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STOCKHOLDERS’ EQUITY
 9 Months Ended
Sep. 30, 2021
Equity [Abstract]  
STOCKHOLDERS’ EQUITY

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 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.

 

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. The Company had approximately $59.5 million available under the ATM Sales Agreement and $90 million available under the 2021 Shelf as of September 30, 2021.

 

Options and Warrants

 

During the nine months ended September 30, 2021, the Company issued an aggregate of 873,047 shares of common stock related to cashless exercise of options. During the nine months ended September 30, 2021, the Company issued an aggregate of 451,000 shares of common stock related to the exercise of options for gross proceeds of $820,750.

 

 

During the nine months ended September 30, 2021, the Company issued an aggregate of 162,033 shares of common stock related to the exercise of warrants for gross proceeds of $480,609.

 

Membership Interest Purchase Agreement

 

On July 31, 2019 the Company entered into a certain membership interest purchase agreement (the “MIPA”) by and between the Company, Conversion Labs PR, a majority owned subsidiary, Taggart International Trust, an entity controlled by the Company’s Chief Executive Officer, Mr. Justin Schreiber, and American Nutra Tech LLC, a company controlled by its Chief Technology and Operating Officer, Mr. Stefan Galluppi (Mr. Schreiber, Taggart International Trust, Mr. Galluppi and American Nutra Tech LLC each a “Related Party” and collectively, the “Related Parties”). Pursuant to the MIPA, the Company purchased 21.83333% of the membership interests (the “Remaining Interests”) of Conversion Labs PR from the Related Parties, bringing the Company’s ownership of Conversion Labs PR to 100%.

 

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

 

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

 

Common Stock

 

Common Stock Transactions During the Nine Months Ended September 30, 2021:

 

On February 11, 2021, the Company consummated the closing of the February 2021 Offering, whereby pursuant to the February 2021 Purchase Agreement entered into by the Company and certain accredited investors on February 11, 2021 the investors purchased 608,696 shares of the Company’s common stock par value $0.01 per share at a purchase price of $23.00 per share for aggregate gross proceeds of approximately $14.0 million.

 

The Purchase Price was funded on the closing date and resulted in net proceeds to the Company of approximately $13.5 million after deducting fees payable to the placement agent and other estimated offering expenses payable by the Company.

 

During the nine months ended September 30, 2021, the Company issued an aggregate of 1,263,750 shares of common stock for services expensed in prior periods.

 

During the nine months ended September 30, 2021, the Company sold 70,786 shares of common stock under the ATM Sales Agreement for net proceeds of $493,481.

 

Noncontrolling Interest

 

For the three months ended September 30, 2021 and 2020, the net loss attributed to the non-controlling interest amounted to $62,706 and $201,233, respectively. During the three months ended September 30, 2021 and 2020, the Company paid distributions to non-controlling stockholders of $36,000 and $0, respectively. For the nine months ended September 30, 2021 and 2020, the net loss attributed to the non-controlling interest amounted to $531,182 and $408,180, respectively. During the nine months ended September 30, 2021 and 2020, the Company paid distributions to non-controlling stockholders of $108,000 and $121,223, respectively.

 

 

WorkSimpli Software Restructuring Transaction

 

Effective January 22, 2021 (the “WSS Effective Date”), the Company consummated a transaction to restructure the ownership of WorkSimpli, (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 Company’s 2020 Equity Incentive Plan (the “2020 Plan”). Approval of the 2020 Plan was included as Proposal 1 in the Company’s definitive proxy statement for its Special Meeting of Shareholders filed with the Securities and Exchange Commission on December 7, 2020. The 2020 Plan is administered by the Compensation Committee and initially provided for the issuance of up to 1,500,000 shares of Common Stock. The number of shares of Common Stock available for issuance under the Plan automatically increases by 150,000 shares of Common Stock on January 1st of each year, for a period of not more than ten years, commencing on January 1, 2021. As of January 1, 2021, the 2020 Plan provided for the issuance of up to 1,650,000 shares of Common Stock. Awards under the 2020 Plan can be granted in the form of stock options, non-qualified and incentive options, stock appreciation rights, restricted stock, and restricted stock units. The 2020 Plan will be administered by the Compensation Committee of the Company’s board of directors (the “Board”).

 

 

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 September 30, 2021, total authorization under the 2020 Plan was 3,150,000 shares. Additionally, authorization under the 2020 Plan will automatically increase 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, in an amount equal to 150,000 shares.

 

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

 

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

 

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

 

On January 20, 2020, the Company approved the transition of its Chief Acquisition Officer, to the role of President of 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 nine months ended September 30, 2021, the Company issued an aggregate of 1,686,500 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 nine months ended September 30, 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   $ 5.20 – 8.81    9.75 years   $7.49 
Granted   1,276,500    6.00 – 21.02    9.50 years    10.65 
Exercised   -                
Cancelled/Forfeited/Expired   (11,000)   13.74    9.73 years    13.74 
                     
Balance at September 30, 2021   2,094,500   $ 5.20 – 21.02    8.42 years   $9.38 
                     
Exercisable at December 31, 2020   76,222   $ 5.20 – 8.81    9.77 years   $7.74 
Exercisable at September 30, 2021   506,104   $ 5.20 – 21.02    9.18 years   $8.79 

 

The total fair value of the options granted was approximately $19,371,408, which was determined by the Black-Scholes Pricing Model with the following assumptions: dividend yield of 0%, expected term of 6.5 years, volatility of 165.44% – 180.12%, and risk-free rate of 0.66%–1.26%. Total compensation expense under the 2020 Plan options above was approximately $1,566,010 and $0 for the three months ended September 30, 2021 and 2020, respectively, with unamortized expense remaining of approximately $15,151,135 as of September 30, 2021. Total compensation expense under the 2020 Plan options above was approximately $4,000,264 and $0 for the nine months ended September 30, 2021 and 2020, respectively.

 

The following is a summary of outstanding service-based options activity (prior to the establishment of our 2020 Plan above) for the nine months ended September 30, 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   2,243,400   $ 0.80 - 7.95    5.14 years   $2.11 
Granted   410,000    4.75 – 19.61    7.09 years    13.17 
Exercised   (100,000)   1.50 – 4.75    9.19 years    2.80 
Cancelled/Forfeited/Expired   (1,022,000)   0.80 – 2.00    2.51 years    1.32 
                     
Balance at September 30, 2021   1,531,400   $ 1.00 – 19.61    6.06 years   $5.56 
                     
Exercisable December 31, 2020   1,570,428   $1.00 – 7.50    2.57 years   $1.67 
Exercisable at September 30, 2021   914,581   $ 1.00 – 19.61    5.18 years   $3.15 

 

 

The total fair value of the options granted was approximately $4,967,380, 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 133.37% – 180.24%, and risk-free rate of 0.73%–1.30%. Total compensation expense under the above service-based option plan was approximately $565,741 and $84,924 for the three months ended September 30, 2021 and 2020, respectively, with unamortized expense remaining of approximately $4,720,399 as of September 30, 2021. Total compensation expense under the above service-based option plan was approximately $1,385,008 and $387,988 for the nine months ended September 30, 2021 and 2020, respectively.

 

The following is a summary of outstanding performance-based options activity for the nine months ended September 30, 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 – 7.50    4.97 years   $1.80 
Granted   -                
Exercised   (235,000)   2.00    0.22 years    2.00 
Cancelled/Expired   (385,000)   1.25 – 2.00    4.19 years    1.67 
                     
Balance at September 30, 2021   545,000   $ 1.25 – 7.50    5.97 years   $1.80 
                     
Exercisable December 31, 2020   425,000   $2.00    1.18 years   $2.00 
Exercisable at September 30, 2021   90,000   $ 1.75 – 2.00    2.13 years   $1.96 

 

Total compensation expense under the above performance-based option plan was approximately $173,397 for both the three and nine months ended September 30, 2021. No compensation expense was recognized on the performance-based option plan above for the three and nine months ended September 30, 2020 as the performance terms had not been met or were not probable.

 

Restricted Stock Units (RSU)

 

The following is a summary of outstanding RSU activity under our 2020 Plan during the nine months ended September 30, 2021:

 

   RSUs Outstanding Number of Shares 
Balance at December 31, 2020   35,000 
Granted   431,250 
Vested   (69,875)
Cancelled/Forfeited/Expired   - 
Balance at September 30, 2021   396,375 

 

The total fair value of the 431,250 RSUs granted was approximately $4,732,500 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 $104,325 and $0 for the three months ended September 30, 2021 and 2020, respectively. Total compensation expense under the above 2020 Plan RSUs above was approximately $589,431 and $0 for the nine months ended September 30, 2021 and 2020, respectively, with unamortized expense remaining of approximately $4,578,989 as of September 30, 2021. During the nine months ended September 30, 2021, 69,875 RSUs vested, of which 50,000 RSUs were issued.

 

The Company granted 600,000 RSUs outside of the 2020 Plan during the nine months ended September 30, 2021. The total fair value of these RSUs was approximately $6,612,000 and no compensation expense was recorded for both the three and nine months ended September 30, 2021, as the performance terms had not been met or were not probable. Total compensation expense for RSUs outside of the 2020 Plan was approximately $15,900,000 and $15,972,000 for the three and nine months ended September 30, 2020, respectively.

 

 

Warrants

 

The following is a summary of outstanding and exercisable warrants activity during the nine months ended September 30, 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   5.58 years  $4.56 
Granted   500,000    12.00   4.67 years   12.00 
Exercised/Expired   (162,033)   1.75 – 4.75   1.83 years   2.97 
                   
Balance at September 30, 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 September 30, 2021   2,621,307    $ 1.40 – 12.00   6.36 years  $5.98 

 

Total compensation expense on the above warrants for services was approximately $604,974 and $379,183 the three months ended September 30, 2021 and 2020, respectively, and $1,814,922 and $538,594 for the nine months ended September 30, 2021 and 2020, respectively.

 

Stock-based Compensation

 

The total stock-based compensation expense related to common stock issued for services, service-based stock options, performance-based stock options, warrants and RSUs amounted to approximately $3,110,816 and $16,364,000 for the three months ended September 30, 2021 and 2020, respectively, and approximately $7,983,891 and $16,899,000 for the nine months ended September 30, 2021 and 2020, respectively. Such amounts are included in general and administrative expenses in the consolidated statement of operations.