The accompanying footnotes
are an integral part of these unaudited condensed consolidated financial statements.
The accompanying footnotes
are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
The accompanying footnotes
are an integral part of these unaudited condensed consolidated financial statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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 online
marketing and telemedicine company with a portfolio of health and wellness brands sold directly to consumers. Our brands consist
of both clinically studied over-the-counter products and prescription drugs. Our products are sold primarily through national
advertising campaigns on Facebook, Google, Amazon and other online advertising platforms. After the establishment of a joint venture
with GoGoMeds.com in June 2019, we now sell branded and generic prescription drugs directly to consumers in all 50 states and
the District of Columbia.
We currently have four commercial stage brands including (i) Shapiro MD, a personalized hair-loss treatment
system consisting of 4 patented over-the-counter products and 2 FDA approved drugs for hair re-growth, (ii) iNR Wellness MD, a
nutritional supplement for immune and gut support, (iii) RexMD, a male-oriented direct-to-consumer pharmacy line initially focused
on generic Viagra and Cialis, and (iv) PDF Simpli, a PDF conversion software, which is marketed through our subsidiary, LegalSimpli
Software, LLC, a marketing-driven software solutions business.
We launched our online
direct-to-consumer 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 (now known as “Conversion Labs PR LLC”). On April
1, 2016, the original operating agreement of Conversion Labs PR LLC was amended and restated, and we increased our ownership and
voting interest in Conversion Labs PR LLC to 78.2%. On April 25, 2019, the operating agreement of Conversion Labs PR LLC was amended
and restated in its entirety to increase the Company’s ownership and voting interest in Conversion Labs PR LLC to 100%.
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”),
Conversion Labs Media LLC (“CVLB Media”), a Puerto Rico limited liability company, Conversion Labs Rx, LLC (“CVLB
Rx”), a Puerto Rico limited liability company, 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 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.
Recent
Developments
On
April 25, 2019, the Company entered into an membership purchase agreement with entities owned by the Company’s Chief Executive
officer and Chief Technology Officer, Conversion Labs PR, and purchased the remaining 21.8% interest of Conversion Labs PR from
the Company’s Chief Executive officer and Chief Technology Officer. As such, the Company now wholly-owns 100% of Conversion
labs PR. In order to consummate this transaction, the Company agreed to issue 5 million shares of common stock based on the issuance
price of $0.18 per share, equal to $900,000 to the Company’s Chief Executive Officer and Chief Technology Officer. The shares
were not issued until August 6, 2019, therefore, the Company has recorded a liability on the Company’s balance sheet
as of September 30, 2019.
On
May 31, 2019, through our wholly-owned subsidiary, Conversion Labs PR, the Company entered into the operating agreement by and
among Conversion Labs Rx, LLC, a Puerto Rico limited liability company (“CVLB Rx”), by and among the Company, Conversion
Labs PR, LLC, Harborside Advisors, LLC, Happy Walters, an individual (“Walters”), and David Hanig, an individual (“Hanig”,
and together with CLPR, Harborside and Walters, each a “Member” and together the “Members”). Pursuant
to the operating agreement, the Company, through Conversion Labs PR, owns 51% of the membership interests of CVLB Rx. The operating
agreement governs the operations of CVLB Rx and provides for CVLB Rx’s management by a Board of Managers of at least three
members. Among the provisions of the operating agreement are limitations and restrictions on the disposition of membership interests
by a member as further defined therein.
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 its ability to raise additional capital from the sale of common
stock or through debt securities. 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. As of September 30, 2019, the Company had an accumulated deficit approximating $15,799,470. Management has significant
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 September 30, 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. 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 51% owned subsidiaries,
CVLB Rx and LegalSimpli and variable interest entities (VIE’s) in which the Company has been determined to be the primary
beneficiary. Prior to April 25, 2019, the non-controlling interest in Conversion Labs PR represented 21.833% equity interest held
by other members of the joint venture, but as of September 30, 2019 the Company owns 100% of the equity interests of the Conversion
Labs PR. 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 in the Company’s Annual
Report on Form 10-K for December 31, 2018 as filed with the SEC on April 1, 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. As of September
30, 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 deemed by management to be
VIEs. The assets and liabilities and revenues and expenses of these VIEs are included in the financial statements of Conversion
Labs PR and further included in the 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 have been eliminated upon consolidation
of the VIE with Conversion Labs PR and the Company. No assets were pledged or given as collateral against any borrowings.
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.
Inventory
As of September 30, 2019 and December 31, 2018, inventory consisted primarily of finished cosmetic products.
Inventory is maintained in a third-party fulfillment center 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 value, if lower. As of September 30, 2019 and December 31, 2018, the Company recorded an inventory reserve in the
amount of $12,500, respectively on the Company’s accompanying balance sheet. As of September 30, 2019 and December 31, 2018,
the inventory balances, net included on the Company’s accompanying balance sheet were approximately $747,525 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 September 30, 2019
and December 31, 2018, the Company has approximately $51,813 and $33,000, respectively included on the Company’s accompanying
balance sheet for product deposits with multiple vendors for the purchase of raw materials for products the Company sells 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 is typically homogenous,
such that review of the contracts and estimate of various revenue related adjustments can be applied to the entire population.
The
Company began testing trial offers with the Shapiro MD products in late 2018. The Company was unable to adequately implement a
process to report any trial-based revenue and the related impact on inventory. Given the relatively new trial period being offered,
the Company has not yet 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 included on the Company’s accompanying statement of operations for the three and nine months
ended September 30, 2019 approximated $219,000 and $1,004,000, respectively. Customer discounts, returns and rebates included
on the Company’s accompanying statement of operations for the three and nine months ended September 30, 2018 approximated
$134,000 and $354,000, 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
September 30, 2019 and December 31, 2018, the accounts receivable reserve included on the Company’s accompany balance sheet
was $0 for both periods. As of September 30, 2019 and December 31, 2018, the reserve for sales returns and allowances included
on the Company’s accompany balance sheet was approximately $83,000 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
September 30, 2019, the Company has approximately $5,370,000 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 $0 and $13,600 options and warrants for the three and nine months ended September
30, 2019, respectively, have not been included in the loss per share calculations as the effects are anti-dilutive.
Common
stock equivalents comprising shares underlying 28,229,377 and 28,229,377 options and warrants for the three and nine months ended
September 30, 2018, respectively, have not been included in the income per share calculations 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 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 CVLB Rx 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. These variable interest entities had no significant
activity during the preceding six months ending September 30, 2019 or the year ended December 31, 2018.
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 tens of 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 September 30, 2019,
the Company’s accounts receivable had no significant concentration from any one customer. As of September 30, 2019, three
credit card processors accounted for 66%, 18% and 12% of accounts receivable.
NOTE
3 – DISCONTINUED 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
its 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. As part
of the Asset Sale Agreement, the Company and Mark Mclaughlin agreed that the options that were fully vested are no
longer issuable and agreed that any contingently issuable performance options issued to Mark McLaughlin and his related
family members were cancelled. These cancelled options consisted of approximately 600,000 services based options and 2,000,000
contingently issuable performance options.
NOTE
4 – BUSINESS COMBINATION
Acquisition
of Membership Interest Purchase Agreement
On
May 29, 2018 (the “Closing Date”), Immudyne, PR (currently Conversion Labs 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 an aggregate 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 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 the total $200,000 consideration to the Sellers for these milestones.
Regardless of whether LegalSimpli achieves either or both of the Milestones, the 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 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 additional $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 September 30, 2019 the Company has the following amounts related to intangible assets:
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
Amortizable of intangible assets
|
|
|
|
|
|
|
Customer relationship asset
|
|
$
|
1,006,840
|
|
|
$
|
(447,484
|
)
|
Indefinite lived intangible assets
|
|
|
|
|
|
|
|
|
Purchased licenses
|
|
|
200,000
|
|
|
|
—
|
|
|
|
$
|
1,206,840
|
|
|
$
|
(447,484
|
)
|
For
the three months ended September 30, 2019, the Company recognized amortization expense of approximately $162,009.
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
The
following table outlines the Company’s notes payable as of September 30, 2019 and December 31, 2018:
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Convertible notes in the principal aggregate amount of $450,000 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 September 30, 2019 and December 31, 2018.
|
|
$
|
170,280
|
|
|
$
|
215,280
|
|
|
|
|
|
|
|
|
|
|
Promissory note in the principal aggregate amount of $230,000 issued in October of 2018. This note has
a maturity date of April 1, 2019 and bears no interest. The Company has recorded $0 and $12,000 as accrued interest as of June
30, 2018 and December 31, 2018, respectively. This note was repaid on April 1, 2019.
|
|
|
—
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
The Company issued convertible notes in the principal aggregate amount of $1,291,000 in August of 2019
to three accredited investors. These notes have a maturity date of August 15, 2020 and accrue interest at 12% per annum. The conversion
price for these notes is $0.23 per share of common stock, subject to quarterly adjustment pursuant to the terms therein.
|
|
|
1,291,500
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
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, 2018.
|
|
|
—
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
—
|
|
|
|
(217,864
|
)
|
|
|
|
|
|
|
|
|
|
The Company issued convertible notes in the principal aggregate amount of $1,291,000 in August of 2019
to three investors at a 20% discount to the convertible note amount which resulted in a discount of $215,250. In conjunction with
the convertible notes, the Company issued warrants to purchase up to 4,612,500 shares of common stock with an exercise price of
$0.28 per share. The fair value of the warrants was determined to be $569,147. The Company paid debt issuance costs paid $61,583
in connection with the new note financing on August 15, 2019. For the three months ended September 30, 2019, the Company recognized
amortization of $106,584.
|
|
|
(739,133
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total Net Debt
|
|
$
|
722,647
|
|
|
$
|
247,416
|
|
NOTE
7 – STOCKHOLDERS’ EQUITY
Common
Stock
In
February 2018, in connection with the sale of the Company’s legacy yeast beta glucan assets, 2,000,000 shares of common
stock belonging to the Company’s Former CEO, Mr. McLaughlin, 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 as the Company’s Chief Executive Officer.
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.
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, an entity owned by our Chief Executive Officer. The stock was issued for services and was the only compensation
that Mr. Shreiber received during the nine months ended September 30, 2019.
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.
During the year ended December 31, 2018, certain convertible note holders were issued 1,498,442 shares
at a conversion price of $0.23 per share in connection with the conversion of $344,641 of principal and interest of their notes,
resulting in a decrease to the aggregate amount of outstanding convertible debt of approximately $344,641 during the year.
During the nine months
ended September 30, 2019, the Company issued 1,521,344 shares of common stock to various third-party investors, the Company received
$350,001 in cash for these shares. In conjunction with one of the stock purchases, the Company issued warrants valued at $20,825
which based on the terms of the warrants, the Company has bifurcated and treated as equity. In addition to the above stock issued,
the Company has issued 100,000 shares of common stock to a consultant for services rendered; which were valued at $16,000.
Noncontrolling
Interest
For the three and nine
months ended September 30, 2019, the net (loss) income from non-controlling interests attributed the Company amounted to approximately
($161,000) and $(376,000), respectively. For the three and nine months ended September 30, 2018, the net (loss) income from non-controlling
interests attributed the Company amounted to approximately ($36,000) and ($66,000), respectively.
On
May 29, 2018, Conversion Labs PR acquired a 51% interest in LegalSimpli, which operates a marketing-driven software solutions
business.
On
April 25, 2019, the Company entered into an membership purchase agreement with entities owned by the Company’s Chief Executive
officer and Chief Technology Officer, Conversion Labs PR, whereby the Company acquired the remaining 21.8% interest of Conversion
Labs PR from the Company’s Chief Executive officer and Chief Technology Officer. As such, the Company now wholly-owns 100%
of Conversion labs PR. In order to consummate this transaction, the Company agreed to issue 5 million shares of common stock based
on the issuance price of $0.18 per share, or for a total of $900,000 to the Company’s Chief Executive officer and Chief
Technology Officer. The shares were not issued until August 6, 2019, and, as such, the Company has recorded a liability on the
Company’s balance sheet as of September 30, 2019.
On May 31, 2019, the Company entered into the operating agreement of CVLB Rx, by and among the Company,
Conversion Labs PR, Harborside Advisors, LLC, Happy Walters, an individual (“Walters”), and David Hanig, an individual
(“Hanig”, and together with Conversion Labs PR, Harborside and Walters, each a “Member” and together the
“Members”). Pursuant to the Operating Agreement, the Company, through Conversion Labs PR, owns 51% of the membership
interests of CVLB Rx. The Operating Agreement governs the operations of CVLB Rx and provides for CVLB Rx’s management by
a Board of Managers of at least three members. Among the provisions of the Operating Agreement are limitations and restrictions
on the disposition of membership interests by a Member, including right of first refusal of the Members and an option for both
the Company and the Members to purchase membership interests that are being offered by a Member.
Stock
Options
The
following is a summary of outstanding service-based options at September 30, 2019:
|
|
Options Outstanding Number of Shares
|
|
|
Exercise Price per Share
|
|
|
Weighted Average Remaining Contractual Life
|
|
Weighted Average Exercise Price per Share
|
|
Balance at December 31, 2018
|
|
|
13,820,000
|
|
|
$
|
0.20 - 0.40
|
|
|
4.59 years
|
|
$
|
0.26
|
|
Granted
|
|
|
500,000
|
|
|
$
|
0.23
|
|
|
9.45 years
|
|
|
0.23
|
|
Cancelled
|
|
|
(25,000
|
)
|
|
$
|
0.40
|
|
|
8.01 years
|
|
|
0.40
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance at September 30, 2019
|
|
|
14,295,000
|
|
|
$
|
0.20 - 0.40
|
|
|
4.75 years
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable December 31, 2018
|
|
|
10,805,416
|
|
|
$
|
0.20 - 0.40
|
|
|
3.63 years
|
|
$
|
0.24
|
|
Exercisable September 30, 2019
|
|
|
11,467,916
|
|
|
$
|
0.20 - 0.40
|
|
|
3.89 years
|
|
$
|
0.25
|
|
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 September 30, 2019 and December 31, 2018 amounted to $0 and $0, respectively.
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 decreasing the exercise price of 500,000 options for 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. The Company
determined that the additional compensation expense for this transaction was approximately $3,000, which was recognized in March
of 2019.
On
March 15, 2019 the Company granted Mr. Piñeiro, the Chief Financial Officer of the Company, options to purchase 500,000
shares of the Company’s common stock at an exercise price of $0.23. The Company valued the estimated compensation expense
for these options as approximately $73,000, using a Black-Scholes option-pricing model 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
|
%
|
Performance-Based
Stock Options
The
following is a summary of outstanding performance-based options at September 30, 2019:
|
|
Options Outstanding Number of Shares
|
|
|
Exercise Price per Share
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
Weighted Average Exercise Price per Share
|
|
Balance at December 31, 2018
|
|
|
15,425,000
|
|
|
$
|
0.25 - 0.40
|
|
|
|
5.46 years
|
|
|
$
|
0.27
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Cancelled
|
|
|
(8,600,000
|
)
|
|
|
0.25 - 0.40
|
|
|
|
7.32 years
|
|
|
|
0.31
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance at September 30, 2019
|
|
|
6,825,000
|
|
|
$
|
0.25 - 0.40
|
|
|
|
3.11 years
|
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable December 31, 2018
|
|
|
3,175,000
|
|
|
$
|
0.25
- 0.40
|
|
|
|
2.63 years
|
|
|
$
|
0.40
|
|
Exercisable September 30, 2019
|
|
|
3,175,000
|
|
|
$
|
0.25
- 0.40
|
|
|
|
2.63 years
|
|
|
$
|
0.40
|
|
Vested
During
2017, the Company granted performance-based options to purchase 250,000 shares of common stock at an exercise price of $0.40
per share. These options expire in 2027 and are vested upon the Company achieving annual sales revenue of $5,000,000. These
options are valued at $55,439. During 2017, the Company met the performance criteria.
Unvested
During
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 become 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. On April 25, 2019, concurrent with the Company’s purchase of the remaining 21.8% interest of Conversion Labs
PR, these options were cancelled.
In
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 become 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. As of February 2018, 2,000,000 of these options had been cancelled.
Warrants
The
following is a summary of outstanding and exercisable warrants:
|
|
Warrants Outstanding Number of Shares
|
|
|
Exercise Price per Share
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
Weighted Average Exercise Price per Share
|
|
Balance at December 31, 2018
|
|
|
5,225,533
|
|
|
$
|
0.20 - 0.50
|
|
|
|
2.99 years
|
|
|
$
|
0.35
|
|
Granted
|
|
|
6,133,844
|
|
|
$
|
0.28
|
|
|
|
9.84 years
|
|
|
|
0.28
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance at September 30, 2019
|
|
|
11,359,377
|
|
|
$
|
0.20
- 0.50
|
|
|
|
6.69 years
|
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable December 31, 2018
|
|
|
5,225,533
|
|
|
$
|
0.20
- 0.50
|
|
|
|
2.99 years
|
|
|
$
|
0.31
|
|
Exercisable September 30, 2019
|
|
|
10,363,000
|
|
|
$
|
0.20
- 0.50
|
|
|
|
6.41 years
|
|
|
$
|
0.35
|
|
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 connection with a 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 connection an issuance of convertible notes payable. These warrants are fully vested and expire in five years.
In
May 2019, the Company issued 1,086,957 warrants to purchase shares of common stock with an exercise price of $0.28 to Bertrand
Velge, a board member. The warrants will vest monthly over a four year period and expire in five years.
On
August 15, 2019, the Company entered into securities purchase agreements with three accredited investors (each an “Investor,”
collectively, the “Investors”). Pursuant to the terms of the Purchase Agreements, the Company issued and sold to the
Investors convertible promissory notes for the aggregate original principal amount of $1,291,500 (the “Notes”), and
warrants to purchase up to 4,679,348 shares of the Company’s common stock (the “Warrants,”). The Warrants are immediately exercisable and have a term of ten years. The Warrants are
exercisable at a price per share of $0.28, subject to adjustment as described herein and contain a cashless exercise mechanism.
Stock
Based Compensation
The
total stock-based compensation expense related to Service-Based Stock Options, Performance-Based Stock Options and Warrants issued
for service approximated $167,000 and $540,000 for the three and nine months ended September 30, 2019, respectively. The total
stock-based compensation expense related to Service-Based Stock Options, Performance-Based Stock Options and Warrants issued for
service approximated $172,000 and $512,000 for the three and nine months ended September 30, 2018, respectively. Such amounts
are included in compensation and related expenses in the consolidated statement of operations.
NOTE
8 – COMMITMENTS AND CONTINGENCIES
Royalty
Agreements
Pilaris
Laboratories, LLC
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 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, 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 September 30,
2019 and December 31, 2018, the Company has accrued $10,000 and $0, respectively, which is included in accounts payable and accrued
expenses in regard to this agreement.
M.ALPHABET,
LLC
On
March 26, 2018, the Company entered into a license agreement (the “Alphabet Agreement”) with M.ALPHABET, LLC (“Alphabet”),
pursuant to which Alphabet agreed to license its PURPUREX business which consists of methods and compositions for the treatment
of purpura, bruising, post-procedural bruising and traumatic bruising (the “Product Line”). Pursuant to the license
granted under the Alphabet Agreement, Conversion Labs PR obtained 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 Alphabet Agreement) realized from the sales
of Licensed Products. Further, so long as the Alphabet Agreement is not previously terminated, the Company, also agreed to pay
Alphabet $50,000 on the 120-day anniversary of the Alphabet Agreement and an additional $50,000 on the 360-day anniversary of
the Agreement.
Upon
execution of the Alphabet Agreement, Alphabet was 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 an additional 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 an additional 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 an additional 200,000 shares of the Company’s common stock at an exercise price of $0.75.
Milestone-based
Royalty Agreement
The
Company is subject to a royalty agreement based upon sales of certain hair care products, namely the owners of the Shapiro
MD product line. For the three and nine months ended September 30, 2019, the Company recognized approximately $26,000 and
$76,000, respectively, in royalty expense related to this agreement. For the three and nine months ended September 30, 2018,
the Company recognized approximately $28,500 and $67,000, respectively, in royalty expense related to this agreement. These
amounts are included in the Company’s accompanying statement of operations as general and administrative
expenses.
Restricted
Stock and Options
The
Company has 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”). Upon signing, each consultant was issued 1,000,000
restricted shares of the Company’s common stock. In addition, each consultant received an additional 150,000 restricted
shares of the Company’s common stock. 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 September 30, 2019, no bonus shares had been issued, and no options have been granted pursuant to the Consultant Agreements. On
April 25, 2019, concurrent with the Company’s purchase of the remaining 21.8% interest of Conversion Labs PR, these options
were cancelled.
Legal
Matters
In
the normal course of business operations, the Company may become involved in various legal matters. At September 30, 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
$5,000 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 payments 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 and nine months ended September 30, 2019, was approximately $8,000 and $95,000,
respectively. Rent expense, including short-term lease, for the three and nine months ended September 30, 2018, was approximately
$4,000 and $49,000, respectively. These amounts are included in the Company’s accompanying statement of operations as general
and administrative expenses.
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 and in lieu of any cash compensation, the Company issued 900,000 shares of common
stock valued at $432,000. The Company recognized the expense over the term of the agreement. In May 2018, the Company entered
into a two year agreement with Mr. Schreiber to compensate him for his service as CEO for the 2018 and 2019 calendar year. In
lieu of any cash compensation for serving as CEO of the Company in 2018 and 2019, the Company agreed to issue 1,000,000
shares of common stock per year and is recognizing the expense over the term of the agreement.
JSDC,
Inc., owned by our Chief Executive Officer, provides credit card processing services through one or more merchant banks. JSDC,
Inc. did not receive any compensation for these services.
On
November 20, 2017, the Company entered into an agreement (the “JOJ 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 JOJ 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 JOJ 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.
Conversion Labs PR utilizes office space in Puerto Rico which is subleased from Mr. Schreiber (President
and CEO) incurs expense of approximately $5,000 a month on month-to-month terms for this office space.
Conversion Labs PR utilizes
BV Global Fulfillment, owned by a related party of the Company’s current Chief Executive Officer for fulfillment services.
The Company pays a monthly fee of $13,000 to $16,000 per month and reimburses BV Global Fulfillment for their costs associated
with shipping the Company’s products. The Company incurred approximately $279,000 and $225,000 for the three months ended
September 30, 2019 and 2018, respectively, for these services. The Company incurred approximately $771,000 and $485,000 for the
nine months ended September 30, 2019 and 2018, respectively, for these services.
NOTE
11 – SUBSEQUENT EVENTS
The
Company has evaluated and determined that there are no subsequent events through the date these financial statements were issued.