreciation expense for the three months ended September 30, 2022 and 2021 was $14,717 and $20,008, respectively. Depreciation expense for the nine months ended September 30, 2022 and 2021 was $53,897 and $61,115, respectively. During the nine months ended September 30, 2022, assets with a cost of $50,923, and accumulated depreciation of $41,636, were removed from property and equipment and resulted in a loss on disposal of $9,287.

6. Intangible Assets, Net

Intangible assets, net consisted of the following on the dates noted below:

 Schedule of Intangible Assets

Amortizable finite-lived identifiable intangible assets consist of a trade name and customer relationships acquired in the acquisition of Activ, effective as of June 1, 2021 (see Note 3), and are being amortized over a period of 10 years. There were no impairment charges incurred in the periods presented. At September 30, 2022 and December 31, 2021, the trademark was classified as an indefinite-lived intangible asset.

For the three months and nine months ended September 30, 2022, amortization expense was $297,500 and $892,500, respectively. For the three months and nine months ended September 30, 2021, amortization expense was $297,500 and $396,667, respectively. The expected future amortization expense for amortizable finite-lived intangible assets as of September 30, 2022 is as follows:

 Schedule of Finite-lived Intangible Assets Amortization Expense 

7. Operating Leases

At September 30, 2022, the Company leased its primary corporate office space located in Houston, Texas, under a month-to-month lease with a lease payment of approximately $2,200 per month. Additionally, at September 30, 2022, the Company leased a warehouse space in Greenville, Ohio under an operating lease with a monthly lease payment of approximately $1,900. The Company ceased its operations in the Greenville, Ohio warehouse in December 2021 and this associated lease obligation will terminate in February 2023.

During the three months ended September 30, 2022 and 2021, rent expense totaled $6,884 and $44,548, respectively. During the nine months ended September 30, 2022 and 2021, rent expense totaled $22,991 and $132,002, respectively.

As of December 31, 2021, the Company’s right-of-use asset related to its warehouse space totaled $24,257. During the nine months ended September 30, 2022, the Company determined this right-of-use asset was fully impaired in light of the Company’s decision to cease operations at the warehouse location, and recorded an impairment charge of $24,257. At September 30, 2022, the net right-of-use asset was $0.

As of December 31, 2021, the Company’s operating lease liability related to its warehouse space totaled $26,028. During the nine months ended September 30, 2022, the Company made payments of $16,556 towards the operating lease liability. As of September 30, 2022, the Company’s operating lease liabilities totaled $9,472.

As of September 30, 2022, the remaining lease term related to the warehouse space was 5 months, and the discount rate for the warehouse space lease is 3.9%.

Future minimum lease payments under the leases are as follows:

Schedule of Lease Liability

8. Stockholders’ Equity

Common Stock

February 2022 Offering

On February 18, 2022, the Company entered into a Securities Purchase Agreement with certain institutional investors, pursuant to which the Company issued and sold, (i) 32,550,000 units, at $0.30 per unit, with each unit consisting of one share of the Company’s common stock, one warrant to purchase one share of the Company’s common stock at an exercise price of $0.37 per share that expires on the fifth anniversary of the date of issuance (“Series A Warrant”) and one warrant to purchase one share of the Company’s common stock at an exercise price of $0.37 per share that expires on the 18 month anniversary of the date of issuance (“Series B Warrant”), and (ii) 4,450,000 pre-funded units, at $0.2999 per unit, with each unit consisting of one pre-funded warrant to purchase one share of the Company’s common stock at an exercise price of $0.0001 per share (a “Pre-Funded Warrant” and together with the Series A Warrants and Series B Warrants, the “Warrants”), one Series A Warrant and one Series B Warrant (collectively, the “February 2022 Offering”).

The exercise prices of the Series A Warrants and Series B Warrants are subject to appropriate adjustment in the event of recapitalization events, stock dividends, stock splits, stock combinations, reclassifications, reorganizations or similar events affecting the Company’s common stock. In addition, in the event the Company effects a reverse stock split during the term of the Series A Warrants and Series B Warrants, the exercise price of such warrants following such reverse split will be subject to further adjustment in the event the trading price of our common stock following such reverse stock split is lower than the exercise price of such warrants. Also, subject to customary exceptions, the exercise price of the Series A Warrants is subject to adjustment in the event of issuances of the Company’s common stock or common stock equivalents at a price below the exercise price of the Series A Warrants. In such event, the exercise price of the Series A Warrants will be reduced to the price of the securities issued in such transactions. In the event of a fundamental transaction, the holder of a warrant shall have the option, exercisable at any time concurrently with, or within 30 days after, the consummation of the fundamental transaction to cause the Company to purchase such warrant from the holder for cash in an amount equal to the Black Scholes value of such warrant calculated in accordance with the terms of warrant.

On February 18, 2022, the Company entered into a Placement Agency Agreement (the “Placement Agency Agreement”) with Roth Capital Partners LLC (“Roth”) and Maxim Group LLC, as co agents (collectively, the “Agents”), pursuant to which the Company paid the Agents an aggregate fee equal to 7.0% of the gross proceeds from the units sold in the February 2022 Offering and reimbursed the Agents $100,000 for expenses incurred in connection with the February 2022 Offering. In addition, the Company issued warrants (the “Placement Agent Warrants”) to Roth to purchase up to 1,850,000 shares of the Company’s common stock exercisable at an exercise price of $0.37 per share. The Placement Agent Warrants were immediately exercisable and expire on the fifth anniversary of the date of the issuance.

On February 23, 2022, the Company closed the February 2022 Offering, and issued (i) 32,550,000 shares of common stock, (ii) Series A Warrants to purchase 37,000,000 shares of common stock, (iii) Series B Warrants to purchase 37,000,000 shares of common stock, and (iv) Pre-Funded Warrants to purchase 4,450,000 shares of common stock. The gross proceeds from the February 2022 Offering were $11,100,000 and the net proceeds, after deducting the placement agent fees and offering expenses payable by us, were approximately $9,969,000. Included in the proceeds were net proceeds of approximately $1,134,000 from the exercise of warrants exercised in connection with the February 2022 Offering.

January 2021 At the Market Offerings

In January 2021, the Company entered into two sales agreements pursuant to which the Company could sell up to $35,000,000 of shares of the Company’s common stock in “at the market” offerings (the “January 2021 ATM Offerings”). The Company agreed to pay a commission to its investment bank equal to 3.0% of the aggregate gross proceeds from each sale of shares. The January 2021 ATM Offerings were completed in full in January and February 2021, pursuant to which the Company sold an aggregate of 7,608,674 shares of its common stock and generated gross proceeds of approximately $35,000,000 and net proceeds, after deducting offering expenses, of $33,662,597.

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, 2022 are as follows:

Schedule of Exercise Price of Warrants Outstanding and Exercisable

During the nine months ended September 30, 2022, and in connection with the February 2022 Offering described above, investors exercised warrants to purchase 4,450,000 shares of the Company’s common stock. The warrants were exercisable for a price of $0.2999 per share, which resulted in gross proceeds to the Company of $1,334,555, and net proceeds of $1,134,040.

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, 2022 are as follows:

 Schedule of Exercise Price of Options Outstanding and Exercisable

During the nine months ended September 30, 2022, the Company granted options to purchase an aggregate of 66,668 shares of common stock to each of the four independent members of the Company’s Board of Directors in connection with the compensation plan for such directors, with a grant date fair value of $7,793 using a Black-Scholes option pricing model based on the following assumptions: (i) a volatility rate of 146%, (ii) a discount rate of 0%, (iii) zero expected dividend yield, and (iv) an expected life of 3 years. The options have an exercise price of $0.15 per share. 8,336 of the options vested on June 30, 2022 and the remaining options vest pro-rata on a quarterly basis thereafter over two years, subject to continued service.

During the nine months ended September 30, 2021, the Company granted options to purchase 269,339 shares of common stock to the Company’s employees and to the independent 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) a discount rate of 0.38% to 1.28%, (iii) zero expected dividend yield, and (iv) an expected life of 6 years. The options have an exercise price of $1.61 to $3.95 per share. 67,558 of the options vested on the one-year anniversary of the grant date, 135,113 of the options will vest on monthly basis over two years, and 66,668 of the options will vest ratably over three years, subject to continued service. As described above, as part of their annual compensation for service on the Board of Directors, each of the five independent directors received an annual stock option grant for 16,333 shares of the Company’s common stock on June 30, 2021.

The Company computes stock price volatility over expected terms based on its historical common stock trading prices. 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 contractual term of the stock option.

For the nine months ended September 30, 2022 and 2021, the Company recognized aggregate stock-compensation expense of $191,882 and $589,229, respectively, related to the fair value of vested options.

As of September 30, 2022, the Company had an aggregate of 182,958 remaining unvested options outstanding, with a remaining fair value of approximately $321,331 to be amortized over an average of 5 years. Based on the closing price of the Company’s common stock on September 30, 2022 of $0.14 per4per share, the aggregate intrinsic value of options outstanding as of September 30, 2022 was $0.

Restricted Common Stock

During the nine months ended September 30, 2022, there were no grants of restricted shares of Company common stock. During the nine months ended September 30, 2022, approximately 211,005 shares of previously granted restricted stock that had vested were issued, net of 37,145 shares withheld related to tax withholding obligations in the amount of $24,011. Shares withheld are retired and deducted from common stock at par value and from additional paid in capital for the excess over par value.

During the nine months ended September 30, 2021, the Company granted 244,338 restricted shares of the Company’s common stock, including 152,671 restricted shares of common stock to the Company’s Chief Executive Officer that vested in January 2022, 41,667 restricted shares of common stock to a consultant for services, which shares were fully vested on August 15, 2021, and 50,000 restricted shares of common stock to the Company’s Chief Commercial Officer, which shares vest pro-rata one third per year for three years on each annual anniversary of the grant date, subject to continued employment with the Company.

The total fair value of the 244,338 restricted shares of common stock was determined to be $742,911 based on the price per share of the Company’s common stock on the dates such shares were granted. During the nine months ended September 30, 2022 and 2021, the Company recognized share-based compensation expense of $76,938 and $505,926, respectively, related to vested restricted shares. At September 30, 2022, there was $24,892 of unvested compensation related to the non-vested shares that will be amortized over a remaining vesting period of 1.75 years.

The following table summarizes restricted common stock activity for the nine months ended September 30, 2022:

 Schedule of Non Vested Restricted Common Stock Activity

2018 Equity Incentive Plan

In 2018, the Company’s stockholders originally approved the 2018 Equity Incentive Plan (as amended, the “2018 Plan”). Under the 2018 Plan (as amended, as described below), up to 10,000,000 shares of common stock may be granted to employees, directors and consultants in the form of stock options, restricted stock units and other stock-based awards. The total number of shares issuable under the 2018 Plan was increased from 1,666,666 to 10,000,000 on September 16, 2022, the date the Company’s stockholders approved an amendment to the 2018 Plan to increase the number of shares eligible under the 2018 Plan to 10,000,000 shares. The terms of awards granted under the 2018 Plan are generally determined by the Compensation Committee of the Board of Directors, subject to the provisions of the 2018 Plan. Options granted under the 2018 Plan expire depending on the individual terms of each grant. The vesting of stock options and restricted stock units granted under the 2018 Plan is variable based on the individual terms of each individual grant. During the nine months ended September 30, 2022 there were 66,668 stock options issued under the 2018 Plan to the independent members of the Company’s Board of Directors in connection with the compensation plan for such directors. During the nine months ended September 30, 2021, the Company granted options to purchase 202,671 shares of common stock, consisting of 152,671 stock options to the Company’s Chief Executive Officer and 50,000 stock options to the Company’s Chief Commercial Officer. During the nine months ended September 30, 2021 there were also 66,668 stock options issued under the 2018 Plan to the independent members of the Company’s Board of Directors in connection with the compensation plan for such directors. During the nine months ended September 30, 2021, the Company granted 202,671 restricted shares of the Company’s common stock, including 152,671 restricted shares of common stock to the Company’s Chief Executive Officer and 50,000 restricted shares of common stock to the Company’s Chief Commercial Officer under the 2018 Plan.

As of September 30, 2022, the Company has granted 611,007 stock options and 202,671 shares of restricted common stock under the 2018 Plan. As of September 30, 2022, there was a balance of 9,186,322 shares of common stock available for grants under the 2018 Plan.

9. Commitments and Contingencies

Legal Proceedings

In the normal course of business, the Company is periodically the subject of various pending or threatened legal actions and claims arising out of its operations. At September 30, 2022 and December 31, 2021, the Company was not a party to any material legal proceedings and is not aware of any pending or threatened legal proceedings against the Company that it believes could have a material adverse effect on its business, operating results, cash flows or financial condition.

10. Subsequent Events

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

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

You should read the following discussion and analysis of our financial condition and results of operations together with and our financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as may be amended, supplemented or superseded from time to time by other reports we file with the SEC. All amounts in this report are in U.S. dollars, unless otherwise noted.

As used in this Quarterly Report on Form 10-Q, the terms “we,” “us” “our” and the “Company” mean Guardion Health Sciences, Inc., individually, or as the context requires, collectively with its subsidiaries.

Overview

We are a clinical nutrition company that develops and distributes clinically supported nutrition, medical foods and dietary supplements. We offer a portfolio of science-based, clinically supported products designed to support retail consumers, healthcare professionals and providers and their patients.

We see opportunities to grow our business and create value by acquiring, developing, and distributing condition-specific, clinically proven and science-based nutrition, medical foods and dietary supplements.

Our profile and focus fundamentally changed with the acquisition of Activ Nutritional, LLC (“Activ” or “Viactiv,” as the context requires) and its Viactiv line of dietary supplements for bone health, immune health and other applications from Adare Pharmaceuticals, Inc. (“Adare”) on June 1, 2021.

The acquisition and integration of the Viactiv line of products has materially changed our financial position, market profile and brand focus, and has also expanded our search for additional business opportunities in the short-term, both internal and external. Our operations and financial results for the three months ended September 30, 2022 are comparable to the three months ended September 30, 2021, which was the first quarter that we owned Activ for all three months. Neither the operations or the financial results for the nine months ended September 30 2022 are comparable to the nine months ended September 30, 2021 since we acquired Activ on June 1, 2021.

We believe the Activ acquisition added other valuable attributes that are helping us achieve our goals, including (1) Viactiv’s brand awareness and acceptance from the consumer; (2) experienced management; (3) established distribution and supply networks and relationships; (4) product development potential; and (5) a long track record of revenue growth and profitability.

Launch of Viactiv® Omega Boost Gel Bites

In February 2022, we began the marketing of our Viactiv® Omega Boost Gel Bites product, our first expansion of the Viactiv brand since we acquired the business in June 2021. The 1,200 mg Omega-3 gel bites are designed to provide total body support, including cardiovascular, brain, joint and eye health. The new dosage form is able to provide the potency of large, hard-to-swallow soft gels, in a great tasting chewable format that has ten times more Omega-3 than the leading fish oil gummies. The gel bite dosage form has been shown to have better absorption and fewer digestive issues than regular soft gel formulas, as well as no unpleasant fishy aftertaste and no sugar, which is associated with many other Omega-3 products. During the three months ended September 30, 2022, we announced interim results of an independent clinical study designed to evaluate the effectiveness of our new Viactiv Omega Boost Gel Bites at increasing Omega-3 saturation levels on red blood cells. Our interim clinical results showed a 51% improvement in Omega-3 levels in just 4 weeks of customer usage.

We hope that this new product will not only increase our revenues but also be the first of many new product launches over upcoming quarters. The Omega Boost Gel Bites also represent an expansion of the Viactiv brand beyond calcium products. Initial customer reaction has been positive as judged by online reviews. Although sales of our Omega Boost Gel Bites have been modest since its launch, we are optimistic about the potential of the product as we increase consumer awareness, receive additional clinical support for the efficacy of the product, refine our marketing activities and increase distribution.

Adding these products has enabled us to create additional value in multiple ways. We believe the Viactiv brand and established distribution will make our Omega Boost Gel Bites sales and marketing functions more successful. Introducing this new product in 2022 expanded our portfolio beyond calcium chews which is an important aspect of our growth strategy. The Viactiv brand has traditionally focused its marketing of calcium supplements to female purchasers at different life stages. We believe this target audience will also be interested in purchasing our omega-3 supplements that we believe provide a preferred alternative to existing omega-3 soft gels and gummy products.

The introduction of the Omega Boost Gel Bites product greatly expanded the total addressable market for Viactiv by expanding the brand into the established sizeable omega-3 market. We hope that our omega-3 product will distinguish itself from the competition over time.

We have also expanded our sales channels for Viactiv by launching a direct-to-consumer website. This new channel offers Viactiv customers an additional channel to purchase our products, but it also provides customers with more customized offers and information.

We plan to leverage the established distribution channels and marketing experience that Viactiv enjoys to our other products, which we hope will accelerate those products’ revenue growth. Viactiv has traditionally distributed its calcium chews through traditional retailers with physical locations, online retailers and direct to consumer via our website. We launched our Omega Boost Gel Bites on the viactiv.com website, and we continue to add online retailers. We are currently evaluating whether to expand distribution to traditional retailers. Initial customer reaction to the Omega Boost Gel Bites has been positive as judged by online reviews, customer surveys and focus groups. While sales of our Omega Boost Gel Bites have been modest, we are optimistic about the product’s potential as we increase consumer awareness, receive additional clinical support for the efficacy of the product, and refine our marketing activities.

Launch of Direct-to-Consumer Online Store for Viactiv Products

During January 2022, we launched our new e-commerce venue through a Shopify store for our Viactiv line of products (which can be found at www.activ.com). The new e-commerce platform offers Viactiv customers the option of shopping via retail outlets (e.g., grocery, pharmacy, etc.) or online through those same retail websites or directly through our new branded website. We derived approximately 1% of our sales revenue from this channel during the nine months ended September 30, 2022. We hope to increase this revenue segment through a targeted marketing effort to attract existing and new customers through a digital marketing strategy which entails mobile optimization, performance marketing, and brand awareness.

Strategic Objectives, Goals and Strategies

Our ability to maximize stockholder value requires that we build a solid corporate foundation and demonstrate growth and commercial success on top of that foundation. We took a number of steps in 2021 and to date in 2022 to strengthen our corporate foundation, including acquiring Viactiv, winding down and reevaluating Vector Vision, hiring key team members and streamlining operations.

Our three primary objectives are:

We are also exploring ways, with the assistance of our financial advisor, to more rapidly grow the Company’s total revenues and improve our profits. We are evaluating potential transaction opportunities to add additional brands to our existing brand portfolio or to combine the Company with larger companies whereby the Company’s brands would be added to such entity’s suite of products in order to obtain operating synergies and opportunities.

Evaluation of Strategic Alternatives

The Company is also evaluating alternative strategic paths focused on maximizing stockholder value, and we have hired a financial advisor to support this process. Our management team and Board of Directors believe that the current market valuation of the Company does not accurately reflect the potential value of the Company and the clinical nutrition platform that we are building. The Company is therefore exploring a diverse range of strategic options to help grow the Company and enhance stockholder value, including, among other things, a sale, merger, acquisition, reverse acquisition, or other strategic transaction. There can be no assurances, however, that this process will result in a transaction, or that if a transaction is completed, it will ultimately enhance stockholder value. There is no set timetable for the strategic review process and the Company does not intend to provide periodic updates until the Board of Directors makes a formal decision and determines that disclosure is appropriate and/or necessary under the circumstances.

Availability of Capital

We may continue to seek to raise additional debt and/or equity capital to fund future operations and acquisitions as necessary, but there can be no assurances that we will be able to secure such additional financing in the amounts necessary to fully fund our operating requirements on acceptable terms or at all. Over time, if we are unable to access sufficient capital resources on a timely basis, we may be forced to reduce or discontinue our product development programs and/or curtail or cease operations.

We will continue to incur significant expenses related to the commercialization and development of our products and with respect to our efforts to build our infrastructure, expand our operations, and execute on our business plans. Even if profitability is achieved in the future, we may not be able to sustain profitability on a consistent basis. We expect to continue to incur substantial losses and negative cash flow from operations for the foreseeable future.

We do not have any credit facilities as a source of present or future capital. If we raise additional capital through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders. Debt financing, if obtained, may involve agreements that include covenants limiting or restricting the ability to take specific actions, such as incurring additional debt, would increase expenses and may require that our assets secure such debt.

February 2022 Offering

On February 18, 2022, we entered into a Securities Purchase Agreement with certain institutional investors, pursuant to which we issued and sold, (i) 32,550,000 units, at $0.30 per unit, with each unit consisting of one share of our common stock, one warrant to purchase one share of our common stock at an exercise price of $0.37 per share that expires on the fifth anniversary of the date of issuance (“Series A Warrant”) and one warrant to purchase one share of our common stock at an exercise price of $0.37 per share that expires on the 18 month anniversary of the date of issuance (“Series B Warrant”), and (ii) 4,450,000 pre-funded units, at $0.2999 per unit, with each unit consisting of one pre-funded warrant to purchase one share of our common stock at an exercise price of $0.0001 per share (a “Pre-Funded Warrant” and together with the Series A Warrants and Series B Warrants, the “Warrants”), one Series A Warrant and one Series B Warrant (collectively, the “February 2022 Offering”.

The exercise prices of the Series A Warrants and Series B Warrants are subject to appropriate adjustment in the event of recapitalization events, stock dividends, stock splits, stock combinations, reclassifications, reorganizations or similar events affecting the Company’s common stock. In addition, in the event the Company effects a reverse stock split during the term of the Series A Warrants and Series B Warrants, the exercise price of such warrants following such reverse split will be subject to further adjustment in the event the trading price of our common stock following such reverse stock split is lower than the exercise price of such warrants. Also, subject to customary exceptions, the exercise price of the Series A Warrants is subject to adjustment in the event of issuances of the Company’s common stock or common stock equivalents at a price below the exercise price of the Series A Warrants. In such event, the exercise price of the Series A Warrants will be reduced to the price of the securities issued in such transactions. In the event of a fundamental transaction, the holder of a warrant shall have the option, exercisable at any time concurrently with, or within 30 days after, the consummation of the fundamental transaction to cause the Company to purchase such warrant from the holder for cash in an amount equal to the Black Scholes value of such warrant calculated in accordance with the terms of warrant.

On February 18, 2022, we entered into a Placement Agency Agreement (the “Placement Agency Agreement”) with Roth Capital Partners LLC (“Roth”) and Maxim Group LLC, as co-agents (collectively, the “Agents”), pursuant to which we paid the Agents an aggregate fee equal to 7.0% of the gross proceeds from the units sold in the February 2022 Offering and reimbursed the Agents $100,000 for expenses incurred in connection with the February 2022 Offering. In addition, we issued warrants (the “Placement Agent Warrants”) to Roth to purchase up to 1,850,000 shares of our common stock exercisable at an exercise price of $0.37 per share. The Placement Agent Warrants were immediately exercisable and expire on the fifth anniversary of the date of the issuance.

On February 23, 2022, we closed the February 2022 Offering, and issued (i) 32,550,000 shares of common stock, (ii) Series A Warrants to purchase 37,000,000 shares of common stock, (iii) Series B Warrants to purchase 37,000,000 shares of common stock, and (iv) Pre-Funded Warrants to purchase 4,450,000 shares of common stock. The gross proceeds from the February 2022 Offering were $11,100,000 and the net proceeds, after deducting the placement agent fees and offering expenses payable by us, were approximately $9,969,000. Included in the proceeds were net proceeds of approximately $1,134,000 from the exercise of warrants exercised in connection with the February 2022 Offering.

Nasdaq Notice

On January 25, 2022, we received a written notice from the Nasdaq Stock Market LLC (“Nasdaq”) that the Company had not been in compliance with the minimum bid price requirement set forth in Nasdaq Listing Rule 5550(a)(2) for a period of 30 consecutive business days. Nasdaq Listing Rule 5550(a)(2) requires listed securities to maintain a minimum bid price of $1.00 per share, and Nasdaq Listing Rule 5810(c)(3)(A) provides that a failure to meet the minimum bid price requirement exists if the deficiency continues for a period of 30 consecutive business days.

In accordance with Nasdaq Listing Rule 5810(3)(A), we were provided a compliance period of 180 calendar days from the date of the notice, or until July 25, 2022, to regain compliance with the minimum $1.00 bid price requirement. We did not regain compliance during the compliance period ended July 25, 2022, and accordingly we requested that Nasdaq grant us a second 180 calendar day period to regain compliance.

On July 26, 2022, the Company received a written notice from Nasdaq that the Company was granted a second 180 calendar day period, or until January 23, 2023, to regain compliance with the $1.00 minimum bid price requirement. Nasdaq’s determination to grant the second compliance period was based on the Company meeting the continued listing requirement for market value of publicly held shares and all other applicable requirements for initial listing on The Nasdaq Capital Market, with the exception of the minimum bid price requirement, and the Company’s written notice of its intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary. Previously, at the Company’s Annual Meeting of Stockholders (“Annual Meeting”) held on June 16, 2022, the proposal to grant discretionary authority to the Company’s Board of Directors to amend the Company’s Certificate of Incorporation, as amended, to combine outstanding shares of the Company’s common stock into a lesser number of outstanding shares at a specific ratio within a range of no split to a maximum of a 1-for-30 split, with the exact ratio to be determined by the Board of Directors in its sole discretion (the “Reverse Stock Split”) was not approved by the requisite vote of a majority of the Company’s issued and outstanding shares. Although 63% the stockholders represented at the Annual Meeting voted in favor of the Reverse Stock Split, more than 50% of the Company’s issued and outstanding shares were not represented at the Annual Meeting as is required under Delaware law to approve the Reverse Stock Split. To regain compliance, the closing bid price of the Company’s common stock must be at least $1.00 per share for a minimum of 10 consecutive business days prior to January 23, 2023.

The Company is carefully assessing potential actions to regain compliance, including, without limitation, holding a special stockholders’ meeting to solicit approval of a Reverse Stock Split, however, the Company may be unable to regain compliance with the $1.00 minimum bid price requirement during the compliance period. If the Company fails to regain compliance during the second 180-day period that will expire on January 23, 2023, then Nasdaq will notify the Company of its determination to delist the Company’s common stock, at which point the Company will have an opportunity to appeal the delisting determination to the Hearing Review Council at Nasdaq, before the Company’s common stock is formally delisted.

VectorVision

During December 2021, as part of management’s evaluation of our business in light of the Activ acquisition, we substantially wound down the day-to-day operations of VectorVision, to significantly reduce costs. We are exploring various alternatives, and significantly less costly ways, to preserve, manage and exploit our various related intellectual property rights. Consequently, with reduced resources dedicated to VectorVision, management believes that it will be able to better focus its efforts and deploy capital to more growth-oriented brands and product lines, like Viactiv, and other products in development.

Concentration of Risk

Information with respect to concentration of risk is provided at Note 2 to the condensed consolidated financial statements for the three months and nine months ended September 30, 2022 and 2021 included elsewhere in this Quarterly Report on Form 10-Q.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates. 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. There were no changes to our critical accounting policies described in the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, that impacted our condensed consolidated financial statements and related notes included herein.

Recent Trends – Market Conditions

We are subject to risks and uncertainties from the COVID-19 pandemic that could adversely impact our business. We have implemented health and safety precautions and protocols in response to the pandemic and government guidelines.

Our financial results for the nine months ended September 30, 2022 have been affected by supply chain constraints due, in large part, to the COVID-19 pandemic and resulting labor shortages experienced by our suppliers. These constraints began in the three months ended December 31, 2021 and have continued through 2022 and will continue into 2023. These supply chain constraints have impacted our ability to obtain inventory to fulfill customer orders for our Viactiv branded products and may continue to impact our ability to fulfill customer orders going forward. The effects of the supply chain constraints, which negatively impact the availability of many critical components of our supply chain and distribution, may have a material adverse effect on our business and results of operations. Additionally, we are subject to out-of-stock fees to certain retailers in the event that we are unable to adequately maintain certain inventory levels of our Viactiv products with such retailers. Although we expect these supply chain challenges to continue through at least throughout 2022, we have begun to see some improvement in the inventory production cycle.

Inflation and potential recession

We are, and our suppliers are experiencing significant broad-based inflation of manufacturing and distribution costs as well as transportation challenges, partially as a result of the pandemic. The competition in labor has driven significant increases in wages in order to compete for sufficient labor availability and has significantly affected our supplier costs. Additionally, the increase in fuel costs has also impacted transportation costs. Although we do not believe that inflation has had a material effect on our business, financial condition or results of operations, it may in the future. We are monitoring cost structures and evaluating to what extent any such costs can be passed on to customers, taking into account the overall impact of increasing inflation and interest rate pressures on consumers. We communicated a price increase to our retail partners during the second quarter of 2022. We expect this price increase to be implemented by year end. We expect input cost inflation to continue through 2022 and into 2023. If we are unable to successfully manage the effects of inflation, our business, operating results, cash flows and financial condition may be adversely affected. Additionally, there have been various economic indicators that the United States economy may be entering a recession in upcoming quarters. An economic recession could potentially impact the general business environment and the capital markets, which may have a material negative impact on our financial results.

Recent Accounting Pronouncements

Information with respect to recent accounting pronouncements is provided at Note 2 to the condensed consolidated financial statements for the three months and nine months ended September 30, 2022 and 2021 included elsewhere in this Quarterly Report on Form 10-Q.

Plan of Operations

General Overview

We are focused on building a leading clinical nutrition company with the objective that we become a top performing growth company. Our team continues to assess the business, the core fundamentals, and the market opportunity for our products and services. With the acquisition of Viactiv brand and business on June 1, 2021, management believes that we will be able to accelerate our growth and development.

Our team is focused on building a strong foundation by developing a business model and infrastructure that is designed for long-term commercial success. This process will take time, but we are taking important steps required to build a stronger company. Based on the availability of sufficient funding, we intend to increase our commercialization and business development activities, including engaging in new product development and further strategic acquisitions, to capitalize on growth opportunities.

Over the long-term, we believe one of the critical keys to our success will be to create value in well-differentiated and robust brands through strong clinically proven claims that address consumer needs in growing markets. We are committed to bringing compelling products to market under meaningful and differentiated brands supported by strong science.

We are currently working on several initiatives that we believe will help achieve these long-term goals as described above under “Strategic Objectives, Goals and Strategies” and below.

Our growth initiatives are focused on increasing revenue and bringing compelling products to market under meaningful and differentiated brands that are supported by strong science. Management intends to focus on those products that possess the greatest chance for commercial success within a reasonable period of time and with a reasonable deployment of capital.

Results of Operations

Through September 30, 2022, we have primarily been engaged in product development, commercialization, integration of Activ and raising capital. We have incurred, and will continue to incur significant expenditures for the commercialization and development of our products. With the acquisition of the Viactiv brand and business effective June 1, 2021, and its successful integration into our operations since that date, we believe we have established a significant baseline level of gross revenues from which we hope to grow.

At December 31, 2021, we ceased operations of VectorVision. We are exploring various alternative ways to preserve, manage and exploit the various related intellectual property rights, including our U.S. patents, associated with the VectorVision technology, in a cost-effective manner.

The results of operations and financial results for the three months ended September 30, 2022 are comparable to the three months ended September 30, 2021 since the operations and financial results from acquisition of Activ on June, 1 2021 were fully reflected in the results in the three months ended September 30, 2021, however neither the operations or the financial results for the nine months ended September 30 2022 are comparable to the nine months ended September 30, 2021.

Comparison of Three Months Ended September 30, 2022 and 2021

Revenue

For the three months ended September 30, 2022, revenue from product sales was $2,663,550, as compared to $3,148,612 for the three months ended September 30, 2021, a decrease of $485,062 or 15%. Our top two customers accounted for a decrease in sales of approximately $340,000, approximately 85% of the change.

Cost of Goods Sold

For the three months ended September 30, 2022, cost of goods sold was $1,575,366, as compared to $1,760,586 for the three months ended September 30, 2021, a decrease of $185,220 or 11%. This decrease is attributable a reduction of $130,787 in cost of sales related to our Viactiv product line, a reduction of $30,268 in our former diagnostics business and a decrease in cost of sales related to our optical line of products in the amount of $24,165 during the three months ended September 30, 2022.

Gross Profit

For the three months ended September 30, 2022, gross profit was $1,088,184, as compared to $1,388,026 for the three months ended September 30, 2021, a decrease of $299,842 or 22%. This decrease is the result of a reduction of gross profit related to our Viactiv product line of $303,932, a reduction of $8,819 of gross profit related to our former diagnostics business partially offset by an increase of $12,909 in gross profit from our optical product lines. Gross margin for the three months ended September 30, 2022 equaled 40.9% compared to 44.08% for the three months ended September 30, 2021. Our gross profit was negatively impacted as a direct result of the increase in retail customer trade promotions and other trade allowances deducted from gross revenue as described above.

Sales and Marketing

For the three months ended September 30, 2022, sales and marketing expenses were $526,193 as compared to $777,526 for the three months ended September 30, 2021, a decrease of $251,333, or 32%. The decrease is attributable to our reduced expenditures in marketing and advertising during the three months ended September 30, 2022 related to our Viactiv line of products. Sales and marketing costs are primarily attributable to the Viactiv product line and consist primarily of advertising expenses related to our Calcium, Immune and Omega Boost Gel Bites products. We incurred additional expense in 2022 related to the launch of our Viactiv® Omega Boost Gel Bites product, including creative development, testimonial advertising, account management and social media related costs. Viactiv® Omega Boost Gel Bites is our first product launch under the Viactiv brand since we acquired the brand in June 2021. The Omega Boost Gel Bites represented an important expansion of the Viactiv brand beyond calcium products.

General and Administrative and other

For the three months ended September 30, 2022, general and administrative and other expenses were $2,241,182 as compared to $3,329,608 for the three months ended September 30, 2021, a decrease of $1,088,426 or 33%. The decrease was primarily driven by decreases of approximately $436,00 in professional fees, $315,000 in stock based compensation, $172,000 in consulting expenses, $98,000 in insurance, $47,000 in license and fees, $45,000 in rent, $36,000 in broker and administrative fees and $15,000 in repairs and maintenance partially offset by an increase in payroll and related costs of $233,000.

Acquisition Transaction Costs

We did not have any acquisition costs in the three months ended September 30, 2022 or in the three months ended September 30, 2021.

Net Loss

For the three months ended September 30, 2022, we incurred a net loss of $1,696,112, as compared to a net loss of $3,014,836 for the three months ended September 30, 2021.

Comparison of Nine Months Ended September 30, 2022 and 2021

Revenue

For the nine months ended September 30, 2022, revenue from product sales was $8,323,382, as compared to $4,605,628 for the nine months ended September 30, 2021, an increase of $3,717,754 or 81%. This increase is primarily attributable to $8,006,229 of revenue generated during the nine months ended September 30, 2022 from sales of our Viactiv product line as compared to the $4,047,920 of revenue generated from sales of our Viactiv product line for the nine months ended September 30, 2021, an increase of $3,958,309. In the 2021 period, we only operated the Viactiv line from June 1 through September 30.

Cost of Goods Sold

For the nine months ended September 30, 2022, cost of goods sold was $4,739,197, as compared to $2,558,840 for the nine months ended September 30, 2021, an increase of $2,180,357 or 85%. This increase is primarily attributable to $4,505,892 of cost of sales related to our Viactiv product line during the nine months ended September 30, 2022 as compared to $2,155,625 of cost of sales related to our Viactiv product line during the nine months ended September 30, 2021, an increase of $2,350,267. In the 2021 period, we only operated the Viactiv line from June 1 through September 30.

Gross Profit

For the nine months ended September 30, 2022, gross profit was $3,584,185, as compared to $2,046,788 for the nine months ended September 30, 2021, an increase of $1,537,397 or 75%. This increase is primarily the result of the addition of $3,500,337 of gross profit generated by sales of our Viactiv products during the nine months ended September 30, 2022, as compared to gross profit generated by sales of our Viactiv products of $1,892,295 during the nine-months ended September 30, 2021. Gross margin for the nine months ended September 30, 2022 equaled 43.1% compared to 44.4% for the nine months ended September 30, 2021. The primary reason for the decrease in gross margin for the nine months ended September 30, 2022 related to a $109,363 impairment charge in such period for out-of-date product packaging materials.

Sales and Marketing

For the nine months ended September 30, 2022, sales and marketing expenses were $1,583,349 as compared to $1,754,321 for the nine months ended September 30, 2021, a decrease of $170,972, or 10%. The decrease is attributable to our reduced expenditures in marketing and advertising during the nine months ended September 30, 2022 related to our Viactiv line of products. Sales and marketing costs are primarily attributable to the Viactiv product line and consist primarily of advertising expenses related to our Calcium, Immune and Omega Boost Gel Bites products. We incurred additional expense in 2022 related to the launch of our Viactiv® Omega Boost Gel Bites product, including creative development, testimonial advertising, account management and social media related costs. Viactiv® Omega Boost Gel Bites is our first product launch under the Viactiv brand since we acquired the brand in June 2021. The Omega Boost Gel Bites represented an important expansion of the Viactiv brand beyond calcium products.

General and Administrative and other

For the nine months ended September 30, 2022, general and administrative and other expenses were $7,875,894, as compared to $8,080,596 for the nine months ended September 30, 2021, a decrease of $204,702, or 3%. The decrease was primarily driven by increases of approximately $547,000 in compensation, $496,000 in amortization of intangible assets, $250,000 in broker and administrative fees, $133,000 in warehouse costs and $34,000 in insurance expense offset by decreases of approximately $826,000 in stock based compensation, $674,000 in consulting fees, $122,000 in rent expense, $46,000 in repairs and maintenance fees and $23,000 in travel expense.

Acquisition Transaction Costs

For the nine months ended September 30, 2021, acquisition transaction costs were $2,103,680 all of which relate to our acquisition of Activ on June 1, 2021. We did not have any acquisition costs in the nine months ended September 30, 2022.

Net Loss

For the nine months ended September 30, 2022, we incurred a net loss of $6,016,562, compared to a net loss of $10,224,649 for the nine months ended September 30, 2021.

Liquidity and Capital Resources

For the nine months ended September 30, 2022, we incurred a net loss of approximately $6,016,562 and used cash in operating activities of approximately $6,083,000. At September 30, 2022, we had cash on hand of approximately $12,946,000 and working capital of approximately $16,078,000.

On February 23, 2022, we closed a securities offering that generated net proceeds to us, after deducting placement agent fees and offering expenses payable by us, of approximately $9,969,000. (see “February 2022 Offering”)

Notwithstanding the net loss for the nine months ended September 30, 2022, management believes that our current cash balance and short-term investments are sufficient to fund operations for at least one year from the date that this Quarterly Report on Form 10-Q is filed with the SEC.

Our financing has historically come primarily from the sale of common stock. We will continue to incur significant expenses for continued commercialization activities related to our clinical nutrition product lines and building our infrastructure. Development and commercialization of clinical nutrition products involves a lengthy and complex process. Additionally, our long-term viability and growth may depend upon the successful development and commercialization of new complementary products or product lines.

We may continue to seek to raise additional debt and/or equity capital to fund future operations and acquisitions as necessary, but there can be no assurances that we will be able to secure such additional financing in the amounts necessary to fully fund our operating requirements and strategic initiatives on acceptable terms or at all. Over time, if we are unable to access sufficient capital resources on a timely basis, we may be forced to reduce or discontinue our product development programs and/or curtail or cease operations.

Sources and Uses of Cash and Cash Equivalents

The following table sets forth the Company’s major sources and uses of cash and cash equivalents for each of the following periods:

Operating Activities

Net cash used in operating activities was $6,082,906 during the nine months ended September 30, 2022, as compared to $9,078,172 for the nine months ended September 30, 2021. The decrease of $2,995,266 in cash used by operating activities was due primarily to the $2,103,680 acquisition costs incurred during the nine months ended September 30, 2021 related to our purchase of Activ on June 1, 2021, partially offset by increased operating cash flows from the Activ business for the nine months ended September 30, 2022.

Investing Activities

Net cash provided by investing activities was $4,990,054 for the nine months ended September 30, 2022, and net cash used by investing activities was $33,107,719 for the nine months ended September 30, 2021.Cash used in investing activities for the nine months ended September 30, 2021 included approximately $26,000,000 expended for the acquisition of Activ on June 1, 2021. Cash provided by investing activities during the nine months ended September 30, 2022 consists primarily of the net of purchases and sales of US Treasury Bills

Financing Activities

Net cash provided by financing activities was $9,944,928 for the nine months ended September 30, 2022 and consisted primarily of the sale of common stock resulting in net proceeds of $8,834,899 and warrant exercises resulting in net proceeds of $1,134,040. Net cash provided by financing activities was $37,231,013 for the nine months ended September 30, 2021, resulting from the sale of common stock resulting in net proceeds of $33,662,597 and the warrant exercises resulting in net proceeds of $3,568,414.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As we are a “smaller reporting company”, as defined in Rule 12b-2 of the Exchange Act we are not required to provide the information required by this Item.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our principal executive officer and principal financial officer, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) as of September 30, 2022, the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that our disclosure controls and procedures were effective such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosure.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during our most recent fiscal quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is not currently a party to any material legal proceedings and is not aware of any pending or threatened legal proceeding or claim against the Company that the Company believes could have a material adverse effect on its business, operating results, cash flows or financial condition. The Company is periodically the subject of various pending or threatened legal actions and claims arising out of its operations in the normal course of business. Regardless of the outcome, such proceedings or claims can have a material adverse impact on the Company because of defense and settlement costs, diversion of resources and other factors, and there can be no assurances that favorable outcomes will be obtained.

ITEM 1A. RISK FACTORS

Risk factors that affect our business and financial results are discussed in Part I, Item 1A “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the SEC on March 31, 2022 (“Annual Report”). There have been no material changes in our risk factors from those previously disclosed in our Annual Report, other than as described herein and below. You should carefully consider the risks described in our Annual Report, which could materially affect our business, financial condition or future results. The risks described in our Annual Report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results. If any of the risks actually occur, our business, financial condition, and/or results of operations could be negatively affected.

Risks Related to the Company’s Business

Inflation and potential recession

We are, and our suppliers are experiencing significant broad-based inflation of manufacturing and distribution costs as well as transportation challenges, partially as a result of the pandemic. The competition in labor has driven significant increases in wages in order to compete for sufficient labor availability and has significantly affected our supplier costs. Additionally, the increase in fuel costs has also impacted transportation costs. Although we do not believe that inflation has had a material effect on our business, financial condition or results of operations, it may in the future. We are monitoring cost structures and evaluating to what extent any such costs can be passed on to customers, taking into account the overall impact of increasing inflation and interest rate pressures on consumers. We communicated a price increase to our retail partners during the second quarter of 2022. We expect this price increase to be implemented by year end. We expect input cost inflation to continue through 2022 and into 2023. If we are unable to successfully manage the effects of inflation, our business, operating results, cash flows and financial condition may be adversely affected. Additionally, there have been various economic indicators that the United States economy may be entering a recession in upcoming quarters. An economic recession could potentially impact the general business environment and the capital markets, which may have a material negative impact on our financial results.

Risks Related to the Company’s Common Stock

The Company received a written notice from Nasdaq that it has failed to comply with certain listing requirements of the Nasdaq Stock Market, which could result in the Company’s being delisted from the Nasdaq Stock Market.

On January 25, 2022, the Company received a written notice from the Nasdaq Stock Market LLC (“Nasdaq”) that the Company had not been in compliance with the minimum bid price requirement set forth in Nasdaq Listing Rule 5550(a)(2) for a period of 30 consecutive business days. Nasdaq Listing Rule 5550(a)(2) requires listed securities to maintain a minimum bid price of $1.00 per share, and Nasdaq Listing Rule 5810(c)(3)(A) provides that a failure to meet the minimum bid price requirement exists if the deficiency continues for a period of 30 consecutive business days.

In accordance with Nasdaq Listing Rule 5810(3)(A), the Company was provided a compliance period of 180 calendar days from the date of the notice, or until July 25, 2022, to regain compliance with the $1.00 minimum bid price requirement. The Company did not regain compliance during the compliance period ended July 25, 2022, and accordingly the Company requested that Nasdaq grant it a second 180 calendar day period to regain compliance.

On July 26, 2022, the Company received a written notice from Nasdaq that the Company was granted a second 180 calendar day period, or until January 23, 2023, to regain compliance with the $1.00 minimum bid price requirement. Nasdaq’s determination to grant the second compliance period was based on the Company meeting the continued listing requirement for market value of publicly held shares and all other applicable requirements for initial listing on The Nasdaq Capital Market, with the exception of the minimum bid price requirement, and the Company’s written notice of its intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary. Previously, at the Company’s Annual Meeting of Stockholders (“Annual Meeting”) held on June 16, 2022, the proposal to grant discretionary authority to the Company’s Board of Directors to amend the Company’s Certificate of Incorporation, as amended, to combine outstanding shares of the Company’s common stock into a lesser number of outstanding shares at a specific ratio within a range of no split to a maximum of a 1-for-30 split, with the exact ratio to be determined by the Board of Directors in its sole discretion (the “Reverse Stock Split”) was not approved by the requisite vote of a majority of the Company’s issued and outstanding shares. Although 63% of the stockholders represented at the Annual Meeting voted in favor of the Reverse Stock Split, more than 50% of the Company’s issued and outstanding shares were required under Delaware law to vote in favor of the Reverse Stock Split. To regain compliance, the closing bid price of the Company’s common stock must be at least $1.00 per share for a minimum of 10 consecutive business days prior to January 23, 2023.

The Company is carefully assessing potential actions to regain compliance, including, without limitation, holding a special stockholders’ meeting to solicit approval of a Reverse Stock Split, however, the Company may be unable to regain compliance with the $1.00 minimum bid price requirement during the compliance period. If the Company fails to regain compliance during the second 180-day period that will expire on January 23, 2023, then Nasdaq will notify the Company of its determination to delist the Company’s common stock, at which point the Company will have an opportunity to appeal the delisting determination to the Hearing Review Council at Nasdaq, before the Company’s common stock is formally delisted.

If the Company is delisted from Nasdaq, its common stock may be eligible for trading on an over-the-counter market. If the Company is not able to obtain a listing on another stock exchange or quotation service for its common stock, it may be extremely difficult or impossible for stockholders to sell their shares of common stock. Further, there can be no assurance that the market price per new share of the Company’s common stock after a reverse stock split will remain unchanged or increase in proportion to the reduction in the number of old shares of the Company’s common stock outstanding before the reverse stock split.  Even if the reverse stock split is approved by the Company’s stockholders, there can be no assurance that the Company will be able to regain compliance with the minimum bid price requirement or will otherwise be in compliance with other Nasdaq listing rules. Moreover, if the Company is delisted from Nasdaq, but obtains a substitute listing for its common stock, it will likely be on a market with less liquidity, and therefore experience potentially more price volatility than experienced on Nasdaq. Stockholders may not be able to sell their shares of common stock on any such substitute market in the quantities, at the times, or at the prices that could potentially be available on a more liquid trading market. As a result of these factors, if the Company’s common stock is delisted from Nasdaq, the value and liquidity of the Company’s common stock, warrants and pre-funded warrants would likely be significantly adversely affected. A delisting of the Company’s common stock from Nasdaq could also adversely affect the Company’s ability to obtain financing for its operations and/or result in a loss of confidence by investors, employees and/or business partners.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.