NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2021 AND 2020
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 (now known as
“Conversion Labs PR”). 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 change 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, which operates a software as a service (“SaaS”) application for converting, editing, signing,
and sharing PDF documents called PDFSimpli. In addition to LegalSimpli Software, LLC’s growth business model, this acquisition
added deep search engine optimization and search engine marketing expertise to the Company. On July 15, 2021, LegalSimpli Software, LLC,
changed its name to WorkSimpli Software, LLC, (“WorkSimpli”). Effective January 22, 2021, the Company consummated a transaction
to restructure the ownership of WorkSimpli (the “WSS Restructuring”) (See Note 7) and concurrently increased its ownership
stake in WorkSimpli 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 patients
of its affiliated medical group 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 affiliated, 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 prescription offerings, the Company sells over-the-counter (“OTC”)
products. All 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 OTC products for male and female hair loss, Food and Drug Administration
(“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, RexMD, 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, NavaMD, 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 WorkSimpli, which operates a SaaS application for converting, editing,
signing and sharing PDF documents called PDFSimpli. In addition to WorkSimpli’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 WorkSimpli to its current 85.6%.
In
early 2019, the Company had launched a service-based business under the name Conversion Labs Media LLC (“CVLB Media”), a
Puerto Rico limited liability company, 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 May 2019, Conversion Labs RX, LLC (“CVLB Rx”), a Puerto Rico limited liability company, signed
a strategic partnership agreement with GoGoMeds.com (“GoGoMeds”). GoGoMeds is a nationwide pharmacy licensed to
dispense prescription medications directly to consumers in all 50 states and the District of Columbia. However, since its inception,
CVLB Rx did not conduct any business and CVLB Rx was dissolved on August 7, 2020.
CVLB
Rx and Conversion Labs Asia Limited (“Conversion Labs Asia”), a Hong Kong company, had no activity during the years ended
December 31, 2021 and 2020.
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 subsidiary, WorkSimpli. The affiliated network of medical Professional Corporations and medical Professional
Associations administratively led by LifeMD Southern Patient Medical Care, P.C., is the Company’s variable interest entity in which
we hold a controlling financial interest (“LifeMD PC”). Unless otherwise specified, all dollar amounts are expressed
in United States dollars.
Partnerships
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.
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 with the agreement, Axle Health granted the Company a revocable, nontransferable,
non-exclusive right and license to install and use the software and other technology relating to the platform to facilitate the scheduling
and provision of certain nursing services to patients of MP Clients.
On
August 4, 2021, the Company entered into a partnership agreement with Particle Health, a state-of-the-art, digital health company with
a HIPAA-compliant technology platform that converts electronic medical records data into a user-friendly Fast Healthcare Interoperability
Resource (“FHIR”) format. Particle
Health’s platform, and patient consent, allow licensed affiliated medical providers on the LifeMD virtual primary
care platform to gain instant access to comprehensive patient health records from a database covering over 90% of the US population,
therefore enabling best-in-class, personalized care through a deeper understanding of their patients’ medical histories.
On
August 30, 2021, the Company signed a letter of intent with Prescryptive Health (“Prescryptive”), a healthcare technology
company empowering consumers by improving the way healthcare is delivered. The partnership is expected to accelerate growth for both
companies by combining LifeMD’s expanding direct-to-patient telehealth brands and the LifeMD virtual primary care platform with
Prescryptive’s best-in-class digital pharmacy fulfillment and e-prescribing technology platform.
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-K as of December 31, 2021 and 2020, and for the years then ended, reflect
the Reverse 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 “June 1, 2021 Purchase Agreement”) with a financial
institution (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 June 1, 2021 Purchase Agreement. The Warrant has a term of three years, and the Debenture has a maturity
date of three years. The Company received gross proceeds of $15.0 million. In October 2021, the Company used a portion of the net proceeds
from the October 4, 2021 Offerings noted below to pay the $15.0 million outstanding on the June 1, 2021 Purchase Agreement.
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 “ATM 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 ATM 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 70,786 shares of common stock sold under the ATM Sales Agreement as of December
31, 2021 and net proceeds received were $493,481. Under the 2021 Shelf, the Company had the ability to raise up to $150 million, of which
$58.5 million was utilized during the year ended December 31, 2021. The Company has approximately $59.5 million available under the ATM
Sales Agreement and $32 million available under the 2021 Shelf as of December 31, 2021.
In
September 2021, the Company entered into two underwriting agreements (the “Preferred Underwriting Agreement” and “the
Common Underwriting Agreement”) with B. Riley. Pursuant to the Preferred Underwriting Agreement, the Company agreed to sell 1,400,000
shares of its 8.875%
Series A Cumulative Perpetual Preferred Stock, par value $0.0001
per share, (the “Series A Preferred Stock”)
at a public offering price of $25.00
per share, prior to deducting underwriting discounts
and commissions and estimated offering expenses (the “Preferred Stock Offering”). In addition, the Company granted the underwriters
an option to purchase up to an additional 210,000
shares of Series A Preferred Stock within 30
days. The option was not exercised. Under the Common Underwriting Agreement, the Company agreed to sell to B. Riley 3,833,334
shares of common stock (including 500,000
shares pursuant to B. Riley’s option) (the
“Common Shares”), par value $0.01
per share, of the Company at a public offering price of $6.00
per share of common stock, prior to deducting underwriting discounts and commissions and estimated offering expenses (the “Common
Stock Offering”). The Preferred Stock Offering and Common Stock Offering collectively referred to as the “October 4, 2021
Offerings”, closed on October 4, 2021. Net proceeds after deducting the underwriting discounts, and commissions, the structuring
fee and estimated offering expenses payable by the Company, but before repayment of debt, from the Offerings was approximately $55.3
million. The Company used a portion of the net proceeds to pay the $15.0
million outstanding on the June 1, 2021 Purchase Agreement and intends to use the remaining net proceeds to fund the segregated
dividend account, for working capital and general corporate purposes including, but not limited to, new patient customer acquisition
expenses and capital expenditures.
The
Company will pay cumulative distributions on the Series A Preferred Stock, from the date of original issuance, in the amount of $2.21875
per share each year, which is equivalent to 8.875%
of the $25.00 liquidation
preference per share. Dividends on the Series A Preferred Stock will be payable quarterly in arrears, on or about the 15th day of January,
April, July, and October of each year. The first dividend on the Series A Preferred Stock sold in this offering was declared on
December 23, 2021 to holders of record as of January 4, 2022 and was paid on January 14, 2022. The first dividend is included is the
Company’s results of operations for the year ended December 31, 2021.
Liquidity
Evaluation
As
of December 31, 2021, the Company has an accumulated deficit approximating $141.9
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 third quarter of 2022. However, the Company expects these losses to continue to improve. Additionally, the Company expects
its burn rate of cash to continue through the third quarter of 2022; however, the Company expects this burn rate to improve and to become
cash flow positive by the fourth quarter of 2022. To date, the Company has been funding operations primarily through the sale of equity
in private placements and securities purchased by a financial institution. 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 $26.7
million as of the filing date, which includes the $13.5
million of net proceeds from the February 2021
Offering and the $55.3
million of net proceeds from the October 4, 2021
Offerings. The Company reviewed its forecasted operating results and sources and uses of cash used in management’s assessment,
which included the available financing and 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 over the next 12 months, (3) $59.5
million available under the ATM Sales Agreement
and $32 million
available under the 2021 Shelf, (4) management’s ability to curtail expenses, if necessary, and (5) the overall market
value of the telehealth industry and how it believes that will continue to drive interest in 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 Accounting Standards Codification (“ASC”)
810, Consolidation.
The
consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, CLPR, its majority owned subsidiary,
WorkSimpli, in addition to LifeMD PC, the Company’s variable interest entity in which we hold a controlling financial interest.
The non-controlling interest in WorkSimpli represents the 49% equity interest held by other members of the subsidiary as of December
31, 2020. During the year ended December 31, 2021, the Company purchased an additional 34.6% of WorkSimpli for a total equity interest
of approximately 85.6% as of December 31 2021 (see Note 7). CVLB Media, CVLB Rx and Conversion Labs Asia had no activity during both
the year ended December 31, 2021 and 2020. CVLB Rx was dissolved during the year ended December 31, 2020.
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 December 31, 2021
and 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
In
accordance with ASC 810, Consolidation, the Company determines whether any legal entity in which the Company becomes involved
is a variable interest entity (a “VIE”) and subject to consolidation. This determination is based on whether an entity has
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 and whether the interest 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
Company determined that the LifeMD PC entity, the Company’s affiliated medical professional corporation, is a VIE and subject
to consolidation. LifeMD PC and the Company do not have any shareholders in common. LifeMD PC is owned by licensed physicians,
and the Company maintains a service agreement with LifeMD PC whereby we provide all non-clinical services to LifeMD PC. The Company determined
that it is the primary beneficiary of LifeMD PC and must consolidate, as we have both the power to direct the activities of LifeMD
PC that most significantly impact the economic performance of the entity and we have the obligation to absorb the losses. As a result,
the Company presents the financial position, results of operations, and cash flows of LifeMD PC as part of the consolidated financial
statements of the Company. There is no non-controlling interest upon consolidation of LifeMD PC.
Total
net loss for LifeMD PC was approximately $1.7 million for the year ended December 31, 2021.
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 valuation of inventory, stockholders’ equity-based transactions, estimates to cash flow projections, and liquidity assessment.
Actual results could differ from those estimates.
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 appropriately conform the Company’s presentation of operating results to industry and accounting standards,
the Company has changed their categories for reporting operations. As a result, the Company has made reclassifications to the prior year
presentation in order to conform it to the current periods’ presentation. These reclassifications include: (1) $2,616,034
of merchant processing fees reclassified from
selling and marketing expenses to general and administrative expenses, (2) $46,256
of reimbursable expenses reclassified from cost
of revenues to other operating expenses, (3) $136,290
of taxes and licensing fees reclassified from
other operating expenses to general and administrative expenses and (4) a $349,336
sales return reserve reclassified from accounts
receivable, net to accounts payable and accrued expenses for the year ended December 31, 2020.
Revenue
Recognition
The
Company records revenue under the adoption of ASC 606, Revenue from Contracts with Customers, 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 $4.7
million and $3.3
million, respectively, during the years ended
December 31, 2021 and 2020.
The
Company, through its majority-owned subsidiary WorkSimpli, 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 December
31, 2021 and 2020, the Company has accrued contract liabilities, as deferred revenue, of approximately $1.5
million and $917
thousand, 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 WorkSimpli revenues approximated $1.8
million and $1.0
million, respectively, during the years ended
December 31, 2021 and 2020.
For
the years ended December 31, 2021 and 2020, the Company had the following disaggregated revenue:
SCHEDULE OF DISAGGREGATED REVENUE
| |
Year Ended December 31, | |
| |
2021 | | |
% | | |
2020 | | |
% | |
| |
| | |
| | |
| | |
| |
Telehealth revenue | |
$ | 68,197,128 | | |
| 73 | % | |
$ | 30,561,163 | | |
| 82 | % |
WorkSimpli revenue | |
| 24,678,678 | | |
| 27 | % | |
| 6,732,747 | | |
| 18 | % |
Total net revenue | |
$ | 92,875,806 | | |
| 100 | % | |
$ | 37,293,910 | | |
| 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 | |
| |
Year Ended December 31, | |
| |
2021 | | |
2020 | |
Beginning of period | |
$ | 916,880 | | |
$ | 109,552 | |
Additions | |
| 23,430,037 | | |
| 6,885,766 | |
Revenue recognized | |
| (22,847,037 | ) | |
| (6,078,438 | ) |
End of period | |
$ | 1,499,880 | | |
$ | 916,880 | |
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 December 31, 2020, the Company
had an allowance for bad debt, attributable to a single agent relationship amounting to approximately $133 thousand. This balance was
written off as of December 31, 2021. As of December 31, 2021 and 2020, the reserve for sales returns and allowances was approximately
$477 thousand and $349 thousand, respectively. For all periods presented the sales returns and allowances were recorded in accounts payable
and accrued expenses on the consolidated balance sheets.
Inventory
As
of December 31, 2021 and 2020, inventory primarily consisted of finished goods related to the Company’s OTC products included in
the telehealth 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 company owned 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 December 31, 2021 and 2020, the Company recorded an inventory reserve in the amount of $57,481.
As
of December 31, 2021 and 2020, the Company’s inventory consisted of the following:
SUMMARY OF INVENTORY
| |
2021 | | |
2020 | |
| |
December 31, | |
| |
2021 | | |
2020 | |
| |
| | |
| |
Finished Goods - Products | |
$ | 1,592,654 | | |
$ | 1,172,624 | |
Raw materials and packaging components | |
| 81,427 | | |
| 149,115 | |
Inventory reserve | |
| (57,481 | ) | |
| (57,481 | ) |
Total Inventory - net | |
$ | 1,616,600 | | |
$ | 1,264,258 | |
Product
Deposit
Many
of our OTC product 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 December 31, 2021 and 2020, the Company has approximately $204 thousand and $817 thousand, 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 December 31, 2021 and 2020, the Company approximates its implicit purchase commitments to be approximately
$511 thousand and $1.6 million, respectively. As of December 31, 2021 and 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 ASC 350-40, Internal-Use Software, are expensed as incurred. As of December 31, 2021 and
2020, the Company capitalized approximately $3.6 million and $438 thousand related to internally developed software costs which is amortized
over the useful life and included in development costs on our statement of operations.
Intangible
Assets
Intangible
assets are comprised of: (1) a customer relationship asset (with original cost of approximately $1,007,000) with an estimated useful
life of three years, (2) a purchased license (with original cost of $200,000) with an estimated useful life of ten years and (3) a purchased
domain name (with an original cost of $22,231) with an estimated useful life of three years. Intangible assets are amortized over their
estimated lives using the straight-line method. 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 year ended December 31, 2021, the Company had a total of $184,914 of its PPP loans forgiven by the Small Business Administration
(“SBA”) (see Note 5). As of December 31, 2021 and 2020, the PPP loan balance was $63,400 and $248,314, 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 WorkSimpli 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 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, 2018, 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
| |
Year Ended December 31, | |
| |
2021 | | |
2020 | |
| |
| | |
| |
Series B Convertible Preferred Stock | |
| 1,264,868 | | |
| 1,124,868 | |
Restricted Stock Units (RSUs) | |
| 975,375 | | |
| - | |
Stock options | |
| 4,257,233 | | |
| 4,232,400 | |
Warrants | |
| 3,888,438 | | |
| 3,550,471 | |
Potentially dilutive securities | |
| 10,385,914 | | |
| 8,907,739 | |
Segment
Data
Our
portfolio of brands are included within two operating segments: Telehealth and WorkSimpli. We believe our current segments and brands
within our segments complement one another and position us well for future growth. Segment operating results are reviewed by the chief
operating decision maker to make determinations about resources to be allocated and to assess performance. Other factors, including type
of business, revenue recognition and operating results are reviewed in determining the Company’s operating segments.
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 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
and pharmacies, although we believe that other contract manufacturers or third-party pharmacies could be quickly secured if any of our
current manufacturers or pharmacies cease to perform adequately. As of December 31, 2021, we utilized four (4) suppliers for fulfillment
services, six (6) suppliers for manufacturing finished goods and four (4) suppliers for packaging, bottling and labeling. As of 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 years ended December 31, 2021 and 2020, we purchased 100%
of our finished goods from six (6) and two (2) OTC manufacturers, respectively.
Recently
Adopted Accounting Pronouncements
In
August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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, 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 December 31, 2021 and 2020, the Company has the following amounts related to intangible assets:
SCHEDULE OF INTANGIBLE ASSETS
| |
Intangible Assets as at: | | |
| |
| |
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 | |
Website domain name | |
| 22,231 | | |
| - | | |
| 3 years | |
Less: accumulated amortization | |
| (1,209,310 | ) | |
| (867,000 | ) | |
| | |
Total net amortizable intangible assets | |
$ | 19,761 | | |
$ | 339,840 | | |
| | |
The
aggregate amortization expense of the Company’s intangible assets for the years ended December 31, 2021 and 2020 was $342,310 and
$335,612, respectively. Total amortization expense for 2022 and 2023 is $7,410 per year and $4,941 for 2024. There is no intangible asset
amortization to be recognized thereafter.
NOTE
4 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
As
of December 31, 2021 and 2020, the Company has the following amounts related to accounts payable and accrued expenses:
SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED
EXPENSES
| |
2021 | | |
2020 | |
| |
December 31, | |
| |
2021 | | |
2020 | |
Accounts payable | |
$ | 9,059,214 | | |
$ | 10,408,172 | |
Accrued selling and marketing expenses | |
| 4,981,453 | | |
| 60,870 | |
Accrued compensation | |
| 1,657,843 | | |
| 237,036 | |
Accrued legal and professional fees | |
| - | | |
| 209,009 | |
Accrued dividends payable | |
| 871,476 | | |
| - | |
Sales tax payable | |
| 2,000,000 | | |
| 125,000 | |
Other accrued expenses | |
| 2,084,833 | | |
| 1,103,333 | |
Total accounts payable and accrued expenses | |
$ | 20,654,819 | | |
$ | 12,143,420 | |
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 $249 thousand (the “PPP
Loan”) under the new Paycheck Protection Program legislation administered by the SBA. 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 SBA 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 SBA until it occurs. During the year ended December 31, 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 consolidated statement of operations.
As
of December 31, 2021 and 2020, the PPP loan balance was $63,400 and $248,314, respectively, and is reflected on the Company’s accompanying
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 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 was repaid in full in August 2021.
Total
interest expense on notes payable, inclusive of amortization of debt discounts, amounted to $159,494 and $1,667,536 for the years ended
December 31, 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 June 1, 2021 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. The debt discount was assigned a twelve-month amortization period. Total
amortization of debt discount was $2,090,236 and $0 for the years ended December 31, 2021 and 2020, respectively. 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) as a result of the June 1, 2021 Purchase
Agreement. In October 2021, the Company used a portion of the net proceeds from the October 4, 2021 Offerings to pay the $15.0 million
outstanding on the June 1, 2021 Purchase Agreement and recorded a loss on debt extinguishment of $4,180,474. The loss on debt extinguishment
is included in the accompanying consolidated statement of operations as of December 31, 2021.
Total
interest expense on long-term debt, inclusive of amortization of debt discounts, amounted to $2,405,222 and $0 for the years ended December
31, 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, 1,610,000
are designated as Series A Preferred Stock and
3,385,000
shares of preferred stock remain undesignated.
On
October 9, 2020, the Company effectuated the Reverse 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 Reverse Split, the Company issued approximately
632 shares for rounding.
On
June 8, 2021, the Company filed 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 the ATM Sales Agreement whereby the Company may offer and sell, from time to time, shares of common stock
having an aggregate offering price of up to $60 million. Under the 2021 Shelf, the Company had the ability to raise up to $150 million,
of which $58.5 million was utilized during the year ended December 31, 2021. The Company has approximately $59.5 million available under
the ATM Sales Agreement and $32 million available under the 2021 Shelf as of December 31, 2021.
Series
A Preferred Stock
As
noted above, in September 2021, the Company entered into the Preferred Underwriting Agreement and the Common Underwriting Agreement with
B.Riley. Pursuant to the Preferred Underwriting Agreement, the Company agreed to sell 1,400,000 shares of its Series A Preferred Stock
under the Preferred Stock Offering. In addition, the Company granted the underwriters an option to purchase up to an additional 210,000
shares of Series A Preferred Stock within 30 days. The option was not exercised. Pursuant to the Common Underwriting Agreement, the Company
agreed to sell to B. Riley 3,833,334 Common Shares under the Common Stock Offering. The offerings, closed on October 4, 2021. Net proceeds
after deducting the underwriting discounts and commissions, the structuring fee and estimated offering expenses payable by the Company,
but before repayment of debt, from the Offerings was approximately $55.3 million.
The
Series A Preferred Stock ranks senior to the Company’s common stock with respect to the payment of dividends and liquidation rights.
The Company will pay cumulative distributions on the Series A Preferred Stock, from the date of original issuance, in the amount of $2.21875
per share each year, which is equivalent to 8.875% of the $25.00 liquidation preference per share. Dividends on the Series A Preferred
Stock will be payable quarterly in arrears, on or about the 15th day of January, April, July and October of each year. The first dividend
on the Series A Preferred Stock sold in this offering was declared on December 23, 2021 to holders of record as of January 4, 2022 and
was paid on January 14, 2022. The first dividend is included is the Company’s results of operations for the year ended December
31, 2021.
Holders
of the Series A Preferred Stock have no voting rights except in the case of certain dividend nonpayments. If dividends on the Series
A Preferred Stock are in arrears, whether or not declared, for six or more quarterly periods, whether or not these quarterly periods
are consecutive, holders of Series A Preferred Stock and holders of all other classes or series of parity preferred stock with which
the holders of Series A Preferred Stock are entitled to vote together as a single class will be entitled to vote, at a special meeting
called by the holders of record of at least 10% of any series of preferred stock as to which dividends are so in arrears or at the next
annual meeting of shareholders, for the election of two additional directors to serve on our Board until all dividend arrearages have
been paid. If and when all accumulated dividends on the Series A Preferred Stock for all past dividend periods shall have been paid in
full, holders of shares of Series A Preferred Stock shall be divested of the voting rights set forth above.
The
Series A Preferred Stock is perpetual and has no maturity date. The Series A Preferred Stock will be redeemable at our option, in whole
or in part, at the following redemption prices, plus any accrued and unpaid dividends up to, but not including, the date of redemption:
1) on and after October 15, 2022 and prior to October 15, 2023, at a redemption price equal to $25.75 per share, 2) on and after October
15, 2023 and prior to October 15, 2024, at a redemption price equal to $25.50 per share, 3) on and after October 15, 2024 and prior to
and prior to October 15, 2025 at a redemption price equal to $25.25 per share and 4) on and after October 15, 2025 at a redemption price
equal to $25.00 per share. In addition, upon the occurrence of a delisting event or change of control, we may, subject to certain conditions,
at our option, redeem the Series A Preferred Stock, in whole or in part within 90 days after the first date on which such delisting event
occurred or within 120 days after the first date on which such change of control occurred, as applicable, by paying $25.00 per share,
plus any accumulated and unpaid dividends up to, but not including, the redemption date.
Upon
the occurrence of a delisting event or a change of control, each holder of Series A Preferred Stock will have the right unless we have
provided or provide notice of our election to redeem the Series A Preferred Stock, to convert some or all of the shares of Series A Preferred
Stock held by such holder into a number of shares of our common stock (or equivalent value of alternative consideration) per share of
Series A Preferred Stock, or the “Common Stock Conversion Consideration”. In the case of a delisting event or change of control,
pursuant to which shares of common stock shall be converted into cash, securities or other property or assets (the “Alternative
Form Consideration”), a holder of shares of Series A Preferred Stock shall receive upon conversion of such shares of Series A Preferred
Stock the kind and amount of Alternative Form Consideration which such holder would have owned or been entitled to receive upon the delisting
event or change of control, had such holder held a number of shares of common stock equal to the Common Stock Conversion Consideration
immediately prior to the effective time of the delisting event or change of control.
Series
B Convertible Preferred Stock
On
August 27, 2020, the Secretary of State of the State of Delaware delivered confirmation of the effective filing of the Company’s
Certificate of Designations of the Series B Convertible Preferred Stock, which established 5,000 shares of the Company’s Series
B Preferred Stock, having such designations, rights and preferences as set forth therein (the “Series B Designations”).
The
shares of Series B Preferred Stock have a stated value of $1,000 per share (the “Series B Stated Value”) and are convertible
into Common Stock at the election of the holder of the Series B Preferred Stock, at a price of $3.25 per share, subject to adjustment
(the “Conversion Price”). Each holder of Series B Preferred Stock shall be entitled to receive, with respect to each share
of Series B Preferred Stock then outstanding and held by such holder, dividends at the rate of thirteen percent (13%) per annum (the
“Preferred Dividends”).
The
Preferred Dividends shall accrue and be cumulative from and after the date of issuance of any share of Series B Preferred Stock on a
daily basis computed on the basis of a 365-day year and compounded quarterly. The Preferred Dividends are payable only when, as, and
if declared by the Board of Directors of the Company (the “Board”) and the Company has no obligation to pay such Preferred
Dividends; provided, however, if the Board determines to pay any Preferred Dividends, the Company shall pay such dividends in kind in
a number of additional shares of Series B Preferred Stock (the “PIK Shares”) equal to the quotient of (i) the aggregate amount
of the Preferred Dividends being paid by the Company in respect of the shares of Series B Preferred Stock held by such holder, divided
by (ii) the Series B Issue Price (as defined in the Series B Designations); provided, further, that, at the election of the purchasers
holding a majority of the shares of Series B Preferred Stock then outstanding, in their sole discretion, such Preferred Dividends shall
be paid in cash or a combination of cash and PIK Shares. Notwithstanding the foregoing, the Preferred Dividends may be paid in cash at
the election of the Company if, and only if, (a) the purchasers holding a majority of the shares of Series B Preferred Stock then outstanding
consent in writing to the payment of any specific dividend in cash, or (b) at any time following the twenty-four (24) month anniversary
of the Closing, (i) the prevailing VWAP of the Common Stock over the trailing ninety (90)-day period is equal to or greater than $15.00
per share (subject to adjustments for stock splits, stock dividends, recapitalizations, reorganizations, reclassifications, combinations,
reverse stock splits or other similar events), and (ii) the average trading volume of the Common Stock over the trailing ninety (90)-day
period is equal to or greater than 40,000 shares of Common Stock per day, or (c) at any time following the thirty-six (36) month anniversary
of the Closing.
The
holders of Series B Preferred Stock rank senior to the Common Stock with respect to payment of dividends and rights upon liquidation
and will vote together with the holders of the Common Stock on an as-converted basis, subject to beneficial ownership limitations, on
each matter submitted to a vote of holders of Common Stock (whether at a meeting of shareholders or by written consent). In addition,
as further described in the Series B Designations, if at least 30% of the number of shares of Series B Preferred Stock sold at the Closing
are outstanding, the Company will not take certain corporate actions without the affirmative vote at a meeting (or the written consent
with or without a meeting) of the purchasers holding a majority of the shares of Series B Preferred Stock then outstanding.
If
at any time following the twelve (12)-month anniversary of the Closing (a) the prevailing VWAP (as defined in the Series B
Designations) of the Common Stock over the trailing ninety (90)-day period is equal to or greater than $15.00 per share ($3.00
pre-split) (subject to adjustments for stock splits, stock dividends, recapitalizations, reorganizations, reclassifications,
combinations, reverse stock splits or other similar events), and (b) the average trading volume of the Common Stock over the
trailing ninety (90)-day period is equal to or greater than 40,000 shares of Common Stock per day, the Company shall have the right,
but not the obligation, in its sole discretion, to elect to convert all, but not less than all, of the then-outstanding shares of
Series B Preferred Stock into Common Stock by delivering written notice of such election (the “Forced Conversion
Notice”) to the holders of the Series B Preferred Stock within ten (10) Business Days following the satisfaction of the
criteria of clauses (a) and (b) above (a “Forced Conversion”). On the Forced Conversion Date (as defined in the
Series B Designations), each share of Series B Preferred Stock shall be converted into the number of fully paid and non-assessable
shares of Common Stock equal to the quotient of: (x) the sum of (1) the Series B Issue Price, plus (2) any accrued but unpaid
dividends on such share of Series B Preferred Stock as of immediately prior to the conversion thereof, including the Preferred
Dividends, divided by (y) the Conversion Price of such share of Series B Preferred Stock in effect at the time of conversion.
The Forced Conversion Notice shall state (i) the number of shares of Series B Preferred Stock held by such Holder that are proposed
to be converted, and (ii) the date on which such Forced Conversion shall occur, which date shall be the thirtieth (30th)
day following the date such Forced Conversion Notice is deemed given (a “Forced Conversion Date”).
In
the event of a Forced Conversion, a holder may elect, in its sole discretion and in lieu of the Forced Conversion, to have each
then-outstanding share of Series B Preferred Stock held by such holder be redeemed by the Company (a “Forced Conversion
Redemption”) by delivering written notice to the Company (a “Forced Conversion Redemption Notice” and the date
such Holder delivers such notice to the Corporation, a “Forced Conversion Redemption Notice Date”) prior to the Forced
Conversion Date, which notice shall state (a) the number of shares of Series B Preferred Stock that are to be redeemed, (b) the date
on which such Forced Conversion Redemption
shall occur, which date shall be the tenth (10th) Business Day following the applicable Forced Conversion Redemption Notice Date (the
“Forced Conversion Redemption Date”) and (c) the wire instructions for the payment of the applicable amount owed to such
holder. Each share of Series B Preferred Stock that is the subject of a Forced Conversion Redemption shall be redeemed by the Company
in cash at a price per share equal to the sum of (1) the Series B Issue Price, plus (2) any accrued but unpaid dividends on such share
of Series B Preferred Stock, including the Preferred Dividends (the “Per Share Forced Conversion Redemption Price”).
At
any time after December 31, 2020, if a sufficient number of shares of Common Stock are not available to effect the conversion of the
Series B Preferred Stock outstanding into Common Stock and the exercise of the Warrants, each holder shall have the right, in its sole
and absolute discretion (in addition to and not to the exclusion of any remedy such holder may have at law or in equity), to require
that the Company redeem (an “Optional Redemption”), to the fullest extent permitted by law and out of funds lawfully available
therefor, all or any portion of such holder’s Series B Preferred Stock then outstanding by delivering written notice thereof. The
Series B Preferred Stock contains certain Change of Control provisions that preclude permanent equity classification.
Securities
Purchase Agreement
On
August 28, 2020, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with an investor (the
“Investor”), to purchase from the Company an aggregate of 3,500
units (the “Units”), at a purchase
price of $1,000
per Unit, each consisting of (i) one share of
Series B Convertible Preferred Stock, and (ii) a warrant to purchase 400
shares of common stock of the Company. The warrants
are exercisable immediately upon issuance, have a 5
year term, an exercise price of $4.60
per share, and provide for a cashless exercise.
The aggregate purchase price for the Units is $3,500,000,
of which (i) $2,892,500
is being paid in cash at the closing of the transaction
and (ii) $607,500,
is being paid by the conversion of the outstanding principal and interest due on the Secured Convertible Promissory Note (the “Note”)
issued by the Company to the Investor on July 27, 2020. The Purchase Agreement provides that the Investor may not sell, transfer,
or otherwise dispose of the Series B Preferred Stock or warrants (or the shares of Common Stock issuable thereunder) for a period
of one year following the closing.
As
a result of the Purchase Agreement, the Company recorded a deemed dividend to the holders of the Series B Preferred Stock of $3,500,000
for the value of the warrants and beneficial conversion feature in excess of the purchase price. Additionally, the Company recorded this
instrument in the mezzanine section of the accompanying consolidated balance sheet of $3,500,000 for the value of the Series B Preferred
Stock redemption feature. This balance was increased by $155,822 for the 13% dividend accrued for the Series B Preferred stockholders
for a balance of $3,655,822 as of December 31, 2020. Total dividends accrued for the year ended December 31, 2021 were $455,000 and are
included in interest expense on the consolidated statement of operations. The balance for the Series B Preferred Stock was $4,110,822
as of December 31, 2021.
Consulting
Agreement – August 2020
On
August 31, 2020, the Company entered into a consulting agreement (the “CL1 Consulting Agreement”) with a consultant (“CL1”
or “Consultant”), to which Consultant will assist the Company with, among other things, general operations of the business,
marketing and branding, and recruiting talent in connection with the Company’s men’s sexual health, hair loss, and
PDF businesses (the “Services”). As compensation for the Services, Consultant shall receive from the Company two warrants
(“Consulting Warrant 1” and “Consulting Warrant 2” collectively, the “Consulting Warrants”), that
entitle Consultant to purchase up to an aggregate of 750,000
of Common Stock of the Company according to the
terms and conditions outlined therein, including any restrictions on exercisability. During the five-year term of Consulting Warrant
1, Consultant may purchase up to an aggregate of 500,000
shares of Common Stock, at an exercise price
equal to the closing price of the Common Stock immediately prior to the Closing of $5.20
per share, and Consulting Warrant 1 becomes exercisable
as to such shares of Common Stock in 18 equal monthly installments beginning on the date that is six months following the issue date
or immediately prior to the consummation of a change of control of the Company. During the five-year term of Consulting Warrant 2, Consultant
may purchase up to an aggregate of 250,000
shares of Common Stock, at an exercise price
of $5.75
per share, and Consulting Warrant 2 becomes exercisable
as to such shares of Common Stock on the date that is 24
months following the issue date or immediately
prior to the consummation of a change of control of the Company.
Warrant
Purchase Agreement
Concurrently,
the Company entered into a warrant purchase agreement (the “Warrant Purchase Agreement”) with CL1 to purchase from the Company
(i) a warrant to purchase 500,000 shares of Common Stock, at an exercise price equal to the closing price of the Common Stock immediately
prior of $5.20 per share (the “Class A Warrant”), for a purchase price of $15,000, and (ii) a warrant to purchase 250,000
shares of Common Stock, at an exercise price of $5.75 per share (the “Class B Warrant” and, together with the Class A Warrant,
the “Purchased Warrants”), for a purchase price of $10,000. Each of the Purchased Warrants have a five-year term. Each of
the Purchase Warrants is immediately exercisable as to fifty percent (50%) of the shares issuable thereunder and the remaining fifty
percent (50%) shall become exercisable on the date that is six months following the issue date of each Purchased Warrant, subject to
a repurchase right in favor of the Company.
The
fair value of the Purchased Warrants was approximately $4,743,893, which was determined by the Black-Scholes Pricing Model with the following
assumptions: dividend yield of 0%, term of 5 years, volatility of 161.4%, and risk-free rate of 0.28%. Total amortization of the Consulting
Warrants for the years ended December 31, 2021 and 2020 was $2,371,947 and $790,649, respectively, and is reflected in stock-based compensation,
with unamortized costs of $1,581,298 remaining at December 31, 2021.
Private
Placement Offering – November 2020
On
November 3, 2020, the Company consummated an initial closing of a private placement offering (the “Offering”), whereby pursuant
to the securities purchase agreement (the “November 2020 Purchase Agreement”) entered into by the Company and certain accredited
investors on October 30, 2020 (each an “Investor” and collectively, the “Investors”) the Company sold to such
Investors an aggregate of 3,044,529 shares (the “Shares”) of the Company’s common stock, par value $0.01 per share
(the “Common Stock”), for an aggregate purchase price of approximately $14.46 million (the “Purchase Price”).
The Purchase Price was funded on November 3, 2020 (the “Closing Date”) and resulted in net proceeds to the Company of approximately
$13.5 million.
Pursuant
to the November 2020 Purchase Agreement, the Company agreed, for a period of 90 days from the closing date, not to issue or enter into
any agreement to issue any shares of common stock or common stock equivalents with the exception of certain exempt issuances as provided
therein.
BTIG,
LLC (the “Placement Agent”) acted as exclusive placement agent for the Offering and received cash compensation equal to 6%
of the Purchase Price and warrants to purchase 91,336
shares of the Company’s common stock, at
an initial exercise price of $4.75
per share, subject to adjustment for any reorganization,
recapitalization, non-cash dividend, stock split, reverse stock split, or other similar transaction (the “PA Warrants”).
The PA Warrants may be exercised on a “cashless” basis and will expire on November
3, 2025.
On
November 19, 2020, the Company consummated the second and final closing (“Final Closing”) of the Offering, whereby pursuant
to the November 2020 Purchase Agreement entered into by the Company and an accredited investor on November 19, 2020 (the “Investor”)
the Company sold to the Investor 323,892 shares (the “Shares”) of the Company’s common stock for a purchase price of
approximately $1.54 million (the “Purchase Price”). The Purchase Price was funded on November 19, 2020 (the “Closing
Date”) and resulted in net proceeds to the Company of approximately $1.4 million. The aggregate gross proceeds to the Company from
the Offering was $16 million.
Pursuant
to the November 2020 Purchase Agreement, the Company agreed, for a period of 90 days from the closing date, not to issue or enter into
any agreement to issue any shares of common stock or common stock equivalents with the exception of certain exempt issuances as provided
therein.
BTIG,
LLC (the “Placement Agent”) acted as exclusive placement agent for the Offering and received cash compensation equal to 6%
of the Purchase Price. In connection with the Final Closing the Placement Agent received warrants to purchase 9,717
shares of the Company’s common stock, at
an initial exercise price of $4.75
per share, subject to adjustment for any reorganization,
recapitalization, non-cash dividend, stock split, reverse stock split, or other similar transaction (the “PA Warrants”).
The PA Warrants expire on November
19, 2025 and may be exercised on a “cashless”
basis.
Convertible
Promissory Notes
Beginning
May 21, 2020 through May 27, 2020 the Company issued convertible promissory notes (the “May 2020 Notes”) to five (5) accredited
investors (each a “May 2020 Investor”, and collectively, the “May 2020 Investors”). The aggregate principal amount
of the May 2020 Notes is $1,000,000 for which the Company received gross proceeds of $1,000,000. The May 2020 Notes may be converted
into shares of the Company’s common stock at any time following the date of issuance at a conversion price of $2.50 per share,
subject to adjustment. During the week ended November 6, 2020, all accredited investors agreed to convert the May 2020 Notes (the “Note
Conversions”) pursuant to the terms therein. On November 24, 2020, the Company issued an aggregate of 447,763 shares of common
stock related to the Note Conversions at $2.50 per share, resulting in the total principal and interest conversion of $1,119,408.
Options
and Warrants
During
the year ended December 31, 2021, the Company issued an aggregate of 375,000 shares of common stock related to the exercise of options
for total proceeds of $670,750.
During
the year ended December 31, 2021, the Company issued an aggregate of 873,047 shares of common stock related to cashless exercise of options.
During
the year ended December 31, 2021, the Company issued an aggregate of 162,033 shares of common stock related to the exercise of warrants
for total proceeds of $480,609.
During
the year ended December 31, 2020, the Company issued an aggregate of 535,600 shares of common stock related to the exercise of options
for total proceeds of $302,400.
During
the year ended December 31, 2020, the Company issued an aggregate of 534,774 shares of common stock related to cashless exercise of options.
During
the year ended December 31, 2020, the Company issued an aggregate of 1,472,556 shares of common stock related to cashless exercise of
warrants.
During
the year ended December 31, 2020, the Company issued a total of 379,957 shares of common stock from the exercise of warrants and cash
proceeds of $622,763.
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 million 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 year ended December
31, 2020 for the issuance of these 2,000,000 shares.
Common
Stock
Common
Stock Transactions During the Year Ended December 31, 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.
As
noted above, in September 2021, the Company entered into the Common Underwriting Agreement with B.Riley. Pursuant to the Common Underwriting
Agreement, the Company agreed to sell to B. Riley 3,833,334 Common Shares under the Common Stock Offering which closed on October 4,
2021. The Common Stock Offering resulted in net proceeds to the Company of approximately $21.8 million after deducting the underwriting
discounts and commissions, the structuring fee and estimated offering expenses payable by the Company, but before repayment of debt.
During
the year ended December 31, 2021, the Company issued an aggregate of 1,347,875 shares of common stock for services rendered.
During
the year ended December 31, 2021, the Company sold 70,786 shares of common stock under the ATM Sales Agreement for net proceeds of $493,481.
Common
Stock Transactions During the Year Ended December 31, 2020
During
the year ended December 31, 2020, the Company issued an aggregate of 2,900,000 shares of common stock related to stock issued for services
totaling $18,305,000.
In
September 2020, the Company received aggregate proceeds of $25,000 for the sale of warrants from the Warrant Purchase Agreement.
In
May 2020, the Company issued 294,120 shares of common stock to an investor for $250,000 in cash consideration.
During
the year ended December 31, 2020, the Company issued 2,722,187 shares of common stock for share liability of $2,181,453.
On
November 24, 2020, the Company issued an aggregate of 447,763 shares of common stock related to the Note Conversions at $2.50 per share,
totaling $1,119,408.
On
October 7, 2020, the Company issued a noteholder, who is also a director, 96,923 common shares in connection with a Debt Exchange Agreement
dated September 22, 2020 (See Note 10).
Effective
October 14, 2020, the Company issued an aggregate of approximately 632 shares for rounding in connection with the Reverse Split.
WorkSimpli
Software Restructuring Transaction
Effective
January 22, 2021 (the “WSS Effective Date”), the Company consummated the WSS Restructuring. To effect the WSS 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 WSS in favor of Conversion Labs PR, for 37,531 newly issued membership interests of WSS (the “Exchange”).
Upon consummation of the Exchange the CVLBPR Note was extinguished.
Concurrently,
in furtherance of the WSS Restructuring, Conversion Labs PR entered into two Membership Interest Purchase Agreements (the “Founding
Members MIPAs”) with two founding members of WSS (the “Founding Members”) whereby Conversion Labs PR purchased from
the Founding Members an aggregate of 2,183 membership interests of WSS for an aggregate purchase price of $225,000, paid in December
2020.
In
furtherance of the WSS Restructuring, Conversion Labs PR entered into a Membership Interest Purchase Agreement with WSS, (the “CVLB
PR MIPA”), pursuant to which Conversion Labs PR purchased 12,000 membership interests of WSS 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 WSS Effective Date.
Following
the consummation of the WSS Restructuring, Conversion Labs PR increased its ownership of WSS from 51% to approximately 85.58% on a fully
diluted basis. WSS entered into an amendment to its operating agreement (the “WSS Operating Agreement Amendment”) to reflect
the change in ownership.
Concurrently
with the WSS 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 WSS. Upon vesting, the Fitzpatrick Options
and the Pathak Options provide for the potential re-purchase of up to an additional 13.25% of WSS 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 WSS 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
WSS achieving $2,500,000 of gross sales in any fiscal quarter (ii) 3,434 membership interests upon WSS achieving $4,000,000 of gross
sales in any fiscal quarter, and (iii) 3,434 membership interests upon WSS 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 WSS achieving $2,500,000 of gross sales in any fiscal quarter (ii) 700 membership interests upon WSS achieving $4,000,000 of gross sales in any fiscal quarter, and (iii) 700 membership interests upon WSS 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 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 of the Board 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 and ending on (and including)
January 1, 2030. 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.
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
December 31, 2021, total authorization under the 2020 Plan was 3,150,000 shares. As of January 1, 2022, the Plan provided for the issuance
of up to 3,300,000 shares of Common Stock. Remaining authorization under the 2020 Plan was 633,250 shares as of December 31, 2021.
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 WorkSimpli (“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 year ended December 31, 2021, the Company issued an aggregate of 1,844,500 stock options to employees and advisory board members
under the 2020 Plan and the prior plan. These stock options have contractual terms of 5 years to 10 years and vest in increments which
fully vest the options over a two-to-three-year period, dependent on the specific agreements’ terms.
A
summary of outstanding options activity under our 2020 Plan is as follows:
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, 2019 | |
| - | | |
$ | - | | |
| | | |
$ | - | |
Granted | |
| 720,000 | | |
| 7.21 – 8.81 | | |
| 9.76 years | | |
| 7.73 | |
Balance, December 31, 2020 | |
| 720,000 | | |
| 7.21 – 8.81 | | |
| 9.76 years | | |
| 7.73 | |
Granted | |
| 1,354,500 | | |
| 4.57 – 21.02 | | |
| 8.99 years | | |
| 10.34 | |
Exercised | |
| - | | |
| | | |
| | | |
| | |
Cancelled/Forfeited/Expired | |
| (11,000 | ) | |
| 13.74 | | |
| 9.48 years | | |
| 13.74 | |
Balance at December 31, 2021 | |
| 2,063,500 | | |
$ | 4.57 – 21.02 | | |
| 8.04 years | | |
$ | 9.41 | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable at December 31, 2020 | |
| 63,750 | | |
$ | 7.21
– 8.81 | | |
| 9.79 years | | |
$ | 8.09 | |
Exercisable at December 31, 2021 | |
| 636,229 | | |
$ | 4.57
– 21.02 | | |
| 8.95 years | | |
$ | 9.18 | |
The
total fair value of the options granted was approximately $19,101,661,
which was determined by the Black-Scholes Pricing Model with the following assumptions: dividend yield of 0%,
expected term of 4
– 6.5
years, volatility of 165.44%
– 376.18%,
and risk-free rate of 0.66%
– 1.29%.
Total compensation expense under the 2020 Plan options above was approximately $5,566,981
and $341,729
for the years ended December 31, 2021 and 2020,
respectively, with unamortized expense remaining of approximately $13,418,283
as of December 31, 2021.
A
summary of outstanding service-based options activity (prior to the establishment of our 2020 Plan above) is as follows:
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, 2019 | |
| 3,114,000 | | |
$ | 0.88
– 7.50 | | |
| 4.11
years | | |
$ | 1.60 | |
Granted | |
| 824,000 | | |
| 0.80
– 7.95 | | |
| 7.95
years | | |
| 4.62 | |
Exercised | |
| (1,175,600 | ) | |
| 0.88
– 2.00 | | |
| 2.97
years | | |
| 1.11 | |
Cancelled/Expired/Forfeited | |
| (305,000 | ) | |
| 1.00
– 2.00 | | |
| 6.52
years | | |
| 1.54 | |
Balance, December 31, 2020 | |
| 2,457,400 | | |
| 0.80
- 7.95 | | |
| 5.25
years | | |
| 2.30 | |
Granted | |
| 490,000 | | |
| 3.78
– 19.61 | | |
| 6.53
years | | |
| 11.64 | |
Exercised | |
| (1,122,000 | ) | |
| 0.80
– 2.00 | | |
| 2.22
years | | |
| 1.38 | |
Cancelled/Forfeited/Expired | |
| (166,667 | ) | |
| 1.50
– 7.50 | | |
| 8.74
years | | |
| 4.51 | |
Balance at December 31,
2021 | |
| 1,658,733 | | |
$ | 1.00
– 19.61 | | |
| 5.85
years | | |
$ | 5.45 | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable December 31, 2020 | |
| 1,595,791 | | |
$ | 0.80
– 7.95 | | |
| 2.50
years | | |
$ | 2.46 | |
Exercisable at December 31, 2021 | |
| 1,019,164 | | |
$ | 1.00
– 19.61 | | |
| 5.21
years | | |
$ | 3.60 | |
The
total fair value of the options granted was approximately $5,269,769, which was determined by the Black-Scholes Pricing Model with the
following assumptions: dividend yield of 0%, expected term of 4 – 6.5 years, volatility of 126.64% – 412.48%, and risk-free
rate of 0.28% – 1.55%. Total compensation expense under the above service-based option plan was approximately $2,013,749 and $559,512
for the years ended December 31, 2021 and 2020, respectively, with unamortized expense remaining of approximately $4,693,484 as of December
31, 2021. Of the total service-based options exercised during the year ended December 31, 2021, 747,000 options were exercised on a cashless
basis which resulted in 657,170 shares issued and 375,000 options were exercised for cash.
A
summary of outstanding performance-based options activity is as follows:
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, 2019 | |
| 1,375,000 | | |
$ | 1.25
– 2.50 | | |
| 5.11
years | | |
$ | 1.71 | |
Cancelled/Expired | |
| (220,000 | ) | |
| 1.50
– 2.00 | | |
| 6.01
years | | |
| 1.70 | |
Balance at December 31, 2020 | |
| 1,155,000 | | |
| 1.25
– 2.50 | | |
| 4.94
years | | |
| 1.71 | |
Granted | |
| - | | |
| | | |
| | | |
| | |
Exercised | |
| (235,000 | ) | |
| 2.00 | | |
| 0.03
years | | |
| 2.00 | |
Cancelled/Forfeited/Expired | |
| (385,000 | ) | |
| 1.25
– 2.00 | | |
| 3.94
years | | |
| 1.67 | |
Balance at December 31,
2021 | |
| 535,000 | | |
$ | 1.25
– 2.50 | | |
| 5.59
years | | |
$ | 1.60 | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable December 31, 2020 | |
| 425,000 | | |
$ | 2.00 | | |
| 1.18
years | | |
$ | 2.00 | |
Exercisable at December 31, 2021 | |
| 100,000 | | |
$ | 1.75
– 2.50 | | |
| 1.96
years | | |
$ | 2.01 | |
Total
compensation expense under the above performance-based option plan was approximately $222,897 for the year ended December 31, 2021. No
compensation expense was recognized on the performance-based option plan above for the year ended December 31, 2020 as the performance
terms had not been met or were not probable. All of the performance-based options exercised during the year ended December 31, 2021,
were exercised on a cashless basis which resulted in 215,877 shares issued.
Restricted
Stock Units (RSUs) (under 2020 Plan)
A
summary of outstanding RSU activity under our 2020 Plan is as follows:
SCHEDULE OF WARRANT AND RESTRICTED STOCK OUTSTANDING AND EXERCISABLE
| |
RSU Outstanding
Number of Shares | |
Balance, December 31, 2019 | |
| - | |
Granted | |
| - | |
Balance at December 31, 2020 | |
| - | |
Granted | |
| 459,250 | |
Vested | |
| (77,875 | ) |
Forfeited | |
| (6,000 | ) |
Balance at December 31, 2021 | |
| 375,375 | |
The
total fair value of the 459,250 RSUs granted was approximately $5,106,320 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 $1,001,536 and $0 for the
years ended December 31, 2021 and 2020, respectively, with unamortized expense remaining of approximately $4,063,864 as of December 31,
2021. During the year ended December 31, 2021, 77,875 RSUs vested, of which 41,875 RSUs were issued.
RSUs
(outside of 2020 Plan)
The
Company granted 620,000 RSUs outside of the 2020 Plan during the year ended December 31, 2021. The total fair value of these RSUs was
approximately $6,867,600. Total compensation expense for RSUs outside of the 2020 Plan was $846,600 and $16,217,000 for the years ended
December 31, 2021 and 2020, respectively, with unamortized expense remaining of approximately $6,021,000. During the year ended December
31, 2021, 20,000 RSUs vested and were issued.
On
October 21, 2020 and November 6, 2020, the Board of the Company, appointed two new directors to the Board. In connection with the appointments
to the Board, the directors each received a one-time grant of 20,000 shares of the Company’s common stock outside of the 2020 Plan.
Appointment
of Chief Compliance Officer
On
November 20, 2020, the Board of the Company appointed a new Chief Compliance Officer and General Counsel (our “CCO”). In
connection with the CCO appointment, our CCO entered into an employment agreement with the Company, which includes stock options to purchase
up to 200,000 shares of the Company’s common stock with an aggregate value of $1,765,837.
Appointment
of Chief Operating Officer
On
November 27, 2020, we appointed a new Chief Operating Officer (“COO”). In connection with the appointment, our COO entered
into an employment agreement dated December 21, 2020 (the “Amended and Restated Employment Agreement”) with the Company.
In connection with his appointment, our COO was granted: (i) Stock Options (the “Stock Options”) to purchase up to 200,000
shares of the Company’s common stock, with 35,000 of the Stock Options scheduled to vest upon the Company’s shareholders
approving a bona fide employee stock option plan (the “Plan”), and the remaining 165,000 Stock Options to vest in equal monthly
tranches, based on the passage of time, over the 30 months following the approval of the Plan; and (ii) upon the approval of the Plan,
a grant of 10,000 restricted stock units of the Company’s common stock in the form of RSUs, which vested on the one-year anniversary
of the Amended and Restated Employment Agreement. The aggregate value of the Stock Options was $1,384,883. On June 29, 2021, the Company
and our COO entered into a Second Amendment (the “Second Amendment”) to the Amended and Restated Employment Agreement dated
December 21, 2020 to provide that our COO is eligible to receive up to 300,000 RSUs, which will vest subject to the Company’s Telehealth
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 Acquisition Officer
On
December 8, 2020, the Company entered into an Amended and Restated Employment Agreement (the “Amended CAO Employment Agreement”)
with the Company’s current Chief Acquisition Officer, (our “CAO”), amending and restating in its entirety the Employment
Agreement between the Company and our CAO, dated July 26, 2018. Pursuant to the Amended CAO Employment Agreement, our CAO has been granted
options to purchase up to 200,000 shares of Common Stock of the Company (the “CAO Options”), which shall vest at a rate of
5,555 options each month for thirty-five (35) consecutive months beginning on the Effective Date, with the final 5,575 shares vesting
on December 8, 2023. The aggregate value of these options was $1,497,885.
Additionally,
under the Amended CAO Employment Agreement, our CAO is eligible to receive up to three hundred thousand (300,000) RSUs, subject to the
Company’s Telehealth Brands (as defined in the Amended CAO Employment Agreement) achieving certain revenue milestones. The RSUs,
if, and to the extent issued, will vest upon the earlier of a Change of Control (as defined in the Amended CAO Employment Agreement)
or December 8, 2023.
Warrants
A
summary of outstanding and exercisable warrant activity is as follows:
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, 2019 | |
| 2,265,324 | | |
$ | 1.00
– 2.50 | | |
| 5.77
years | | |
$ | 1.25 | |
Granted | |
| 4,209,596 | | |
| 0.65
– 5.75 | | |
| 5.56
years | | |
| 3.87 | |
Exercised/Expired | |
| (2,924,449 | ) | |
| 0.65
– 0.70 | | |
| 0.82
years | | |
| 0.96 | |
Balance at December 31, 2020 | |
| 3,550,471 | | |
| 1.40
– 5.75 | | |
| 5.58
years | | |
| 4.56 | |
Granted | |
| 500,000 | | |
| 12.00 | | |
| 4.67
years | | |
| 12.00 | |
Exercised | |
| (162,033 | ) | |
| 1.75
– 4.75 | | |
| 1.83
years | | |
| 2.97 | |
Balance at December 31,
2021 | |
| 3,888,438 | | |
$ | 1.40
– 12.00 | | |
| 4.94
years | | |
$ | 5.59 | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable December 31, 2020 | |
| 2,144,700 | | |
$ | 1.40
– 5.75 | | |
| 7.67
years | | |
$ | 4.29 | |
Exercisable December 31, 2021 | |
| 2,621,307 | | |
$ | 1.40
– 12.00 | | |
| 6.36
years | | |
$ | 5.98 | |
Total
compensation expense on the above warrants for services was approximately $2,419,896 and $1,582,984 for the years ended December 31,
2021 and 2020, respectively, with unamortized expense remaining of approximately $7,917,938.
August
2020 Warrant Inducement
During
August 2020, the Company offered an inducement to all 26 warrant holders of our $2.00 strike price warrants, which total 526,846 common
stock warrants outstanding, by offering a reduced exercise price of $1.75 (a $0.25 discount) for these warrants if they are immediately
exercised. For the year ended December 31, 2020, there were 379,957 of these warrants exercised, and none forfeited or adjusted. The
Company accounted for the warrant inducement as a deemed dividend based on the difference in the Black-Scholes value of the warrants
immediately before and immediately after the inducement. The significant assumptions used included common stock volatility of 148.49%,
risk free rate of 0.14%, a weighted average term of 1.6 years and the current stock price of the Company as of the date of inducement.
Based on the Black-Scholes valuation method, the Company recorded a deemed dividend to additional paid in capital and retained earnings
on the inducement of approximately $73,636 and received proceeds from the warrants exercised of approximately $623,000 during the year
ended December 31, 2020.
Alpha
Capital Anstalt (“Alpha”) Warrants
On
February 25, 2020, the Company and Alpha entered into a Note Repayment and Warrant Amendment Agreement (the “2018 Alpha Amendment”)
whereby the Company agreed to (i) repay the outstanding balance of the convertible promissory note issued in favor of Alpha, effective
on May 29, 2018, in the amount of $224,145, including principal and interest (the “2018 Alpha Note”) and (ii) amend the exercise
price of the warrant (the “2018 Alpha Warrant”) issued to Alpha in connection with the 2018 Alpha Note on May 29, 2018. The
2018 Alpha Warrant originally provided for the purchase of up to 391,304 shares of the Company’s common stock at an exercise price
of $1.40 per share, none of which have been exercised as of the date of the 2018 Alpha Amendment. Pursuant to the terms of the 2018 Alpha
Warrant and in connection with the 2018 Alpha Amendment, the Company revised the exercise price of the Alpha 2018 Warrant from $1.40
per share to $0.68 per share and increased the number of shares issuable under the Alpha 2018 Warrant from 391,304 to 811,594 shares.
On
February 25, 2020, the Company and Alpha entered into a Note Repayment and Warrant Amendment Agreement (the “2019 Alpha Amendment”)
whereby the Company agreed to (i) repay the outstanding balance of the convertible promissory note issued in favor of Alpha on August
15, 2019 in the amount of $520,000, including principal and interest (the “August 2019 Alpha Note”) and (ii) amend the exercise
price of the August 2019 Warrant issued to Alpha in connection with the 2019 Alpha Note on August 15, 2019. The August 2019 Warrant issued
to Alpha originally provided for the purchase of up to 365,217 shares of the Company’s common stock at an exercise price of $1.40
per share, none of which have been exercised as of the date of the 2019 Alpha Amendment. Pursuant to the 2019 Alpha Amendment, Alpha
has agreed to the reduction of the exercise price from $1.40 to $1.15, subject to further adjustment. As a result of the above described
reduction of the exercise price and the application of certain provisions of the 2019 Alpha Warrant, the amount of shares that may be
purchased upon exercise of the 2019 Alpha Warrant after giving effect to the foregoing is increased to 757,488 shares of the Company’s
common stock.
On
May 7, 2020, the Company agreed to further amend August 2019 Warrant issued to Alpha on August 15, 2019, as amended on February 25, 2020
(the “Second Alpha Warrant Amendment”). Specifically, pursuant to anti-dilution provisions contained therein, the Company
agreed to amend the August 2019 Warrant issued to Alpha in order to increase the amount of shares able to be purchased thereunder by
an additional 331,401 shares of the Company’s common stock or an aggregate of up to 1,088,889 shares (the “Alpha Warrant
Shares”). On the same day, Alpha exercised, on a cashless basis, all of the August 2019 Warrants issued to Alpha, as amended, resulting
in the issuance of 391,466 shares of the Company’s common stock to Alpha, with no effect on the Company’s statement of operations.
Upon Alpha’s cashless exercise, the August 2019 Warrants issued to Alpha are no longer in force or effect and no additional issuances
will be due or owing.
As
a result of the above transactions, the Company has recorded a deemed dividend to Alpha for the price adjustments of the August 2019
Warrant issued to Alpha of $915,479 which is recorded in the statement of changes in stockholder’s equity as an increase in additional
paid in capital and a reduction of accumulated deficit. During the month of March 2020, Alpha exercised a portion of their warrants in
a cashless exercise, whereby Alpha exercised 267,223 common stock warrants to obtain 90,231 shares of common stock.
Brio
Master Fund (“Brio”) Warrants
On
February 25, 2020, the Company, and Brio entered into a Warrant Amendment Agreement to amend the exercise price of the warrant issued
to Brio on May 29, 2018. The Brio 2018 Warrant originally provided for the purchase of up to 86,957 shares of the Company’s common
stock at an exercise price of $1.40 per share, none of which have been issued as of the date of the 2018 Brio Warrant Amendment. Pursuant
to the 2018 Brio Warrant Amendment, the Company agreed to revise the exercise price of the 2018 Brio Warrant from $1.40 per share to
$0.68 per share and increased the number of shares issuable under the 2018 Brio Warrant from 86,957 to 93,398 shares.
On
February 25, 2020, the Company, and Brio entered into a Note Repayment and Warrant Amendment Agreement whereby the Company agreed to
(i) repay the outstanding balance of the Convertible Promissory Note issued in favor of Brio on August 15, 2019 in the amount of $162,500,
including principal and interest and (ii) amend the exercise price of the warrant issued to Brio in connection with the 2019 Brio Note
on August 15, 2019. The Brio 2019 Warrant originally provide for the purchase of up to 114,130 shares of the Company’s common stock
at an exercise price of $1.40 per share, none of which have been exercised as of the date of the 2019 Brio Amendment. Pursuant to the
2019 Brio Amendment, Brio has agreed to the reduction of the exercise price of $1.40 to $1.15, subject to further adjustment. As a result
of the above described reduction of the exercise price and the application of certain provisions of the 2019 Brio Warrant, the amount
of shares that may be purchased upon exercise of the 2019 Brio Warrant after giving effect to the foregoing is increased to 236,715 shares
of the Company’s common stock.
On
May 7, 2020, the Company agreed to further amend those certain warrants issued to Brio on August 15, 2019, as amended on February 25,
2020. Specifically, pursuant to anti-dilution provisions therein, the Company agreed to amend the 2019 Brio Warrant in order to increase
the amount of shares able to be purchased thereunder by an additional 103,562 shares of the Company’s common stock or an aggregate
of up to 340,278. On the same day, Brio exercised on a cashless basis the Brio Warrants in full resulting in the issuance of 103,562
shares of the Company’s common stock to Brio with no effect on the Company’s statement of operations. Upon Brio’s cashless
exercise, the 2019 Brio Warrants are no longer in force or effect and no additional issuances will be due or owing.
As
a result of the above transactions, the Company has recorded a deemed dividend to Brio for the price adjustments of the Brio warrants
of $226,906 which is recorded in the statement of changes in stockholder’s equity as an increase in additional paid in capital
and a reduction of accumulated deficit. During the month of March 2020, Brio exercised a portion of their warrants in a cashless exercise,
whereby Alpha exercised 100,000 common stock warrants to obtain 57,547 shares of common stock.
Amended
Consulting Agreement
On
September 29, 2020, the parties entered into an amendment to the Consulting Agreement (the “Amended Consulting Agreement”)
with Blue Horizon Consulting, LLC (“Blue Horizon”) primarily to change the compensation for services provided by the Consultant.
Under the Amended Consulting Agreement, Blue Horizon may receive an aggregate of up to 2,000,000 shares of the Company’s common
stock, subject to adjustment, upon the Company reaching certain revenue milestones. Happy Walters, a member of the Board, is the sole
owner of Blue Horizon. The Amended Consulting Agreement was approved by the Company’s disinterested directors.
As
a result of the Amended Consulting Agreement, the Company recorded stock compensation expense of $15,900,000 during the year ended December
31, 2020, representing the fair value of the 2,000,000 shares of common stock earned under the Amended Consulting Agreement during the
year. No shares remained unearned under the Amended Consulting Agreement as of December 31, 2020. A total of 800,000 common shares of
the total 2,000,000 shares earned were issued under the Amended Consulting Agreement on October 16, 2020, with the remaining 1,200,000
shares issued on February 24, 2021.
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 $12,071,659 and $36,961,141 for the years ended December 31, 2021 and 2020, respectively.
Such amounts are included in general and administrative expenses in the consolidated statement of operations. Unamortized expense remaining
related to service-based stock options, performance-based stock options, warrants and RSUs was approximately $36,114,569 as of December
31, 2021.
NOTE
8 – LEASES
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes all existing guidance on accounting for leases in ASC
840, Lease Accounting. ASU 2016-02 is intended to provide enhanced transparency and comparability by requiring lessees to record
right-of-use assets and corresponding lease liabilities on the balance sheet. ASU 2016-02 will continue to classify leases as either
finance or operating, with classification affecting the pattern of expense recognition in the statement of income.
The
Company leases office space domestically under operating leases. The Company’s headquarters are located in New York, New York for
which the lease expires in 2025. We operate a marketing and sales center in Huntington Beach, California for which the lease expires
in 2023 and a patient care center in Greenville, South Carolina for which the lease expires in 2024.
The
table below reconciles the undiscounted future minimum lease payments under the above noted operating leases to the total operating lease
liabilities recognized on the consolidated balance sheet as of December 31, 2021:
SCHEDULE
OF MATURITY OF OPERATING LEASE LIABILITIES
| |
| | |
Fiscal year 2022 | |
$ | 715,969 | |
Fiscal year 2023 | |
| 703,897 | |
Fiscal year 2024 | |
| 484,580 | |
Fiscal year 2025 | |
| 68,850 | |
Less: imputed interest | |
| (187,262 | ) |
Present value of operating lease liabilities | |
$ | 1,786,034 | |
Operating
lease expenses were $47,565 and $10,886 for the years ended December 31, 2021 and 2020, respectively, and were included in other operating
expenses in our consolidated statement of operations.
Other
information related to operating lease liabilities consisted of the following:
SCHEDULE
OF OTHER INFORMATION RELATED TO OPERATING LEASE LIABILITIES
| |
Year Ended December 31, | |
| |
2021 | | |
2020 | |
Cash paid for operating lease liabilities | |
$ | 392,241 | | |
$ | 90,962 | |
Weighted average remaining lease term in years | |
| 3.75 | | |
| 4.08 | |
Weighted average discount rate | |
| 7.15 | % | |
| 7.0 | % |
We
have elected to apply the short-term lease exception to the warehouse space we lease in Lancaster, Pennsylvania. This lease has a term
of 12 months
and is not recognized on the balance sheet, but rather expensed on a straight-line basis over the lease term. Straight-line lease payments
are $2,100 per
month. Additionally, Conversion Labs PR utilizes office space in Puerto Rico, which is currently subleased from Fried LLC,
on a month-to-month basis, incurring rental expense of approximately $3,000
per month.
NOTE
9 - 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 December 31, 2021 and
2020, no amount was included in accounts payable and accrued expenses in regard to this agreement.
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 December 31, 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 December 31, 2021 and 2020, the Company approximates
its implicit purchase commitments to be approximately $511 thousand and $1.6 million, respectively.
Employment
and Consulting Agreements
The
Company has entered into various agreements with officers, directors, employees and consultants that expire in terms of one to five years.
See Note 10.
Legal
Matters
In
the normal course of business operations, the Company may become involved in various legal matters. As of December 31, 2021, other than
as set forth below, the Company’s management does not believe that there are any potentially material pending legal proceedings.
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 alleged 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 did not quantify damages but sought 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 made the same claims as found in the Owens, Sr. Lawsuit, and, similarly, did not quantify
damages and sought 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 alleged, inter alia,
that the defendants’ www.rexmd.com had barriers making it inaccessible to the visually impaired needing the assistance
of screen-reading software, and therefore, allegedly violated: (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 did not quantify damages but sought 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 sought preliminary and permanent injunctive relief. On September 20, 2021, the class action lawsuit filed against
the Company was voluntarily dismissed.
On
December 10, 2021, a purported breach of contract, breach of duty of good faith and fair dealing, unjust enrichment, quantum meruit,
and fraud lawsuit, captioned Harborside Advisors LLC v. LifeMD, Inc., Case No. 21-cv-10593, was filed in the United States
District Court for the Southern District of New York against the Company. The Harborside Complaint alleges, among other things, that
the Company breached a Consulting Services Agreement dated as of June 5, 2019, and “Harborside was entitled to 1 million
shares (i.e., 200,000 shares
post 5-for-1 reverse stock
split) in the Company if the Conversion Labs
Rx business achieved a topline revenue of $10 million
and an additional 1 million
shares (i.e., 200,000 shares
post 5-for-1 reverse stock
split) for each additional $5 million
in topline revenue up to a maximum of 5 million
shares (i.e., 1,000,000 shares
post 5-for-1 reverse stock
split). The Complaint further alleges that
the Company fraudulently induced Harborside to give up its ownership interest in Conversion Labs Rx and that it was a breach of the
duty of good faith and fair dealing and fraudulent for the Company to have dissolved Conversion Labs Rx. Consequently, alleges
Harborside, the Company was unjustly enriched and is entitled to recover from the Company for quantum meruit. The Harborside
Complaint implies between $5,020,000 and
$33,020,000 in alleged
damages related to failure to award the aforementioned stock but only specifically states that “Harborside has incurred
damages in excess of $75,000,
with the exact amount to be determined with specificity at trial” for each of the 5 counts. On February 11, 2022, the Company
filed a Motion to Dismiss the Harborside Complaint. Harborside’s opposition to the motion to dismiss is due on March
25, 2022, and the Company’s reply is due on April 4, 2022. The Company intends to continue to vigorously defend against
this action. As this action is in its preliminary phase, a potential loss cannot yet be estimated.
On
December 10, 2021, a purported breach of contract, unjust enrichment, quantum meruit, and account stated lawsuit, captioned Specialty
Medical Drugstore, LLC D/B/A GoGoMeds v. LifeMD, Inc., Case No. 21-cv-10599, was filed in the United States District Court for
the Southern District of New York against the Company. The GoGoMeds Complaint alleges, among other things, that Conversion Labs Rx
breached a Strategic Partnership Agreement (dated May 27, 2019) (the “SPA”) by the Company not paying two invoices
(#3269 and 3270) totaling $273,859,
and, therefore, “LifeMD has been unjustly enriched in an amount in excess of $273,859,
with the exact amount to be determined with specificity at trial.” Further, GoGoMeds alleges that “to the extent that
the SPA is inapplicable, GoGoMeds is entitled to recover from LifeMD from quantum meruit” because “GoGoMeds conferred a
benefit on LifeMD by fulfilling over 17,000 prescriptions
and over the counter drug orders for LifeMD’s clients.” On February 11, 2022, the Company filed its Answer and
Counterclaim to the GoGoMeds Complaint, pleading the affirmative defenses that the claims are barred, in whole or in part: (i)
because they fail to state claims upon which relief can be granted; (ii) by breach of contract by plaintiff; (iii) by offset,
recoupment, and/or unjust enrichment to plaintiff; (iv) by accord and satisfaction; (v) for failure of condition precedent; (vi)
because adequate remedies at law exist; (vii) by failure to mitigate; (viii) by the doctrine of unclean hands; and (ix) by consent
ratification, waiver, excuse, and/or estoppel, (x) as well as that attorney fees and costs, as well as special, indirect,
incidental, and/or consequential damages are not recoverable. Further, the Company counterclaimed against GoGoMeds for: (a) breach
of contract for failing to: (i) provide adequate customer service and related pharmacy services; (ii) charge LifeMD actual costs for
prescription and over the counter drugs (including shipping); and (iii) provide regular reports and allow audits for review to
establish adequate service and accurate costs; (b) trade secret misappropriation of the LifeMD Information, Data, and Materials, as
defined therein; (c) unjust enrichment of GoGoMeds through its retention of such LifeMD Information, Data, and Materials, and for
the benefit of the creation of the GoGoCare telehealth company; (d) conversion by GoGoMeds by exercising unauthorized dominion and
control over the LifeMD Information, Data, and Materials; (e) detinue; and (f) an accounting. GoGoMeds’ response to the
counterclaims is due on March 4, 2022. The Company intends to continue to vigorously defend against this action. As this action is
in its preliminary phase, a potential loss cannot yet be estimated.
On
February 28, 2022, a purported breach of contract lawsuit (with six counts of alleged breach, and indemnity reliance concerning
reasonable costs and expenses), captioned William Blair LLC v. LifeMD, Inc., Case No. 2022L001978, was filed in the Circuit
Court of Cook County, Illinois County Department, Law Division against the Company. The Blair Complaint alleges, among other things,
that LifeMD breached an engagement letter agreement entered into on January 7, 2021 with Blair that concerned potential debt
financing. In particular, Blair alleges that the Company breached its obligations by, inter alia: (i) failing to advise Blair
of, and ultimately completing, a debt financing transaction with a different investment banking firm on or about June 3, 2021; (ii)
reproducing several pages from a Confidential Information Brochure used in the Company’s debt financing transaction with a
different investment banking firm; (iii) failing to provide Blair with a right of first refusal to be its joint active bookrunning
manager for a common stock sales agreement that it executed on or about June 3, 2021, through a different investment banking firm;
(iv) failing to provide Blair with a right of first refusal to be its joint active bookrunning manager for a common stock sales
agreement that it executed on or about September 28, 2021, through a different investment banking firm (despite the Company having
formally terminated the engagement letter with Blair on or about July 16, 2021); (v) failing to provide Blair with a right of first
refusal to be its joint active bookrunning manager for a preferred stock offering that it executed on or about September 28, 2021,
through two different investment banking firms as bookrunning co-managers (despite the Company having formally terminated the
engagement letter with Blair on or about July 16, 2021); and (vi) purchasing a convertible note from a pharmaceutical investor in
connection with its acquisition of all outstanding shares of allergy telehealth platform, Cleared. The Blair Complaint seeks damages
adequate to compensate Blair for the aforementioned alleged breaches (i.e., which implicitly meets or exceeds the purported
$1,000,000 minimum
fee in the engagement letter), as well as reasonable costs and expenses incurred in this action. The Company intends to vigorously
defend against this action. As this action is in its preliminary phase, a potential loss cannot yet be estimated.
NOTE
10 – RELATED PARTY TRANSACTIONS
Chief
Executive Officer
Conversion
Labs PR utilizes office space in Puerto Rico, which is currently subleased from Fried LLC, and incurs expense of approximately
$3,000
a month for this office space. The
Company previously made payments to JLS Ventures, an entity wholly owned by our CEO, for rent on Conversion Labs PR’s Puerto
Rico office space which amounted to $78,750
and $45,000
for the years ended December 31, 2021 and 2020,
respectively.
During
the year ended December 31, 2021, Conversion Labs PR utilized BV Global Fulfillment (“BV Global”), 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
for their direct costs associated with shipping the Company’s products. The Company reimbursed BV Global a total of $1,784,679
and $819,617
during the years ended December 31, 2021 and
2020, respectively. As of December 31, 2021 and 2020, the Company owed BV Global Fulfillment $61,824
and $58,943,
respectively, which are included in accounts payable and accrued liabilities on the accompanying consolidated balance sheets.
On
December 31, 2021, the Company entered into an Asset Purchase Agreement with BV Global and the owner, who is a related person
of the Company’s CEO (the “Owner”), whereby BV Global and the Owner agreed to sell to the Company certain purchased
assets of BV Global in exchange for approximately $9
thousand. The Company accounted for the transaction
as an acquisition of assets under ASC 805, Business Combinations. The cost of the acquisition, including certain transaction costs,
was allocated to the assets acquired on the basis of relative fair values. The Company also assumed the BV Global real property lease
for approximately 6,000
square feet of warehouse space located in Pennsylvania.
The lease term is for one year and ends on June
30, 2022. Straight line rent of $2,100
is payable monthly for a total of $25,200
for the lease term. In addition, the Company
and the Owner entered into an employment agreement commencing on January 1, 2022 through January 1, 2027, whereby the Owner will serve
in the position of Logistics & Fulfillment Advisor at BV Global for a base salary of $119,000
per year.
Promissory
Note with Director
On
July 23, 2020, the Company received proceeds of $250,000 for a promissory note to a director. The promissory note is non-interest bearing
and originally matured in July 2021. This promissory note was cancelled in exchange for 96,923 restricted shares of the Company’s
common stock and a common stock purchase warrant to purchase 500,000 shares of the Company’s common stock at $4.65 per share as
part of a Debt Exchange Agreement dated September 22, 2020. The Company issued the shares of common stock and the purchase warrant on
October 7, 2020 and cancelled the note, resulting in the reduction of notes payable of $250,000 with a loss on debt settlement of $914,862
for the year ended December 31, 2020.
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 year ended December 31, 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. On June 29, 2021, the Company and Mr. Roberts entered into 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
RSUs of the Company’s common stock, par
value $0.01,
which will vest subject to the Company’s Telehealth 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).
Chief
Digital Officer
On
January 5, 2021, the Board appointed Mr. Bryant Hussey as the Company’s Chief Digital Officer. In connection with the appointment,
Mr. Hussey entered into an employment agreement (the “CDO Employment Agreement”) with the Company. Pursuant to the CDO Employment
Agreement, Mr. Hussey was granted a Stock Option to purchase up to 200,000 shares of the Company’s common stock, scheduled to vest
in equal monthly tranches, based on the passage of time, over the 36 months following the effective date.
Chief
Medical Officer
On
January 11, 2021, the Board appointed Dr. Anthony Puopolo as the Company’s Chief Medical Officer. In connection with the appointment,
Mr. Puopolo entered into an employment agreement (the “CMO Employment Agreement”). Pursuant to the CMO Employment Agreement,
Mr. Puopolo was granted options to purchase up to 200,000 shares of the Company’s common stock. 5,555 of the options shall vest
in equal monthly tranches, based on the passage of time, over the 36 months following the approval of the effective date, with the remaining
5,575 options scheduled to vest on January 11, 2024.
Chief
Business Officer
On
February 3, 2021, the Board appointed Corey Deutsch (“Deutsch”), the Company’s then current Head of Corporate Development,
to serve as the Company’s Chief Business Officer. Pursuant to the employment agreement, Mr. Deutsch was granted a options to purchase
up to 175,000 shares of the Company’s common stock. The options were to vest in equal monthly tranches, based on the passage of
time, over the 36 months following the effective date. On February 4, 2022, Mr. Deutsch was terminated as an employee of the Company.
Upon termination, pursuant to the employment agreement, the Company provided to Mr. Deutsch severance pay equal to his current monthly
base salary for four months from the date of termination, during which time Mr. Deutsch will continue to receive all employee benefits
and employee benefit plans as described in the employment agreement.
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 (the “CFO Employment Agreement”). To induce Mr. Benathen
to enter into the CFO Employment Agreement, Mr. Benathen was granted a signing bonus of 15,000 RSUs. These RSUs vest in accordance with
the following: (i) 3,750 of the RSUs vesting on February 4, 2021 (ii) 3,750 RSUs vesting on February 4, 2022 (iii) 3,750 RSUs vesting
on February 4, 2023 and (iv) 3,750 RSUs vesting on February 4, 2024. In addition to the RSUs, 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 CFO Employment Agreement. On January
27, 2022, the Company and Mr. Benathen entered into the First Amendment to the CFO Employment Agreement (see Note 13).
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 (the “President Employment Agreement”). To induce Mr. Mironov to enter
into the President 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 outside of the Company’s 2020 Equity and Incentive Plan, 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.
WorkSimpli
Software
During
the year ended December 31, 2021, WorkSimpli utilized LegalSubmit Pvt. Ltd. (“LegalSubmit”), a company owned by WorkSimpli’s
Chief Software Engineer, to provide software development services. WorkSimpli paid LegaSubmit a total of $851,523
and $396,709
during the years ended December 31, 2021 and
2020, respectively, for these services. There were no amounts owed to LegalSubmit as of both December 31, 2021 and 2020.
Board
of Director Appointment
On
September 8, 2021, the Company appointed Naveen Bhatia as a member of the Board. In connection with the appointment to the Board, the
Company and Mr. Bhatia entered into a director agreement (the “Director Agreement”), whereby, as compensation for his services
as a member of the Board, Mr. Bhatia shall receive a one-time grant of eight thousand (8,000) restricted stock units of the Company,
vesting quarterly beginning on September 30, 2021, pursuant to the Company’s Employee Stock Option Plan. The Company and Mr. Bhatia
also entered into a consulting agreement (the “Bhatia Consulting Agreement”), whereby Mr. Bhatia will assist the Company
with its capital markets strategy, business development initiatives and growth strategy for a term of one year. Pursuant to the Bhatia
Consulting Agreement, Mr. Bhatia received a stock option to purchase 100,000 shares of the Company’s common stock, par value $0.01
per share, with an exercise price of $7.07 per share.
NOTE
11 – INCOME TAXES
As
of December 31, 2021, the Company has approximately $66.6 million of operating loss carryforwards for federal income tax reporting purposes
that may be applied against future taxable income. Portions of the net operating loss carryforwards will expire in 2022 if not utilized
prior, and will continue to expire 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 net operating
loss carryforwards could be subject to limitation in any given year in the event of a change in ownership as defined by IRC Section 382.
The
valuation allowance overall increased by approximately $20.8 million and $1.3 million during the years ended 2021 and 2020, respectively.
The Company has fully reserved the deferred tax asset resulting from available net operating loss carryforwards.
The
income tax provision charged to continuing operations for the years ended December 31, 2021 and 2020 was as follows:
SCHEDULE
OF INCOME TAX PROVISION CHARGES
| |
2021 | | |
2020 | |
| |
December 31, | |
| |
2021 | | |
2020 | |
Current: | |
| | | |
| | |
U.S. federal | |
$ | - | | |
$ | 152,100 | |
State and local | |
| 7,700 | | |
| 40,400 | |
Total | |
| 7,700 | | |
| 192,500 | |
Deferred: | |
| | | |
| | |
U.S. federal | |
| - | | |
| (70,000 | ) |
State and local | |
| - | | |
| - | |
Total | |
| - | | |
| (70,000 | ) |
Provision for income taxes | |
$ | 7,700 | | |
$ | 122,500 | |
The
provision for income taxes differs from the expected amount of income tax expense (benefit) determined by applying a combined U.S. federal
and state (Puerto Rico) income tax rate of 25% to pretax income (loss) for the years ended December 31, 2021 and 2020 as follows:
SCHEDULE
OF PROVISION DIFFERS FROM THE AMOUNT OF INCOME TAX
| |
2021 | | |
2020 | |
| |
December 31, | |
| |
2021 | | |
2020 | |
Computed “expected” tax expense (benefit) | |
$ | (12,684,000 | ) | |
$ | (12,684,000 | ) |
Increase (decrease) in income taxes resulting from: | |
| | | |
| | |
State taxes | |
| (618,000 | ) | |
| - | |
Permanent differences | |
| (52,000 | ) | |
| 7,765,000 | |
Apportionment of Puerto Rico income | |
| 76,000 | | |
| 3,607,000 | |
Nondeductible expenses | |
| - | | |
| 140,000 | |
Change in valuation allowance | |
| 13,192,000 | | |
| 1,269,000 | |
Other | |
| 93,700 | | |
| 25,500 | |
Provision for income taxes | |
$ | 7,700 | | |
$ | 122,500 | |
Net
deferred tax liabilities consist of the following components as of December 31, 2021 and 2020:
SCHEDULE
OF NET DEFERRED TAX LIABILITIES
| |
2021 | | |
2020 | |
| |
December 31, | |
| |
2021 | | |
2020 | |
Deferred tax liability: | |
| | | |
| | |
Other | |
$ | - | | |
$ | - | |
| |
| - | | |
| - | |
Deferred tax assets: | |
| | | |
| | |
Stock-based compensation | |
| 6,899,000 | | |
| 716,000 | |
Temporary differences | |
| 1,201,000 | | |
| 113,000 | |
Net operating loss carryforwards | |
| 15,673,000 | | |
| 2,151,000 | |
Total | |
| 23,773,000 | | |
| 2,980,000 | |
Less valuation allowance | |
| (23,773,000 | ) | |
| (2,980,000 | ) |
Total | |
$ | - | | |
$ | - | |
NOTE
12 – SEGMENT DATA
Our
portfolio of brands are included within two operating segments: Telehealth and WorkSimpli. We believe our current segments and brands
within our segments complement one another and position us well for future growth. Relevant segment data for the years ended December
31, 2021 and 2020 is as follows:
SCHEDULE
OF RELEVANT SEGMENT DATA
| |
2021 | | |
2020 | |
| |
Year Ended December 31, | |
| |
2021 | | |
2020 | |
Telehealth | |
| | | |
| | |
Revenue | |
$ | 68,197,128 | | |
$ | 30,561,163 | |
Gross margin | |
| 74.3 | % | |
| 71.9 | % |
Operating loss | |
$ | 51,411,142 | | |
$ | 55,698,251 | |
Total assets | |
$ | 48,056,920 | | |
$ | 11,493,193 | |
| |
| | | |
| | |
WorkSimpli | |
| | | |
| | |
Revenue | |
$ | 24,678,678 | | |
$ | 6,732,747 | |
Gross margin | |
| 98.2 | % | |
| 95.7 | % |
Operating loss | |
$ | 2,889,939 | | |
$ | 2,121,202 | |
Total assets | |
$ | 1,866,323 | | |
$ | 1,909,798 | |
| |
| | | |
| | |
Consolidated | |
| | | |
| | |
Revenue | |
$ | 92,875,806 | | |
$ | 37,293,910 | |
Gross margin | |
| 80.6 | % | |
| 76.2 | % |
Operating loss | |
$ | 54,301,081 | | |
$ | 57,819,453 | |
Total assets | |
$ | 49,923,243 | | |
$ | 13,402,991 | |
NOTE
13 – SUBSEQUENT EVENTS
The
Company has evaluated subsequent events through the date these consolidated financial statements were issued and has identified the following:
Cleared
Acquisition
On
January 18, 2022, the Company acquired Cleared, a rapidly growing nationwide allergy telehealth platform
that provides personalized treatments for allergy, asthma, and immunology. Under the terms of the agreement, the Company will acquire
all outstanding shares of Cleared at closing in exchange for a $460,000
upfront cash payment, and non-contingent milestone
payments for total of $3.46
million ($1.73
million each on or before the first and second
anniversaries following the closing date. The Company will purchase a convertible note from a strategic pharmaceutical investor for $507,000.
The Company also agreed to a performance-based earnout based on Cleared’s future net sales, payable in cash or shares at the Company’s
discretion. We are currently in the process of finalizing the accounting for this transaction and expect to complete
our preliminary allocation of the purchase consideration to the assets acquired and liabilities assumed by the end of the first quarter
of 2022.
ResumeBuild
Asset Purchase Agreement
In
February 2022, WorkSimpli entered into an Asset Purchase Agreement (the “APA”) with East Fusion FZCO, a Dubai, UAE corporation
(the “Seller”), whereby WorkSimpli acquired substantially all of the assets, and assumed certain liabilities, associated
with the Seller’s business offering subscription-based resume building software through SaaS online platforms (the “Acquisition”).
WorkSimpli paid to the Seller a purchase price $4,000,000 and agreed to assume certain liabilities set forth in the APA. The Seller also
will be entitled to quarterly payments equal to the greater of 15% of Net Profits (as defined in the APA) or $62,500, for a two-year
period ending on the two-year anniversary of the closing of the Acquisition. In no event shall the Seller receive less than $500,000
in Net Profits by the second anniversary of the closing of the Acquisition. WorkSimpli borrowed the purchase price from the Company pursuant
to a promissory note with the obligation secured by an equity purchase guarantee agreement and a stock option pledge agreement from Fitzpatrick
Consulting, LLC and its sole member Sean Fitzpatrick, who is Co-Founder and President of WorkSimpli.
Stock
Issued for Service
In
2022, the Company issued an aggregate of 197,500 shares of common stock for services rendered.
Warrant
Exercise
In
January 2022, the Company issued an aggregate of 22,000 shares of common stock related to the exercise of warrants for total proceeds
of $38,500.
Stock
Option Exercise
In
February 2022, the Company issued an aggregate of 12,432 shares of common stock related to the cashless exercise of options.
Officer
Appointment
On
February 4, 2022, Maria Stan was appointed as Controller and Principal Accounting Officer of the Company. In connection with her appointment
as Principal Accounting Officer, Ms. Stan entered into an amendment to her employment agreement with the Company, whereby the Company
granted her an additional long-term incentive award of 15,000 RSUs, with 5,000 units vesting on the grant date and the first and second
anniversaries of the grant date, and 50,000 Performance Stock Units (“PSUs”). The PSUs vest upon the achievement of certain
key revenue, EBITDA and share price appreciation milestones.
Amended
Officer Employment Agreements
On
January 27, 2022, the Company and Mr. Benathen, our CFO, entered into the First Amendment to his employment agreement to provide that
Mr. Benathen received 75,000 RSUs, with 25,000 of the RSUs vesting on the grant date and the first and second anniversaries of the grant
date. Additionally, the First Amendment to his employment agreement provided that Mr. Benathen is eligible to receive up to 250,000 PSUs,
which will vest subject to the Company achieving certain key revenue, EBITDA and share price appreciation milestones.
On
January 27, 2022, the Company and our CCO entered into the First Amendment to his employment agreement to provide that our CCO received
37,500 RSUs, with 12,500 of the RSUs vesting on the grant date and the first and second anniversaries of the grant date. Additionally,
the First Amendment to his employment agreement provided that our COO is eligible to receive up to 105,000 PSUs, which will vest subject
to the Company achieving certain key revenue, EBITDA and share price appreciation milestones.