UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For
the quarterly period ended
OR
For the transition period from ____ to ____
Commission
file number:
(Exact name of Registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
Telephone:
(Address and telephone number of principal executive offices)
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:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The |
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. ☒
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). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company | |||
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒
As of August 16, 2021, there were shares of the Company’s common stock, par value $0.001 per share, issued and outstanding.
TABLE OF CONTENTS
| 2 |
PART I – FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Guardion Health Sciences, Inc.
Condensed Consolidated Balance Sheets
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Short-term investments | - | |||||||
| Accounts receivable | ||||||||
| Inventories | ||||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Deposits | ||||||||
| Prepaid expense | - | |||||||
| Property and equipment, net | ||||||||
| Right of use asset, net | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | - | |||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Operating lease liability – current | ||||||||
| Payable to former officer | - | |||||||
| Derivative warrant liability | - | |||||||
| Total current liabilities | ||||||||
| Operating lease liability – long term | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ Equity | ||||||||
| Preferred stock, $ par value; shares authorized, shares issued and outstanding | - | - | ||||||
| Common stock, $ par value; shares authorized; shares and shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
| 3 |
Guardion Health Sciences, Inc.
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenue | ||||||||||||||||
| Clinical nutrition | $ | $ | $ | $ | ||||||||||||
| Diagnostics equipment | ||||||||||||||||
| Other | ||||||||||||||||
| Total revenue | ||||||||||||||||
| Cost of goods sold | ||||||||||||||||
| Clinical nutrition | ||||||||||||||||
| Diagnostics equipment | ||||||||||||||||
| Other | ||||||||||||||||
| Total cost of goods sold | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Research and development | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Transaction costs related to acquisition of Activ Nutritional, LLC | - | - | ||||||||||||||
| Costs related to resignation of former officer (including the reversal of previously recognized stock compensation expense of $ and $ during the three months and six months ended June 30, 2020, respectively) | - | ( | ) | - | ( | ) | ||||||||||
| Impairment loss on equipment held for sale | - | - | ||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | - | ( | ) | - | ( | ) | ||||||||||
| Interest income | - | - | ||||||||||||||
| Change in fair value of derivative liability | - | - | ( | ) | ||||||||||||
| Total other income (expense) | ( | ) | ||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per common share – basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average common shares outstanding – basic and diluted | ||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
| 4 |
Guardion Health Sciences, Inc.
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
| Common Stock | Additional Paid-In | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Three and Six Months Ended June 30, 2021 | ||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Cumulative effect adjustment from the impact of adoption of ASU 2020-06 related to warrants (See Notes 2 and 9) | - | - | - | |||||||||||||||||
| Fair value of vested stock options | - | - | - | |||||||||||||||||
| Fair value of vested restricted stock | - | - | - | |||||||||||||||||
| Common stock issued for cash, net of offering costs | - | |||||||||||||||||||
| Common stock issued upon exercise of warrants | - | |||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||
| Balance at March 31, 2021 | ( | ) | ||||||||||||||||||
| Fair value of vested stock options | - | - | - | |||||||||||||||||
| Fair value of vested restricted stock | - | - | - | |||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Common Stock | Additional Paid-In | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Three and Six Months Ended June 30, 2020 | ||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Fair value of vested stock options – officer and director | - | - | - | |||||||||||||||||
| Fair value of vested stock options | - | - | - | |||||||||||||||||
| Issuance of common stock for services | - | |||||||||||||||||||
| Issuance of common stock – warrant exercises | - | |||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ||||||||||||||
| Balance at March 31, 2020 | ( | ) | ||||||||||||||||||
| Fair value of vested stock options – officer and director | - | - | ( | ) | - | ( | ) | |||||||||||||
| Fair value of vested stock options | - | - | - | |||||||||||||||||
| Issuance of common stock – warrant exercises | - | |||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
See accompanying notes to condensed consolidated financial statements.
| 5 |
Guardion Health Sciences, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2021 | 2020 | |||||||
| Operating Activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Impairment loss on equipment held for sale | - | |||||||
| Amortization of operating lease right-of-use asset | ||||||||
| Fair value of vested stock options | - | |||||||
| Fair value of vested restricted stock | ||||||||
| Fair value of vested stock options – officer and director | - | ( | ) | |||||
| Change in fair value of derivative liability | - | |||||||
| Changes in operating assets and liabilities: | ||||||||
| (Increase)/decrease: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventories | ( | ) | ||||||
| Prepaid expenses | ( | ) | ( | ) | ||||
| Increase/(decrease): | ||||||||
| Accounts payable | ( | ) | ||||||
| Operating lease liability | ( | ) | ( | ) | ||||
| Accrued expenses | ( | |||||||
| Payable to former officer | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Investing Activities | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Purchase of US Treasury Bills | ( | ) | - | |||||
| Sale of US Treasury Bills | - | |||||||
| Cash paid for acquisition, net of cash acquired | ( | ) | - | |||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing Activities | ||||||||
| Proceeds from sale of common stock, net | - | |||||||
| Proceeds from exercise of warrants | ||||||||
| Net cash provided by financing activities | ||||||||
| Cash: | ||||||||
| Net (decrease) increase | ( | ) | ||||||
| Balance at beginning of period | ||||||||
| Balance at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for: | ||||||||
| Income taxes | $ | - | ||||||
| Non-cash financing activities: | ||||||||
| Reclass of prepaid costs to inventory | $ | $ | ||||||
| Reclass of equipment sold from property and equipment to equipment held for sale | $ | $ | ||||||
| Adjust warrant liability for adoption of ASU 2020-06 | $ | $ | ||||||
| Reclass of property and equipment to inventory | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
| 6 |
Guardion Health Sciences, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Three Months and Six Months Ended June 30, 2021 and 2020
1. Organization and Business Operations
Business
Guardion Health Sciences, Inc. (the “Company”) is a clinical nutrition and diagnostics company that develops and distributes clinically supported nutrition, medical foods, supplements and medical devices. The Company offers a portfolio of science-based, clinically supported products and devices designed to support healthcare professionals and providers, and their patients and consumers. In June 2021, the Company acquired Activ Nutritional, LLC (“Activ”), the owner and distributor of the Viactiv® line of chewable mineral supplements for bone health and other applications (see Note 3). Prior to its acquisition of Activ, the Company has been primarily engaged in research and development, product commercialization and capital raising activities.
The Company was formed in December 2009 as a California limited liability company under the name P4L Health Sciences, LLC. On June 30, 2015, the Company converted from a California limited liability company to a Delaware corporation, and changed its name from Guardion Health Sciences, LLC to Guardion Health Sciences, Inc.
Liquidity
The
accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets
and the settlement of liabilities and commitments in the normal course of business. For the six months ended June 30, 2021, the Company
incurred a net loss of $
The amount and timing of future cash requirements will depend, in part, on the Company’s ability to ultimately achieve operating profitability. The Company expects to continue to incur net losses and negative operating cash flows in the near-term and will continue to incur significant expenses for the development, commercialization and distribution of its clinical nutrition products (including the Viactiv® product line), the development and commercialization of its diagnostics equipment, and the successful development and commercialization of any new products or product lines. The Company may also utilize cash to fund additional acquisitions.
The Company may seek to raise additional debt and/or equity capital to fund future operations and strategic initiatives, but there can be no assurances that the Company will be able to secure such additional financing in the amounts necessary to fully fund its operating requirements on acceptable terms or at all. Over time, if the Company is unable to access sufficient capital resources on a timely basis to fund its operations, the Company may be forced to reduce or discontinue some or all of its technology and product development programs and curtail operations.
COVID-19
The Company is subject to risks and uncertainties of the COVID-19 pandemic that could adversely impact our business. The Company has implemented additional health and safety precautions and protocols in response to the pandemic and government guidelines, including curtailing employee travel and primarily working remotely. During 2020 and through the first half of 2021, sales of certain products remained flat as compared to prior comparable periods, as many professional offices were closed for long periods, or operating with limited capacity, due to COVID-19 related orders. During 2020 and through the second quarter of 2021, the Company did not experience a jeopardization of its supply chain due to the COVID-19 outbreak.
| 7 |
The extent of the impact of the COVID-19 pandemic has had and will continue to have on the Company’s business is highly uncertain and difficult to predict and quantify. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat it, including vaccination efforts and new strains of the virus, as well as the economic impact on local, regional, national and international markets.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the SEC. The condensed consolidated balance sheet as of December 31, 2020 included herein was derived from the audited consolidated financial statements as of that date, but does not include all disclosures, including notes, required by GAAP.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to fairly present the Company’s financial position and results of operations for the interim periods reflected. Except as noted, all adjustments contained herein are of a normal recurring nature. The results of operations for the interim periods presented are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2021.
Reverse Stock Split
On
March 1, 2021, following stockholder and board approval, the Company effectuated a
Accordingly, all share and per share amounts presented herein with respect to common stock have been retroactively adjusted to reflect the above-described reverse stock split for all periods presented.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, VectorVision Ocular Health, Inc., NutriGuard Formulations, Inc., Transcranial Doppler Solutions, Inc, and Activ Nutritional, LLC. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of our financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. On an ongoing basis, management reviews its estimates and if deemed appropriate, those estimates are adjusted. Significant estimates include those related to assumptions used in valuing inventories at net realizable value, assumptions used in valuing assets acquired in business acquisitions, impairment testing of goodwill and other long-term assets, assumptions used in valuing stock-based compensation, the valuation allowance for deferred tax assets, accruals for potential liabilities, and assumptions used in the determination of the Company’s liquidity. Actual results could differ from those estimates.
| 8 |
Revenue Recognition
The Company generates its revenue from two business segments:
| ● | Clinical Nutrition | |
| ● | Diagnostics Equipment |
The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Revenue is recognized when control of promised goods or services is transferred to the customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those products or services. The Company reviews its sales transactions to identify contractual rights, performance obligations, and transaction prices, including the allocation of prices to separate performance obligations, if applicable.
All products sold by the Company are distinct individual products and are offered for sale as finished goods only, and there are no performance obligations required post-shipment for customers to derive the expected value from them. Contracts with customers contain no incentives or discounts that could cause revenue to be allocated or adjusted over time.
Shipping and handling activities are performed before the customer obtains control of the goods and therefore represent a fulfillment activity rather than a promised service to the customer. Historically the Company has not experienced any significant payment delays from customers.
In certain circumstances, returns of products are allowed. A right of return does not represent a separate performance obligation, but because customers are allowed to return products, the consideration to which the Company expects to be entitled is variable. Upon evaluation of historical product returns, the Company determined it is probable that such returns will not cause a significant reversal of revenue in the future. Due to the insignificant amount of historical returns, as well as the standalone nature of the Company’s products and assessment of performance obligations and transaction pricing for the Company’s sales contracts, the Company does not currently maintain a contract asset or liability balance at this time. The Company assesses its contracts and the reasonableness of its conclusions on a quarterly basis.
Revenues by segment are as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Clinical nutrition | $ | $ | $ | $ | ||||||||||||
| Diagnostics equipment | ||||||||||||||||
| Other | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
The
Company’s Clinical Nutrition revenues earned during the three months and six months ended June 30, 2021 and 2020 are derived from
distributors and individual retail customers in North America. Diagnostics Equipment revenues are derived from a worldwide customer base
consisting of both retail customers and distributors. Sales to distributors were approximately
Revenues by geographical area are as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| North America | $ | $ | $ | $ | ||||||||||||
| Malaysia | ||||||||||||||||
| Asia - other | ||||||||||||||||
| Europe and other | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| 9 |
Business Combinations
The Company accounts for its business combinations using the acquisition method of accounting where the purchase consideration is allocated to the tangible and intangible assets acquired, and liabilities assumed, based on their respective fair values as of the acquisition date. The excess of the fair value of the purchase consideration over the estimated fair values of the net assets acquired is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing intangible assets include, but are not limited to, expected future cash flows, which includes consideration of future growth and margins, future changes in technology, brand awareness and discount rates. Fair value estimates are based on the assumptions that management believes a market participant would use in pricing the asset or liability.
Investments
Short-term investments as of June 30, 2021, consist of a U.S. Treasury Bill, which is classified as held-to-maturity. The Company’s U.S. Treasury Bill matured July 29, 2021 and the proceeds were reinvested into another U.S. Treasury Bill that is scheduled to mature approximately 30 days from the date of purchase. Unrealized gains and losses were de minimus. As of June 30, 2021, the carrying value of the Company’s U.S. Treasury Bill approximates its fair value due to its short-term maturity.
Accounts Receivable
Accounts receivable are recorded net of an allowance for expected losses. Management evaluates the collectability of its trade accounts receivable and determines an allowance for doubtful accounts based on historical write-offs, known or expected trends, and the identification of specific balances deemed uncollectible based on a customer’s financial condition, credit history and the current economic conditions.
There
was
Inventories
Inventories
are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out (“FIFO”) basis. The
Company records adjustments to its inventory for estimated obsolescence or diminution in net realizable value equal to the difference
between the cost of the inventory and the estimated net realizable value. When evidence exists that the net realizable value of inventory
is lower than its cost, the difference is recognized as a loss in the period in which it occurs. Once inventory has been written down,
it creates a new cost basis for inventory that may not subsequently written up. For the three months and six months ended June 30, 2021
and 2020, there were
Intangible Assets
Amortizable
finite-lived identifiable intangible assets consist of a trade name and customer relationships acquired in the acquisition of Activ effective
June 1,2021 (See Note 3), and are stated at cost less accumulated amortization. The trade name and customer relationships are being amortized
over a period of
| 10 |
At
June 30, 2021 and December 31, 2020, the Company has a trademark for $
Goodwill
Goodwill consists of the excess of the cost of Activ (see Note 3) over the fair value of amounts assigned to assets acquired and liabilities assumed. Under the guidance of ASC 350, goodwill is not amortized, rather it is tested for impairment annually, and will be tested for impairment between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. An impairment loss generally would be recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit and would be measured as the excess carrying value of goodwill over the derived fair value of goodwill. The Company’s policy is to perform an annual impairment testing for its reporting units on December 31 of each fiscal year.
Concentrations
During
the three months ended June 30, 2021, two customers accounted for approximately
During
the six months ended June 30, 2021, two customers accounted for approximately
Cash
balances are maintained at large, well-established financial institutions. At times, cash balances exceed federally insured limits. Insurance
coverage limits are $
Research and Development Costs
Research
and development costs consist primarily of fees paid to consultants and outside service providers, and other expenses relating to the
acquisition, design, development and testing of the Company’s Clinical Nutrition products. Research and development expenditures
are expensed as incurred and totaled $
Patent Costs
The
Company is the owner of four issued domestic patents, two pending domestic patent applications and one granted patent in Canada. Due
to the significant uncertainty associated with the successful development of one or more commercially viable products based on the Company’s
research efforts and any related patent applications, patent costs, including patent-related legal fees, filing fees and internally generated
costs, are expensed as incurred. During the six months ended June 30, 2021, and 2020, patent costs were $
Stock-Based Compensation
The Company periodically issues stock-based compensation to employees and non-employees in non-capital raising transactions for services and for financing costs. Such grants vest and expire according to terms established at the issuance date. The Company accounts for such grants issued and vesting based on ASC 718, Compensation-Stock Compensation whereby the value of the award is measured on the date of grant and recognized for employees as compensation expense on a straight-line or graded basis over the vesting period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for the services.
| 11 |
The fair value of stock options granted is estimated using the Black-Scholes option-pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life, and future dividends. The assumptions used in the Black-Scholes option pricing model could materially affect compensation expense recorded in future periods.
Basic loss per share is computed by dividing net loss by the weighted-average common shares outstanding during a period. Diluted earnings per share is computed based on the weighted-average common shares outstanding plus the effect of dilutive potential common shares outstanding during the period calculated using the treasury stock method. Dilutive potential common shares include shares from unexercised warrants and options. Potential common share equivalents have been excluded where their inclusion would be anti-dilutive. The Company’s basic and diluted net loss per share is the same for all periods presented the Company had a net loss for all periods presented and all shares issuable upon exercise of warrants and options would therefore be anti-dilutive.
| June 30, | ||||||||
| 2021 | 2020 | |||||||
| Warrants | ||||||||
| Options | ||||||||
Fair Value of Financial Instruments
Accounting standards require certain assets and liabilities be reported at fair value in the financial statements and provide a framework for establishing that fair value. Fair value is defined as the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, the Company considers the principal or most advantageous market in which it transacts and considers assumptions that market participants would use when pricing the asset or liability. The framework for determining fair value is based on a hierarchy that prioritizes the inputs and valuation techniques used to measure fair value:
Level 1 - Quoted prices in active markets for an identical asset or liability that the Company has the ability to access as of the measurement date.
Level 2 - Inputs, other than quoted prices included within Level 1, which are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.
Level 3 - Unobservable inputs in which there is little or no market data for the asset or liability which requires the reporting entity to develop its own assumptions.
The Company determines the level in the fair value hierarchy within which each fair value measurement falls in its entirety, based on the lowest level input that is significant to the fair value measurement in its entirety. In determining the appropriate levels, the Company performs an analysis of the assets and liabilities at each reporting period end.
The Company believes the carrying amount of its financial instruments (consisting of cash, short-term investments, accounts receivable, and accounts payable and accrued liabilities) approximates fair value due to the short-term nature of such instruments.
At
December 31, 2020, the Company’s balance sheets included Level 2 liabilities comprised of the fair value of warrant liabilities
of $
| 12 |
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The standard significantly changes how entities will measure credit losses for most financial assets, including accounts and notes receivables. The standard will replace today’s “incurred loss” approach with an “expected loss” model, under which companies will recognize allowances based on expected rather than incurred losses. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. As a smaller reporting company, ASU 2016-13 will be effective for the Company beginning January 1, 2023, with early adoption permitted. The Company is currently assessing the impact of adopting this standard on the Company’s financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 eliminates Step 2 of the two-step goodwill impairment test, under which a goodwill impairment loss was measured by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04 requires only a one-step quantitative impairment test, whereby a goodwill impairment loss is measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). Entities are required to apply ASU 2017-04 on a prospective basis. ASU 2017-04 was effective January 1, 2020. The adoption of ASU 2017-04 did not have any impact on the Company’s consolidated financial statement presentation or disclosures.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions and enhances and simplifies various aspects of the income tax accounting guidance in ASC 740. ASU 2019-12 was effective January 1, 2021. The adoption of ASU 2019-12 did not have any impact on the Company’s consolidated financial statement presentation or disclosures.
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”). ASU 2020-06 reduces the number of accounting models for convertible debt instruments by eliminating the cash conversion and beneficial conversion models. As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost as long as no other features require bifurcation and recognition as derivatives. For contracts in an entity’s own equity, the type of contracts primarily affected by this update are freestanding and embedded features that are accounted for as derivatives under the current guidance due to a failure to meet the settlement conditions of the derivative scope exception. This update simplifies the related settlement assessment by removing the requirements to (i) consider whether the contract would be settled in registered shares, (ii) consider whether collateral is required to be posted, and (iii) assess shareholder rights. ASU 2020-06 is effective January 1, 2024, for the Company and the provisions of this update can be adopted using either the modified retrospective method or a fully retrospective method. Early adoption is permitted, but no earlier than January 1, 2021.
At
December 31, 2020, the Company had recorded a derivative liability of $25,978 related to 10,417 warrants issued in 2019 because the settlement
provisions of the warrants contained language that the shares underlying the warrants are required to be registered. Effective January
1, 2021, the Company early adopted ASU 2020-06 using the modified retrospective approach. ASU 2020-06 removed the requirement to consider
if the warrants would be settled in registered shares, and accordingly, the adoption of ASU 2020-06 resulted in a decrease to accumulated
deficit of $
| 13 |
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic 470-50), Compensation — Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”). ASU 2021-04 provides guidance as to how an issuer should account for a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option (i.e., a warrant) that remains classified after modification or exchange as an exchange of the original instrument for a new instrument. An issuer should measure the effect of a modification or exchange as the difference between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification or exchange and then apply a recognition model that comprises four categories of transactions and the corresponding accounting treatment for each category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination or modification). ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the guidance provided in ASU 2021-04 prospectively to modifications or exchanges occurring on or after the effective date. Early adoption is permitted for all entities, including adoption in an interim period. If an entity elects to early adopt ASU 2021-04 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period. The adoption of ASU 2021-04 is not expected to have any impact on the Company’s consolidated financial statement presentation or disclosures.
Other recent accounting pronouncements issued by the FASB, its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future financial statements.
3. Acquisition of Activ Nutritional, LLC.
On
June 1, 2021, the Company completed the acquisition of Activ. The acquisition was made pursuant to an equity purchase agreement dated
May 18, 2021 between the Company, Adare Pharmaceuticals, Inc., (“Adare”), and Activ. The Company acquired all of the issued
and outstanding equity of Activ from Adare for $
Activ owns the Viactiv® line of supplement chews for bone health, immune health and other applications which are currently marketed through many of the nation’s largest retailers, including, among others, Walmart (retail and online), Target and Amazon. The Viactiv product lines are expected to become the Company’s most prominent product lines for the foreseeable future.
The Company utilized the acquisition method of accounting for the acquisition in accordance with ASC 805, Business Combinations. The Company allocated the purchase price to Activ’s tangible assets, identifiable intangible assets, and assumed liabilities at their estimated fair values as of the date of acquisition. The fair value of the intangible assets was estimated using the income approach, pursuant to which after-tax cash flows are discounted to present value based on projections and other available financial data. The cash flows were based on estimates used to value the acquisition, and the discount rates applied were benchmarked with reference to the implied rate of return from the transaction model, as well as the weighted average cost of capital. The valuation assumptions took into consideration the Company’s estimates of customer attrition and revenue growth projections. The excess of the purchase price paid by the Company over the estimated fair value of identified tangible and intangible assets has been recorded as goodwill.
The following table summarizes the allocation of the fair value of the purchase consideration to the fair value of tangible assets, identifiable intangible assets, and assumed liabilities of Activ on the date of acquisition:
| Fair value of consideration : | ||||
| Purchase price, as adjusted, paid in cash | $ | |||
| Allocation of the consideration to the fair value of assets acquired and liabilities assumed: | ||||
| Cash | $ | |||
| Accounts receivable | ||||
| Inventories | ||||
| Prepaids | ||||
| Accounts payable | ( | ) | ||
| Net tangible assets | ||||
| Trade names and trademarks | ||||
| Customer relationships | ||||
| Net identifiable intangible assets | ||||
| Goodwill | ||||
| Fair value of net assets acquired | $ | |||
| 14 |
The
Company consolidated Activ’s operations with the Company’s operations commencing June 1, 2021, the closing date of the transaction.
Activ’s operations are included in the Company’s Clinical Nutrition segment. The amount of revenue and net income of Activ
included in the Company’s consolidated statements of operations during the three months and six months ended June 30, 2021, was
$
Acquisition-related
transaction costs (e.g., legal, due diligence, valuation, investment banking and other professional fees) are not included as a component
of consideration transferred, but were expensed as incurred. During the three months and six months ended June 30, 2021, the Company
incurred approximately $
Pro Forma Information
The following unaudited pro forma condensed consolidated statement of operations for the three months and six months ended June 30, 2021 and 2020 is presented as if the acquisition of Activ had occurred on January 1, 2020, after giving effect to certain pro forma adjustments. The pro forma results of operations are presented for informational purposes only and are not indicative of the results of operations that would have been achieved if the acquisition had actually been consummated on January 1, 2020. These results are prepared in accordance with ASC 606.
| Unaudited Pro forma for the three months ended | Unaudited Pro forma for the six months ended | |||||||||||||||
| June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share-basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Trade
name and trademarks, and customer relationship intangible assets are being amortized over an estimated useful life of
4. Inventories
Inventories consisted of the following:
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Raw materials | $ | $ | ||||||
| Finished goods | ||||||||
| $ | $ | |||||||
| 15 |
The Company’s inventories are stated at the lower of cost or net realizable value on a first-in, first-out (FIFO) basis.
5. Property and Equipment, Net
Property and equipment, net consisted of the following:
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Leasehold improvements | $ | $ | ||||||
| Testing equipment | ||||||||
| Furniture and fixtures | ||||||||
| Computer equipment | ||||||||
| Office equipment | ||||||||
| Less accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| $ | $ | |||||||
For
the six months ended June 30, 2021 and 2020, depreciation and amortization expense was $
6. Intangible Assets, Net
Intangible assets, net consisted of the following:
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Trade name | $ | $ | ||||||
| Customer relationships | - | |||||||
| Trademark | ||||||||
| Less accumulated amortization | ( | ) | - | |||||
| $ | $ | |||||||
The
trade name and customer relationship were acquired June 1, 2021 in conjunction with the acquisition of Activ (see Note 3) and are being
amortized over a period of
The expected future amortization expense for amortizable finite-lived intangible assets as of June 30, 2021 is as follows:
| Total | ||||
| 2021 (remaining 6 months) | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| Total future expected amortization expense | $ | |||
7. Operating Leases
The
Company leases an office and certain warehouse space under two operating leases. The Company accounts for its leases under ASC 842, Leases.
During the three months ended June 30, 2021 and 2020, lease costs totaled $
As
of December 31, 2020, the Company’s net right of use asset totaled $
| 16 |
As
of December 31, 2020, the Company’s operating lease liabilities totaled $
As
of June 30, 2021, the weighted average remaining lease terms for operating leases are
Future minimum lease payments under the leases are as follows:
| Year ending | Operating Leases | |||
| Remainder of 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| Total lease payments | ||||
| Less: Imputed interest/present value discount | ( | ) | ||
| Present value of lease liabilities | ||||
| Less: Current portion | ( | ) | ||
| $ | ||||
8. Payable to Former Officer
Effective
June 15, 2020, Michael Favish resigned as Chief Executive Officer of the Company and also resigned from the Company’s Board of
Directors. Terms of the settlement agreement between the parties included the continuation of his previous salary of $
9. Derivative Liability
On
April 9, 2019, the Company issued
Effective
January 1, 2021, the Company early adopted ASU 2020-06 using the modified retrospective approach. ASU 2020-06 removed the requirement
to consider if the warrants would be settled in registered shares, and accordingly, the adoption of ASU 2020-06 resulted in a decrease
to accumulated deficit of $
At December 31, 2020, the fair value of such warrant was determined to be $2.49 using the Black-Scholes option pricing model utilizing the following assumptions:
| Warrant Liability As of | ||||
| December 31, 2020 | ||||
| Stock price | $ | |||
| Risk free interest rate | % | |||
| Expected volatility | % | |||
| Expected life in years | ||||
| Expected dividend yield | % | |||
| Number of warrants | ||||
| Fair value of warrants | $ | |||
| 17 |
10. Stockholders’ Equity
Common Stock
January 2021 and February 2021 At the Market Offerings
On
January 8, 2021, the Company entered into a sales agreement with Maxim Group LLC (“Maxim”) pursuant to which the Company
could sell up to $
On
January 28, 2021, the Company entered into a sales agreement with Maxim pursuant to which the Company could sell up to $
The
Company incurred costs related to these financings of approximately $
Warrants
A summary of the Company’s warrant activity is as follows:
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | ||||||||||
| December 31, 2020 | $ | |||||||||||
| Granted | - | |||||||||||
| Forfeitures | - | |||||||||||
| Expirations | - | |||||||||||
| Exercised | ( | ) | - | |||||||||
| June 30, 2021, all exercisable | ||||||||||||
The exercise prices of warrants outstanding and exercisable as of June 30, 2021 are as follows:
| Warrants Outstanding and Exercisable (Shares) | Exercise Prices | |||||
| $ | ||||||
| 18 |
During
the six months ended June 30, 2021, investors exercised a total of
Stock Options
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | ||||||||||
| December 31, 2020 | ||||||||||||
| Granted | ||||||||||||
| Forfeitures | ( | ) | - | |||||||||
| Expirations | - | |||||||||||
| Exercised | - | |||||||||||
| June 30, 2021, outstanding | $ | |||||||||||
| June 30, 2021, exercisable | $ | |||||||||||
| Options Outstanding | Exercise Prices | |||||
| (Shares) | ||||||
| 19 |
During the six months ended June 30, 2021, the Company granted options to purchase shares of common stock to employees and members of the Board of Directors with a grant date fair value of $ using a Black-Scholes option pricing model based on the following assumptions: (i) volatility rates of to , (ii) discount rates of to , (iii) zero expected dividend yield, and (iv) expected life of years. The options have an exercise price of $ to $ per share. of the options will vest on the anniversary of the grant date and the remaining options will vest on monthly basis over two years. Options for shares vest ratably over three years. As part of their annual compensation for service on the Board of Directors, each of the four non-officer directors receives annual stock option grant for shares of the Company’s common stock on the earlier of the annual meeting of stockholders or June 30. The option shall vest and become exercisable in eight equal installments on the last day of each of the subsequent eight calendar quarter-end dates following the date of grant.
The volatility of the Company’s common stock is based on an average volatility of similar companies in the same industry. The risk-free interest rate was based on rates established by the Federal Reserve Bank. The expected dividend yield was based on the fact that the Company has not paid dividends to its common stockholders in the past and does not expect to pay dividends to its common stockholders in the future. The expected life of the stock options granted is estimated using the “simplified” method, whereby the expected term equals the average of the vesting term and the original contract.
During the six months ended June 30, 2021 and 2020, the Company recognized stock-compensation expense related to the fair value of vested stock options of $ and $, respectively, which was recorded in general and administrative expense.
As
of June 30, 2021, the Company had an aggregate of remaining unvested options outstanding, with a remaining fair value of $
Restricted Common Stock
In January 2021, the Company granted shares of the Company’s common stock to the Company’s Chief Executive Officer (“CEO”). The shares vest on the first anniversary of the award. If the CEO’s employment with the Company is terminated for any reason, any shares not then vested will be forfeited. Also effective in January 2021, the Company granted shares of the Company’s common stock to a consultant for services, with of the shares vesting immediately and the balance of shares vesting through August 15, 2021. In the event the consultant’s service with the Company terminates, any shares not then vested will be forfeited. During the quarter ended June 30, 2021 the Company granted shares of the Company’s common stock with vesting terms to the Company’s Chief Commercial Officer. The shares vest one third per year for three years on the anniversary of the award.
The
total fair value of the shares was determined to be $ based on the price per shares of the Company’s common stock
on the dates granted. The Company accounts for the share awards using the straight-line attribution or graded vesting method over the
requisite service period provided that the amount of compensation cost recognized at any date is no less than the portion of the grant-date
fair value of the award that is vested at that date. During the six months ended June 30, 2021, total share-based expense recognized
related to vested restricted shares totaled $. At June 30, 2021, there was $ of unvested compensation related to these
awards that will be amortized over a remaining vesting period of
The following table summarizes restricted common stock activity for the six months ended June 30, 2021:
| Number of shares | Fair value of shares | |||||||
| Non-vested shares, December 31, 2020 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ( | ) | ||||
| Forfeited | ||||||||
| Non-vested shares, June 30, 2021 | $ | |||||||
| 20 |
11. Related Party Transactions
David
Evans, Ph.D., was the interim chief executive officer of the Company from June 12, 2020 to January 6, 2021, and together with his spouse,
wholly owns Ceatus Media Group LLC (“Ceatus”) and DWT Evans LLC (“DWT”). For the three months and six months
ended June 30, 2021 and 2020 the Company paid Ceatus $
In
September 2017, the Company acquired VectorVision, Inc. from David Evans. At the same time, the Company also acquired AcQviz from David
Evans, which is a patented methodology for auto-calibrating and standardizing the testing light level for computer generated vision testing
systems. David Evans is entitled to receive a royalty on net revenue from AcQviz. As part of the development of the CSV-2000, AcQviz
was embedded in the product by Radiant Technologies, Inc. in exchange for a
12. Segment Reporting
The
Company determined its reporting units in accordance with ASC 280, “Segment Reporting”. The Company currently operates in
The Clinical Nutrition segment provides a portfolio of science-based, clinically supported nutrition, medical foods, and supplements. The Diagnostics Equipment segment includes a portfolio of medical diagnostic devices currently focused on the ocular space and contrast testing. The Company’s diagnostics equipment and accessories are used to measure visual function and certain anatomical features of the eye that detect early disease and monitor changes over time.
The segments are based on the discrete financial information reviewed by the Chief Executive Officer, who is the Company’s Chief Operating Decision Maker (“CODM”), to make resource allocation decisions and to evaluate performance. The reportable segments are each managed separately because they manufacture and distribute distinct products or provide services with different processes. All reported segment revenues are derived from external customers.
The accounting policies of the Company’s reportable segments are the same as those described in the summary of significant accounting policies (see Note 2). Certain corporate general and administrative expenses, including general overhead functions such as information systems, accounting, human resources, Board of Director fees, corporate legal fees, other compliance costs and certain administrative expenses, as well as interest and tax expense, are not allocated to the segments. The following tables set forth our results of operations by segment:
| For the Three Months Ended June 30, 2021 | ||||||||||||||||
| Corporate | Clinical Nutrition | Diagnostics Equipment | Total | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | - | |||||||||||||||
| Gross profit | - | |||||||||||||||
| Stock compensation expense | - | - | ||||||||||||||
| Operating expenses | ||||||||||||||||
| Loss from operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| 21 |
| For the Three Months Ended June 30, 2020 | ||||||||||||||||
| Corporate | Clinical Nutrition | Diagnostics Equipment | Total | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Stock compensation expense | ( | ) | - | - | ( | ) | ||||||||||
| Operating expenses | ||||||||||||||||
| Loss from operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| For the Six Months Ended June 30, 2021 | ||||||||||||||||
| Corporate | Clinical Nutrition | Diagnostics Equipment | Total | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | - | |||||||||||||||
| Gross profit | - | |||||||||||||||
| Stock compensation expense | - | - | ||||||||||||||
| Operating expenses | ||||||||||||||||
| Loss from operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| For the Six Months Ended June 30, 2020 | ||||||||||||||||
| Corporate | Clinical Nutrition | Diagnostics Equipment | Total | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Stock compensation expense | ( | ) | - | - | ( | ) | ||||||||||
| Operating expenses | ||||||||||||||||
| Loss from operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
The following tables set forth our total assets by segment. Intersegment balances and transactions have been removed:
| 22 |
| As of June 30, 2021 | ||||||||||||||||
| Corporate | Clinical Nutrition | Diagnostics Equipment | Total | |||||||||||||
| Current assets | ||||||||||||||||
| Cash | $ | $ | $ | $ | ||||||||||||
| Short-term investments | - | - | ||||||||||||||
| Inventories | - | |||||||||||||||
| Accounts receivable | - | |||||||||||||||
| Other | - | |||||||||||||||
| Total current assets | ||||||||||||||||
| Right of use asset, net | - | |||||||||||||||
| Property and equipment, net | - | |||||||||||||||
| Intangible assets, net | - | - | ||||||||||||||
| Goodwill | - | - | ||||||||||||||
| Other | - | - | ||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
| As of December 31, 2020 | ||||||||||||||||
| Corporate | Clinical Nutrition | Diagnostics Equipment | Total | |||||||||||||
| Current assets | ||||||||||||||||
| Cash | $ | $ | $ | $ | ||||||||||||
| Inventories | - | |||||||||||||||
| Other | - | |||||||||||||||
| Total current assets | ||||||||||||||||
| Right of use asset | - | |||||||||||||||
| Property and equipment, net | - | |||||||||||||||
| Intangible assets, net | - | - | ||||||||||||||
| Other | - | - | ||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
13. Commitments and Contingencies
The Company is periodically the subject of various pending or threatened legal actions and claims arising out of its operations in the normal course of business. In the opinion of management of the Company, adequate provision has been made in the Company’s financial statements at June 30, 2021 and December 31, 2020 with respect to any such matters.
Effective
January 6, 2021, the Board of Directors appointed Bret Scholtes as President, Chief Executive Officer, and as a director of the Company.
The Company and Mr. Scholtes entered into an employment agreement pursuant to which Mr. Scholtes’ annual base salary is $
| 23 |
Additionally,
14. Subsequent Events
The Company performed an evaluation of subsequent events through the date of filing of these consolidated financial statements with the SEC. There were no material subsequent events which affected, or could affect, the amounts or disclosures in the consolidated financial statements.
| 24 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q for the six-month period ended June 30, 2021 contains “forward-looking statements” within the meaning of the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements contain information about our expectations, beliefs or intentions regarding our product development and commercialization efforts, business, financial condition, results of operations, strategies or prospects, and other similar matters. These forward-looking statements are based on management’s current expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. These statements may be identified by words such as “expects,” “plans,” “projects,” “will,” “may,” “anticipates,” “believes,” “should,” “intends,” “estimates,” “hopes” and other words of similar meaning.
Actual results could differ materially from those contained in forward-looking statements. Many factors could cause actual results to differ materially from those in forward-looking statements, including those matters discussed below. Readers are urged to read the risk factors set forth in the Company’s recent filings with the U. S. Securities and Exchange Commission (the “SEC”), including the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and in other documents the Company files with the SEC from time to time. These filings are available at the SEC’s website (www.sec.gov).
Other unknown or unpredictable factors that could also adversely affect our business, financial condition and results of operations may arise from time to time. Given these risks and uncertainties, the forward-looking statements discussed in this report may not prove to be accurate. Accordingly, you should not place undue reliance on these forward-looking statements, which only reflect the views of the Company’s management as of the date of this report. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results or expectations, except as required by law.
Presentation of Information
As used in this Quarterly Report on Form 10-Q, the terms “we,” “us” “our” and the “Company” mean Guardion Health Sciences, Inc., and its affiliates unless the context requires otherwise. The following discussion and analysis should be read in conjunction with our audited financial statements and the related notes that appear elsewhere in this report and our audited financing statements for the year ended December 31, 2020, and the notes thereto, which are set forth in the Company’s 2020 Annual Report on Form 10-K. All dollar amounts refer to U.S. dollars unless otherwise indicated.
Overview
Guardion Health Sciences, Inc., a Delaware corporation (the “Company” or “we”) is a clinical nutrition and diagnostics company that develops and distributes clinically supported nutrition, medical foods, supplements and medical devices. The Company offers a portfolio of science-based, clinically supported products and devices designed to support healthcare professionals and providers, and their patients and consumers.
We see opportunities to grow our business and create value by acquiring, developing and distributing condition-specific, clinically proven nutrition, medical foods, supplements and diagnostic devices. We see opportunities to grow our business and create value by developing and distributing condition-specific, clinically proven nutrition, medical foods, supplements and diagnostic devices. Our portfolio of science-based, clinically supported products support healthcare professionals, their patients, and consumers in achieving health goals.
| 25 |
The Company’s profile and focus fundamentally changed with the acquisition of Activ Nutritional, LLC in June 2021, (“Activ”), the owner and distributor of the Viactiv® line of chewable mineral supplements for bone health, immune health and other applications.
The acquisition and integration of the Viactiv line of products has changed the Company’s financial position, market profile and brand focus, and has also expanded the Company’s search for additional business opportunities in the short-term, both internal and external.
The Company believes the Viactiv acquisition adds valuable attributes, including (1) Viactiv’s brand awareness and acceptance from the consumer; (2) experienced management; (3) established distribution networks and relationships; (4) product development potential; and (5) a long track record of revenue growth and profitability.
| ● | Brand awareness - Viactiv was initially launched by industry leaders Mead Johnson/Johnson &Johnson approximately twenty years ago, and we believe this history, along with the product’s marketing campaigns, taste profile and receipt of consistently positive consumer reviews, have led to strong consumer awareness and acceptance. | |
| ● | Experienced management – As part of the Activ acquisition the Company appointed Craig Sheehan as the Chief Commercial Officer. Mr. Sheehan was the senior executive responsible for the Viactiv brand as a member of the executive leadership team of Adare Pharmaceuticals. | |
| ● | Established distribution – Viactiv’s products are currently marketed through many of the nation’s largest retailers, including, among others, Walmart (retail and online), Target, CVS and Amazon. | |
| ● | Product development potential – The Viactiv brand has promising organic growth potential through expanded product development, increased marketing programs, and line extensions. Viactiv recently launched its Calcium Plus Immune product and there are other complementary products in development that the Company is considering bring to market. Track record of profitability – Viactiv generated net revenues of approximately $11,900,000 in 2020 and operating income of approximately $1,200,000 in 2020. For the three months and six months ended June 30, 2021, on a pro forma basis, Guardion’s total revenues would have been $3,137,736 and $7,273,595, respectively, and the Viactiv products would have accounted for 94% and 94%, respectively, of Guardion’s pro forma total revenues for those periods. The Company expects the acquisition of Viactiv to contribute increasing revenue and consistent operating margins and profitability, as well as a multitude of growth opportunities, to the Company. |
Recent Developments
Acquisition of Activ Nutritional
On June 1, 2021, the Company completed its previously announced acquisition of Activ. The acquisition was made pursuant to an Equity Purchase Agreement dated May 18, 2021, between the Company, Adare Pharmaceuticals, Inc., (“Adare”), and Activ. . The Company acquired all of the issued and outstanding shares of Activ from Adare for $26 million in cash, subject to certain adjustments as provided in the Equity Purchase Agreement.
Activ owns the Viactiv® line of supplement chews for bone health, immune health and other applications which are currently marketed through many of the nation’s largest retailers, including, among others, Walmart (retail and online), Target and Amazon. The Viactiv product lines will become the Company’s most prominent product lines for the foreseeable future.
The Company utilized the acquisition method of accounting for the acquisition in accordance with ASC 805, Business Combinations. The Company allocated the purchase price to Activ’s tangible assets, identifiable intangible assets, and assumed liabilities at their estimated fair values as of the date of acquisition. The fair value of the intangible assets was estimated using the income approach in which after-tax cash flows are discounted to present value by a third-party valuation firm based on projections and financial data provided by management of the Company. The cash flows are based on estimates used to value the acquisition, and the discount rates applied were benchmarked with reference to the implied rate of return from the transaction model as well as the weighted average cost of capital. The valuation assumptions take into consideration our estimates of customer attrition and revenue growth projections. The excess of the purchase price paid by the Company over the estimated fair value of identified tangible and intangible assets has been recorded as goodwill.
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Appointment of CEO
Effective as of January 6, 2021, the Board of Directors appointed Bret Scholtes as President and Chief Executive Officer and as a director of the Company.
The Company and Mr. Scholtes entered into an employment agreement pursuant to which Mr. Scholtes’ annual base salary is $400,000. The Employment Agreement provides that Mr. Scholtes shall have an annual target cash bonus opportunity of no less than $400,000 (the “Bonus”) based on the achievement of Company and individual performance objectives to be determined by the Board of Directors.
Mr. Scholtes was granted an award of stock options equal to one percent (1%) of the issued and outstanding number of shares of the Company’s common stock (the “Stock Options”) pursuant to the Company’s 2018 Equity Incentive Plan (the “Incentive Plan”), at an exercise price equal to the closing price of the Company’s common stock on the Effective Date (152,671 shares, exercise price of $3.95 per share). One third (1/3) of the Stock Options shall vest and become exercisable the first anniversary of the Effective Date, and the balance of the Stock Options shall vest ratably in equal installments for the twenty-four (24) months thereafter, subject to continued service, and shall vest in full upon a Change in Control (as defined in the Incentive Plan). Additionally, the Company shall grant unvested shares of common stock in an amount equal to one percent (1%) of the number of shares of Company common stock issued and outstanding on the Effective Date (the “Stock Grant”) to Mr. Scholtes under the Incentive Plan (152,671 shares). The shares underlying the Stock Grant shall become vested in full on the first anniversary of the Effective Date. Additionally, Mr. Scholtes shall be granted (i) additional stock options equal to two percent (2%) of the Company’s issued and outstanding shares of common stock on the date of grant if the Company achieves certain specified written performance objectives established by the Board for the Company’s fiscal years ending December 31, 2021 and December 31, 2022 and (ii) additional stock options equal to either two percent (2%) or three percent (3%) of the Company’s issued and outstanding shares of common stock on the date of grant if the Company meets certain financial objectives during the first five years following the Effective Date.
If Mr. Scholtes’ employment is terminated by the Company without cause (as defined in his employment agreement), if the term expires after a notice of non-renewal is delivered by the Company or if Mr. Scholtes’ employment is terminated following a change of control (as defined in the Incentive Plan), Mr. Scholtes will be entitled to (a) twelve months’ base salary, (b) the prorated portion of the Bonus for the year in which the termination occurs, based on actual performance and (c) base salary and benefits accrued through the date of termination.
January and February 2021 At the Market Offerings
On January 8, 2021, the Company entered into a sales agreement with Maxim Group LLC (“Maxim”) pursuant to which the Company could sell up to $10,000,000 worth of shares of its common stock in an “at the market” offering through Maxim (the “January 2021 1st ATM Offering”). On January 15, 2021, the Company completed the January 2021 1st ATM Offering, pursuant to which the Company sold an aggregate of 2,559,834 shares of its common stock and raised gross proceeds (after deduction for sales commissions) of approximately $9,700,000.
On January 28, 2021, the Company entered into a sales agreement with Maxim pursuant to which the Company could sell up to $25,000,000 worth of shares of its common stock in an “at the market” offering through Maxim (the “January 2021 2nd ATM Offering”). On February 10, 2021, the Company completed the January 2021 2nd ATM Offering, pursuant to which the Company sold an aggregate of 5,048,840 shares of its common stock and raised gross proceeds (after deduction for sales commissions) of approximately $24,250,000.
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The Company incurred costs related to these financings of approximately $327,000 which are reflected in APIC as a reduction that offsets to the proceeds for shares issued. The net cash received from both offering after all expense is approximately $33,623,000.
Warrant Exercises
From January 1, 2021 through June 30, 2021, the Company received total gross proceeds of $3,568,415 from the exercise of 1,647,691 warrants issued.
Recent Accounting Pronouncements
See Note 2 to the condensed consolidated financial statements for management’s discussion of recent accounting pronouncements.
Concentration of Risk
Cash balances are maintained at large, well-established financial institutions. At times, cash balances exceed federally insured limits. Insurance coverage limits are $250,000 per depositor at each financial institution. The Company has never experienced any losses related to these balances.
During the six months ended June 30, 2021, two customers accounted for approximately 44% of the Company’s sales. No other customer accounted for more than 10% of such sales in either the 2021 or 2020 six-month periods.
Critical Accounting Policies and Estimates
The Company’s financial statements have been prepared in conformity with GAAP. The preparation of its financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Actual results could differ from those estimates. The Company’s financial statements included herein include all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows.
The following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s financial statements.
Revenue Recognition
The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. Revenue is recognized when control of promised goods or services is transferred to the customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those products or services. The Company reviews its sales transactions to identify contractual rights, performance obligations, and transaction prices, including the allocation of prices to separate performance obligations, if applicable.
All products sold by the Company are distinct individual products and are offered for sale as finished goods only, and there are no performance obligations required post-shipment for customers to derive the expected value from them. Contracts with customers contain no incentives or discounts that could cause revenue to be allocated or adjusted over time.
Inventories
Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out (“FIFO”) basis. The Company records adjustments to its inventory for estimated obsolescence or diminution in net realizable value equal to the difference between the cost of the inventory and the estimated net realizable value. The difference is recognized as a loss in the period in which it occurs. Once inventory has been written down, it creates a new cost basis for inventory that is not subsequently written up.
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Business Combinations
The Company accounts for its business combinations using the acquisition method of accounting where the purchase consideration is allocated to the tangible and intangible assets acquired, and liabilities assumed, based on their respective fair values as of the acquisition date. The excess of the fair value of the purchase consideration over the estimated fair values of the net assets acquired is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing intangible assets include, but are not limited to, expected future cash flows, which includes consideration of future growth and margins, future changes in technology, expected cost and time to develop in-process research and development, brand awareness and discount rates. Fair value estimates are based on the assumptions that management believes a market participant would use in pricing the asset or liability.
Stock-Based Compensation
The Company periodically issues stock-based compensation to employees and non-employees in non-capital raising transactions for services and for financing costs. Such grants vest and expire according to terms established at the issuance date. The Company accounts for such grants issued and vesting based on ASC 718, Compensation-Stock Compensation, whereby the value of the award is measured on the date of grant and recognized for employees as compensation expense on a straight-line or graded basis over the vesting period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for the services.
The fair value of stock options granted is estimated using the Black-Scholes option-pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life, and future dividends. The assumptions used in the Black-Scholes option pricing model could materially affect compensation expense recorded in future periods. The Company periodically issues stock-based compensation to officers, directors, contractors and consultants for services rendered. Such issuances vest and expire according to terms established at the issuance date.
Recent Trends – Market Conditions; COVID-19
The COVID-19 pandemic has and will continue affecting economies and businesses around the world. The impacts of the pandemic could be material, but due to the evolving nature of this situation, we are not able at this time to estimate the impact on our financial or operational results. Among the factors that could impact our results are the effectiveness of COVID-19 mitigation and vaccination measures; the development of COVID-19 variants, global economic conditions; consumer spending; work from home trends; supply chain sustainability; and other factors. These factors could result in increased or decreased demand for our products and services and impact our ability to serve customers.
Plan of Operations
General Overview
The Company is focused on building a leading clinical nutrition company with the objective that it become a top performing growth company. Our team has taken the first part of 2021 to assess the business, the core fundamentals, and the market opportunity for the Company’s products and services. With the acquisition of Activ, management believes that the Company will be able to accelerate its growth and development.
Our team is focused on building a strong foundation by developing a business model and infrastructure that are designed for long-term commercial success. This process will take time, but we are taking important steps required to build a stronger company, such as the Activ acquisition. Furthermore, we successfully raised equity in two at-the-market equity financings during the first three months ended March 31, 2021, and the Company implemented a reverse stock split that enabled us to come into full compliance with Nasdaq’s continued listing rules regarding minimum bid stock price. Based on the availability of sufficient funding, the Company intends to increase its commercialization and business development activities, including engaging in further strategic acquisitions, to capitalize on growth opportunities.
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Over the long-term, we believe one of the critical keys to our success will be to create value in well-differentiated and robust brands through strong clinically proven claims that address consumer needs in growing markets, both domestically and internationally. We are committed to bringing compelling products to market under meaningful and differentiated brands supported by strong science.
We are currently working on a number of initiatives required to achieve these long-term goals. These include the following:
Growth initiatives focused on increasing revenue and bringing compelling products to market under meaningful and differentiated brands that are supported by strong science.
| ● | Brand Strategy – Brands are an important part of our strategy, and Guardion’s team is evaluating the best ways to manage its brand portfolio. In particular, we are seeking to develop a strategy that best leverages Viactiv’s strong consumer awareness and acceptance. | |
| ● | Scientific Work – Our team continuously evaluates scientific journals and clinical evidence to improve the science behind our existing products and drive our product development process. In addition, we are working with health care professionals to increase clinical evidence on existing products. | |
| ● | Product Strategy – Our team is evaluating our current product portfolio and seeking opportunities to improve or discontinue our existing products and technologies and develop new ones. We are focused on differentiated formulations, product taste, compelling product formats, and competitive cost structures. | |
| ● | Sales Channels – Our team is evaluating opportunities to increase product commercialization through better access to sales channels. The Viactiv products enjoy established distribution through traditional retailers and third-party eCommerce retailers. Our other clinical nutrition products are sold directly to consumers via the Company’s website. By leveraging our collective experience selling in these channels, we seek to increase the distribution of our products. | |
| ● | Existing Business Lines – Our team is evaluating the Company’s non-Viactiv business lines to determine their fit in the strategic direction of the Company. As discussed elsewhere and in our Annual Report on Form 10-K for the Year Ended December 31, 2020, product development and successful commercialization can be an expensive and time-consuming process. Management wants to focus on those products and technologies that possess the greatest chance for commercial success within a reasonable period of time and a reasonable deployment of capital. |
Efficiency initiatives focused on increased profitability
| ● | Logistics – Our team is evaluating the way our products are handled, stored and transported. We believe there could be opportunities to become more efficient and potentially reduce warehouse costs. | |
| ● | Office costs – We have moved our executive offices to Houston, Texas. We are evaluating options to decrease our costs as a result of this relocation, and the Company’s successful use of virtual management. | |
| ● | Portfolio evaluation – We are evaluating our entire product portfolio with the goal to identify efficiencies and insuring fit with the Company’s strategy. | |
| ● | Information Technology – Our team is implementing a number of information technology projects designed to increase efficiency and marketing effectiveness, and to manage risk. |
Results of Operations
Through June 30, 2021, the Company has primarily been engaged in product development, commercialization, and raising capital. The Company has incurred and will continue to incur significant expenditures for the development of its products and intellectual property, which includes nutrition, medical foods, supplements and Diagnostics Equipment. These products support healthcare professionals, their patients and consumers in achieving health goals. The Company had limited revenue during the three and six months ended June 30, 2021 and 2020.
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Comparison of Three Months Ended June 30, 2021 and 2020
Three Months Ended June 30, | ||||||||||||||||
| 2021 | 2020 | Change | ||||||||||||||
| Revenue | $ | 1,223,720 | $ | 1,190,909 | $ | 32,811 | 3 | % | ||||||||
| Cost of goods sold | 665,219 | 644,579 | 20,640 | 3 | % | |||||||||||
| Gross Profit | 558,501 | 546,330 | 12,171 | 2 | % | |||||||||||
| Operating Expenses: | ||||||||||||||||
| Research and development | 16,756 | 44,581 | (27,825 | ) | (62 | )% | ||||||||||
| Sales and marketing | 440,793 | 519,067 | (78,274 | ) | (15 | )% | ||||||||||
| General and administrative | 2,537,826 | 1,712,183 | 825,643 | 48 | % | |||||||||||
| Acquisition transaction costs | 2,103,680 | - | 2,103,680 | |||||||||||||
| Costs related to resignation of former officer | - | (1,052,223 | ) | 1,052,223 | ||||||||||||
| Impairment loss on equipment held for sale | - | 30,948 | (30,948 | ) | ||||||||||||
| Total Operating Expenses | 5,099,055 | 1,254,556 | 3,844,499 | 306 | % | |||||||||||
| Loss from Operations | (4,540,554 | ) | (708,226 | ) | (3,832,328 | ) | 541 | % | ||||||||
| Other Expense (Income): | ||||||||||||||||
| Interest expense | - | 1,790 | (1,790 | ) | (100 | )% | ||||||||||
| Interest income | (266 | ) | - | (266 | ) | |||||||||||
| Change in fair value of derivative warrants | - | (2,856 | ) | 2,856 | (100 | )% | ||||||||||
| Net Loss | $ | (4,540,288 | ) | $ | (707,160 | ) | $ | (3,833,128 | ) | (542 | )% | |||||
Revenue
For the three months ended June 30, 2021, revenue from product sales was $1,223,720 compared to $1,190,909 for the three months ended June 30, 2020, resulting in an increase of $32,811 or 3%. The relatively flat overall performance reflects a combination of improved sales of Clinical Nutrition resulting from our acquisition of Activ Nutritional, LLC, offset by a decrease in Diagnostics Equipment sales primarily due to the impact of COVID-19 office closures for many in our customer base. Activ was acquired on June 1, 2021 and contributed $1,049,803 of revenue in the one month it was part of the Company during the period ended June 30, 2021. This contribution represented 86% of the Company’s revenue during the quarter. For the three months ended June 30, 2021, on a proforma basis, the amount of revenue from Activ we would have included in our consolidated results was $2,842,177.
Cost of Goods Sold
For the three months ended June 30, 2021, cost of goods sold was $665,219 compared to $644,579 for the three months ended June 30, 2020, an increase of $20,640 or 3%. This increase is primarily driven by the addition of the Viactiv product line to our offerings.
Gross Profit
For the three months ended June 30, 2021, gross profit was $558,501 compared to $546,330 for the three months ended June 30, 2020, an increase of $12,171 or 2%, primarily as a result in the decrease in Diagnostics Equipment sales and the increase in cost of goods sold. Gross profit represented 46% of revenues in each three-month period ended June 30. Activ was acquired on June 1, 2021 and contributed $503,073 of gross profit in the one month it was part of the Company. This contribution represented 90% of the Company’s gross profit during the quarter.
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Research and Development
For the three months ended June 30, 2021, research and development costs were $16,756 compared to $44,581 for the three months ended June 30, 2020, a decrease of $27,825 or 62%, primarily as a result of the timing of certain studies conducted on a periodic basis. Research and development costs primarily consist of engineering efforts related to our Diagnostics Equipment and clinical studies related to our medical foods.
Sales and Marketing
For the three months ended June 30, 2021, sales and marketing expenses were $440,793 as compared to $519,067 for the three months ended June 30, 2020, representing a decrease in sales and marketing expenses of $78,274 or 15% compared to the prior three-month period. The decrease is primarily attributable to increases in marketing and advertising of approximately $187,000 partially offset by decreases in payroll and stock compensation of approximately $233,000 which in previous years allocated to Sales and Marketing which is now in general and administrative costs and a decrease in postage costs of approximately $20,000.
General and Administrative
For the three months ended June 30, 2021, general and administrative expenses were $2,537,826 as compared to $1,712,183 for the three months ended June 30, 2020. The increase of $825,643 or 48% compared to the prior period was primarily attributable increases in stock-based compensation increased approximately $767,000 and professional fees of approximately $409,000, offset primarily by a decrease in payroll costs of approximately $268,000.
Acquisition Transaction Costs
For the three months ended June 30, 2021, acquisition transaction costs were $2,103,680 all of which relate to our acquisition of Activ. We did not have any acquisition costs in the comparable three-month period in 2020.
Costs Related to Resignation of Former Officer
Effective June 15, 2020, Michael Favish resigned as Chief Executive Officer and as an employee of the Company and resigned from the Company’s Board of Directors. Terms of the settlement agreement included the continuation of his previous salary of $325,000 during the following twelve months. The $325,000 settlement was recorded in costs related to resignation of former officer expense in the accompanying condensed consolidated statement of operations for the three months ended June 30, 2020.
In connection with his separation, the expiration date of his vested stock options was extended for twelve months from June 15, 2020. In accordance with ASC 718, the extension of the exercise period for the vested options constitutes a modification of the original option agreement. In accounting for the modification, the Company calculated the fair value of the vested options immediately before modification using current valuation inputs including the Company’s closing stock price of $0.49 on June 15, 2020, a volatility metric of 142%, and a risk-free interest rate of 0.22%. The Company also calculated the fair value of the vested options immediately following the modification using the extended 12-month exercise period. An incremental stock compensation charge of $24,359 was recorded in costs related to resignation of former officer.
Mr. Favish’s unvested options at the time of his separation were forfeited. All compensation from prior periods related to these unvested options was reversed, resulting in an adjustment to stock compensation expense during the three months ended June 30, 2020 of $(1,401,582) that was recorded in costs related to resignation of former officer.
Impairment Loss on Equipment Held for Sale
During June 2020, in an effort to reduce costs, the Company began to wind down the TDSI subsidiary. The wind down was completed in the third quarter of 2020. TDSI holds a group of ultrasound machines as fixed assets. We intend to sell these machines, and therefore have reflected their value as the lower of carrying value or fair value less estimated selling costs. An impairment charge of $30,948 has been recorded in the condensed consolidated statements of operations for the three months ended June 30, 2020. No impairment charge was recorded for the three months ended June 30, 2021.
Interest Expense
For the three months ended June 30, 2021, interest expense was $0 compared to $1,790 for the three months ended June 30, 2020. In 2020 we financed the cost of various insurance policies and incurred interest expense. We did not finance the cost of the 2021 insurance policies therefore we incurred no interest in the quarter ended June 30, 2021.
Net Loss
For the three months ended June 30, 2021, the Company incurred a net loss of $4,540,288, compared to a net loss of $707,160 for the three months ended June 30, 2020. The increase in net loss of $3,833,128 or 542% compared to the prior year period is primarily attributable to the increase in costs of goods sold, general and administrative costs and acquisition transaction costs described above.
Segment Information
The following tables set forth our results of operations by segment:
The Clinical Nutrition segment’s Viactiv® line of supplement chews for bone health, immune health and other applications are currently marketed through many of the nation’s largest retailers, including, among others, Walmart (retail and online), Target and Amazon. The Company believes the Viactiv product lines will become the Company’s most prominent product lines. Our other products in the Clinical Nutrition segment include Lumega-Z, GlaucoCetin and ImmuneSF.
The Diagnostics Equipment segment includes a portfolio of medical diagnostic devices currently focused on the ocular space and is the industry leader in contrast testing. Our products include VectorVision CSV-1000, CSV-1000HGT, CSV-2000 and associated accessories as well as the MapcatSF.
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See Note 12 to the condensed consolidated financial statements for further details on our reportable segments.
| For the Three Months Ended June 30, 2021 | ||||||||||||||||
| Corporate | Clinical Nutrition | Diagnostics Equipment | Total | |||||||||||||
| Revenue | $ | - | $ | 1,171,445 | $ | 52,275 | $ | 1,223,720 | ||||||||
| Cost of goods sold | - | 639,188 | 26,031 | 665,219 | ||||||||||||
| Gross profit | - | 532,257 | 26,244 | 558,501 | ||||||||||||
| Stock compensation expense | 343,092 | - | - | 343,092 | ||||||||||||
| Operating expenses | 2,759,319 | 1,938,799 | 57,845 | 4,755,963 | ||||||||||||
| Loss from operations | $ | (3,102,411 | ) | $ | (1,406,542 | ) | $ | (31,601 | ) | $ | (4,540,554 | ) | ||||
| For the Three Months Ended June 30, 2020 | ||||||||||||||||
| Corporate | Clinical Nutrition | Diagnostics Equipment | Total | |||||||||||||
| Revenue | $ | 2,700 | $ | 1,152,894 | $ | 35,315 | $ | 1,190,909 | ||||||||
| Cost of goods sold | 1,096 | 628,205 | 15,278 | 644,579 | ||||||||||||
| Gross profit | 1,604 | 524,689 | 20,037 | 546,330 | ||||||||||||
| Stock compensation expense | (1,335,441 | ) | - | - | (1,335,441 | ) | ||||||||||
| Operating expenses | 1,423,869 | 1,072,508 | 93,620 | 2,589,997 | ||||||||||||
| Loss from operations | $ | (86,824 | ) | $ | (547,819 | ) | $ | (73,583 | ) | $ | (708,226 | ) | ||||
Revenue
For the three months ended June 30, 2021, revenue from our Clinical Nutrition segment was $1,171,445 compared to $1,152,894 for the three months ended June 30, 2020, an increase of $18,551 or 2%. For the three months ended June 30, 2021, revenue from our Diagnostics Equipment segment was $52,275 compared to $35,315 for the three months ended June 30, 2020, an increase of $16,960 or 48% primarily due to the sale of MapcatSF devices in first quarter of 2020.
Cost of Goods Sold
For the three months ended June 30, 2021, cost of goods sold from our Clinical Nutrition segment was $639,188 as compared to $628,205 for the three months ended June 30, 2020, an increase of $10,983 or 2%. For the three months ended June 30, 2021, cost of goods sold from our Diagnostics Equipment segment was $26,031 as compared to $15,278 for the three months ended June 30, 2020, an increase of $10,753 or 70%.
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Gross Profit
For the three months ended June 30, 2021, gross profit from the Clinical Nutrition segment was $532,257 compared to $524,689 for the three months ended June 30, 2020, an increase of $7,568 or 1 %. For the three months ended June 30, 2021, gross profit from the Diagnostics Equipment segment was $26,244 as compared to $20,037 for the three months ended June 30, 2020, resulting in a decrease of $6,207 or 31%. Gross profit overall represented 46% of revenues for the three months ended June 30, 2021and 46% of revenues for the three months ended June 30, 2020.
Comparison of Six Months Ended June 30, 2021 and 2020
Six Months Ended June 30, | ||||||||||||||||
| 2021 | 2020 | Change | ||||||||||||||
| Revenue | $ | 1,457,017 | $ | 1,436,633 | $ | 20,384 | 1 | % | ||||||||
| Cost of goods sold | 798,255 | 753,688 | 44,567 | 6 | % | |||||||||||
| Gross Profit | 658,762 | 682,945 | (24,183 | ) | (4 | )% | ||||||||||
| Operating Expenses: | ||||||||||||||||
| Research and development | 37,364 | 75,769 | (38,405 | ) | (51 | )% | ||||||||||
| Sales and marketing | 898,520 | 1,007,913 | (109,393 | ) | (11 | )% | ||||||||||
| General and administrative | 4,829,277 | 3,228,698 | 1,600,579 | 50 | % | |||||||||||
| Acquisition transaction costs | 2,103,680 | - | 2,103,680 | |||||||||||||
| Costs related to resignation of former officer | - | (615,936 | ) | 615,936 | (100 | )% | ||||||||||
| Impairment loss on equipment held for sale | - | 30,948 | (30,948 | ) | (100 | )% | ||||||||||
| Total Operating Expenses | 7,868,841 | 3,727,392 | 4,141,449 | 111 | % | |||||||||||
| Loss from Operations | (7,210,079 | ) | (3,044,447 | ) | (4,165,632 | ) | 137 | % | ||||||||
| Other Expense (Income): | ||||||||||||||||
| Interest expense | - | - | - | - | % | |||||||||||
| Interest income | (266 | ) | - | (266 | ) | |||||||||||
| Change in fair value of derivative warrants | - | 6,088 | (6,088 | ) | (100 | )% | ||||||||||
| Net Loss | $ | (7,209,813 | ) | $ | (3,054,073 | ) | $ | (4,155,740 | ) | 136 | % | |||||
Revenue
For the six months ended June 30, 2021, revenue from product sales was $1,457,017 compared to $1,436,633 for the six months ended June 30, 2020, resulting in an increase of $20,384 or 1%. The relatively flat overall performance reflects a combination of improved sales of Clinical Nutrition a direct result of our acquisition and integration of Activ partially offset by a decrease in Diagnostics Equipment sales primarily due to the impact of COVID-19 office closures for many in our customer base. For the six months ended June 30, 2021, on a proforma basis, the amount of revenue from Activ we would have included in our consolidated results was $6,582,596.
Cost of Goods Sold
For the six months ended June 30, 2021, cost of goods sold was $798,255 compared to $753,688 for the six months ended June 30, 2020, an increase of $44,567 or 6%. This increase is primarily driven by a change in product mix as the result of our acquisition and integration of Activ. During the six months ended June 30, 2021, the Company recorded an inventory write down of approximately $6,000 related to Vector Vision raw materials inventory.
Gross Profit
For the six months ended June 30, 2021, gross profit was $658,762 compared to $682,945 for the six months ended June 30, 2020, a decrease of $24,183 or 4%, primarily as a result in the decrease in Diagnostics Equipment sales and the increase in cost of goods sold resulting from the acquisition and integration of Activ. Gross profit represented 46% of revenues for the six months ended June 30, 2021, versus 48% of revenue for the six months ended June 30, 2020.
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Research and Development
For the six months ended June 30, 2021, research and development costs were $37,364 compared to $75,769 for the six months ended June 30, 2020, a decrease of $38,405 or 51%, primarily as a result of the timing of certain studies conducted on a periodic basis. Research and development costs primarily consist of engineering efforts related to our Diagnostics Equipment and clinical studies related to our medical foods.
Sales and Marketing
For the six months ended June 30, 2021, sales and marketing expenses were $898,520 as compared to $1,007,913 for the six months ended June 30, 2020, representing a decrease in sales and marketing expenses of $109,393 or 11% compared to the prior six-month period.
General and Administrative
For the six months ended June 30, 2021, general and administrative expenses were $4,829,277 as compared to $3,228,698 for the six months ended June 30, 2020. The increase of $1,600,579 or 50% compared to the prior period. was primarily attributable to increases of approximately in professional fees of $178,000, an increase in stock-based compensation of $687,000, an increase in consulting fees of $303,000, an increase of $61,000 in Insurance, an increase in computer and internet costs of $64,000 partially offset by decreases of $48,000 in office expense and a decrease of $38,000 in corporate travel expenses.
Acquisition Transaction Costs
For the six months ended June 30, 2021, acquisition transaction costs were $2,103,680 all of which relate to our acquisition of Activ. We did not have any acquisition costs in the comparable six month period of 2020.
Costs Related to Resignation of Former Officer
Effective June 15, 2020, Michael Favish resigned as Chief Executive Officer and as an employee of the Company and resigned from the Company’s Board of Directors. Terms of the settlement agreement included the continuation of his previous salary of $325,000 during the following twelve months. The $325,000 settlement was recorded in costs related to resignation of former officer expense in the accompanying condensed consolidated statement of operations for the six months ended June 30, 2020.
In connection with his separation, the expiration date of his vested stock options was extended for twelve months from June 15, 2020. In accordance with ASC 718, the extension of the exercise period for the vested options constitutes a modification of the original option agreement. In accounting for the modification, the Company calculated the fair value of the vested options immediately before modification using current valuation inputs including the Company’s closing stock price of $0.49 on June 15, 2020, a volatility metric of 142%, and a risk-free interest rate of 0.22%. The Company also calculated the fair value of the vested options immediately following the modification using the extended 12-month exercise period. An incremental stock compensation charge of $24,359 was recorded in costs related to resignation of former officer.
Mr. Favish’s unvested options at the time of his separation were forfeited. All compensation from prior periods related to these unvested options was reversed, resulting in an adjustment to stock compensation expense during the six months ended June 30, 2020 of $(965,295) that was recorded in costs related to resignation of former officer.
Impairment Loss on Equipment Held for Sale
During June 2020, in an effort to reduce costs, the Company began to wind down the TDSI subsidiary. The wind down was completed in the third quarter of 2020. TDSI holds a group of ultrasound machines as fixed assets. We intend to sell these machines, and therefore have reflected their value as the lower of carrying value or fair value less estimated selling costs. An impairment charge of $30,948 has been recorded in the condensed consolidated statements of operations for the six months ended June 30, 2020. No impairment charge was recorded for the six months ended June 30, 2021.
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Interest Expense
For the six months ended June 30, 2021, interest expense was $0 compared to $3,538 for the six months ended June 30, 2020. In 2020 we financed the cost of various insurance policies and incurred interest expense. We did not finance the cost of the 2021 insurance policies therefore we incurred no interest in the six months ended June 30, 2021.
Net Loss
For the six months ended June 30, 2021, the Company incurred a net loss of $7,209,813, compared to a net loss of $3,054,073 for the three months ended June 30, 2020. The increase in net loss of $4,155,740 or 136% compared to the prior year period is primarily attributable to the increase in costs of goods sold and general and administrative costs described above.
Segment Information
The following tables set forth our results of operations by segment:
The Clinical Nutrition segment provides a portfolio of science-based, clinically supported nutrition, medical foods, and supplements. Our products include, among others, Lumega-Z, GlaucoCetin and ImmuneSF.
The Diagnostics Equipment segment includes a portfolio of medical diagnostic devices currently focused on the ocular space and is the industry leader in contrast testing. Our products include VectorVision CSV-1000, CSV-1000HGT, CSV-2000 and associated accessories as well as the MapcatSF.
See Note 12 to the condensed consolidated financial statements for further details on our reportable segments.
| For the Six Months Ended June 30, 2021 | ||||||||||||||||
| Corporate | Clinical Nutrition | Diagnostics Equipment | Total | |||||||||||||
| Revenue | $ | - | $ | 1,333,588 | $ | 123,429 | $ | 1,457,017 | ||||||||
| Cost of goods sold | - | 724,105 | 74,150 | 798,255 | ||||||||||||
| Gross profit | - | 609,483 | 49,279 | 658,762 | ||||||||||||
| Stock compensation expense | 730,707 | - | - | 730,707 | ||||||||||||
| Operating expenses | 3,909,898 | 3,114,926 | 113,310 | 7,138,134 | ||||||||||||
| Loss from operations | $ | (4,640,605 | ) | $ | (2,505,443 | ) | $ | (64,031 | ) | $ | (7,210,079 | ) | ||||
| For the Six Months Ended June 30, 2020 | ||||||||||||||||
| Corporate | Clinical Nutrition | Diagnostics Equipment | Total | |||||||||||||
| Revenue | $ | 6,100 | $ | 1,304,028 | $ | 126,505 | $ | 1,436,633 | ||||||||
| Cost of goods sold | 2,477 | 695,291 | 55,920 | 753,688 | ||||||||||||
| Gross profit | 3,623 | 608,737 | 70,585 | 682,945 | ||||||||||||
| Stock compensation expense | (831,573 | ) | - | - | (831,573 | ) | ||||||||||
| Operating expenses | 1,004,484 | 3,344,411 | 210,070 | 4,558,965 | ||||||||||||
| Loss from operations | $ | (169,288 | ) | $ | (2,735,674 | ) | $ | (139,485 | ) | $ | (3,044,447 | ) | ||||
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Revenue
For the six months ended June 30, 2021, revenue from our Clinical Nutrition segment was $1,333,588 compared to $1,304,028 for the six months ended June 30, 2020, an increase of $29,560 or 2%. For the six months ended June 30, 2021, revenue from our Diagnostics Equipment segment was $123,429 compared to $126,505 for the six months ended June 30, 2020, a decrease of $3,076 or 2%.
Cost of Goods Sold
For the six months ended June 30, 2021, cost of goods sold from our Clinical Nutrition segment was $724,105 as compared to $695,291 for the six months ended June 30, 2020, an increase of $28,814 or 4%. The increase was primarily due to the change in product mix for the Clinical Nutrition segment resulting from our acquisition of Activ. For the six months ended June 30, 2021, cost of goods sold from our Diagnostics Equipment segment was $74,150 as compared to $55,920 for the six months ended June 30, 2020, an increase of $18,230 or 33%. This increase is primarily driven by a change in product mix in the Diagnostics Equipment business.
Gross Profit
For the three months ended June 30, 2021, gross profit from the Clinical Nutrition segment was $609,483 compared to $608,737 for the six months ended June 30, 2020, an increase of $746 or less than 1%. For the six months ended June 30, 2021, gross profit from the Diagnostics Equipment segment was $49,279 as compared to $70,585 for the six months ended June 30, 2020, resulting in a decrease of $21,306 or 30%. Gross profit overall represented 45% of revenues for the six months ended June 30, 2021, versus 48% of revenue for the six months ended June 30, 2020.
Liquidity and Capital Resources
Since its formation in 2009, the Company has devoted substantial effort and capital resources to the development and commercialization activities related to its product candidates. For the six months ended June 30, 2021, the Company incurred a net loss of $7,209,813 and used cash in operating activities of $7,285,354. At June 30, 2021, the Company had cash on hand of $5,502,411, short term investments of $7,000,266, and working capital of $14,741,926. Notwithstanding the net loss for the half quarter of 2021, management believes that its current cash balance is sufficient to fund operations for at least the next twelve months.
The Company’s financing has historically come primarily from the issuance of convertible notes, promissory notes and from the sale of common and preferred stock. The Company will continue to incur significant expenses for continued commercialization activities related to its Clinical Nutrition product lines, Diagnostics Equipment, and building its infrastructure. Development and commercialization of Clinical Nutrition products and Diagnostics Equipment involves a lengthy and complex process. Additionally, the Company’s long-term viability and growth may depend upon the successful development and commercialization of new complementary products or product lines.
The Company 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 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 technology and product development programs and curtail or cease operations.
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Sources and Uses of Cash
The following table sets forth the Company’s major sources and uses of cash for each of the following periods:
Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Net cash used in operating activities | $ | (7,285,354 | ) | $ | (4,020,731 | ) | ||
| Net cash used in investing activities | (32,961,980 | ) | (40,733 | ) | ||||
| Net cash provided by financing activities | 37,231,013 | 4,549,421 | ||||||
| Net (decrease) increase in cash | $ | (3,016,321 | ) | $ | 487,957 | |||
Operating Activities
Net cash used in operating activities was $7,285,354 during the six months ended June 30, 2021, versus $4,020,731 used during the comparable prior year period. The increase over 2020 was due primarily to transaction costs associated with our acquisition of Activ, higher legal, insurance, professional services, paid in the current three-month period.
Investing Activities
Net cash used in investing activities was $32,961,980 for the three months ended June 30, 2021 and $40,733 for the six months ended June 30, 2020. The increase was primarily to fund the Activ acquisition in June 2021. Cash was used in the prior year period for the purchase of testing equipment, furniture and fixtures. There immaterial purchases of furniture, fixtures and equipment in the quarter ended June 30, 2021.
Financing Activities
Net cash provided by financing activities was $37,231,013 for the six months ended June 30, 2021 and consisted of the sale of common stock with net proceeds of $33,662,599 and warrant exercises during the period with proceeds of $3,568,414. Net cash provided by financing activities was $4,459,421 for the six months ended June 30, 2020 and is all attributable to the exercise of warrants.
Off-Balance Sheet Arrangements
At June 30, 2021 and December 31, 2020, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
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 June 30, 2021. As of June 30, 2021, management’s assessment identified the following material weakness in the Company’s internal control over financial reporting:
Segregation of Duties – The Company did not maintain effective policies to ensure adequate segregation of duties within its accounting processes. Specifically, due to the size of the Company and the smaller nature of department teams, opportunities are limited to segregate duties, resulting in one individual having almost complete responsibility for the processing of certain financial information.
While we have designed and implemented, or expect to implement, measures that we believe address or will address this control weakness, we continue to develop our internal controls, processes and reporting systems by, among other things, hiring qualified personnel with expertise to perform specific functions, and designing and implementing improved processes and internal controls, including ongoing senior management review and audit committee oversight. We plan to remediate the identified material weakness through the redistribution of job responsibilities, by hiring additional senior accounting staff, and through the design and implementation of additional internal controls in order to promote adequate segregation of duties. We expect to complete the remediation in 2021 in conjunction with the process of developing our various business initiatives. We expect to incur additional costs to remediate this weakness, primarily personnel costs.
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Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation that occurred during or subsequent to the period ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting.
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 against the Company that the Company believes could have a material adverse effect on its business, operating results, cash flows or financial condition. The Company is periodically the subject of various pending or threatened legal actions and claims arising out of its operations in the normal course of business. Regardless of the outcome, such proceedings or claims can have an adverse impact on the Company because of defense and settlement costs, diversion of resources and other factors, and there can be no assurances that favorable outcomes will be obtained.
ITEM 1A. RISK FACTORS
Our business, financial condition, results of operations, and cash flows may be impacted by a number of factors, many of which are beyond our control, including those set forth in our Form 10-K, the occurrence of any one of which could have a material adverse effect on our actual results.
There have been no material changes to the Risk Factors previously disclosed in our Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
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ITEM 6. EXHIBITS
| 101.INS* | Inline XBRL Instance Document | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104* | Cover Page Interactive Data File - the cover page from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 is formatted in Inline XBRL |
| * | Filed herewith. |
| + | Indicates a management contract or any compensatory plan, contract or arrangement. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on the 16th day of August 2021.
| Signature | Title | Date | ||
| /s/ Bret Scholtes | Chief Executive Officer | August 16, 2021 | ||
| Bret Scholtes | (Principal Executive Officer) | |||
| /s/ Jeffrey Benjamin | Chief Accounting Officer | August 16, 2021 | ||
| (Principal Financial and Accounting Officer) |
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