Guardion Health Sciences, Inc. - Quarter Report: 2023 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, 2023

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 9, 2023, there were 1,275,238 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, 2022, 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. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. 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. We qualify all of the information presented in this Quarterly Report on Form 10-Q, and particularly our forward-looking statements, by these cautionary statements.

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 Months and Nine Months Ended September 30, 2023 and 2022

(Unaudited)

1. Organization and Business Operations

Business

Guardion Health Sciences, Inc. (the “Company”) is a clinical nutrition company that develops and distributes clinically supported nutrition, medical foods and dietary supplements. The Company offers a portfolio of science-based, clinically supported products designed to support healthcare professionals and providers, and their patients and consumers. The Company was formed in 2009 as a California limited liability company under the name P4L Health Sciences, LLC, and in 2015 converted from a California limited liability company to a Delaware corporation, changing its name from Guardion Health Sciences, LLC to Guardion Health Sciences, Inc. In June 2021, the Company acquired Activ Nutritional, LLC (“Activ”), the owner and distributor of the Viactiv® line of supplements for bone health and other applications.

Liquidity

For the nine months ended September 30, 2023, the Company recorded a loss from operations of $3,249,567 and used cash in operating activities of $3,052,293. The Company has a history of operating losses and negative cash flows. Even though the Company’s management identified certain indicators, including the current period loss from operations and the potential impact of inflation and general economic uncertainty, management concluded these indicators do not raise substantial doubt regarding the Company’s ability to continue as a going concern within one year after the date these financial statements are issued. As of September 30, 2023, the Company had $7,657,309 of cash and cash equivalents, and management determined that it is probable that the Company will be able to fund its current operating plan and meet all of its obligations due within one year from the date these financial statements are issued.

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 (primarily the Viactiv® product line) and the successful development and commercialization of new products and product lines. The Company may also utilize cash to fund acquisitions of complementary businesses, product lines and/or brands.

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. Over time, if the Company is unable to access sufficient capital resources on a timely basis, the Company may be forced to reduce or discontinue its product development programs or curtail or cease operations.

Inflation

Higher inflation, the actions by the Federal Reserve Bank to address inflation, most notably continuing increases in interest rates, and rising food and energy prices in combination with higher labor costs create uncertainty about the future economic environment. The Company expects that the impact of these issues will continue to evolve. The Company believes these factors impacted the Company’s business in 2022 and the first nine months of 2023, and will continue to impact the Company’s business for the remainder of 2023 and in 2024. The implications of higher government deficits and debt, tighter monetary policy, and higher long-term interest rates may drive a higher cost of capital for the business and an increase in the Company’s operating expenses.

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, 2022, 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, 2023.

These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes for the fiscal year ended December 31, 2022 included in the Company’s December 31, 2022 Annual Report on Form 10-K, which was filed with the SEC on April 17, 2023. The condensed consolidated balance sheet as of December 31, 2022 was derived from the audited consolidated financial statements as of that date, but does not include all disclosures, including notes, required by GAAP.

The Company’s 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.

In accordance with the “Segment Reporting” Topic of the Accounting Standards Codification, the Company’s chief operating decision maker (the Company’s Chief Executive Officer) determined that the Company has only one reporting unit.

Reverse Stock Split

On January 6, 2023, the Company filed a Certificate of Amendment to its Certificate of Incorporation, as amended, with the Secretary of State of the State of Delaware to effectuate a one-for-fifty (1:50) reverse stock split of its outstanding common stock without any change to its par value. The authorized number of shares of common stock was not affected by the reverse stock split. The Company issued 35,281 additional common shares in connection with this reverse stock split per the Company’s determination to round up all fractional shares resulting from the reverse stock split to the nearest whole share.

Accordingly, all common shares, stock options, stock warrants and per share amounts in these consolidated financial statements have been adjusted retroactively to reflect the reverse stock split as if the split occurred at the beginning of the earliest period presented in this Quarterly Report on Form 10-Q.

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 the warrant derivative liability, 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

Revenue and costs of sales are recognized when control of the products transfers to our customer, which generally occurs upon delivery to the customer. The Company’s performance obligations are satisfied at that time. 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.

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

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

Due to the insignificant amount of historical returns, as well as the standalone nature of the Company’s products and assessment of performance obligations and transaction pricing for the Company’s sales contracts, the Company does not currently maintain a contract asset or liability balance at this time. The Company assesses its contracts and the reasonableness of its conclusions on a quarterly basis.

At September 30, 2023 and December 31, 2022, the allowance for doubtful accounts was zero and $1,996, respectively.

The Company’s revenues by product line for the three months and nine months ended September 30, 2023 and 2022 are as a follows:

 Schedule of Revenues by Product

Substantially all of the Company’s revenues earned during the three months and nine months ended September 30, 2023 and 2022 are derived from sales of the Company’s clinical nutrition products primarily to retail customers in North America.

The Company’s revenues by geographical area for the three months and nine months ended September 30, 2023 and 2022 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 which provides 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 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 $1,759,260 and $1,876,259 for the three months ended September 30, 2023 and 2022, respectively, and $4,339,388 and $1,932,967 for the nine months ended September 30, 2023 and 2022, 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 $135,059 and $209,804 for the three months ended September 30, 2023 and 2022, respectively, and $416,101 and $622,178 for the nine months ended September 30, 2023 and 2022, respectively.

Advertising Costs

Advertising costs are expensed as incurred and are included in sales and marketing expense. Advertising costs were $279,457 and $385,010 for the three months ended September 30, 2023 and 2022, respectively, and $1,109,310 and $1,264,740 for the nine months ended September 30, 2023 and 2022, respectively.

Concentrations

Revenue. During the three months ended September 30, 2023, the Company had two customers that accounted for 68% of total revenue. During the nine months ended September 30, 2023, the Company had two customers that accounted for 64% of total revenue. During the three months ended September 30, 2023, the largest customer accounted for 47% of the Company’s total revenue, and the second largest customer accounted for 21% of the Company’s total revenue. During the nine months ended September 30, 2023, the largest customer accounted for 50% of the Company’s total revenue and the second largest customer accounted for 14%. During the three months ended September 30, 2022, the Company had one customer that accounted for 57% of total revenue. During the nine months ended September 30, 2022, the Company had one customer that accounted for 56% of the Company’s total revenue. No other customer accounted for more than 10% of revenue during the three months and nine months ended September 30, 2023 and 2022. The Company sells the majority of its products to one of the largest retailers in the United States.

Accounts receivable. As of September 30, 2023, the Company had accounts receivable from one customer which comprised approximately 61% of its accounts receivable and one customer that accounted for approximately 13% of its accounts receivable. As of December 31, 2022, the Company had accounts receivable from one customer which comprised approximately 88% of its accounts receivable. No other customer accounted for more than 10% of accounts receivable as of September 30, 2023 and December 31, 2022.

Purchases from vendors. During the three months and nine months ended September 30, 2023 and 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 59% and 47% of all purchases during the three months and nine months ended September 30, 2023, respectively. Total purchases from this manufacturer accounted for approximately 49% and 46% of all purchases during the three months and nine months ended September 30, 2022, respectively.

Accounts payable. As of September 30, 2023, one vendor accounted for 84% of total accounts payable. As of December 31, 2022, one vendor accounted for 88% of the total accounts payable. One other vendor accounted for 13% of total accounts payable as of September 30, 2023. No other vendor accounted for more than 10% of accounts payable as of December 31, 2022.

Cash and cash equivalents. Cash and cash equivalents consist of funds deposited with BMO Harris Bank (“BMO”), which is a major, established, high quality financial institution, in 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. The Company has an overnight investment feature established with BMO whereby the Company’s cash is swept into a Money Market Mutual Fund managed by Goldman Sachs Asset Management. This fund invests solely in high quality U.S. government issued securities. As of September 30, 2023, $7,657,309 included in cash and cash equivalents was held in the Goldman Sachs Financial Square Government Institutional Fund, a fund that is not insured by the Federal Deposit Insurance Corporation (the “FDIC”).

The Company routinely has cash balances in financial institutions in excess of the FDIC and SIPC insurance limits of $250,000 and $500,000, respectively. The Company believes that no significant concentration of credit risk exists with respect to its cash balances because of the creditworthiness and financial viability of the financial institutions that hold such cash balances. The Company has not experienced any losses to date resulting from this policy.

Stock-Based Compensation

Stock-based awards for stock options and restricted stock awards to employees and non-employees are accounted for by 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.

Warrants

The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”), and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own common stock and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted when the warrants are issued and at the end each subsequent quarterly period while the warrants are outstanding. For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be liability classified and recorded at their initial fair value on the date of issuance and remeasured at fair value at each balance sheet date thereafter. Changes in the estimated fair value of the warrants are recognized as a non-cash gain or loss on the statements of operations. The Company has determined that the warrants issued in the February 18, 2022 equity financing (see Note 6) meet the requirements for liability classification.

Income (Loss) per Common Share

Basic earnings (loss) per share (“EPS” or “LPS”) 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 EPS/LPS 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. In addition, net earnings (loss) for diluted EPS/LPS is adjusted for the impact of the assumed exercise of the outstanding warrants, to the extent they are dilutive. For the three months ended September 30, 2022, and the nine months ended September 30, 2023 and 2022, the Company recorded a net loss, as a result of which warrants, options, and unvested restricted shares of common stock were excluded from the computation of diluted EPS/LPS because they were considered anti-dilutive. For the three months ended September 30, 2023, the Company recorded net income, and it was determined that the applicable warrants and options were out-of-the-money. For the three months ended September 30, 2023, the treasury stock method was not applied to options or warrants that were out-of-the-money, and accordingly, the warrants, options, and unvested restricted shares of common stock were excluded from the computation of diluted EPS/LPS because they were considered anti-dilutive.

The following potentially dilutive shares were excluded from the shares used to calculate diluted earnings (loss) 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 to 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 and liabilities at fair value as of September 30, 2023, and December 31, 2022:

 Schedule of Assets and Liabilities at Fair Value

The following table provides a roll-forward of the warrant derivative liability measured at fair value on a recurring basis using unobservable Level 3 inputs for the nine months ended September 30, 2023:

 Schedule of Warrant Derivative Liability Measured at Fair Value

As of September 30, 2023, and December 31, 2022, the Company’s outstanding warrants were treated as derivative liabilities and changes in the fair value were recognized in earnings (see Note 6). As of September 30, 2023, the current warrant derivative liability was zero and the long-term warrant derivative liability was $3,744,400. As of December 31, 2022, the current warrant derivative liability was $1,931,400 and the long-term warrant derivative liability was $4,506,600.

The Company believes the carrying amounts of certain financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities, approximate fair value due to the short-term nature of such instruments and are excluded from the fair value tables above. 

Recent Accounting Pronouncements

In September 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Credit Losses – Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 significantly changes how entities will measure credit losses for most financial assets, including accounts and notes receivables. ASU 2016-13 replaces the “incurred loss” approach with an “expected loss” model, under which companies will recognize allowances based on expected rather than incurred losses. Entities will apply the ASU 2016-13’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. As a smaller reporting company, ASU 2016-13 was effective for and adopted by the Company effective January 1, 2023. The adoption of ASU 2016-13 did not have any material impact on the Company’s financial statement presentation or and related disclosures.

In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic 470-50), Compensation — Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”). ASU 2021-04 provides guidance as to how an issuer should account for a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option (i.e., a warrant) that remains classified after modification or exchange as an exchange of the original instrument for a new instrument. An issuer should measure the effect of a modification or exchange as the difference between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification or exchange and then apply a recognition model that comprises four categories of transactions and the corresponding accounting treatment for each category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination or modification). ASU 2021-04 was 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 related disclosures.

In July 2023, the FASB issued ASU 2023-03, Presentation of Financial Statements (Topic 205), Income Statement — Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation — Stock Compensation (Topic 718) Presentation of Financial Statements (“ASU 2023-03”). ASU 2023-03 amends the FASB Accounting Standards Codification to include Amendments to SEC Paragraphs pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and SEC Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280 — General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. As ASU 2023-03 did not provide any new guidance, there was no transition or effective date associated with its adoption. Accordingly, the Company adopted ASU 2023-03 immediately upon its issuance. The adoption of ASU 2023-03 did not have any impact on the Company’s consolidated financial statement presentation or related disclosures.

Other recent accounting pronouncements and guidance 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. Inventories

Inventories consist of the following:

 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.

4. Intangible Assets, Net

At December 31, 2021, the gross amount of the Company’s amortizable finite-lived identifiable intangible assets, consisting of a trade name and customer relationships, totaled $11,900,000. Effective December 31, 2022, the Company performed an impairment analysis of its intangible assets and determined that the asset group’s fair value was zero, as a result of which the Company recorded an impairment loss of $10,065,833 for the net book balance of the intangible assets at that date.

For the three months and nine months ended September 30, 2022, amortization expense was $297,500 and $892,500, respectively.

5. Operating Leases

In July 2021, the Company entered into a month-to-month lease for its primary corporate office space located in Houston, Texas, with lease payments of approximately $2,700 per month. Leases with the duration of less than 12 months are not recognized on the balance sheet and are expensed on a straight-line basis over the lease term.

As of December 31, 2022, the Company’s VectorVision subsidiary leased a warehouse space in Ohio under an operating lease that expired in February 2023. During the year ended December 31, 2022, the Company recorded an impairment of the operating lease right-of-use asset of $24,257 and made payments of $22,221 on the operating lease liability. At December 31, 2022, the balance of the operating lease liability was $3,807, which was paid in full and extinguished in February 2023.

6. Warrant Derivative Liability

On February 18, 2022, the Company sold in a best-efforts public offering, 651,000 shares of the Company’s common stock (see Note 8) and 740,000 Series A warrants (the “Series A Warrants”) and 740,000 Series B warrants (the “Series B Warrants”). The Series A and Series B Warrants had an initial exercise price of $18.50 per share. The Series A Warrants expire in February 2027 and the Series B Warrants expired in August 2023. 

The Series A and Series B Warrants contain certain anti-dilution provisions, including a down round provision and certain cash redemption rights. On November 30, 2022, the exercise price of the Series A and Series B Warrants was adjusted downward to $7.88 per share to equal the Series C Convertible Redeemable Preferred Stock conversion price (see Note 8).

In addition, the Series A Warrants and Series B Warrants contain a provision which requires that the exercise price of such warrants be adjusted to the volume weighted average price of the Company’s common stock for the five trading days immediately following effectiveness of a reverse stock split if such calculation resulted in an exercise price below the then-current exercise price. The Company determined that this provision represented a variable that is not an input to the fair value of a “fixed-for-fixed” option as defined under ASC 815-40, and thus the Series A and Series B Warrants are not considered indexed to the Company’s own stock and not eligible for an exception from derivative accounting. Accordingly, the Series A and Series B warrants are classified as a derivative liability. In January 2023, in conjunction with the completion of the Company’s reverse stock split (see Note 2), the exercise price of the Series A and Series B warrants was further adjusted to $7.57 per share.

The fair value of the warrant liability on September 30, 2023, and at December 31, 2022, was $3,744,400 and $6,438,000, respectively. The estimated fair value of the warrants is determined using Level 3 inputs. Inherent in a binomial lattice model are assumptions related to expected probability of event occurrence, including stock splits, stock-price volatility, expected life, risk-free interest rate and dividend yield. The Company estimates the volatility of its common stock warrants based on the Company’s historical volatility. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the grant or valuation date for a maturity similar to the expected remaining life of the warrants. The expected life of the warrants is assumed to be equivalent to their remaining contractual term. The dividend rate is based on the Company’s historical rate, which the Company anticipates remaining at zero. The derivative liabilities were valued using a binomial lattice model with the following assumptions:

 Schedule of Warrant Derivative Liability

The 740,000 Series B Warrants expired on August 24, 2023. On the expiration date, the Series B Warrants were marked to a fair value of zero with such change being recorded as part of the change in fair value of warrant derivative included in the statement of operations.

7. Redeemable Preferred Stock (Temporary Equity, redeemed in full in February 2023)

On November 29, 2022, the Company issued and sold, in a private placement, 495,000 shares of the Company’s Series C Convertible Redeemable Preferred Stock (the “Series C Preferred Stock”), and 5,000 shares of the Company’s Series D Redeemable Preferred Stock (the “Series D Preferred Stock,” and together with the Series C Preferred Stock, the “Preferred Stock”). 

The Series C Preferred Stock had the right to vote on an amendment (the “Amendment”) to the Company’s Certificate of Incorporation, as amended, to authorize a reverse split of the Common Stock on an as-converted to common stock basis (see Note 2). The shares of the Series D Preferred Stock were automatically voted in a manner that “mirrored” the proportions on which the shares of Common Stock (excluding any shares of Common Stock that were not voted) and Series C Preferred Stock were voted on the Amendment. The Certificates of Designation for the Preferred Stock provided that the Preferred Stock had no voting rights other than the right to vote on the Amendment and as a class on certain other specified matters, and, with respect to the Series D Certificate of Designation, the right to cast 1,000,000 votes per share of Series D Preferred Stock on the Reverse Stock Split proposal. The Amendment required the approval of the majority of the votes associated with the Company’s outstanding stock entitled to vote on the proposal. On January 5, 2023, the Amendment to authorize a reverse split of the Common Stock was approved at a special meeting of the Company’s stockholders. Following the meeting, the board of directors approved a one-for-fifty (1-for-50) reverse split of the Company’s issued and outstanding shares of common stock (see Note 2).

The following table reconciles the Series C and Series D Preferred Stock reflected on the balance sheet at December 31, 2022:

 Schedule of Preferred Stock

At December 31, 2022, $4,750,000 in gross proceeds received from the issuance of the Preferred Stock, plus an additional $500,000, which was required to fund the 105% redemption price for the Preferred Stock, was held in an escrow account and presented as restricted cash on the Company’s December 31, 2022 consolidated balance sheet. The Preferred Stock was redeemed in full for cash through February 8, 2023, the escrow account was closed, and as of September 30, 2023, there were no shares of Preferred Stock outstanding.

8. Stockholders’ Equity

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 in a best-efforts public offering, (i) 651,000 units, at $15.00 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 $18.50 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 $18.50 per share that expired on the 18-month anniversary of the date of issuance (“Series B Warrant”), and (ii) 89,000 pre-funded units, at $14.995 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 $0.005 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 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 Warrants, the exercise price of the Warrants following such reverse split will be subject to further adjustment in the event the volume-weighted average trading price of our common stock for the five days following such reverse stock split is lower than the exercise price of the Warrants. Also, subject to customary exceptions, the exercise price of the 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 Warrants. In such event, the exercise price of the Warrants will be reduced to the price of the securities issued in such transactions. In the event of a fundamental transaction, as defined, 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 37,000 shares of the Company’s common stock exercisable at an exercise price of $18.50 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) 651,000 shares of common stock, (ii) Series A Warrants to purchase 740,000 shares of common stock, (iii) Series B Warrants to purchase 740,000 shares of common stock, and (iv) Pre-Funded Warrants to purchase 89,000 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.

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, 2023, are as follows:

 Schedule of Exercise Price of Warrants Outstanding and Exercisable

During the nine months ended September 30, 2023, warrants exercisable into 7,649 shares of common stock were exercised for total proceeds of $57,903. Based on the closing price of the Company’s common stock on September 30, 2023 of $7.38 per share, the intrinsic value of the warrants as of September 30, 2023 was $318,570.

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, 2023 are as follows:

 Schedule of Exercise Price of Options Outstanding and Exercisable

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

During the nine months ended September 30, 2023 and 2022, the Company granted options to purchase an aggregate of 1,344 shares of common stock to the independent members of the Company’s Board of Directors in connection with the compensation plan for such directors with grant date fair values of $8,454 and $7,793, respectively, using a Black-Scholes option pricing model based on the following assumptions: (i) a volatility rate of 146%, (ii) a discount rate of 3.81% and 3.35%, respectively, (iii) zero expected dividend yield, and (iv) an expected life of 3 years. The options have an exercise price of $7.78 and $7.35 per share, respectively. The options vest on a quarterly basis over two years from the grant date, with the first tranche vesting on September 30, 2023.

During the nine months ended September 30, 2023, the Company granted options to purchase 10,000 shares of common stock to the Company’s new Chief Executive Officer (“CEO”) with a grant date fair value of $65,000 using a Black-Scholes option pricing model based on the following assumptions: (i) a volatility rate of 146%, (ii) a discount rate of 3.80%, (iii) zero expected dividend yield, and (iv) an expected life of 6 years. The options vest on a quarterly basis thereafter over two years.

The Company’s former CEO resigned effective June 9, 2023. All options issued to the former CEO that were not vested at the time of resignation were forfeited. Compensation expense previously recorded related to the unvested options was reversed, resulting in a reduction of stock compensation expense of $(92,412) during the three months and nine months ended September 30, 2023.

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, 2023 and 2022, the Company recognized aggregate stock-compensation expense of $(20,331) and $191,882, respectively, related to the fair value of vested options, net of the impact of forfeitures.

As of September 30, 2023, the Company had an aggregate of 10,096 remaining unvested options outstanding, with a remaining grant date fair value of approximately $153,000 to be amortized over an average of 5 years. Based on the closing price of the Company’s common stock on September 30, 2023 of $7.38 per share, the aggregate intrinsic value of unvested options outstanding as of September 30, 2023 was approximately $13,700.

Restricted Common Stock

During the nine months ended September 30, 2023 and 2022, there were no grants of restricted common stock.

During the nine months ended September 30, 2023 and 2022, the Company recognized share-based compensation expense of $12,911 and $76,938, respectively, related to vested restricted shares. At September 30, 2023, there was $6,534 of unvested compensation related to the non-vested shares that will be amortized over a remaining vesting period of one year.

The following table summarizes restricted common stock activity for the nine months ended September 30, 2023:

 Schedule of Non Vested Restricted Common Stock Activity

9. Commitments and Contingencies

Employment Agreement

On June 19, 2023, the Board of Directors appointed Jan Hall as President and Chief Executive Officer of the Company. The Company and Ms. Hall entered into an employment agreement pursuant to which Ms. Halls’ annual base salary is $370,000 and provides that Ms. Hall shall have an annual target cash bonus of no less than her base salary based on performance objectives determined by the Compensation Committee of the Board of Directors. With respect to the 2023 performance period, Ms. Hall’s annual bonus will be equal to either (i) her full target bonus, prorated based on a period commencing on June 19, 2023, or (ii) in the event there is a change in control of the Company that is consummated on or before March 31, 2024, $200,000, subject to remaining employed through the payment of her bonus (which may be up to 90 days following the change in control), compliance with her restrictive covenants, her execution and non-revocation of a general release of claims against the Company, and if requested, entering into any offer letter, restrictive covenant agreement and/or employment agreement with the buyer after being offered an opportunity to negotiate such agreements in good faith; provided, however, that in no event will she be entitled to both payments with respect to the 2023 performance period. In the event the Company terminates Ms. Hall’s employment without cause, she resigns for good reason or her employment is terminated by the Company following a change in control of the Company, subject to executing and not revoking a general release of claims against the Company and complying with her restrictive covenants, she will be entitled to (a) nine months of salary continuation, which is to be increased to twelve months if the qualifying termination of her employment occurs on or after June 19, 2024; (b) any unpaid annual bonus for the year prior to the year in which the termination of her employment occurs; (c) a prorated bonus for the year in which the termination of her employment occurs, based on actual performance; and (d) any salary earned and vested benefits accrued prior to Ms. Hall’s termination of employment.

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. Other than those matters described elsewhere in the footnotes, 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, 2022, 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 nutritional medical foods and dietary supplements. The Company offers a portfolio of science-based, clinically supported products designed to support retail consumers, healthcare professionals and providers, and their patients by supporting bone health, eye health, cardiovascular health, and brain health through nutrients such as Calcium, Vitamin D, Vitamin K, Carotenoids, and Omega-3s.

Our profile and focus fundamentally changed with the acquisition of Activ Nutritional, LLC (“Activ” or “Viactiv” as the context requires) in June 2021, the owner and distributor of the Viactiv® line of supplements for bone health and other applications. As a result of the Activ acquisition, our commercial efforts changed to its current focus on the development and marketing of science-based clinical nutrition and supplements.

The acquisition and integration of the Viactiv® line of products has changed our financial position, market profile and brand and operating focus. In order to leverage the Viactiv® platform, the Company has searched for additional complementary business opportunities. Additionally, the Company is focusing on new product development that it can launch under the Viactiv® brand and in the year ended December 31, 2022, the Company launched its new Omega Boost Gel Bites product.

In June 2023, Bret Scholtes, the Company’s former President and Chief Executive Officer and a member of the Board of Directors, resigned as an officer and as a member of the Board of Directors. In June 2023, we appointed former Neutrogena and Coca-Cola executive, Jan Hall, as our new President and Chief Executive Officer. Ms. Hall is a highly regarded veteran of big consumer health and consumables, including dietary supplements. Ms. Hall has an extensive array of commercial experience and a proven track record of growing well-known consumer and healthcare brands at leading global companies. Ms. Hall is instrumental in building out the Company’s capability to drive growth with the existing Viactiv® line of products and accelerate the development of new complementary products. In addition, in July 2023, we appointed Katie Cox as our new Chief Accounting Officer, replacing Jeffrey Benjamin.

We believe the Activ acquisition added valuable attributes, which have contributed to achieving 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 consistent track record of financial performance.

Viactiv® Calcium Fortified Soft Chew

Viactiv® was first introduced to the market over 20 years ago as a calcium-fortified soft chew intended to deliver clinical nutrition to women in a product form that has an enjoyable taste and is easy to consume. The chews are available in chocolate and caramel flavors, each delivering nutrition to help consumers maintain health goals, such as strong bones and immune support. The calcium chews contain 650 mg of calcium that deliver benefits of hard-to swallow pills in a chewable form with the great taste you expect from a gummy. Compared to the leading gummies, we believe our calcium chews are one of the only products with both Vitamin D and K1 to boost calcium absorption and help support bone mineral density.

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 valuable health benefits, including the support of cardiovascular, brain, joint and eye health. The gel bite dosage form has been shown to have better absorption and fewer digestive issues than regular soft gel formulas, as well as without the unpleasant fishy aftertaste and sugar, which is associated with many other Omega-3 products.

The Omega Boost Gel Bites also represent an expansion of the Viactiv® brand beyond calcium products. We are focusing on 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.

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

During January 2022, we launched our e-commerce venue through a Shopify store for our Viactiv® line of products (which can be found at www.activ.com). The 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 branded website. We derived approximately 1% of our sales revenue from this channel during the three months and nine months ended September 30, 2023 and 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 Initiatives

We believe that our ability to maximize stockholder value requires that we continue to build a solid corporate foundation and demonstrate growth and commercial success on top of that foundation. We have taken a number of steps over the last two years to strengthen our corporate foundation, including acquiring Viactiv®, winding down and reevaluating VectorVision, hiring key team members, launching a new product, strengthening our eCommerce capabilities and streamlining operations.

Our three primary objectives are:

Evaluation of Strategic Alternatives

The Company is also evaluating alternative strategic paths focused on maximizing stockholder value, and we have hired Alantra, LLC (“Alantra”) as the Company’s exclusive financial advisor to implement a strategic review to evaluate alternatives to maximize stockholder value in the near-term, which could include, among other alternatives, a sale of the Company or the Viactiv brand, or a merger, acquisition, reverse acquisition, or other strategic transaction, which review was ongoing at September 30, 2023.

The Company is continuing to explore a diverse range of strategic options to help grow the Company and enhance stockholder value. 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 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.

Reverse Stock Split

On January 6, 2023, the Company filed a Certificate of Amendment to its Certificate of Incorporation, as amended, with the Secretary of State of the State of Delaware to effectuate a one-for-fifty (1:50) reverse stock split of its outstanding common stock without any change to its par value. The authorized number of shares of common stock was not affected by the reverse stock split. The Company issued 35,281 additional common shares in connection with this reverse stock split per the Company’s determination to round up all fractional shares resulting from the reverse stock split to the nearest whole share.

Accordingly, all common shares, stock options, stock warrants and per share amounts in these consolidated financial statements have been adjusted retroactively to reflect the reverse stock split as if the split occurred at the beginning of the earliest period presented in this Quarterly Report on Form 10-Q.

Concentration of Risk

Information with respect to concentration of risk is provided at Note 2 to the condensed consolidated financial statements for the nine months ended September 30, 2023 and 2022, 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, the classification and valuation of warrants, 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, 2022 that impacted our condensed consolidated financial statements and related notes included herein.

Recent Trends – Market Conditions

Beginning in December 2021 and through the third quarter of 2022, we experienced supply chain constraints due to the COVID-19 pandemic. These supply chain issues constrained our ability to obtain inventory to fulfill customer orders for our Viactiv® brand products on a timely basis. The constraints began to abate during the fourth quarter of 2022, and we have not experienced any disruptions since that time. 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.

We, along with our suppliers, continue to experience significant broad-based inflation and labor cost pressures. We expect input cost inflation to continue through the remainder of 2023 and 2024. There are signs that unit volume consumption is softening in recent vitamins, minerals, and supplements syndicated industry data. We believe that the impact of inflation-based cost increases on consumers’ purchasing power in combination with the implementation of higher retail prices across brands in the vitamins, minerals and supplements category is contributing to the softness.

Store traffic in the drug channel has declined due to a decrease in the number of people choosing to have a COVID-19 shot. Lower footfall has reduced chainwide sales, including vitamins, minerals, and supplements. The legal cost of opioid settlements has also impacted drug retailers. In October 2023, Rite Aid filed for protection under Chapter 11 of the United States Bankruptcy Code and disclosed a restructuring plan which includes a phased approach to a significant store-closure program. We have adjusted our sales forecast to account for the changes to the number of Rite Aid stores and will continue to identify new distribution opportunities to bridge the gap and accelerate brand sales.

Inflation

The continuing impact of higher inflation, the actions by the Federal Reserve Bank to address inflation, most notably continuing increases in interest rates, and rising food and energy prices in combination with higher labor costs create uncertainty about the future economic environment which will continue to evolve. The Company believes these factors impacted the Company’s business in 2022 and the first nine months of and will continue for the remainder of 2023 and, and we believe, in 2024. The consequences of higher government deficits and debt, tighter monetary policy, and potentially higher long-term interest rates may result in a higher cost of capital for the business and an increase in our operating expenses.

Recent Accounting Pronouncements

Information with respect to recent accounting pronouncements is provided at Note 2 to the condensed consolidated financial statements for the nine months ended September 30, 2023 and 2022 included elsewhere in this Quarterly Report on Form 10-Q.

Plan of Operations

General Overview

We are a clinical nutrition company that develops and distributes clinically supported nutritional medical foods and dietary supplements. The Company offers a portfolio of science-based, clinically supported products designed to support retail consumers, healthcare professionals and providers, and their patients by supporting bone health, eye health, cardiovascular health, and brain health through nutrients such as Calcium, Vitamin D, Vitamin K, Carotenoids, and Omega-3s.

We believe that 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. In the last two years we have taken numerous steps to strengthen our corporate foundation, including acquiring Viactiv® winding down and reevaluating VectorVision, hiring key team members, including, more recently, hiring Ms. Hall as the Company’s President and Chief Executive Officer, launching a new product, strengthening our eCommerce capabilities, and streamlining operations.

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

Results of Operations

Through September 30, 2023, we have primarily been engaged in product development and marketing, commercialization of our products and improving our operating efficiencies. 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 its successful integration into our operations, we believe we have established a significant baseline level of revenue from which to grow.

Comparison of Three Months Ended September 30, 2023 and 2022

Revenue

For the three months ended September 30, 2023, revenue was $3,337,190 as compared to $2,663,550 for the three months ended September 30, 2022, an increase of $673,640 or 25%. This increase is primarily attributable to $3,252,673 of revenue generated during the three months ended September 30, 2023, from sales of our Viactiv® product line as compared to $2,563,398 of revenue generated from sales of our Viactiv® product line for the three months ended September 30, 2022. During the three months ended September 30, 2023, we experienced positive phasing for orders previously delayed in the prior three months by our carrier’s warehouse expansion plan, which was resolved in July 2023.

Cost of Goods Sold

For the three months ended September 30, 2023, cost of goods sold was $1,876,938, as compared to $1,575,366 for the three months ended September 30, 2022, an increase of $301,572 or 19%. This increase is primarily attributable to the increase in revenues for the three months ended September 30, 2023, as compared to the three months ended September 30, 2022, and a result of lower transportation costs negotiated during the period.

Gross Profit

For the three months ended September 30, 2023, gross profit was $1,460,252, as compared to $1,088,184 for the three months ended September 30, 2022, an increase of $372,068 or 34%. This increase is primarily the result of the additional gross profit generated by sales of our Viactiv® products during the three months ended September 30, 2023, as compared to the three months ended September 30, 2022. Gross margin for the three months ended September 30, 2023, was 43.8%, as compared to 40.9% for the three months ended September 30, 2022.

Sales and Marketing

For the three months ended September 30, 2023, sales and marketing expenses were $318,734, as compared to $526,193 for the three months ended September 30, 2022, a decrease of $207,459, or 39%. The decrease is attributable to expenditures in marketing and advertising during the three months ended September 30, 2023, 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 support for our calcium chews, and Omega Boost Gel Bites products. During the three months ended September 30, 2023, we ran digital advertising campaigns to support the core calcium chew business with new creative focusing on the benefits of Viactiv® to strengthen bones and help protect against osteoporosis and implemented a separate marketing campaign for pregnancy. Both performed well against industry benchmarks and compared with prior brand advertising. In addition to advertising for the calcium products, we also ran a specific digital advertising campaign to support Omega Boost Gel Bites focusing on their unique benefits of enhanced absorption, quantity of Omega-3, no sugar and no fishy taste. Like the calcium chews, the campaign also worked well against industry metrics. Based on the consumer learning, we will continue to optimize the campaigns in 2023.

General and Administrative and other

For the three months ended September 30, 2023, general and administrative and other expenses were $1,903,761, as compared to $2,241,182 for the three months ended September 30, 2022, a decrease of $337,421 or 15%. The decrease was primarily driven by decreases of approximately $298,000 in the amortization of intangibles, and $112,000 in payroll costs, partially offset by an increase of approximately $96,000 in insurance fees. We continue to focus our efforts and resources on lowering the ratio of general and administrative and other expense to net sales. The ratio has decreased from 84% to 57% in the three months ended September 30, 2023, as compared to the three months ended September 30, 2022.

Change in Fair Value of Warrant Derivative Liability

For the three months ended September 30, 2023, the change in the fair value of warrant derivative liabilities related to the issuance of the Series A warrants and Series B warrants in November 2022 was a gain of $1,050,800, as compared to a gain of $873,200 for the three months ended September 30, 2022.

Loss from Operations

For the three months ended September 30, 2023, we incurred a loss of $772,914, as compared to a loss of $1,739,394 for the three months ended September 30, 2022. The reduction in operating loss was attributable to an increase of gross profit due to an increase in sales of $673,640 or 25%. In addition, the decrease of $337,421 or 15% in the general and administrative expense category and the decrease of $207,459 or 39% in the sales and marketing expense category for the three months ended September 30, 2023, as compared to the three months ended September 30, 2022.

Net Income (Loss)

For the three months ended September 30, 2023, net income was $372,633, as compared to a net loss of $822,912 for the three months ended September 30, 2022. Net income was impacted by a change in value of the warrant derivative liability, which was a gain of $1,050,800 for the three months ended September 30, 2023, as compared to a gain from the change in fair value of the warrant derivative liability of $873,200 for the three months ended September 30, 2022.

Comparison of Nine Months Ended September 30, 2023 and 2022

Revenue

For the nine months ended September 30, 2023, revenue was $9,312,695, as compared to $8,323,382 for the nine months ended September 30, 2022, an increase of $989,313 or 12%. We experienced supply chain delays for inventory in the quarter ended September 30, 2022, which reduced revenues. In the nine months ended September 30,2023, we were able to successfully mitigate the inventory supply challenges experienced during the nine months ended September 30, 2022, which enabled us to meet increased customer demand for our Viactiv® line of products and grow sales by 12% as compared to the nine months ended September 30, 2022.

Cost of Goods Sold

For the nine months ended September 30, 2023, cost of goods sold was $5,267,874, as compared to $4,739,197 for the nine months ended September 30, 2022, an increase of $528,677 or 11%. This increase was primarily driven by our 12% growth in revenue primarily from our Viactiv® line of products for the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022.

Gross Profit

For the nine months ended September 30, 2023, gross profit was $4,044,821, as compared to $3,584,185 for the nine months ended September 30, 2022, an increase of $460,636 or 13%. This increase was primarily driven by the increase in sales during the nine months ended September 30, 2023. In addition, during the nine months ended September 30, 2023, we paid out-of-stock fees of approximately $5,126, as compared to out-of-stock fees paid during the nine months ended September 30, 2022, of approximately $88,000, which fees were due to our inability to maintain contractually agreed upon levels of inventory with certain retailers. We solved these challenges in 2022 and have realized a measurable benefit as a result. During the nine months ended September 30, 2023, we had a gross profit percentage of 43.4%, as compared to a gross profit percentage of 43.1% for the nine months ended September 30, 2022.

Sales and Marketing

For the nine months ended September 30, 2023, sales and marketing expenses were $1,332,469, as compared to $1,583,349 for the nine months ended September 30, 2022, a decrease of $250,880 or 16%. The decrease was primarily attributable to our reduced expenditures in marketing and advertising during the nine months ended September 30, 2023, as we reduced expenses across the product line. We incurred additional expense in the nine months ended September 30, 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.

General and Administrative and Other

For the nine months ended September 30, 2023, general and administrative and other expenses were $5,811,314, as compared to $7,885,181 for the nine months ended September 30, 2022, a decrease of $2,073,867 or 26%. The decrease in 2023 was primarily driven by decreases of approximately $892,500 in amortization expense, $397,000 in payroll expense, $242,000 in consulting fees, $276,000 in stock-based compensation, $157,000 in recruiting fees, and $128,000 in insurance expense, partially offset by an increase in legal fees of approximately $93,000.

Loss from Operations

Loss from operations for the nine months ended September 30, 2023, was $(3,249,567), as compared to $(6,071,020) for the nine months ended September 30, 2022, a decrease of $2,821,453 or 46%. The reduction in operating loss was primarily attributable to a decrease of $2,073,867 or 26% in the general and administrative expense category for the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022.

Change in Fair Value of Warrant Derivative Liability

For the nine months ended September 30, 2023, the change in the fair value of warrant derivative liabilities related to the issuance of the Series A Warrants and Series B Warrants in November 2022 was a gain of $2,693,600, as compared to a gain of $3,548,300 for the nine months ended September 30, 2022.

Net Income (Loss)

For the nine months ended September 30, 2023, we generated a net loss of $266,687, as compared to a net loss of $2,468,262 for the nine months ended September 30, 2022. Net loss for the nine months ended September 30, 2023 was attributable to the operating loss that was partially offset by the non-cash gain on the change in fair value of the warrant derivative liability described above.

Liquidity and Capital Resources

For the nine months ended September 30, 2023, we generated a net loss of $266,687 and used cash in operating activities of $3,052,293. At September 30, 2023, we had cash and cash equivalents of $7,657,309 and working capital of $11,407,975.

Notwithstanding the net operating loss for the nine months ended September 30, 2023, 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.

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.

Our financing has historically come from the sale of common stock and securities convertible into common stock. 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 $3,052,293 during the nine months ended September 30, 2023, as compared to $6,082,906 for the nine months ended September 30, 2022. The decrease of $3,030,613 in cash used by operating activities was primarily due to a reduction in general and administrative expenses.

Investing Activities

Net cash used in investing activities was $3,791 for the nine months ended September 30, 2023, as compared to net cash provided by investing activities in the amount of $4,990,054 for the nine months ended September 30, 2022. Cash used in investing activities for the nine months ended September 30, 2023 was for the purchase of property and equipment. Cash used in investing activities during the nine months ended September 30, 2022 was primarily attributable to the net of purchases and sales of US Treasury Bills.

Financing Activities

Net cash used in financing activities was $5,250,000 for the nine months ended September 30, 2023. The entire amount was used to repay in full the holders of the Preferred Stock, originally issued in November 2022, during January and February 2023. Cash provided by financing activities for the nine months ended September 30, 2022 was $9,944,928 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.

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 this information.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Accounting Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Securities and Exchange Act of 1934 Rules 13a-15(f). Based on this evaluation, our Chief Executive Officer and our Chief Accounting Officer concluded that the Company’s disclosure controls and procedures were not effective as of September 30, 2023. As of September 30, 2023, management’s assessment identified the following material weaknesses in the Company’s internal control over financial reporting:

We continue to have a material weakness in our internal control over financial reporting as disclosed in the December 31, 2022 Annual Report on Form 10-K, in that the Company did not design and maintain effective controls over the preparation and review of accounting for complex financial transactions, mainly due to the lack of adequate technical expertise to ensure the proper application, at inception, of ASC 815-15 Embedded Derivatives related to certain stock warrants issued in February 2022.

Remediation Plan

As of September 30, 2023, management has designed and implemented the following measures to remediate the material weakness related to the accounting for the preparation and review of accounting for complex financial transactions, mainly due to the lack of adequate technical expertise to ensure proper application, as described in the preceding paragraph. As part of the remediation process, the Company has engaged a third party to review the Company’s accounting for complex financial transactions on a quarterly basis, or when any significant unusual transaction has been entered into.

While management believes that the measures already designed and implemented in the accounting for the preparation and review of accounting for complex financial transactions are effective, the material weakness will not be considered fully remediated until the associated controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. The Company will monitor the effectiveness of its remediation plan and will refine its remediation plan as appropriate.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the nine months ended September 30, 2023 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, 2022, as filed with the SEC on April 17, 2023 (“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.

We have identified material weaknesses in our disclosure controls and procedures and internal control over financial reporting. If not remediated, our failure to establish and maintain effective disclosure controls and procedures and internal control over financial reporting could result in material misstatements in our financial statements and a failure to meet our reporting and financial obligations, each of which could have a material adverse effect on our financial condition and the trading price of our common stock.

Maintaining effective internal control over financial reporting and effective disclosure controls and procedures are necessary for us to produce reliable financial statements. As discussed in Part I, Item 4 – “Controls and Procedures” of this Quarterly Report on Form 10-Q, we have re-evaluated our internal control over financial reporting and our disclosure controls and procedures and concluded that they were not effective as of September 30, 2023.

A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses we identified are (1) ineffective controls over outsourced Information Technology systems and business processes and (2) inadequate segregation of duties within accounting processes.

As discussed in Part I, Item 4 – “Controls and Procedures” of this Quarterly Report on Form 10-Q as of September 30, 2023, management has designed and implemented measures to remediate the material weakness related to the accounting for the preparation and review of accounting for complex financial transactions. The execution of our remediation is ongoing and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles. Management expects to complete its remediation plan by December 31, 2023.

Risks Related to the Company’s Business

Supply Chain Constraints; Inflationary Pressures

We experienced supply chain constraints due to the COVID-19 pandemic and its aftermath. These constraints began in approximately December 2021 and continued through approximately the third quarter of 2022. These constraints had impacted the Company’s ability to obtain inventory to fulfill customer orders for its Viactiv® branded products and may continue to impact its ability to fulfill customer orders going forward which would have a material adverse effect on the Company’s business and results of operations. A resurgence of COVID-19 could impact the Company’s operations. 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 our Viactiv® products. The Company paid approximately $5,126 and $88,000 in such fees for the nine months ended September 30, 2023 and 2022, respectively, to certain of these retailers. Additionally, the Company and its suppliers are experiencing significant broad-based inflation of manufacturing and distribution costs as well as transportation challenges. The Company expects input cost inflation to continue throughout 2023 and 2024. 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

We are currently listed on The Nasdaq Capital Market. If we are unable to maintain listing of our securities on Nasdaq or any stock exchange, our stock price could be adversely affected and the liquidity of our stock and our ability to obtain financing could be impaired and it may be more difficult for our shareholders to sell their securities.

Although our common stock is currently listed on The Nasdaq Capital Market, we may not be able to continue to meet the exchange’s minimum continued listing requirements or those of any other national exchange. If we are unable to maintain listing on Nasdaq or if a liquid market for our common stock does not develop or is sustained, our common stock may remain thinly traded.

The Listing Rules of Nasdaq require listing issuers to comply with certain standards in order to remain listed on its exchange. If, for any reason, we should fail to maintain compliance with these listing standards and Nasdaq should delist our securities from trading on its exchange and we are unable to obtain listing on another national securities exchange, a reduction in some or all of the following may occur, each of which could have a material adverse effect on our shareholders:

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

During the three months ended September 30, 2023, no director or officer (as defined in Rule 16a-1(f) under the Exchange Act) of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” as such term is defined in Item 408(a) of Regulation S-K.

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.