See accompanying notes to condensed consolidated financial statements.

Guardion Health Sciences, Inc.

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

Guardion Health Sciences, Inc.

Condensed Consolidated Statements of Cash Flows

See accompanying notes to condensed consolidated financial statements.

Guardion Health Sciences, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NineThree Months Ended September 30,March 31, 2018 and 2017 and 2016

Organization and Business

Guardion Health Sciences, Inc. (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, changing its name from Guardion Health Sciences, LLC to Guardion Health Sciences, Inc.

The Company is a specialty health sciences company formed to develop, formulate and distribute condition-specific medical foods with an initial medical food product on the market under the brand name Lumega-Z^® that replenishes and restores the macular protective pigment.

Through September 30, 2017, the Company has had limited operations, but has been primarily engaged in research, development, commercialization and capital raising. The Company has incurred significant expenditures foralso developed a proprietary medical device called the development ofMapcatSF^®that accurately measures the Company's products and intellectual property, which includes research and development of both medical foods and medical diagnostic equipment for the treatment of various eye diseases. The Company had limited revenue during the nine months ended September 30, 2017 and 2016, all of which was generated by the sale of the Company’s proprietary product, Lumega-Z.macular pigment optical density.

On September 29, 2017, the Company completed its acquisition of substantially all of the assets and certain liabilities of VectorVision, Inc., a company that specializes in the standardization of contrast sensitivity, glare sensitivity, low contrast acuity, and ETDRS (“Early Treatment Diabetic Retinopathy Study”) visual acuity testing. VectorVision develops, manufactures and sells equipment and supplies for standardized vision testing. See Note 3.

The Company has had limited operations to date and has been primarily engaged in research, development, commercialization and capital raising.

Going Concern and Liquidity

The financial statements have been prepared assuming the Company will continue as a going concern. The Company had a net loss of $3,109,062$2,333,461 and utilized cash in operating activities of $1,914,745$1,353,530 during the ninethree months ended September 30, 2017.March 31, 2018. The Company expects to continue to incur net losses and negative operating cash flows in the near-term. However, the CompanyAs a result, management has also completed multiple capital financing transactions during 2017, resulting in cash on hand of $1,269,755 at September 30, and an additional $5,000,000 was received prior to the issuance of these financial statements.

As of December 31, 2016, management had concluded that there wasis substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements were issued, and theare issued.

The Company’s independent registered public accounting firm has also included explanatory going concern language in their reportopinion accompanying the Company’s audited financial statements for the year ended December 31, 2016.2017. The Company’s financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.

Although recent capital transactions have significantly improved our current cash position, theThe Company will continue to incur significant expenses for continued commercialization activities related to its lead product Lumega-Z, the MapcatSF^® medical device, and with respect to efforts to build the Company’s infrastructure.VectorVision products. Development and commercialization of medical foods and medical devices 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 other than Lumega-Z and the MapcatSF.or product lines. The Company is continuing attemptsto attempt to raise additional debt and/or equity capital to fund future operations, but there can be no assurances that the Company will be able to secure such additional financing in the amounts necessary to fully fund its operating requirements on acceptable terms or at all. If the Company is unable to access sufficient capital resources on a timely basis, the Company may be forced to reduce or discontinue its technology and product development programs and curtail or cease operations.

Basis of Presentation and Use of Estimates

The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of the 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.

Intangible Assets

In connection with the VectorVision transaction, we identified and allocated estimated fair values to intangible assets including goodwill and customer relationships.

In accordance with Accounting Standard Codification (“ASC”) 350 – Intangibles – Goodwill and Other, we determined whether these assets are expected to have indefinite (such as goodwill) or limited useful lives, and for those with limited lives, we established an amortization period and method of amortization. Our goodwill and other intangible assets are subject to periodic impairment testing.

We utilized the services of an independent third-party valuation firm to assist us in identifying intangible assets and in estimating their fair values. The useful lives for our intangible assets other than goodwill were estimated based on Management’s consideration of various factors, including assumptions that market participants might use about sales expectations as well as potential effects of obsolescence, competition, technological progress and the regulatory environment. Because the future pattern in which the economic benefits of these intangible assets may not be reliably determined, amortization expense is generally calculated on a straight-line basis.

Amortization expense for the identifiable intangible assets associated with the VectorVision acquisition is approximately $54,000 per quarter and is included with general and administrative expenses in our Statements of Operations.

Impairment of Long-Lived Assets

The Company reviews long-lived assets, including property and equipment, identifiable intangible assets, and goodwill for impairment at each fiscal year end or when events or changes in circumstances indicate the carrying value of these assets may exceed their current fair values. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the assets. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and are no longer depreciated. The Company has not historically recorded any impairment to its long-lived assets. In the future, if events or market conditions affect the estimated fair value to the extent that a long-lived asset is impaired, the Company will adjust the carrying value of these long-lived assets in the period in which the impairment occurs. As of March 31, 2018 and December 31, 2017, the Company had not deemed any long-lived assets as impaired and was not aware of the existence of any indicators of impairment at such dates.

Segment Information

The Company operates and manages its business as one reporting and operating segment, which is the business of developing and commercializing a variety of products that support the detection, intervention and monitoring of a range of eye diseases. The Company’s chief executive officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for purposes of allocating resources and evaluating financial performance.

Revenue Recognition

The Company’s revenue is comprised of sales of medical foods and dietary supplements to consumers through a direct sales/credit card process. In addition, the Company sells medical device equipment and supplies to consumers both in the U.S. and internationally.

In September 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09 (ASU No. 2014-09) regarding revenue recognition. The new standard provides authoritative guidance clarifying the principles for recognizing revenue and developing a common revenue standard for U.S. generally accepted accounting principles. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in the exchange for those goods or services. The ASU became effective January 1, 2018.

Due to the nature of the products sold by the Company, the adoption of the new standard has had no quantitative effect on the financial statements. However, the guidance requires additional disclosures to help readers of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized.

The Company previously recognized revenue when risk of loss transferred to our customers and collection of the receivable was reasonably assured, which generally occurs when the product is shipped. A product is not shipped without an order from the customer and credit acceptance procedures performed. The Company allows for returns within 30 days of purchase, although for all periods presented, returns have been insignificant.

Under the new guidance, revenue is recognized when control of promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods 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. Revenue and costs of sales are recognized once products are delivered to the customer’s control and performance obligations are satisfied.

All products sold by the Company are distinct individual products and consist of medical foods, supplemental formulas, medical devices and related supplies. The products 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.

Control of products we sell transfers to customers upon shipment from our facilities, and the Company’s performance obligations are satisfied at that 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. Payment for sales of Lumega-Z is generally made by approved credit cards. Payments for medical device sales are generally made by check, credit card, or wire transfer. Historically the Company has not experienced any significant payment delays from customers.

We provide a 30-day right of return to our retail Lumega-Z customers. 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 Lumega-Z and VectorVision product returns, the Company determined that less than one percent of product is returned (less than $2,000 in 2017), and therefore believes 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 our products and assessment of performance obligations and transaction pricing for our sales contracts, we do not currently maintain a contract asset or liability balance at this time. We assess our contracts and the reasonableness of our conclusions on a quarterly basis.

The following table presents our revenues disaggregated by product type:

Research and Development Costs

Research and development costs consist primarily of fees paid to consultants and outside service providers patent fees and costs, and other expenses relating to the acquisition, design, development and testing of the Company’s medical foods and related products. Research and development expenditures, which include patent related costs and stock compensation expense, are expensed as incurred and totaled $131,330$159,588 and $43,062$10,239 for the ninethree months ended September 30,March 31, 2018 and 2017, and 2016, respectively.

Stock-Based Compensation

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.

Stock-based payments to officers, directors, consultants, contractors, and employees, which include grants of employee stock options, are recognized in the financial statements based on their fair values. Stock option grants, which are generally time vested, will be measured at the grant date fair value and charged to operations on a straight-line basis over the vesting period. The fair value of stock options is determined utilizing the Black-Scholes option-pricing model, which is affected by several variables, including the risk-free interest rate, the expected dividend yield, the expected life of the equity award, the exercise price of the stock option as compared to the fair market value of the common stock on the grant date and the estimated volatility of the common stock over the term of the equity award.

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Until the Company has established a trading market for its common stock, estimated volatility is based on the average historical volatilities of comparable public companies in a similar industry. The expected dividend yield is based on the current yield at the grant date. The Company has never declared or paid dividends on its common stock and has no plans to do so for the foreseeable future.

The fair value of common stock was determined based on management’s judgment. In order to assist management in calculating such fair value, the Company retained an independent third-party valuation firm whose input was utilized in determining the related per unit or share valuations of the Company’s equity instruments. Management used valuations of $1.00 per unit or share in its fair value calculations for the periods between January 1, 2016 and September 30, 2016, and $0.88 per share for periods between October 1, 2016 and June 30, 2017. Per share valuations are based on various inputs, including valuation reports prepared by third-party valuation firms and are impacted by the dilutive effect of the issuance of common shares as compensation during the periods. There are numerous acceptable ways to estimate company value, including using net tangible assets, a market-based approach, or discounted cash flows. The Company considered alternative methods and concluded that due to the lack of suitably comparable market data, the discounted cash flows method was the most appropriate. A discounted cash flows (i.e. free cash flows to equity) methodology was applied by the third-party valuation firm using multiple years of balance sheet and income statement projections along with the following primary assumptions:

Due to the availability of historical data from the Company’s recent preferred stock sales, Management used a valuation of $0.75 for accounting purposes beginning in the third quarter of 2017. Management considered business and market factors affecting the Company during the nine-month periods ended September 30, 2017 and 2016, including capital raising efforts, its proprietary technology, and other factors. Based on this evaluation, management believes that its valuations are appropriate for accounting purposes for the periods ending September 30, 2017 and 2016, respectively.

The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the FASB wherewhereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period onusing a straight-linegraded vesting basis. In certain circumstances where there are no future performance requirements by the non-employee, grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

The Company recognizes stock compensation expense, on stock or unit purchases at a price less than fair value, and for fully-vested stock issued to consultants and other service providers, for the excess of fair value of the stock or units over the price paid for the stock or units.

stock. The Company recognizes the fair value of stock-based compensation within its statements of operations with classification depending on the nature of the services rendered. The Company will issue new shares to satisfy stock option exercises.

Net Loss per Share

The Company’s computation of basic and diluted net loss per common share is measured as net loss divided by the weighted average common shares outstanding during the respective periods, excluding unvested restricted common stock.stock, if applicable. Shares of restricted stock are included in the basic weighted average number of common shares outstanding from the time they vest. Potential common shares such as from unexercised warrants, options, and shares of common stock issuable upon conversion of convertible debt and convertible preferred stock outstanding that have an anti-dilutive effect are excluded from the calculation of diluted net loss per share. The Company’s basic and diluted net loss per share is the same for all periods presented because all shares of common stock issuable upon exercise of warrants, options, and conversion of convertible debt and convertible preferred stock outstanding are anti-dilutive as they decrease loss per share.

The following table sets forth the number of shares excluded from the computation of diluted loss per share, as their inclusion would have been anti-dilutive:

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. ASU 2014-09 also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. Based on the FASB’s Exposure Draft Update issued on April 29, 2015, and approved in July 2015, Revenue from Contracts With Customers (Topic 606): Deferral of the Effective Date, ASU 2014-09 is now effective for reporting periods beginning after December 15, 2017, with early adoption permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The adoption of ASU 2014-09 is not expected to have any impact on the Company’s financial statement presentation or disclosures.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires a lessee to record a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease payments, on the balance sheet for all leases with terms longer than 12 months, as well as the disclosure of key information about leasing arrangements. ASU 2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. ASU 2016-02 requires classification of all cash payments within operating activities in the statement of cash flows. Disclosures are required to provide the amount, timing and uncertainty of cash flows arising from leases. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. The Company has not yet evaluated the impact of the adoption of ASU 2016-02 on the Company’s financial statement presentation or disclosures.

In July 2017, the FASB issued Accounting Standards Update No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features; (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). ASU 2017-11 allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature) is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with down round features may no longer be required to be accounted for as derivative liabilities. A company will recognize the value of a down round feature only when it is triggered and the strike price has been adjusted downward. For equity-classified freestanding financial instruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income available to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be amortized to earnings. ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The guidance in ASU 2017-11 is to be applied using a full or modified retrospective approach. The adoption of ASU 2017-11 is not currently expected to have any impact on the Company’s financial statement presentation or disclosures.

The Company’s management does not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have a material impact on the Company’s financial statement presentation or disclosures.

On September 29, 2017, the Company, through a wholly-owned subsidiary, completed the acquisition of substantially all of the assets and certain liabilities of VectorVision, Inc., an Ohio corporation (“VectorVision”), in exchange for 3,050,000 shares of the Company’s common stock, valued at $2,287,500, pursuant to the terms of an Asset Purchase and Reorganization Agreement dated September 29, 2017, which agreement was entered into on an arm’s-length basis. The wholly-owned subsidiary that acquired the business is called VectorVision Ocular Health, Inc., a Delaware corporation, doing business as VectorVision. VectorVision’s assets acquired by the Company pursuant to the agreement included, among others, accounts receivable, fixed assets, inventories, trademarks and copyrights. VectorVision’s liabilities assumed by the Company included, among others, certain trade accounts payable to third parties and accrued liabilities, and amounts owed under an outstanding line of credit.

With respect to the 3,050,000 shares of common stock, 250,000 shares wereare held back by the Company through November 28, 2019 as security for VectorVision’s indemnification obligations to the Company and the remaining 2,800,000 shares were issued to VectorVision at the closing of the transaction.transaction, which were subsequently distributed out to the two VectorVision shareholders in proportion to their shareholdings in VectorVision, per the Agreement. The shares represented approximately 11% of the Company’s issued and outstanding common stock immediately following consummation of the agreement. The shares held back as security are included in our weighted average common shares outstanding for per-share calculations.

Pursuant to the terms of the agreement, David Evans, the founder of VectorVision, was appointed to the Company’s Board of Directors on September 29, 2017. Dr. Evans is recognized as the leading expert in clinical contrast sensitivity and glare testing. He has provided his testing expertise and data analysis capability to a wide range of leading ophthalmic companies. Dr. Evans has published more than 30 scientific articles and 3 book chapters in the areas of refractive surgery, glaucoma, ocular blood flow and visual function, and is the inventor of 5 patents related to vision testing devices. Dr. Evans received a Bachelor of Science degree in Human Factors Engineering from the United States Air Force Academy, a Master of Science degree and Masters in Business Administration from Wright State University in Dayton, Ohio, and a Ph.D. in Ocular Physiology from Indiana University. Dr. Evans will also serve as a consultant to the Company to further the Company’s planned development and commercialization of the Company’s portfolio of products.

VectorVision develops, manufactures and sells equipment and supplies for standardized vision testing for use by eye doctors in clinical trials, for real-world vision evaluation, and industrial vision testing. VectorVision specializes in the standardization of contrast sensitivity, glare sensitivity, low contrast acuity, and ETDRS (Early Treatment Diabetic Retinopathy Study) visual acuity testing. VectorVision developed and commercialized its CSV-1000 medical device to conduct contrast sensitivity testing and it developed and commercialized its ESV-3000 medical device to conduct ETDRS visual acuity testing. The patented standardization system provides the practitioner or researcher with the ability to delineate very small changes in visual capability, either as compared to the population or from visit to visit. The Company believes VectorVision’s CSV-1000 device to be the standard of care for clinical trials. The acquisition of VectorVision transaction expands the Company’s technical portfolio and the Company believes it further establishes the Company’s position at the forefront of early detection, intervention and monitoring of a range of eye diseases.

The Company accounted for the acquisition pursuant to Accounting Standards Codification Topic 805, Business Combinations (“ASC 805”). Management identified and evaluated the preliminary fair values of the assets acquired, relying in part, on the work of an independent third party valuation firm engaged by the Company to provide input as to the fair value of the consideration paid (because there is no established trading market for the Company’s Common Stock) and the assets acquired, including the valuation methodology most relevant to the transactions described herein, and to assist in the related calculations, analysis and allocations. Historical transactions, as well as the income, market and cost approaches to value were considered. Management ultimately determined that due to recent sales of the Company’s preferred stock and consideration of current business and market factors, that the use of historical transactions, and a value of $0.75, would result in the most appropriate valuation for accounting purposes. The valuation conclusion is preliminary, and subject to revision.

In accordance with ASC 805, the Company utilized the acquisition method of accounting, whereby the purchase consideration is allocated to specific tangible and intangible assets at their estimated fair values on the date of acquisition. The following table summarizes the allocation of preliminary fair values of the purchase consideration to the assets and liabilities assumed:

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the expected revenue and benefits of the combined company.

The Company has consolidated VectorVision’s balance sheet with the Company’s balance sheet effective September 30, 2017, and will include VectorVision’s operations with the Company’s statement of operations commencing October 1, 2017.

The following preliminary unaudited pro forma financial information gives effect to the Company’s acquisition of VectorVision as if the acquisition had occurred on January 1, 2016 and had been included in the Company’s consolidated statements of operations during the three and nine-month periodsthree-month period ended September 30, 2017 and 2016:March 31, 2017:

Inventories consisted of the following:

Property and equipment consisted of the following: 

For the ninethree months ended September 30,March 31, 2018 and 2017, and 2016, depreciation and amortization expense was $47,869$19,363 and $44,587,$15,545, respectively, of which $22,044$7,530 and $20,165$7,325 was included in research and development expense, respectively,$1,500 and $25,825$0 was included in sales and $24,422marketing expense, and $10,333 and $8,220 was included in general and administrative expense, respectively.

On January 26, 2018, the Company acquired the rights to the trademark GLAUCO-HEALTH as well as the name “International Eye Wellness Institute” (together, the “IP Assets”) from an unrelated party. The purchase included all rights, title, and interest in and to the IP Assets, including (a) the right to register and use the IP Assets; (b) all goodwill associated with the IP Assets; (c) all income, royalties, and damages hereafter due or payable with respect to the IP Assets; (d) all rights to sue for past, present, and future infringements or misappropriations of the IP Assets; and (e) and all other intellectual property rights owned or claimed by the seller or embodied in the IP Assets. In exchange for these rights, the Company paid the seller $50,000 in cash.

ASC 350-30-20 defines a defensive intangible asset as an acquired intangible asset in a situation in which an entity does not intend to actively use the asset but intends to hold (lock up) the asset to prevent others from obtaining access to the asset. The Company determined that the acquired intangible asset met the definition of a defensive intangible asset. The Company accounted for the $50,000 payment as an acquired intangible asset as of the closing of the agreement. As the Company can renew the underlying rights to the IP Assets indefinitely at nominal cost, the assets have been classified as a non-amortizable intangible asset on the Company’s balance sheet at March 31, 2018. The Company will evaluate the status of the assets for impairment quarterly.

On January 26, 2018 the Company entered into a consulting agreement with the principal of the seller to assist with the development of the IP Assets and other assets acquired by the Company in the transaction. In July 2010,conjunction with the consulting agreement, the Company issued an unsecured convertible note payable ina stock option on January 26, 2018 to the amountconsultant to purchase a total of $25,000. The note carries simple interest at a rate500,000 shares of 12% per annum and became due and payable on August 1, 2013. The outstanding amounts are convertible into shares ofthe common stock of the Company at conversion prices of $0.08 per share. This note is currently outstanding and past due, and $21,567 of accrued interest is recorded as of September 30, 2017.(see Note 8).

(a) In 2016, the Company issued $170,000 of promissory notes to various outside investors, with simple interest rates ranging from 4% - 9% and a weighted average term at issuance of approximately three months. As of December 31, 2016, a $10,000 note remained outstanding and was past due. The note was repaid in July 2017 along with the associated $449 of accrued interest.

(b) In January 2017, the Company issued a $100,000 unsecured promissory note to an outside investor, with a term of 120 days and a fixed interest charge consisting of 6% of the principal in cash plus 6% of the principal in shares of common stock at a price of $0.75 per share, or 8,000 shares. The note was repaid in July 2017. As of September 30, 2017, $15,605 of accrued interest remained outstanding.

In 2016, the Company issued $140,000 of unsecured promissory notes to various related party investors, with interest rates ranging from 6% to 12% and a weighted average term at issuance of approximately four months. As of December 31, 2016 the remaining balance of the unpaid notes was $14,000, and this amount plus accrued interest was repaid during the first quarter of 2017.

The Company is periodically the subjectDue to and from related parties represents unreimbursed expenses and compensation incurred on behalf 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 ofamounts loaned to the Company adequate provision has been made inby, Michael Favish, the Company’s condensed financial statements at June 30, 2017 with respect to such matters, including the matter noted below.

On or about July 26,Chief Executive Officer, as well as other stockholders. The advances are unsecured, non-interest bearing and are due on demand. As of March 31, 2018 and December 31, 2017, the Company received a payment demand from a former consultanthad $136,968 and $146,133, respectively, due to related parties.

During the three months ended March 31, 2018, the Company alleging that he is owed approximately $192,000 for services rendered. The Company has disputed this demandincurred $68,750 of salary expense and the resolution of this matter is uncertain. The Company intendspaid $44,762 in salary to vigorously protect its rights.CEO, Michael Favish.

Preferred Stock

Series A

During 2016, the Company sold 1,170,000 shares of the Company’sCompany's Series A Senior Convertible Preferred Stock (the “Series"Series A Preferred Stock”Stock") to various investors. The purchase price of the Series A Preferred Stock was $1.00 per share, for an aggregate purchase price of $1,170,000. In addition, during 2016, the Company issued 535,154 shares of its Series A Preferred Stock with a fair value of $784,888 upon conversion of $535,149 of notes payable and accrued interest. The Series A Preferred Stock hashad a stated value of $1.00 per share and accruesaccrued an annual dividend at the rate of 8% of the stated value, calculated quarterly, to be paid in shares of common stock at the rate of $0.60 per share. Dividends are payable to holders of record quarterly, on the last business day of each calendar quarter, from the date of issuance, as may be declared by the Board of Directors, and are cumulative.

At the option of each holder, the Series A Preferred Stock (including accrued but unpaid dividends) may be converted into shares of the Company’s common stock commencing January 1, 2017 at $0.60 per share. The Series A Preferred Stock (including accrued but unpaid dividends) shall automatically convert into shares of common stock in the event that the Company receives gross proceeds of at least $4,000,000 in one or more equity financing transactions subsequent to September 30, 2016, or if the ten (10) day Volume Weighted Average Price per share of common stock is $2.00 or more. If not converted by September 30, 2019, the Series A Preferred Stock (including accrued but unpaid dividends) shall automatically and mandatorily convert into shares of common stock at $0.60 per share. Such mandatory conversion shall be subject to either a registration statement having been filed with the Securities and Exchange Commission, including the common stock underlying the Series A Preferred Stock, and being in effect, or all shares of underlying common stock being saleable under Rule 144 pursuant to the Securities Act without regard to volume limitations.

The issuance of the 1,170,000 shares of Series A Preferred Stock gave rise to a beneficial conversion feature due to the stated conversion price of $0.60 per share being less than the market price of the shares of Series A Preferred Stock at the issuance date as determined by an independent third-party valuation firm. The Company accounted for the beneficial conversion features in accordance with ASC 470-20, Accounting for Debt with Conversion and Other Options. The Company calculated a total deemed dividend on the Series A Preferred Stock of $779,586 at December 31, 2016, which equals the amount by which the estimated fair value of the common stock issuable upon conversion of the issued Series A Preferred Stock exceeded the proceeds from such issuances on the date of issuance. The deemed dividend on the Series A Preferred Stock is accreted using the effective interest method from the respective issuance dates through the earliest conversion date of January 1, 2017. The accretion of the deemed dividend for the year ended December 31, 2016 was $760,011. The remaining balance of $19,575, representing the amount allocable to the January 1, 2017 earliest conversion date, was accreted in January 2017.

Sale of the Company’s Series A Preferred Stock closed on December 31, 2016.

During the ninethree months ended September 30,March 31, 2017, the Company declared dividends of $102,029$33,636 on its Series A Preferred Stock which were satisfied in full through the issuance of an aggregate of 170,07556,065 shares of common stock.

Series B

Beginning in March 2017 and through September 30, 2017, the Company sold 3,105,000 shares of the Company’sCompany's Series B Convertible Preferred Stock (the “Series"Series B Preferred Stock”Stock") to various investors. The purchase price of the Series B Preferred Stock was $1.00 per share, for an aggregate purchase price of $3,105,000. The Series B Preferred Stock hashad a stated value of $1.00 per share and accruesaccrued an annual dividend at the rate of 6% of the stated value,calculated quarterly, to be paid in shares of common stock at the rate of $0.75 per share. Series B Preferred Stock is convertible commencing December 31, 2017, or earlier upon the approval of the Board of Directors, by the holders thereof into common stock at a conversion rate of $0.75 per share. The stock is automatically convertible by the Company upon an equity financing of at least $5,000,000 subsequent to June 30, 2017, or in the event the Company’s common stock is publicly traded for at least $2.00 per share for 10 consecutive trading days, or upon completion of a Major Transaction (as defined in the Certificate of Designation). Dividends are payable to holders of record quarterly, on the last business day of each calendar quarter, from the date of issuance, as may be declared by the Board of Directors, and are cumulative. Series B Preferred Stock is senior to all common stock and junior to the Series A Preferred Stock in terms of liquidation preferences. Sale of the Company’s Series B Preferred Stock closed on July 31, 2017.

The issuance of the Series B Preferred Stock gave rise to a beneficial conversion feature due to the stated conversion price of $0.75 per share being less than the market price of the shares at the issuance date. In addition, warrants were issued to purchasers of the Series B Preferred Stock who had previously participated in the 2016 Series A Preferred Stock offering. The Company accounted for the beneficial conversion feature, including an allocation of proceeds for the warrants on a relative fair value basis, in accordance with ASC 470-20, Accounting for Debt with Conversion and Other Options. The Company calculated a total deemed dividend on the Series B Preferred Stock of $582,377, which equals the amount by which the estimated fair value of the common stock issuable upon conversion of the Series B Preferred Stock exceeded the proceeds from such issuances on the date of issuance. The deemed dividend on the Series B Preferred Stock is accreted using the effective interest method from the respective issuance dates through the earliest conversion date of December 31, 2017. The accretion of the deemed dividend for the nine months ended September 30, 2017 was $315,761, and $226,616 will be accreted in future periods.

During the ninethree months ended September 30,March 31, 2017, the Company declared dividends of $57,769$2,441 on its Series B Preferred Stock which were satisfied in full through the issuance of an aggregate of 77,0453,256 shares of common stock.

Both classes of preferred stock will vote with the common stock on an “as converted” basis and have standard anti-dilution rights, exclusive of price protection. Upon any liquidation, dissolution or winding-up ofOn November 3, 2017, the Company whether voluntary or involuntary, no distribution shall be made tocompleted the holdersissuance and sale of anyan aggregate of 4,347,827 shares of common stock (see below). The completion of the Company unless, prior thereto,private placement triggered, at the holders of all classes of preferred stock shall have received out ofCompany's election, the available assets of the Company, whether capital or surplus, an amount equal to 100% of the stated value, plus any accrued and unpaid dividends thereon. If the assets of the Company are insufficient to pay in full such amounts due the holdersautomatic conversion of the preferred stock theninto shares of common stock. Accordingly, immediately following the entire assets shall be distributed ratably among the holderscompletion of the preferred stock, first to holdersprivate placement, the Company effected the conversion of Series A Preferred Stock, then to holders of Series B Preferred Stock, in accordance with the respective preferences and amounts that would be payable on suchall outstanding shares of preferred stock if all amounts payable thereon were paid in full.

Preferred shareholders of both series have unlimited piggyback registration rights. Holders of a majority of theinto 6,981,938 shares of preferredcommon stock (based on the $1.00 stated value) outstanding shall have the right to one demand registration during the three (3) years following the effective date of the Company’s registration statement under the Securities Exchange Act of 1934, so long as at least $500,000 of preferred stock was sold of that series, and at least $250,000 of the related class of preferred stock is still outstanding. This demand registration right and the piggyback registration rights will terminate when all shares of preferred stock have been converted into common stock.

In the event of a merger or acquisition or change in control of the Company, both classes of preferred stock (including all(excluding accrued but unpaid dividends) will be deemed converted into shares of common stock immediately prior to the closing of such a transaction.effective November 3, 2017.

Common Stock

During 2016 and prior, the Company issued 2,005,000 shares of common stock for services rendered by various parties. The aggregate fair value of the stock was $2,146,316. 1,405,000 of these shares were subject to vesting requirements over 9 to 12 months and subject to forfeiture if vesting conditions were not met. As of December 31, 2016, 1,052,500 of the shares, with a fair value of $1,580,372, had vested, and 352,500 shares with a fair value of $111,369 remained to be vested. As of September 30, 2017, all 1,405,000 shares have fully vested.

During the first nine months of 2017, the Company issued 617,500 shares of common stock to service providers. The aggregate fair value of the stock was $522,600 based on a valuation per share ranging from $0.75 to $0.88 on the date of grant.

Additional details of the Company’s restricted common stock are as follows:

Warrants

During March 2017, in connection with the Series B Preferred Stock offering discussed above, the Company issued a total of 60,000 warrants as additional incentive to investors who had previously invested in the Company’s Series A Preferred Stock offering in 2016. These warrants are fully vested, are immediately exercisable at $0.75 per share, and expire between March 6, 2020 and March 8, 2020.

The fair value of the warrants was calculated as $51,796, based upon the Black-Scholes option-pricing model, with a stock price of $0.88, volatility of 135%, and an average risk-free interest rate of 1.61%. The Company accounted for the warrants by allocating a portion of proceeds for the warrants on a relative fair value basis, in accordance with ASC 470-20, Accounting for Debt with Conversion and Other Options. The resulting proceeds allocable to the relative fair value of the warrants of $44,170 was used in determining the beneficial conversion feature embedded in the Series B Preferred Stock, which the Company determined was $96,170 and will be accreted using the effective interest method from the through the earliest voluntary conversion date for the preferred stock of December 31, 2017. The accretion for the nine months ended September 30, 2017 was $66,612, and $29,558 will be accreted in future periods.

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

As of September 30, 2017, the Company had an aggregate of 2,983,666 outstanding warrants to purchase shares of its common stock with a weighted average exercise price of $0.37, weighted average remaining life of 0.9 years and aggregate intrinsic value of $1,293,512, based upon a stock valuation of $0.88 per share. The intrinsic value is calculated as the difference between the market value of the underlying common stock and the exercise price of the warrants.

Stock Options

On September 30, 2017, the Company entered into a consulting agreement pursuant to which the Company issued a total of 1,250,000 common stock options. 650,000 of the options vested immediately and the remaining will vest ratably over the next twelve months on a quarterly basis. The options are non-qualified, have an exercise price of $1.00 per share, and will expire after 5 years. The options were valued in total at $934,804 based upon the Black-Scholes option-pricing model, with a stock price of $0.75, volatility of 123%, and an average risk-free rate of 1.63%. Based upon a graded vesting schedule, $550,014 has been recorded as stock compensation in the Company’s condensed consolidated statement of operations for the three and nine months ended September 30, 2017.

Due to and from related parties represents unreimbursed expenses and compensation incurred on behalf of, and amounts loaned to the Company by, Michael Favish, the Company’s Chief Executive Officer, as well as other stockholders. The advances are unsecured, non-interest bearing and are due on demand. As of September 30, 2017 and December 31, 2016, the Company had $152,771 and $91,483, respectively, due to related parties.

During the nine months ended September 30, 2017, the Company incurred $187,500 of salary expense and paid $130,000 in salary to our CEO, Michael Favish. During the twelve-month period ended December 31, 2016, the Company incurred salary expense of $250,000 and paid $48,500 in salary to Mr. Favish. Accrued amounts are included in general and administrative expenses.

On November 3, 2017, the Company completed the issuance and sale of an aggregate of 4,347,827 shares of common stock, par value $0.001 per share, at a purchase price of $1.15 per share. Total gross proceeds were $5,000,001. These shares were sold in a private placement to certain purchasers pursuant to a Stock Purchase Agreement dated as of November 3, 2017 as more fully set forth2017. Pursuant to the agreement, the purchasers have customary preemptive rights to participate in future equity and equity-linked issuances by the Company up to the extent necessary to maintain such purchaser’s pro rata ownership percentage in the Company’s Current Reportsecurities, subject to customary exceptions. The preemptive rights terminate at the earlier of (i) 18 months from the Effective Date, (ii) such time as the Purchasers hold less than five percent (5%) of the issued and outstanding shares of the Company’s common stock, or (iii) such time as the shares of common stock of the Company shall become listed or approved for listing on Form 8-K filed with the SEC on November 7, 2017 and the exhibits attached thereto.a national securities exchange.

The completionWarrants

A summary of the private placement triggered, at the Company’s election, the automatic conversion of the preferred stock intowarrant activity is as follows: 

In January 2018, an investor exercised warrants for 146,000 shares of common stock. Accordingly, immediately followingThe warrants were exercisable for $0.01 per share, and the completionCompany received $1,460 in cash. The Company issued the shares and recorded the cash received as additional equity.

As of March 31, 2018, the Company had an aggregate of 2,837,666 outstanding warrants to purchase shares of its common stock with a weighted average exercise price of $0.37, weighted average remaining life of 0.9 years and aggregate intrinsic value of $1,932,661, based upon a stock valuation of $1.15 per share. The intrinsic value is calculated as the difference between the market value of the private placement,underlying common stock and the exercise price of the warrants.

Stock Options

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

On September 30, 2017, the Company effectedentered into a consulting agreement pursuant to which the conversionCompany issued a total of all outstanding1,250,000 common stock options. 650,000 of the options with a fair value of $486,070 vested immediately, and the remaining 600,000 options will vest ratably over the next twelve months on a quarterly basis, with compensation cost to be measured as of the fair value at the end of each reporting period. The options are non-qualified, have an exercise price of $1.00 per share, and will expire after 5 years. As of December 31, 2017, the Company had recognized compensation cost of $658,383 relating to the vesting of the 800,000 options. As of March 31, 2018, the remaining 450,000 options to vest were valued at $517,127 based upon a Black-Scholes option-pricing model. During the three months ended March 31, 2018, the Company recognized stock compensation costs of $165,449 related to the amortization of these options based upon a graded vesting schedule.

On December 30, 2017, the Company entered into a consulting agreement pursuant to which the Company issued a total of 750,000 common stock options. 250,000 of the options with a fair value of $312,275 vested immediately and the remaining will vest ratably over the next six months on a quarterly basis. The options are non-qualified, have an exercise price of $1.25 per share, and will expire after 5 years. As of March 31, 2018, the remaining 500,000 options to vest were valued at $574,655 based upon a Black-Scholes option-pricing model. During the three months ended March 31, 2018, the Company recognized stock compensation costs of $303,782 related to the amortization of these options based upon a graded vesting schedule.

On January 26, 2018, the Company entered into an agreement with a consultant to develop products based on certain intellectual property owned by the Company (see Note 6). In conjunction with the consulting agreement, the Company issued a stock option to the consultant to purchase a total of 500,000 shares of preferredthe common stock into 6,981,938of the Company. 250,000 shares of the option with a fair value of $287,500 vested immediately, 125,000 shares vest on December 31, 2018 and the remaining 125,000 shares vest on December 31, 2019 provided the consultant is still an active service provider. The options are non-qualified, have an exercise price of $1.25 per share, and will expire after 5 years. As of March 31, 2018, the 250,000 options that remain to vest were valued in total at $287,500 based upon a Black-Scholes option-pricing model. During the three months ended March 31, 2018, the Company recognized stock compensation costs of $20,782 related to the amortization of these options based upon a graded vesting schedule.

As of March 31, 2018, the options were valued based upon the Black-Scholes option-pricing model, with a stock price of $1.15 volatility of 127%, and an average risk-free rate of 2.37.

As of March 31, 2018, the Company had an aggregate of 800,000 remaining unvested options outstanding, with unamortized compensation of $505,951 that will be amortized in future periods. The aggregate intrinsic value of options outstanding as of March 31, 2018 was $187,500.

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 condensed financial statements at March 31, 2018 with respect to such matters, including the matter noted below.

On or about July 26, 2017, the Company received a payment demand from a former consultant to the Company alleging that the consultant is owed approximately $192,000 for services rendered. The Company has disputed this demand and attempts to resolve this matter were unsuccessful. On January 29, 2018, the Company filed a lawsuit against the consultant and its related entities in the United States District Court for the Southern District of California (Case No. 18CV200-W-KSC) seeking declaratory relief regarding advisory fees and ownership interest in the Company. On March 6, 2018, the consultant and its related entities filed counterclaims against the Company, seeking payment for services rendered and seeking declaratory relief regarding ownership interest in the Company. The Company cannot predict the outcome of this matter and believes it has provided appropriate provision for any settlement of this matter as of March 31, 2018.

On April 26, 2018, the Company filed a Certificate of Elimination of Designations, Preferences and Rights of Series A and Series B Convertible Preferred Stock (the "Certificate of Elimination") with the Delaware Secretary of State. The Certificate of Elimination eliminates the Company's Series A Preferred Stock and the Company's Series B Preferred Stock from the Company's certificate of incorporation. No shares of the Series A Preferred Stock or Series B Preferred Stock were outstanding at the time of the filing of the Certificate of Elimination.

On April 30, 2018, The Company offered a one-month exercise period extension to stockholders who held warrants to purchase shares of common stock (excluding accrued but unpaid dividends) effective November 3, 2017. Theof the Company that were scheduled to expire on May 1, 2018. Pursuant to the terms of a Note and Warrant Purchase Agreement entered into by the Company and such holders, such warrants were issued 205,242 sharesupon the conversion of certain promissory notes into common stock foron May 1, 2015. Six warrant holders elected to extend the accrued but unpaid dividends from Octoberterm of an aggregate of 403,085 warrants by one month to June 1, 2017 through November 3, 2017, representing the payment in full2018. The exercise price of all Preferred Stock dividend obligations.such warrants is $1.00 per share.

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

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. 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, 2016,2017, and the notes thereto, which are set forth in the 20162017 Form 10-K. All dollar amounts refer to U.S. dollars unless otherwise indicated.

Overview

Guardion Health Sciences, Inc. was formed in December 2009 in California as a limited liability company under the name P4L Health Sciences, LLC and we subsequently changed our name to Guardion Health Sciences, LLC. On June 30, 2015, we converted from a California limited liability company to a Delaware corporation, changing our name to Guardion Health Sciences, Inc.

We are a specialty health sciences company formed to develop, formulate and distribute condition-specific medical foods with an initial medical food product on the market under the brand name Lumega-Z^® that replenishes and restores the macular protective pigment. A depleted macular protective pigment is a modifiable risk factor for retina basedretina-based diseases such as age-related macular degeneration (“AMD”), computer vision syndrome (“CVS”) and diabetic retinopathy. Additional research has also shown a depleted macular protective pigment to be a biomarker for neurodegenerative diseases such as Alzheimer’s and dementia. We have had limited operations to date, and have primarily been engaged in research, product development, commercialization and capital raising.

We have also developed a proprietary medical device called the MapcatSF^®that accurately measures the macular pigment optical density (“MPOD”). We invented our own proprietary patented technology embodied in the MapcatSF. On November 8, 2016, the USPTO issued patent number 9,486,136 for the MapcatSF invention. Using the MapcatSF to measure the MPOD allows one to monitor the increase in the density of the macular protective pigment after taking Lumega-Z. The MapcatSF is a non-mydriatic, non-invasive device that is designed to accurately measure the MPOD, the lens optical density and lens equivalent age, thereby creating an evidence-based protocol that is shared with the patient. A non-mydriatic device is one that does not require dilation of the pupil for it to function. The MapcatSF is intended to be the first device using a patented “single fixation” process and “automatic lens density correction” that produces accurate serialized data.

Lumega-Z has a patent-pending formula that replenishes and restores the macular protective pigment simultaneously delivering critical and essential nutrients to the eye. Formulated by Dr. Sheldon Hendler in 2010, modifications were made over a two-year period to improve the taste and method of delivery. We believe that there is an increasing level of acceptance of medical foods as a primary therapy by patients and healthcare providers to treat pain syndromes, sleep and cognitive disorders, obesity, hypertension, and viral infection. In clinical practice, medical foods are being prescribed as both a standalone therapy and as an adjunct therapy to low doses of commonly prescribed drugs. We believe that medical foods will continue to grow in importance over the coming years.

In September 2017, the Company, through its wholly-owned subsidiary VectorVision Ocular Health, Inc., acquired substantially all the assets and certain liabilities of VectorVision, Inc., a company that specializes in the standardization of contrast sensitivity, glare sensitivity, low contrast acuity, and early treatment diabetic retinopathy study (“ETDRS”) visual acuity testing. VectorVision’s standardization system is designed to provide the practitioner or researcher with the ability to delineate very small changes in visual capability, either as compared to the population or from visit to visit. VectorVision develops, manufactures and sells equipment and supplies for standardized vision testing for use by eye doctors in clinical trials, for real-world vision evaluation, and industrial vision testing. The acquisition expands the Company’s technical portfolio and the Company believes it further establishes its position at the forefront of early detection, intervention and monitoring of a range of eye diseases.

By combining ourthe MapcatSF medical device, the newly acquired VectorVision standardized vision testing technology and Lumega-Z medical food, we havethe Company has developed, based on our management’sManagement’s knowledge of the industry, what we believeit believes to be the only reliable two-pronged,three-pronged, evidence-based protocol for replenishing and restoring the macular protective pigment, and increasing overall retinal health.health and measuring the related improvements in visual function.

Recent Developments

Development of Sales Force

The Company invested in a direct sales force in March 2017 comprised of a field-based team of account managers located in key geographical locations based on high population density areas with demographics that match the Company’s target markets. Each account manager will have responsibility for a pre-defined geographical area and will be expected to travel extensively to support the needs of customers. The account managers will be tasked with prospecting for new accounts, closing leads generated by the Company’s marketing efforts, and generating revenue through account management activities including physician and staff training, and implementation of patient education resources. The account managers will also participate in national and regional trade shows and events, including supporting professional optometric and ophthalmological societies at a State level. Each account manager will be tasked with a quota that includes units of Lumega-Z sold, as well as sales of the MapcatSF, CSV-1000 and ESV-3000. Commissions are based on sales performance and achievement of quota.

Patents

On September 29, 2017,March 14, 2018, the Company throughreceived a wholly-owned subsidiary, completed the acquisitionNotice of substantially all of the assetsAllowance on Patent Application 15/445,586, which describes a methodology to continuously calibrate display monitors to automatically hold display luminance constant for vision testing. The VectorVision CSV-1000 and liabilities of VectorVision, Inc., an Ohio corporation (“VectorVision”), in exchange for 3,050,000 shares of the Company’s common stock, pursuantESV-3000 devices each embody this invention. The Company expects this patent to issue shortly.

Prior to the termsissuance of an Asset Purchase and Reorganization Agreement, which agreement was entered into on an arm's-length basis. The wholly-owned subsidiary that acquired the business is called VectorVision Ocular Health, Inc., a Delaware corporation, doing business as VectorVision. VectorVision’s assets acquired byUS Patent No. 9,486,136, the Company pursuantfiled a continuation application, Patent Application 15/346,010, covering new embodiments around the MapcatSF^® device. These new embodiments contain improvements related to the agreement included, among others, accounts receivable, fixed assets, inventories, trademarks and copyrights. VectorVision’s liabilities assumed byaccuracy of intensity measurements made with the Company included, among others, certain trade accounts payable to third parties and accrued liabilities, and amounts owed under an outstanding line of credit.

With respect to the 3,050,000 shares of common stock, 250,000 shares were held backdevice, as security for VectorVision’s indemnification obligations to the Company and the remaining 2,800,000 shares were issued to VectorVision at the closing of the transaction. The shares represented approximately 11% of the Company’s issued and outstanding common stock immediately following consummation of the agreement.well as updated features around photodiode detector calibrations.

Going Concern

The financial statements have been prepared assuming the Company will continue as a going concern. The Company had a net loss of $3,109,062$2,333,461 and utilized cash in operating activities of $1,914,745$1,353,530 during the ninethree months ended September 30, 2017.March 31, 2018. The Company expects to continue to incur net losses and negative operating cash flows in the near-term. However, the CompanyAs a result, management has also completed multiple capital financing transactions during 2017, resulting in cash on hand of $1,269,755 at September 30, and an additional $5,000,000 was received prior to issuance of these financial statements.

As of December 31, 2016, management had concluded that there wasis substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements were issued, and theare issued.

The Company’s independent registered public accounting firm has also included explanatory going concern language in their reportopinion accompanying the Company’s audited financial statements for the year ended December 31, 2016.2017. The Company’s financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.

Although recent capital transactions have significantly improved our current cash position, weThe Company will continue to incur significant expenses for continued commercialization activities related to our lead product Lumega-Z, the MapcatSF^® medical device, and with respect to efforts to build our infrastructure.VectorVision products. Development and commercialization of medical foods and medical devices involves a lengthy and complex process. Additionally, ourthe Company’s long-term viability and growth may depend upon the successful development and commercialization of new complementary products other than Lumega-Z and the MapcatSF. We areor product lines. The Company is continuing attemptsto attempt to raise additional debt and/or equity capital to fund future operations, but there can be no assurances that wethe Company will be able to secure such additional financing in the amounts necessary to fully fund ourits operating requirements on acceptable terms or at all. If we arethe Company is unable to access sufficient capital resources on a timely basis, wethe Company may be forced to reduce or discontinue ourits technology and product development programs and curtail or cease operations.

Recent Accounting Pronouncements

See Note 2 to the condensed consolidated financial statements for our managements’ discussion of recent accounting pronouncements.

Critical Accounting Policies and Estimates

Our financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). 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 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. Our financial statements included herein include all adjustments, consisting of only normal recurring adjustments, necessary to present fairly our 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 our financial statements.

In connection with the VectorVision transaction, we identified and allocated estimated fair values to intangible assets including goodwill and customer relationships.

In accordance with Accounting Standard Codification (“ASC”) 350 – Intangibles – Goodwill and Other, we determined whether these assets are expected to have indefinite (such as goodwill) or limited useful lives, and for those with limited lives, we established an amortization period and method of amortization. Our goodwill and other intangible assets are subject to periodic impairment testing.

We utilized the services of an independent third-party valuation firm to assist us in identifying intangible assets and in estimating their fair values. The useful lives for our intangible assets other than goodwill were estimated based on Management’s consideration of various factors, including assumptions that market participants might use about sales expectations as well as potential effects of obsolescence, competition, technological progress and the regulatory environment. Because the future pattern in which the economic benefits of these intangible assets may not be reliably determined, amortization expense is generally calculated on a straight-line basis.

Impairment of Long-Lived Assets

The Company reviews long-lived assets, including property and equipment, identifiable intangible assets, and goodwill for impairment at each fiscal year end or when events or changes in circumstances indicate the carrying value of these assets may exceed their current fair values. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the assets. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and are no longer depreciated. The Company has not historically recorded any impairment to its long-lived assets. In the future, if events or market conditions affect the estimated fair value to the extent that a long-lived asset is impaired, the Company will adjust the carrying value of these long-lived assets in the period in which the impairment occurs. As of March 31, 2018 and December 31, 2017, the Company had not deemed any long-lived assets as impaired and was not aware of the existence of any indicators of impairment at such dates.

Stock-Based Compensation

WeThe Company periodically issueissues stock-based compensation to officers, directors, contractors and other consultants for services rendered. Such issuances vest and expire according to terms established at the issuance date.

Stock-based payments to officers, and directors, consultants, contractors, and to employees, in the future which will include grants of employee stock options, are recognized in the financial statements based on their fair values. Stock option grants, which are generally time vested, will be measured at the grant date fair value and charged to operations on a straight-line basis over the vesting period. The fair value of stock options is determined utilizing the Black-Scholes option-pricing model, which is affected by several variables, including the risk-free interest rate, the expected dividend yield, the expected life of the equity award, the exercise price of the stock option as compared to the fair market value of the common stock on the grant date and the estimated volatility of the common stock over the term of the equity award.

The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the FASB whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period using a graded vesting basis. In certain circumstances where there are no future performance requirements by the non-employee, grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Until we havethe Company has established a trading market for ourits common stock, estimated volatility is based on the average historical volatilities of comparable public companies in a similar industry. The expected dividend yield is based on the current yield at the grant date; we havedate. The Company has never declared or paid dividends on ourits common stock and havehas no plans to do so for the foreseeable future.

The fair value of common stock was determined based on management’s judgment. In order to assist management in calculating such fair value, the Companywe retained an independenta third-party valuation firm whosein determining the value of our Company. The third-party valuation firm’s input was utilized in determining the related per unit or share valuations of the Company’sour equity instruments.used during 2017. Management used valuationsa valuation of $1.00 per unit or share in its fair value calculations for the periods between January 1, 2016 and September 30, 2016, and $0.88 per share for periods between October 1, 2016 and June 30,the first quarter of 2017. Per shareInternal valuations are based on various inputs, including valuation reports prepared by third-party valuation firms and are impacted by the dilutive effect of the issuance of common shares as compensation during the periods. There are numerous acceptable ways to estimate company value, including using net tangible assets, a market-based approach, or discounted cash flows. The Company considered alternative methods and concluded that due to the lack of suitably comparable market data, the discounted cash flows method was the most appropriate. A discounted cash flows (i.e. free cash flows to equity) methodology was applied by the third-party valuation firm usingto assist management in their determination of the $0.88 used during 2017. This methodology used multiple years of balance sheet and income statement projections along with the following primary assumptions:

Due to the availability of historical data from the Company’s recent preferredcommon stock sales, Management used a valuation of $0.75$1.15 for accounting purposes beginning in the thirdfirst quarter of 2017.2018. Management considered business and market factors affecting the Company during the nine-monththree-month periods ended September 30,March 31, 2018 and 2017, and 2016, including capital raising efforts, its proprietary technology, and other factors. Based on this evaluation, management believes that its$1.15 and $0.88 per share valuations are appropriate for accounting purposes for the periods ending September 30, 2017at March 31, 2018 and 2016, respectively.

We account for stock and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the FASB whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.2017.

We recognizeThe Company recognizes stock compensation expense, on stock purchases at a price less than fair value, and for fully-vested stock issued to consultants and other service providers, for the excess of fair value of the stock over the price paid for the stock.

We recognize The Company recognizes the fair value of stock-based compensation within ourits statements of operations with classification depending on the nature of the services rendered. WeThe Company will issue new shares to satisfy warrantstock option exercises.

During the nine months ended September 30, 2017 and 2016, we recognized aggregate stock-compensation expense of $1,183,983 and $1,323,869, respectively, based upon deemed stock values ranging from $0.75 to $1.14 per share, of which $1,162,997 and $1,198,835 was recorded in general and administrative expense, $20,357 and $120,785 was recorded in sales and marketing expense, and $629 and $4,249 was recorded in research and development expense, respectively.

Plan of Operations

General Overview

Based on the availability of sufficient funding, we intend to increase our commercialization activities and:

The FDA and other regulatory bodies require electronic medical devices to comply with IEC 60601 standards. The International Electrical Commission (“IEC”) established technical standards for the safety and effectiveness of medical electrical equipment. Adherence to these standards is required for commercialization of electrical medical equipment. As a medical device powered by electricity, the MapcatSF will need to undergo testing to demonstrate compliance with the IEC 60601 standards. This testing is typically conducted by a Nationally Recognized Testing Laboratory (“NRTL”), which is an independent laboratory recognized by the Occupational Safety and Health Administration (“OSHA”) to test products to the specifications of applicable product safety standards. We are in discussions with our contract manufacturer of the MapcatSF to engage an NRTL at the appropriate juncture prior to commercialization of the MapcatSF. The relevant predicate device for the MapcatSF is the MPS II, the applicable Class I product code for the MapcatSF is HJW and the applicable Code of Federal Regulation is 886.1050. The FDA does not require test documents to be submitted to the FDA for a Class I medical device, but that the evidence of such testing be placed in a Design History file and be kept internally at the company or manufacturer and readily available should the FDA or other regulatory bodies request to review the testing documents. While the FDA does not require that a Class I medical device have formal validation, we expect to complete applicable IEC 60601-1 testing prior to commercialization as we believe in marketing a product that has evidence that it is safe and effective.

Results of Operations

Through September 30, 2017,March 31, 2018, we had limited operations and have primarily been engaged in research, development, commercialization and raising capital. We have incurred and will continue to incur significant expenditures for the development of our products and intellectual property, which includes research and development of both medical foods and medical diagnostic equipment for the treatment of various eye diseases. We had limited revenue during the nine-month periodsquarters ended September 30,March 31, 2018 and 2017. In the fourth quarter of 2017, and 2016, allwe began recognizing product revenue from the sale of which was generated by the saleVectorVision products in addition to sales of our proprietary product, Lumega-Z. In late 2014, we changed our focus from the dietary supplement category to the medical food category based on consultation with our intellectual property counsel and regulatory affairs consultants, as a result of which Lumega-Z is now categorized and sold as a medical food.

Comparison of Three Months Ended September 30,March 31, 2018 and 2017 and 2016

Revenue

For the three months ended September 30, 2017,March 31, 2018, revenue from the sale of Lumega-Zproduct sales was $62,698$193,040 compared to $33,677$55,941 for the three months ended September 30, 2016,March 31, 2017, resulting in an increase of $29,021$137,099 or 86%245%. The increase is reflective ofreflects both an increased customer base for Lumega-Z as we expand into new clinics.clinics and sales of VectorVision products. Approximately $72,000, or 37% of revenue in the first quarter of 2018 was generated by sales of Lumega-Z products, representing a 27% increase in Lumega-Z sales over the prior period.

The following table presents our revenues disaggregated by product type:

Cost of Goods Sold

For the three months ended September 30, 2017,March 31, 2018, cost of goods sold from the sale of Lumega-Z was $30,094$79,278 compared to $22,997$22,633 for the three months ended September 30, 2016,March 31, 2017, resulting in an increase of $7,097$56,645 or 31%250%. The increase corresponds to the additional sales recorded in 2017.2018.

Research and Development

For the three months ended September 30, 2017,March 31, 2018, research and development costs were $105,561$159,588 compared to $20,789$10,239 for the three months ended September 30, 2016,March 31, 2017, resulting in an increase of $84,772$149,349 or 408%1,459%. The increase resulted fromwas due to research associated with our MapcatSF^® medical device.

Sales and Marketing

For the three months ended September 30, 2017,March 31, 2018, sales and marketing expenses were $116,440$605,990 compared to $85,866$76,736 for the three months ended September 30, 2016.March 31, 2017. The increase in sales and marketing expenses of $30,574$529,254 or 36%690% compared to the prior period was due primarily to our hiring and training of a national sales team, an increased presence at trade shows, and an increase in multimedia marketing costs and professional fees of $49,000, partially offset by a decrease of $24,000 in non-cash stock compensation expense.initiatives.

General and Administrative

For the three months ended September 30, 2017,March 31, 2018, general and administrative expenses were $1,392,524$1,680,810 compared to $765,352$598,913 for the three months ended September 30, 2016.March 31, 2017. The increase of $627,172$1,081,897 or 82%181% compared to the prior period was primarily due to a $325,000$627,000 increase in legal, professional fees and travel expenses as well as stock compensation expenses recorded during the current period. Labor, legal, and consulting costs also increased during the period.

Interest Expense

For the three months ended September 30, 2017,March 31, 2018, interest expense was $2,462$835 compared to $279,718$16,431 for the three months ended September 30, 2016.March 31, 2017. The decrease in interest expense of $277,256$15,596, or 99% compared to the prior period95%, was due to the repayment or conversion of the majority ofall promissory notes and convertible debt that had been outstanding during 2016. Included in the $2,462 amount is $1,496 that relates to notes that are past due as of September 30, 2017.

Net Loss

For the three months ended September 30, 2017,March 31, 2018, we incurred a net loss of $1,584,383,$2,333,461, compared to a net loss of $1,141,045$669,011 for the three months ended September 30, 2016.March 31, 2017. The increase in net loss of $443,338$1,664,450 or 39%249% compared to the prior year period was primarily due to stock compensation expense of $670,014$777,513 incurred in the current quarter, partially offset bythe addition of and training for a reduction of $277,256 in interest expense related to promissory notes and convertible debt that was repaid or converted since September 30, 2016.

Comparison of Nine Months Ended September 30, 2017 and 2016

Revenue

For the nine months ended September 30, 2017, revenue from the sale of Lumega-Z was $178,610 compared to $92,195 for the nine months ended September 30, 2016, resulting in an increase of $86,415 or 94%. The increase is reflective of annational sales team, increased customer base as we expand into new clinics.

Cost of Goods Sold

For the nine months ended September 30, 2017, cost of goods sold from the sale of Lumega-Z was $82,420 compared to $50,127 for the nine months ended September 30, 2016, resulting in an increase of $32,293 or 64%. The increase corresponds to the additional sales recorded in 2017.

Research and Development

For the nine months ended September 30, 2017, research and development costs were $131,330 compared to $43,062 for the nine months ended September 30, 2016, resulting in an increase of $88,268 or 205%. The increase resulted primarily from research associated with our MapcatSF^® medical device.

Sales and Marketing

For the nine months ended September 30, 2017, sales and marketing expenses were $294,774 compared to $293,979 for the nine months ended September 30, 2016. The increase in sales and marketing expenses of $795 compared to the prior period was due primarily to increases in consulting, marketing and promotional costs of $101,000, mostly offset by a decrease in non-cash stock compensation expense of approximately $100,000.

General and Administrative

For the nine months ended September 30, 2017, general and administrative expenses were $2,758,331 compared to $2,282,354 for the nine months ended September 30, 2016. The increase of $475,977 or 21% compared to the prior period was primarily due to a $414,000 increase in legal, professional and travel costs.

Interest Expense

For the nine months ended September 30, 2017, interest expense was $20,817 compared to $863,548 for the comparable period of 2016. The decrease in interest expense of $842,731 or 98% compared to the prior year was due to the repayment or conversion of the majority of promissory notes and convertible debt that had been outstanding during 2016. Included in the $20,817 amount is $2,984 that relates to notes that are past due as of September 30, 2017.

Net Loss

For the nine months ended September 30, 2017, we incurred a net loss of $3,109,062, compared to a net loss of $3,440,875 for the nine months ended September 30, 2016. The decrease in net loss of $331,813 or 10% compared to the prior year period was primarily due to the reduction of $842,731 in interest expense related to promissory notes and convertible debt that were repaid or converted in late 2016. This reduction was partially offset byinitiatives, increased legal professional,expenses and travel costs of $414,000 in the current year.internal labor costs.

Liquidity and Capital Resources

Since our formation in 2009, we have devoted substantial effort and capital resources to the development and commercialization activities related to our lead product Lumega-Z and our MapcatSF medical device. As a result of these activities we utilized cash in operating activities of $1,914,745$1,353,530 during the ninethree months ended September 30, 2017.March 31, 2018. We had positive working capital of $782,904$2,953,371 at September 30, 2017March 31, 2018 due primarily to our sale of preferredcommon stock in November 2017. As of September 30, 2017,March 31, 2018, we had cash in the amount of $1,269,755$3,198,349 and no available borrowings. Our financing has historically come from the issuance of convertible notes, promissory notes and from the sale of common and preferred stock and exercise of warrants. Some of our notes have remained outstanding beyond their stated maturity dates, resulting in additional interest charges due upon settlement.

The financial statements have been prepared assuming the Company will continue as a going concern. The Company had a net loss of $3,109,062$2,333,461 and utilized cash in operating activities of $1,914,745$1,353,530 during the ninethree months ended September 30, 2017.March 31, 2018. The Company expects to continue to incur net losses and negative operating cash flows in the near-term. However, the CompanyAs a result, management has also completed multiple capital financing transactions during 2017, resulting in cash on hand of $1,269,755 at September 30, and an additional $5,000,000 was received prior to issuance of these financial statements.

As of December 31, 2016, management had concluded that there wasis substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements were issued, and theare issued.

The Company’s independent registered public accounting firm has also included explanatory going concern language in their reportopinion accompanying the Company’s audited financial statements for the year ended December 31, 2016.2017. The Company’s financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.

WeThe Company will continue to incur significant expenses for continued commercialization activities related to our lead product Lumega-Z, the MapcatSF^® medical device, and with respect to efforts to build our infrastructure.VectorVision products. Development and commercialization of medical foods and medical devices involves a lengthy and complex process. Additionally, ourthe Company’s long-term viability and growth willmay depend upon the successful development and commercialization of new complementary products other than Lumega-Z and the MapcatSF. We areor product lines. The Company is continuing attempts to raise additional debt and/or equity capital to fund future operations, but there can be no assurances that wethe Company will be able to secure such additional financing in the amounts necessary to fully fund ourits operating requirements on acceptable terms or at all. If we arethe Company is unable to access sufficient capital resources on a timely basis, wethe Company may be forced to reduce or discontinue its technology and product development programs and ultimately curtail or cease operations.

Sources and Uses of Cash

The following table sets forth our major sources and uses of cash for each of the following periods:

Operating Activities

Net cash used in operating activities was $1,914,745$1,353,530 during the ninethree months ended September 30, 2017,March 31, 2018, versus $1,196,415$445,576 used during the comparable prior year period. The increase in 20172018 was due primarily to higher sales, marketing, travel,labor, and legal costs, in addition to paydown of our accrued rent liability and the buildup of inventory stock.costs.

Investing Activities

Net cash used in investing activities was $20,308$145,111 for the ninethree months ended September 30, 2017March 31, 2018 and $3,195$0 for the ninethree months ended September 30, 2016, and consisted primarily of investmentMarch 31, 2017. In January 2018, we acquired the rights to a trademark portfolio for $50,000. In addition, we invested in office and computer equipment. Also reflected is the cash balance receiveda trade show booth in connection with our acquisition of VectorVision, Inc., on September 29, 2017.February.

Financing Activities

Net cash provided byused in financing activities was $3,142,288$38,240 for the ninethree months ended September 30, 2017.March 31, 2018 was due primarily to our payoff of a line of credit balance that had been assumed from the VectorVision transaction. Financing activities for the prior year comparable period provided proceeds of $100,000 from the issuance of short-term loans, offset by payments of principal and interest on loans of $124,000, $3,105,000$14,000, $700,000 in proceeds from the issuance of Series B Preferred Stock, and $61,288 in amounts due to related parties on a net basis.

Net cash provided by financing activities was $1,575,800 for the nine months ended September 30, 2016. Financing activities for the period provided proceeds of $496,000 from the issuance of convertible notes and promissory notes partially offset by payments on those loans of $137,000, $1,045,000 in proceeds from the issuance of Series A Preferred Stock, and $171,800$41,906 in amounts due to related parties on a net basis.

Off-Balance Sheet Arrangements

At September 30, 2017March 31, 2018 and December 31, 2016,2017, we 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

As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Accounting Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon this evaluation, the Chief Executive Officer and Chief Accounting Officer each concluded that the Company’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that such information has been accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Accounting Officer, in a manner that allows timely decisions regarding required disclosure. There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation that occurred during the thirdfirst quarter ended in 20172018 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 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 condensed consolidated financial statements at September 30, 2017March 31, 2018 with respect to such matters, including the matter noted below.

On or about July 26, 2017, the Company received a payment demand from a former consultant to the Company alleging that hethe consultant is owed approximately $192,000 for services rendered. The Company has disputed this demand and attempts to resolve this matter were unsuccessful. On January 29, 2018, the resolutionCompany filed a lawsuit against the consultant and its related entities in the United States District Court for the Southern District of California (Case No. 18CV200-W-KSC) seeking declaratory relief regarding advisory fees and ownership interest in the Company. On March 6, 2018, the consultant and its related entities filed counterclaims against the Company, seeking payment for services rendered and seeking declaratory relief regarding ownership interest in the Company. The Company cannot predict the outcome of this matter is uncertain. The Company intends to vigorously protect its rights.and believes it has provided appropriate provision for any settlement of this matter as of March 31, 2018.

ITEM 1A. RISK FACTORS

Not required for smaller reporting companies.

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

During the nine months ended September 30, 2017, the Company sold 3,105,000In January 2018, an investor exercised warrants for 146,000 shares of the Company’s Series B Convertible Preferred Stock to various investors.common stock. The purchase price of the stock was $1.00 per share,warrants were exercisable for an aggregate purchase price of $3,105,000. The stock has a stated value of $1.00$0.01 per share, and accrues an annual dividend at the rate of 6% of the stated value, calculated quarterly, to be paid in shares of common stock at the rate of $0.75 per share. Series B preferred stock is convertible commencing December 31, 2017, or earlier upon the approval of the Board of Directors, by the holder into common stock at $0.75 per share. The stock is automatically convertible by the Company upon an equity financing of at least $5,000,000 subsequent to June 30, 2017, or is publicly traded for at least $2.00 per share for 10 consecutive trading days, or upon completion of a Major Transaction (as definedreceived $1,460 in cash. The Company issued the Certificate of Designation). Dividends are payable to holders of record quarterly, onshares and recorded the last business day of each calendar quarter, from the date of issuance,cash received as may be declared by the Board of Directors, and are cumulative. Series B preferred stock is senior to all Common Stock and junior to the Series A preferred stock.additional equity.

During March 2017, in connection with the Series B Convertible Preferred Stock offering,On January 26, 2018, the Company issued a stock option to a consultant to purchase a total of 60,000 warrants as additional incentive to investors who had previously invested in500,000 shares of the Company’s Series A Senior Convertible Preferred Stock offering in 2016. These warrantscommon stock of the Company. 250,000 shares of the option with a fair value of $287,500 vested immediately, 125,000 shares vest on December 31, 2018 and the remaining 125,000 shares vest on December 31, 2019 provided the consultant is still an active service provider. The options are fully vested, are immediately exercisable at $0.75non-qualified, have an exercise price of $1.25 per share, and will expire betweenafter 5 years. As of March 6, 2020 and March 8, 2020. The warrants31, 2018, the 250,000 options that remain to vest were valued in total at $51,796,$287,500 based upon thea Black-Scholes option-pricing model, with a stock price of $0.88, volatility of 135%, and an average risk-free interest rate of 1.61%.

The offerings of Series B Preferred Stock were exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, and Regulation D and/or Regulation S promulgated thereunder. No sales commissions were paid in connection with these transactions and no placement agent or underwriter was involved.

model. During the first ninethree months of 2017,ended March 31, 2018, the Company issued 617,500 sharesrecognized stock compensation costs of common stock$20,782 related to service providers. The aggregate fair value of the stock was $543,500 based on a valuation per share ranging from $0.75 to $0.88 on the date of grant. 162,500amortization of these shares were restricted shares subject tooptions based upon a graded vesting requirements over 4 months and subject to forfeiture if vesting conditions were not met. As of June 30, 2017, all such shares had fully vested. The securities issued in these transactions were exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, as such transaction did not involve any public offering. No sales commissions were paid in connection with the transactions and no placement agent or underwriter was involved.schedule.

During September of 2017, the Company issued 3,050,000 shares of common stock pursuant to the acquisition of VectorVision, Inc. 250,000 of these shares were held back as security for VectorVision’s indemnification obligations to the Company. The fair value of the stock has been preliminarily estimated at $2,287,500. The securities issued in this transaction were exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

A list of exhibits required to be filed as part of this report is set forth in the Index to Exhibits, which is presented elsewhere in this document, and is incorporated herein by reference.

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 13th11th day of November, 2017.May, 2018.