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Stockholders' Equity
 3 Months Ended
Mar. 31, 2021
Stockholders' Equity Note [Abstract]  
Stockholders' Equity

NOTE 5 – STOCKHOLDERS’ EQUITY  

 

The Company has authorized the issuance of up to 100,000,000 shares of common stock, $0.01 par value, and 5,000,000 shares of preferred stock, $0.0001 par value, of which 5,000 shares are designated as Series B Convertible Preferred Stock and 4,996,500 shares of preferred stock remain undesignated.

 

On October 9, 2020, the Company effectuated a 1-for-5 reverse stock split (the “Stock Split”) of the Company’s issued and outstanding shares of common stock that became effective in the market on October 14, 2020 (see Note 1). In connection with the Stock Split, the Company issued approximately 632 shares for rounding.

 

Options and Warrants

 

During the three months ended March 31, 2021, the Company issued an aggregate of 608,905 shares of common stock related to cashless exercise of options.

 

During the three months ended March 31, 2021, the Company issued an aggregate of 30,000 shares of common stock related to the exercise of warrants for gross proceeds of $24,000.

 

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, LLC (“CVLB 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 CVLB PR from the Related Parties, bringing the Company’s ownership of CVLB PR to 100%.

 

As consideration for the Company’s purchase of the Remaining Interests from the Related Parties, Mr. Schreiber and Mr. Galluppi agreed to cancel all potential issuances of restricted stock and or options related to their employment with the Company, in exchange for the immediate issuance of 500,000 shares of the Company’s restricted common stock to each of Mr. Schreiber and Mr. Galluppi (the “Initial Issuances”) (equal to 1,000,000 shares in the aggregate). Mr. Schreiber and Mr. Galluppi were also entitled to additional issuances pursuant to certain milestones as follows: (i) 500,000 shares of the Company’s Common Stock to each of Mr. Schreiber and Mr. Galluppi (1,000,000 shares in the aggregate) on the business day following a consecutive ninety (90) day period, during which the Company’s Common Stock shall have traded at an average price per share equal to or higher than $2.50 (the “First Milestone”), and (ii) an additional 500,000 shares of the Company’s Common Stock to each of Mr. Schreiber and Mr. Galluppi (1,000,000 shares in the aggregate) following a consecutive ninety (90) day period during which the Common Stock shall have traded at an average price per share equal to or higher than $3.75 (the “Second Milestone” and, together with the First Milestones, the “Milestones”). Having achieved the Milestones, the Company, on December 9, 2020, issued an aggregate of 1,000,000 shares of the Company’s Common Stock to each of Mr. Schreiber and Mr. Galluppi (the “Milestone Shares”) (2,000,000 shares in the aggregate). The Milestone Shares are subject to the previously disclosed 180-day Lock-Up Agreement each of Mr. Schreiber and Mr. Galluppi signed on November 3, 2020.

 

The Company recorded an aggregate expense of $18,060,000   reflected in general and administrative expenses during the three months ended September 30, 2020 for the issuance of these 2,000,000 shares, of which 1,200,000 shares were issued during the three months ended March 31, 2021.

 

Common Stock

 

Common Stock Transactions During the Three Months Ended March 31, 2021:

 

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.

 

During the three months ended March 31, 2021, the Company issued an aggregate of 1,203,750   shares of common stock for services expensed in prior periods.

 

Noncontrolling Interest

 

For the three months ended March 31, 2021 and 2020, the net loss attributed to the non-controlling interest amounted to $270,503 and $138,816, respectively. During the three months ended March 31, 2021 and 2020, the Company paid distributions to non-controlling shareholders of $36,000 and $36,000, respectively.

 

LegalSimpli Software Restructuring Transaction

 

Effective January 22, 2021 (the “LSS Effective Date”), the Company consummated a transaction to restructure the ownership of LegalSimpli Software, LLC, a Puerto Rico limited liability company (“LSS”), a majority-owned subsidiary of the Company (the “LSS Restructuring”). To effect the LSS Restructuring the Company’s wholly-owned subsidiary Conversion Labs PR LLC, a Puerto Rico limited liability company (“CVLB PR”) entered into a series of membership interest exchange agreements, pursuant to which, CVLB PR exchanged that certain a promissory note, dated May 8, 2019 with an outstanding balance of $375,823 (the “CVLBPR Note”), issued by LSS in favor of CVLB PR, for 37,531 newly issued membership interests of LSS (the “Exchange”). Upon consummation of the Exchange the CVLBPR Note was extinguished.

 

Concurrently, in furtherance of the LSS Restructuring, CVLB PR entered into two Membership Interest Purchase Agreements (the “Founding Members MIPAs”) with two founding members of LSS (the “Founding Members”) whereby CVLB PR purchased from the Founding Members an aggregate of 2,183 membership interests of LSS for an aggregate purchase price of $225,000, paid in December 2020.

 

In furtherance of the LSS Restructuring, CVLB PR entered into a Membership Interest Purchase Agreement with LSS, (the “CVLB PR MIPA”), pursuant to which CVLB PR purchased 12,000 membership interests of LSS for an aggregate purchase price of $300,000. The CVLB PR MIPA provides that the transaction may be completed in three (3) tranches with a purchase price of $100,000 per tranche to be made at the sole discretion of CVLB 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 are due on the 60-day anniversary and the 120-day anniversary of the LSS Effective Date and are reflected in accounts payable and accrued expenses as of March 31, 2021.

 

Following the consummation of the LSS Restructuring, CVLB PR increased its ownership of LSS from 51% to approximately 85.58% on a fully diluted basis. LSS entered into an amendment to its operating agreement (the “LSS Operating Agreement Amendment”) to reflect the change in ownership.

 

Concurrently with the LSS Restructuring, CVLB 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 CVLB PR granted options to purchase membership interest units of LSS. Upon vesting, the Fitzpatrick Options and the Pathak Options provide for the potential re-purchase of up to an additional 13.25% of LSS by Fitzpatrick and Pathak in the aggregate with CVLB PR ownership ratably reduced to approximately 72.98%.

 

The Fitzpatrick Option Agreement grants Sean Fitzpatrick the option to purchase 10,300 membership interest units of LSS for an exercise price of $1.00 per membership interest unit. The Fitzpatrick Options vest in accordance with the following (i) 3,434 membership interests upon LSS achieving $2,500,000 of gross sales in any fiscal quarter (ii) 3,434 membership interests upon LSS achieving $4,000,000 of gross sales in any fiscal quarter and (iii) 3,434 membership interests upon LSS achieving $8,000,000 of gross sales with a ten percent (10%) net profit margin in any fiscal quarter.

 

The Pathak Options shall vest in accordance with the following (i) 700 membership interests upon LSS achieving $2,500,000 of gross sales in any fiscal quarter (ii) 700 membership interests upon LSS achieving $4,000,000 of gross sales in any fiscal quarter and (iii) 700 membership interests upon LSS achieving $8,000,000 of gross sales with a ten percent (10%) net profit margin in any fiscal quarter.

 

The first two tranches of performance options granted to Sean Fitzpatrick and Varun Pathak vested immediately after the consummation of the restructuring transaction and therefore have been recorded as part of the acquisition through equity. The third tranche is not deemed probable and therefore has not been recognized to date.

 

Stock Options

 

2020 Equity Incentive Plan (the “2020 Plan”)

 

On January 8, 2021, the Company approved the Company’s 2020 Equity Incentive Plan (the “2020 Plan”). Approval of the 2020 Plan was included as Proposal 1 in the Company’s definitive proxy statement for its Special Meeting of Shareholders filed with the Securities and Exchange Commission on December 7, 2020. The 2020 Plan is administered by the Compensation Committee and initially provided for the issuance of up to 1,500,000 shares of Common Stock. The number of shares of Common Stock available for issuance under the Plan automatically increases by 150,000 shares of Common Stock on January 1st of each year, for a period of not more than ten years, commencing on January 1, 2021. As of January 1, 2021, Plan provided for the issuance of up to 1,650,000 shares of Common Stock. Awards under the 2020 Plan can be granted in the form of stock options, non-qualified and incentive options, stock appreciation rights, restricted stock, and restricted stock units. The 2020 Plan will be administered by the Compensation Committee of the Company’s Board of Directors.

 

The affirmative vote of the holders of shares of common stock representing a majority of the shares of Common Stock cast at the Annual Meeting of Stockholders to be held June 24, 2021 is required for the approval of the proposed 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.

 

The forms of award agreements to be used in connection with awards made under the 2020 Plan to the Company’s executive officers and non-employee directors are:

 

● Form of Non-Qualified Option Agreement (Non-Employee Director Awards)
● Form of Non-Qualified Option Agreement (Employee Awards); and
● Form of Restricted Stock Award Agreement.

 

Previously, the Company had granted service-based stock options and performance-based stock options separate from this plan.

 

On January 20, 2020, the Company approved the transition of its Chief Acquisition Officer, to the role of President of LegalSimpli (“President”). In connection with this change in role , the Company amended that certain services agreement entered into on July 23, 2018, by and between the Company and its President, to (i) decrease the number of options to purchase the Company’s common stock previously granted from 1,000,000 options to 500,000 options, 130,000 of which are fully vested as of the effective date and (ii) amend the vesting schedule for the remaining 370,000 performance options to include four performance metrics that, if met, each trigger the vesting of 92,500 options. As a result of amendment, the Company cancelled 500,000 service-based options with an exercise price of $1.50.

 

During the three months ended March 31, 2021, the Company issued an aggregate of 905,000 stock options to employees and advisory board members. These stock options have a contractual term of 10 years and vest in increments which fully vest the options over a two-to-three-year period, dependent on the specific agreements’ terms.

 

The following is a summary of outstanding options activity under our 2020 Plan for the three months ended March 31, 2021:

 

   

Options

Outstanding

Number of Shares

    

Exercise Price

per Share

    

Weighted

Average

Remaining

Contractual

Life

    

Weighted

Average

Exercise Price

per Share

  
                         
Balance, December 31, 2020     829,000     $ 5.80 – 9.24       9.75     $ 7.54  
Granted     775,000       6.00 – 21.02       9.81       10.47  
Exercised     -                          
Cancelled/Forfeited/Expired     -     $                    
                                 
Balance at March 31, 2021     1,604,000     $ 5.80 – 21.02       9.65     $ 8.95  
                                 
Exercisable at December 31, 2020     76,222     $ 5.80 – 9.24       9.77     $ 7.74  
Exercisable at March 31, 2021     207,306     $ 5.80 – 21.02       9.59     $ 8.95  

 

The total fair value of the options granted was approximately $7,975,592, which was determined by the Black-Scholes Pricing Model with the following assumptions: dividend yield of 0%, term of 10 years, volatility of 179.17 – 180.24%, and risk-free rate of 0.66%–1.28%. Total compensation expense under the 2020 Plan options above was approximately $1,240,117 and $0 for the three months ended March 31, 2021 and 2020, respectively, with unamortized expense remaining of approximately $12,678,337 as of March 31, 2021.

 

Restricted Stock Units (RSU)

 

The following is a summary of outstanding and exercisable RSU activity under our 2020 Plan during the three months ended March 31, 2021:

 

    RSU Outstanding Number of Shares     Exercise Price per Share     Weighted Average Remaining Contractual Life     Weighted Average Exercise Price per Share  
Balance at December 31, 2020     35,000     $ 6.03 – 21.02             $ 12.45  
Granted     12,500       19.61               19.61  
Exercised/Expired     -                          
                                 
Balance at March 31, 2021     47,500     $ 6.03 – 21.02             $ 14.34  
                                 
Exercisable December 31, 2020     20,000     $ 6.03 – 21.02             $ 12.45  
Exercisable March 31, 2021     20,590     $ 6.03 – 21.02                $ 6.45  

 

The total fair value of the RSUs granted was approximately $681,025 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 $132,763 and $0 for the three months ended March 31, 2021 and 2020, respectively, with unamortized expense remaining of approximately $548,262 as of March 31, 2021.

 

The following is a summary of outstanding service-based options activity (prior to the establishment of our 2020 Plan above) for the three months ended March 31, 2021:

 

    Options Outstanding Number of Shares     Exercise Price per Share     Weighted Average Remaining Contractual Life     Weighted Average Exercise Price per Share  
                         
Balance, December 31, 2020     2,228,400     $ 0.80 - 7.50       5.15 years     $ 2.11  
Granted     130,000       4.75 – 19.61       9.90 years       15.04  
Exercised     (467,000 )     0.80 – 2.00       3.18 years       1.06  
Cancelled/Forfeited/Expired     -                          
                                 
Balance at March 31, 2021     1,891,400     $ 0.80 - 7.50       5.67 years     $ 3.25  
                                 
Exercisable December 31, 2020     1,570,428     $ 1.00 – 7.50       2.57 years     $ 1.67  
Exercisable at March 31, 2021     1,252,954     $ 1.00 – 7.50       2.71 years     $ 2.37  

 

Total compensation expense under the above service-based option plan was approximately $347,922 and $95,900 for the three months ended March 31, 2021 and 2020, respectively, with unamortized expense remaining of approximately $3,291,992 as of March 31, 2021.

 

The following is a summary of outstanding performance-based options activity for the three months ended March 31, 2021:

    Options Outstanding Number of Shares     Exercise Price per Share     Weighted Average Remaining Contractual Life     Weighted Average Exercise Price per Share  
                         
Balance at December 31, 2020     1,165,000     $ 1.25 – 2.00       4.97 years     $ 1.80  
Granted     -       -               -  
Exercised     (265,000 )   $ 1.25 – 2.00       1.34 years       1.92  
Cancelled/Expired     -       -                  
                                 
Balance at March 31, 2021     900,000     $ 1.25 – 2.00       5.72 years     $ 1.76  
                                 
Exercisable December 31, 2020     635,000     $ 1.25 – 2.00       1.38 years     $ 2.00  
Exercisable at March 31, 2021     310,000     $ 1.25 – 2.00       0.75 years     $ 2.00  

 

No compensation expense was recognized on the performance-based options above for the three months ended March 31, 2021 and 2020, as the performance terms have not been met or are not probable. All performance options exercised this quarter had been previously expensed.

 

Warrants

 

The following is a summary of outstanding and exercisable warrants activity during the three months ended March 31, 2021:

 

    Warrants Outstanding Number of Shares     Exercise Price per Share     Weighted Average Remaining Contractual Life     Weighted Average Exercise Price per Share  
Balance at December 31, 2020     3,550,471       $ 1.40 – 5.75         5.59 years     $ 4.56  
Granted     -                          
Exercised/Expired     -                          
                                 
Balance at March 31, 2021     3,550,471       $ 1.40 – 5.75         5.34 years     $ 4.56  
                                 
Exercisable December 31, 2020     2,144,700       $ 1.40 – 5.75         7.67 years     $ 4.29  
Exercisable March 31, 2021     2,144,700       $ 1.40 – 5.75         7.42 years     $ 4.29  

 

Total compensation expense on the above warrants for services was approximately $604,974 and $0 for the three months ended March 31, 2021 and 2020.

 

Stock-based Compensation

 

The total stock-based compensation expense related to common stock issued for services, service-based stock options, performance-based stock options, warrants and RSUs amounted to approximately $2,325,775 and $95,900 for the three months ended March 31, 2021 and 2020, respectively. Such amounts are included in general and administrative expenses in the consolidated statement of operations.