NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – NATURE OF THE ORGANIZATION AND BUSINESS
Corporate
History
LifeMD,
Inc. was formed in the State of Delaware on May 24, 1994, under its prior name, Immudyne, Inc. The Company changed its name to Conversion
Labs, Inc. on June 22, 2018 and then subsequently, on February 22, 2021, changed its name to LifeMD, Inc. Effective February 22, 2021,
the trading symbol for the Company’s common stock, par value $0.01 per share on The Nasdaq Stock Market LLC changed from “CVLB”
to “LFMD”.
On
April 1, 2016, the original operating agreement of Immudyne PR LLC (“Immudyne PR”), a joint venture to market the Company’s
skincare products, was amended and restated and the Company increased its ownership and voting interest in Immudyne PR to 78.2%. Concurrent
with the name change of the parent company to Conversion Labs, Inc., Immudyne PR was renamed to Conversion Labs PR LLC. On April 25,
2019, the operating agreement of Conversion Labs PR was amended and restated in its entirety to increase the Company’s ownership
and voting interest in Conversion Labs PR to 100%. On February 22, 2021, concurrent with the name of the parent company to LifeMD, Inc.,
Conversion Labs PR LLC was renamed to LifeMD PR, LLC.
In
June 2018, the Company closed the strategic acquisition of 51%
of LegalSimpli Software, LLC (“LegalSimpli”), which operates a software as a service (SaaS) application for converting, editing,
signing and sharing PDF documents called PDFSimpli. In addition to LegalSimpli Software’s growth business model, this acquisition
added deep search engine optimization and search engine marketing expertise to the Company. Effective January 22, 2021, the Company consummated
a transaction to restructure the ownership of LegalSimpli (the “LSS Restructuring”) (See Note 7) and concurrently
increased its ownership stake in LegalSimpli to 85.6%.
Nature
of Business
The
Company is a direct-to-patient telehealth technology company that provides a smarter, cost-effective and convenient way for
a provider’s patients to access healthcare. The Company believes that the traditional model of visiting a doctor’s office,
receiving a physical prescription, visiting a local pharmacy, and returning to see a doctor for follow up care or prescription refills
is inefficient, costly to patients, and discourages many patients from seeking much needed medical care. The U.S. healthcare system is
undergoing a paradigm shift, thanks to new technologies and the emergence of direct-to-patient healthcare. Direct-to-patient telehealth
technology companies, like the Company, connect consumers to licensed healthcare professionals for care across numerous indications,
including concierge care, men’s sexual health and dermatology, among others.
The
Company’s telehealth platform helps patients access their licensed providers for diagnoses, virtual care, and prescription
medications, often delivered on a recurring basis. In addition to its telehealth technology offerings, it sells nutritional supplements
and other over-the-counter products. Many of its products are available on a subscription or membership basis, where a patient can subscribe
to receive regular shipments of prescribed medications or products. This creates convenience and often discounted pricing opportunities
for patients and recurring revenue streams for the Company.
The
Company believes that brand innovation, customer acquisition and service excellence form the heart of its business. As is exemplified
with its first brand, Shapiro MD, it has built a full line of proprietary over-the-counter (“OTC”) products for male and
female hair loss, FDA approved OTC minoxidil, an FDA-cleared medical device, and now a personalized telehealth platform offering
that gives consumers access to virtual medical treatment from their providers and, when appropriate, a full line of oral and topical
prescription medications for hair loss. The Company’s men’s brand, Rex MD, currently offers access to provider-based
treatment for erectile dysfunction, as well as treatment for other common men’s health issues including premature ejaculation and
hair loss. In the first quarter of 2021, the Company launched its newest brand, Nava MD, a tele-dermatology and skincare brand for women.
The Company has built a platform that allows it to efficiently launch telehealth and wellness product lines wherever it determines there
is a market need.
Business
and Subsidiary History
In
June 2018, Conversion Labs closed the strategic acquisition of 51% of LegalSimpli Software, LLC (“LegalSimpli”), which operates
a software as a service (SaaS) application for converting, editing, signing and sharing PDF documents called PDFSimpli. In addition to
LegalSimpli’s growth business model, this acquisition added deep search engine optimization and search engine marketing expertise
to the Company. The Company subsequently increased its ownership stake in LegalSimpli to its current 85.6%.
In
early 2019, the Company had launched a service-based business under the name Conversion Labs Media LLC, which was to be used to run e-commerce
marketing campaigns for other online businesses. However, this business initiative was terminated in early 2019 in order to focus on
its core business as well as the expansion of our telehealth opportunities. In June 2019, a strategic joint venture with GoGoMeds.com
(GoGoMeds) was formed in order to help facilitate the launch of our telehealth business. GoGoMeds is a nationwide pharmacy licensed to
dispense prescription medications directly to consumers in all 50 states and the District of Columbia. However, on August 7, 2020, the
Company terminated its Strategic Partnership Agreement with GoGoMeds. The joint venture with GoGoMeds had not initiated activities, and
its termination did not have an impact on the Company’s operations.
Conversion
Labs Rx, LLC (“CVLB Rx”), a Puerto Rico limited liability company, had no activity during the year ended December 31, 2020
and was dissolved during the period.
Unless
otherwise indicated, the terms “LifeMD,” “Company,” “we,” “us,” and “our”
refer to LifeMD, Inc. (formerly known as Conversion Labs, Inc.), our wholly subsidiary LifeMD PR, LLC (formerly Immudyne PR LLC, and
“Conversion Labs PR”), a Puerto Rico limited liability company (“Conversion Labs PR”, or “CLPR”)
and our majority-owned subsidiaries LegalSimpli Software, LLC, a Puerto Rico limited liability company (“LegalSimpli”). Unless
otherwise specified, all dollar amounts are expressed in United States dollars.
Reverse
Stock Split
On
October 9, 2020, the Company filed a Certificate of Amendment to its Articles of Incorporation with the Secretary of State of Delaware
(the “Amendment”) in order to effectuate a 1-for-5 reverse stock split of the Company’s issued and outstanding shares
of common stock (the “Reverse Split” or “Split”). The Reverse Split was approved by the Financial Industry Regulatory
Authority (FINRA) and became effective in the market on October 14, 2020. All references to common
shares and common share data in these financial statements and elsewhere in this Form 10-Q as of June 30, 2021 and 2020, and for the
three and six months then ended, reflect the Reverse Stock Split.
Liquidity
The
Company has funded operations in the past through the sales of its products, issuance of common and preferred stock and through loans
and advances. The Company’s continued operations are dependent upon obtaining an increase in its sale volumes and obtaining funding
from third-party sources or the issuance of additional shares of common stock.
On
February 11, 2021, the Company consummated the closing of a private placement offering (the “February 2021 Offering”), whereby
pursuant to the securities purchase agreement (the “February 2021 Purchase Agreement”) entered into by the Company and certain
accredited investors on February 11, 2021 the Investors purchased 608,696 shares of the Company’s common stock par value $0.01
per share at a purchase price of $23.00 per share for aggregate gross proceeds of approximately $14.0 million (the “Purchase Price”).
The Purchase Price was funded on the closing date and resulted in net proceeds to the Company of approximately $13.5 million after deducting
fees payable to the placement agent and other estimated offering expenses payable by the Company. The Company intends to use the net
proceeds to fund growth initiatives, as well as for general corporate purposes.
On
June 1, 2021, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with an institutional investor
(the “Purchaser”), pursuant to which the Company sold and issued: (i) a senior secured redeemable debenture (the “Debenture”)
in the aggregate principal amount of $15.0
million (the “Aggregate Principal Amount”),
and (ii) warrants to purchase up to an aggregate of 1,500,000
shares of the Company’s common stock at
an exercise price of $12.00
per share (the “Warrant”) of which
500,000
warrants were issued to the Purchaser upon closing with the remaining 1,000,000 warrants only issued to the Purchaser in increments of
500,000 if the Debenture remains outstanding for twelve and twenty four months, respectively, following the closing date of the Purchase
Agreement. The Warrant has a term of three
years, and the Debenture has a maturity date
of three years. The Debenture may be paid fully or in part by the Company at any time prior to maturity without penalty to
the Company. The Company received gross proceeds of $15.0
million and intends to use such proceeds for
working capital, growth investment and general corporate purposes.
On
June 8, 2021, the Company filed a shelf registration statement on Form S-3 under the Securities Act of 1933, or “Securities
Act”, which was declared effective on June 22, 2021 (the “2021 Shelf”). Under the 2021 Shelf at the time of effectiveness,
the Company had the ability to raise up to $150 million by selling common stock, preferred stock, debt securities, warrants and units.
In conjunction with the 2021 Shelf, the Company also entered into an At Market Issuance Sales Agreement (the “Sales Agreement”)
with B. Riley Securities, Inc. (“B. Riley”) and Cantor Fitzgerald & Co. (“Cantor”, and collectively the “Agents”)
relating to the sale of its common stock. In accordance with the terms of the Sales Agreement, the Company may, but is not obligated
to, offer and sell, from time to time, shares of common stock having an aggregate offering price of up to $60
million, through or to the Agents, acting as
agent or principal. Sales of common stock, if any, will be made by any method permitted that is deemed an “at the market offering”
as defined in Rule 415 under the Securities Act. The Company intends to use any net proceeds from the sale of securities for our
operations and for other general corporate purposes, including, but not limited to, capital expenditures, general working capital and
possible future acquisitions. There were no sales of shares of common stock under the 2021 Shelf or the Sales Agreement as of
June 30, 2021. The Company had the full availability of the Sales Agreement and $90 million available under the 2021 Shelf as of June
30, 2021.
Going
Concern Evaluation
The
accompanying unaudited condensed consolidated 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
June 30, 2021, the Company has an accumulated deficit approximating $108.6
million and has experienced significant losses
from its operations. Although the Company is showing significant positive revenue trends, the Company expects to incur further losses
through the end of 2021. Additionally, the Company expects its burn rate of cash to continue through the second half of 2021; however,
the Company expects this burn rate to improve in future quarters. To date, the Company has been funding operations primarily through
the sale of equity in private placements and securities purchased with an institutional investor. Management is unable to predict if
and when the Company will be able to generate significant positive cash flow or achieve profitability. There can be no assurances that
we will be successful in increasing revenues, improving operational efficiencies or that financing will be available or, if available,
that such financing will be available under favorable terms.
The
Company has a current cash balance of approximately $12.5
million as of the filing date, which includes the $13.5
million of net proceeds from the February 2021
Offering and the $14.9
million of net proceeds from the June 2021 Purchase
Agreement. Based on the Company’s projected cash requirements, management estimates that it will utilize approximately $15.3
million through the next 12 months from the filing
date of this report. The Company reviewed its forecasted operating results and sources and uses of cash used in management’s assessment,
which included the available financing, consideration of positive and negative evidence impacting management’s forecasts, market
and industry factors. Positive indicators that lead to its conclusion that the Company will have sufficient cash over the next 12 months
following the date of this report include (1) its continued strengthening of the Company’s revenues and improvement of operational
efficiencies across the business, (2) the expected improvement in its cash burn rate in the second half of 2021 and over the next 12
months, (3) overall investor interest in its equity securities which it believes will enable it to successfully complete future capital
raises, (4) full availability of the Sales Agreement and $90 million available under the 2021 Shelf, (5) management’s ability
to curtail expenses if necessary and (6) the overall market value of the telehealth industry and how it believes that will
continue to drive interest in the Company.
NOTE
2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Article 8
of Regulation S-X. Accordingly, they do not include all of the information and note disclosures required by U.S. generally accepted accounting
principles (“U.S. GAAP”) for complete audited financial statements. The accompanying unaudited financial information should
be read in conjunction with the audited consolidated financial statements, including the notes thereto, as of and for the year ended
December 31, 2020, included in our 2020 Annual Report on Form 10-K filed with the SEC. The information furnished in this report reflects
all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation
of our financial position, results of operations and cash flows for each period presented. The results of operations for the three and
six months ended June 30, 2021 are not necessarily indicative of the results for the year ending December 31, 2021 or for any future
period.
Principles
of Consolidation
The
Company evaluates the need to consolidate affiliates based on standards set forth in ASC 810 Consolidation (“ASC 810”).
The
unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, CLPR and its
majority owned subsidiary, LegalSimpli. The non-controlling interest in LegalSimpli represents the 49%
equity interest held by other members of the subsidiary as of December 31, 2020. During the six months ended June 30, 2021, the Company
purchased an additional 36%
of LegalSimpli for a total equity interest of approximately 85%
(see Note 7).
All
significant intercompany transactions and balances have been eliminated in consolidation.
Cash
and Cash Equivalents
Highly
liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. As of June 30, 2021
and December 31, 2020, there were no cash equivalents. The Company maintains deposits in financial institutions in excess of amounts
guaranteed by the Federal Deposit Insurance Corporation. Cash and cash equivalents are maintained at financial institutions, and at times,
balances may exceed federally insured limits. We have never experienced any losses related to these balances.
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.
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 three (3) entities were VIEs and subject to consolidation.
1.
|
Conversion
Labs Media, LLC (“CVLB Media”), a Puerto Rico limited liability company,
|
2.
|
Conversion
Labs Rx, LLC (“CVLB Rx”), a Puerto Rico limited liability company (dissolved in 2020), and
|
3.
|
Conversion
Labs Asia Limited, a Hong Kong company (“Conversion Labs Asia”).
|
CVLB
Media, CVLB Rx and Conversion Labs Asia are all considered immaterial as of June 30, 2021 and December 31, 2020. CVLB Rx had no activity
and was dissolved during the year ended December 31, 2020.
Use
of Estimates
The
Company prepares its unaudited 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 valuation of inventory, stockholders’ equity-based transactions, estimates to cash flow projections
and going concern assessment. Actual results could differ from those estimates.
The
continuing impact on business activity brought about by the Coronavirus pandemic (“COVID-19”) continues to evolve, globally
in macro terms, and in micro terms, as such affects the Company. As a result, many of our estimates and assumptions for the period ended
June 30, 2021 were subject to an increased level of judgment and may carry a higher degree of variability and volatility. In future periods,
subsequent to June 30, 2021, when additional information becomes available, which may differ from our current assumptions, may subject
our estimates to material change in future periods.
Reclassifications
Certain
reclassifications have been made to conform the prior year’s data to the current presentation. These reclassifications have no
effect on previously reported operating loss, stockholders’ deficit or cash flows. Given the increase in the Company’s software
business and to conform the Company’s presentation of operating results to industry standards, the Company has changed their categories
for reporting operations, as result the Company has made reclassifications to the prior year presentation in order to conform it to the
current periods’ presentation. The reclassification includes $495,787 and $917,785 of merchant processing fees reclassified from
cost of revenues to general and administrative expenses for the three and six months ended June 30, 2020, respectively.
Revenue
Recognition
The
Company records revenue under the adoption of ASC 606 by analyzing exchanges with its customers using a five-step analysis:
1.
|
Identify
the contract
|
2.
|
Identify
performance obligations
|
3.
|
Determine
the transaction price
|
4.
|
Allocate
the transaction price
|
5.
|
Recognize
revenue
|
For
the Company’s product-based contracts with customers, the Company has determined that there is one performance obligation, which
is the delivery of the product; this performance obligation is transferred at a discrete point in time. The Company generally records
sales of finished products once the customer places and pays for the order, with the product being simultaneously shipped by a third-party
fulfillment service provider; in limited cases, title does not pass until the product reaches the customer’s delivery site, in
these limited cases, 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, and deems the impact to be immaterial. In all cases, delivery
is considered to have occurred when title and risk of loss have transferred to the customer, which is usually commensurate upon shipment
of the product. In the case of its product-based contracts, the Company provides a subscription sensitive service based on the recurring
shipment of products and records the related revenue under the subscription agreements subsequent to receiving the monthly product order,
recording the revenue at the time it fulfills the shipment obligation to the customer.
For
its product-based contracts with customers, the Company records an estimate for provisions of discounts, returns, allowances, customer
rebates and other adjustments for its product shipments, and are reflected as contra revenues in arriving at reported net revenues. The
Company’s discounts and customer rebates are known at the time of sale, correspondingly, the Company reduces gross product sales
for such discounts and customer rebates. The Company estimates customer returns and allowances based on information derived from historical
transaction detail, and accounts for such provisions, as contra revenue, during the same period in which the related revenues are earned.
The Company has determined that the population of its product-based contracts with customers are homogenous, supporting the ability to
record estimates for returns and allowances to be applied to the entire product-based portfolio population. Customer discounts, returns
and rebates on product revenues approximated $1,362,000 and $857,000 for the three months ended June 30, 2021 and 2020, respectively.
Customer discounts, returns and rebates on product revenues approximated $2,584,000 and $1,334,000 for the six months ended June 30,
2021 and 2020, respectively.
The
Company, through its majority-owned subsidiary LegalSimpli, offers a subscription-based service providing a suite of software applications
to its subscribers, principally on a monthly subscription basis. The software suite allows the subscriber/user to convert almost any
type of document to another electronic form of editable document, providing ease of editing. For these subscription-based contracts with
customers, the Company offers an initial 14-day trial period which is billed at $1.95,
followed by a monthly subscription, or a yearly subscription to the Company’s software suite dependent on the subscriber’s
enrollment selection. The Company has estimated that there is one product and one performance obligation that is delivered over time,
as the Company allows the subscriber to access the suite of services for the time period of the subscription purchased. The Company allows
the customer to cancel at any point during the billing cycle, in which case the customers subscription will not be renewed for the following
month or year depending on the original subscription. The Company records the revenue over the customers’ subscription period
for monthly and yearly subscribers or at the end of the initial 14-day service period for customers who purchased the initial subscription,
as the circumstances dictate. The Company offers a discount for the monthly or yearly subscriptions being purchased, which is deducted
at the time of payment at the initiation of the contract term, therefore the Contract price is fixed and determinable at the contract
initiation. Monthly and annual subscriptions for the service are recorded net of the Company’s known discount rates. As of June
30, 2021 and December 31, 2020, the Company has accrued contract liabilities, as deferred revenue, of approximately $1,382,000
and $917,000,
respectively, which represent obligations on in-process monthly or yearly contracts with customers and a portion attributable to the
yet to be recognized initial 14-day trial period collections. Customer discounts and allowances on software revenues approximated $668,000
and $107,000
for the three months ended June 30, 2021 and
2020, respectively. Customer discounts and allowances on software revenues approximated $1,222,000
and $270,000
for the six months ended June 30, 2021 and 2020,
respectively.
For
the three and six months ended June 30, 2021 and 2020, the Company had the following disaggregated revenue:
SCHEDULE OF DISAGGREGATED REVENUE
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
|
%
|
|
|
2020
|
|
|
%
|
|
|
2021
|
|
|
%
|
|
|
2020
|
|
|
%
|
|
Product revenues by Brand for Conversion Labs PR:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rex MD
|
|
$
|
12,128,524
|
|
|
|
54
|
%
|
|
$
|
1,835,503
|
|
|
|
20
|
%
|
|
$
|
21,969,077
|
|
|
|
55
|
%
|
|
$
|
2,328,276
|
|
|
|
18
|
%
|
Shapiro MD
|
|
|
3,515,631
|
|
|
|
16
|
%
|
|
|
5,881,965
|
|
|
|
65
|
%
|
|
|
6,899,414
|
|
|
|
17
|
%
|
|
|
8,219,073
|
|
|
|
61
|
%
|
Nava MD
|
|
|
108,252
|
|
|
|
1
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
108,252
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
iNR Wellness
|
|
|
19,737
|
|
|
|
-
|
%
|
|
|
71,162
|
|
|
|
1
|
%
|
|
|
43,642
|
|
|
|
-
|
%
|
|
|
|
|
|
1
|
%
|
Purpurex
|
|
|
27,466
|
|
|
|
-
|
%
|
|
|
79,426
|
|
|
|
1
|
%
|
|
|
62,540
|
|
|
|
-
|
%
|
|
|
132,948
|
|
|
|
1
|
%
|
Scarology
|
|
|
-
|
|
|
|
-
|
%
|
|
|
1,757
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
4,227
|
|
|
|
-
|
%
|
Total product revenue for Conversion Labs PR
|
|
$
|
15,799,610
|
|
|
|
71
|
%
|
|
$
|
7,869,813
|
|
|
|
87
|
%
|
|
$
|
29,082,925
|
|
|
|
72
|
%
|
|
$
|
10,825,614
|
|
|
|
81
|
%
|
Software revenue for LegalSimpli
|
|
|
6,514,001
|
|
|
|
29
|
%
|
|
|
1,219,970
|
|
|
|
13
|
%
|
|
|
11,428,798
|
|
|
|
28
|
%
|
|
|
2,568,981
|
|
|
|
19
|
%
|
Total net revenue
|
|
$
|
22,313,611
|
|
|
|
100
|
%
|
|
$
|
9,089,783
|
|
|
|
100
|
%
|
|
$
|
40,511,723
|
|
|
|
100
|
%
|
|
$
|
13,394,595
|
|
|
|
100
|
%
|
Deferred
Revenues
The
Company records deferred revenues when cash payments are received or due in advance of its performance. The Company’s deferred
revenues relate to payments received for the in-process
monthly or yearly contracts with customers and a portion attributable to the yet to be recognized initial 14-day trial period collections.
SCHEDULE OF CONTRACT WITH CUSTOMER LIABILITY
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Beginning of period
|
|
$
|
1,339,309
|
|
|
$
|
302,960
|
|
|
$
|
916,880
|
|
|
$
|
109,552
|
|
Additions
|
|
|
6,183,965
|
|
|
|
1,127,862
|
|
|
|
11,210,719
|
|
|
|
2,484,256
|
|
Revenue recognized
|
|
|
6,141,336
|
|
|
|
1,127,152
|
|
|
|
10,745,661
|
|
|
|
2,290,138
|
|
End of period
|
|
$
|
1,381,938
|
|
|
$
|
303,670
|
|
|
$
|
1,381,938
|
|
|
$
|
303,670
|
|
Accounts
Receivable
Accounts
receivable principally consist of amounts due from third-party merchant processors, who process our subscription revenues; the merchant
accounts balance receivable represents the charges processed by the merchants that have not yet been deposited with the Company. The
unsettled merchant receivable amount normally represents processed sale transactions from the final one to three days of the month, with
collections being made by the Company within the first week of the following month. Management determines the need, if any, for an allowance
for future credits to be granted to customers, by regularly evaluating aggregate customer refund activity, coupled with the consideration
and current economic conditions in its evaluation of an allowance for future refunds and chargebacks. As of both June 30, 2021 and December
31, 2020, the Company had an allowance for bad debt, attributable to the single agent relationship amounting to approximately $133,000.
As of June 30, 2021 and December 31, 2020, the reserve for sales returns and allowances was approximately $470,000 and $349,000, respectively.
For all periods presented, as noted above, the sales returns and allowances were recorded as contra assets in arriving at presented accounts
receivable, net.
Inventory
As
of June 30, 2021 and December 31, 2020, inventory primarily consisted of finished goods related to the Company’s brands included
in the product revenue section of the table above. Inventory is maintained at the Company’s third-party warehouse location in Wyoming
and at the Amazon fulfillment center. The Company also maintains inventory at a related-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. As of June 30, 2021, the Company did not record an inventory reserve. As of December 31, 2020, the Company recorded an inventory
reserve in the amount of $57,481.
As
of June 30, 2021 and December 31, 2020, the Company’s inventory consisted of the following:
SUMMARY OF INVENTORY
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
Finished Goods - Products
|
|
$
|
1,526,491
|
|
|
|
1,172,624
|
|
Raw materials and packaging components
|
|
|
87,626
|
|
|
|
149,115
|
|
Inventory reserve
|
|
|
-
|
|
|
|
(57,481
|
)
|
Total Inventory - net
|
|
$
|
1,614,117
|
|
|
$
|
1,264,258
|
|
Product
Deposit
Many
of our vendors require deposits when a purchase order is placed for goods or fulfillment services. These deposits typically range from
10%
to 33%
of the total purchased amount. Our vendors include a credit memo within their final invoice, recognizing the deposit amount previously
paid. As of June 30, 2021 and December 31, 2020, the Company has $1,391,764
and $816,765,
respectively, of product deposits with multiple vendors for the purchase of raw materials or finished goods. The Company’s history
of product deposits with its inventory vendors, creates an implicit purchase commitment equaling the total expected product acceptance
cost in excess of the product deposit. As of June 30, 2021 and December 31, 2020, the Company approximates its implicit purchase commitments
to be $2.6 million
and $1.6 million,
respectively. As of June 30, 2021 and December 31, 2020, the vast majority of these product deposits are with one vendor that manufacturers
the Company’s finished goods inventory for its Shapiro hair care product line.
Capitalized
Software Costs
The
Company capitalizes certain internal payroll costs and third-party costs related to internally developed software and amortizes these
costs using the straight-line method over the estimated useful life of the software, generally three years. The Company does not sell
internally developed software other than through the use of subscription service. Certain development costs not meeting the criteria
for capitalization, in accordance with Accounting Standards Codification (“ASC”) ASC 350-40 Internal-Use Software,
are expensed as incurred. As of June 30, 2021 and December 31, 2020, the Company capitalized $1,390,483 and $438,136, respectively, related
to internally developed software costs which are amortized over the useful life and included in development costs on our statement of
operations.
Intangible
Assets
Intangible
assets are comprised of a customer relationship asset (with original cost of approximately $1,007,000) and a purchased license (with
a cost of $200,000) with an estimated useful life of three and ten years, respectively. Intangible assets are amortized over their estimated
lives using the straight-line method. Both intangible assets are fully amortized as of June 30, 2021. Costs incurred to renew or extend
the term of recognized intangible assets are capitalized and amortized over the useful life of the asset.
Impairment
of Long-Lived Assets
Long-lived
assets are evaluated for impairment whenever events or changes in circumstances have indicated that an asset may not be recoverable and
are grouped with other assets to the lowest level for which identifiable cash flows are largely independent of the cash flows of other
groups of assets and liabilities (asset group). If the sum of the projected undiscounted cash flows (excluding interest charges) of an
asset group is less than its carrying value and the fair value of an asset group is also less than its carrying value, the assets will
be written down by the amount by which the carrying value of the asset group exceeded its fair value. However, the carrying amount of
a finite-lived intangible asset can never be written down below its fair value. Any loss would be recognized in income from continuing
operations in the period in which the determination is made.
Paycheck
Protection Program
During
the year ended December 31, 2020, the Company received aggregate loan proceeds in the amount of approximately $249,000 under the Paycheck
Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES
Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying
business. The loans and accrued interest are forgivable after eight weeks as long as the borrower uses the loan proceeds for eligible
purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced
if the borrower terminates employees or reduces salaries during the eight-week period.
The
unforgiven portion of the PPP loan is payable over two years at an interest rate of 1%, with a deferral of payments for the first six
months. The Company intends to use the proceeds for purposes consistent with the PPP. While the Company currently believes that its use
of the loan proceeds will meet the conditions for forgiveness of the loan, we cannot assure you that we will not take actions that could
cause the Company to be ineligible for forgiveness of the loan, in whole or in part.
During
the six months ended June 30, 2021, the Company had a total of $184,914
of its PPP loans forgiven by the SBA (see Note
5). As of June 30, 2021 and December 31, 2020, the PPP loan balance was $74,269
and $259,183,
respectively, and is reflected on the Company’s consolidated balance sheet as current liabilities, within notes payable, net.
Income
Taxes
The
Company files corporate federal, state and local tax returns. Conversion Labs PR and LegalSimpli file tax returns in Puerto Rico, both
are limited liability companies and 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 management 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, 2017, remain open to audit by all related taxing authorities.
Stock-based
Compensation
The
Company follows the provisions of ASC 718, “Share-Based Payment”. Under this guidance compensation cost generally is recognized
at fair value on the date of the grant and amortized over the respective vesting or service period. 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 common shares using weekly price observations over an observation
period that approximates the expected life of the options. The risk-free interest 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 Company has
elected to account for forfeitures as they occur.
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. Convertible
securities, 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.
The
Company follows the provisions of ASC 260, “Diluted Earnings per Share”. In computing diluted EPS, basic EPS is adjusted
for the assumed issuance of all potentially dilutive securities. The dilutive effect of call options, warrants and share-based payment
awards is calculated using the “treasury stock method,” which assumes that the “proceeds” from the exercise of
these instruments are used to purchase common shares at the average market price for the period. The dilutive effect of traditional convertible
debt and preferred stock is calculated using the “if-converted method.” Under the if-converted method, securities are assumed
to be converted at the beginning of the period, and the resulting common shares are included in the denominator of the diluted EPS calculation
for the entire period being presented.
The
following table summarizes the number of shares of common stock issuable pursuant to our convertible securities that were excluded from
the diluted per share calculation because the effect of including these potential shares was antidilutive even though the exercise price
could be less than the average market price of the common shares:
SCHEDULE OF POTENTIALLY DILUTIVE SECURITIES
|
|
Three Months
Ended
|
|
|
Three Months
Ended
|
|
|
Six Months
Ended
|
|
|
Six Months
Ended
|
|
|
|
June
30, 2021
|
|
|
June
30, 2020
|
|
|
June
30, 2021
|
|
|
June
30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred Stock
|
|
|
1,076,923
|
|
|
|
-
|
|
|
|
1,076,923
|
|
|
|
-
|
|
Restricted Stock Units (RSUs)
|
|
|
664,375
|
|
|
|
-
|
|
|
|
355,938
|
|
|
|
-
|
|
Stock options
|
|
|
4,013,400
|
|
|
|
4,469,000
|
|
|
|
4,204,200
|
|
|
|
4,169,000
|
|
Warrants
|
|
|
3,984,787
|
|
|
|
1,407,636
|
|
|
|
3,767,629
|
|
|
|
2,167,136
|
|
Potentially dilutive securities
|
|
|
9,739,485
|
|
|
|
5,876,636
|
|
|
|
9,404,690
|
|
|
|
6,336,136
|
|
Fair
Value of Financial Instruments
The
carrying value of the Company’s financial instruments, including cash, accounts receivable, accounts payable and accrued expenses
and the face amount of notes payable approximate fair value for all periods presented.
Concentrations
of 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.
We
are dependent on certain third-party manufacturers, although we believe that other contract manufacturers could be quickly secured if
any of our current manufacturers cease to perform adequately. As of June 30, 2021 and December 31, 2020, we utilized two (2) suppliers
for fulfillment services, two (2) suppliers for manufacturing finished goods, one (1) supplier for packaging and bottles and one (1)
supplier for labeling. For the three and six months ended June 30, 2021 and 2020, we purchased 100% of our finished goods from two (2)
manufacturers.
Recently
Adopted Accounting Pronouncements
In
August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives
and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40); Accounting for Convertible Instruments and Contracts in
an Entity’s Own Equity (“ASU 2020-06”)”, which addresses issues identified as a result of the complexities
associated with applying U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. This update addresses,
among other things, the number of accounting models for convertible debt instruments and convertible preferred stock, targeted improvements
to the disclosures for convertible instruments and earnings-per-share (“EPS”) guidance and amendments to the guidance for
the derivatives scope exception for contracts in an entity’s own equity, as well as the related EPS guidance. This update applies
to all entities that issue convertible instruments and/or contracts in an entity’s own equity. This guidance is effective for financial
statements issued for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is
permitted, but no earlier than for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.
FASB specified that an entity should adopt the guidance as of the beginning of its annual fiscal year, or January 1, 2021, should the
Company elect to early adopt. This standard was adopted on January 1, 2021 and did not have a material impact on the Company’s
financial position, results of operations or cash flows.
Other
Recent Accounting Pronouncements
All
other accounting standards updates 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.
NOTE
3 – INTANGIBLE ASSETS
As
of June 30, 2021 and December 31, 2020, the Company has the following amounts related to intangible assets:
SCHEDULE OF INTANGIBLE ASSETS
|
|
Intangible Assets as at:
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
Amortizable
|
|
|
|
2021
|
|
|
2020
|
|
|
Life
|
|
Amortizable Intangible
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationship asset
|
|
$
|
1,006,840
|
|
|
$
|
1,006,840
|
|
|
|
3 years
|
|
Purchased licenses
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
10 years
|
|
Less: accumulated amortization
|
|
|
(1,206,840
|
)
|
|
|
(867,000
|
)
|
|
|
|
|
Total net amortizable intangible assets
|
|
$
|
-
|
|
|
$
|
339,840
|
|
|
|
|
|
The
aggregate amortization expense of the Company’s intangible assets for the six months ended June 30, 2021 and 2020 was approximately
$339,840 and $167,806, respectively. There is no intangible asset amortization expense to be recognized in future periods as of June
30, 2021.
NOTE 4 – ACCOUNTS PAYABLE AND ACCRUED
EXPENSES
As of June 30, 2021 and December
31, 2020, the Company has the following amounts related to accounts payable and accrued expenses:
SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED
EXPENSES
|
|
June
30,
|
|
December
31,
|
|
|
2021
|
|
2020
|
Accounts payable
|
|
$
|
11,664,281
|
|
|
$
|
10,408,172
|
|
Accrued compensation
|
|
|
3,363,794
|
|
|
|
237,036
|
|
Accrued selling and marketing expenses
|
|
|
180,683
|
|
|
|
60,870
|
|
Accrued legal and professional fees
|
|
|
56,456
|
|
|
|
209,009
|
|
Sales tax payable
|
|
|
275,000
|
|
|
|
125,000
|
|
Other accrued expenses
|
|
|
1,186,484
|
|
|
|
753,997
|
|
Total accounts payable and accrued expenses
|
|
$
|
16,726,698
|
|
|
$
|
11,794,084
|
|
NOTE
5 – NOTES PAYABLE
PPP
Loan and Forgiveness
In
June 2020, the Company and its subsidiaries received three loans in the aggregate amount of approximately $259,183 (the “PPP Loan”)
under the Paycheck Protection Program legislation administered by the U.S. Small Business Administration. These loans bear interest at
one percent per annum (1.0%) and mature five years from the date of the first disbursement. The proceeds of the PPP Loan must be used
for payroll costs, lease payments on agreements entered into before February 15, 2020 and utility payments under lease agreements entered
into before February 1, 2020. At least 60% of the proceeds must be used for payroll costs and certain other expenses and no more than
40% may be used on non-payroll expenses. Proceeds from the PPP Loan used by the Company for the approved expense categories may be fully
forgiven by the Small Business Administration if the Company satisfies applicable employee headcount and compensation requirements. The
Company currently believes that a majority of the PPP Loan proceeds will qualify for debt forgiveness; however, there can be no assurance
that the Company will qualify for forgiveness from the Small Business Administration until it occurs. During the six months ended June
30, 2021, the Company had a total of $184,914 of its PPP loans forgiven by the SBA which is included in gain on debt forgiveness on the
accompanying unaudited condensed consolidated statement of operations. As of June 30, 2021 and December 31, 2020, the PPP loan balance
was $74,269 and $259,183, respectively, and is reflected on the Company’s unaudited condensed consolidated balance sheet as current
liabilities, within notes payable, net.
Bank
Loan
In
December 2020, the Company received proceeds of $500,000 under a short-term working capital loan with Chase Bank. The terms of the loan
include a service charge of $19,950 (3.99%). The total balance of $519,950 as of December 31, 2020, included in notes payable, net, on
the accompanying unaudited condensed consolidated balance sheet, and was repaid in full in January 2021.
Merchant
Funding Agreement
On
March 17, 2021, the Company entered into a Merchant Funding Agreement with MO Technologies USA, LLC (“MO Tech”), which provides
cash advances to the Company based on the Company’s accounts receivable for a total cash advance of $600,000. The terms of the
funding agreement include a service charge of 3.99% on cash advances from MO Tech. The total balance owed under this agreement was repaid
in full in May 2021.
On
June 23, 2021, the Company entered into a Merchant Funding Agreement with MO Tech, which provides cash advances to the Company based
on the Company’s accounts receivable for a total cash advance of $350,000. The terms of the funding agreement include a service
charge of 3.99% on cash advances from MO Tech. The total balance owed under this agreement is $363,965 as of June 30, 2021 and is included
in notes payable, net.
Total
interest expense on notes payable, inclusive of amortization of debt discounts, amounted to $229,351
and $228,875
for the three months ended June 30, 2021
and 2020, respectively. Total interest expense on notes payable, inclusive of amortization of debt discounts, amounted to $368,814 and $1,021,914
for the six months ended June 30, 2021 and 2020,
respectively.
NOTE 6 – LONG-TERM DEBT
Securities Purchase Agreement
As noted above, on June
1, 2021, the Company entered into the Purchase Agreement with the Purchaser, pursuant to which the Company sold and issued: (i) the Debenture
in the aggregate principal amount of $15.0 million and (ii) warrants to purchase up to an aggregate of 1,500,000 shares of the Company’s
common stock at an exercise price of $12.00 per share of which 500,000 warrants were issued to the Purchaser upon closing with the remaining
1,000,000 warrants only issued to the Purchaser in increments of 500,000 if the Debenture remains outstanding for twelve and twenty four
months, respectively, following the closing date of the Purchase Agreement. The total fair value of the 500,000 warrants issued to the
Purchaser upon closing was $6,270,710. The total fair value was recorded to debt discount and was included as a reduction to long-term debt on the unaudited condensed consolidated balance sheet as of June 30, 2021. The debt discount will be amortized over a twelve-month
period. Total amortization of debt discount was $522,559 for the three months ended June 30, 2021. The Warrant has a term of three years.
The Aggregate Principal Amount of the Debenture, together with interest, is due and payable on
June 1, 2024. The Debenture bears interest as follows: (i) for the period beginning on June 1, 2021 and ending on the date that is six
(6) months thereafter (the “Initial Interest Rate Period”) shall be six percent (6%), (ii) for the period beginning the date
following the Initial Interest Rate Period and ending on the date that is three (3) months thereafter (the “Second Interest Rate
Period”), nine percent (9%), and (iii) for the period beginning the date following the Second Interest Rate Period and ending on
June 1, 2024, twelve percent (12%). Until such time as the obligations shall have been paid in full, the Company shall apply thirty-five
percent (35%) of the gross proceeds received by the Company from At-The-Market offerings of its Common Stock to partial redemptions of
each Debenture on a pro rata basis. The Company received gross proceeds of $15.0 million (net proceeds of $14.9 million) and intends
to use such proceeds for working capital and general corporate purposes.
Total interest expense on
long-term debt, inclusive of amortization of debt discounts, amounted to $672,559 and $0 for the three months ended June 30, 2021 and
2020, respectively. Total interest expense on long-term debt, inclusive of amortization of debt discounts, amounted to $672,559 and $0
for the six months ended June 30, 2021 and 2020, respectively.
NOTE
7 – STOCKHOLDERS’ EQUITY
The
Company has authorized the issuance of up to 100,000,000 shares of common stock, $0.01 par value, and 5,000,000 shares of preferred stock,
$0.0001 par value, of which 5,000 shares are designated as Series B Convertible Preferred Stock and 4,996,500 shares of preferred stock
remain undesignated.
On
October 9, 2020, the Company effectuated a 1-for-5 reverse stock split (the “Stock Split”) of the Company’s issued
and outstanding shares of common stock that became effective in the market on October 14, 2020 (see Note 1). In connection with the Stock
Split, the Company issued approximately 632 shares for rounding.
Options
and Warrants
During
the six months ended June 30, 2021, the Company issued an aggregate of 873,047
shares of common stock related to cashless exercise
of options. During the six months ended June 30, 2021, the Company issued an aggregate of 421,000
shares of common stock related to the exercise
of options for gross proceeds of $766,750.
During
the six months ended June 30, 2021, the Company issued an aggregate of 65,684 shares of common stock related to the exercise of warrants
for gross proceeds of $311,999.
Membership
Interest Purchase Agreement
On
July 31, 2019 the Company entered into a certain membership interest purchase agreement (the “MIPA”) by and between the Company,
Conversion Labs PR, a majority owned subsidiary, Taggart International Trust, an entity controlled by the Company’s Chief Executive
Officer, Mr. Justin Schreiber, and American Nutra Tech LLC, a company controlled by its Chief Technology and Operating Officer, Mr. Stefan
Galluppi (Mr. Schreiber, Taggart International Trust, Mr. Galluppi and American Nutra Tech LLC each a “Related Party” and
collectively, the “Related Parties”). Pursuant to the MIPA, the Company purchased 21.83333%
of the membership interests (the “Remaining Interests”) of Conversion Labs PR from the Related Parties, bringing the
Company’s ownership of Conversion Labs PR to 100%.
As
consideration for the Company’s purchase of the Remaining Interests from the Related Parties, Mr. Schreiber and Mr. Galluppi agreed
to cancel all potential issuances of restricted stock and or options related to their employment with the Company, in exchange for the
immediate issuance of 500,000 shares of the Company’s restricted common stock to each of Mr. Schreiber and Mr. Galluppi (the “Initial
Issuances”) (equal to 1,000,000 shares in the aggregate). Mr. Schreiber and Mr. Galluppi were also entitled to additional issuances
pursuant to certain milestones as follows: (i) 500,000 shares of the Company’s Common Stock to each of Mr. Schreiber and Mr. Galluppi
(1,000,000 shares in the aggregate) on the business day following a consecutive ninety (90) day period, during which the Company’s
Common Stock shall have traded at an average price per share equal to or higher than $2.50 (the “First Milestone”), and (ii)
an additional 500,000 shares of the Company’s Common Stock to each of Mr. Schreiber and Mr. Galluppi (1,000,000 shares in the aggregate)
following a consecutive ninety (90) day period during which the Common Stock shall have traded at an average price per share equal to
or higher than $3.75 (the “Second Milestone” and, together with the First Milestones, the “Milestones”). Having
achieved the Milestones, the Company, on December 9, 2020, issued an aggregate of 1,000,000 shares of the Company’s Common Stock
to each of Mr. Schreiber and Mr. Galluppi (the “Milestone Shares”) (2,000,000 shares in the aggregate). The Milestone Shares
are subject to the previously disclosed 180-day Lock-Up Agreement each of Mr. Schreiber and Mr. Galluppi signed on November 3, 2020.
The
Company recorded an aggregate expense of $18,060,000
reflected in general and administrative expenses
during the three months ended September 30, 2020 for the issuance of these 2,000,000
shares, of which 1,200,000
shares were issued during the six months ended
June 30, 2020.
Common
Stock
Common
Stock Transactions During the Six Months Ended June 30, 2021:
On
February 11, 2021, the Company consummated the closing of the February 2021 Offering, whereby
pursuant to the February 2021 Purchase Agreement entered into by the Company and certain
accredited investors on February 11, 2021 the investors purchased 608,696 shares of the Company’s common stock par value $0.01
per share at a purchase price of $23.00 per share for aggregate gross proceeds of approximately $14.0 million.
The
Purchase Price was funded on the closing date and resulted in net proceeds to the Company of approximately $13.5 million after deducting
fees payable to the placement agent and other estimated offering expenses payable by the Company.
During
the six months ended June 30, 2021, the Company issued an aggregate of 1,233,750 shares of common stock for services expensed in prior
periods.
Noncontrolling
Interest
For
the three months ended June 30, 2021 and 2020, the net loss attributed to the non-controlling interest amounted to $197,973
and $68,131,
respectively. During the three months ended June 30, 2021 and 2020, the Company paid distributions to non-controlling stockholders
of $36,000 and
$85,223,
respectively. For the six months ended June 30, 2021 and 2020, the net loss attributed to the non-controlling interest amounted to $468,476
and $206,947,
respectively. During the six months ended June 30, 2021 and 2020, the Company paid distributions to non-controlling stockholders
of $72,000 and
$121,223,
respectively.
LegalSimpli
Software Restructuring Transaction
Effective
January 22, 2021 (the “LSS Effective Date”), the Company consummated a transaction to restructure the ownership of LegalSimpli
Software, LLC, a Puerto Rico limited liability company (“LSS”), a majority-owned subsidiary of the Company (the “LSS
Restructuring”). To effect the LSS Restructuring the Company’s wholly-owned subsidiary Conversion Labs PR, entered
into a series of membership interest exchange agreements, pursuant to which, Conversion Labs PR exchanged that certain promissory
note, dated May 8, 2019 with an outstanding balance of $375,823
(the “CVLBPR Note”), issued by LSS
in favor of Conversion Labs PR, for 37,531
newly issued membership interests of LSS (the
“Exchange”). Upon consummation of the Exchange the CVLBPR Note was extinguished.
Concurrently,
in furtherance of the LSS Restructuring, Conversion Labs PR entered into two Membership Interest Purchase Agreements (the “Founding
Members MIPAs”) with two founding members of LSS (the “Founding Members”) whereby Conversion Labs PR purchased
from the Founding Members an aggregate of 2,183
membership interests of LSS for an aggregate
purchase price of $225,000,
paid in December 2020.
In
furtherance of the LSS Restructuring, Conversion Labs PR entered into a Membership Interest Purchase Agreement with LSS, (the
“CVLB PR MIPA”), pursuant to which Conversion Labs PR purchased 12,000
membership interests of LSS for an aggregate
purchase price of $300,000.
The
CVLB PR MIPA provides that the transaction may be completed in three (3) tranches with a purchase price of $100,000 per tranche to be
made at the sole discretion of Conversion Labs PR. Payment for the first tranche of $100,000 was made upon execution of the CVLB
PR MIPA in January 2021. Payments for the second and third tranches were made on the 60-day anniversary and the 120-day anniversary of
the LSS Effective Date.
Following
the consummation of the LSS Restructuring, Conversion Labs PR increased its ownership of LSS from 51% to approximately 85.58%
on a fully diluted basis. LSS entered into an amendment to its operating agreement (the “LSS Operating Agreement Amendment”)
to reflect the change in ownership.
Concurrently
with the LSS Restructuring, Conversion Labs PR entered into option agreements with Sean Fitzpatrick (the “Fitzpatrick Option
Agreement”) and Varun Pathak (the “Pathak Option Agreement” together with Fitzpatrick Option Agreement the “Option
Agreements”), pursuant to which Conversion Labs PR granted options to purchase membership interest units of LSS. Upon vesting,
the Fitzpatrick Options and the Pathak Options provide for the potential re-purchase of up to an additional 13.25% of LSS by Fitzpatrick
and Pathak in the aggregate with Conversion Labs PR ownership ratably reduced to approximately 72.98%.
The
Fitzpatrick Option Agreement grants Sean Fitzpatrick the option to purchase 10,300 membership interest units of LSS for an exercise price
of $1.00 per membership interest unit. The Fitzpatrick Options vest in accordance with the following (i) 3,434 membership interests upon
LSS achieving $2,500,000 of gross sales in any fiscal quarter (ii) 3,434 membership interests upon LSS achieving $4,000,000 of gross
sales in any fiscal quarter and (iii) 3,434 membership interests upon LSS achieving $8,000,000 of gross sales with a ten percent (10%)
net profit margin in any fiscal quarter.
The
Pathak Options shall vest in accordance with the following (i) 700 membership interests upon LSS achieving $2,500,000 of gross sales
in any fiscal quarter (ii) 700 membership interests upon LSS achieving $4,000,000 of gross sales in any fiscal quarter and (iii) 700
membership interests upon LSS achieving $8,000,000 of gross sales with a ten percent (10%) net profit margin in any fiscal quarter.
The
first two tranches of performance options granted to Sean Fitzpatrick and Varun Pathak vested immediately after the consummation of the
restructuring transaction and therefore have been recorded as part of the acquisition through equity. The third tranche is not deemed
probable and therefore has not been recognized to date.
Stock
Options
2020
Equity Incentive Plan (the “2020 Plan”)
On
January 8, 2021, the Company approved the Company’s 2020 Equity Incentive Plan (the “2020 Plan”). Approval of the 2020
Plan was included as Proposal 1 in the Company’s definitive proxy statement for its Special Meeting of Shareholders filed with
the Securities and Exchange Commission on December 7, 2020. The 2020 Plan is administered by the Compensation Committee and initially
provided for the issuance of up to 1,500,000
shares of Common Stock. The number of shares
of Common Stock available for issuance under the Plan automatically increases by 150,000
shares of Common Stock on January 1st of each
year, for a period of not more than ten years, commencing on January 1, 2021. As of January 1, 2021, the 2020 Plan provided for
the issuance of up to 1,650,000
shares of Common Stock. Awards under the 2020
Plan can be granted in the form of stock options, non-qualified and incentive options, stock appreciation rights, restricted stock, and
restricted stock units. The 2020 Plan will be administered by the Compensation Committee of the Company’s Board of Directors.
On
June 24, 2021, at the Annual Meeting of Stockholders, the stockholders of the Company approved an amendment to the 2020
Plan to increase the maximum number of shares of the Company’s common stock available for issuance under the 2020 Plan by 1,500,000
shares. As of June 30, 2021, total authorization under the 2020 Plan was 3,150,000 shares.
The
forms of award agreements to be used in connection with awards made under the 2020 Plan to the Company’s executive officers and
non-employee directors are:
●
|
Form
of Non-Qualified Option Agreement (Non-Employee Director Awards)
|
●
|
Form
of Non-Qualified Option Agreement (Employee Awards); and
|
●
|
Form
of Restricted Stock Award Agreement.
|
Previously,
the Company had granted service-based stock options and performance-based stock options separate from this plan.
On
January 20, 2020, the Company approved the transition of its Chief Acquisition Officer, to the role of President of LegalSimpli (“President”).
In connection with this change in role, the Company amended that certain services agreement entered into on July 23, 2018, by and between
the Company and its President, to (i) decrease the number of options to purchase the Company’s common stock previously granted
from 1,000,000 options to 500,000 options, 130,000 of which are fully vested as of the effective date and (ii) amend the vesting schedule
for the remaining 370,000 performance options to include four performance metrics that, if met, each trigger the vesting of 92,500 options.
As a result of amendment, the Company cancelled 500,000 service-based options with an exercise price of $1.50.
During
the six months ended June 30, 2021, the Company issued an aggregate of 1,368,000 stock options to employees and advisory board members.
These stock options have a contractual term of 10 years and vest in increments which fully vest the options over a two-to-three-year
period, dependent on the specific agreements’ terms.
The
following is a summary of outstanding options activity under our 2020 Plan for the six months ended June 30, 2021:
SCHEDULE OF OPTION ACTIVITY
|
|
Options
Outstanding
Number of Shares
|
|
|
Exercise Price
per Share
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Weighted
Average
Exercise Price
per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2020
|
|
|
829,000
|
|
|
$
|
5.20 – 8.81
|
|
|
|
9.75
|
|
|
$
|
7.49
|
|
Granted
|
|
|
958,000
|
|
|
|
6.00 – 21.02
|
|
|
|
9.64
|
|
|
|
11.09
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/Forfeited/Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2021
|
|
|
1,787,000
|
|
|
$
|
5.20 – 21.02
|
|
|
|
8.40
|
|
|
$
|
9.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2020
|
|
|
76,222
|
|
|
$
|
5.20 – 8.81
|
|
|
|
9.77
|
|
|
$
|
7.74
|
|
Exercisable at June 30, 2021
|
|
|
331,000
|
|
|
$
|
5.20 – 21.02
|
|
|
|
9.39
|
|
|
$
|
8.49
|
|
The
total fair value of the options granted was approximately $16,502,680,
which was determined by the Black-Scholes Pricing Model with the following assumptions: dividend yield of 0%,
expected term of 6.5
years, volatility of 169.00%
– 180.12%,
and risk-free rate of 0.66%–1.26%.
Total compensation expense under the 2020 Plan options above was approximately $1,200,387
and $0
for the three months ended June 30, 2021 and
2020, respectively, with unamortized expense remaining of approximately $13,848,417
as of June 30, 2021. Total compensation expense
under the 2020 Plan options above was approximately $2,434,254
and $0
for the six months ended June 30, 2021 and 2020,
respectively.
Restricted
Stock Units (RSU)
The
following is a summary of outstanding RSU activity under our 2020 Plan during the six months ended June 30, 2021:
SCHEDULE OF WARRANT AND RESTRICTED STOCK OUTSTANDING AND EXERCISABLE
|
|
RSUs
Outstanding Number of Shares
|
|
Balance at December 31, 2020
|
|
|
35,000
|
|
Granted
|
|
|
356,250
|
|
Vested
|
|
|
(26,875
|
)
|
Cancelled/Forfeited/Expired
|
|
|
-
|
|
Balance at June 30, 2021
|
|
|
364,375
|
|
The
total fair value of the 356,250 RSUs granted was approximately $4,496,950
which was determined using the fair value of
the quoted market price on the date of grant. Total compensation expense under the above 2020 Plan RSUs above was approximately $357,163
and $0
for both the three and six months ended June
30, 2021 and 2020, respectively, with unamortized expense remaining of approximately $4,139,787
as of June 30, 2021. During the six months
ended June 30, 2021, 26,875
RSUs vested, of which 20,000
RSUs were issued.
The
Company granted 300,000 RSUs
outside of the 2020 Plan during the six months ended June 30, 2021. The total fair value of these RSUs was approximately $4,212,000 and
no compensation expense was recorded as the performance terms were not met.
The
following is a summary of outstanding service-based options activity (prior to the establishment of our 2020 Plan above) for the six
months ended June 30, 2021:
SCHEDULE OF OPTION ACTIVITY
|
|
Options
Outstanding Number of Shares
|
|
|
Exercise
Price per Share
|
|
|
Weighted
Average Remaining Contractual Life
|
|
|
Weighted
Average Exercise Price per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2020
|
|
|
2,243,400
|
|
|
$
|
0.80
- 7.95
|
|
|
|
5.14
years
|
|
|
$
|
2.11
|
|
Granted
|
|
|
410,000
|
|
|
|
4.75
– 19.61
|
|
|
|
7.34
years
|
|
|
|
13.17
|
|
Exercised
|
|
|
(100,000
|
)
|
|
|
0.80
– 2.00
|
|
|
|
2.58
years
|
|
|
|
1.31
|
|
Cancelled/Forfeited/Expired
|
|
|
(992,000
|
)
|
|
|
1.50
– 4.75
|
|
|
|
9.44
years
|
|
|
|
2.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2021
|
|
|
1,561,400
|
|
|
$
|
1.00
– 19.61
|
|
|
|
6.36
years
|
|
|
$
|
5.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
December 31, 2020
|
|
|
1,570,428
|
|
|
$
|
1.00
– 7.50
|
|
|
|
2.57
years
|
|
|
$
|
1.67
|
|
Exercisable
at June 30, 2021
|
|
|
837,997
|
|
|
$
|
1.00
– 19.61
|
|
|
|
5.23
years
|
|
|
$
|
2.69
|
|
Total
compensation expense under the above service-based option plan was approximately $470,896 and $255,153 for the three months ended June
30, 2021 and 2020, respectively, with unamortized expense remaining of approximately $5,234,815 as of June 30, 2021. Total compensation
expense under the above service-based option plan was approximately $819,269 and $260,677 for the six months ended June 30, 2021 and
2020, respectively.
The
following is a summary of outstanding performance-based options activity for the six months ended June 30, 2021:
SCHEDULE OF OPTION ACTIVITY
|
|
Options
Outstanding Number of Shares
|
|
|
Exercise
Price per Share
|
|
|
Weighted
Average Remaining Contractual Life
|
|
|
Weighted
Average Exercise Price per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2020
|
|
|
1,165,000
|
|
|
$
|
1.25
– 7.50
|
|
|
|
4.97
years
|
|
|
$
|
1.80
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(235,000
|
)
|
|
|
2.00
|
|
|
|
0.47
years
|
|
|
|
2.00
|
|
Cancelled/Expired
|
|
|
(265,000
|
)
|
|
|
1.25
– 2.00
|
|
|
|
3.74
years
|
|
|
|
1.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2021
|
|
|
665,000
|
|
|
$
|
1.25
– 7.50
|
|
|
|
6.19
years
|
|
|
$
|
1.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
December 31, 2020
|
|
|
425,000
|
|
|
$
|
2.00
|
|
|
|
1.18
years
|
|
|
$
|
2.00
|
|
Exercisable
at June 30, 2021
|
|
|
90,000
|
|
|
$
|
1.75
– 2.00
|
|
|
|
2.38
years
|
|
|
$
|
1.96
|
|
No
compensation expense was recognized on the performance-based
options above for the three and six months ended June 30, 2021 and 2020, as the performance terms have not been met or are not probable.
All performance options exercised during the six months ended June 30, 2021 had been previously expensed.
Warrants
The
following is a summary of outstanding and exercisable warrants activity during the six months ended June 30, 2021:
SCHEDULE OF WARRANT AND RESTRICTED STOCK OUTSTANDING AND EXERCISABLE
|
|
Warrants
Outstanding Number of Shares
|
|
|
Exercise
Price per Share
|
|
|
Weighted
Average Remaining Contractual Life
|
|
|
Weighted
Average Exercise Price per Share
|
|
Balance
at December 31, 2020
|
|
|
3,550,471
|
|
|
$
|
1.40 – 5.75
|
|
|
|
5.58
years
|
|
|
$
|
4.56
|
|
Granted
|
|
|
500,000
|
|
|
|
12.00
|
|
|
|
4.92
years
|
|
|
|
12.00
|
|
Exercised/Expired
|
|
|
(65,684
|
)
|
|
|
4.75
|
|
|
|
4.34
years
|
|
|
|
4.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2021
|
|
|
3,984,787
|
|
|
$
|
1.40 – 12.00
|
|
|
|
5.08
years
|
|
|
$
|
5.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
December 31, 2020
|
|
|
2,144,700
|
|
|
$
|
1.40 – 5.75
|
|
|
|
7.67
years
|
|
|
$
|
4.29
|
|
Exercisable
June 30, 2021
|
|
|
2,994,760
|
|
|
$
|
1.40
– 12.00
|
|
|
|
6.12
years
|
|
|
$
|
5.67
|
|
Total
compensation expense on the above warrants for services was approximately $604,974
and $147,424
for the three months ended June 30, 2021 and
2020, respectively, and $1,209,948
and $159,411
for the six months ended June 30, 2021 and 2020,
respectively.
Stock-based
Compensation
The
total stock-based compensation expense related to common stock issued for services, service-based stock options, performance-based stock
options, warrants and RSUs amounted to approximately $2,547,300
and $439,000
for the three months ended June 30, 2021 and
2020, respectively, and approximately $4,873,075
and $535,000
for the six months ended June 30, 2021 and 2020,
respectively. Such amounts are included in general and administrative expenses in the consolidated statement of operations.
NOTE
8 - COMMITMENTS AND CONTINGENCIES
Royalty
Agreements
During
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, ten years. 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. As of both June 30, 2021
and December 31, 2020, no amount was included in accounts payable and accrued expenses in regard to this agreement, as no sales occurred.
During
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 developed by Alphabet 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 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. No amounts were earned
or owed as of June 30, 2021.
Upon
execution of the Alphabet Agreement, Alphabet was granted a 10-year
stock option to purchase 20,000
shares of the Company’s common stock at
an exercise price of $2.50.
Further, if Licensed Products have gross receipts of $7,500,000
in any calendar year, the Company will grant
Alphabet an option to purchase 20,000
shares of the Company’s common stock at
an exercise price of $2.50;
(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 20,000
shares of the Company’s common stock at
an exercise price of $2.50
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 40,000
shares of the Company’s common stock at
an exercise price of $3.75.
The likelihood of meeting these performance goals for the licensed products are remote and, therefore, the Company has not recognized
any compensation.
Purchase
Commitments
Many
of the Company’s vendors require product deposits when a purchase order is placed for goods or fulfillment services related to
inventory requirements. The Company’s history of product deposits with its inventory vendors creates an implicit purchase commitment
equaling the total expected product acceptance cost in excess of the product deposit. As of June 30, 2021 and December 31, 2020, the
Company approximates its implicit purchase commitments to be $2.6
million and $1.6
million, respectively.
Legal
Matters
In
the normal course of business operations, the Company may become involved in various legal matters. As of June 30, 2021, other than as
set forth below, the Company’s management does not believe that there are any potential legal matters that could have an adverse
effect on the Company’s consolidated financial position.
On
April 16, 2021, a purported securities class action lawsuit, captioned David L. Owens, Sr. v. LifeMD, Inc. et al., Case No. 21-cv-03384,
was filed in the United States District Court for the Southern District of New York against the Company, Justin Schreiber (LifeMD’s
Chairman of the Board and Chief Executive Officer), Juan Pinero Dagnery (LifeMD’s former Chief Financial Officer), and Marc Benathen
(LifeMD’s current Chief Financial Officer) (the “Owens, Sr. Lawsuit”). The Owens, Sr. Complaint alleges, among other
things, that the defendants made false or misleading statements about, and allegedly failed to disclose material adverse facts concerning,
the Company’s business, operations, and prospects, and asserts claims under Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 and Rule 10b-5 promulgated thereunder. The Complaint does not quantify damages but seeks to recover damages on behalf of
investors who purchased or otherwise acquired LifeMD’s common stock between January 19, 2021 and April 13, 2021. On May 18, 2021,
the class action lawsuit filed against the Company was voluntarily dismissed.
Similarly,
on May 5, 2021, a second purported securities class action lawsuit, captioned Cho v. LifeMD, Inc. et al., Case No. 21-cv-04004,
was filed in the United States District Court for the Southern District of New York against the same aforementioned parties (the “Cho
Lawsuit”). The Cho Complaint makes the same claims as found in the Owens, Sr. Lawsuit, and, similarly, does not quantify damages
and seeks to recover damages on behalf of investors who purchased or otherwise acquired LifeMD’s common stock during the same,
aforementioned time period between January 19, 2021 and April 13, 2021. On May 19, 2021, the class action lawsuit filed against the Company
was voluntarily dismissed.
On
June 7, 2021, a purported Americans with Disabilities class action lawsuit, captioned Sosa v. LifeMD, Inc. et al., Case No. 21-cv-05032,
was filed in the United States District Court for the Southern District of New York. The Sosa Complaint alleges, inter alia, that the
defendants’ www.rexmd.com has barriers making it inaccessible to the visually impaired needing the assistance of screen-reading
software, and therefore, allegedly violates: (i) the Americans with Disabilities Act, 42 U.S.C. § 12181 et seq.; (ii) the New York
State Human Rights Law (NYSHRL), N.Y. Exec. Law §§ 292 and 296; and (iii) the New York City Human Rights Law (NYCHRL), §§
8-102 and 8-107. The Complaint does not quantify damages but seeks to recover compensatory damages, civil penalties, and attorneys’
fees and costs under the NYSHRL and NYCHRL, as well as punitive damages under the NYCHRL. The Complaint also seeks preliminary and permanent
injunctive relief. The Company’s response to the Complaint is currently due on September 6, 2021.
NOTE
9 – RELATED PARTY TRANSACTIONS
Chief
Executive Officer
Conversion
Labs PR utilizes office space in Puerto Rico, which is subleased from the President and CEO, and incurs expense of approximately $7,500
a month for this office space for which the Company
and the CEO do not have a written lease agreement. Payments to JLS Ventures, an entity wholly owned by our CEO, for rent on Conversion
Labs PR’s Puerto Rico office space amounted to $22,500
and $15,000
for the three months ended June 30, 2021 and
2020, respectively, and $45,000 and $30,000 for the six months ended June 30, 2021 and 2020, respectively.
Conversion
Labs PR utilizes BV Global Fulfillment, owned by a related person of the Company’s CEO to warehouse a portion of the Company’s
finished goods inventory and for fulfillment services. The Company pays a monthly fee of $13,000
to $16,000
for fulfillment services and reimburses BV Global
Fulfillment for their direct costs associated with shipping the Company’s products. The Company reimbursed BV Global Fulfillment
a total of $418,526
and $316,804
during the six months ended June 30, 2021 and
2020, respectively. As of June 30, 2021 and December 31, 2020, the Company owed BV Global Fulfillment $90,047
and $58,943,
respectively, which are included in accounts payable and accrued liabilities on the accompanying unaudited condensed consolidated
balance sheets.
Consulting
Agreement with Chief Operating Officer
On
November 27, 2020, the Company entered into a consulting
agreement (the “Consulting Agreement”) with JDM Investments, LLC (“JDM”), an entity solely owned by our COO,
whereby JDM will provide consulting services in support of the Company’s day-to-day call center operations. The Consulting Agreement
is for a term of thirty-six months and is renewable for additional twelve-month periods upon the mutual agreement of the Company and
JDM. As compensation for the services, JDM will receive a monthly fee of $17,000 and shall be eligible to receive a metric based performance
bonus for each calendar quarter during the term of the Consulting Agreement in accordance with metrics to be mutually agreed upon by
the Company and JDM. The Company paid a total of $102,000 under this agreement, with no bonus earned or accrued, for the six months ended
June 30, 2021.
On
June 15, 2021, the Company and Brad Roberts, our COO, restructured Mr. Roberts’s compensation arrangements. The Company and JDM
mutually terminated Mr. Roberts’s Consulting Agreement and Mr. Roberts waived all consulting fees due for the remainder of the
term of the Consulting Agreement. In place of the Consulting Agreement, Mr. Roberts and the Company amended his Amended and Restated
Employment Agreement dated December 21, 2020 (the “Amendment”) to increase his base salary to $475,000
per calendar year and to update the terms of
his annual bonus, providing for a target amount of $200,000,
with any actual bonus to be awarded in the sole discretion of the Board of Directors. On June 29, 2021, the Company and Mr. Roberts
entered into a Second Amendment (the “Second Amendment”) to the Amended and Restated Employment Agreement dated December
21, 2020 to provide that Mr. Roberts is eligible to receive up to 300,000 restricted stock units of the Company’s common stock,
par value $0.01 (the “RSUs”), which will vest subject to the Company’s Telemedicine Brands (as defined in the Second
Amendment) achieving certain revenue milestones. The RSUs will also vest upon a Change of Control (as defined in the Second Amendment).
Appointment
of Chief Financial Officer
On
February 4, 2021, the Board appointed Mr. Marc Benathen as the Company’s Chief Financial Officer. In connection with the Appointment,
Mr. Benathen entered into an Employment Agreement with the Company. To induce Mr. Benathen to enter into the Employment Agreement, Mr.
Benathen was granted a signing bonus of 15,000
restricted stock units of the Company’s
common stock (the “RSUs”). The RSU’s vest in accordance with the following: (i) 3,750
of the RSUs vesting on February 4, 2021
(ii) 3,750
RSUs on February
4, 2022 (iii) 3,750
RSU’s on February
4, 2023 and (iv) 3,750
RSU’s on February
4, 2024. In addition to the RSU’s, Mr.
Benathen received stock options to purchase up to 200,000
shares of the Company’s common stock. The
Stock Options shall vest in equal monthly tranches, based on the passage of time, over the 36
months. On March 18, 2021, we issued 3,750
common shares under this Employment Agreement.
Appointment
of President
On
June 10, 2021, the Board appointed Mr. Alex Mironov as the Company’s President. In connection with the appointment, Mr.
Mironov entered into an Employment Agreement with the Company. To induce Mr. Mironov to enter into the Employment Agreement, Mr. Mironov
was granted an equity award with a grant date of June 10, 2021 outside of the Company’s 2020 Equity and Incentive Plan.
Mironov received options to purchase an aggregate of 200,000
shares of LifeMD, Inc. common stock. The options
have an exercise price of $14.04,
which is equal to the closing price of LifeMD. Inc. common stock on June 10, 2021. The
options will vest ratably, with 1/36th of the shares fully vested on June 10, 2021, and the remainder of the shares vesting ratably each
month over a 35-month period that commences on the date of grant, subject to, the employee’s continued employment with LifeMD,
Inc. on such vesting dates. The options have a
five-year
term. Additionally, Mr. Mironov received a performance-based
grant of up to 300,000
restricted shares of LifeMD, Inc. common stock,
subject to, the employee’s sourcing, and material contribution to the consummation of pharmaceutical deals, as set forth in more
detail in the employment agreement.
NOTE
10 – SUBSEQUENT EVENTS
The
Company has evaluated subsequent events through the date these unaudited condensed consolidated financial statements were issued
and has identified the following:
Partnerships
Quest
Diagnostics and Axle Health
On
July 13, 2021, the Company, on behalf of its customers, entered
into an agreement to engage Quest Diagnostics Incorporated (“Quest Diagnostics”) as the Company’s laboratory services
provider to perform certain clinical laboratory diagnostic services based on orders submitted to Quest Diagnostics by licensed health
care providers who are under contract with the Company and are authorized under U.S. federal or state law to order laboratory tests.
Patients of LifeMD Inc.’s affiliated providers gain access to more than 150 of the most ordered laboratory tests at substantially
discounted prices, and which can be completed in the comfort, safety, and convenience of their home or office.
In
addition, on July 14, 2021, the Company entered into an agreement to engage Axle Health Inc. (“Axle Health”)
to assist the Company in establishing a platform to enable patients of the Company’s medical practice clients (“MP Clients”)
to schedule certain nursing services, including blood draws, injections, and other basic healthcare services, and to furnish operational
support services to medical practices using the platform. In connection therewith, Axle Health granted the Company a revocable, nontransferable,
non-exclusive right and license, with the right to grant sublicenses, to install and use the software and other technology relating to
the platform developed, owned, or with the right to grant sublicenses to install and use the software and/or other technology developed,
owned, or licensed by Axle Health, including the platform, to facilitate the scheduling and provision of certain nursing services to
patients of MP Clients.
Restricted
Stock Issuance
In
July 2021, the Company issued an aggregate of approximately 30,000 shares of common stock pursuant to the vesting of restricted stock.