The accompanying footnotes are an integral
part of these unaudited condensed consolidated financial statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2019
(Unaudited)
NOTE
1 – NATURE OF THE ORGANIZATION AND BUSINESS
Nature
of Business
Conversions
Labs, Inc. (“Conversion Labs,” “we,” “us,” “our,” the “Company”) is
an internet-based direct response marketing company that in-licenses, acquires and creates innovative and proprietary products
that are sold to consumers around the world via our technology infrastructure and relationships with agencies, third party marketers,
and online advertising platforms such as Facebook, Google and Amazon. We currently have three commercial stage products Shapiro MD, a patented shampoo, conditioner, and leave-in foamer for thicker, fuller hair, iNR Wellness MD, a nutritional supplement
for immune support and PDF Simpli, 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.
We
launched our online direct marketing business in the fourth quarter of 2015 with the establishment of a partnership with Inate
Skincare, LLC (“Inate”). Our initial intention was to launch a skin care line containing our proprietary ingredients
and to market such products directly to consumers. We entered into a limited liability company operating agreement with our joint
venture partners with respect to Inate under the legal name Immudyne PR LLC (“Immudyne PR”, now Conversion Labs PR LLC (“Conversion Labs PR”)). On April 1, 2016, the
original operating agreement of Immudyne PR was amended and restated and we increased our ownership and voting interest in Immudyne
PR to 78.2%.
During
2016, we utilized third party entities to provide and increase credit card processing capacity and optimize corresponding rates
and fees through one or more merchant bank accounts held by such entities. Some of the entities contracted to provide these services
had been determined to be variable interest entities (“VIEs”) and were consolidated in the Company’s financial
statements. The one (1%) percent fee received by these VIEs was eliminated in consolidation of the net revenues processed and
collected by such contractors from sales initiated by the Company. The remaining entities provided such services as independent
contractors, the majority of which were considered related parties and no fee was paid. Upon receipt of funds by such contractors
from their respective merchant banks, the Company required the prompt transfer of funds to Company controlled accounts. The Company
reimbursed and/or advanced funds to such contractors for any deficit or charge related to returns, chargeback and other fees charged
by such merchant bank. By the year ended December 31, 2018, we ceased processing credit card charges through all VIE merchant
accounts. At December 31, 2018, we recorded the merchant reserves from these VIE merchant accounts on our balance sheet as accounts
receivable.
As
used in these financial statements and unless otherwise indicated, the terms “Company,” “we,” “us,”
and “our” refer to Conversion Labs, Inc. (formerly known as Immudyne, Inc.) and our majority-owned subsidiaries LegalSimpli
Software, LLC, a Puerto Rico limited liability company (“LegalSimpli”), Conversion Labs PR, LLC (formerly Immudyne
PR LLC), a Puerto Rico limited liability company (“Conversion Labs PR”), and Conversion Labs Asia Limited, a Hong
Kong company (“Conversion Labs Asia”). Unless otherwise specified, all dollar amounts are expressed in United States
dollars.
Acquisition
of Membership Interest Purchase Agreement
On
May 29, 2018, Immudyne PR acquired 51% of the membership interests (the “Membership Interests”) of LegalSimpli Software,
LLC, a Puerto Rico limited liability company (“LegalSimpli”), which operates a marketing-driven software solutions
business. In consideration for Immudyne PR’s purchase of the Membership Interests, Immudyne PR paid $150,000 (the “Initial
Payment”) to the sellers upon execution of the purchase agreement. Additionally, Conversion Labs PR agreed to pay up to
an additional $200,000 for such Membership Interests and an additional $400,000 of contingent consideration should the Company
or Conversion Labs PR ever pay a dividend.
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 March 31, 2019, the Company had an accumulated
deficit approximating $12.9 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 March 31, 2019, and projected cash needs for 2019, management estimates that it will need to increase sales revenue
and/or raise additional capital to cover operating and capital requirements for the 2019 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 capital to fund operations, 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.
NOTE
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 subsidiaries, Conversion Labs PR and LegalSimpli
and variable interest entities (VIE’s) in which the Company has been determined to be the primary beneficiary. The non-controlling
interest in Conversion Labs 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, 2018 and 2017 filed in the Company’s
Annual Report on Form 10-K with the SEC on March 29, 2019.
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, 2018, we ceased processing credit card charges through all VIE merchant accounts. At March
31, 2019 and December 31, 2018, we recorded the merchant reserves from these VIE merchant accounts on our balance sheet as accounts
receivable.
Conversion Labs PR
is the primary beneficiary of Innerwell Skincare LLC, Spurs 5, LLC, and Salus LLC, which are qualified as VIEs. The assets, liabilities,
revenues and expenses of these VIEs are included in the financial statements of Conversion Labs PR and are further included in
the condensed consolidated financial statements. The assets and liabilities include balances due from and due to the subsidiaries
of Conversion Labs PR. These inter-company receivables and payables are eliminated upon consolidation of the VIE with Conversion
Labs PR and the Company. No assets were pledged or given as collateral against any borrowings.
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 Conversion Labs PR.
Use
of Estimates
The Company prepares
its condensed 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.
Inventory
At
March 31, 2019 and December 31, 2018, 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 March 31, 2019, and December 31, 2018, the Company recorded an inventory reserve in the amount of $12,500 and $12,500,
respectively. As of March 31, 2019 and December 31, 2018, the inventory balances were approximately $877,000 and $1,022,000, respectively.
Product
Deposits
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 March 31, 2019 and
December 31, 2018, the Company has $0 and $33,302, respectively of products deposit with multiple vendors for the purchase of
raw materials for products we sell online.
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.
For
the Company’s product-based contracts with customers, the Company generally records sales of finished products once the
customer places and pays for 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, which is usually upon shipment
of the product. The Company records an estimate for provisions of discounts, returns, allowances, customer rebates and other adjustments
for each shipment, and are netted with gross sales. The Company accounts for such provisions during the same period in which the
related revenues are earned. The Company has determined that the population of contracts with customers tends to be homogenous,
so that review of the contracts and estimate of various revenue related adjustments can be applied to the entire population.
The
Company began testing a trial offers with the Shapiro MD products in late 2018. The Company was unable to adequately
implement a process to report any trial-based sales and the related impact on inventory. Given the relatively new trial
period being offered, the Company has not been able to estimate the historical effect to determine how this will change the
recording of revenue.
For
the Company’s software subscription-based contracts with customers, the Company records the sales after completion of
the customers 14-day free trial and at the end of the service period for which the customer purchased a monthly subscription
or records revenue over time as the yearly subscription lapses. The Company offers either a monthly subscription or a yearly
subscription to the Company’s software. The Company offers a discount for purchase of the yearly subscription, which
must be paid at initiation of the contract term, so that the Contract price is fixed at the contract initiation. Yearly
subscriptions for the software are recorded net of discount.
Customer
discounts, returns and rebates for the three months ended March 31, 2019 and 2018 approximated $552,000 and $300,000, respectively.
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
March 31, 2019 and December 31, 2018, the accounts receivable reserve was approximately $0 and $0, respectively. At March 31,
2019 and December 31, 2018, the reserve for sales returns and allowances was approximately $81,000 and $43,000, respectively.
Income
Taxes
The
Company files Corporate Federal and State tax returns, while Conversion Labs PR and LegalSimpli, 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 federal and state taxing authorities.
At
March 31, 2019, the Company has approximately $4,237,000 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 Company has fully
reserved the deferred tax asset resulting from available net operating loss carryforwards.
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.
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 27,200 options and warrants for the three months ended March 31, 2019, respectively,
have not been included in the income per share calculations as the effects are anti-dilutive.
Common
stock equivalents comprising shares underlying 5,481,100 options and warrants for the three months ended March 31, 2018, have
not been included in the loss per share calculation as the effects are anti-dilutive.
Recent
Accounting Pronouncements
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 condensed 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 Conversion Labs PR and LegalSimpli 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 Conversion Labs PR, and LegalSimpli’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.
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 March 31, 2019, the Company’s accounts receivable had no significant concentration from any one customer. As of March
31, 2019, three credit card processors accounted for 51%, 35% and 14% of accounts receivable.
NOTE
3 – DISCONTNUED OPERATIONS AND ASSETS AND LIABILITIES HELD FOR SALE
On
January 29, 2018, the Company entered into a Legacy Asset Sale Agreement (the “Asset Sale Agreement”) with Mark McLaughlin
(the Company’s former President and Chief Executive Officer) 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 Sale
Agreement (the “Asset Sale Agreement Amendment”) 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 Asset Sale Agreement Amendment 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.
NOTE
4 – BUSINESS COMBINATION
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 Conversion Labs 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 (“LegalSimpli”),
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 as LegalSimpli’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 LegalSimpli’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.
As of December 31, 2018, while the Company does not anticipate LegalSimpli meeting the above milestones, the Company anticipates
that it is probable that the Company will pay $200,000 consideration to the Sellers for these milestones. Regardless of whether
LegalSimpli achieves either or both of the Milestones, Buyer will retain full ownership of the Membership Interests. In addition,
the Purchase Agreement calls for an additional $400,000 of consideration to be paid to the Sellers if/when Conversion Labs PR (formerly Immudyne
PR) or the Company ever pay a dividend to shareholders. The Company has determined that it is probable that at some future point
that the Company will pay this $400,000 to the Sellers.
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
|
|
|
Additional consideration to be paid
|
|
|
200,000
|
|
|
Contingent consideration
|
|
|
400,000
|
|
|
Fair value of total consideration
|
|
$
|
750,000
|
|
|
|
|
|
|
|
|
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
|
)
|
|
Deferred revenue
|
|
|
(29,818
|
)
|
|
Non-controlling interest
|
|
|
(144,118
|
)
|
|
Total identifiable net assets
|
|
|
(256,840
|
)
|
|
Customer relationship asset
|
|
|
1,006,840
|
|
|
|
|
$
|
750,000
|
|
NOTE
5 – INTANGIBLE ASSETS
As of March 31, 2019, the Company has the following amounts related to intangible assets:
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Amortizable intangible assets
|
|
|
|
|
|
|
|
|
|
Customer relationship asset
|
|
$
|
1,006,840
|
|
|
$
|
(279,678
|
)
|
|
Indefinite lived intangible assets
|
|
|
|
|
|
|
|
|
|
Purchased licenses
|
|
|
200,000
|
|
|
|
-
|
|
|
|
|
$
|
1,206,840
|
|
|
$
|
(279,678
|
)
|
For
the three months ended March 31, 2019, the Company recognized amortization expense of approximately $83,000.
There were no intangible assets or amortization for the three months ended March 31, 2018.
As of December 31, 2018, the Company has the following amounts related to intangible assets:
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Amortizable intangible assets
|
|
|
|
|
|
|
|
|
|
Customer relationship asset
|
|
$
|
1,006,840
|
|
|
$
|
(195,775
|
)
|
|
Indefinite lived intangible assets
|
|
|
|
|
|
|
|
|
|
Purchased licenses
|
|
|
200,000
|
|
|
|
-
|
|
|
|
|
$
|
1,206,840
|
|
|
$
|
(195,775
|
)
|
NOTE
6 – NOTES PAYABLE
|
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
Convertible notes of $550,000 issued in May of 2018. These notes have a maturity date of May 28, 2019 and 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. The borrowers have converted $344,642 of these notes including $9,922 of interest as of March 31, 2019 and December 31, 2018.
|
|
$
|
215,280
|
|
|
$
|
215,280
|
|
|
Warrants to purchase up to 2,391,305 shares of common stock with an exercise price of $0.28 per share. The fair value of the warrants was determined to be $533,691 and was recorded as a debt discount to be amortized over the life of the note. For the three months ended March 31, 2019 and year ended December 31, 2018, amortization of debt discount was $131,595 and $315,828, respectively.
|
|
|
(86,268
|
)
|
|
|
(217,864
|
)
|
|
Promissory note of $230,000 issued in October of 2018. This note has a maturity date of April 1, 2019 and bears no interest, but requires an additional $30,000 from the original $200,000 received. The Company has recorded $30,000 and $12,000 as accrued interest as of March 31, 2019 and December 31, 2018, respectively. This note was repaid on April 1, 2019.
|
|
|
200,000
|
|
|
|
200,000
|
|
|
Related party promissory note of $106,000 issued in December of 2018. This note has a maturity date of March 1, 2019 and bears no interest, but requires an additional $6,000 from the original $100,000 received. The Company has recorded $9,000 as accrued interest as of March 31, 2019.
|
|
|
100,000
|
|
|
|
50,000
|
|
|
|
|
$
|
429,012
|
|
|
$
|
247,416
|
|
NOTE
7 – STOCKHOLDERS’ EQUITY
Common
Stock
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 shares of common stock 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. 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. These 1,000,000 shares serve as the compensation for Mr. Schreiber for his services as
CEO of the Company.
In May 2018, the Company
issued 200,000 shares of common stock valued at $56,000 to a consultant for services over a three-month term. The Company is recognizing
the expense at the time of issuance.
During the year end
December 31, 2018, the Company had convertible note holders convert 1,498,442 shares at a conversion price of $0.23 per share,
resulting in a decrease to the aggregate amount of outstanding convertible debt of approximately $344,641 during the year.
On
January 1, 2019, in connection with the Company’s agreement with JLS Ventures, LLC, the Company issued 1,000,000 shares
of restricted stock to JLS Ventures, LLC.
On
February 27, 2019, the Company entered into a short-term note agreement for $100,000 that was repaid prior to the quarter end.
As part of the note agreement, the Company issued 100,000 shares of common stock to the note holder valued at $16,000.
Noncontrolling
Interest
For
the three months ended March 31, 2019 and 2018, the net (loss) income of Conversion Labs PR attributed the Company amounted to
approximately ($69,000) and $13,000, respectively.
On
May 29, 2018, Conversion Labs PR acquired a 51% interest in LegalSimpli, which operates a marketing-driven software solutions
business.
Stock
Options
On
February 9, 2019, Robert Kalkstein the former Chief Financial Officer of the Company, tendered his resignation to the Company’s
Board of Directors, effective March 31, 2019. In connection with Mr. Kalkstein’s resignation, the Company agreed to amend
certain options granted to Mr. Kalkstein by decrease the exercise price of 500,000 options to purchase the Company’s common
stock previously granted to Mr. Kalkstein from $0.40 per share to $0.28 per share; accelerate the vesting of 150,000 Options with
such options to vest on March 31, 2019; and cancel 200,000 unvested options, the vesting of which was not accelerated.
On
March 15, 2019 the Company granted Mr. Piñeiro options to purchase 500,000 shares of the Company’s common stock at
an exercise price of $0.23.
A
Summary of the outstanding service-based options are as follows:
|
|
|
Number of
|
|
|
|
|
Options
|
|
|
Balance at December 31, 2017
|
|
|
10,960,800
|
|
|
Issued
|
|
|
3,400,000
|
|
|
Expired
|
|
|
(550,000
|
)
|
|
Exercised
|
|
|
(40,800
|
)
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
|
13,820,000
|
|
|
Issued
|
|
|
500,000
|
|
|
Balance at March 31, 2019
|
|
|
14,320,000
|
|
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 March 31, 2019 and December 31, 2018 amounted to $0 and $1,210,342, respectively.
During
the three months ended, 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
|
|
|
2.38
|
%
|
|
Expected stock price volatility
|
|
|
184.78
|
%
|
|
Expected dividend payout
|
|
|
-
|
|
|
Expected option life-years
|
|
|
6.5 years
|
|
|
Weighted average grant date fair value
|
|
$
|
0.15
|
|
|
Forfeiture rate
|
|
|
0.01
|
%
|
The
following is a summary of outstanding service-based options at March 31, 2019:
|
Exercise Price
|
|
|
Number of
Options
|
|
|
Weighted Average
Remaining
Contractual Life
|
|
$
|
0.20 - $0.25
|
|
|
|
8,620,000
|
|
|
3.9 years
|
|
$
|
0.30 - $0.35
|
|
|
|
3,825,000
|
|
|
8.5 years
|
|
$
|
0.40
|
|
|
|
1,875,000
|
|
|
4.7 years
|
|
|
Total
|
|
|
|
14,320,000
|
|
|
|
Performance-Based
Stock Options
Vested
During 2017, the Company
granted performance-based options to purchase 250,000 shares of common stock at an exercise prices of $0.40 per share. These options
expire in 2027 and are exercisable upon the Company achieving annual sales revenue of $5,000,000. These options are valued at $55,439.
During the year ended December 31, 2017, the Company met the performance criteria.
Unvested
During the year
ended December 31, 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 to JLS Ventures, LLC, a related party. The options expire in 10 years and are exercisable
upon cash received by Conversion Labs, Inc. from Conversion Labs PR between $4,000,000 and $7,000,000. The aggregate fair
value of these performance-based options is $1,688,212.
During the third quarter
of 2017, the Company granted performance-based options to purchase 3,750,000 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 $1,152,849.
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, 2017
|
|
|
3,089,119
|
|
|
$
|
0.40
|
|
|
|
2018 - 2020
|
|
|
Issued
|
|
|
(354,891
|
)
|
|
$
|
0.44
|
|
|
|
2018
|
|
|
Exercised
|
|
|
2,491,305
|
|
|
$
|
0.29
|
|
|
|
2023 - 2028
|
|
|
Balance at December 31, 2018 and March 31, 2019
|
|
|
5,225,533
|
|
|
$
|
0.35
|
|
|
|
2019 - 2028
|
|
In
March 2018, the Company issued 100,000 warrants to purchase shares of common stock 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 to purchase shares of common stock 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 5,225,533 at March 31, 2019 and December 31, 2018, respectively. The weighted average
exercise price of warrants outstanding at March 31, 2019 and December 31, 2018 is $0.35. The warrants expire at various times
between September 2019 and March 2028.
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 $181,108 and $84,313 for the three months ended March 31, 2019 and 2018, respectively. Such amounts are
included in compensation and related expenses in the consolidated statement of operations.
NOTE
8 – COMMITMENTS AND CONTINGENCIES
Royalty
Agreements
On September 1,
2016, Conversion Labs 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 Conversion Labs PR this license,
Pilaris will receive on quarterly basis, 10% of the net income collected by the licensed products according to 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, Conversion Labs 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, 2018, 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 March 31, 2019, and December 31, 2018, the Company has accrued $29,592 and $0,
respectively which is included in accounts payable and accrued expenses in regard to this agreement.
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, Conversion Labs 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.
The
Company is subject to a royalty agreement based upon sales of certain hair care products. For the three months ended March 31,
2019 and 2018, the Company recognized $55,950 and $20,752, respectively, in royalty expense related to this agreement.
Restricted
Stock and Options
The Company entered
into two agreements on April 1, 2016, with two consultants of Conversion Labs 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 Conversion
Labs PR to the Company. For each consultant, the number of shares of common stock to be issued by the Company to the consultants
shall be capped at 1,500,000 restricted shares of common stock when Conversion Labs PR has transferred $5,000,000 to the Company,
for a combined capped total of 3,000,000 restricted shares of common stock. For the year ended December 31, 2016, 2,300,000 restricted
shares of common stock have been issued related to the Consultant. The Company valued the shares of common stock 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 Consultant
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 a price of $0.20 per share (including
a cashless exercise feature) when Conversion Labs 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 a price of $0.20 per share. As of March 31, 2019, no
bonus shares had been issued, and no options have been granted under the Consultant Agreement.
Legal
Matters
In
the normal course of business operations, the Company may become involved in various legal matters. At March 31, 2019, 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.
NOTE 9 – LEASES
On January 1, 2019,
we adopted ASU 2016-02 using the optional transition method resulting in a cumulative-effect adjustment to our Consolidated Balance
Sheets. Comparative financial statements of prior periods have not been adjusted to apply the new method retrospectively. The new
method of accounting was applied only to leases that have ongoing minimum lease commitments after January 1, 2019, excluding short-term
leases.
The Company has applied
the practical expedient for leases less than 12-months for the following lease, and as such has excluded it from the calculation
of right of use assets and lease liabilities. Conversion Labs 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 per month for this office space.
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 rent is payable
on a monthly basis in the amount of $2,106 for the first twelve months, $2,149 for the second twelve months and $2,235 for the
third twelve months. The Company has recognized a right of use asset and lease liability of $30,287 as of January 1, 2019, for
adopting ASC 842, and has classified this lease as an operating lease. The lease did not contain any interest for use in the present
value calculation, as a result, the Company used the third-party interest rate from similar borrowings of 7%. The Company has paid
a security deposit of $2,235 was paid for this lease. The lease payment for this lease were $6,382 and the implied interest for
such lease was $4,241.
Rent expense, including
short-term lease, for the three months ended March 31, 2019 and 2018, was $30,477 and $16,023, respectively.
NOTE 10 – RELATED PARTY TRANSACTIONS
Other
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 and CEO, employment of the Company’s former President and CEO’s
wife, and legal and business advisory services provided by one of the Company’s directors.
Chief
Executive Officer
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. In July 2017, the Company and JLS Ventures, an entity owned by the Company’s
current Chief Executive Officer, entered into a 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. In May 2018, the Company issued 1,000,000 shares of common stock valued at $230,000 to JLS Ventures, LLC, for services.
The Company also committed to issue an additional 1,000,000 shares of common stock on January 1, 2019 valued in the aggregate
amount of $230,000 if JLS Ventures met the service requirement specified in the agreement. These 2,000,000 shares serve as the
compensation for Mr. Schreiber for his services as CEO of the Company. The Company is recognizing the expense for the issuances
over the twenty-four-month term of the agreement.
On November
20, 2017, the Company entered into an agreement (the “
Agreement
”) with JOJ Holdings, LLC (“
JOJ
”).
Pursuant to the terms of the Agreement, Conversion Labs, Inc. (“Conversion Labs”) 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, Conversion Labs agreed to issue one
(1) share of Conversion Labs common stock to JOJ for every dollar Conversion Labs 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.
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.
Conversion
Labs PR utilizes office space in Puerto Rico which is subleased from Mr. Schreiber (President and CEO) incurs expense of approximately
$4,000 a month on month-to-month terms for this office space.
Conversion
Labs PR utilizes BV Global Fulfillment, owned by the father of Mr. Schreiber, the Company’s current Chief Executive Officer,
and incurred $97,477 and $29,720 for the three months ended March 31, 2019 and 2018, respectively, for these services.
NOTE
11 – SUBSEQUENT EVENTS
The
Company has evaluated subsequent events through the date these financial statements were issued.