Notes
to Condensed Consolidated Financial Statements
For
the Three Months Ended March 31, 2023 and 2022
(Unaudited)
1.
Organization and Business Operations
Business
Guardion
Health Sciences, Inc. (the “Company”) is a clinical nutrition company that develops and distributes clinically supported
nutrition, medical foods and dietary supplements. The Company offers a portfolio of science-based, clinically supported products and
devices designed to support healthcare professionals and providers, and their patients and consumers. In June 2021, the Company acquired
Activ Nutritional, LLC (“Activ”), the owner and distributor of the Viactiv® line of supplements for bone health and other
applications. The Company was formed in 2009 as a California
limited liability company under the name P4L Health Sciences, LLC, and in 2015 converted from a California limited liability company
to a Delaware corporation, changing its name from Guardion Health Sciences, LLC to Guardion Health Sciences, Inc.
Liquidity
For
the three months ended March 31, 2023, the Company recorded a loss from operations of $1,464,007 and used cash in operating activities
of $1,879,210. The Company has a history of operating losses and negative cash flows. Even though the Company’s management identified
certain indicators including, among others, the current period loss from operations, the potential impact of inflation and general economic
uncertainty, management concluded these indicators do not raise substantial doubt regarding the Company’s ability to continue as
a going concern within one year after the date these financial statements are issued. As of March 31, 2023, the Company had $8,774,626
of cash, and management determined that it is probable that the Company will be able to fund its current operating plan and meet all
of its obligations due within one year from the date these financial statements are issued.
The
amount and timing of future cash requirements will depend, in part, on the Company’s ability to ultimately achieve operating profitability.
The Company expects to continue to incur net losses and negative operating cash flows in the near-term and will continue to incur significant
expenses for the development, commercialization and distribution of its clinical nutrition products (including the Viactiv® product
line) and the successful development and commercialization of new products and product lines. The Company may also utilize cash to fund
acquisitions of complementary businesses, product lines or brands.
The
Company may seek to raise additional debt and/or equity capital to fund future operations, but there can be no assurances that the Company
will be able to secure such additional financing in the amounts necessary to fully fund its operating requirements on acceptable terms
or at all. Over time, if the Company is unable to access sufficient capital resources on a timely basis, the Company may be forced to
reduce or discontinue its product development programs, or curtail or cease operations.
COVID-19
and Inflation
COVID-19
and Supply Disruptions. The Company’s financial results for the year ended December 31, 2022 were affected by supply chain
constraints due, in large part, to the COVID-19 pandemic and associated labor shortages and increased wages experienced by the Company’s
suppliers. These constraints began in the fourth quarter of 2021 and continued until the third quarter of 2022 and impacted the Company’s
ability to obtain inventory to fulfill customer orders for its Viactiv branded products on a timely basis during and subsequent to that
timeframe. Additionally, the Company is subject to out-of-stock fees to certain retailers in the event that the Company is unable to
adequately maintain certain inventory levels of its Viactiv products with such retailers. Starting during the fourth quarter of 2022
and in the three months ended March 31, 2023, the Company has seen some improvement in the inventory production cycle.
Inflation.
The continuing impact of the COVID-19 pandemic, higher inflation, the actions by the Federal Reserve to address inflation, most notably
sustained increases in interest rates, and rising energy prices create uncertainty about the future economic environment which will continue
to evolve and, we believe, has impacted the Company’s business in 2022 and may continue to impact business in 2023. The implications
of higher government deficits and debt, tighter monetary policy, and potentially higher long-term interest rates may drive a higher cost
of capital for the business and an increase in the Company’s operating expenses.
2.
Summary of Significant Accounting Policies
Basis
of Presentation
The
unaudited condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the
United States of America (“GAAP”) pursuant to the applicable rules and regulations of the Securities and Exchange Commission
(“SEC”) for interim financial information. The unaudited condensed consolidated financial statements have been prepared on
the same basis as the Company’s annual financial statements for the year ended December 31, 2022 and, in the opinion of management,
reflect all adjustments, which consist of normal recurring adjustments, considered necessary for a fair presentation of the periods presented.
The results of operations for the interim periods presented are not necessarily indicative of the results of operations to be expected
for the full fiscal year ending December 31, 2023. These unaudited condensed consolidated financial statements should be read in conjunction
with the Company’s audited consolidated financial statements and accompanying notes, included in the Company’s 2022 Annual
Report on Form 10-K, filed with the SEC on April 17, 2023. The condensed consolidated balance sheet as of December 31, 2022, was derived
from the audited consolidated financial statements as of that date, but does not include all disclosures, including notes, required by
GAAP.
The
unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company
transactions and balances have been eliminated in consolidation.
In
accordance with the “Segment Reporting” Topic of the Accounting Standards Codification, the Company’s chief operating
decision maker (the Company’s Chief Executive Officer) determined that the Company has only one reporting unit.
Reverse
Stock Split
On
January 6, 2023, the Company filed a Certificate of Amendment to its Certificate of Incorporation, as amended, with the Secretary of
State of the State of Delaware to effectuate a one-for-fifty (1:50) 2023 Reverse Stock Split of its common stock without any change to
its par value (see Note 1). The authorized number of shares of common stock was not affected by the reverse stock split. The Company
issued 35,281 additional common shares in connection with this reverse stock split per the rounding provisions provided therein.
Accordingly,
all common shares, stock options, stock warrants and per share amounts in these consolidated financial statements have been adjusted
retroactively to reflect the reverse stock splits as if the split occurred at the beginning of the earliest period presented in this
quarterly report.
Use
of Estimates
The
preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States
of America (“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 materially from those estimates.
Revenue
Recognition
Revenue
and costs of sales are recognized when control of the products transfers to our customer, which generally occurs upon delivery to the
customer. The Company’s performance obligations are satisfied at that time. The Company does not have any significant contracts
with customers requiring performance beyond delivery, and contracts with customers contain no incentives or discounts that could cause
revenue to be allocated or adjusted over time. Shipping and handling activities are performed before the customer obtains control of
the goods and therefore represent a fulfillment activity rather than a promised service to the customer.
All
products sold by the Company are distinct individual products and are offered for sale as finished goods only, and there are no performance
obligations required post-shipment for customers to derive the expected value from them. Contracts with customers contain no incentives
or discounts that could cause revenue to be allocated or adjusted over time.
Shipping
and handling activities are performed before the customer obtains control of the goods and therefore represent a fulfillment activity
rather than a promised service to the customer. Historically the Company has not experienced any significant payment delays from customers.
Due
to the insignificant amount of historical returns, as well as the standalone nature of the Company’s products and assessment of
performance obligations and transaction pricing for the Company’s sales contracts, the Company does not currently maintain a contract
asset or liability balance at this time. The Company assesses its contracts and the reasonableness of its conclusions on a quarterly
basis.
At
March 31, 2023 and December 31, 2022, the allowance for doubtful accounts was $0 and $1,996, respectively.
Revenue
by product:
Schedule
of Revenues by Product
| |
2023 | | |
2022 | |
| |
Three Months Ended
March 31, | |
| |
2023 | | |
2022 | |
Clinical Nutrition | |
$ | 3,185,689 | | |
$ | 2,365,900 | |
Other | |
| - | | |
| 18,719 | |
Revenue | |
$ | 3,185,689 | | |
$ | 2,384,619 | |
The
Company’s revenues earned during the three months ended March 31, 2023 and 2022, are derived primarily from retail customers in
North America.
Revenues
by geographical area are as follows:
Schedule
of Revenue by Geographical Area
| |
2023 | | |
2022 | |
| |
Three Months Ended March 31, | |
| |
2023 | | |
2022 | |
North America | |
$ | 3,185,689 | | |
$ | 2,365,720 | |
Europe | |
| - | | |
| 18,899 | |
Total revenue | |
$ | 3,185,689 | | |
$ | 2,384,619 | |
Third-Party
Outsourcing
The
Company derives substantially all of its revenue from the sale of products using a third-party fulfillment center to provide order processing
and sales fulfillment, customer invoicing and collections, and product warehousing. Substantially all of the Company’s products
are shipped through the third-party fulfillment center to the customer. Shipping charges to customers are included in revenues. In addition,
the Company uses the third-party fulfillment center to provide sales and inventory management, and marketing and promotional services.
The
Company outsources the production of substantially all of its products with a third-party that manufactures and packages the finished
products under a product supply agreement.
Costs
incurred related to third-party outsourcing, which includes manufacturing, order processing and fulfillment, customer invoicing, collections
and warehousing, were approximately $1,937,000 and $1,847,000 for the three months ended March 31, 2023 and 2022, respectively.
Cost
of Goods Sold
Cost
of goods sold is comprised of the costs for third-party contract manufacturing, packaging, manufacturing fees, and in-bound freight charges.
Shipping
Costs
Shipping
costs associated with product distribution after manufacture are included as part of cost of goods sold. Shipping and handling expense
totaled $146,820 and $135,423 for the three months ended March 31, 2023 and 2022, respectively.
Advertising
Costs
Advertising
costs are expensed as incurred and are included in sales and marketing expense. Advertising costs were $479,866 and $587,361 for the
three months ended March 31, 2023 and 2022, respectively.
Concentrations
Revenue. During
the three months ended March 31, 2023, the Company had three customers that accounted for 80%
of total revenue. The largest customer accounted for 59%
of the Company’s total revenue, the second largest customer accounted for 11%
of the Company’s total revenue and the third largest customer accounted for 10%
of the Company’s revenue. During the three months ended March 31, 2022, the Company had one customer that accounted for 59%
of the Company’s total revenue. No other customer accounted for more than 10%
of revenue during the three months ended March 31, 2023 and the three months ended March 31, 2022. The Company sells the majority of
its products to one of the largest retailers in the United States.
Accounts
receivable. As of March 31, 2023,
the Company had accounts receivable from one customer which comprised approximately 67% of its accounts receivable. As of December
31, 2022, the Company had accounts receivable from one customer which comprised approximately 88%
of its accounts receivable. No other customer accounted for more than 10% of accounts receivable as of March 31, 2023 and
December 31, 2022.
Purchases
from vendors. During the three months ended March
31, 2023, the Company utilized one manufacturer for most of its production and packaging of its
clinical nutrition products. Total purchases from this manufacturer accounted for approximately 49% of all purchases during the three
months ended March 31, 2023. The Company utilized a firm to manage and handle media and
advertising of its clinical nutrition products. Total purchases from this vendor accounted for approximately 13% of all purchases during
the three months ended March 31, 2023. During the three months ended March 31, 2022, the
Company’s largest vendor accounted for approximately 41% of all purchases. No other vendors accounted for more than 10% of purchases
during the three months ended March 31, 2023 and 2022.
Accounts
payable. As of March 31, 2023,
two vendors accounted for 80% of total accounts payable. One vendor accounted for 70% and a second vendor accounted for 10% of the accounts
payable at March 31, 2023. As of December 31, 2022, one vendor accounted for 88% of the
total accounts payable. No other vendor accounted for more than 10% of accounts payable as of March 31, 2023 and
December 31, 2022.
Cash
and cash equivalents. Cash and cash equivalents consist of funds deposited with BMO Harris Bank(“BMO”), a major, established,
high quality financial institution and short-term (original maturity of generally 60 days or less) liquid investments in money market
deposit accounts. Cash equivalents are classified as Level 1 in the GAAP valuation hierarchy and are valued using the net asset value
(“NAV”) per share of the money market fund. The Company has an overnight investment feature established with BMO whereby
the Company’s cash is swept into a Money Market Mutual Fund managed by Goldman Sachs Asset Management. This fund invests solely
in high quality U.S. government issued securities. As of March 31, 2023, $8,774,626 included in cash and cash equivalents was held in
the Goldman Sachs Financial Square Government Institutional Fund, a fund that is not insured by the Federal Deposit Insurance Corporation
(the “FDIC”).
The
Company routinely has cash balances in financial institutions in excess of the FDIC and SIPC insurance limits of $250,000 and $500,000,
respectively. The Company believes that no significant concentration of credit risk exists with respect to its cash balances because
of its assessment of the creditworthiness and financial viability of the financial institutions that hold such cash balances. The Company
has not experienced any losses to date resulting from this policy.
Stock-Based
Compensation
Stock-based
awards for stock options and restricted stock awards to employees and non-employees are accounted using the fair value method in accordance
with ASC 718, Share-Compensation – Stock Compensation. The estimated fair value of stock options granted to employees in
exchange for services is measured at the grant date, using a fair value-based method, such as a Black-Scholes option valuation model,
and is recognized as an expense on a straight-line basis over the requisite service periods. The assumptions used in the Black-Scholes
option pricing model could materially affect compensation expense recorded in future periods. The fair value of restricted stock units
is measured at the grant date based on the closing market price of the Company’s common stock on the date of grant, and is recognized
as an expense on a straight-line basis over the requisite service periods. Recognition of compensation expense for non-employees is accounted
for in the same period and manner as if the Company had paid cash for the services.
Income
(Loss) per Common Share
Basic
income (loss) per share is computed by dividing net loss by the weighted-average common shares outstanding during the period, excluding
shares of unvested restricted common stock outstanding. Diluted earnings per share is computed based on the weighted-average common shares
outstanding plus the effect of dilutive potential common shares outstanding during the period calculated using the treasury stock method.
Shares of vested restricted stock are included in the diluted weighted average number of common shares outstanding from the date they
are vested. Dilutive potential common shares include shares from unexercised warrants and options. Potential common share equivalents
have been excluded where their inclusion would be anti-dilutive. For the periods presented in this Quarterly Report on Form 10-Q, the
Company had net income for the three months ended March 31, 2023 and a net loss for the three months ended March 31, 2022. Although the
Company reported net income for the three months ended March 31, 2023, using the treasury stock method, for the period from January 1,
2023 to the redemption of the preferred stock on February 8, 2023, under the most advantageous pricing approach, there was no material
change to the diluted net income per share as reported.
The
following potentially dilutive shares were excluded from the shares used to calculate diluted earnings per share:
Schedule
of Anti-dilutive Securities Excluded from Computation of Earnings Per Share
| |
2023 | | |
2022 | |
| |
March 31, | |
| |
2023 | | |
2022 | |
Warrants | |
| 1,526,701 | | |
| 1,526,701 | |
Options | |
| 12,459 | | |
| 17,062 | |
Unvested restricted common stock | |
| 667 | | |
| 1,000 | |
Anti-dilutive securities | |
| 1,539,827 | | |
| 1,544,763 | |
Fair
Value of Financial Instruments
Accounting
standards require certain assets and liabilities to be reported at fair value in the financial statements and provide a framework for
establishing that fair value. Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer
a liability in an orderly transaction between market participants on the measurement date. When determining fair value, the Company considers
the principal or most advantageous market in which it transacts and considers assumptions that market participants would use when pricing
the asset or liability. The framework for determining fair value is based on a hierarchy that prioritizes the inputs and valuation techniques
used to measure fair value:
Level
1 – Quoted prices in active markets for an identical asset or liability that the Company has the ability to access as of the
measurement date.
Level
2 – Inputs, other than quoted prices included within Level 1, which are directly observable for the asset or liability or indirectly
observable through corroboration with observable market data.
Level
3 – Unobservable inputs in which there is little or no market data for the asset or liability which requires the reporting
entity to develop its own assumptions.
The
Company determines the level in the fair value hierarchy within which each fair value measurement falls in its entirety, based on the
lowest level input that is significant to the fair value measurement in its entirety. In determining the appropriate levels, the Company
performs an analysis of the assets and liabilities at each reporting period end.
The
following table sets forth by level, within the fair value hierarchy, the Company’s financial assets at fair value as of March
31, 2023 and December 31, 2022:
Schedule
of Assets and Liabilities at Fair Value
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
| |
March 31, 2023 | |
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Assets | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
Total assets | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
| |
| | | |
| | | |
| | | |
| | |
Liabilities | |
| | | |
| | | |
| | | |
| | |
Warrant derivative liability | |
$ | - | | |
$ | - | | |
$ | 4,539,900 | | |
$ | 4,539,900 | |
Total liabilities | |
$ | - | | |
$ | - | | |
$ | 4,539,900 | | |
$ | 4,539,900 | |
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
| |
December 31, 2022 | |
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Assets | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
Total assets | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
| |
| | | |
| | | |
| | | |
| | |
Liabilities | |
| | | |
| | | |
| | | |
| | |
Warrant derivative liability | |
$ | - | | |
$ | - | | |
$ | 6,438,000 | | |
$ | 6,438,000 | |
Total liabilities | |
$ | - | | |
$ | - | | |
$ | 6,438,000 | | |
$ | 6,438,000 | |
The
following table provides a roll-forward of the warrant derivative liability measured at fair value on a recurring basis using unobservable
level 3 inputs for the three months ended March 31, 2023 as follows:
Schedule
of Warrant Derivative Liability
| |
March 31, 2023 | |
Warrant derivative liability | |
| | |
Balance as of beginning of period – December 31, 2022 | |
$ | 6,438,000 | |
| |
| | |
Change in fair value of warrant derivative liability | |
| (1,898,100 | ) |
Balance as of end of period – March 31, 2023 | |
$ | 4,539,900 | |
As
of March 31, 2023 and December 31, 2022, the Company’s outstanding warrants were treated as derivative liabilities and changes
in the fair value were recognized in earnings (see Note 6).
The
Company believes the carrying amounts of certain financial instruments, including cash, accounts receivable, and accounts payable and
accrued liabilities, approximate fair value due to the short-term nature of such instruments and are excluded from the fair value tables
above.
Recent
Accounting Pronouncements
In
September 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”)
2016-13, Credit Losses – Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). 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 was effective for the Company beginning January 1, 2023, with early adoption permitted. The Company adopted this
standard effective January 1, 2023 and there was no material impact of adopting this standard on the Company’s financial statements
and related disclosures.
Other
recent accounting pronouncements and guidance issued by FASB, its Emerging Issues Task Force, the American Institute of Certified Public
Accountants, and the SEC did not or are not believed by management to have a material impact on the Company’s present or future
financial statements.
3.
Inventories
Inventories
consisted of the following on the dates noted below:
Schedule
of Inventories
| |
March 31, | | |
December 31, | |
| |
2023 | | |
2022 | |
Raw materials | |
$ | 49,652 | | |
$ | 49,637 | |
Finished goods | |
| 3,011,267 | | |
| 3,069,784 | |
Inventories, net | |
$ | 3,060,919 | | |
$ | 3,119,421 | |
The
Company’s inventories are stated at the lower of cost or net realizable value calculated on a first-in, first-out basis.
4.
Intangible Assets, Net
During
the year ended December 31, 2022, the gross amount of the Company’s amortizable finite-lived identifiable intangible assets consisting
of a trade name and customer relationships, totaled $11,900,000. Effective December 31, 2022, the Company performed an impairment analysis
of its intangible assets and determined that the asset group’s fair value was zero and recorded an impairment loss of $10,065,833
for the net book balance of the intangible assets.
For
the three months ended March 31, 2022, amortization expense was $297,500.
5.
Operating Leases
In
July, 2021, the Company entered into a month-to-month lease for its primary corporate office space located in Houston, Texas, with lease
payments of approximately $2,700 per month. Leases with the duration of less than 12 months are not recognized on the balance sheet and
are expensed on a straight-line basis over the lease term.
As
of December 31, 2022, the Company’s VectorVision subsidiary leased a warehouse space in Ohio under an operating lease that expired
in February 2023. During the year ended December 31, 2022, the Company recorded an impairment of the operating lease right of use asset
of $24,257, and made payments of $22,221 on the operating lease liability. At December 31, 2022, the balance of the operating lease liability
was $3,807, which was paid off in February 2023.
6.
Warrant Derivative Liability
On
February 18, 2022, the Company sold shares of the Company’s common stock (see Note 8) and 740,000 Series A warrants (the “Series
A Warrants”) and 740,000 warrants Series B warrants (the “Series B Warrants”). The Series A and Series B Warrants had
an initial exercise price of $18.50 per share. The Series A Warrants expire in February 2027 and the Series B Warrants expire in August
2023.
The
Series A and Series B Warrants contain certain anti-dilution provisions, including a down round provision and certain cash redemption
rights. On November 30, 2022, the exercise price of the Series A and Series B Warrants was adjusted downward to $7.88 per share to equal
the Series C Convertible Redeemable Preferred Stock conversion price (see Note 8).
In
addition, the Series A Warrants and Series B Warrants contain a provision which requires that the exercise price of such warrants be
adjusted to the volume weighted average price of the Company’s common stock for the five trading days immediately following effectiveness
of a reverse stock split if such calculation resulted in an exercise price below the then-current exercise price. The Company determined
that this provision represented a variable that is not an input to the fair value of a “fixed-for-fixed” option as defined
under ASC 815-40, and thus the Series A and Series B Warrants are not considered indexed to the Company’s own stock and not eligible
for an exception from derivative accounting. Accordingly, the Series A and Series B warrants are classified as a derivative liability.
In January 2023, in conjunction with the completion of the Company’s reverse stock split (see Note 1), the exercise price of the
Series A and Series B warrants was further adjusted to $7.57 per share.
The
fair value of the warrant liability at March 31, 2023, and at December 31, 2022, was $4,539,900 and $6,438,000, respectively. The estimated
fair value of the warrants is determined using Level 3 inputs. Inherent in a binomial lattice model are assumptions related to expected
probability of event occurrence, including stock splits, stock-price volatility, expected life, risk-free interest rate and dividend
yield. The Company estimates the volatility of its common stock warrants based on the Company’s historical volatility. The risk-free
interest rate is based on the U.S. Treasury zero-coupon yield curve on the grant or valuation date for a maturity similar to the expected
remaining life of the warrants. The expected life of the warrants is assumed to be equivalent to their remaining contractual term. The
dividend rate is based on the Company’s historical rate, which the Company anticipates remaining at zero. The derivative liabilities
were valued using a binomial lattice model with the following assumptions:
Schedule
of Warrant Derivative Liability
| |
Series A Warrants | | |
Series B Warrants | |
| |
March 31,
2023 | | |
December 31,
2022 | | |
March 31, 2023 | | |
December 31,
2022 | |
Common stock market price | |
$ | 6.11 | | |
$ | 7.26 | | |
$ | 6.11 | | |
$ | 7.26 | |
Exercise price | |
| 7.57 | | |
| 7.57 | | |
| 7.88 | | |
| 7.88 | |
Expected term (in years) | |
| 3.9 | | |
| 0.40 | | |
| 4.15 | | |
| 0.65 | |
Expected volatility | |
| 137.50 | % | |
| 90.02 | % | |
| 131.20 | % | |
| 104.50 | % |
Expected dividend yield | |
| - | | |
| - | | |
| - | | |
| - | |
Risk-free interest rate | |
| 3.83 | % | |
| 4.11 | % | |
| 4.85 | % | |
| 4.75 | % |
Total fair value | |
$ | 3,759,200 | | |
$ | 4,506,600 | | |
$ | 780,700 | | |
$ | 1,931,400 | |
7.
Redeemable Preferred Stock (Temporary Equity, redeemed in full in February 2023)
On
November 29, 2022, the Company issued and sold, in a private placement, 495,000 shares of the Company’s Series C Convertible Redeemable
Preferred Stock (the “Series C Preferred Stock”), and 5,000 shares of the Company’s Series D Redeemable Preferred Stock
(the “Series D Preferred Stock,” and together with the Series C Preferred Stock, the “Preferred Stock”).
The
Series C Preferred Stock had the right to vote on an amendment (the “Amendment”) to the Company’s Certificate of Incorporation,
as amended, to authorize a reverse split of the Common Stock on an as-converted to common stock basis. The shares of the Series D Preferred
Stock were automatically voted in a manner that “mirrored” the proportions on which the shares of Common Stock (excluding
any shares of Common Stock that were not voted) and Series C Preferred Stock were voted on the Amendment. The Certificates of Designation
for the Preferred Stock provided that the Preferred Stock had no voting rights other than the right to vote on the Amendment and as a
class on certain other specified matters, and, with respect to the Series D Certificate of Designation, the right to cast 1,000,000 votes
per share of Series D Preferred Stock on the Reverse Stock Split proposal. The Amendment required the approval of the majority of the
votes associated with the Company’s outstanding stock entitled to vote on the proposal. On January 5, 2023, the Amendment to authorize
a reverse split of the Common Stock was approved at a special meeting of stockholders. Following the meeting, the board of directors
approved a one-for-fifty (1-for-50) reverse split of the Company’s issued and outstanding shares of common stock (see Note 1).
As
of December 31, 2022, Series C and Series D Preferred Stock reflected on the balance sheet was reconciled in the following table:
Schedule
of Preferred Stock
| |
Series C
Preferred Stock | | |
Series D
Preferred Stock | |
Gross Proceeds | |
$ | 4,702,500 | | |
$ | 47,500 | |
Less: | |
| | | |
| | |
Preferred stock issuance costs | |
| (437,169 | ) | |
| (4,416 | ) |
Plus: | |
| | | |
| | |
Accretion of carrying value to redemption value | |
| 932,169 | | |
| 9,416 | |
Preferred stock subject to possible redemption | |
$ | 5,197,500 | | |
$ | 52,500 | |
At
December 31, 2022, $4,750,000 in gross proceeds from the issuance of the Preferred Stock, plus an additional $500,000, which was required
to fund the 105% redemption price, was held in an escrow account and presented as restricted cash on the December 31, 2022 consolidated
balance sheet. The Preferred Stock was redeemed in full for cash through February 8, 2023, the
escrow account was closed, and as of March 31, 2023 there were no shares of Preferred Stock outstanding.
8.
Stockholders’ Equity
February
2022 Offering
On
February 18, 2022, the Company entered into a Securities Purchase Agreement with certain institutional investors, pursuant to which the
Company issued and sold, (i) 651,000 units, at $15.00 per unit, with each unit consisting of one share of the Company’s common
stock, one warrant to purchase one share of the Company’s common stock at an exercise price of $18.50 per share that expires on
the fifth anniversary of the date of issuance (“Series A Warrant”) and one warrant to purchase one share of the Company’s
common stock at an exercise price of $18.50 per share that expires on the 18 month anniversary of the date of issuance (“Series
B Warrant”), and (ii) 89,000 pre-funded units, at $14.995 per unit, with each unit consisting of one pre-funded warrant to purchase
one share of the Company’s common stock at an exercise price of $0.005 per share (a “Pre-Funded Warrant” and together
with the Series A Warrants and Series B Warrants, the “Warrants”), one Series A Warrant and one Series B Warrant (collectively,
the “February 2022 Offering”).
The
exercise prices of the Series A Warrants and Series B Warrants are subject to appropriate adjustment in the event of recapitalization
events, stock dividends, stock splits, stock combinations, reclassifications, reorganizations or similar events affecting the Company’s
common stock. In addition, in the event the Company effects a reverse stock split during the term of the Series A Warrants and Series
B Warrants, the exercise price of such warrants following such reverse split will be subject to further adjustment in the event the volume-weighted
average trading price of our common stock for the five days following such reverse stock split is lower than the exercise price of such
warrants. Also, subject to customary exceptions, the exercise price of the Series A Warrants is subject to adjustment in the event of
issuances of the Company’s common stock or common stock equivalents at a price below the exercise price of the Series A Warrants.
In such event, the exercise price of the Series A Warrants will be reduced to the price of the securities issued in such transactions.
In the event of a fundamental transaction, as defined, the holder of a warrant shall have the option, exercisable at any time concurrently
with, or within 30 days after, the consummation of the fundamental transaction to cause the Company to purchase such warrant from the
holder for cash in an amount equal to the Black Scholes value of such warrant calculated in accordance with the terms of warrant.
On
February 18, 2022, the Company entered into a Placement Agency Agreement (the “Placement Agency Agreement”) with Roth Capital
Partners LLC (“Roth”) and Maxim Group LLC, as co agents (collectively, the “Agents”), pursuant to which the Company
paid the Agents an aggregate fee equal to 7.0% of the gross proceeds from the units sold in the February 2022 Offering and reimbursed
the Agents $100,000 for expenses incurred in connection with the February 2022 Offering. In addition, the Company issued warrants (the
“Placement Agent Warrants”) to Roth to purchase up to 37,000 shares of the Company’s common stock exercisable at an
exercise price of $18.50 per share. The Placement Agent Warrants were immediately exercisable and expire on the fifth anniversary of
the date of the issuance.
On
February 23, 2022, the Company closed the February 2022 Offering, and issued (i) 651,000 shares of common stock, (ii) Series A Warrants
to purchase 740,000 shares of common stock, (iii) Series B Warrants to purchase 740,000 shares of common stock, and (iv) Pre-Funded Warrants
to purchase 89,000 shares of common stock. The gross proceeds from the February 2022 Offering were $11,100,000 and the net proceeds,
after deducting the placement agent fees and offering expenses payable by us, were approximately $9,969,000. Included in the proceeds
were net proceeds of approximately $1,134,000 from the exercise of warrants exercised in connection with the February 2022 Offering.
Warrants
A
summary of the Company’s warrant activity is as follows:
Schedule of Warrants Activity
| |
Shares | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual Term (Years) | |
December 31, 2022 | |
| 1,526,701 | | |
$ | 8.67 | | |
| 2.39 | |
Granted | |
| - | | |
| - | | |
| - | |
Forfeitures | |
| - | | |
| - | | |
| - | |
Expirations | |
| - | | |
| - | | |
| - | |
Exercised | |
| - | | |
| - | | |
| - | |
March 31, 2023, all exercisable | |
| 1,526,701 | | |
$ | 8.67 | | |
| 2.14 | |
The
exercise prices of warrants outstanding and exercisable as of March 31, 2023 are as follows:
Schedule of Exercise Price of Warrants Outstanding and Exercisable
Warrants Outstanding and Exercisable (Shares) | |
Exercise Prices | |
1,517,000 | |
| 7.57 | |
9,701 | |
| 120.00 | |
1,526,701 | |
| | |
During
the three months ended March 31, 2023, there were no warrant exercises. Based on the closing price of the Company’s common stock
on March 31, 2023 of $6.11 per share, the aggregate intrinsic value of warrants outstanding as of March 31, 2023 was $0.
Stock
Options
A
summary of the Company’s stock option activity is as follows:
Schedule of Share-based Compensation, Stock Options, Activity
| |
Shares | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual Term (Years) | |
December 31, 2022 | |
| 13,294 | | |
$ | 217.05 | | |
| 6.80 | |
Granted | |
| - | | |
| - | | |
| - | |
Forfeitures | |
| - | | |
| - | | |
| - | |
Expirations | |
| 835 | | |
| 750.00 | | |
| - | |
Exercised | |
| - | | |
| - | | |
| - | |
March 31, 2023, outstanding | |
| 12,459 | | |
| 217.05 | | |
| 6.80 | |
March 31, 2023, exercisable | |
| 10,152 | | |
| 252.06 | | |
| 6.70 | |
The
exercise prices of options outstanding and exercisable as of March 31, 2023 are as follows:
Schedule of Exercise Price of Options Outstanding and Exercisable
Options Outstanding (Shares) | | |
Options Exercisable (Shares) | | |
Exercise Prices | |
1,344 | | |
840 | | |
$ | 7.35 | |
841 | | |
682 | | |
| 45.50 | |
1,002 | | |
334 | | |
| 80.50 | |
1,008 | | |
882 | | |
| 88.00 | |
840 | | |
840 | | |
| 116.70 | |
336 | | |
336 | | |
| 162.33 | |
3,058 | | |
2,208 | | |
| 197.70 | |
3,862 | | |
3,862 | | |
| 300.00 | |
168 | | |
168 | | |
| 750.00 | |
12,459 | | |
10,152 | | |
| | |
The
Company accounts for share-based payments in accordance with ASC 718 wherein grants are measured at the grant date fair value and charged
to operations over the vesting periods.
During
the three month’s ended March 31, 2023 and 2022, there were no grants of options to purchase shares of common stock.
The
Company computes stock price volatility over expected terms based on its historical common stock trading prices. The risk-free interest
rate was based on rates established by the Federal Reserve Bank. The expected dividend yield was based on the fact that the Company has
not paid dividends to its common stockholders in the past and does not expect to pay dividends to its common stockholders in the future.
The expected life of the stock options granted is estimated using the “simplified” method, whereby the expected term equals
the average of the vesting term and the original contractual term of the stock option.
For
the three months ended March 31, 2023 and 2022, the Company recognized aggregate stock-compensation expense of $25,182 and $85,963, respectively,
related to the fair value of vested options.
As
of March 31, 2023, the Company had an aggregate of 2,307 remaining unvested options outstanding, with a remaining fair value of approximately
$209,743 to be amortized over an average of 5 years. Based on the closing price of the Company’s common stock on March 31, 2023
of $6.11 per share, the aggregate intrinsic value of options outstanding as of March 31, 2023 was $0.
Restricted
Common Stock
During
the three months ended March 31, 2023 and 2022, there were no grants of restricted common stock.
During
the three months ended March 31, 2023 and 2022, the Company recognized share-based compensation
expense of $5,329 and $59,906, respectively, related to vested restricted shares. At March 31,
2023, there was $14,117 of unvested compensation related to the non-vested shares that will be amortized over a remaining vesting
period of 1.25 years.
The
following table summarizes restricted common stock activity for the three months ended March 31,
2023:
Schedule of Non Vested Restricted Common Stock Activity
| |
Number of shares | | |
Fair value of shares | |
Non-vested shares, December 31, 2022 | |
| 667 | | |
$ | 80.50 | |
Granted | |
| - | | |
| - | |
Vested | |
| - | | |
| - | |
Forfeited | |
| - | | |
| - | |
Non-vested shares, March 31, 2023 | |
| 667 | | |
| 80.50 | |
9.
Commitments and Contingencies
Legal
Proceedings
In
the normal course of business, the Company is periodically the subject of various pending or threatened legal actions and claims arising
out of its operations. At March 31, 2023 and December 31, 2022, the Company was not a party
to any material legal proceedings and is not aware of any pending or threatened legal proceedings against the Company that it believes
could have a material adverse effect on its business, operating results, cash flows or financial condition.