Notes
to Consolidated Financial Statements
June
30, 2018
(unaudited)
Conversions Labs, Inc. (“Conversion
Labs”, “we”, “us”, “our”, the “Company”) is an internet based direct response
marketing company that in-licenses, acquires or creates innovative and proprietary products that can be sold to consumers around
the world via our technology infrastructure and relationships with agencies, third party marketers, and online advertising platforms
such as Facebook and Google. We currently have three commercial stage products and intend to launch an additional two products
in 2018. Our leading product, launched in the second quarter of 2017, is a patented shampoo, conditioner, and leave-in foamer
for thicker, fuller hair. Our second product, launched in the first quarter of 2018, is a nutritional supplement for immune support.
Our third product, launched in the second quarter of 2018, is a PDF conversion software, which was acquired through the purchase
of 51% of the membership interests of LegalSimpli Software, LLC, a Puerto Rico limited liability company, which operates a marketing-driven
software solutions business.
In
2015, the Company formed a joint venture domiciled in Puerto Rico, Innate Skincare, LLC (“Innate”). Under the terms
of the joint venture agreement, the Company held a 33.3% equity interest, and a 51% controlling voting interest, in Innate. On
January 20, 2016, Innate amended its limited liability company operating agreement and changed its legal name to Immudyne PR LLC
(“Immudyne PR”). On April 1, 2016, Immudyne PR further amended its operating agreement and restated the Company’s
ownership and voting interest in Immudyne PR increasing its ownership to 78.1667% resulting in a charge to noncontrolling interest
and additional paid-in-capital of $91,612. Immudyne PR was formed to launch a complete skin care regime formulated using strategic
ingredients provided by the Company. In the second quarter of 2017, Immudyne PR expanded their product line and launched their
in-licensed patented hair loss shampoo and conditioner.
Throughout
2017, we manufactured, distributed and sold natural immune support products containing our proprietary yeast beta glucans, a group
of beta glucans naturally occurring in the cell walls of yeast that have been shown through testing and analysis to support the
immune system. Beta glucans, or β-Glucans, are a natural extract that are considered to be “biological response modifiers”
that support the immune system. The most common sources of beta glucans are from the cell walls of baker’s yeast, the cellulose
in plants, the bran of cereal grains and certain fungi and bacteria.
In
2017, our yeast beta glucan nutraceutical and cosmetic product lines consisted of our natural, premium yeast beta glucans in oral
and topical applications. We offered our yeast beta glucans as natural raw material ingredients in bulk quantities, our “Nutraceutical
and Cosmetic Additives” segment, and finished, consumer products packaged under our brands as well as private label brands,
our “Finished Cosmetic Products” segment, which were marketed directly to consumers.
In
the first quarter of 2018 we sold assets and certain liabilities related to our legacy business that manufactured raw yeast beta
glucan. As a result of this divestiture, we solely operate our online direct marketing business owned by Immudyne PR.
Membership
Interest Purchase Agreement
On
May 29, 2018 (the “Closing Date”), Immudyne, PR entered into a Membership Interest Purchase Agreement (the “Purchase
Agreement”) by and among nine individuals, as sellers and Immudyne PR, as buyer (“Buyer”), pursuant to which
Buyer acquired from Sellers all of Sellers’ right, title and interest in and to 51% of the membership interests (the “Membership
Interests”) of LegalSimpli Software, LLC, a Puerto Rico limited liability company (“LSS”), which operates a
marketing-driven software solutions business.
Conversion
Labs, Inc.
Notes
to Consolidated Financial Statements
June
30, 2018
(unaudited)
1.
|
Organization (continued)
|
Membership Interest Purchase Agreement
(continued)
In
consideration for Buyer’s purchase of the Membership Interests the Buyer paid $150,000 (the “Initial Payment”)
to the Sellers upon execution of the Purchase Agreement. Additionally, Buyer may be obligated to pay up to an additional $200,000
in accordance with the following milestones (the “Milestones”): (i) $100,000 to the Sellers on the 90-day anniversary
of the Purchase Agreement, so long LSS’s gross revenue for the preceding 30-day period is equal to or greater than $75,000;
and (ii) $100,000 to the Sellers on the 180-day anniversary of the Purchase Agreement, so long as LSS’s gross revenue for
the preceding 30-day period is equal to or greater than $150,000, with a minimum net profit margin of 25% in each instance.
Regardless
of whether LSS achieves either or both of the Milestones, Buyer will retain full ownership of the Membership Interests.
Name
Change and Symbol Change
Effective
June 22, 2018 the Company changed its name from Immudyne, Inc. to Conversion Labs, Inc. All references to the “Company”
in this Report refers to Conversion Labs, Inc., unless stated otherwise. Further, in connection with changing its name, the Company
changed its trading symbol to CVLB. In connection with the name change, Immudyne PR did not finalize its name change, but the
Company expects to complete the name change of Immudyne PR in 2018.
Going
Concern
The
Company has funded operations in the past through the sales of its products, issuance of common stock and through loans and advances
from officers and directors. The Company’s continued operations are dependent upon obtaining an increase in its sales volume
and the continued financial support from officers and directors or the issuance of additional shares of common stock.
The
accompanying financial statements have been prepared on the basis that the Company will continue as a going concern, which assumes
the realization of assets and the satisfaction of liabilities in the normal course of business. At June 30, 2018, the Company
had an accumulated deficit approximating $10.9 million and has incurred negative cash flows from operations. These conditions
raise substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Based
on the Company's cash balance at June 30, 2018, and projected cash needs for 2018, management estimates that it will need to increase
sales revenue and/or raise additional capital to cover operating and capital requirements for the 2018 fiscal year. Management
will need to raise the additional needed funds through increased sales volume, issuing additional shares of common stock or other
equity securities, or obtaining debt financing. Although management has been successful to date in raising necessary funding,
there can be no assurance that sales revenue will substantially increase or that any required future financing can be successfully
completed on a timely basis, or on terms acceptable to the Company.
Conversion
Labs, Inc.
Notes
to Consolidated Financial Statements
June
30, 2018
(unaudited)
2.
|
Summary
of Significant Accounting Policies
|
Principles
of Consolidation
The
Company evaluates the need to consolidate affiliates based on standards set forth in ASC 810 Consolidation (“ASC 810”).
The
consolidated financial statements include the accounts of the Company and its majority owned subsidiary, Immudyne PR, its 51%
owned LSS and variable interest entities (VIE’s) in which the Company has been determined to be the primary beneficiary.
The non-controlling interest in Immudyne PR represents the 21.833% equity interest held by other members of the joint venture.
All significant consolidated transactions and balances have been eliminated in consolidation.
Management’s
Representation of Interim Financial Statements
The
accompanying unaudited consolidated financial statements have been prepared by the Company without audit pursuant to the rules
and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included
in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”)
have been condensed or omitted as allowed by such rules and regulations, and management believes that the disclosures are adequate
to make the information presented not misleading. These consolidated financial statements include all of the adjustments, which
in the opinion of management are necessary to a fair presentation of financial position and results of operations. All such adjustments
are of a normal and recurring nature. Interim results are not necessarily indicative of results for a full year. These consolidated
financial statements should be read in conjunction with the audited consolidated financial statements at December 31, 2017 and
2016 filed with the Company’s Form 10-K on April 2, 2018 with the SEC.
Variable
Interest Entities
The
Company follows ASC 810-10-15 guidance with respect to accounting for variable interest entities (each, a “VIE”).
These entities do not have sufficient equity at risk to finance their activities without additional subordinated financial support
from other parties or whose equity investors lack any of the characteristics of a controlling financial interest. A variable interest
is an investment or other interest that will absorb portions of a VIE’s expected losses or receive portions of its expected
residual returns and are contractual, ownership, or pecuniary in nature and that change with changes in the fair value of the
entity’s net assets. A reporting entity is the primary beneficiary of a VIE and must consolidate it when that party has
a variable interest, or combination of variable interests, that provides it with a controlling financial interest. A party is
deemed to have a controlling financial interest if it meets both of the power and losses/benefits criteria. The power criterion
is the ability to direct the activities of the VIE that most significantly impact its economic performance. The losses/benefits
criterion is the obligation to absorb losses from, or right to receive benefits from, the VIE that could potentially be significant
to the VIE. The VIE model requires an ongoing reconsideration of whether a reporting entity is the primary beneficiary of a VIE
due to changes in facts and circumstances.
By
our fiscal year ending December 31, 2017, we ceased processing credit card charges through all VIE merchant accounts. At June
30, 2018 and December 31, 2017, we recorded the merchant reserves from these VIE merchant accounts on our balance sheet as accounts
receivable.
Immudyne
PR is the primary beneficiary of Innerwell Skincare LLC, Spurs 5, LLC, and Salus LLC, which are qualified as VIEs. The assets
and liabilities and revenues and expenses of these VIEs included in the financial statements of Immudyne PR and further included
in the consolidated financial statements. The assets and liabilities include balances due from and due to the subsidiaries of
Immudyne PR. These inter-company receivables and payables are eliminated upon consolidation of the VIE with Immudyne PR and the
Company. No assets were pledged or given as collateral against any borrowings.
Conversion
Labs, Inc.
Notes
to Consolidated Financial Statements
June
30, 2018
(unaudited)
2.
|
Summary
of Significant Accounting Policies (continued)
|
Variable
Interest Entities (continued)
The
Company utilizes third party entities to provide and increase credit card processing capacity and optimize corresponding rates
and fees. A majority of these entities provide this service as independent contractors in exchange for a one (1%) percent fee
of the net revenues processed and collected by such contractors from sales initiated by the Company. The VIEs consolidated in
the Company’s financial statements are primarily contracted to credit card processing through one or more merchant banks
contracted by each VIE. Upon receipt of funds by each VIE, the collection of receipts less any returns, chargeback and other fees
charged by such merchant bank is transferred to Immudyne PR.
Use
of Estimates
The
Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United
States of America which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of
the more significant estimates required to be made by management include the determination of reserves for accounts receivable,
returns and allowances, the accounting for derivatives, the valuation of inventory and stockholders’ equity based transactions.
Actual results could differ from those estimates.
Derivative
Liabilities
Under
ASC 815-40-05, Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company’s Own Stock,
in the event the Company does not have a sufficient number of authorized and unissued shares of common stock to satisfy obligations
for stock options, warrants and other instruments potentially convertible into common stock, the fair value of these instruments
should be reported as a derivative liability. Pursuant to the outstanding option, warrant and convertible debt agreements, there
is currently no effective registration statement covering the shares of common stock underlying these agreements, which are currently
subject to a cashless exercise whereby the holders, at their option, may surrender their options and warrants to the company in
exchange for shares of common stock. The number of shares of common stock into which an option or a warrant would be exchangeable
in such a cashless exercise depends on both the exercise price of the options or warrant and the market price of the common stock,
each at or near the time of exercise. Because the market price is variable, it is possible that the Company could have insufficient
authorized shares to satisfy a cashless exercise. In this scenario, if the Company were unable to obtain shareholder approval
to increase the number of authorized shares, the Company could be obligated to settle such a cashless exercise with cash rather
than by issuing shares of common stock. Further, ASC 815-40-05 requires that the Company record the potential settlement obligation
at each reporting date using the current estimated fair value of these contracts, with any changes in fair value being recorded
through our statement of operations. The Company had reported the potential settlement obligation as a derivative liability. In
the third quarter of 2017, the Company obtained a majority of shareholders’ approval and amended its Articles of Incorporation
to increase the number of shares of its authorized common stock, therefore the derivative liability is no longer applicable.
Sequencing
Policy
Under
ASC 815-40-35, the Company has adopted a sequencing policy whereby, in the event that reclassification of contracts from equity
to assets or liabilities is necessary pursuant to ASC 815 due to the Company’s inability to demonstrate it has sufficient
authorized shares, shares will be allocated on the basis of the earliest issuance date of potentially dilutive instruments, with
the earliest grants receiving the first allocation of authorized but unissued shares, and all future instruments being classified
as a derivative liability, with the exception of instruments related to share-based compensation issued to employees or directors.
Inventory
At
June 30, 2018 and December 31, 2017, inventory consisted primarily of finished cosmetic products. Inventory is maintained in a
third-party warehouse in Pennsylvania.
Inventory
is valued at the lower of cost or net realizable value with cost determined on a first-in, first-out (“FIFO”) basis.
Management compares the cost of inventory with the net realizable value and an allowance is made for writing down inventory to
net realizable, if lower. At June 30, 2018 and December 31, 2017, the Company recorded an inventory reserve in the amount of $12,500
and $12,500, respectively. As of June 30, 2018 and December 31, 2017, the inventory balances were $507,211 and 681,258, respectively.
Conversion
Labs, Inc.
Notes
to Consolidated Financial Statements
June
30, 2018
(unaudited)
2.
|
Summary
of Significant Accounting Policies (continued)
|
Revenue
Recognition
The
Company records revenue under the adoption of ASC 606 by analyzing exchanges with its customers using a five-step analysis such
as identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction
price and allocating the transaction price to each separate performance obligation. The Company’s policy is to record revenue
as earned when a firm commitment, indicating sales quantity and price exists, delivery has taken place and collectability is reasonably
assured. The Company generally records sales of finished cosmetic products once the customer places the order and the product
is simultaneously shipped, but in limited cases if title does not pass until the product reaches the customer’s delivery
site, then recognition of revenue should be deferred until that time, however the Company does not have a process to properly
record the recognition of revenue if orders are not immediately shipped. Delivery is considered to have occurred when title and
risk of loss have transferred to the customer. Provisions for discounts, returns, allowances, customer rebates and other adjustments
are netted with gross sales. The Company accounts for such provisions during the same period in which the related revenues are
earned. Customer discounts, returns and rebates for the three and six months ended June 30, 2018, was $131,752 and $219,752, respectively.
Customer discounts, returns and rebates for the three and six months ended June 30, 2017, was approximately and $12,000 and $50,000,
respectively.
There
are no formal sales incentives offered to any of the Company’s customers. Volume discounts may be offered from time to time
to customers purchasing large quantities on a per transaction basis.
Accounts
receivable
Accounts
receivable are carried at original invoice amount less an estimate made for holdbacks and doubtful receivables based on a review
of all outstanding amounts. Management determines the allowance for doubtful accounts by regularly evaluating individual customer
receivables and considering a customer’s financial condition, credit history and current economic conditions and sets up
an allowance for doubtful accounts when collection is uncertain. Customers’ accounts are written off when all attempts to
collect have been exhausted. Recoveries of accounts receivable previously written off are recorded as income when received. At
June 30, 2018 and December 31, 2017, the accounts receivable reserve was approximately $0 and $0, respectively. At June 30, 2018
and December 31, 2017, the reserve for sales returns and allowances was approximately $43,805 and $23,200, respectively.
Conversion
Labs, Inc.
Notes
to Consolidated Financial Statements
June
30, 2018
(unaudited)
2.
|
Summary
of Significant Accounting Policies (continued)
|
Income
Taxes
The
Company files Corporate Federal and State tax returns, while Immudyne PR and LSS, which were formed as limited liability companies,
file separate tax returns with any tax liabilities or benefits passing through to its members.
The
Company records current and deferred taxes in accordance with Accounting Standards Codification (ASC) 740, “Accounting for
Income Taxes.” This ASC requires recognition of deferred tax assets and liabilities for temporary differences between tax
basis of assets and liabilities and the amounts at which they are carried in the financial statements, based upon the enacted
rates in effect for the year in which the differences are expected to reverse. The Company establishes a valuation allowance when
necessary to reduce deferred tax assets to the amount expected to be realized. The Company periodically assesses the value of
its deferred tax asset, a majority of which has been generated by a history of net operating losses and determines the necessity
for a valuation allowance. ASC 740 also provides a recognition threshold and measurement attribute for the financial statement
recognition of a tax position taken or expected to be taken in a tax return. Using this guidance, a company may recognize the
tax benefit from an uncertain tax position in its financial statements only if it is more likely-than-not (i.e., a likelihood
of more than 50%) that the tax position will be sustained on examination by the taxing authorities, based on the technical merits
of the position.
The
Company’s tax returns for all years since December 31, 2014, remain open to taxing authorities.
Stock-Based
Compensation
The
Company follows the provisions of ASC 718, “Share-Based Payment”. Under this guidance compensation cost generally
is recognized at fair value on the date of the grant and amortized over the respective vesting periods. The fair value of options
at the date of grant is estimated using the Black-Scholes option pricing model. The expected option life is derived from assumed
exercise rates based upon historical exercise patterns and represents the period of time that options granted are expected to
be outstanding. The expected volatility is based upon historical volatility of the Company’s shares using weekly price observations
over an observation period that approximates the expected life of the options. The risk-free rate approximates the U.S. Treasury
yield curve rate in effect at the time of grant for periods similar to the expected option life. Due to limited history of forfeitures,
the estimated forfeiture rate included in the option valuation was zero.
Many
of the assumptions require significant judgment and any changes could have a material impact in the determination of stock-based
compensation expense.
Conversion
Labs, Inc.
Notes
to Consolidated Financial Statements
June
30, 2018
(unaudited)
2.
|
Summary
of Significant Accounting Policies (continued)
|
Earnings
(Loss) Per Share
Basic
earnings (loss) per common share is based on the weighted average number of shares outstanding during each period presented. Warrants
and options to purchase common stock are included as common stock equivalents only when dilutive. Potential common stock equivalents
are excluded from dilutive earnings per share when the effects would be antidilutive.
Common
stock equivalents comprising shares underlying 8,210,800 and 6,090,111 options and warrants for the three and six months
ended June 30, 2018, respectively, have not been included in the income per share calculations as the effects are
anti-dilutive.
Common
stock equivalents comprising shares underlying 5,145,693 and 11,550,273 options and warrants for the three and six months ended
June 30, 2017, respectively, have not been included in the loss per share calculation as the effects are anti-dilutive.
Recent
Accounting Pronouncements
In
May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. The new
standard provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to
apply modification accounting in Topic 718. This pronouncement is effective for annual reporting periods beginning after December
15, 2017 but early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance.
In
August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and
Cash Payments (“ASU 2016-15”). ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing
diversity in practice regarding how certain cash receipts and cash payments are presented in the statement of cash flows. The
standard provides guidance on the classification of the following items: (1) debt prepayment or debt extinguishment costs, (2)
settlement of zero-coupon debt instruments, (3) contingent consideration payments made after a business combination, (4) proceeds
from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies, (6) distributions
received from equity method investments, (7) beneficial interests in securitization transactions, and (8) separately identifiable
cash flows. The Company is required to adopt ASU 2016-15 for fiscal years, and for interim periods within those fiscal years,
beginning after December 15, 2017 on a retrospective basis. Early adoption is permitted, including adoption in an interim period.
We have reviewed ASU 2016-15 and have determined that it will not have any material effect on our financial statements and related
disclosures.
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes all existing guidance on accounting for leases
in ASC Topic 840. ASU 2016-02 is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use
assets and corresponding lease liabilities on the balance sheet. ASU 2016-02 will continue to classify leases as either finance
or operating, with classification affecting the pattern of expense recognition in the statement of income. ASU 2016-02 is effective
for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted.
ASU 2016-02 is required to be applied with a modified retrospective approach to each prior reporting period presented with various
optional practical expedients. We have reviewed ASC 842 and have determined that it will not have any material effect on our financial
statements and related disclosures.
Conversion
Labs, Inc.
Notes
to Consolidated Financial Statements
June
30, 2018
(unaudited)
2.
|
Summary
of Significant Accounting Policies (continued)
|
Recent
Accounting Pronouncements (continued)
In
May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606). The new revenue
recognition standard (“ASC 606”) provides a five-step analysis of transactions to determine when and how revenue is
recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services. This Topic defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment
and estimates may be required within the revenue recognition process than required under existing GAAP including identifying performance
obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating
the transaction price to each separate performance obligation. The two permitted transition methods under the new standard are
the full retrospective method or the modified retrospective method. The new standard is effective for annual reporting periods
beginning after December 15, 2017, and accordingly we are required to adopt this standard effective January 1, 2018, the beginning
of our fiscal year. We have reviewed ASC 606 and have determined that it will not have any material effect on our revenue recognition.
All
other accounting standards that have been issued or proposed by the FASB that do not require adoption until a future date are
not expected to have a material impact on the consolidated financial statements upon adoption.
Fair
Value of Financial Instruments
The
carrying value of the Company’s financial instruments, including cash, trade accounts receivable, accounts payable and accrued
expenses and the face amount of notes payable approximate fair value for all periods.
Noncontrolling
Interests
The
Company accounts for its less than 100% interests in Immudyne PR and LSS in accordance with ASC Topic 810, Consolidation, and
accordingly the Company presents noncontrolling interests as a component of equity on its consolidated balance sheet and reports
the noncontrolling interest’s share of the Immudyne PR, and LSS’s net loss attributable to noncontrolling interests
in the consolidated statement of operations.
Consolidation
of Variable Interest Entities
In
accordance with ASC 810-10-25-37 and as amended by ASU 2009-17, the Company determines whether any legal entity in which the Company
becomes involved is a VIE and subject to consolidation. The Company conducts an assessment on an ongoing basis for each VIE including
(1) the power to direct activities of the VIE that most significantly impact the VIE’s economic performance, and (2) the
obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. As a result,
the Company determined that six entities were VIEs and subject to consolidation.
Conversion
Labs, Inc.
Notes
to Consolidated Financial Statements
June
30, 2018
(unaudited)
2.
|
Summary
of Significant Accounting Policies (continued)
|
Concentration
of Credit Risk
The
Company grants credit in the normal course of business to its customers. The Company periodically performs credit analysis and
monitors the financial condition of its customers to reduce credit risk.
The
Company monitors its positions with, and the credit quality of, the financial institutions with which it invests. The Company,
at times, maintains balances in various operating accounts in excess of federally insured limits.
Although
the Company does have some wholesale customers, over 90% of the Company’s sales are to unique customers. Since the Company
sells its products to thousands of customers, there is no accounts receivable concentration from customers. However, the Company
uses merchant processors to charge customer credit cards and does contain concentration risk between credit card processors.
As of June 30, 2018, the Company’s
accounts receivable had no significant concentration from any customer.
As of June 30, 2018, three credit card processors accounted for 81%, 12% and 5% of accounts receivable.
3.
|
Discontinued
Operations and Assets and Liabilities Held for Sale
|
|
|
On January 29, 2018, the Company
entered into a Legacy Asset Sale Agreement with Mark McLaughlin (the Company’s former President and CEO) whereby the Company
sold the net assets of the legacy beta glucan business for $850,000. On February 7, 2018, the Company and Mr. McLaughlin entered
into an amendment to the asset purchase agreement to amend the purchase price of the assets, whereby Mr. McLaughlin agreed, through
a newly formed entity, to purchase the assets and liabilities of the yeast beta glucan manufacturing business, for the following:
(i) 2,000,000 shares of the Company’s common stock (valued at $0.23 per share or $460,000), payable on February 12, 2018,
(the “Closing Date”), (ii) $190,000 payable on the Closing Date, (iii) $200,000 payable within 120 days following
the Closing Date, and (iv) the waiver of all rights to any severance payment in the amount of $150,000. The total purchase price
per the amended asset sale agreement was $1,000,000. The total net assets and liabilities transferred in the sale was $255,248,
resulting in a gain on sale of $744,752.
Operating
results for the three months and six months ended June 30, 2018, and 2017 for the yeast beta glucan manufacturing business are
presented as discontinued operations and the assets and liabilities classified as held for sale are presented separately in the
balance sheet.
A
breakdown of the discontinued operations is presented as follows:
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
|
June 30,
2018
|
|
|
June 30,
2017
|
|
|
June 30,
2018
|
|
|
June 30,
2017
|
|
|
Net Sales
|
|
$
|
-
|
|
|
$
|
447,331
|
|
|
$
|
363,613
|
|
|
$
|
703,894
|
|
|
Cost of Sales
|
|
|
-
|
|
|
|
144,148
|
|
|
|
56,666
|
|
|
|
259,331
|
|
|
Gross Profit
|
|
|
-
|
|
|
|
303,183
|
|
|
|
306,947
|
|
|
|
444,563
|
|
|
Operating expenses
|
|
|
-
|
|
|
|
148,358
|
|
|
|
125,960
|
|
|
|
262,931
|
|
|
Income from discontinued operations
|
|
|
-
|
|
|
|
154,825
|
|
|
|
180,987
|
|
|
|
181,632
|
|
|
Gain on sale
|
|
|
-
|
|
|
|
-
|
|
|
|
744,752
|
|
|
|
-
|
|
|
Net income from discontinued operations
|
|
$
|
-
|
|
|
$
|
154,825
|
|
|
$
|
925,739
|
|
|
$
|
181,632
|
|
Assets
and liabilities of discontinued operations held for sale included the following:
|
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable, net
|
|
$
|
-
|
|
|
$
|
270,580
|
|
|
Inventory, net
|
|
|
-
|
|
|
|
25,903
|
|
|
|
|
$
|
-
|
|
|
$
|
296,483
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
-
|
|
|
$
|
81,733
|
|
|
|
|
$
|
-
|
|
|
$
|
81,733
|
|
Conversion Labs, Inc.
Notes to Consolidated Financial Statements
June 30, 2018
(unaudited)
Acquisition of Membership
Interest Purchase Agreement
On May 29, 2018 (the “Closing
Date”), Immudyne, PR entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) by and
among nine individuals, as sellers and Immudyne PR, as buyer (“Buyer”), pursuant to which Buyer acquired from Sellers
all of Sellers’ right, title and interest in and to 51% of the membership interests (the “Membership Interests”)
of LegalSimpli Software, LLC, a Puerto Rico limited liability company (“LSS”), which operates a marketing-driven software
solutions business.
In consideration for Buyer’s
purchase of the Membership Interests the Buyer paid $150,000 (the “Initial Payment”) to the Sellers upon execution
of the Purchase Agreement. Additionally, Buyer may be obligated to pay up to an additional $200,000 in accordance with the following
milestones (the “Milestones”): (i) $100,000 to the Sellers on the 90-day anniversary of the Purchase Agreement, so
long LSS’s gross revenue for the preceding 30-day period is equal to or greater than $75,000; and (ii) $100,000 to the Sellers
on the 180-day anniversary of the Purchase Agreement, so long as LSS’s gross revenue for the preceding 30-day period is equal
to or greater than $150,000, with a minimum net profit margin of 25% in each instance.
Regardless of whether LSS achieves
either or both of the Milestones, Buyer will retain full ownership of the Membership Interests.
Fair Value of Consideration Transferred and Recording
of Assets Acquired
The following table summarizes the acquisition date fair value
of the consideration paid, identifiable assets acquired, and liabilities assumed including an amount for intangible assets:
|
Consideration Paid:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
150,000
|
|
|
Fair value of total consideration
|
|
$
|
150,000
|
|
|
|
|
|
|
|
|
Recognized amount of identifiable assets acquired, and liabilities assumed:
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,445
|
|
|
Financial liabilities:
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
(84,349
|
)
|
|
Non-controlling interest
|
|
|
(144,118
|
)
|
|
Total identifiable net assets
|
|
|
(227,022
|
)
|
|
Intangible assets
|
|
|
377,022
|
|
|
|
|
$
|
150,000
|
|
Conversion Labs, Inc.
Notes to Consolidated Financial Statements
June 30, 2018
(unaudited)
In the third quarter of 2016
the Company commenced an offering pursuant to which it offered 11% subordinated promissory notes in fifty thousand ($50,000) dollar
increments combined with 62,500 shares of the Company’s Common Stock for a maximum offering amount of $200,000 (the “Offering”).
In August and September 2016, the Company sold promissory notes totaling $150,000 to three unrelated individuals. Two of the promissory
notes totaling $100,000 were payable in February 2017 and one promissory note for $50,000 was payable in March 2017. In October
2016, the Company sold promissory notes totaling $50,000 to two unrelated individuals. These promissory notes were payable in October
2017. In connection with these promissory notes sold, pursuant to the Offering, the Company issued 250,000 shares of common stock
valued at $58,750 which was recorded as a debt discount and were amortized over the term of these notes. Amortization of the debt
discounts for the year ended December 31, 2017 and 2016 was $25,035 and $33,715, respectively. During 2016, the Company repaid
$68,600 of the principal balance; and as a result, the outstanding balances of these notes as of December 31, 2016, were $131,400.
The balance of debt discount related to the subordinated promissory notes is $25,035 at December 31, 2016. During 2017, the Company
repaid $81,420 of the principal balance and converted the remaining balance of $49,980 into 196,000 shares of common stock and
98,000 warrants, which satisfied the notes in full. The fair market value of the shares and warrants issued upon conversion was
determined to be $179,384, of which $129,404 was included in loss on extinguishment of debt. Interest expense related to these
notes for the six months ended June 30, 2018 and 2017, amounted to $0 and $131,117, respectively.
In December 2016, the Company
borrowed $100,000 from an officer and issued a convertible promissory note with a maturity date of February 28, 2017. The loan
bore no interest. This note was convertible if not repaid by the maturity date at a conversion price of $0.23 per Unit. Each Unit
shall consist of one share of the Company’s common stock and one three-year common-stock warrant to purchase one-half of
one share of the Company’s common stock with an exercise price of $0.40 per share. In March 2017, the Company repaid the
entire outstanding balance of this note.
In January 2017, the Company
borrowed $200,000 and issued a promissory note with a 5% original issue discount for a total principal amount of $210,000. The
loan incurred 11% interest per annum and matured in various tranches from February 2017 through April 2017. In addition, the Company
issued 217,391 shares of common stock related to this note. In February 2017, the Company repaid $70,000 of the principal balance
of this note. In March 2017, the Company converted the remaining $140,000 of the principal balance of this note and accrued interest
of $2,212 in exchange for 559,179 shares of common stock and 304,348 warrants which satisfied the note in full. The fair market
value of the shares and warrants issued upon conversion was determined to be $566,030, of which $423,818 was included in loss on
extinguishment of debt.
In February 2017, the Company
borrowed $25,000 from an American Express working capital line with 60 days maturity. The interest for this loan is a flat fee
of $250. On April 17, 2017, the Company repaid this loan. In June 2017, the Company borrowed $74,043 from an American Express working
capital line with 90 days maturity. The interest for this loan is a flat fee of $1,111. On August 30, 2017, the Company repaid
this loan. In September 2017, the Company borrowed $77,333 from an American Express working capital line with 90 days maturity.
The interest for this loan is a flat fee of $1,160. In November 2017, $42,479 was drawn from the line of credit and $78,493 was
paid back in December 2017. In the first quarter of 2018 the Company repaid this loan. As of June 30, 2018 and December 31, 2017,
there was $0 and $42,479 outstanding, respectively.
In December 2017, Immudyne PR
received two working capital loans from related parties for $50,000 and $75,000 respectively. The loans accrue at 2% interest per
month and mature in February 2018. In February 2018, the Company repaid these loans with all outstanding accrued interest.
In May 2018, the Company borrowed
$550,000 and issued convertible notes payable with a maturity date of May 28, 2019. These notes accrue interest at a rate of 12%
compounded annually. The conversion price for these notes is $0.23 per share of common stock, subject to adjustment. In the event
the average VWAP (as defined) for the consecutive five trading days preceding but not including the six month anniversary of the
original issue date of the note is less than the then conversion price in effect on such six month anniversary date, then the conversion
price shall be reduced to 80% of the VWAP for the ten trading days following (but not including) such six month anniversary date,
subject to further reduction. In addition, the Company issued warrants to purchase up to 2,391,305 shares of common stock at a
price of $0.28 per share. The fair value of the warrants were determined to be $533,691 and were recorded as a debt discount to
be amortized over the life of the note. For the six months ended June 30, 2018, amortization of debt discount was $46,789.
Interest expense related to loans
from officers, directors and other related individuals amounted to $4,383 and $1,713 for the six months ended June 30, 2018 and
2017, respectively.
Interest expense related to loans
from officers, directors and other related individuals amounted to $0 and $250 for the three months ended June 30, 2018 and 2017,
respectively.
Total interest expense on notes
payable, inclusive of amortization of debt discount of $46,789 and $81,558, amounted to $57,528 and $649,607 for the six months
ended June 30, 2018 and 2017, respectively.
Total interest expense on notes
payable, inclusive of amortization of debt discount of $46,789 and $0, amounted to $51,078 and $250 for the three months ended
June 30, 2018 and 2017, respectively.
Conversion Labs, Inc.
Notes to Consolidated Financial Statements
June 30, 2018
(unaudited)
At June 30, 2018, the Company
has approximately $3,193,000 of operating loss carryforwards for federal that may be applied against future taxable income. The
net operating loss carryforwards will begin to expire in the year 2021 if not utilized prior to that date, expiring during various
years through 2037. There is no provision for income taxes because the Company has historically incurred operating losses and
maintains a full valuation allowance against its net deferred tax assets.
The Tax Cuts and Jobs Act (the
“Act”) was enacted on December 22, 2017. The Act reduces the US federal corporate tax rate from 34% to 21%. The most
significant impact of the legislation for the Company was a $242,000 reduction of the value of net deferred tax assets (which represent
future tax benefits) as a result of lowering the U.S. corporate income tax rate from statutory rate of 34% to 21%.
The valuation allowance overall
decreased by approximately $81,000 during the six months ended June 30, 2018. The Company has fully reserved the deferred tax asset
resulting from available net operating loss carryforwards.
The tax effect of temporary differences
that gave rise to significant portion of the deferred tax assets were as follows:
|
Net operating loss
|
|
$
|
817,000
|
|
|
Accounts receivable reserves
|
|
|
-
|
|
|
Inventory reserves
|
|
|
-
|
|
|
Stock compensation
|
|
|
340,000
|
|
|
Net deferred tax asset
|
|
|
1,157,000
|
|
|
Valuation allowance
|
|
|
(1,157,000)
|
|
|
Total
|
|
$
|
-
|
|
The net operating loss carryforwards
could be subject to limitation in any given year in the event of a change in ownership as defined by IRC Section 382.
Common Stock
In January 2017, the Company
issued 1,183,490 shares of common stock pursuant to a conversion of Immudyne PR equity contributions of $272,203 into equity of
the Company by the noncontrolling interest.
In January 2017, the Company
issued 217,391 shares of common stock in relation to issuance of a $210,000 note payable.
In the first quarter of 2017,
the Company commenced an offering to sell up to 4,000,000 shares of common stock at a price of $0.23 per share and warrants to
purchase up to 2,000,000 shares of common stock exercisable any time prior to the second anniversary of the issuance. The warrants
are paired with the stock on the basis of one warrant for every two shares of stock purchased. During 2017, the Company received
subscriptions in the amount of 2,927,156 shares and issued 1,463,578 warrants and proceeds in the amount of $673,246.
In March 2017, the Company issued
755,179 shares of common stock for the conversion of the outstanding balance of three notes payable totaling $499,802 (see Note
4).
Conversion Labs, Inc.
Notes to Consolidated Financial Statements
June 30, 2018
(unaudited)
7.
|
Stockholders’
Equity (continued)
|
Common Stock (continued)
On April 24, 2017, the Company,
issued 217,390 shares of common stock pursuant to a stock subscription agreement and the Company issued 108,696 warrants with an
exercise price of $0.40 per share for the stated consideration and satisfaction of obligation to pay $50,000 on the 180-day anniversary
of the execution of the Sole and Exclusive License, Royalty, and Advisory Agreement dated September 1, 2016 with Pilaris Laboratories,
LLC.
During the second quarter of
2017 the Company received subscriptions in the amount of 110,000 shares and issued 55,000 warrants and proceeds in the amount of
$25,300.
On June 1, 2017, the Company
entered into an agreement with a consultant to provide services, with a six-month term, and issued 125,000 shares of common stock
as compensation. The shares were valued at $45,000 and the Company is recognizing the expense over the term of the agreement. For
the year ending December 31, 2017, $45,000 has been expensed and included in compensation and related expenses on the consolidated
statement of operations.
In July 2017, the Company and
JLS Ventures entered into a separate three year incentivized second amendment to a Service Agreement effective July 1, 2017. As
compensation, the Company issued 900,000 shares of common stock valued at $432,000. The Company is recognizing the expense over
the term of the agreement. For the six months ending June 30, 2018 and 2017, $72,000 and $0, respectively, has been expensed and
included in compensation and related expenses on the consolidated statement of operations.
In July 2017, Mark McLaughlin,
the Company’s former President and Chief Executive Officer, exercised 1,500,000 warrants on a cashless basis and was issued
1,140,000 shares of common stock.
In July 2017, Mark McLaughlin
exercised 1,000,000 options on a cashless basis and was issued 800,000 shares of common stock.
In July 2017, Mark McLaughlin
exercised 339,473 options on a cashless basis and was issued 271,579 shares of common stock.
In August 2017, the Company issued
100,000 shares of common stock valued at $40,000 to Acorn Management Partners L.L.C. (“Acorn”) for financial advisory,
strategic business planning and other investor relation services. The Company is recognizing the expense over the term of the agreement.
For the year ending December 31, 2017, $40,000 has been expensed and included in compensation and related expenses on the consolidated
statement of operations.
In August 2017, the Company issued
50,000 shares of common stock valued at $20,000 to BV Global Fulfillment, LLC (“BV Global”) for fulfillment services.
In November 2017, the Company
issued 100,000 shares of common stock valued at $44,000 to an employee as a bonus.
In November 2017, the Company
issued 135,721 shares of common stock pursuant to a conversion of Immudyne PR equity contributions of $31,216 into equity of the
Company by the noncontrolling interest.
In February 2018, pursuant to
the sale of the Company’s legacy yeast beta glucan assets to the Company’s former CEO, Mr. McLaughlin, 2,000,000 of
Mr. McLaughlin’s shares were cancelled.
In March 2018, the Company issued
500,000 shares of common stock valued at $120,000 to a consultant for over a one-year term. In May 2018, the Company amended the
agreement with the consultant whereby the Company rescinded the 500,000 shares of common stock and reissued 250,000 shares of
common stock. The 250,000 shares of common stock issued on May 14, 2018, were valued at $62,500. The Company is recognizing the
expense at the time of issuance.
In May 2018, the Company issued
1,000,000 shares of common stock valued at $230,000 to JLS Ventures, LLC, a company controlled by our CEO, Justin Schreiber, for
services with a 24-month term. These 1,000,000 shares serve as the compensation for Mr. Schreiber for his services as CEO of the
Company. The Company is recognizing the expense over the term of the agreement. For the six months ending June 30, 2018, $95,833
has been expensed and included in compensation and related expenses on the consolidated statement of operations.
In May 2018, the Company issued
200,000 shares of common stock valued at $56,000 to a consultant for services over a 3-month term. The Company is recognizing
the expense at the time of issuance. For the six months ending June 30, 2018, $56,000 has been expensed and included in compensation
and related expenses on the consolidated statement of operations.
Conversion Labs, Inc.
Notes to Consolidated Financial Statements
June 30, 2018
(unaudited)
7.
|
Stockholders’ Equity (continued)
|
Noncontrolling Interest
On April 1, 2016, the Company
increased its ownership in Immudyne PR from to 78.16667% decreasing the minority interest from 66.7% to 21.83% resulting in a charge
to noncontrolling interest and additional paid-in-capital of $91,612.
In 2016, the net change in loans,
contributions and distributions by other members of Immudyne PR resulted an increase in noncontrolling interests of $63,377. In
2017, the net change in loans, contributions and distributions by other members of Immudyne PR resulted an increase in noncontrolling
interests of $119,894.
During 2017, the Company issued
a total of 1,319,211 shares of common stock and 659,606 warrants pursuant to a conversion of Immudyne PR equity contributions of
$303,418 into equity of the Company by the noncontrolling interest.
For the six months ended June
30, 2018 and 2017, the net loss of Immudyne PR attributed the Company amounted to $23,145 and $68,924, respectively.
For the three months ended June
30, 2018 and 2017, the net loss of Immudyne PR attributed the Company amounted to $35,842 and $41,194, respectively.
On May 29, 2018, Immudyne PR
acquired a 51% interest in LSS, which operates a marketing-driven software solutions business. For the month of June 2018, the
net loss of LSS was $48,613, of which $5,200 was attributed to the Company. During June 2018, contributions by other members of
LSS resulted an increase in noncontrolling interests of $154,000
Service-Based Stock Options
In January 2017, the Company
issued 100,000 service-based options valued at $24,109 to Brunilda McLaughlin as additional compensation in an employment agreement.
These options have an exercise price of $0.40 per shares, are fully vested, and expire in 10 years.
In February 2017, the Company
issued 500,000 service-based options valued at $113,522 to a director with an exercise price of $0.20 per share. The options are
fully vested and expire in 10 years.
In July 2017, the Company issued
75,000 service-based options valued at $20,985 to Brunilda McLaughlin as additional compensation in an employment agreement. These
options have an exercise price of $0.35 per shares, are fully vested, and expire in 10 years.
In July 2017, the Company issued
300,000 service-based options valued at $83,939 to three directors with an exercise price of $0.35 per share. The options are fully
vested and expire in 10 years.
In July 2017, the Company issued
125,000 service-based options valued at $49,219 to a consultant with an exercise price of $0.40 per share. The options are fully
vested and expire in 5 years.
Conversion Labs, Inc.
Notes to Consolidated Financial Statements
June 30, 2018
(unaudited)
7.
|
Stockholders’ Equity (continued)
|
Service-Based Stock Options
(continued)
In July 2017, the Company issued
Mark McLaughlin a ten year option to buy 750,000 shares at $0.35 vesting one-third or 250,000 shares upon signing, and 250,000
shares on July 1, 2018 and 250,000 shares on July 1, 2019. Once the options are fully vested, they expire in 10 years. The options
vested at December 31, 2017 are valued at $69,949. In February 2018, Mr. McLaughlin resigned as CEO, therefore no further options
will be vested.
On October 1, 2017, Michael Borenstein
was appointed to our Board of Directors. As a director, Mr. Borenstein received a ten-year, fully-vested option to purchase 100,000
shares of our common stock at a price of $0.35 per share. In addition, Mr. Borenstein received four ten-year options to each purchase
75,000 shares of our common stock at prices of $0.25, $0.25, $0.35, and $0.35 per share, which vest upon the Company earning $4,000,000,
$5,000,000, $6,000,000 and $7,000,000 in earnings before income taxes, respectively.
In October 2017, the Company
entered into a consulting agreement with Mr. Kalkstein and issued him a ten-year option to buy 500,000 shares at $0.40 vesting
30% upon signing, 35% shall vest on the two-year anniversary of this Agreement and 35% shall vest on the three year anniversary
of this Agreement. Once the options are fully vested, they expire in 10 years. The fair value of the options upon issuance was
$199,897 to be recognized as an expense over the three-year term of the agreement. For the six months ended June 30, 2018 and 2017,
$33,316 and $0, respectively, has been recognized as expense. For the three months ended June 30, 2018 and 2017, $16,658 and $0,
respectively, has been recognized as expense.
Accordingly, stock-based compensation
for the six months ended June 30, 2018 and 2017 included $33,316 and $113,522, respectively, related to such service-based stock
options.
Accordingly, stock-based compensation
for the three months ended June 30, 2018 and 2017 included $16,658 and $-0-, respectively, related to such service-based stock
options.
A Summary of the outstanding
service-based options are as follows:
|
|
|
Number of
Options
|
|
|
Balance at December 31, 2016
|
|
|
10,700,273
|
|
|
Exercised
|
|
|
(1,339,473
|
)
|
|
Issued
|
|
|
1,600,000
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
|
10,960,800
|
|
|
Issued
|
|
|
-
|
|
|
Expired
|
|
|
(500,000
|
)
|
|
Exercised
|
|
|
-
|
|
|
Balance at June 30, 2018
|
|
|
10,460,800
|
|
All outstanding options are exercisable
and have a cashless exercise provision, and certain options provide for accelerated vesting provisions and modifications, as defined,
if the Company is sold or acquired. The intrinsic value of options outstanding and exercisable at June 30, 2018 and December 31,
2017 amounted to $160,796 and $1,210,342, respectively.
Conversion Labs, Inc.
Notes to Consolidated Financial Statements
June 30, 2018
(unaudited)
7.
|
Stockholders’ Equity (continued)
|
Service-Based Stock Options
(continued)
The significant assumptions used to determine the
fair values of options issued, using a Black-Scholes option-pricing model are as follows:
|
Significant assumptions:
|
|
|
|
|
Risk-free interest rate at grant date
|
|
|
1.49% - 1.98
|
%
|
|
Expected stock price volatility
|
|
|
194% - 217
|
%
|
|
Expected dividend payout
|
|
|
—
|
|
|
Expected option life-years
|
|
|
3 years
|
|
|
Weighted average grant date fair value
|
|
$
|
0.23 - 0.41
|
|
|
Forfeiture rate
|
|
|
0
|
%
|
The following is a summary of
outstanding service-based options at June 30, 2018:
|
Exercise Price
|
|
Number of
Options
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
|
|
|
|
|
|
|
|
$0.10
|
|
|
40,800
|
|
|
|
<1 year
|
|
|
$0.20 - $0.25
|
|
|
8,120,000
|
|
|
|
4 years
|
|
|
$0.35
|
|
|
725,000
|
|
|
|
9 years
|
|
|
$0.40
|
|
|
1,575,000
|
|
|
|
5 years
|
|
|
Total
|
|
|
10,460,800
|
|
|
|
|
|
Performance-Based Stock
Options
Vested
In February 2017, the Company
granted performance-based options to purchase 250,000 shares of common stock at exercise prices of $0.40. The options expire in
2027 and are exercisable upon the Company achieving annual sales revenue of $5,000,000. The options are valued at $55,439. During
2017, the Company met the performance criteria.
Conversion Labs, Inc.
Notes to Consolidated Financial Statements
June 30, 2018
(unaudited)
7.
|
Stockholders’ Equity (continued)
|
Unvested
The Company granted performance-based
options to purchase 900,000 shares of common stock at exercise price of $0.80. The options expire at various dates between 2021
and 2027 and are exercisable upon the Company achieving annual sales revenue of $10,000,000. During 2017, these unvested options
were cancelled.
In July 2017, the Company granted
performance-based options to purchase 6,000,000 shares of common stock with an exercise prices of $0.35 per share. The options
expire in 10 years and are exercisable upon cash received by the Company from Immudyne PR between $4,000,000 and $7,000,000. The
aggregate fair value of these performance-based options is $1,688,212.
In the third quarter of 2017,
the Company granted performance-based options to purchase 3,150,000 shares of common stock with an exercise prices of $0.25 and
$0.35 per share. The options expire in 10 years and are exercisable upon the company achieving pre-tax earnings benchmarks between
$4,000,000 and $7,000,000. The aggregate fair value of these performance-based options is $910,146.
In the fourth quarter of 2017,
the Company granted performance-based options to purchase 600,000 shares of common stock with an exercise prices of $0.25 and $0.35
per share. The options expire in 10 years and are exercisable upon the company achieving pre-tax earnings benchmarks between $4,000,000
and $7,000,000. The aggregate fair value of these performance-based options is $242,709.
Warrants
The following is a summary of outstanding and exercisable
warrants:
|
|
|
Number of Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Year of
Expiration
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
|
1,954,981
|
|
|
|
0.19
|
|
|
2017 - 2019
|
|
Issued
|
|
|
2,634,228
|
|
|
|
0.40
|
|
|
2018 - 2020
|
|
Exercised
|
|
|
(1,500,000
|
)
|
|
|
0.12
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
|
3,089,119
|
|
|
|
0.40
|
|
|
2018 - 2020
|
|
Issued
|
|
|
2,491,305
|
|
|
|
0.29
|
|
|
2023 - 2028
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
Balance at June 30, 2018
|
|
|
5,580,424
|
|
|
|
0.35
|
|
|
2018 - 2028
|
In January 2017, the Company
issued 591,745 warrants with an exercise price of $0.40 per share, in relation to an issuance of common stock for the conversion
of an equity contribution into Immudyne PR by the noncontrolling interest. These warrants are fully vested and expire in two years.
In March 2017, the Company issued
402,348 warrants with an exercise price of $0.40 per share, in relation to an issuance of common stock for the conversion of debt.
These warrants are fully vested and expire in two years.
In the first quarter of 2017,
the Company issued 1,408,578 warrants with an exercise price of $0.40 per share, in relation to a sale of common stock. These warrants
are fully vested and expire in two years.
Conversion Labs, Inc.
Notes to Consolidated Financial Statements
June 30, 2018
(unaudited)
7.
|
Stockholders’ Equity (continued)
|
Warrants (continued)
In April 2017, the Company issued
55,000 warrants with an exercise price of $0.40 per share, in relation to a sale of common stock. These warrants are fully vested
and expire in two years.
In April 2017, the Company issued
108,696 warrants with an exercise price of $0.40 per share, in relation to an issuance of common stock for conversion of a payable.
These warrants are fully vested and expire in three years.
In November 2017, the Company
issued 67,861 warrants with an exercise price of $0.40 per share, in relation to an issuance of common stock for conversion of
an equity contribution into Immudyne PR by the noncontrolling interest. These warrants are fully vested and expire in three years.
In March 2018, the Company issued
100,000 warrants with an exercise price of $0.50 per share, in relation to royalty license agreement. These warrants are fully
vested and expire in ten years.
In May 2018, the Company issued
2,391,305 warrants with an exercise price of $0.28 per share, in relation to an issuance of convertible notes payable. These warrants
are fully vested and expire in five years.
Warrants outstanding and exercisable
amounted to 5,580,424 and 3,089,119 at June 30, 2018 and December 31, 2017, respectively. The weighted average exercise price of
warrants outstanding at June 30, 2018 and December 31, 2017 is $0.35 and $0.40, respectively. The warrants expire at various times
between September 2018 and March 2028.
The fair value of options and
warrants granted (or extended) during the six months ended June 30, 2018 and 2017, was estimated on the date of grant (or extension)
using the Black-Scholes option-pricing model with the following weighted-average assumptions:
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
191% - 196
|
%
|
|
|
181% - 211
|
%
|
|
Risk free interest rate
|
|
|
2.44%
- 2.58
|
%
|
|
|
1.03% - 2.22
|
%
|
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
|
Expected option term (in years)
|
|
|
3 - 5
|
|
|
|
1.4 - 8.5
|
|
|
Weighted average grant date fair value
|
|
|
$
0.21 – 0.22
|
|
|
|
$
0.37 - 0.50
|
|
Under ASC 815-40-05, Accounting
for Derivative Financial Instruments Indexed to and Potentially Settled in a Company’s Own Stock, in the event the Company
does not have a sufficient number of authorized and unissued shares of common stock to satisfy obligations for stock options, warrants
and other instruments potentially convertible into common stock, the fair value of these instruments should be reported as a liability.
Pursuant to the outstanding option, warrant and convertible debt agreements, there is currently no effective registration statement
covering the shares of common stock underlying these agreements, which are currently subject to a cashless exercise whereby the
holders, at their option, may surrender their options and warrants to the company in exchange for shares of common stock. The number
of shares of common stock into which an option or a warrant would be exchangeable in such a cashless exercise depends on both the
exercise price of the options or warrant and the market price of the common stock, each at or near the time of exercise. Because
the market price is variable, it is possible that we could have insufficient authorized shares to satisfy a cashless exercise.
In this scenario, if we were unable to obtain shareholder approval to increase the number of authorized shares, we could be obligated
to settle such a cashless exercise with cash rather than by issuing shares of common stock. Further, ASC 815-40-05 requires that
we record the potential settlement obligation at each reporting date using the current estimated fair value of these contracts,
with any changes in fair value being recorded through our statement of operations. We reported the potential settlement obligation
as a liability until such time as these contracts are exercised or expire or we are otherwise able to modify the agreements to
remove the provisions which require this treatment. On September 21, 2017, the Company filed an amendment to its certificate of
incorporation with the Delaware Secretary of State increasing the number of authorized shares of the Company’s common stock
from 50,000,000 to 100,000,000, which enabled the Company to reclassify the derivative liability.
Stock Based Compensation
The total stock-based compensation
expense related to Service-Based Stock Options, Performance-Based Stock Options and Warrants issued for service amounted to $340,395
and $274,355 for the six months ended June 30, 2018 and 2017, respectively. Performance-Based Stock Options and Warrants issued
for service amounted to $256,082 and $84,166 for the three months ended June 30, 2018 and 2017, respectively. Such amounts are
included in compensation and related expenses in the consolidated statement of operations.
Conversion Labs, Inc.
Notes to Consolidated Financial Statements
June 30, 2018
(unaudited)
The Company is subject to a royalty
agreement based upon sales of certain hair care products. For the six months ended June 30, 2018 and 2017, the Company recognized
$38,394 and $12,112, respectively, in royalty expense related to this agreement. As of June 30, 2018 and December 31, 2017, $17,642
and $14,039 was included in accounts payable and accrued expenses in regards to this agreement. In addition, the Company shall
pay a performance fee in relation to this agreement. In April 2017, the Company issued 217,390 shares of common stock and 108,696
warrants, pursuant to a subscription agreement, for the stated consideration and satisfaction of obligation to pay $50,000 of the
performance fee (see Note 8).
On March 26, 2018, the Company
entered into a license agreement (the “Agreement”) with M.ALPHABET, LLC (“Alphabet”), pursuant to which
Alphabet agreed to license its PURPUREX business which consists of methods and compositions developed by Licensor for the treatment
of purpura, bruising, post-procedural bruising and traumatic bruising (the “Product Line”). Pursuant to the license
granted under the Agreement, Immudyne PR obtains an exclusive license to incorporate (i) any intellectual property rights related
to the Product Line and (ii) all designs, drawings, formulas, chemical compositions and specifications used or useable in the Product
Line into one or more products manufactured, sold, and/or distributed by Alphabet for the treatment of purpura, bruising, post-procedural
bruising and traumatic bruising and for all other fields of use or purposes (the “Licensed Product(s)”), and to make,
have made, advertise, promote, market, sell, import, export, use, offer to sell and distribute the Licensed Product(s) throughout
the world with the exception of China, Hong Kong, Japan, and Australia (the “License”).
The Company shall pay Alphabet
a royalty equal to 13% of Gross Receipts (as defined in the Agreement) realized from the sales of Licensed Products. Further, so
long as the Agreement is not previously terminated, the Company, also agreed to pay Alphabet $50,000 on the 120-day anniversary
of the Agreement and an additional $50,000 on the 360-day anniversary of the Agreement.
Upon execution of the Agreement,
Alphabet will be granted a 10-year option to purchase 100,000 shares of the Company’s common stock at an exercise price of
$0.50. Further, if Licensed Products have gross receipts of $7,500,000 in any calendar year, the Company will grant Alphabet an
option to purchase 100,000 shares of the Company’s common stock at an exercise price of $0.50; (ii) if Licensed Products
have gross receipts of $10,000,000 in any calendar year, the Company will grant Alphabet an additional option to purchase 100,000
shares of the Company’s common stock at an exercise price of $0.50 and (iii) If Licensed Products have gross receipts of
$20,000,000 in any calendar year, the Company will grant Alphabet an option to purchase 200,000 shares of the Company’s common
stock at an exercise price of $0.75.
9.
|
Commitments and Contingencies
|
Leases
Immudyne PR utilizes office space
in Puerto Rico which is subleased from Mr. Schreiber (the Company’s President and CEO) and incurs expense of approximately
$4,000 a month for this office space. Rent expense for the six months ended June 30, 2018 and 2017, was $24,000 and $23,000, respectively.
The Company started paying $95 per month to WeWork for a mailing address and the ability to lease conference
space on-demand at their locations worldwide. The Company incurred $285 of expenses for the three month period ended June 30, 2018.
In February 2018, the Company
entered into a 3-year agreement to lease office space in Huntington Beach, CA beginning on March 2, 2018. The monthly rent is
$2,106 for the first twelve months, $2,149 for the second twelve months and $2,235 for the third twelve months. A security deposit
of $2,235 was paid for this lease. Rent expense for the six months ended June 30, 2018 and 2017, was $6,130 and $-0-, respectively.
Consulting Agreements
In August 2017, the Company entered
into a Professional Service Agreement with Acorn Management Partners L.L.C. (“Acorn”) for financial advisory, strategic
business planning and other investor relation services for one year effective August 8, 2017. During the term of the Agreement,
Acorn shall receive $7,500 cash monthly. As additional compensation, the Company shall issue within five (5) days of signing 100,000
shares of the Company’s common stock and upon each three (3) month period thereafter during the term of the Agreement an
additional 100,000 shares of the Company’s common stock for a total of 400,000 shares of the Company’s common stock.
Conversion Labs, Inc.
Notes to Consolidated Financial Statements
June 30, 2018
(unaudited)
9.
|
Commitments and Contingencies (continued)
|
Restricted Stock and Options
The Company has entered into
two agreements on April 1, 2016 with two consultants of Immudyne PR for business development, marketing and sales related services
(the “Consultant Agreements”). The consultants are treated as employees for accounting purposes. Upon signing, each
consultant was issued 1,000,000 restricted shares of the Company’s common stock. In addition, each consultant shall receive
an additional 150,000 restricted shares of the Company’s common stock for each $500,000 distributed by Immudyne PR to the
Company. For each consultant, the amount of shares to be issued by the Company to the consultants shall be capped at 1,500,000
restricted shares when Immudyne PR has transferred $5,000,000 to the Company, for a combined capped total of 3,000,000 restricted
shares. For the year ended December 31, 2016, 2,300,000 restricted shares of common stock have been issued related to these agreements.
The Company valued the shares at their grant date for a value of $0.30 per share for a total of $690,000 to be expensed over the
estimated service period.
In
addition, the Consulting Agreements provided that each consultant shall receive a bonus of an additional 750,000 restricted shares
of the Company’s common stock, plus an option to buy 1,000,000 shares of the Company’s. common stock at $0.20/share
(including a cashless exercise feature) when Immudyne PR has transferred to the Company at each of the following three (3) thresholds:
$1,250,000, $2,000,000 and $3,000,000 for a total of 2,250,000 of restricted shares of the Company’s common stock and options
to purchase up to 3,000,000 shares of the Company’s common stock at $0.20/share. As of June 30, 2018 no bonus shares had
been issued, and no options have been granted under this agreement.
Sole and Exclusive License,
Royalty, and Advisory Agreement
On September 1, 2016 Immudyne
PR entered into a sole and exclusive license, royalty and advisory agreement with Pilaris Laboratories, LLC (“Pilaris”)
relating to Pilaris’ PilarisMax shampoo formulation and conditioner. The term of the agreement will be the life of the US
Patent held by Pilaris. As consideration for granting Immudyne PR this license, Pilaris will receive on quarterly basis, 10% of
the net income collected by the licensed products based on the following formula: Net Income = total income – cost of goods
sold – advertising and operating expenses directly related to the marketing of the licensed products. In addition, Immudyne
PR shall pay Pilaris a performance fee of $50,000 on the 180-day anniversary of the agreement and an additional $50,000 performance
fee on the 365-day anniversary of the agreement. For the year ended December 31, 2017, the Company recognized expenses related
to the performance fee in the amount of $100,000. In April 2017, the Company issued 217,390 shares of common stock and 108,696
warrants, pursuant to a subscription agreement, for the stated consideration and satisfaction of obligation to pay $50,000 on the
180-day anniversary of the execution of this agreement. As of June 30, 2018 and December 31, 2017, $17,645 and $14,039, respectively,
was included in accounts payable and accrued expenses in regards to this agreement.
Legal Matters
In the normal course of business
operations, the Company may become involved in various legal matters. At June 30, 2018, the Company’s management does not
believe that there are any potential legal matters that could have an adverse effect on the Company’s financial position.
Conversion Labs, Inc.
Notes to Consolidated Financial Statements
June 30, 2018
(unaudited)
Many of our vendors require deposits
when a purchase order is placed for goods. Our vendors issue a credit memo when sending their final invoice, reducing the amount
the Company owes for the deposit amount on file with the vendors. As of June 30, 2018, the Company has $84,000 of products deposit
with multiple vendors for the purchase of raw materials for products we sell online.
11.
|
Related Party Transactions
|
Certain related party transactions
were incurred by the legacy business that was sold in February 2018, including reimbursement of home office expenditures to the
Company’s former President, employment of the Company’s former President’s wife, and legal and business advisory
services provided by one of its directors.
Immudyne PR utilizes BV Global
Fulfillment, owned by the father of Mr. Schreiber, the Company’s current Chief Executive Officer, and incurred $60,463 and
$42,556 for the six months ended June 30, 2018 and 2017, respectively, for these services. For the three months ended June 30,
2018, the Company has incurred $30,743 and $32,160, respectively, for these services.
Taggart International Trust (“Taggart”),
a shareholder; provides credit card processing services through one or more merchant banks. Taggart did not receive any compensation
for these services.
JLS Ventures LLC, owned by our
current CEO, provides credit card processing services through one or more merchant banks. JLS Ventures LLC did not receive any
compensation for these services.
JSDC, Inc., owned by CEO, provides
credit card processing services through one or more merchant banks. JSDC, Inc. did not receive any compensation for these services.
Immudyne PR utilizes office space
in Puerto Rico which is subleased from Mr. Schreiber (President and CEO) incurs expense of approximately $4,000 a month for this
office space.
In December 2017, Immudyne PR
received two working capital loans from Robert Kalkstein, the Company’s CFO, and from Mr. Schreiber for $50,000 and $75,000,
respectively. The loans accrue at 2% interest per month and mature in February 2018. Accrued interest relating to the loans were
$1,867 as of December 31, 2017. In February 2018, these loans were repaid in full.
During 2017, the Company issued
a total of 1,319,211 shares of common stock to Mr. Schreiber pursuant to a conversion of Immudyne PR equity contributions of $303,419
into equity of the Company.
On November 20, 2017, the Company
entered into an agreement (the “
Agreement
”) with JOJ Holdings, LLC (“
JOJ
”). Pursuant to the
terms of the Agreement, the Company purchased 2,000,000 shares (post-split from a 2:1 forward split on January 16, 2018) of Blockchain
Industries, Inc. (“BCII”) from JOJ. The Agreement was amended on December 8, 2017 and again on March 9, 2018. In consideration
for the purchase, the Company agreed to issue one (1) share of the Company’s common stock to JOJ for every dollar the Company
realizes from gross proceeds on the sale of shares of BCII purchased pursuant to the Agreement, up to a total maximum aggregate
amount of 5,000,000 shares. The Company has 3 years to sell the shares of BCII and has agreed not to sell more than 20% of the
30-day average daily trading volume of BCII. Justin Schreiber, the Company’s President and CEO, is the President and owner
of JOJ. The transaction was determined not to meet the criteria for recognition as an exchange transaction, therefore no asset
or liability has been recorded in the financial statements.
The Company has evaluated subsequent
events through the date these financial statements were issued.